Attached files
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EX-32.1 - GlenRose Instruments Inc. | v178768_ex32-1.htm |
EX-31.1 - GlenRose Instruments Inc. | v178768_ex31-1.htm |
EX-23.1 - GlenRose Instruments Inc. | v178768_ex23-1.htm |
EX-31.2 - GlenRose Instruments Inc. | v178768_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
|
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
fiscal year ended December 27, 2009
or
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
file number 000-51645
GLENROSE
INSTRUMENTS INC.
(Exact
name of Registrant as specified in its charter)
Delaware
|
20-3521719
|
(State
of incorporation or organization)
|
(IRS
Employer Identification No.)
|
45
First Avenue
|
|
Waltham,
Massachusetts
|
02451
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant’s
Telephone Number, Including Area Code: (781) 622-1120
Securities
registered pursuant to Section 12(b) of the Act: None
Title of each class
|
Name of each exchange on which
registered
|
Common
Stock, $0.01 par value
|
N/A
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Securities Act. Yes ¨ No x
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 ¨ No x
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every
Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).
Yes ¨ No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
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 ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No x
The
aggregate market value of the voting shares of the registrant held by
non-affiliates is not applicable because our common stock was not yet trading as
of June 28, 2009.
As of
March 26, 2010 the registrant’s shares of common stock outstanding were:
3,117,647.
WARNING CONCERNING
FORWARD-LOOKING STATEMENTS
THIS
ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER
FEDERAL SECURITIES LAWS. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON OUR
PRESENT INTENT, BELIEFS OR EXPECTATIONS, AND ARE NOT GUARANTEED TO OCCUR AND MAY
NOT OCCUR. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR
IMPLIED BY OUR FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS.
WE
GENERALLY IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS “MAY,”
“WILL,” “SHOULD,” “EXPECTS,” “PLANS,” “ANTICIPATES,” “COULD,” “INTENDS,”
“TARGET,” “PROJECTS,” “CONTEMPLATES,” “BELIEVES,” “ESTIMATES,” “PREDICTS,”
“POTENTIAL” OR “CONTINUE” OR THE NEGATIVE OF THESE TERMS OR OTHER SIMILAR WORDS.
THESE STATEMENTS ARE ONLY PREDICTIONS. THE OUTCOME OF THE EVENTS DESCRIBED IN
THESE FORWARD-LOOKING STATEMENTS IS SUBJECT TO KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR, OUR CUSTOMERS’ OR OUR
INDUSTRY’S ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS, TO
DIFFER.
THIS
REPORT ALSO CONTAINS MARKET DATA RELATED TO OUR BUSINESS AND INDUSTRY. THESE
MARKET DATA INCLUDE PROJECTIONS THAT ARE BASED ON A NUMBER OF ASSUMPTIONS. IF
THESE ASSUMPTIONS TURN OUT TO BE INCORRECT, ACTUAL RESULTS MAY DIFFER FROM THE
PROJECTIONS BASED ON THESE ASSUMPTIONS. AS A RESULT, OUR MARKETS MAY NOT GROW AT
THE RATES PROJECTED BY THESE DATA, OR AT ALL. THE FAILURE OF THESE MARKETS TO
GROW AT THESE PROJECTED RATES MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION AND THE MARKET PRICE OF OUR
COMMON STOCK.
SEE “ITEM
1A. RISK FACTORS,” “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS” AND “BUSINESS,” AS WELL AS OTHER SECTIONS IN THIS
REPORT, THAT DISCUSS SOME OF THE FACTORS THAT COULD CONTRIBUTE TO THESE
DIFFERENCES. THE FORWARD- LOOKING STATEMENTS MADE IN THIS ANNUAL REPORT ON FORM
10-K RELATE ONLY TO EVENTS AS OF THE DATE ON WHICH THE STATEMENTS ARE MADE.
EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE OR RELEASE ANY
FORWARD-LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR
OTHERWISE.
GLENROSE
INSTRUMENTS INC.
ANNUAL
REPORT ON FORM 10-K
FOR
THE FISCAL YEAR ENDED DECEMBER 27, 2009
TABLE
OF CONTENTS
PART
I
|
||
Item
1.
|
Business.
|
1
|
Item
1A.
|
Risk
Factors.
|
9
|
Item
1B.
|
Unresolved
Staff Comments.
|
13
|
Item
2.
|
Properties.
|
14
|
Item
3.
|
Legal
Proceedings.
|
14
|
Item
4.
|
Reserved.
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14
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PART
II
|
||
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
15
|
Item
6.
|
Selected
Financial Data.
|
16
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
16
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
20
|
Item
8.
|
Financial
Statements and Supplementary Data.
|
20
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
20
|
Item
9A(T).
|
Controls
and Procedures.
|
21
|
Item
9B.
|
Other
Information.
|
21
|
PART
III
|
||
Item
10.
|
Directors,
Executive Officers and Corporate Governance.
|
22
|
Item
11.
|
Executive
Compensation.
|
25
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
29
|
|
||
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
31
|
|
||
Item
14.
|
Principal
Accountant Fees and Services.
|
32
|
PART
IV
|
||
Item
15.
|
Exhibits
and Financial Statement Schedules.
|
33
|
PART
I
Item 1. Business.
General
GlenRose
Instruments Inc., or GlenRose Instruments, the company, we, our, or us, and its
subsidiaries, provides radiological services; operates a radiochemistry
laboratory network; and provides radiological characterization and analysis;
provides hazardous, radioactive and mixed waste management; and provides
facility, environmental, safety, and health management.
We
primarily provide the services described above to the federal government and its
prime contractors. We do not treat, store, transport or dispose of hazardous
waste as part of our business. As part of our ongoing business, our laboratories
generate small volumes of wastes, and we employ commercial firms to transport,
treat, and dispose of the wastes. We currently operate a network of laboratories
in three locations in the United States, or U.S.
Although
we intend to continue to grow our laboratory and radiological services business,
our primary growth strategy is to develop, acquire and operate analytical
instruments businesses. Analytical instruments use a variety of highly
sophisticated measurement technologies and are used by the scientific community,
the government and industry to perform basic research, applied research and
development, process monitoring and control, and many other applications. Our
management has extensive experience in acquiring and operating analytical
instruments businesses. We have identified a number of companies with revenues
of between $10.0-35.0 million as potential acquisition targets, although we have
not yet purchased any such business and do not have any commitments to buy any
businesses. Our initial strategy will be to acquire instrument companies, which
may be in difficult business conditions but have well-established and proven
technology. Our plan is to increase their operating margins and revenues using
techniques developed by our management team during the course of their careers
in the analytical instruments industry.
GlenRose
Instruments was incorporated in Delaware in September 2005. The company operates
through its wholly owned subsidiary, Eberline Services Inc., or Eberline
Services, or ESI, and its subsidiaries. The subsidiaries of Eberline Services
are Eberline Services Hanford, Inc., or ESHI, Eberline Analytical Corporation,
or EAC, Benchmark Environmental Corp., and Lionville Laboratory Inc., or
Lionville. At the beginning of 2007, all of our outstanding shares of common
stock were held by an affiliated limited partnership, which distributed all of
our shares to its partners on December 31, 2007. As of December 27, 2009,
Eberline Services and its subsidiaries generated all of the revenues of the
company.
Our
principal operational headquarters is located in Albuquerque, New Mexico, and
our principal executive offices are located in Waltham, Massachusetts. We plan
to maintain a website at the following address: www.glenroseinstruments.com, but
our website address included in this Annual Report on Form 10-K is a textual
reference only and the information in the website is not incorporated by
reference into this Annual Report on Form 10-K. Through a link on our website to
the Securities and Exchange Commission, or SEC, website, www.sec.gov, we will
provide free access to our Annual Report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, or the Exchange Act, as soon as reasonably practicable after electronic
filing with the SEC. The charters of our committees of the board of directors of
the company, and our Code of Business Conduct and Ethics for our directors,
officers and employees, will also be available on our proposed website, and we
will post on our website any waivers of, or amendments to, such code of
ethics.
Segment
Reporting
As of
December 27, 2009, we have three operating segments – the Environmental Services
segment, the Analytical Laboratories segment and the Instruments segment. The
first operating segment provides radiological and waste management services
primarily to the federal government in connection with the clean-up of the
former and present atomic weapons and energy sites operated by the federal
government. The second operating segment provides radiological services and
involves the operation of a radiochemistry laboratory network. The third
operating segment involves the acquisition and operation of analytical
instruments businesses. See our consolidated financial statements included in
‘‘Item 15. Exhibits and Financial Statement Schedules’’ of this Annual Report on
Form 10-K for further financial information on our operating
segments.
1
Background
and Market
Environmental
and Analytical Laboratory Services
The
principal regulatory drivers of the hazardous waste management industry are the
Resource Conservation and Recovery Act, or RCRA, enacted in 1976, and the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, or
CERCLA. RCRA requires waste generators to distinguish between “hazardous” and
“non-hazardous” wastes, and to treat, store and dispose of hazardous waste in
accordance with specific regulations. The collection and disposal of solid and
hazardous wastes are subject to local, state and federal laws and regulations,
which regulate health, safety, the environment, zoning and land use. CERCLA
holds generators and transporters of hazardous substances, as well as past and
present owners and operators of sites where there has been a hazardous release,
strictly, jointly and severally liable for environmental clean-up costs
resulting from the release or threatened release of a hazardous substance. An
integral part of this regulatory and compliance scheme is the need to detect and
measure contaminants in order to ensure compliance.
Our
present focus is on the detection and measurement of radioactive wastes and
“mixed wastes” which consist of radioactive wastes and other hazardous
materials. These wastes were primarily generated by the federal government
during the development and production of nuclear weapons. The nuclear power
industry is another source of radioactive wastes.
The
Department of Defense, or DOD, and the Department of Energy, or DOE, have had
annual budgets for environmental expenditures that include cleaning up military
bases and restoring former nuclear weapons facilities. These budgets are
detailed in the annual budget requests from these departments to Congress,
congressional appropriations reports and bills, and congressional authorization
reports and bills. The DOE’s fiscal year 2009 budget was approximately $6.0
billion for environmental management and will be approximately the same for
2010. In addition, the stimulus bill provided an additional $6.0 billion to be
spent over the life of the stimulus funding in accelerating clean-up efforts.
The DOD has stated that there is an urgent need to ensure that the hazardous
wastes present at these sites, often located near population centers, do not
pose a threat to the surrounding population, and, in connection with the closure
of many military bases, there is an economic incentive to make sure that the
environmental restoration enables these sites to be developed commercially by
the private sector. The DOE has long recognized the need to stabilize and safely
store nuclear weapons materials and to clean up areas contaminated with
hazardous and radioactive waste.
Our
radiological and waste management services are employed primarily by the federal
government in connection with the clean-up of the former and present atomic
weapons and energy sites operated by the federal government.
Analytical
Instruments
According
to published sources, in 2007, the analytical instrument market was
approximately $36.1 billion in revenues1. Going forward, the
global analytical instrument market is forecasted by industry reports to show
solid growth, and assuming no macro-economic changes, should have sales in
excess of $48.9 billion by 20122. We do not currently
operate in the analytical instruments market, but we plan to do so in the
future.
Currently,
there are over 60 types of analytical instruments being sold into a variety of
markets worldwide. Analytical instruments for life sciences represent the
largest single segment with annual sales of approximately $9.4 billion; sales of
separations are approximately $6.2 billion; and sales of molecular spectroscopy
instrumentation are approximately $3.3 billion. Instrument companies within
these segments currently have higher valuations due to higher growth rate
expectations. Over time, the growth rates and valuations of individual segments
tend to vary as new instrumentation areas develop, demand for older instruments
levels off or new technology and regulations render older instruments
obsolete.
Technologists,
regulators and managers around the world rely on analytical and life science
instrumentation in the pursuit of knowledge in all types of industries, from
drug development and research, to polymers and plastics, to environmental
monitoring. The number of different types of instruments and technologies
employed is almost as large as the number of applications for which they are
used. These life science and analytical instruments are based on various
chemical separations as well as optical and other techniques each of which have
strengths in analyzing specific materials and compounds.
2
Strategic Directions International, Inc., The Laboratory Analytical and Life
Science Instrumentation Industry, Market Forecast: 2007-2012, SDi’s Global
Assessment Report, 10th
Edition, September 2008, page 42.
2
Technological
advancements and the search for production efficiency are driving the demand for
application-specific laboratory analytical instruments and services globally.
Market developments include a trend toward integrated instrumentation and
software as well as extensive research in biochemistry, drug discovery, homeland
security and environmental testing. Greater emphasis on quality control in
manufacturing processes and economic prospects are also driving demand.
Improvements
in instrument design, such as miniaturization, incorporation of software and
unattended operation with automated sample handling, are aiding customers to
maximize productivity and minimize costs. Vendors are focusing on compatibility
of instruments with research facilities such as lab-on-a-chip and laboratory
information management systems to enable complete interconnectivity.
Application-specific equipment, such as surface analyzers for semiconductor
chips and infrared spectrometers, are increasing the demand for these
instruments as a whole.
Analytical
instruments are found in over 200,000 laboratories around the world. Until
recently, the major markets were the U.S., Western Europe and Japan. Recently,
countries such as China, Taiwan and South Korea are becoming major purchasers of
all types of analytical instruments.
The
majority of the instrument purchases are by large commercial companies,
universities and government laboratories. After the government, the
pharmaceutical industry is the largest single purchaser of analytical
instruments. Academia traditionally continues to have a strong demand for nearly
every type of available instrument due to the complete range of scientific
disciplines found at universities.
Analytical
Laboratory Services
Services
We
operate a network of laboratories in the U.S. In addition to two radiochemistry
laboratories, we also operate a stable chemistry laboratory, which provides
analyses for traditional samples and for radioactive mixed waste samples.
Radiochemistry is an analysis technique to determine the presence and extent of
radioactive materials. The company and its predecessors have served the nuclear
industry since 1948 with the opening of a laboratory in Richmond, California. In
addition to the Richmond laboratory, we have laboratories in Oak Ridge,
Tennessee and Exton, Pennsylvania.
We
provide a wide variety of sample analyses for government agencies, industry and
nuclear utilities. The radionuclides or radioactive substances analyzed are in
many chemical and physical forms, often in low concentrations and in a variety
of matrices. These matrices include:
·
Surface and potable
water
|
·
Aquatic and land animals
|
·
Sea water
|
·
Particulate fallout
|
·
Rain water
|
·
Urine and feces bioassay
|
·
Air filters
|
·
Reactor coolants and effluents
|
·
Soils and sediments
|
·
Irradiated reactor fuel
|
·
Food stuffs
|
·
Fissionable material
|
·
Vegetation
|
·
Low-level radioactive waste
|
We have
extensive experience in the transuranic characterization of samples generated by
the nuclear utility industry, by nuclear fuel processors, and by DOE and DOD
facilities. Transuranic isotopes are those radioactive substances found in the
atomic weapons and nuclear industries that must be isolated and disposed of in
order to produce clean sites that can be returned to industrial use. We have
specifically designed procedures to dissolve any refractory transuranic
substances that may be present in samples from the nuclear fuel cycle. We can
also perform radio-bioassays to detect and quantify radioactive substances in
body fluids and excretions. Our laboratories use a broad range of analytical
techniques and instrumentation. However, we work in the environmental range of
analyses and do not undertake to perform high-level (hot laboratory) analyses.
Our
stable chemistry analysis laboratory in Exton, Pennsylvania offers a full range
of capabilities and a large capacity to support environmental laboratory
programs. Water, soil, solid waste and air samples are analyzed for a wide
variety of organic, inorganic and physical parameters using a variety of
Environmental Protection Agency protocols and American Society for Testing and
Materials methods. Routine service capabilities include organic chemicals,
metals, wet chemistry and physical properties. Ancillary services include field
sampling, field screening, data interpretation, method development and
validation, onsite laboratories, mobile laboratories, analytical specifications
preparation (quality assurance project plans, sampling and analysis plans) and
data storage.
3
Regulation
While our
business has benefited substantially from increased governmental regulation of
hazardous wastes, the environmental services industry itself has become the
subject of extensive and evolving regulation by federal, state and local
authorities. Environmental testing laboratories like those we operate are
subject to a variety of certifications. We believe that we have acquired all
operating permits and approvals required for the current operation of our
business. We make a continuing effort to anticipate regulatory, political and
legal developments that might affect operations, but are not always able to do
so. Compliance with federal state and local environmental provision has only a
nominal effect on current or anticipated capital expenditures and has had no
material effect on earnings or our competitive position. We cannot predict the
extent to which any environmental legislation or regulation that may be enacted
or enforced in the future may affect our operations.
Our
laboratories hold the appropriate permits and licenses from the DOE, DOD, United
States Corps of Engineers, Navy, Nuclear Regulatory Agency and from over 26
states.
Clients
and Contracts
The
largest component of our laboratory business is with the federal government and
its prime contractors. We service more than 100 clients overall. We generally
have long-standing relationships with our clients, averaging more than ten years
with our top ten clients. Our clients include federal agencies, prime
contractors to the federal government, state regulatory agencies and leading
companies in the environmental marketplace.
Our
strategy is to develop and maintain ongoing relationships with a diversified
group of customers who have recurring needs for environmental services. We
strive to be recognized as a reliable and high quality supplier of laboratory
testing services based upon quality, responsiveness, customer service,
information technologies, breadth of analytical techniques and cost
effectiveness.
Laboratory
pricing is based upon fixed unit pricing. In this process, clients are invoiced
for each analysis based on a fixed price for each substance that is analyzed,
the type of report and quality assurance desired, the turn-around time, and the
total price is determined by the number of corresponding analyses. Discounts may
be provided for large volumes. Premiums are added for faster turn-around times
of analyses. The laboratories have no cost-plus-fixed-fee contracts.
We
provide our services under contracts and purchase orders. We bill all of our
laboratory clients as analyses are completed and data packages are submitted to
the client. No billing is done periodically based on costs incurred, on either
an hourly-fee basis or on a percentage of completion. Analyses are normally
completed and invoiced within one month after sample receipt from the
client.
Environmental
Services
Services
Our
environmental specialists provide a wide range of services for radiological
characterization and analysis; hazardous, radioactive and mixed waste
management; and environmental, safety and health management. These services
include program development, implementation and assessment; regulatory analysis,
strategy development, permitting and compliance; and environmental liabilities
management through such techniques as pollution prevention and application of
best management practices. Our field services personnel provide radiological and
industrial hygiene control and monitoring.
Our major
environment services client is the federal government, either directly or
through its prime contractors. Our experience dates back to 1989 when we had our
first contracts at the DOE’s Los Alamos and Waste Isolation Pilot Plant, or
WIPP.
Our core
competencies in environmental services are hazardous and radioactive waste
characterization, waste management, and multimedia environmental regulatory
compliance. Environmental regulatory compliance capabilities include multimedia
environmental program development, implementation and assessment, including in
the following areas:
|
·
|
Air
quality;
|
|
·
|
Water
quality (drinking water, storm water, wastewater, surface water and
groundwater);
|
|
·
|
Waste
management (sanitary, solid, hazardous, radioactive, mixed and toxic
substances); and
|
4
|
·
|
Soil
and subsurface quality (bioremediation strategies for
petroleum-contaminated soils and characterization and investigation of
subsurface contamination).
|
The
current personnel of our environmental services operations consist of over 36
professionals, who include environmental scientists and engineers, health
physicists and nuclear engineers. The staff members hold professional
certifications and registrations such as Certified Environmental Trainer, Safe
Drinking Water Act Compliance Sampler, Hazardous Waste Specialist, Hazardous
Substances Professional, Registered Environmental Manager, Certified Hazardous
Materials Manager, New Mexico Water Systems Operator Levels I through IV and New
Mexico Wastewater Systems Operator Levels I through IV. Several of our employees
have DOE security clearances.
As an
outgrowth of its radiological characterization expertise, our staff developed,
for its own use, a gamma spectral analysis software tool, or SNAP™, which we
have used on projects at Los Alamos National Laboratory, or Los Alamos, Rocky
Flats Environmental Technology Site, and Idaho National Engineering and
Environmental Laboratory, or Idaho National Laboratory. This software tool
allows an experienced gamma spectral analyst more flexibility in performing peak
identification, source modeling, and assay calculations than other similar,
commercially available software. SNAP is used by customers at Los Alamos, Sandia
National Laboratories, and at the U.K. atomic agency in Aldermaston, England.
Clients
and Contracts
We manage
and perform certain contracts for clients at Los Alamos, Idaho National
Laboratory, Oak Ridge National Laboratory, or Oak Ridge, and for the New Mexico
Environment Department. At Los Alamos we have supported waste management and
environmental protection programs since 1989. Our work includes task order
contracts to provide radiological waste characterization services and waste
management technical support services, as well as a subcontract to manage
environmental protection programs for Los Alamos, for which the prime contractor
is managed by Los Alamos National Security, LLC, or LANS. We have provided
radiological characterization services in support of closure activities at
various sites, and radiological characterization in support of waste retrieval
operations at Idaho National Laboratory since 2003. We have provided on-call,
statewide hazardous materials incident response services to the New Mexico
Environment Department since 1997.
Our waste
management expertise includes comprehensive waste certification and
characterization support activities for transuranic wastes destined for WIPP. We
have provided WIPP certification support at numerous DOE sites including Hanford
(Washington State) Reservation Site (Hanford Reservation), Los Alamos, Idaho
National Laboratory, Oak Ridge, Argonne National Laboratory-East and Lawrence
Berkeley National Laboratory, and we have operated mobile transuranic waste
characterization systems at Nevada Test Site and Argonne
National/Laboratory-East. The environmental group has multiple-year basic
ordering agreement contracts at Los Alamos. One contract is an environmental
support contract to LANS, the prime contractor at Los Alamos, which generates a
base of approximately $1.7 million per year. In addition to the base funding on
this contract, we conduct other work for LANS on task order basis. Our Los
Alamos contract with LANS was extended through September 2010, the end of the
government fiscal year. Eberline Services has been contracted for this scope of
work for the last ten years, as a subcontractor to LANS, and KSL Services JV,
the predecessor of LANS.
Since
1994, ESHI has provided radiological and industrial hygiene support, quality
assurance, and safety services as a pre-selected subcontractor to both, Bechtel
Hanford, Inc., and Washington Closure Hanford, LLC, or WCH, at the Hanford
Reservation. The Hanford Reservation is the largest complex within the DOE, and
the clean-up program is anticipated to extend beyond 2035. From 1994-2009, ESHI
generated over $160.0 million in revenue from subcontracting work between the
two contractors.
Until
September 2005, we performed the Hanford Reservation work under a subcontract
agreement with Bechtel Hanford, Inc, or ERC. However, the ERC contract expired
on August 30, 2005 and the DOE awarded the successor contract, the River
Corridor Contract, or RCC, to WCH. WCH pre-selected ESHI as a subcontractor, and
we continue to provide services to the site-wide clean-up effort. The scope of
the work of the RCC contract has substantial incentives for the team to complete
the project in seven years. ESHIs’ current contract relationship with WCH is on
a year-to-year basis with extensions to the base contract through 2015. As with
all contracts of this nature, our contract can be canceled on relatively short
notice at the convenience of the federal government. Based in
Richland, Washington, ESHI has approximately 173 employees. It has a contract
with the Hanford Atomic Metal Trades Council labor bargaining unit and employs
radiological control and industrial hygiene technicians to support Hanford
Reservation projects. The Hanford Reservation contract with WCH is the largest
held by us and accounts for approximately 62% of our total
revenues.
At the
Hanford Reservation site, we provide radiation protection services for the
excavation, decontamination, and decommissioning of reactors, area surveillance
maintenance and transition facilities, area remedial action and waste disposal
sites, the Environmental Restoration Disposal Facility for the underground
disposal of low-level wastes, the ground water project and the complex
decontamination and decommissioning of the plutonium processing facility. The
services provided by our radiological personnel include:
5
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Maintaining
adequate staffing of radiological control technicians and radiological
control supervisors for the projects to detect and prevent the exposure of
personnel to radiation;
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Performing
and document radiation, contamination and airborne surveys;
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Writing
and approve radiological work permits;
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Writing
and implementing procedures and work instructions to ensure compliance
with federal regulations for conducting work in areas that cause exposure
to radioactivity;
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Providing
program and inventory support for the radiological instrumentation and
source control programs;
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Maintaining
and providing input for radiological worker and workplace monitoring
metrics;
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Providing
radiation surveys of large contaminated open areas on the Hanford
Reservation site using proprietary global positioning system, or GPS, and
laser-assisted radiological mapping systems; and
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Maintaining
a cadre of certified instructors that provide radiological
training.
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We have
established an excellent record for working safely in an environment consisting
of radioactively contaminated condemned buildings and nuclear reactors,
contaminated excavation sites with steep slopes and trenches, and in the
vicinity of heavy equipment. In spite of the fact that approximately 173
technicians and supervisors are deployed daily to work in excavation sites, old
buildings and facilities, we had only one lost-time injury in the 10-year ERC
history and have passed a milestone of one million hours worked without
lost-time injury on the RCC.
Government
Contracts
We must
comply with and are affected by laws and regulations relating to the formation,
administration and performance of U.S. government contracts. These laws and
regulations, among other things:
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Require
certification and disclosure of all cost or pricing data in connection
with certain contract negotiations;
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Impose
acquisition regulations that define allowable and unallowable costs and
otherwise govern our right to reimbursement under certain cost-based U.S.
government contracts; and
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Restrict
the use and dissemination of information classified for national security
purposes and the exportation of certain products and technical
data.
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U.S. government contracts are
conditioned upon the continuing availability of congressional appropriations.
Long-term government contracts and related orders are subject to cancellation if
appropriations for subsequent performance periods become unavailable. Congress
usually appropriates funds on a fiscal-year basis even though contract
performance may extend over many years. Consequently, at the outset of a
program, the contract is usually partially funded, and Congress annually
determines if additional funds are to be appropriated to the
contract.
The U.S.
government, and other governments, may terminate any of our government contracts
and, in general, subcontracts, at their convenience, as well as for default
based on performance. Upon termination for convenience of a cost reimbursement
contract, we normally are entitled to reimbursement of allowable costs plus a
portion of the fee. The amount of the fee recovered, if any, is related to the
portion of the work accomplished prior to termination and is determined by
negotiation. A termination arising out of our default could expose us to
liability and have a material adverse effect on our ability to compete for
future contracts and orders.
In
addition, our U.S. government contracts (or those of the prime contractors)
typically span one or more base years and multiple option years. The U.S.
government generally has the right to not exercise option periods and may not
exercise an option period if the agency is not satisfied with our performance of
the contract. U.S. government contracts generally contain provisions that allow
the U.S. government to unilaterally suspend us from receiving new contracts
pending resolution of alleged violations of procurement laws or regulations,
reduce the value of existing contracts, issue modifications to a contract and
control and potentially prohibit the export of our services and associated
materials.
For the
previous two years ended December 27, 2009 and December 28, 2008, the federal
government and its prime contractors accounted for more than 90% of our
consolidated revenues. Only two contracts, the contract at Los Alamos for which
the prime contractor is LANS, and the RCC, for which the prime contractor is
WCH, accounted for approximately more than 74% of our consolidated revenues. Any
disruption in government funding or in our relationship with the government
could have a material adverse impact on our financial condition. In addition,
the inability to win new government contracts would have a material adverse
effect on our business and financial condition.
6
We
believe that the principal competitive factors in all areas of our business
are:
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technical
proficiency;
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operational
experience;
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price;
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breadth
of services offered; and
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local
presence.
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We
compete with a diverse array of small and large organizations including the
following:
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national
or regional environmental management firms;
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national,
regional and local architectural, engineering and construction firms;
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environmental
management divisions or subsidiaries of international firms;
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engineering,
construction and systems companies; and
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hazardous
waste generators that have developed in-house
capabilities.
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If and
when we acquire an analytical instrument business and enter that market, we
would expect competition from several firms. Currently, there are hundreds of
analytical instrument companies worldwide. Sizes range from a few million
dollars to over a billion dollars in analytical instrument revenues. The top ten
analytical instrument companies represent approximately 38% of the overall
market.
Proprietary
Technology
We have
developed substantial proprietary technology and have established and maintain
an extensive knowledge of the leading commercially available technologies. We
incorporate these technologies into the environmental services that we provide
to our customers. We currently hold three patents and 15 trademarks in the U.S.,
and we license software and other intellectual property from various third
parties. We enter into confidentiality agreements with certain of our employees,
consultants and corporate partners, and control access to software documentation
and other proprietary information. We believe that we hold adequate rights to
all intellectual property used in our business and that we do not infringe upon
any intellectual property rights held by other parties.
We have
several proprietary technologies that we believe give us a competitive advantage
by offering unique services that benefit our clients, including:
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SNAP
TM
(Spectral Nondestructive Assay Platform);
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SGS
TM
(Segmented Gate System);
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GPERS
TM
(Global Positioning Environmental Radiological Surveyor); and
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LARADS
TM
(Laser-Assisted Ranging and Data System).
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SNAP:
Spectral Nondestructive Assay Platform
Each
transuranic analysis is comparatively expensive due to the rigorous accuracy and
quality assurance requirements dictated by federal and state law. Another cost
consideration to DOE is that the disposal of transuranic waste at the WIPP is
significantly more expensive than the disposal of routine low-level radioactive
waste. Therefore, we have identified a secondary opportunity to provide a less
expensive onsite analysis of uncharacterized waste to distinguish these wastes
at the generator’s site. SNAP is the technology we developed in response to this
need. SNAP is an onsite and non-intrusive method to radiologically characterize
the contents of a wide array of wastes at lower costs than other methods. The
use of mathematical models allows the company to adequately characterize and
quantify wastes in less than one-half the time typically required to achieve
comparable results. SNAP makes it possible to accurately characterize wastes of
unknown composition with minimal effort.
Defensible,
cost-effective waste characterization capability is essential to the remediation
of contaminated sites and waste management. SNAP yields the following
benefits:
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Cost
savings over standard characterization techniques;
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Small,
light-weight, portable and battery-powered instrumentation that lends its
use to remote deployment;
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Digital
storage of data on the locations and concentrations of contaminants and
display of the data in near real-time;
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Ability
to assay all sizes and shapes of waste packages;
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Portable
non-destructive assay technology yielding excellent detection limits in
addition to accurate radionuclide quantification;
and
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Data
on isotopes, concentration levels and locations (rather than just activity
levels).
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Considering
the high cost of transuranic waste management and disposal, reductions such as
these have produced significant cost savings for our clients. We believe that
the use of SNAP has reduced disposal costs at the WIPP site.
SGS:
Segmented Gate System
The SGS
is a technology that separates radioactively contaminated soil from clean soil.
The SGS is a combination of sophisticated conveyor systems, radiation detectors
and computer controls that remove contaminated soil from a moving feed supply on
a conveyor belt. It significantly reduces the volume of contaminated soils
requiring treatment and disposal, enabling large cost savings. The clean soil
stream is diverted for return to the site or cheaper disposal options. The SGS
has been successfully used to remediate over 200,000 cubic yards of
plutonium-contaminated soil on Johnston Atoll, which is a large environmental
restoration project, which involves a significant volume reduction of
radioactively contaminated soil. The system has also processed over 15,000 cubic
yards of soils contaminated with various radionuclides at many DOE and DOD sites
across the U.S. The system was employed at a commercial site in Louisiana to
remediate soil contaminated with radionuclides from oil field
operations.
Radiological
Mapping Systems
We offer
two types of radiological mapping technologies, GPERS and LARADS.
Common
features of the two radiological mapping systems are as follows:
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Both
systems collect and store in electronic files the positional coordinates
and radiological readings on a point-per-second basis. These field files
are then downloaded and processed with software to produce both a
color-coded (based on radiological reading) map of the survey trace
overlaid upon a computer-aided-design base map or digital photo of the
site or area; and
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Survey
detectors can be hand-carried or mounted on a vehicle for large area
surveys.
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Use of
the GPERS and LARADS systems offers several advantages over traditional
radiological surveys, which involve manual collection and documentation of
objective data and manual data archival, management, and assembly. These
advantages include:
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The
GPERS system constantly updates position data from global positioning
satellites accurate to within less than 0.5 meters. The LARADS system
utilizes an auto tracking laser range finding system to provide the same
positioning data accurate to less than inch for those situations where
satellite data are unavailable (i.e., indoors or under trees next to
buildings);
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GPERS
and LARADS automatically acquire and store radiation and positioning data
as the technician moves from location to location providing a continuous
record in retrievable format;
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The
radiation data is acquired every second and can be merged, averaged and
evaluated without subjective operator interpretation;
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The
need for manual data entry is eliminated because data is collected and
stored in database format. This eliminates transcription errors and
position errors, and also allows the position data to be reported in any
commonly used coordinates system;
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Ability
to report on data collected within 24 hours; and
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Savings
in accelerated performance.
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GPERS: Global Positioning
Environmental Radiological Surveyor is a lightweight survey platform used for
performing radiological surveys in open land areas. GPERS reduces labor
requirements to characterize large outside land areas for radiological
contaminants, thereby significantly reducing project costs. This technology
merges standard radiation monitoring equipment with satellite global positioning
to accurately locate and quantify areas of elevated radioactive contamination.
The accuracy of the sophisticated equipment automatically produces repeatable
and verifiable coordinates, thus reducing requirements for extensive grid
establishment. The GPERS is coupled with conventional radiation detectors for
outdoor radiological surveys where positional accuracies of less than one meter
are sufficient.
8
LARADS: Laser-Assisted
Ranging and Data System is a radiological surveying instrument that automates
the collection of indoor radiation measurement data. LARADS reduces labor costs
to characterize the interior surfaces of buildings where GPS tracking is
unavailable. This system integrates standard radiation monitoring equipment with
a laser positioning total system to locate elevated levels of radioactive
contamination. Both GPERS and LARADS databases can be overlaid on digital
photographs, computer aided design drawings, and drawings generated by the
system to visually depict the characterization data.
LARADS
offers two advantages over the GPERS systems in that:
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It
can be used inside a building or facility, while the GPERS requires a view
of the sky; and
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Its
positional accuracy, and hence detector velocity, are much more precise.
This allows greater control of survey scan rates, and post-processed
minimum detection analyses are much more accurate. The LARADS includes an
alarm to alert the surveyor if the velocity user-set point is
exceeded.
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The
resulting color-coded data maps are helpful tools for evaluating site conditions
and providing pre-job briefings. This system is coupled with conventional
radiation detectors for indoor surveys or surveys where higher positional
accuracy is desired (less than two centimeters). The LARADS system can be (and
has been successfully) mounted on automated platforms to allow surveys of walls
and ceilings without the use of ladders and scaffolds, minimizing the risks to
personnel accessing these types of equipment.
Research
and Development
In 2008, we began limited research and
development in nuclear instrumentation with the intent to develop a new line of
instruments. The development budget for the first instrument is approximately
$250,000. In 2009, the company spent approximately $25,000 towards the
development of a prototype. The research and development effort should be
completed in 2010.
Employees
As of
December 27, 2009, the company and its subsidiaries employed approximately 307
active full-time employees and 17 part time employees. Included in this group
are approximately 150 employees at the Hanford Reservation who are covered under
a collective bargaining agreement. One of our subsidiaries has a contract with
the Hanford Atomic Metal Trades Council. We have a good relationship with the
union. In general, we believe that our relationship with our employees is
satisfactory.
Item
1A. Risk Factors.
Our
business faces many risks. The risks described below may not be the only risks
we face. Additional risks that we do not yet know of, or that we currently think
are immaterial, may also impair our business operations or financial results. If
any of the events or circumstances described in the following risks occurs, our
business, financial condition or results of operations could suffer and the
value of our securities could decline. Investors and prospective investors
should consider the following risks and the information contained under the
heading ‘‘Warning Concerning Forward-Looking Statements’’ before deciding
whether to invest in our securities.
We
have incurred losses, and these losses may continue in parts of our
business.
For the
years ended December 27, 2009 and December 28, 2008, we reported net losses. As
DOE closes facilities, it may mean fewer projects and samples for analytical
services and environmental services.
We
are substantially dependent on contracts with the U.S. Government.
Over 90%
of our revenue is derived, directly or indirectly, from contracts with the
federal government. The environmental group has multiple-year basic ordering
agreement contracts in two areas at Los Alamos. The first is a five-year ID/IQ
contract for waste management which is nearing the end of its life. With the
change in management at Los Alamos, the contract may not be renewed or fully
utilized as the laboratory management determines the new direction of Los
Alamos. The second is an environmental support contract to LANS, the prime
contractor at Los Alamos, which generates approximately a base of $1.7 million
per year.
9
Until
September 2005, we performed the Hanford Reservation work under a subcontract
agreement with Bechtel Hanford, Inc. However, the ERC contract expired on August
30, 2005, and the DOE awarded the successor contract, the RCC, to WCH. WCH
pre-selected ESHI as a subcontractor, and we continue to provide services to the
site-wide clean-up effort. ESHI’s current contract relationship with WCH is on a
year-to-year basis with extensions to the base contract through
2015.
Any
disruption in government funding or in our relationship with the government
could have a material adverse impact on our financial condition. In addition,
many of our contracts with federal government agencies require annual funding
approval and may be terminated at their discretion. A reduction in spending by
the applicable federal agencies could limit the continued funding of our
existing contracts with them and could limit our ability to obtain additional
contracts. The inability to win new government contracts would have a material
adverse effect on our business and financial condition.
Fixed-price
contracts expose us to losses in the event of unanticipated cost
increases.
Our
laboratories conduct a fixed-price sample business, which constitutes over 23%
of our revenues. Fixed-price contracts may have unanticipated or unforeseeable
cost increases that could have a material adverse impact on our financial
condition if we underbid these contracts. Fixed-price contracts protect clients
but expose us to a number of risks. These risks include:
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underestimation
of costs;
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problems
with the appropriate choice of
technologies;
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unforeseen
costs or difficulties;
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delays
beyond our control; and
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economic
and other changes that may occur during the contract
period.
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It is
possible that future federal audits performed by the Defense Contract Audit
Agency, or DCAA, on cost-plus-fixed-fee and related types of government
contracts may determine that there have been overpayments to us by the
government. Any related settlement of that sort may create a liability for the
company. In the past, settlements had the opposite effect with the company
recouping additional funds. The possibility, however, does exist for overbilling
due to incorrect provisional overhead rates in a given year.
We
perform services under numerous subcontract agreements on cost-reimbursable
contracts with the federal government. During the period from 1998 to 2003, the
company was party to a subcontract agreement with Johnson Control Northern New
Mexico, or JCNNM, to provide services to Los Alamos on a cost-reimbursable
basis. On May 14, 2007, we received notification from IAP-Northern New Mexico,
or IAPNNM, the successor corporation to JCNNM, that the results of a Los Alamos
audit for the period ending in 2003 determined that certain costs previously
claimed and billed by the company were subsequently deemed unallowable or
otherwise not reimbursable. IAPNNM requested that we reimburse the amount of
$321,836 that was paid to us during the subject time period. In January 2009, we
protested the Los Alamos audit results claiming they were inaccurate and
requested to resubmit a claim for the subject contract. The Los Alamos audit
team agreed to review the audit results and adjust the claim as needed. In the
event it is determined that we have to reimburse such amount in full, the
resultant cost would materially affect our results of operations.
Our
government contracts expose us to the possibility of substantial fines and
penalties, governmental audits and investigations and suspension or
debarment.
We face
specific risks associated with government contracting, which include the risk of
substantial civil and criminal fines and penalties for violations of applicable
laws and regulations. Government contracting requirements are complex, highly
technical and subject to varying interpretations. During the course of an audit,
an agency may disallow costs if, for example, it determines that we improperly
accounted for such costs in a manner inconsistent with government cost
accounting standards. Under the typical “cost-reimbursable” government contracts
that we perform, only those costs that are reasonable, allocable and allowable
are recoverable in accordance with federal acquisition regulations and
cost-accounting standards. In addition to damage to our business reputation, the
failure to comply with the terms of one or more of our government contracts
could also result in our suspension or debarment from government contract
projects for a significant period of time. This would have a material adverse
effect on our business.
10
Our
nuclear waste management services subject us to potential environmental and
other liabilities.
Our
business of rendering services in connection with management of waste, including
certain types of hazardous waste and low-level radioactive waste, subjects us to
risks of liability for damages. Such liability could involve, without
limitation:
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claims
for clean-up costs, personal injury or damage to the environment in cases
in which we are held responsible for the release of hazardous or
radioactive materials;
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claims
of employees, customers, or third parties for personal injury or property
damage occurring in the course of our operations;
and
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claims
alleging negligence or professional errors or omissions in the planning or
performance of our services.
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In
addition, we are subject to potentially large civil and criminal liabilities.
The government could suspend or disbar us as a government contractor or hold us
liable for any failure to abide by environmental laws and regulations.
Our inability to successfully
identify and complete acquisitions or successfully integrate any new or previous
acquisitions could have a material adverse effect on our
business.
Our
primary growth strategy is to acquire and operate analytical instruments
businesses. We may be unable to execute our primary growth strategy for the
following reasons:
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we
may fail to identify suitable acquisition candidates or to acquire
additional companies on favorable
terms;
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we
may fail to obtain the necessary financing, on favorable terms or at all,
for any of our potential
acquisitions;
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we
may fail to successfully integrate or manage these acquired companies due
to differences in business backgrounds or corporate cultures or inadequate
internal systems or controls; and
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these
acquired companies may not perform as we
expect.
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we
may need to pay back in cash the entire principal amount, including
accrued interest, to the holders of our convertible debentures if we fail
to successfully complete an
acquisition.
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Furthermore,
identifying and pursuing future acquisition opportunities requires a significant
amount of management time and skill.
Our
acquisition strategy will require additional capital, and we may not be able to
raise this capital on favorable terms, if at all.
We
anticipate that we will need to raise additional capital to fund our acquisition
strategy and our cash needs may vary significantly from our projected needs. If
our estimates as to future cash needs are wrong, we may need to raise additional
capital sooner than expected. We cannot assure you that our estimations
regarding our cash needs will prove accurate, that we will be able to secure
required additional financing if needed, or that additional financing, if
obtained, will be on favorable or acceptable terms. We may raise additional
funds through public or private equity offerings or debt financings. To the
extent that we raise additional funds by issuing equity securities, our
stockholders may experience significant dilution, and debt financing, if
available, may involve restrictive covenants. If we are unable to obtain
additional financing when needed, we would be required to significantly scale
back development plans and, depending upon cash flow from our existing business,
reduce the scope of our operations or cease operations entirely.
We
are substantially dependent on current management, and if we fail to attract and
keep senior management and key scientific and operating personnel, we may be
unable to successfully pursue our growth strategy.
Our
success depends on the contributions of our key management, especially our Chief
Executive Officer, Arvin Smith, and our Chairman, John Hatsopoulos. Their
respective ages are 80 and 75. We expect that our future market capitalization
will be in significant part dependent on the reputation of these individuals. We
do not have employment contracts with either of these individuals, and we do not
maintain key person insurance on any of our employees, officers, or directors.
The loss of the services of either of these individuals would likely have a
material adverse effect on our business and prospects.
Our
success also depends on our ability to retain and expand our staff of qualified
managerial and technical personnel, particularly if we are successful in
implementing our acquisition strategy. Qualified individuals are in high demand
and are often subject to competing offers. We cannot be certain that we will be
able to attract and retain the qualified personnel we need for our business. If
we are unable to hire additional personnel as needed, it would likely have a
material adverse effect on us.
11
Our
operating results fluctuate across quarters due to the nature of our
business.
Our
quarterly revenues, expenses and operating results may fluctuate significantly
due to a number of factors, including:
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the
seasonality of the spending cycle of our public sector clients, notably
the federal government;
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employee
hiring and utilization rates;
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the
number and significance of client projects commenced and completed during
a quarter;
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delays
incurred in connection with a
project;
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the
ability of our clients to terminate projects without penalties;
and
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weather
conditions.
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Historically,
we experience lower revenues in the first calendar quarter primarily due to
weather conditions. Also, because we have a heavy concentration of federal
government contracts, the federal appropriations process may significantly
affect our operating results. However, variations in any of these factors could
cause significant fluctuations in our operating results from quarter to
quarter.
Our
industry is subject to intense competition, and several of our competitors are
larger than us.
In our
radiological services business, we compete with many national environmental and
consulting firms, and in our laboratory business we compete with many regional
or niche firms. Some of our larger competitors benefit from economies of scale
and have better access to bonding and insurance markets at a lower cost than we
can achieve. The entry of large systems contractors and international
engineering and construction firms into the environmental services industry has
increased competition for major federal government contracts and
programs.
The
analytical instrument business is subject to intense competition. Competitors
would include many other companies that offer products and services similar to
ours. Many of our potential competitors have longer operating histories, large
customer bases, greater brand recognition and significantly greater financial,
marketing and other resources. Certain of our potential competitors may be able
to devote greater resources to marketing, adopt more aggressive pricing policies
and devote substantially more resources to developing their products. We may be
unable to compete successfully against current and future competitors, and
competitive pressures may have a material adverse effect on us.
If
we are successful in acquiring analytical instrument businesses or products,
that business will be subject to a variety of specific risks.
Our
success in the analytical instrument business will depend in large part on our
ability to engineer and improve or develop our products. The following
circumstances, among others, may lead to a significant delay:
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our
inability to hire or retain skilled internal technical developers and
technicians to develop, maintain and enhance our products;
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unforeseen
technical or development issues;
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unanticipated
product requirements requested by vendors, consumer or regulators;
and
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our
inability to develop, in a cost-effective manner, unique
products.
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The
analytical instrument business depends on the protection of proprietary rights,
which is difficult and costly.
If we are
successful in acquiring analytical businesses, we will need to protect our
proprietary rights in our products. Intellectual property rights implementation
and protection is complex and costly. We may be unable to obtain or maintain
adequate protection, and we may be subject to infringement claims by our
competitors. We may not have the financial resources to prosecute patent
applications or defend our patents from infringement or claims of invalidity. In
addition to patents, we expect to rely on trade secrets and proprietary
knowledge, which we seek to protect, in part, through appropriate
confidentiality and proprietary information agreements. Our proprietary
information or confidentiality agreements with employees, consultants and others
may be breached, or we may not have adequate remedies for any breach or our
trade secrets may otherwise become known to or independently developed by
competitors.
12
There
is no public market for our outstanding common stock, and there will be
restrictions on transferability.
There is
presently no public market for our outstanding common stock, and we cannot
assure you that a public market will ever develop. Moreover, even if a public
market develops, any sale of our outstanding common stock may be made only
pursuant to an effective registration statement under federal and applicable
state securities laws or exemptions therefrom. Realization of any gains on an
investment in us will be principally dependent upon our ability to effectuate
one or more liquidity-providing transactions.
We
anticipate that if and when our common stock becomes publicly traded, such
trading in the stocks of smaller companies like us is often thin, sporadic and
characterized by wide fluctuations in trading prices, due to many factors that
may have little to do with our operations or business prospects.
Our
ability to access capital for the repayment of debts and for future growth is
limited as the financial markets are currently in a period of disruption and
recession and the company does not expect these conditions to improve in the
near future.
Our ability to continue to access
capital could be impacted by various factors including general market conditions
and the continuing slowdown in the economy, interest rates, the perception of
our potential future earnings and cash distributions, any unwillingness on the
part of lenders to make loans to us and any deterioration in the financial
position of lenders that might make them unable to meet their obligations to
us.
Our
business is affected by general economic conditions and related uncertainties
affecting markets in which we operate. The current economic conditions including
the global recession could adversely impact our business in 2010 and
beyond.
The
current economic conditions including the global recession could adversely
impact our business in 2010 and beyond, resulting in reduced demand for our
services, increased rate of order cancellations or delays, increased pressure on
the prices for our samples; and greater difficulty in collecting accounts
receivable.
Trading
of our common stock may be restricted by the SEC’s “penny stock” regulations
which may limit a stockholder’s ability to buy and sell our stock.
The SEC
has adopted regulations which generally define “penny stock” to be any equity
security that has a market price less than $5.00 per share or an exercise price
of less than $5.00 per share, subject to certain exceptions. If and when our
common stock becomes publicly traded, it will likely be covered by the penny
stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
accredited investors. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the SEC that
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and other quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statement showing the market value of each penny stock held in the customer’s
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer in writing
before or with the customer’s confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
these rules, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser’s written agreement to the transaction. These disclosure and
suitability requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that is subject to these penny
stock rules. Consequently, these penny stock rules may affect the ability of
broker-dealers to trade our securities. We believe that the penny stock rules
discourage investor interest in and limit the marketability of our capital
stock. Trading of our capital stock may be restricted by the SEC’s penny stock
regulations which may limit a stockholder’s ability to buy and sell our
stock.
We
have no intention to pay dividends.
We
currently intend to retain earnings, if any, to fund the development and growth
of our business and do not anticipate paying cash dividends in the foreseeable
future. Our payment of any future dividends will be at the discretion of our
board of directors after taking into account various factors, including our
financial condition, operating results, cash needs and growth
plans.
Item
1B. Unresolved Staff Comments.
None.
13
Item
2. Properties.
We own
two properties and lease office space at four locations. Our operational
headquarters are located on four acres in Albuquerque, New Mexico and consists
of office and storage space, and our principal executive offices are located in
Waltham, Massachusetts. Our Analytical Laboratories segment includes a facility
in Richmond, California consisting of approximately 20,000 square feet. The
company owns a facility in Albuquerque, New Mexico consisting of 14,449 square
feet. The company leases facilities in Exton, Pennsylvania consisting of 11,256
square feet and Oak Ridge, Tennessee consisting of approximately 10,000 square
feet. Our Environmental Services segment leases office space in Richland,
Washington consisting of approximately 6,000 square feet. We believe that our
facilities are appropriate and adequate for our current needs.
In
2009, the company entered into an agreement, subject to closing conditions, with
a buyer to sell the property in Albuquerque, New Mexico for approximately $2.0
million. The property is classified as “Assets held for sale” on the company’s
balance sheet as of December 27, 2009. The company expects to complete the sale
in 2010.
Item
3. Legal Proceedings.
As of
December 27, 2009, the company was a party to two lawsuits with former employees
over their terminations.
The first
lawsuit was with Wendling at the Superior Court in Benton County in the State of
Washington and was dismissed with prejudice on March 17, 2010. The second
lawsuit with Voss is at the 2nd
Judicial Court in Bernalillo County in the State of New Mexico, where the case
is still in the discovery phase. We anticipate that we will prevail in the Voss
lawsuit and do not expect either litigation or any other legal activity will
have a materially adverse affect on our business, operating results or financial
condition.
Item
4. Reserved.
14
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market
Our
common stock is not currently traded on any stock exchange or electronic
quotation system.
Holders
As of
March 26, 2010, the number of holders of record of our common stock was
27.
Dividends
We currently intend to retain earnings,
if any, to fund the development and growth of our business and, do not
anticipate paying cash dividends in the foreseeable future. See “Note 8 –
Related party transactions” to our consolidated financial statements regarding a
one-time dividend that was declared in December 2007.
Set forth
below is information regarding common stock issued, warrants issued and stock
options granted by the company since fiscal year 2007. Also included is the
consideration, if any, we received and information relating to the section of
the Securities Act of 1933, as amended, or the Securities Act, or rule of the
SEC, under which exemption from registration was claimed.
Common
Stock
On August
31, 2007, the company raised $718,529 in a private placement of 102,647 shares
of common stock, representing 3.4% of the total shares then outstanding, at a
price of $7.00 per share. Prior to this transaction, the company had 3,000,000
shares of common stock outstanding. No underwriters were involved in the
foregoing sales of securities; however, in connection with such transaction, R.F
Lafferty & Co., Inc. received a cash commission of $31,112. All of the
purchasers were accredited investors, and such transactions were exempt from
registration under the Securities Act under Section 4(2) and/or Regulation D
thereunder.
Restricted
Stock Grants
On
November 13, 2007, the company made restricted stock grants to its independent
directors by permitting them to purchase an aggregate of 15,000 shares of common
stock, representing 0.5% of the total shares then outstanding, at a price of
$0.01 per share. Of those shares, 25% vest on the first anniversary of the grant
date and then an additional 25% vest on each of the subsequent three
anniversaries, provided that none of the shares will vest until 90 days after
the company’s common stock becomes publicly-traded. Prior to this transaction,
the company had 3,102,647 shares of common stock outstanding. Such transactions
were exempt from registration under the Securities Act under Section 4(2),
and/or Regulation D thereunder. No restricted stock awards were granted in 2008
or 2009.
Stock
Options
On
November 13, 2007, the company granted nonqualified stock options to purchase
230,000 shares of the company’s common stock to 44 employees at a price of $7.00
per share. Those shares vest in equal installments over a period of 5 years from
the date of the grant and expire in 7 years. Such transactions were exempt from
registration under the Securities Act under Section 4(2) and/or Regulation D
thereunder. No stock option awards were granted in 2008 or 2009.
Rule
144
Pursuant
to Rule 144 under the Securities Act, in general, a person who is not deemed to
have been one of our affiliates at any time during the 90 days preceding a sale,
and who has beneficially owned shares of our common stock for more than six
months but less than one year would be entitled to sell an unlimited number of
shares. Sales under Rule 144 during this time period are still subject to the
requirement that current public information is available about us for at least
90 days prior to the sale. After such person beneficially owns shares of our
common stock for a period of one year or more, the person is entitled to sell an
unlimited number of shares without complying with the public information
requirement or any of the other provisions of Rule 144. As of March 26, 2010,
all of our outstanding shares of common stock held by non-affiliates were
eligible for resale under Rule 144.
15
Item
6. Selected Financial Data.
Not
applicable.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
You
should read the following discussion and analysis of our financial condition and
results of operations together with our financial statements and related notes
appearing elsewhere in this Annual Report on Form 10-K. Some of the information
contained in this discussion and analysis or set forth elsewhere in this Annual
Report on Form 10-K, including information with respect to our plans and
strategy for our business, includes forward-looking statements that involve
risks and uncertainties. You should review “Item 1A. Risk Factors” beginning on
page 9 of this Annual Report on Form 10-K for a discussion of important factors
that could cause actual results to differ materially from the results described
in or implied by the forward-looking statements contained in the following
discussion and analysis.
During 2009, there has been a slowdown
in the economy, a decline in the availability of financing from the capital
markets, and a widening of credit spreads which has, or may in the future,
adversely affect us to varying degrees. Such conditions may impact our ability
to meet obligations to our suppliers and other third parties. These market
conditions could also adversely affect the amount of revenue we report, require
us to increase our allowances for losses, result in impairment charges and
valuation allowances that increase our net losses and reduce our cash flows from
operations. In addition, these conditions or events could impair our credit
rating and our ability to raise additional capital.
General
Overview
The
company continues to review potential opportunities in the instrument business
with the intent to make acquisitions that will build a base in the
instrumentation market. As of December 27, 2009, we had not identified an
opportunity that meets our financial requirements for an initial acquisition.
For the year ended December 27, 2009, Eberline Services and its subsidiaries
comprised 100% of the company’s sales. Eberline Services primarily provides
services to the federal government contracting market for nuclear and
environmental services. We believe the present level of government expenditures
should remain relatively stable.
Business
Overview
We
provide radiological characterization and analysis; hazardous, radiological, and
mixed (radiological and hazardous) waste management; and environmental, safety
and health services, primarily to the federal government. We provide labor-based
consulting, engineering, and technical services, as well as measurement and
detection services; we are not in the business of creating, treating, storing,
transporting or disposing of hazardous waste. Our network of radiochemistry
laboratories is an experienced provider of radiological services. Radiochemistry
is an analysis technique to determine the presence and extent of radioactive
materials. Our laboratories are located in California, Pennsylvania and
Tennessee. The laboratories generate a small amount of waste in the analytical
processes. We dispose of all waste in accordance with specific guidelines.
Sample volume and laboratory productivity has not improved sufficiently at all
laboratories in recent years. As a result, the laboratory segment has not been
profitable. We have taken steps to improve productivity but still have
substantial work to meet profit goals. In recent months sample flow has
moderately increased, and assuming continuing DOE spending, we anticipate that
there should be further increases in laboratory work.
We derive
the majority of our revenues directly or indirectly from contracts with the
federal and state governments. Two contracts account for approximately 74% of
Eberline Services’ total sales: the RCC in Richland, Washington, and the LANS at
Los Alamos. At the Hanford Nuclear Reservation in Richland, Washington, we
provide radiological support services to WCH, a prime contractor to the DOE. In
Los Alamos, New Mexico, we provide technical services to LANS, a prime
contractor to Los Alamos. Additionally, our laboratories derive the large
majority of their revenues from the analysis of samples collected from
government funded clean-up sites by the prime contractors or other
subcontractors; a minor portion of our laboratory revenues is derived from other
government agencies and commercial customers.
Our
business base is primarily comprised of cost-plus fee contracts. Under these
contracts, we recover our allowable costs plus either a fixed fee or an
incentive fee. For cost-plus contracts, we recognize revenue based on the actual
costs we incur, plus earned fees. We bill cost-plus fixed fee contracts at
approved, predetermined provisional billing rates. We adjust billing rates as
needed to minimize over-billed or under-billed variances at contract
closeout.
16
Recent
Accounting Pronouncements
For
recent accounting pronouncements see “Note 1 - The organization and significant
accounting policies” to our consolidated financial statements.
Critical
Accounting Policies
For
critical accounting policies see “Note 1 - The organization and significant
accounting policies” to our consolidated financial statements.
Results
of Operations for the Years Ended December 27, 2009, and December 28,
2008
Fiscal
2009 Compared with Fiscal 2008
Revenues
Revenues in 2009 were $33,248,254
compared to $32,699,683 for the same period in 2008, an increase of $548,571 or
1.7%. The increase in revenues was in both operating segments of our business;
our Environmental Services and our Analytical Laboratory segment. The increase
in our Environmental Services revenues was primarily due to the conduct of
various field service contracts and increased activity at Los Alamos. The
increase in our Analytical Laboratory revenues was primarily due to increased
sample volume at our Richmond facility where we analyzed samples from the
Columbia River and due to increased sample volume from our commercial customers
at our Oak Ridge facility. These increases were offset by a decrease in revenue
at our Lionville facility as a result of lower sample flow while it was
completing its relocation to a new facility.
Revenues from our Environmental
Services in 2009 were $25,469,474 compared to $25,092,116 for the same period in
2008, an increase of $377,358 or 1.5%. Our Environmental Services contributed
76.6% to total revenues in 2009 versus 76.7% in 2008. The increase in our
Environmental Services revenues was primarily due to the conduct of various
field service contracts, the initiation of a new contract at Hanford, and a
small decrease of revenue on the RCC contract at the Hanford site. The decrease
at Hanford was primarily related to the timing of the payment and subsequent
revenue recognition of allowable pension costs. In general, our revenues at
Hanford were approximately at the same level as with previous year’s
revenues.
Revenues from our Analytical
Laboratories in 2009 were $7,778,780 compared to $7,607,567 for the same period
in 2008, an increase of $171,213 or 2.3%. Our Analytical Labs contributed 23.4%
to total revenues in 2009 versus 23.3% for the same period in 2008. The increase
in our Analytical Laboratory revenues was primarily due to increased sample
volume from our commercial customers at our Oak Ridge facility and due to
substantially increased sample volume at our Richmond facility from special
large projects at Hanford and the Central Plateau. These increases were offset
by a decrease in revenue at our Lionville facility as a result of lower sample
flow as it completed its relocation to a new facility and because of the timing
of the relocation and sampling on the Columbia River project in which Lionville
would have participated.
The company engages in an ongoing
business development effort to obtain more contracts for both Environmental
Services and Analytical Laboratories though existing government contacts or
newly appropriated Federal stimulus funding. In addition, the company continues
to evaluate potential acquisitions in the Instruments segment. As of the date of
this report the company has not made any commitments, nor has it acquired any
instrument businesses.
Cost
of Sales
The cost of sales in 2009 was
$31,264,449 compared to $30,628,195 for the same period in 2008, an increase of
$636,254 or 2.1%. The increase in cost of sales was primarily due to the
additional personnel, expenses and subcontracts on new and increased
Environmental Services contracts and due to expenses related with the relocation
of the Lionville laboratory.
The cost of sales from our
Environmental Services in 2009 was $23,360,119 compared to $22,996,208 for the
same period in 2008, an increase of $363,911 or 1.6%. The increase was due to
additional personnel with its associated cost, subcontracts, material and travel
costs that were necessary to conduct new contract work and increased efforts on
existing contracts. The field group had several new projects; a new contract was
initiated at Hanford and primary contract at Las Alamos saw a larger effort on
new task orders than previously experienced.
17
The cost of sales from our Analytical
Laboratories in 2009 was $7,904,330 compared to $7,631,987 for the same period
in 2008, an increase of $272,343 or 3.6%. The increase in cost of sales was
primarily at Lionville since costs of sales at our Richmond and our Oak Ridge
laboratories were essentially unchanged. Included in cost of sales were
non-recurring expenses of approximately $230,000, including additional rent,
clean-up costs, write-off of leasehold improvements and other expenses
associated with the relocation of Lionville. The majority of these costs were
incurred during the first six months of the year and the company began
recognizing the benefit of the relocation during the last half of
2009.
Gross
Profit
Gross profit in 2009 was $1,983,805
compared to $2,071,488 for the same period in 2008, a decrease of $87,683 or
4.2%. The gross profit margin decreased to 6.0% in 2009 from 6.3% for the same
period in 2008. The gross profit from our Environmental Services in 2009 was
$2,109,355 compared to $2,095,908 for the same period in 2008, an increase of
$13,447 or 0.6%. The increase was due to more efficient utilization of personnel
on our field service contracts and due to a reduction in the overhead rate of
our field service division. The gross profit from our Analytical Laboratories in
2009 was a loss of $125,550 in 2009 compared to a loss of $24,420 for the same
period in 2008, a decrease of $101,130. The decrease was due to the costs
associated with relocation of Lionville and the subsequent loss of revenues
associated with the move.
Operating
Expenses
General
and administrative expenses in 2009 were $2,211,927 compared to $2,597,009 for
the same period in 2008, a decrease of $385,082 or 14.8%. Our general and
administrative costs decreased due to cost control measures, including
reductions of expense at the Eberline Services and corporate level. These costs
included indirect salaries, legal expense, travel expense, general insurance,
and facilities.
Operating
Income (Loss)
The
operating loss in 2009 was $228,122 compared to an operating loss of $525,521
for the same period in 2008. The operating loss was the combination of the
Environmental Services operating income of $717,463 offset by an operating loss
at the Analytical Laboratories of $566,125 and corporate general and
administrative expenses of $379,460.
Other
Income (Expense)
Other
expenses in 2009 were $658,479 compared to $341,649 for the same period in 2008,
an increase of $316,830 or 92.7%. Interest and other miscellaneous income in
2009 was $48,338 compared to $146,724 for the same period in 2008. The decrease
was primarily due to a lower cash balance of funds invested. Interest expense in
2009 was $706,817 compared to $488,373 for the same period in 2008, due to
increased interest expense and the associated underwriting expenses associated
with our related party convertible debentures that originated in July 2008 and
the amortization of deferred financing costs.
Provision
for Income Taxes
We
recorded a tax provision in 2009 of $299,833 compared with a tax benefit of
$123,531for the same period in 2008. The provision is a non cash expense
associated with the write-off of certain deferred tax assets due to their
uncertain realization.
Net
Loss
We
incurred a net loss in 2009 of $1,186,434 compared to a net loss of $743,639 for
the same period in 2008.
Liquidity
and Capital Resources
Consolidated
working capital at December 27, 2009 was $13,207,568, compared to $13,129,425 at
December 28, 2008. Included in working capital were cash, cash equivalents and
short-term investments of $11,073,166 as of December 27, 2009, compared to
$11,383,800 at December 28, 2008. The increase in working capital was primarily
related to the payment of accrued interest, as well as a reduction in our trade
accounts payable.
Cash used
by operating activities in 2009 was $116,835, compared to cash provided by
operating activities of $207,397 for the same period in 2008. Our net
receivables balance increased to $3,087,987 in 2009, compared to $3,036,225 at
December 28, 2008, resulting in a decrease in cash of $51,762. Our unbilled
contract receivables decreased to $651,337 in 2009, compared to $776,988 at
December 28, 2008, resulting in an increase in cash of $125,651 due to the
timing of invoicing on cost reimbursable contracts. Our prepaid expenses
decreased to $125,465 in 2009, compared to $250,324 at December 28, 2008,
resulting in an increase in cash of $124,859. Other receivables decreased to
$59,812 in 2009, compared to $183,658 at December 28, 2008, resulting in an
increase in cash of $123,846 due to the receipt of certain employee related
expenses that were due to the company by our prime contractor. Our deferred tax
asset decreased to $0 in 2009, compared to $557,123 at December 28,
2008.
18
Accounts
payable decreased to $734,644 in 2009, compared to $1,001,499 at December 28,
2008, resulting in a decrease in cash of $266,855. Other accrued liabilities,
including accrued expenses, accrued employee-related costs, income taxes payable
and other long-term liabilities, increased to $1,966,541 in 2009, compared to
$1,835,665 at December 28, 2008, resulting in an increase in cash of $130,876
due to an increase in accrued employee related costs. Our accrued interest
balance associated with the convertible debentures decreased to $262,722 in
2009, compared to $601,328 at December 28, 2008, resulting in a decrease in cash
of $338,606, due to payments on the accrued interest on our convertible
debentures.
The
primary investing activities of the company’s operations included the purchase
of equipment. The company continues to manage its capital expenditures very
selectively and in 2009 we used $237,929 for purchases of equipment. The
company’s proceeds from maturities of securities classified as available for
sale were $10,792,991 in 2009. The company used $10,461,542 of the proceeds from
the maturities of available for sale securities to purchase certificates of
deposits and money market funds. The company’s financing activities used $12,937
of cash in 2009, primarily due to payments on capital lease
obligations.
The
company owns property in Albuquerque, New Mexico. In 2009, the company entered
into an agreement, subject to closing conditions, with a buyer to sell the
property in Albuquerque, New Mexico for approximately $2.0 million. The property
is classified as “Assets held for sale” on the company’s balance sheet as of
December 27, 2009. The assets held for sale of $911,970 include land of $507,700
and buildings and improvements with a net book value of $404,270. The company
expects to complete the sale in 2010.
The
company believes that its existing resources, including cash and cash
equivalents and future cash flow from operations, are sufficient to meet the
working capital requirements of its existing business for the foreseeable
future, including the next 12 months. We believe that our cash and cash
equivalents and our ability to control certain costs, including those related to
general and administrative expenses will enable us to meet our anticipated cash
expenditures through the end of 2010. The company’s long-term liabilities
primarily include convertible debentures that bear interest of 4%, payable
quarterly in cash and mature on July 25, 2013. The company believes that its
existing resources, including cash and cash equivalents, future cash flow from
operations, and potential future property sales in Albuquerque, New Mexico and
Richmond California will be sufficient to meet those obligations. Our ability to
continue to access capital, however, could be impacted by various factors
including general market conditions and the continuing slowdown in the economy,
interest rates, the perception of our potential future earnings and cash
distributions, any unwillingness on the part of lenders to make loans to us and
any deterioration in the financial position of lenders. See the information
contained under the heading “Warning Concerning Forward- Looking Statements” in
this Annual Report on Form 10-K.
Seasonality
Our
revenues may fluctuate significantly due to a number of factors,
including:
|
·
|
the
seasonality of the spending cycle of our public sector clients, notably
the federal government;
|
|
·
|
employee
hiring and utilization rates;
|
|
·
|
the
number of client projects commenced and completed during a
quarter;
|
|
·
|
delays
incurred in connection with a
project;
|
|
·
|
the
ability of our clients to terminate projects without penalties;
and
|
|
·
|
weather
conditions at specific work sites.
|
Historically,
we experience lower revenues in the first calendar quarter primarily due to
weather conditions. Also, because we have a heavy concentration of federal
government contracts the federal appropriations process may significantly affect
our operating results. In the absence of appropriated budgets, the continuing
resolution method of funding for departments such as DOE can result in
restrictions on certain projects. Recent history indicates that government
spending within DOE for our types of services is greater in our second and third
fiscal quarters. Also, much of our effort in both Environmental Services and
Analytical Laboratories are in support of decommissioning and remediation
projects, which are easier to conduct in the warmer months. Since our services
work is project based rather than production based, the award of a large
contract for a limited time can cause fluctuations in the quarterly revenues.
However, variations in any of the above factors could cause significant
fluctuations in our operating results from quarter to quarter.
19
We
provide radiological services and operate a radiochemistry laboratory network.
The major component of our costs is our personnel and associated fringes. Since
the majority of our contracts are cost-plus based contracts, we are able to pass
along the effects of inflation. In our laboratories, however, since our services
are primarily priced on a fixed unit price basis we are less flexible to deal
with the effects of inflation. Inflation may cause our cost of goods sold to
increase, and therefore lower our return on investment and depress our gross
margins. The Analytical Laboratory revenue in 2009 was approximately 23.4% of
total revenue.
Off
Balance Sheet Arrangements
The company has no off balance sheet
arrangements.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
Not
applicable.
Item
8. Financial Statements and Supplementary Data.
See Item
15. Exhibits and Financial Statement Schedules
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
20
Item
9A(T). Controls and Procedures.
Management’s
Evaluation of Disclosure Controls and Procedures:
Our Chief
Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this Annual Report on Form 10-K, or the Evaluation Date, have
concluded that as of the Evaluation Date, our Disclosure Controls were effective
to provide reasonable assurance that information required to be disclosed in our
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified by the SEC, and that
material information relating to our company and any consolidated subsidiaries
is made known to management, including our Chief Executive Officer and Chief
Financial Officer, particularly during the period when our periodic reports are
being prepared to allow timely decisions regarding required
disclosure.
Changes
in Internal Control over Financial Reporting:
In
connection with the evaluation referred to in the foregoing paragraph, we have
identified no change in our internal control over financial reporting that
occurred during the year ended December 27, 2009 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
Report
of Management on Internal Control over Financial Reporting:
The
management of the company is responsible for establishing and maintaining
adequate internal control over financial reporting in accordance with the
Exchange Act. Management conducted an evaluation of our internal control over
financial reporting based on the framework and criteria established in Internal Control—Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission. This evaluation included review of the documentation of
controls, evaluation of the design effectiveness of controls, testing of the
operating effectiveness of controls and a conclusion of this evaluation. Based
on this evaluation, management concluded that the company’s internal control
over financial reporting was effective as of December 27, 2009.
Our
management, including our Chief Executive Officer and Chief Financial Officer,
do not expect that our Disclosure Controls or our internal control over
financial reporting will prevent or detect all error and all fraud. A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be met. The
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Further, because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to
error or fraud will not occur or that all control issues and instances of fraud,
if any, within the company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Projections of any
evaluation of controls’ effectiveness to future periods are subject to risks.
Over time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or
procedures.
This
Annual Report on Form 10-K does not include an attestation report of the
company’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
company’s registered public accounting firm pursuant to temporary rules of the
SEC that permit the company to provide only management’s report in this Annual
Report on Form 10-K.
Item
9B. Other Information.
None.
21
Executive
Officers and Directors
The
following table lists the current members of our board of directors and our
executive officers. The address for our directors and officers is c/o GlenRose
Instruments Inc., 45 First Avenue, Waltham, Massachusetts 02451.
Name
|
Age
|
Position
|
||
John
N. Hatsopoulos
|
75
|
Chairman
of the Board
|
||
Arvin
H. Smith
|
80
|
President,
Chief Executive Officer and Director
|
||
Dr.
Richard Chapman
|
64
|
Executive
Vice President and Chief Operating Officer
|
||
Dr.
Shelton Clark
|
62
|
Vice
President, Services
|
||
Anthony
S. Loumidis
|
45
|
Treasurer
and Chief Financial Officer
|
||
Robert
Aghababian
|
68
|
Director
|
||
Barry
S. Howe
|
54
|
Director
|
||
Theo
Melas-Kyriazi
|
50
|
Director
|
||
William
J. Zolner
|
66
|
Director
|
||
John
H. Park
|
|
42
|
|
Director
|
There are
no family relationships among any of our directors or executive officers. Each
executive officer is elected or appointed by, and serves at the discretion of,
our board of directors.
Our board
of directors has determined that Mr. Hatsopoulos’s prior experience in senior
finance positions at Thermo Electron Corporation, which is now Thermo Fisher
Scientific (NYSE: TMO), where he demonstrated leadership capability and garnered
extensive expertise involving complex financial matters, and his extensive
knowledge of complex financial and operational issues qualify him to be a member
of the board of directors.
Arvin H. Smith has been our
President and Chief Executive Officer since 2005. Mr. Smith is one of the four
founding members of GlenRose Partnership L.P., and was a General Partner of
GlenRose Capital LLC, formed in 2000 as a leverage buyout firm focused on making
acquisitions in the environmental services and instrumentation business areas.
Mr. Smith was the Chairman of Thermo Instrument Systems Inc., a public
subsidiary of Thermo Electron Corporation, which is now Thermo Fisher Scientific
(NYSE: TMO), from 1997 until 2000, and was President and Chief Executive Officer
of that company from 1986 until 1996. He was also an Executive Vice President
and member of the operating committee of Thermo Electron. Mr. Smith joined
Thermo Electron in 1970, where he held various senior
management positions. Prior to joining Thermo Electron and during the early
years of the space program from 1959 until 1970, he held positions at NASA
headquarters in Washington, D.C, as chief of Solar and Chemical Power Systems in
the office of Advanced Research & Technology and at the Jet Propulsion
Laboratory. He was also employed by General Dynamics from early 1954 until 1959
as an electronic technician and test engineer in the Aircraft Nuclear Propulsion
Programs and also served in the U.S. Navy from 1950 until 1954. Mr. Smith
graduated with honors from Texas Christian University and holds bachelor’s
degrees in physics and mathematics.
Our board
of directors has determined that Mr. Smith’s prior experience in senior finance
positions at Thermo Electron Corporation, which is now Thermo Fisher Scientific
(NYSE: TMO), where he demonstrated leadership capability and garnered extensive
expertise involving complex financial matters, and his extensive knowledge of
complex financial and operational issues qualify him to be a member of the board
of directors.
22
Dr. Richard Chapman has been
our Executive Vice President and Chief Operating Officer since 2005. Dr. Chapman
is one of the four founding members of GlenRose Partnership L.P., and was a
General Partner of GlenRose Capital LLC, formed in 2000 as a leverage buyout
firm focused on making acquisitions in the environmental services and
instrumentation business areas. Dr. Chapman was President, Chief Executive
Officer and a Director of ThermoQuest Corporation, a subsidiary of Thermo
Electron Corporation, which is now Thermo Fisher Scientific (NYSE: TMO), from
1995 until 2000. He was also Senior Vice President of Thermo Instrument Systems,
Inc. from 1995 to 2000, and served as Chairman of the Board of Thermo
BioAnalysis Corporation from 1995 to 1997, and a Director of Thermo Cardio
Systems, Inc., both publicly held subsidiaries of Thermo Electron. He is also a
director of OI Corporation (NASDAQ: OICO) and founder and chairman of Axxiom
Inc, and Harbinger Instrument Systems, Inc., and holds bachelor’s and master’s
of science degrees from the University of North Texas, and a doctorate from
Oregon State University.
Dr. Shelton Clark has been
our Vice President, as well as the President of the Services Group since 2005.
From 1990 to 2001, he served in a number of U.S. and international management
positions with Thermo Instrument Systems Inc., a public subsidiary of Thermo
Electron Corporation, which is now Thermo Fisher Scientific (NYSE: TMO). Dr.
Clark received a bachelor’s of science degree from the University of North Texas
and holds a doctorate degree from the University of Texas.
Anthony S. Loumidis has been
our Chief Financial Officer and Treasurer since 2005. Mr. Loumidis devotes a
substantial part of his business time to the affairs of the company. Mr.
Loumidis is also the Chief Financial Officer of American DG Energy Inc. (NYSE
Amex: ADGE), a publicly traded company in the cogeneration business, and he is
the Vice President and Treasurer of Tecogen Inc., a manufacturer of natural gas,
engine-driven commercial and industrial cooling and cogeneration systems. He is
also a Partner and President of Alexandros Partners LLC, a financial advisory
firm providing consulting services to early stage entrepreneurial ventures and
Treasurer of Ilios Inc. Mr. Loumidis was previously with Thermo Electron
Corporation, which is now Thermo Fisher Scientific (NYSE: TMO), where he held
various positions including National Sales Manager for Thermo Capital Financial
Services, Manager of Investor Relations and Manager of Business Development of
Tecomet, a subsidiary of Thermo Electron. Mr. Loumidis is a FINRA registered
representative, holds a bachelor’s degree in business administration from the
American College of Greece in Athens and a master’s degree in business
administration from Northeastern University.
Robert Aghababian has been a
member of our board of directors since 2005. Mr. Aghababian is a tax attorney
and former employee of Thermo Electron Corporation, which is now Thermo Fisher
Scientific (NYSE: TMO), where he served as the Director of Tax for seventeen
years. Prior to Thermo Electron he served in a similar position for Pneumo-Abex
Corporation. Mr. Aghababian received a bachelor’s degree in
business administration from Northeastern University and is a graduate of Boston
College Law School.
Our board
of directors has determined that Mr. Aghababian’s prior experience in senior
finance positions as the chief tax officer of Thermo Electron Corporation, which
is now Thermo Fisher Scientific (NYSE: TMO), where he garnered extensive
expertise involving complex financial matters including the understanding of
complex corporate tax organizations and reporting, qualify him to be a member of
the board of directors.
Theo Melas-Kyriazi has been a
member of our board of directors since 2005. Mr. Melas-Kyriazi has been the
Chief Financial Officer of Levitronix LLC since June 2006. He worked for Thermo
Electron Corporation, which is now Thermo Fisher Scientific (NYSE: TMO), from
1986 to 2004, serving in a number of management roles, including Chief Financial
Officer from 1999 to 2004. Prior to joining Thermo Electron, Mr. Melas-Kyriazi
was a Manager in the private investment-banking firm of Bourgeois Fils &
Co., Inc., located in Exeter, New Hampshire. He is a member of the board of
directors of Valeant Pharmaceuticals International (NYSE: VRX) since 2003 and of
Helicos BioSciences Corporation (NASDAQ: HLCS) since 2007. Mr. Melas-Kyriazi
received a bachelor’s degree in economics from Harvard University, and a
master’s degree in business administration from the Harvard Graduate School of
Business Administration.
Our board
of directors has determined that Mr. Melas-Kyriazi’s prior experience in senior
finance positions at various companies, where he demonstrated leadership
capability and garnered extensive expertise involving complex financial matters,
and his extensive knowledge of complex financial and operational issues qualify
him to be a member of the board of directors.
23
Barry S. Howe has been a
member of our board of directors since 2006. Mr. Howe was the President, CEO and
a director of Electronic Sensor Technology (OTC BB: ESNR) from 2007 to 2008. He
was a Corporate Vice President of Thermo Electron Corporation, which is now
Thermo Fisher Scientific (NYSE: TMO), from 2002 to 2004, in charge of the
Measurement & Control Sector. Mr. Howe joined Thermo Electron Corporation in
1986 as an Assistant Corporate Controller and was named President of the Thermo
Separation Products subsidiary of Thermo Instrument Systems Inc. in 1989. He
served as President and Chief Executive Officer of Thermo BioAnalysis from 1995
to 1998 and President and Chief Executive Officer of Thermo Spectra from 1998 to
2000, and Thermo Optek from 1999 to 2000. In 2000, he became President of the
Optical Technologies Sector of Thermo Electron, a sector with 20 business units
and over $600.0 million in revenues. Prior to joining Thermo Electron, Mr. Howe
was an audit manager with Arthur Andersen & Co. from 1977 to 1985. Mr. Howe
received a bachelor’s degree in business administration from Boston
University.
Our board
of directors has determined that Mr. Howe’s prior experience in senior finance
positions at various companies, where he demonstrated leadership capability and
garnered extensive expertise involving complex financial matters, and his
extensive knowledge of complex financial and operational issues qualify him to
be a member of the board of directors.
Dr. William J. Zolner has been a member
of our board of directors since 2007. He is President of Eagle Analytical
Services, Inc., a subsidiary of Professional Compounding Centers of America.
From 1993 to 2003, Dr. Zolner worked in various leadership capacities for Thermo
Electron Corporation, which is now Thermo Fisher Scientific (NYSE: TMO). From
1997 to 2001 he was President, CEO and Director of Onix Systems Inc., a Thermo
Instruments public subsidiary. Prior to 1997, he was President of Thermo
Instruments Controls, a wholly owned subsidiary of Thermo Instruments and
predecessor of Onix Systems Inc. Dr. Zolner worked for Thermo Electron
Corporation from 1971 to 1977 in the environmental instruments division. From
1978 to 1993, he held key management position with divisions of The Bendix
Corporation, Combustion Engineering, JWP Inc., and Lear Siegler Measurement
Controls. Dr. Zolner received a bachelor’s degree and doctorate in chemical
engineering from Northeastern University.
Our board
of directors has determined that Mr. Zolner’s prior experience in senior finance
positions at various companies, where he demonstrated leadership capability and
garnered extensive expertise involving complex financial matters, and his
extensive knowledge of complex financial and operational issues qualify him to
be a member of the board of directors.
John H. Park has been a
member of our board of directors since 2008. He is a Partner and is co-head of
the investment committee of Blum Capital since 2004. He currently serves on the
board of directors for Avid Technology, Inc., a portfolio company. Prior to
joining Blum Capital, Mr. Park spent 11 years at Columbia Wanger Asset
Management where he was the Portfolio Manager of the Columbia Acorn Select Fund
since inception and Co-Manager of the Columbia Acorn Fund (both of which
received Morningstar 5 star ratings during his tenure). In addition, Mr. Park
was a Partner at the firm and served as Director of Research as well. Prior to
Columbia Wanger Asset Management, Mr. Park was a Summer Associate at Ariel
Capital Management and a Financial Analyst at Kidder, Peabody. Mr. Park received
his bachelor’s degree and his master’s degree in business administration, both
with Honors, from the University of Chicago and is a Chartered Financial
Analyst.
Our board
of directors has determined that Mr. Park’s business acumen gained through
extensive private equity and fund investment experience, and his experience on
other public company boards of directors and participation in corporate
turn-around efforts qualify him to be a member of the board of directors. Our
board of directors also benefits from the perspective he lends as a general
partner of Blum Capital Partners, L.P., which is a GlenRose
investor.
Each
executive officer is elected or appointed by, and serves at the discretion of,
our board of directors. The elected officers of the company will hold office
until the next meeting of the board of directors and until their successors are
duly elected and qualified, or until their earlier resignation or removal.
Board
of Directors
Our board
of directors currently consists of seven directors. In addition, our amended and
restated by-laws will provide that the authorized number of directors may be
changed only by resolution of our board of directors. Each director shall serve
for a term ending on the date of the first annual meeting following the annual
meeting at which such director was elected; provided further, that the term of
each director shall continue until the election and qualification of a successor
and be subject to such director’s earlier death, resignation or
removal.
Board
Committees
Our board
of directors has established an audit committee, established in accordance with
Section 3(c)(58)(A) of the Exchange Act, and a compensation committee. All of
the members of each of these standing committees are independent as defined
under NASDAQ rules and, in the case of the audit committee, the independence
requirements contemplated by Rule 10A-3 under the Exchange Act. The members of
our audit committee are Messrs. Howe and Aghababian. The members of our
compensation committee are Messrs. Melas-Kyriazi and
Aghababian.
24
Audit
Committee
The audit
committee’s responsibilities include:
|
·
|
appointing,
approving the compensation of, and assessing the independence of our
independent auditor;
|
·
|
overseeing
the work of our independent auditor, including through the receipt and
consideration of reports from the independent auditor;
|
|
·
|
reviewing
and discussing with management and our independent auditor our annual and
quarterly financial statements and related
disclosures;
|
·
|
monitoring
our internal control over financial reporting, disclosure controls and
procedures, and code of business conduct and ethics;
|
|
·
|
discussing
our risk management policies;
|
|
·
|
establishing
policies regarding hiring employees from our independent auditor and
procedures for the receipt and retention of accounting related complaints
and concerns;
|
|
·
|
meeting
independently with our independent auditor and management;
and
|
|
·
|
preparing
the audit committee report required by SEC rules to be included in our
proxy statements.
|
All audit
services and all non-audit services, except de minimis non-audit services, must
be approved in advance by the audit committee. Our board of directors has
determined that at least one of our audit committee members is an audit
committee financial expert. That person is Barry S. Howe who is also independent
under NASDAQ rules.
Compensation
Committee
The
compensation committee’s responsibilities include:
·
|
annually
reviewing and approving corporate goals and objectives relevant to
compensation of our Chief Executive Officer;
|
|
·
|
determining
the compensation of our Chief Executive Officer;
|
|
·
|
reviewing
and approving, or making recommendations to our board of directors with
respect to, the compensation of our other executive
officers;
|
|
·
|
overseeing
an evaluation of our senior executives;
|
|
·
|
overseeing
and administering our cash and equity incentive plans;
and
|
|
·
|
reviewing
and making recommendations to our board of directors with respect to
director compensation.
|
Corporate
Governance
We
believe that good corporate governance is important to ensure that, as a public
company, we will manage for the long-term benefit of our stockholders. In that
regard, we have established and adopted charters for the audit committee and
compensation committee, as well as a Code of Business Conduct and Ethics
applicable to all of our directors, officers and employees.
Section
16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act
requires the officers and directors of the company, and persons who own 10% or
more of any class of equity interests in the company, to report their beneficial
ownership of equity interests in the company to the SEC. Their initial reports
are required to be filed using the SEC’s Form 3, and they are required to report
subsequent purchases, sales and other changes using the SEC’s Form 4, which must
be filed within two days of most transactions. Officers, directors and
shareholders owning more than 10% of any class of equity interests in the
company are required by SEC regulations to furnish us with copies of all reports
they file pursuant to Section 16(a). Based solely on our review of the copies of
these reports furnished to us or written representations that no such reports
were required, we believe that, during 2009, all filing requirements under 16(a)
of the Exchange Act applicable to our executive officers, directors and greater
that 10% shareholders were timely met.
Item
11. Executive Compensation.
Before we
became a public company, GlenRose Partnership L.P. made decisions on executive
compensation for our executive officers. In January 2007, we established a
Compensation Committee to be responsible for decisions regarding the company’s
executive compensation. The company’s current compensation practices are highly
unusual. As is shown in the Summary Compensation Table below, we did not pay our
Chief Executive Officer, Arvin H. Smith any compensation in the last two years
and do not plan to pay him any compensation in the current
year.
25
The
company’s business is in transition from its current operations providing
radiological services to a focus on the acquisition and operation of analytical
instruments businesses. Until we have begun to implement our new business
strategy, we expect to continue to pay modest cash compensation to our executive
officers. Once we have begun to implement our new business strategy, our
Compensation Committee expects to make determinations with respect to executive
compensation based on customary parameters, such as the following:
|
·
|
ensure
that the interests of our executive officers are closely aligned with
those of our investors and owners;
|
|
·
|
attract
and retain highly qualified and motivated employees who can drive an
enterprise to succeed in today’s competitive
marketplace;
|
|
·
|
motivate
our employees to deliver high business
performance;
|
|
·
|
differentiate
compensation so that it varies based on individual and team performance;
and
|
|
·
|
balance
rewards for these demanding roles between short-term results and the
long-term strategic decisions needed to ensure sustained business
performance over time.
|
As is discussed under Item 12
“Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters”, our board of directors and stockholders have adopted our
2005 Stock Option and Incentive Plan and reserved 700,000 shares of our common
stock for issuance thereunder. In 2007, the company granted nonqualified options
to purchase 230,000 shares of the common stock to 44 employees at $7.00 per
share that vest over 5 years. In addition, in 2007 the company made restricted
stock grants to three of its directors by permitting them to purchase an
aggregate of 15,000 shares of common stock at a price of $0.01 per
share.
We
currently have no employment or change in control agreements, but we might have
such agreements in the future. The following summarizes the compensation earned
during fiscal years 2009 and 2008 by our Chief Executive Officer and by other
named executive officers.
SUMMARY
COMPENSATION TABLE
Option
|
All other
|
|||||||||||||||||
Name and principal position
|
Year
|
Salary ($)
|
awards ($)
|
compensation ($)
|
Total ($)
|
|||||||||||||
Arvin
H. Smith (1)
|
2009
|
- | - | - | - | |||||||||||||
Chief
Executive Officer
|
2008
|
- | - | - | - | |||||||||||||
Dr.
Richard Chapman
|
2009
|
79,997 | - | - | 79,997 | |||||||||||||
Executive
Vice President & COO
|
2008
|
79,997 | - | - | 79,997 | |||||||||||||
Dr.
Shelton Clark
|
2009
|
121,910 | - | - | 121,910 | |||||||||||||
Vice
President, Services
|
2008
|
121,910 | - | - | 121,910 | |||||||||||||
Anthony
S. Loumidis (2)
|
2009
|
87,840 | - | - | 87,840 | |||||||||||||
Chief
Financial Officer & Treasurer
|
2008
|
80,340 | - | - | 80,340 |
|
(1)
|
Arvin
H. Smith did not receive a salary, bonus or any other compensation in 2009
or 2008, and will not receive a salary, bonus or any other compensation in
2010.
|
|
(2)
|
American
DG Energy Inc. pays the salary of Anthony S. Loumidis, part of which is
reimbursed by the company.
|
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR END
The
following table summarizes the outstanding equity awards held by each named
executive officer as of December 27, 2009. No stock option awards or other
equity awards were granted in 2009 or 2008. Our named executive officers did not
exercise any options during the fiscal year ended December 27,
2009.
26
No. of securities
|
No. of securities
|
|||||||||||||||
underlying
|
underlying
|
|||||||||||||||
unexercised
|
unexercised
|
Option
|
Option
|
|||||||||||||
options (#)
|
options (#)
|
exercise
|
expiration
|
|||||||||||||
Name
|
Exercisable (1)
|
unexercisable
|
price ($)
|
date
|
||||||||||||
Arvin
H. Smith
|
- | - | - | - | ||||||||||||
Dr.
Richard Chapman
|
15,000 | 9,000 | $ | 7.00 |
11/13/2014
|
|||||||||||
Dr.
Shelton Clark
|
25,000 | 15,000 | $ | 7.00 |
11/13/2014
|
|||||||||||
Anthony
S. Loumidis
|
25,000 | 15,000 | $ | 7.00 |
11/13/2014
|
|
(1)
|
Common
stock options that vest in equal installments over a period of 5 years
from the date of the grant, which was November 13
2007.
|
Employment
contracts and termination of employment and change-in-control
arrangements
None of
our executive officers has an employment contract or change-in-control
arrangement.
Director
Compensation
Each
director who is not also one of our employees receives an annual cash
compensation of $2,000, effective January 1, 2007. Non-employee directors are
eligible to receive stock options under our equity incentive plan. We reimburse
all of our non-employee directors for reasonable travel and other expenses
incurred in attending board of directors and committee meetings. The following
table sets forth information with respect to director compensation for the
fiscal year ended December 27, 2009:
DIRECTOR
COMPENSATION
Fees earned or
|
Stock
|
All Other
|
||||||||||||||
Name
|
paid in cash ($)
|
awards ($)
|
compensation ($)
|
Total ($)
|
||||||||||||
John
N. Hatsopoulos
|
- | - | - | - | ||||||||||||
Arvin
H. Smith
|
- | - | - | - | ||||||||||||
Robert
Aghababian
|
2,000 | - | - | 2,000 | ||||||||||||
Barry
S. Howe
|
2,000 | - | - | 2,000 | ||||||||||||
Theo
Melas-Kyriazi
|
2,000 | - | - | 2,000 | ||||||||||||
William
J. Zolner
|
2,000 | - | - | 2,000 | ||||||||||||
John
H. Park
|
2,000 | - | - | 2,000 |
Compensation
Committee Interlocks and Insider Participation
None of
our executive officers serves as a member of the board of directors or
compensation committee, or other committee serving an equivalent function, of
any other entity that has one or more of its executive officers serving as a
member of our board of directors or its compensation committee. None of the
current members of the compensation committee of our board of directors has ever
been one of our employees.
401(k)
Plan and other benefit plans
Our
retirement plan, which we refer to as the 401(k) plan, is qualified under
Section 401 of the Internal Revenue Code of 1986, as amended, or the Code. Our
employees may elect to reduce their current compensation by an amount no greater
than the statutorily prescribed annual limit and may have that amount
contributed to the 401(k) plan. We may make matching or additional contributions
to the 401(k) plan in amounts to be determined annually by us. To date, we have
not made any contributions to the 401(k) plan.
We
currently maintain two defined contribution 401(k) plans within Eberline
Services. Additionally, employees of the Hanford Reservation site are covered by
a multi-employer, defined benefit plan that is not administered by
us.
27
Eberline
Services’ employees are eligible to participate in the 401(k) plan immediately.
Participants may elect to contribute up to 100% of their compensation to the
401(k) Plans, subject to Internal Revenue Service annual limitations. Eberline
Services makes discretionary matching contributions of up to 4.5% of a
participant’s compensation, depending on deferral amount. During 2008, the
company merged the Lionville 401(k) plan into the Eberline Services plan.
Contributions for Lionville employees are included in the Eberline Services
contribution disclosure. For the years ended December 27, 2009 and December 28,
2008, Eberline Services contributed approximately $250,564 and $235,625,
respectively.
Employees
of ESHI are eligible to participate in a multi-employer defined benefit plan or
the Plan. The Plan is administered by Fluor Hanford, Inc., on behalf of
eligible, participating companies. The Plan is funded by participating companies
on a payroll-by-payroll basis, in amounts actuarially computed by Fluor Hanford,
Inc. The company expenses the computed expense amount annually. Under the terms
and conditions of the Plan, individual companies assume no liability for future
pension or benefit costs associated with the Plan. The government reimburses the
company for all pension related costs as a direct project cost. Accordingly, no
information with respect to the Plan is included herein. Annual expense amounts
are based on the total labor base incurred at the Hanford Reservation site. For
the years ended December 27, 2009, and December 28, 2008, the expense was
$726,473 and $456,885, respectively.
Additionally,
ESHI employees are eligible to participate in a traditional, employer-sponsored
401(k) plan also administered by Fluor Hanford, Inc. For the years ended
December 27, 2009, and December 28, 2008, employer contributions were $545,364
and $525,913, respectively.
28
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The
GlenRose Partnership L.P., and the holder of 3,000,000 shares of common stock of
the company, dissolved effective as of December 31, 2007. Upon dissolution, the
GlenRose Partnership L.P. distributed all of the common stock of the company
that it owned to its partners. The partners of the GlenRose Partnership L.P.
included certain of the company’s officers and directors. The following table
gives effect to such distribution and sets forth information with respect to the
beneficial ownership of our common stock as of March 26, 2010, for:
|
•
|
each
of our executive officers and
directors;
|
|
•
|
all
of our executive officers and directors as a group;
and
|
|
•
|
any
other person known by us to be a beneficial owner of more than 5% of our
outstanding common stock.
|
Beneficial
ownership is determined in accordance with the rules of the SEC. These rules
generally attribute beneficial ownership of securities to persons who possess
sole or shared voting power or investment power with respect to those securities
and include ordinary shares issuable upon the exercise of stock options that are
immediately exercisable or exercisable within 60 days. Except as otherwise
indicated, all persons listed below have sole voting and investment power with
respect to the shares beneficially owned by them, subject to applicable
community property laws. The information is not necessarily indicative of
beneficial ownership for any other purpose.
The
following table sets forth certain information with respect to the beneficial
ownership of the company's voting securities by (i) any person (including any
“group” as set forth in Section 13(d)(3) of the Exchange Act, known by us to be
the beneficial owner of more than 5% of any class of our voting securities, (ii)
each director, (iii) each of the named executive officers, and (iv) all of our
current directors and executive officers as a group. The percentages in the
following table are based on 3,117,647 shares of common stock issued and
outstanding as of March 26, 2010.
Number of
|
%
|
|||||||
Shares
|
of Shares
|
|||||||
Name
and address of
|
Beneficially
|
Beneficially
|
||||||
beneficial owner (1)
|
Owned
|
Owned
|
||||||
5% Stockholders:
|
||||||||
Blum
Strategic Partners IV, L.P (2)
|
1,714,286 | 35.48 | % | |||||
Arvin
H. Smith (3)
|
719,311 | 21.65 | % | |||||
John
N. Hatsopoulos (4)
|
647,882 | 19.93 | % | |||||
Phillip
Frost, M.D (5)
|
571,535 | 17.92 | % | |||||
George
N. Hatsopoulos (6)
|
513,954 | 16.49 | % | |||||
Kenmare
(7)
|
301,324 | 9.67 | % | |||||
Ralph
Wanger Trust (8)
|
256,977 | 8.24 | % | |||||
WHI
Private Equity Managers Fund LLC (9)
|
250,053 | 8.02 | % | |||||
Directors & Officers:
|
||||||||
Arvin
H. Smith (3)
|
719,311 | 21.65 | % | |||||
John
N. Hatsopoulos (4)
|
647,882 | 19.93 | % | |||||
Dr.
Richard Chapman (10)
|
18,503 | 0.59 | % | |||||
Dr.
Shelton Clark (11)
|
10,000 | 0.32 | % | |||||
Anthony
S. Loumidis (12)
|
10,000 | 0.32 | % | |||||
Robert
Aghababian
|
- | 0.00 | % | |||||
Barry
S. Howe
|
- | 0.00 | % | |||||
Theo
Melas-Kyriazi
|
- | 0.00 | % | |||||
William
J. Zolner
|
- | 0.00 | % | |||||
John
H. Park
|
- | 0.00 | % | |||||
All
executive officers and directors as a group (10 persons)
|
1,405,696 | 40.36 | % |
|
(1)
|
The
address of the officers and directors listed in the table above is: c/o
GlenRose Instruments Inc., 45 First Avenue, Waltham, Massachusetts,
02451.
|
|
(2)
|
Includes
1,714,286 shares of common stock that it has the right to acquire pursuant
to currently convertible 4% debentures. Based on a Schedule 13D filed with
the SEC on August 4, 2008, Blum Strategic Partners IV, L.P’s address is
909 Montgomery Street, Suite 400, San Francisco, California
94133.
|
29
|
(3)
|
Includes:
(a) 513,954 shares of common stock held by the Arvin Herley & Wynona
Lowe Smith, TTEES F/T Smith Living Trust, a Texas trust whose trustees are
Mr. Smith and his wife, Wynona Smith, each of whom share voting power and
investment power, and beneficiaries of that trust are members of Mr. and
Mrs. Smith’s family; and (b) 205,357 shares of common stock, held by Mr.
and Mrs. Smith as joint tenants with rights of survivorship, each of whom
share voting and investment power, that Mr. and Mrs. Smith have the right
to acquire pursuant to currently convertible 4%
debentures.
|
|
(4)
|
Includes:
(a) 513,954 shares of common stock held by John Hatsopoulos and his wife,
Patricia Hatsopoulos, as joint tenants with rights of survivorship, each
of whom share voting and investment power; and (b) 133,928 shares of
common stock, held by John and Patricia Hatsopoulos, each of whom share
voting and investment power, that John Hatsopoulos and Patricia
Hatsopoulos have the right to acquire pursuant to currently convertible 4%
debentures.
|
|
(5)
|
Includes:
(a) 500,106 shares of common stock held by Dr. Philip Frost; and (b)
71,429 shares of common stock that Dr. Frost has the right to acquire
pursuant to currently convertible 4% debentures, with an address of 4400
Biscayne Boulevard, Miami, Florida
33137.
|
|
(6)
|
Includes:
513,954 shares of common stock held by George Hatsopoulos and his wife,
Daphne Hatsopoulos, as joint tenants with rights of survivorship, each of
whom share voting and investment power, with an address of 233 Tower Road,
Lincoln, Massachusetts 02773.
|
|
(7)
|
Includes
235,756 shares beneficially owned by Kenmare Fund I, L.P. and 65,568
shares beneficially owned by Kenmare Offshore, Ltd. Based on a Schedule
13G filed with the SEC on February 14, 2008, the members of the group are
Kenmare Fund I, L.P., Kenmare Offshore, Ltd., Kenmare Capital Partners,
LLC, Kenmare Offshore Management, LLC, and Mark McGrath, each with an
address of 712 Fifth Avenue, New York, New York
10019.
|
|
(8)
|
Includes
256,977 shares held by the Ralph Wanger Revocable Trust, an Illinois trust
whose sole trustee is Ralph Wanger. Mr. Wanger has sole voting power and
sole dispositive power with respect to the shares held by the Ralph Wanger
Revocable Trust, with an address of 191 North Wacker Drive, Chicago,
Illinois 60606.
|
|
(9)
|
Includes
250,053 shares directly held by WHI Private Equity Managers Fund LLC,
whose sole manager is William Harris Investors, Inc., and who may
therefore be deemed to have voting and/or dispositive power over the
shares. Michael Resnick is the only officer of William Harris Investors,
Inc. who has sole voting power and sole dispositive power (acting through
William Harris Investors, Inc.) with respect to the shares held by WHI
Private Equity Managers Fund LLC, with an address of 191 North Wacker
Drive, Chicago, Illinois 60606.
|
(10)
|
Includes:
(a) 12,503 shares of common stock; and (b) options to purchase 15,000
shares of common stock of which 6,000 are exercisable within 60 days of
March 26, 2010.
|
(11)
|
Includes
options to purchase 25,000 shares of common stock of which 10,000 are
exercisable within 60 days of March 26,
2010.
|
(12)
|
Includes
options to purchase 25,000 shares of common stock of which 10,000 are
exercisable within 60 days of March 26,
2010.
|
2005
Stock Option and Incentive Plan
The
company’s 2005 Stock Option and Incentive Plan, or the Stock Plan, was adopted
by the company in September 2005. The Stock Plan provides for the grant of
stock-based awards to employees, officers and directors of, and consultants or
advisors to, the company and its subsidiaries. Under the Stock Plan, the company
may grant options that are intended to qualify as incentive stock options within
the meaning of Section 422 of the Code, options not intended to qualify as
incentive stock options (non-statutory options), restricted stock and other
stock-based awards. Incentive stock options may be granted only to employees of
the company. A total of 700,000 shares of common stock may be issued upon the
exercise of options or other awards granted under the Stock Plan. The maximum
number of shares with respect to which awards may be granted to any employee
under the Stock Plan shall not exceed 25% of that number.
The Stock
Plan is administered by our board of directors and our Compensation Committee.
Subject to the provisions of the Stock Plan, our board of directors and our
Compensation Committee each has the authority to select the persons to whom
awards are granted and determine the terms of each award, including the number
of shares of common stock subject to the award. Payment of the exercise price of
an award may be made in cash, in a “cashless exercise” through a broker, or if
the applicable stock option agreement permits, shares of common stock or by any
other method approved by our board of directors or Compensation Committee.
Unless otherwise permitted by the company, awards are not assignable or
transferable except by will or the laws of descent and
distribution.
30
Upon the
consummation of an acquisition of the business of the company, by merger or
otherwise, our board of directors shall, as to outstanding awards (on the same
basis or on different bases as our board of directors shall specify), make
appropriate provision for the continuation of such awards by the company or the
assumption of such awards by the surviving or acquiring entity and by
substituting on an equitable basis for the shares then subject to such awards
either (a) the consideration payable with respect to the outstanding shares of
common stock in connection with the acquisition, (b) shares of stock of the
surviving or acquiring corporation or (c) such other securities or other
consideration as our board of directors deems appropriate, the fair market value
of which (as determined by our board of directors in its sole discretion) shall
not materially differ from the fair market value of the shares of common stock
subject to such awards immediately preceding the acquisition. In addition to or
in lieu of the foregoing, with respect to outstanding stock options, our board
of directors may, on the same basis or on different bases as our board of
directors shall specify, upon written notice to the affected optionees, provide
that one or more options then outstanding must be exercised, in whole or in
part, within a specified number of days of the date of such notice, at the end
of which period such options shall terminate, or provide that one or more
options then outstanding, in whole or in part, shall be terminated in exchange
for a cash payment equal to the excess of the fair market value (as determined
by our board of directors in its sole discretion) for the shares subject to such
options over the exercise price thereof. Unless otherwise determined by our
board of directors (on the same basis or on different bases as our board of
directors shall specify), any repurchase rights or other rights of the company
that relate to a stock option or other award shall continue to apply to
consideration, including cash, that has been substituted, assumed or amended for
a stock option or other award pursuant to these provisions. The company may hold
in escrow all or any portion of any such consideration in order to effectuate
any continuing restrictions.
Our board
of directors may at any time provide that any stock options shall become
immediately exercisable in full or in part, that any restricted stock awards
shall be free of some or all restrictions, or that any other stock-based awards
may become exercisable in full or in part or free of some or all restrictions or
conditions, or otherwise realizable in full or in part, as the case may
be.
Our board
of directors or our Compensation Committee may, in its sole discretion, amend,
modify or terminate any award granted or made under the Stock Plan, so long as
such amendment, modification or termination would not materially and adversely
affect the participant.
Option Grants
As discussed under the section
entitled “2005 Stock Option and Incentive Plan,” our board of directors and
stockholders have adopted the above Stock Plan and reserved 700,000 shares of
our common stock for issuance thereunder. In 2007, the company granted
nonqualified options to purchase 230,000 shares of the common stock to 44
employees at $7.00 per share that vest over 5 years. In addition, in 2007 the
company made grants of restricted stock to three of its directors by permitting
them to purchase an aggregate of 15,000 shares of common stock at a price of
$0.01 per share. No stock options or restricted stock awards were issued in 2009
or 2008. The following table sets forth information with respect to our
securities authorized for issuance under the Stock Plan:
Plan
Category
|
No. of Securities to be issued upon exercise of outstanding options, warrants and
rights
|
Weighted average exercise price of outstanding options, warrants and
rights
|
Number of securities
remaining available
for future issuance under equity compensation
plans excluding
securities reflected in second
column
|
|||||||||
Equity
compensation plans approved by security holders (1)
|
201,000 | $ | 6.48 | 499,000 | ||||||||
Equity
compensation plans not approved by security holders
|
- | $ | - | - | ||||||||
Total
|
201,000 | $ | 6.48 | 499,000 |
|
(1)
|
Includes
15,000 shares of restricted common stock issued to the company’s directors
at $0.01 per share and 186,000 shares of common stock issued upon exercise
of stock options at an exercise price of $7.00 per
share.
|
Item
13. Certain Relationships and Related Transactions, and Director
Independence.
Related
Person Transactions
On July
25, 2008, the company entered into subscription agreements with four investors
for the sale of convertible debentures in the aggregate principal amount of
$14,875,000. The primary investor was Blum Strategic Partners IV, L.P., who
subscribed for $12,000,000 of the debentures. Additional investors included John
N. Hatsopoulos, the company’s Chairman of the board, Arvin H. Smith, the
company’s President and Chief Executive Officer, and Philip Frost M.D., a holder
of more than 10% of the outstanding equity securities of the company immediately
prior to the sale of the debentures, who subscribed for $2,875,000 of debentures
by exchanging promissory notes of the company for the debentures. The debentures
bear interest at 4%, payable quarterly in cash, and mature on July 25, 2013. The
debentures will be convertible at the option of the holder at any time into
shares of common stock at an initial conversion price equal to $7.00 per share.
In connection with the transaction, the company appointed John H. Park to the
company’s board of directors. Ladenburg Thalman & Co., Inc., a registered
broker-dealer, acted as placement agent on a best efforts basis for the sale of
the company’s debentures. In connection with the transaction, the company paid
the placement agent a cash fee of $600,000.
31
On July
25, 2008 the company paid in cash the principal amount on its remaining
subordinated promissory note due 2011. In connection with that transaction, the
company made a payment of $500,000 to Richard Chapman, the company’s Executive
Vice President and Chief Operating Officer.
Director
Independence
The company requires a majority of its
board of directors to be “independent” as defined by Item 407(a) of Regulation
S-K under the Securities Act, including, in the judgment of our board of
directors, the requirement that such directors have no material relationship
with the company. Our board of directors has determined that Messrs. Aghababian,
Howe, Melas-Kyriazi, Zolner and Park are “independent” in accordance with Item
407(a) of Regulation S-K under the Securities Act. Each of these directors has
no relationship with the company, other than any relationship that is
categorically not material under the company’s guidelines and other than
compensation for services as a director as disclosed in this Annual Report on
Form 10-K.
Item
14. Principal Accountant Fees and Services.
The
following table summarizes fees billed to the company by Caturano and Company,
P.C. for professional services rendered for the period ended December 27,
2009:
2009
|
2008
|
|||||||
Audit
fees
|
$ | 94,673 | $ | 115,227 | ||||
Audit-related
fees
|
- | 9,146 | ||||||
Tax
fees
|
- | - | ||||||
All
other fees
|
- | - | ||||||
$ | 94,673 | $ | 124,373 |
Audit Fees. The audit fees
consist of aggregate fees billed for each of the last two fiscal years for
professional services rendered by the audit of our annual consolidated financial
statements and review of the interim consolidated financial statements included
in quarterly reports.
Audit-Related Fees. The
audit-related fees consist of aggregate fees billed for assurance and related
services reasonably related to the performance of the audit or review of our
consolidated financial statements and are not reported under “Audit
Fees”.
Tax Fees. Tax fees consist of
aggregate fees billed for professional services for tax compliance, tax advice
and tax planning. These services included assistance regarding federal and state
tax compliance, and tax audit defense.
All Other Fees. Fees that are
billed for professional services rendered in connection with this Annual Report
on Form 10-K are included in all other fees.
Audit
Pre-Approval of Policies and Procedures
The Audit
Committee’s current policy is to pre-approve all audit and permissible non-audit
services provided by our independent auditors. These services may include audit
services, audit related services, tax services and other services. The Audit
Committee may also pre-approve particular services on a case-by-case
basis.
Audit
Committee Approval of Fees
Our Audit
Committee approved all audit-related fees, tax fees and other fees listed above
provided by Caturano and Company, P.C. to us during the year ended December 27,
2009.
32
PART
IV
Item
15. Exhibits and Financial Statement
Schedules.
(a)
|
Index To Financial
Statements and Financial
Statements Schedules:
|
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of December 27, 2009 and December 28, 2008
Consolidated
Statements of Operations for the years ended December 27, 2009 and December 28,
2008
Consolidated
Statements of Stockholders’ Equity for the years ended December 27, 2009 and
December 28, 2008
Consolidated
Statements of Cash Flows for the years ended December 27, 2009 and December 28,
2008
Notes to
Consolidated Financial Statements
All other
schedules for which provision is made in the applicable accounting regulations
of the SEC are not required under the related instructions, or are inapplicable,
and therefore have been omitted.
33
(b)
|
Exhibits:
|
Exhibit
|
||
Number
|
Description
|
|
3.1
|
Certificate
of Incorporation (incorporated by reference to the registrant’s Form 10,
as amended, originally filed with the Securities and Exchange Commission
on November 17, 2006).
|
|
3.2
|
By-laws
(incorporated by reference to the registrant’s Form 10, as amended,
originally filed with the Securities and Exchange Commission on November
17, 2006).
|
|
4.1
|
Form
of 4% Convertible Debenture due 2013 (incorporated by reference to the
registrant’s Form 10-Q, filed with the Securities and Exchange Commission
for the quarter ended June 29, 2008).
|
|
10.1
|
Form
of Subscription Agreement (incorporated by reference to the registrant’s
Form 8-K, filed with the Securities and Exchange Commission on July 29,
2008).
|
|
10.2
|
Form
of Investor Rights Agreement (incorporated by reference to the
registrant’s Form 10-Q, filed with the Securities and Exchange Commission
for the quarter ended June 29, 2008).
|
|
10.3*
|
Promissory
note of Eberline Services, Inc. issued to Arvin Smith dated as of January
1, 2005 (incorporated by reference to the registrant’s Form 10, as
amended, originally filed with the Securities and Exchange Commission on
November 17, 2006).
|
|
10.4*
|
Promissory
note of Eberline Services, Inc. issued to John N. Hatsopoulos and Patricia
Hatsopoulos dated as of January 1, 2005 (incorporated by reference to the
registrant’s Form 10, as amended, originally filed with the Securities and
Exchange Commission on November 17, 2006).
|
|
10.5*
|
Promissory
note of Eberline Services, Inc. issued to Arvin Smith dated as of December
17, 2007 (incorporated by reference to the registrant’s Form 10-K, as
amended, originally filed with the Securities and Exchange Commission on
March 31, 2008 for the year ended December 28, 2008).
|
|
10.6*
|
GlenRose
Instruments Inc. 2005 Stock Option and Incentive Plan (incorporated by
reference to the registrant’s Form 10, as amended, originally filed with
the Securities and Exchange Commission on November 17,
2006).
|
|
10.7
|
Lease
Agreement between J.W. Gibson Construction Company and Eberline Analytical
Corp. dated October 24, 2000 (incorporated by reference to the
registrant’s Form 10, as amended, originally filed with the Securities and
Exchange Commission on November 17, 2006).
|
|
10.8
|
Lease
Agreement between G-C-T Corporation and Lionville Laboratories, Inc. dated
September 23, 2004 (incorporated by reference to the registrant’s Form 10,
as amended, originally filed with the Securities and Exchange Commission
on November 17, 2006).
|
|
10.9
|
Lease
Agreement between Eberline Services, Inc. and First Industrial
Pennsylvania LP., dated June 1, 2008 (incorporated by reference to the
registrant’s Form 10-Q, filed with the Securities and Exchange Commission
for the quarter ended June 29, 2008).
|
|
10.10
|
Agreement
between Washington Closure Hanford, LLC and Eberline Services Hanford,
Inc. (incorporated by reference to the registrant’s Form 10, as amended,
originally filed with the Securities and Exchange Commission on November
17, 2006).
|
|
10.11
|
Subcontract
Agreement No. 69899-000-09 between Los Alamos National Security, LLC, and
Eberline Services, Inc. dated November 4, 2008 (incorporated by reference
to the registrant’s Form 10-K filed with the Securities and Exchange
Commission on March 27, 2009).
|
|
10.12*
|
Form
of Restricted Stock Purchase Agreement (incorporated by reference to the
registrant’s Form 10-K filed with the Securities and Exchange Commission
on March 27,
2009).
|
34
10.13*
|
Form
of Stock Option Agreement Under 2005 Stock Option and Incentive Plan
(incorporated by reference to the registrant’s Form 10-K filed with the
Securities and Exchange Commission on March 27, 2009).
|
|
14.1
|
Code
of Business Conduct and Ethics (incorporated by reference to the
registrant’s Form 10, as amended, originally filed with the Securities and
Exchange Commission on November 17, 2006).
|
|
21.1
|
List
of subsidiaries (incorporated by reference to the registrant’s Form 10, as
amended, originally filed with the Securities and Exchange Commission on
November 17, 2006).
|
|
23.1#
|
Consent
of Caturano and Company, P.C.
|
|
31.1#
|
Rule
13a-14(a) Certification of Chief Executive Officer.
|
|
31.2#
|
Rule
13a-14(a) Certification of Chief Financial Officer.
|
|
32.1
|
|
Section
1350 Certifications of Chief Executive Officer and Chief Financial Officer
(Furnished herewith).
|
#
|
Filed
herewith.
|
*
|
Management
contract or compensatory plan or
arrangement.
|
35
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
GLENROSE
INSTRUMENTS INC.
|
|
(Registrant)
|
|
By:
|
/s/ ARVIN H. SMITH
|
Chief
Executive Officer
|
|
(Principal
Executive Officer)
|
|
By:
|
/s/ ANTHONY S. LOUMIDIS
|
Chief
Financial Officer
|
|
(Principal
Financial Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacity and on the dates indicated.
Signature
|
Title
|
Date
|
||
/s/ JOHN N. HATSOPOULOS
|
Chairman
of the Board
|
March
26, 2010
|
||
John
N. Hatsopoulos
|
||||
/s/ ARVIN H. SMITH
|
President,
Chief Executive Officer and
|
March
26, 2010
|
||
Arvin
H. Smith
|
Director
|
|||
/s/ ANTHONY S. LOUMIDIS
|
Chief
Financial Officer
|
March
26, 2010
|
||
Anthony
S. Loumidis
|
(Principal
Financial & Accounting Officer)
|
|||
/s/ ROBERT AGHABABIAN
|
Director
|
March
26, 2010
|
||
Robert
Aghababian
|
||||
/s/ BARRY S. HOWE
|
Director
|
March
26, 2010
|
||
Barry
S. Howe
|
||||
/s/ THEO MELAS-KYRIAZI
|
Director
|
March
26, 2010
|
||
Theo
Melas-Kyriazi
|
||||
/s/ WILLIAM J. ZOLNER
|
Director
|
March
26, 2010
|
||
William
J. Zolner
|
||||
/s/ JOHN H. PARK
|
|
Director
|
|
March
26, 2010
|
John H.
Park
36
PUBLIC
ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
GlenRose
Instruments, Inc.
We have
audited the accompanying consolidated balance sheets of GlenRose Instruments
Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December
27, 2009 and December 28, 2008 and the related consolidated statements of
operations, changes in stockholders’ equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company as
of December 27, 2009 and December 28, 2008 and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/
CATURANO AND COMPANY, P.C.
|
Boston,
Massachusetts
|
March
26, 2010
|
F-1
GLENROSE
INSTRUMENTS INC.
CONSOLIDATED BALANCE
SHEETS
DECEMBER
27, 2009 AND DECEMBER 28, 2008
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 1,012,250 | $ | 1,062,581 | ||||
Short-term
investments
|
10,060,916 | 10,321,219 | ||||||
Accounts
receivable (net of allowances of $18,039
|
||||||||
and
$27,688 for 2009 and 2008, respectively)
|
3,087,987 | 3,036,225 | ||||||
Unbilled
contract receivables
|
651,337 | 776,988 | ||||||
Supply
inventory
|
65,475 | 59,263 | ||||||
Prepaid
expenses
|
125,465 | 250,324 | ||||||
Other
receivables
|
59,812 | 183,658 | ||||||
Income
tax receivable
|
184,971 | 302,391 | ||||||
Deferred
tax asset
|
- | 557,123 | ||||||
Assets
held for sale
|
911,970 | - | ||||||
Total
current assets
|
16,160,183 | 16,549,772 | ||||||
Property,
plant and equipment, net
|
1,606,983 | 2,863,699 | ||||||
Other
assets
|
||||||||
Restricted
cash
|
415,000 | 415,000 | ||||||
Deferred
financing costs
|
430,000 | 550,000 | ||||||
Goodwill
|
2,740,913 | 2,740,913 | ||||||
Total
other assets
|
3,585,913 | 3,705,913 | ||||||
TOTAL
ASSETS
|
$ | 21,353,079 | $ | 23,119,384 |
The
accompanying notes are integral part of these consolidated financial
statements.
F-2
CONSOLIDATED
BALANCE SHEETS
DECEMBER
27, 2009 AND DECEMBER 28, 2008
2009
|
2008
|
|||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 734,644 | $ | 1,001,499 | ||||
Accrued
expenses
|
203,353 | 169,980 | ||||||
Accrued
employee-related costs
|
1,726,445 | 1,623,850 | ||||||
Accrued
interest, related party
|
262,722 | 601,328 | ||||||
Due
to related party
|
16,545 | 14,216 | ||||||
Capital
lease obligations
|
8,906 | 7,593 | ||||||
Income
taxes payable
|
- | 1,881 | ||||||
Total
current liabilities
|
2,952,615 | 3,420,347 | ||||||
Long-term
liabilities
|
||||||||
Convertible
debentures due to related parties
|
14,875,000 | 14,875,000 | ||||||
Capital
lease obligations, net of current portion
|
13,611 | 27,861 | ||||||
Deferred
tax liability
|
- | 256,946 | ||||||
Other
long-term liabilities
|
36,743 | 39,954 | ||||||
Total
liabilities
|
17,877,969 | 18,620,108 | ||||||
Stockholders'
equity
|
||||||||
Common
stock ($0.01 par value; 10,000,000 shares authorized;
|
||||||||
3,117,647
shares issued and outstanding at
|
||||||||
December
27, 2009 and December 28, 2008)
|
31,176 | 31,176 | ||||||
Additional
paid-in-capital
|
7,898,613 | 7,764,185 | ||||||
Accumulated
deficit
|
(4,454,679 | ) | (3,268,245 | ) | ||||
Accumulated
other comprehensive income (loss)
|
- | (27,840 | ) | |||||
Total
stockholders' equity
|
3,475,110 | 4,499,276 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 21,353,079 | $ | 23,119,384 |
The
accompanying notes are integral part of these consolidated financial
statements.
F-3
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 27, 2009 AND DECEMBER 28, 2008
2009
|
2008
|
|||||||
Revenues
|
$ | 33,248,254 | $ | 32,699,683 | ||||
Cost
of sales
|
31,264,449 | 30,628,195 | ||||||
Gross
profit from operations
|
1,983,805 | 2,071,488 | ||||||
General
and administrative expenses
|
2,211,927 | 2,597,009 | ||||||
Operating
loss
|
(228,122 | ) | (525,521 | ) | ||||
Other
income (expense)
|
||||||||
Miscellaneous
income
|
2,337 | 24,336 | ||||||
Interest
and other income
|
46,001 | 122,388 | ||||||
Interest
expense
|
(706,817 | ) | (488,373 | ) | ||||
Total
other expense
|
(658,479 | ) | (341,649 | ) | ||||
Loss
from operations, before income taxes
|
(886,601 | ) | (867,170 | ) | ||||
Benefit
(provision) for income taxes
|
(299,833 | ) | 123,531 | |||||
Net
loss
|
$ | (1,186,434 | ) | $ | (743,639 | ) | ||
Net
loss per share - basic and diluted
|
$ | (0.38 | ) | $ | (0.24 | ) | ||
Weighted
average shares outstanding -
|
||||||||
basic
and diluted
|
3,102,647 | 3,102,647 |
The
accompanying notes are integral part of these consolidated financial
statements.
F-4
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 27, 2009 AND DECEMBER 28, 2008
Common Stock
|
Accumulated
|
|||||||||||||||||||||||
$0.01 Par Value
|
Additional
|
Other
|
|
Total
|
||||||||||||||||||||
Number
|
Paid-in
|
Comprehensive
|
Accumulated
|
Stockholders'
|
||||||||||||||||||||
of Shares
|
Amount
|
Capital
|
Income
|
Deficit
|
Equity
|
|||||||||||||||||||
Balance,
December 30, 2007
|
3,117,647 | $ | 31,176 | $ | 7,494,514 | $ | - | $ | (2,524,606 | ) | $ | 5,001,084 | ||||||||||||
Stock-based
compensation expense
|
- | - | 269,671 | - | - | 269,671 | ||||||||||||||||||
Unrealized
loss on available-for-sale-securities
|
- | - | - | (27,840 | ) | - | (27,840 | ) | ||||||||||||||||
Net
loss
|
- | - | - | - | (743,639 | ) | (743,639 | ) | ||||||||||||||||
Balance,
December 28, 2008
|
3,117,647 | 31,176 | 7,764,185 | (27,840 | ) | (3,268,245 | ) | 4,499,276 | ||||||||||||||||
Stock-based
compensation expense
|
- | - | 134,428 | - | - | 134,428 | ||||||||||||||||||
Reclassification
to earnings of available-for-sale securities
|
- | - | - | 27,840 | - | 27,840 | ||||||||||||||||||
Net
loss
|
- | - | - | - | (1,186,434 | ) | (1,186,434 | ) | ||||||||||||||||
Balance,
December 27, 2009
|
3,117,647 | $ | 31,176 | $ | 7,898,613 | $ | - | $ | (4,454,679 | ) | $ | 3,475,110 |
The
accompanying notes are integral part of these consolidated financial
statements.
F-5
CONSOLIDATED STATEMENTS OF CASH
FLOWS
FOR
THE YEARS ENDED DECEMBER 27, 2009 AND DECEMBER 28, 2008
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$ | (1,186,434 | ) | $ | (743,639 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
625,202 | 596,432 | ||||||
Provision
for deferred income taxes
|
300,177 | 519 | ||||||
Amortization
of deferred financing costs
|
120,000 | 50,000 | ||||||
Stock-based
compensation
|
134,428 | 269,671 | ||||||
Bad
debt expense
|
(9,649 | ) | 26,808 | |||||
Gain
on maturities of short-term investments
|
(47,299 | ) | - | |||||
Change
in fair value of certificates of deposit
|
3,993 | - | ||||||
Loss
(gain) on disposal of fixed assets
|
12,906 | (11,049 | ) | |||||
Changes
in operating assets and liabilities
|
||||||||
(Increase)
decrease in:
|
||||||||
Restricted
cash
|
- | 10,424 | ||||||
Accounts
receivable
|
(42,113 | ) | (85,221 | ) | ||||
Other
receivables
|
123,846 | (167,481 | ) | |||||
Unbilled
contract receivables
|
125,651 | 175,351 | ||||||
Prepaid
expenses
|
124,859 | 51,638 | ||||||
Inventory
|
(6,212 | ) | 21,573 | |||||
Income
tax receivable
|
117,420 | (130,522 | ) | |||||
Increase
(decrease) in:
|
||||||||
Accounts
payable
|
(266,855 | ) | 205,582 | |||||
Accrued
interest, related party
|
(338,606 | ) | (211,555 | ) | ||||
Due
to related party
|
2,329 | 6,913 | ||||||
Other
long-term liabilities
|
(3,211 | ) | 19,954 | |||||
Other
accrued liabilities
|
92,733 | 121,999 | ||||||
Net
cash provided by (used in) operating activities
|
(116,835 | ) | 207,397 | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Proceeds
from sale of equipment
|
- | 25,036 | ||||||
Purchase
of property and equipment
|
(237,929 | ) | (918,215 | ) | ||||
Proceeds
from maturities of short-term investments
|
10,792,991 | - | ||||||
Purchase
of short-term investments
|
(10,461,542 | ) | (10,349,059 | ) | ||||
Payments
of selling costs on assets held for sale
|
(14,079 | ) | - | |||||
Net
cash provided by (used in) investing activities
|
79,441 | (11,242,238 | ) | |||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from convertible debentures, net of costs
|
- | 11,400,000 | ||||||
Payments
on subordinated notes
|
- | (500,000 | ) | |||||
Principal
payments on capital lease obligations
|
(12,937 | ) | (9,300 | ) | ||||
Net
cash provided by (used in) financing activities
|
(12,937 | ) | 10,890,700 | |||||
Net
decrease in cash and cash equivalents
|
(50,331 | ) | (144,141 | ) | ||||
Cash
and cash equivalents, beginning of the year
|
1,062,581 | 1,206,722 | ||||||
Cash
and cash equivalents, ending of the year
|
$ | 1,012,250 | $ | 1,062,581 | ||||
Supplemental
cash flow information:
|
||||||||
Cash
paid for interest
|
$ | 943,270 | $ | 614,586 | ||||
Cash
paid for income taxes
|
- | 20,853 | ||||||
Supplemental
non-cash investing activity:
|
||||||||
Unrealized
loss on available-for-sale investments
|
- | (27,840 | ) | |||||
Equipment
acquired under capital lease
|
- | 18,996 | ||||||
Supplemental
non-cash financing activity:
|
||||||||
Exchange
of senior notes into convertible debentures
|
- | (875,000 | ) | |||||
Exchange
of subordinated notes into convertible debentures
|
- | (1,500,000 | ) | |||||
Exchange
of demand notes into convertible debentures
|
- | (500,000 | ) | |||||
Assets
held for sale reclassification
|
$ | 911,970 | $ | - |
The
accompanying notes are integral part of these consolidated financial
statements.
F-6
GLENROSE INSTRUMENTS
INC.
Note
1 - The organization and significant accounting policies:
Organization
GlenRose
Instruments Inc., a Delaware corporation, or the company, we, our, or us, was
incorporated in September 2005 by the GlenRose Partnership L.P., or the GlenRose
Partnership, a private-equity partnership with its headquarters in Waltham,
Massachusetts. The company was organized to serve as a holding company through
which the GlenRose Partnership’s partners would hold the shares of Eberline
Services, Inc. or Eberline Services or ESI) (all of which had previously been
held by the GlenRose Partnership). In order to effect such change in structure,
the GlenRose Partnership entered into a stock exchange agreement with the
company in September 2005 pursuant to which all outstanding shares of Eberline
Services owned by the GlenRose Partnership were exchanged for 3,000,000 shares
of common stock of GlenRose Instruments. As a result of this exchange, the
GlenRose Partnership owned all of the outstanding stock of the company, and the
company owned all of the outstanding stock of its subsidiary, ESI.
On August
30, 2007, the company issued 102,647 shares to a limited number of accredited
investors through a private placement of common stock at a price per share of
$7.00. On December 31, 2007, the limited partners and the general partner of the
GlenRose Partnership dissolved the partnership and distributed the 3,000,000
shares of common stock of GlenRose Instruments to its limited partners in
accordance with the GlenRose Partnership plan of liquidation and
distribution.
On July
25, 2008, the company entered into subscription agreements with four investors
for the sale of convertible debentures in the aggregate principal amount of
$14,875,000. The debentures bear interest at 4%, payable quarterly in cash, and
mature on July 25, 2013. The debentures are convertible at the option of the
holder at any time into shares of common stock at an initial conversion price
equal to $7.00; see “Note 3 – Debt”.
GlenRose
Instruments, through Eberline Services and its subsidiaries, provides
radiological services and operates a radiochemistry laboratory network, as well
as provides radiological characterization and analysis, hazardous, radioactive
and mixed waste management, and facility, environmental, safety and health
management. The subsidiaries of Eberline Services are Eberline Services Hanford,
Inc. or ESHI, Eberline Analytical Corporation, Benchmark Environmental Corp.,
and Lionville Laboratory Inc., or Lionville.
Principles
of Consolidation and Basis of Presentation
The
accompanying consolidated financial statements include the company and its
subsidiaries. All significant intercompany transactions have been
eliminated.
Reclassifications
Certain prior period amounts have been
reclassified to conform to the current year presentation.
Fiscal
Year
The
company’s fiscal year-end is the last Sunday of each calendar year. Each quarter
is comprised of two four-week and one five-week period to ensure consistency in
prior-year comparative analysis. The company changed the fiscal year-end to the
current format in 2006. The previous fiscal year-end was December 28,
2008.
Use
of Estimates in Preparation of Statements
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and underlying assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could
differ from those estimates.
Concentration
of Credit Risk
Financial
instruments, which potentially subject the company to concentrations of credit
risk, consist of highly liquid cash equivalents and trade receivables. The
company’s cash equivalents are placed with certain financial institutions and
issuers. At December 27, 2009, the company had a balance of $10,817,784 in cash
and cash equivalents and short-term investments that exceeded the Federal
Deposit Insurance Corporation limit of $250,000.
F-7
GLENROSE INSTRUMENTS
INC.
The
company performs periodic credit evaluations of its customers’ financial
condition and generally does not require collateral. The company provides for an
allowance for doubtful accounts on receivable balances based upon the expected
collectability of such receivables. Federal and state governments collectively
account for more than 90% of environmental services and laboratory revenues for
the years ended December 27, 2009 and December 28, 2008. Only two of the
company’s customers account for more than 10% of revenue and trade accounts
receivable. One customer represented approximately 73% and 70% of revenue and
41% and 51% of trade accounts receivable for the years ended December 27, 2009
and December 28, 2008, respectively. The other customer represented
approximately 12% and 13% of revenue and 22% and 14% of trade accounts
receivable for the years ended December 27, 2009 and December 28, 2008,
respectively.
Fair
Value of Financial Instruments
The
company’s financial instruments are cash and cash equivalents, short-term
investments, accounts receivable, accounts payable, convertible debentures and
capital lease obligations. The recorded values of cash and cash equivalents,
accounts receivable and accounts payable approximate their fair values based on
their short-term nature. Short-term investments are recorded at fair value. The
fair value of capital lease obligations is estimated at its carrying value based
on current rates. The current value of the convertible debentures on the balance
sheet at December 27, 2009 approximates fair value as the terms approximate
those currently available for similar instruments. See Note 10 for discussion of
fair value measurements.
Cash
and Cash Equivalents
The
company considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents. The company has cash balances in
certain financial institutions in amounts which occasionally exceed current
federal deposit insurance limits. The financial stability of these institutions
is continually reviewed by senior management. The company believes it is not
exposed to any significant credit risk on cash and cash
equivalents.
Restricted
Cash
Restricted
cash includes certificates of deposit set aside to meet statutory requirements
in the event of decommissioning activities of certain laboratory operations and
is not indicative of any real or contingent liability.
Investments
The
company accounts for its investments in debt and equity securities in accordance
with ASC 320 Investments-Debt and Equity Securities, that requires the
classification of investments in debt and equity securities as
“held-to-maturity”, “available-for-sale” or “trading.” Investments which
are considered held-to-maturity are stated at amortized cost. Investments which
are considered trading securities and available-for-sale securities
are carried at fair market value. Unrealized gains and losses on
available-for-sale securities are included in accumulated other comprehensive
income (loss) as a separate component of stockholders’ equity. Unrealized
holding gains and losses on trading securities are included in current
period earnings. Realized gains and losses, dividend and interest income,
including amortization of the premium and discount arising at acquisition, for
all three categories of investments are included in earnings.
At
December 27, 2009 short term investments consisted of $10,060,916 in money
market mutual funds and certificates of deposit. At December 28, 2008 short term
investments consisted of money market mutual funds, corporate bonds, and U.S.
Treasury bills with maturities of less than twelve months. At December 28, 2008,
$7,042,853 of the short-term investments were classified as available-for-sale
securities. An unrealized loss of $27,840 was recorded in accumulated other
comprehensive loss in the available-for-sale securities for the year ended
December 28, 2008.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Maintenance,
repairs and minor renewals are expensed to operations as incurred. Major repairs
and betterments, which substantially extend the useful life of the property, are
capitalized. Depreciation is provided for principally on a straight-line basis
in amounts sufficient to charge the cost of depreciable assets to operations
over the estimated service lives of assets as follows:
Buildings
& improvements
|
12
to 30 years
|
|
Computer
equipment
|
3
years
|
|
Plant
and laboratory equipment
|
8
to 10 years
|
F-8
GLENROSE INSTRUMENTS
INC.
Leasehold
improvements are amortized using the straight-line method over the lesser of the
estimated useful lives of the assets or the term of the related
leases.
Recovery
of Long-Lived Assets
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the remaining estimated useful life of such assets might warrant
revision or that the balances may not be recoverable. If undiscounted cash flows
are insufficient to recover the net book value of long-term assets including
amortizable intangible assets, further analysis is performed in order to
determine the amount of the impairment. In such circumstances an impairment loss
would be recorded equal to the amount by which the net book value of the assets
exceeds fair value. Fair value is usually determined based on the present value
of estimated expected future cash flows using a discount rate commensurate with
the risks involved. No events occurred or circumstances changed at December
27, 2009 that would indicate that the remaining net book value of the company’s
long-lived assets are not recoverable.
Goodwill
Goodwill
is the excess of the purchase price over the fair value of identifiable net
assets acquired in business combinations. Goodwill is subject to an impairment
test annually. Goodwill is also reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. The company performs impairment testing at the reporting unit
level. An impairment loss is recognized when the fair value of the discounted
cash flows of the reporting unit including its tangible assets is less than the
carrying value.
At
December 27, 2009, and December 28, 2008, the company’s goodwill balance was
related to the Environmental Services segment which includes Eberline Services,
ESHI and Benchmark Environmental Corp. The Analytical Laboratories goodwill was
written off in prior years. At December 27, 2009, the Environmental Services
segment reported revenues of $25,469,474 and gross profit of $2,109,355. Those
results were consistent with prior year’s results, and consistent with the
contracts in effect for that segment. In preparing the discounted cash flow
analysis, the company analyzed the prior years' results as well as the contracts
in effect for the next five years. The company estimated future sales volume
using a 3% increase in revenues, which is consistent with the contract type(s)
in effect. As the majority of the contracts in the segment are government
cost-reimbursable contracts, the company escalated the associated costs
consistent with the revenue increase. The segment's largest cost is labor. The
company further estimated capital expenditures consistent with prior years
amounts, and included the effects of depreciation in determining its net free
cash flow prior to discount. The company utilized a weighted average cost of
capital discount rate of 12.7% and 9.7% for terminal value calculations. Total
expected free cash flow from the segment is approximately$7.6 million before
adjustments. The company further discounted the cash flow based on management’s
internal assessment of achieving the forecast results. The company’s internal
assessment factor was 95% for 2011 declining to 30% for the terminal value year.
Based on the assumptions above, the company determined that goodwill for the
Environmental Services segment in the amount of $2,740,913 was not considered to
be impaired.
Revenue
Recognition
Revenue
for laboratory services is recognized upon completion of the services and the
shipment of the related data packages to the company’s customers. Revenue for
government service contracts is recognized as the services are performed.
Revenues are recognized based upon actual costs incurred plus specified fees or
actual time and materials as required. The company performs certain contracts
that are audited by either the Defense Contract Audit Agency, or the DCAA, or
Los Alamos National Laboratories Internal Audit. Such contracts may be subject
to adjustment dependent upon such factors as provisional billing rates or other
contract terminology. Calculations of allowable overhead and profit may also
change after audits by the DCAA for cost reimbursable type contracts. Contracts
are normally settled during the audit year the contract terminates performance
and is submitted for closure. The company is currently audited and settled
through December 2005 for all contracts subject to review by DCAA and audited
through December 2002 for contracts subject to review by the Los Alamos Internal
Audit. Contracts performed before either 2005 or 2002 respectively that are
either active or have not been submitted for closure may be subject to
adjustment during subsequent audits during the year they are closed and
audited.
The
company is engaged principally in three types of service contracts with the
federal government and its contractors:
Cost
Reimbursable Contracts. Revenue from “cost-plus-fixed-fee” contracts is
recognized on the basis of reimbursable contract costs incurred during the
period plus an earned fee. Costs incurred for services which have been
authorized and performed, but may not have been billed, are allocated with
operational fringe, overhead, general and administrative expenses and fees, and
are presented as Unbilled Contract Receivables on the accompanying consolidated
balance sheet contained herein.
F-9
GLENROSE INSTRUMENTS
INC.
Time-and-Materials
Contracts. Revenue from “time and material” contracts is recognized on the
basis of man-hours utilized plus other reimbursable contract costs incurred
during the period.
Fixed-Price
Contracts. Revenue from “fixed-price” contracts is recognized on the
percentage-of-completion method. For fixed-price contracts, the amount of
revenues recognized is that portion of the total contract amount that the actual
cost expended bears to the anticipated final total cost based on current
estimates of cost to complete the project (cost-to-cost method). However,
when it becomes known that the anticipated final total cost will exceed the
contract amount, the excess of cost over the contract amount is immediately
recognized as a loss on the contract. Recognition of profit commences on an
individual project only when cost to complete the project can reasonably be
estimated and after there has been some meaningful performance achieved on the
project (greater than 10% complete). Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions (when applicable) and final contract settlements, may result
in revisions to costs and income and are recognized in the period in which the
revisions are determined. Claims and change orders are not recorded and
recognized until such time as they have been accepted.
Direct
costs of contracts include direct labor, subcontractors and consultants,
materials and travel. The balance of costs, including facilities costs,
insurance, administrative costs, overhead labor and fringe costs, are classified
as either indirect costs or general and administrative expense, and are
allocated to jobs as a percentage of each division’s total cost
base.
Accounts
Receivable
Accounts
receivable are carried at original invoice amounts less an estimate made for
doubtful receivables based on a review of all outstanding amounts on a monthly
basis. Management determines the allowance for doubtful accounts by identifying
troubled accounts and by using historical experience applied to an aging of
accounts. Accounts receivable are written off when deemed
uncollectible. Recoveries of accounts receivable previously written off are
recorded as a credit to bad debt expense when received.
Unbilled
Contract Receivables
Costs
related to work that has been completed and performed, for which revenue has
been recognized but are not yet fully billed, are classified as “unbilled
contract receivables.”
Supply
Inventory
Inventories
are stated at the lower of cost or market, valued on a first-in, first-out
basis. Inventory is reviewed periodically for slow-moving and obsolete items. As
of December 27, 2009 and December 28, 2008, there were no reserves or
write-downs recorded against inventory.
Income
Taxes
The
company uses the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
The amount of such provisions is based on various factors, such as the amount of
taxable income in the current and prior periods, and the likelihood of continued
taxable income. Additionally, management is responsible for estimating the
probability that certain tax assets or liabilities can and will be utilized in
future periods. The company believes it records and/or discloses such potential
tax liabilities as appropriate and has reasonably estimated its income tax
liabilities and recoverable tax assets. At December 27, 2009, the Company
recorded a tax provision of $299,833 in order to increase the valuation
allowance for certain deferred tax assets due to their uncertain
realization.
Loss
per Common Share
The
calculation of loss per common share is based on the weighted-average number of
common shares outstanding during the applicable period.
F-10
GLENROSE
INSTRUMENTS INC.
Stock
Based Compensation
Stock
based compensation cost is measured at the grant date based on the estimated
fair value of the award and is recognized as an expense in the statement of
operations over the requisite service period. The fair value of stock options
granted is estimated using the Black-Scholes option pricing valuation model. The
company recognizes compensation on a straight-line basis for each separately
vesting portion of the option award. Use of a valuation model requires
management to make certain assumptions with respect to selected model inputs.
Expected volatility is calculated based on the average volatility of 20
companies in the same industry as the company. The average expected life is
estimated using the simplified method for “plain vanilla” options. The expected
life in years is based on the “simplified” method. The simplified method
determines the expected life in years based on the vesting period and
contractual terms as set forth when the award is made. The company uses the
simplified method for awards of stock-based compensation since it does not have
the necessary historical exercise and forfeiture data to determine an expected
life for stock options. The risk-free interest rate is based on U.S. Treasury
zero-coupon issues with a remaining term which approximates the expected life
assumed at the date of grant. When options are exercised the company normally
issues new shares.
See “Note
6 – Stockholders’ equity” for a summary of the restricted stock and stock option
activity under our stock-based employee compensation plan for the year ended
December 27, 2009.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued guidance on changes in the accounting and
reporting of business acquisitions. The guidance requires an acquirer to
recognize the assets acquired, the liabilities assumed, and any noncontrolling
interest in purchased entities, measured at their fair values at the date of
acquisition based upon the definition of fair value. This guidance was effective
for the company at the beginning of 2009. The guidance had no impact on the
company’s consolidated financial statements and any future effect will depend on
the extent that the company makes business acquisitions in the
future.
In
September, 2006, the FASB issued guidance which defines fair value, establishes
a framework for measuring fair value, and expands disclosures about fair value
measurements. In February, 2008, the FASB delayed the effective date of the fair
value guidance for all non-financial assets and non-financial liabilities,
except those that are measured on a recurring basis. Effective January 1, 2009,
the company adopted fair value guidance with respect to non-financial assets and
liabilities measured on a non-recurring basis. The company does not expect the
guidance to have a material impact on its results of operations and financial
condition.
In March
2008, the FASB issued a pronouncement pertaining to disclosures about derivative
instruments and hedging activities. This guidance requires disclosures of how
and why an entity uses derivative instruments; how derivative instruments and
related hedged items are accounted for; and how derivative instruments and
related hedged items affect an entity’s financial position, financial
performance and cash flows. The rule was effective for the company beginning
January 1, 2009. The company does not expect the guidance to have a material
impact on its results of operations and financial condition.
In April
2009, the FASB issued guidance on providing interim disclosures about fair value
of financial instruments. This new guidance requires the fair value disclosures
that were previously disclosed only annually to be disclosed now on an interim
basis. This guidance was effective for the company in the second quarter of
2009, and has resulted in additional disclosures in our interim financial
statements, and therefore did not impact our financial position, results of
operations or cash flows.
In May
2009, the FASB issued a pronouncement on subsequent event accounting. The
guidance identifies the following: the period after the balance sheet date
during which management shall evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements; the
circumstances under which an entity shall recognize events or transactions
occurring after the balance sheet date in its financial statements; and the
disclosures that an entity shall make about events or transactions that occurred
after the balance sheet date. The pronouncement was effective for the company’s
second quarter 2009, and did not have an impact on our financial position,
results of operations, or cash flows.
In June
2009, the FASB issued guidance on the FASB Accounting Standards Codification and
the hierarchy of generally accepted accounting principles. The FASB Accounting
Standards Codification, or the Codification, is the single source of
authoritative nongovernmental generally accepted accounting principles in the
U.S. The Codification was effective for interim and annual periods ending after
September 15, 2009. The adoption of the Codification had no impact on the
company’s financial position, results of operations or cash flows.
F-11
GLENROSE INSTRUMENTS
INC.
In
September 2009, the Emerging Issues Task Force issued new rules pertaining to
the accounting for revenue arrangements with multiple deliverables. The new
rules provide an alternative method for establishing fair value of a deliverable
when vendor specific objective evidence cannot be determined. The guidance
provides for the determination of the best estimate of selling price to separate
deliverables and allows the allocation of arrangement consideration using this
relative selling price model. The guidance supersedes the prior multiple element
revenue arrangement accounting rules that are currently used by the company.
This guidance is effective for us January 1, 2011 and is not expected to have a
material effect on our consolidated financial position or results of
operations.
Note
2 – Property plant and equipment:
Property,
plant and equipment consist of the following as of December 27, 2009 and
December 28, 2008:
2009
|
2008
|
|||||||
Land
|
$ | 267,814 | $ | 775,514 | ||||
Buildings
and improvements
|
984,175 | 2,168,024 | ||||||
Machinery
and equipment
|
4,124,527 | 5,137,336 | ||||||
Assets
under capital lease
|
56,771 | 56,771 | ||||||
Leasehold
improvements
|
587,073 | 469,527 | ||||||
6,020,360 | 8,607,172 | |||||||
Less:
accumulated depreciation
|
(4,413,377 | ) | (5,743,473 | ) | ||||
Net
property, plant and equipment
|
$ | 1,606,983 | $ | 2,863,699 |
Depreciation
expense for the years ended December 27, 2009 and December 28, 2008 was $625,202
and $596,432, respectively.
The
company owns property in Albuquerque, New Mexico. In 2009, the company entered
into an agreement, subject to closing conditions, with a buyer to sell the
property for approximately $1.9 million. As a result the Company reclassified
$507,700 in land, $2,265,764 in buildings and improvements, and 1,916,927 in
accumulated depreciation as “Assets held for sale” on the company’s balance
sheet as of December 27, 2009. The assets held for sale balance of $911,970 also
includes selling costs incurred to date of $14,079 and an accrual of $41,354
towards decommissioning of the site. The company expects to complete the sale in
2010.
Note
3 – Debt:
On July
25, 2008, the company entered into subscription agreements with four investors
for the sale of convertible debentures in the aggregate principal amount of
$14,875,000. The primary investor was Blum Strategic Partners IV, L.P., who
subscribed for $12,000,000 of the debentures. Additional investors included John
N. Hatsopoulos, the company’s Chairman of the board, Arvin H. Smith, the
company’s President and Chief Executive Officer, and Philip Frost M.D., a holder
of more than 10% of the outstanding equity securities of the company immediately
prior to the sale of the debentures, who subscribed for $2,875,000 of debentures
by exchanging existing promissory notes of the company for the debentures. The
debentures bear interest at 4%, payable quarterly in cash, and mature on July
25, 2013. The debentures will be convertible at the option of the holder at any
time into shares of common stock at a conversion price equal to $7.00 per share.
In connection with the transaction, the company appointed John H. Park to the
company’s board of directors. Ladenburg Thalman & Co., Inc., a registered
broker-dealer, acted as placement agent on a best efforts basis for the sale of
the company’s debentures. In connection with the transaction, the company paid
the placement agent a cash fee of $600,000.
On July
25, 2008, the company made a payment of $500,000 to Richard Chapman, the
company’s Executive Vice President and Chief Operating Officer, for the
principal amount on its remaining subordinated promissory note due
2011.
F-12
GLENROSE INSTRUMENTS
INC.
Note
4 – Commitments and contingencies:
The
company and its subsidiaries lease facilities and equipment under various
operating leases. Future minimum rental commitments for long-term,
non-cancelable operating leases at December 27, 2009 are as
follows:
Summary
of Lease Obligations:
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
Totals
|
||||||||||||||||||||||
Facilities
|
$ | 274,605 | $ | 216,508 | $ | 214,554 | $ | 124,176 | $ | 49,128 | $ | 12,282 | $ | 891,253 | ||||||||||||||
Equipment
|
35,490 | - | - | - | - | - | 35,490 | |||||||||||||||||||||
$ | 310,095 | $ | 216,508 | $ | 214,554 | $ | 124,176 | $ | 49,128 | $ | 12,282 | $ | 926,743 |
For the
years ended December 27, 2009 and December 28, 2008, rent expense was $383,494
and $666,548, respectively. On June 3, 2008, the company entered into a lease
for a new facility for the Lionville business. From July 2008 to February 2009
the company paid rent for two facilities in Lionville, while in a transition
period.
The
company performs services under numerous subcontract agreements on
cost-reimbursable contracts with the federal government. During the period from
1998 to 2003, the company was party to a subcontract agreement with Johnson
Control Northern New Mexico, or JCNNM, to provide services to Los Alamos on a
cost-reimbursable basis. On May 14, 2007, the company received notification from
IAP-Northern New Mexico, or IAPNNM, the successor corporation to JCNNM, that the
results of a Los Alamos audit for the period ending in 2003 determined that
certain costs previously claimed and billed by the company were subsequently
deemed unallowable or otherwise not reimbursable. IAPNNM requested that the
company reimburse the amount of $321,836 that was paid to the company
during the subject time period. In January 2009, the company protested the Los
Alamos audit results claiming they were inaccurate and requested to resubmit a
claim for the subject contract. The Los Alamos audit team agreed to review the
audit results and adjust the claim as needed. In the event it is determined that
the company has to reimburse such amount in full, the resultant cost could
materially affect its results of operations.
In late
2008, the New Mexico Environmental Department notified the company of a proposed
civil penalty for non-compliance with certain New Mexico administrative
statutes. In July 2009 the company agreed to a resolution agreement in principle
with the New Mexico Environmental Department. The company negotiated a
settlement, without admitting fault, to expedite resolution and mitigate the
costs associated with the claim. The settlement did not result in a material
adverse affect on the company’s business, operating results or financial
condition.
As of
December 27, 2009, the company was a party to two lawsuits with former employees
over their terminations.
The first
lawsuit was dismissed with prejudice on March 17, 2010. The second lawsuit is
still in the discovery phase. We do not expect either litigation or any other
legal activity will have a materially adverse affect on our business, operating
results or financial condition.
Note
5 - Capital leases:
In 2006,
the company leased laboratory equipment under a capital lease agreement. The
lease term is for three more years, with the company owning the equipment at
completion of the lease. The assets are amortized over their normal useful
lives. In October 2008 the company entered into a capital lease with Phoenix
Leasing Systems for the purpose of financing equipment at Lionville. The lease
terms are 60 months with a $1 purchase option at completion.
Assets
under capital lease as of December 27, 2009 and December 28, 2008:
2009
|
2008
|
|||||||
Equipment
|
$ | 56,771 | $ | 56,771 | ||||
Less:
accumulated depreciation
|
(29,730 | ) | (18,102 | ) | ||||
Net
assets under capital lease
|
$ | 27,041 | $ | 38,669 |
During
the year ended December 27, 2009 the company paid a total of $12,937 in
principal payments towards capital leases. The following is a schedule of future
payments by years required under the lease(s) together with their present
values:
F-13
GLENROSE INSTRUMENTS
INC.
Payments
|
||||
2010
|
$ | 11,722 | ||
2011
|
5,072 | |||
2012
|
5,072 | |||
2013
|
5,072 | |||
Total
lease payments
|
26,938 | |||
Less:
amount representing interest
|
(4,421 | ) | ||
Present
value of minimum lease payments
|
$ | 22,517 |
Stock
Based Compensation
In
September 2005, the company adopted a stock option plan under which the board of
directors may grant incentive or non-qualified stock options and stock grants to
key employees, directors, advisors and consultants of the company.
The
maximum number of shares of stock or underlying options allowable for issuance
under the plan is 700,000 shares of common stock, including 15,000 restricted
shares as of December 27, 2009. Stock options vest based upon the terms within
the individual option grants, usually over a five-year period at 20% per year,
with an acceleration of the unvested portion of such options upon a liquidity
event, as defined in the company’s stock option agreement. The options are not
transferable except by will or domestic relations order. The number of
securities remaining available for future issuance under the plan was 499,000 at
December 27, 2009.
The
option price per share under the plan is not less than the fair market value of
the shares on the date of the grant. The determination of the fair value of
share-based payment awards is affected by our stock price. The company
considered the sales price of common stock in private placements to unrelated
third parties during the year as a measure of the fair value of its common
stock. The company’s most recent private placement of common stock was in August
of 2007 at a price of $7.00 per share. There were no stock options
awards granted in 2009 or 2008. Stock option activity for the years ended
December 27, 2009 and December 28, 2008 was as follows:
Exercise
|
Weighted
|
Weighted
|
||||||||||||||||||
Price
|
Average
|
Average
|
Aggregate
|
|||||||||||||||||
Number of
|
Per
|
Exercise
|
Remaining
|
Intrinsic
|
||||||||||||||||
Options
|
Share
|
Price
|
Life
|
Value
|
||||||||||||||||
Outstanding,
December 30, 2007
|
230,000 | $ | 7.00 | $ | 7.00 | 6.87 | $ | - | ||||||||||||
Granted
|
- | - | - | |||||||||||||||||
Exercised
|
- | - | - | |||||||||||||||||
Canceled
|
(30,000 | ) | 7.00 | 7.00 | ||||||||||||||||
Expired
|
- | - | - | |||||||||||||||||
Outstanding,
December 28, 2008
|
200,000 | $ | 7.00 | 7.00 | 5.88 | - | ||||||||||||||
Vested
& Exercisable, December 28, 2008
|
40,000 | $ | 7.00 | 5.88 | $ | - | ||||||||||||||
Outstanding,
December 28, 2008
|
200,000 | $ | 7.00 | $ | 7.00 | 5.88 | $ | - | ||||||||||||
Granted
|
- | - | - | |||||||||||||||||
Exercised
|
- | - | - | |||||||||||||||||
Canceled
|
(14,000 | ) | 7.00 | 7.00 | ||||||||||||||||
Expired
|
- | - | - | |||||||||||||||||
Outstanding,
December 27, 2009
|
186,000 | $ | 7.00 | 7.00 | 4.88 | - | ||||||||||||||
Vested
& Exercisable, December 27, 2009
|
74,400 | $ | 7.00 | 4.88 | $ | - |
The
aggregate intrinsic value of options outstanding as of December 27, 2009 is
calculated as the difference between the exercise price of the underlying
options and the price of the company’s common stock for options that were
in-the-money as of that date.
F-14
GLENROSE INSTRUMENTS
INC.
In 2007,
the company made restricted stock grants to three of its directors by permitting
them to purchase an aggregate of 15,000 shares of common stock at a price of
$0.01 per share. Those shares begin to vest 90 days after the company’s initial
listing on a securities exchange or an over-the-counter bulletin board at a rate
of 25% per year. All of the shares become vested shares upon a change in control
prior to a termination event. There were no restricted stock awards granted in
2009 or 2008. At December 27, 2009, there were 15,000 unvested shares of
restricted stock outstanding. Restricted stock activity for the years ended
December 27, 2009 and December 28, 2008 was as follows:
Number of
|
Grant Date
|
|||||||
Restricted Stock
|
Fair Value
|
|||||||
Unvested,
December 30, 2007
|
15,000 | $ | 7.00 | |||||
Granted
|
- | - | ||||||
Vested
|
- | - | ||||||
Forfeited
|
- | - | ||||||
Unvested,
December 28, 2008
|
15,000 | $ | 7.00 | |||||
Granted
|
- | - | ||||||
Vested
|
- | - | ||||||
Forfeited
|
- | - | ||||||
Unvested,
December 27, 2009
|
15,000 | $ | 7.00 |
The
company recognized employee non-cash stock based compensation expense of
$134,428 and $269,671 related to the issuance of restricted stock and stock
options during the years ended December 27, 2009 and December 28, 2008,
respectively. The
Company recorded $88,654 and $89,663 to cost of sales for the years ended
December 27, 2009 and December 28, 2008, respectively, and $45,774 and $180,008
to general administrative expenses for the years ended December 27, 2009 and
December 28, 2008, respectively. The total compensation cost related
to unvested restricted stock awards and stock option awards not yet recognized
is $149,238 at December 27, 2009. This amount is expected to be recognized over
a weighted average period of 3.1 years.
Note
7 - Benefit plans:
The
company currently maintains two defined contribution “401(k)” plans.
Additionally, employees of ESHI are covered by a multi-employer, defined benefit
plan that is not administered by the company.
Eberline
Services’ employees are eligible to participate in the 401(k) plan
immediately. Participants may elect to contribute up to 100% of their
compensation to the 401(k) Plans, subject to Internal Revenue Service annual
limitations. Eberline Services makes discretionary matching contributions of up
to 4.5% of a participant’s compensation, depending on deferral amount. During
2008, the company merged the Lionville 401(k) plan into the Eberline Services
plan. Contributions for Lionville employees are included in the Eberline
Services contribution disclosure. For the years ended December 27, 2009 and
December 28, 2008, Eberline Services contributed approximately $250,564 and
$235,625, respectively.
Employees
of ESHI are eligible to participate in a multi-employer defined benefit plan or
the Plan. The Plan is administered by Fluor Hanford, Inc., on behalf of
eligible, participating companies. The Plan is funded by participating
companies on a payroll-by-payroll basis, in amounts actuarially computed by
Fluor Hanford, Inc. The company expenses the computed expense amount
annually. Under the terms and conditions of the Plan, individual companies
assume no liability for future pension or benefit costs associated with the
Plan. The government reimburses the company for all pension related costs as a
direct project cost. Accordingly, no information with respect to the Plan
is included herein. Annual expense amounts are based on the total labor base
incurred at the Hanford Reservation site. For the years ended December 27,
2009, and December 28, 2008, the expense was $726,473 and $456,885,
respectively.
Additionally,
ESHI employees are eligible to participate in a traditional, employer-sponsored
401(k) plan also administered by Fluor Hanford, Inc. For the years ended
December 27, 2009, and December 28, 2008, employer contributions were $545,364
and $525,913, respectively.
F-15
GLENROSE INSTRUMENTS
INC.
Note
8 – Related party transactions:
On July
25, 2008, the company entered into subscription agreements with four investors
for the sale of convertible debentures in the aggregate principal amount of
$14,875,000. The primary investor was Blum Strategic Partners IV, L.P., who
subscribed for $12,000,000 of the debentures. Additional investors included John
N. Hatsopoulos, the company’s Chairman of the board, Arvin H. Smith, the
company’s President and Chief Executive Officer, and Philip Frost M.D., a holder
of more than 10% of the outstanding equity securities of the company immediately
prior to the sale of the debentures, who subscribed for $2,875,000 of debentures
by exchanging existing promissory notes of the company for the debentures. The
debentures bear interest at 4%, payable quarterly in cash, and mature on July
25, 2013. The debentures will be convertible at the option of the holder at any
time into shares of common stock at an initial conversion price equal to $7.00
per share. In connection with the transaction, the company appointed John H.
Park to the company’s board of directors. Ladenburg Thalman & Co., Inc., a
registered broker-dealer, acted as placement agent on a best efforts basis for
the sale of the company’s debentures. In connection with the transaction, the
company paid the placement agent a cash fee of $600,000.
On July
25, 2008 the company paid in cash the principal amount on its remaining
subordinated promissory note due 2011. In connection with that transaction, the
company made a payment of $500,000 to Richard Chapman, the company’s Executive
Vice President and Chief Operating Officer.
The
company’s Chief Financial Officer devotes part of his business time to the
affairs of American DG Energy Inc., or American DG, that pays his salary and
part of his salary is reimbursed by the company. Also, the company’s Chairman of
the Board is the Chairman, Chief Executive Officer and a significant investor in
American DG and did not receive a salary, bonus or any other compensation from
American DG in 2008.
Note
9 - Loss per share:
Basic and
diluted loss per share are computed by dividing earnings available to common
stockholders by the weighted average number of common shares outstanding during
the period to common stock. Because of the reported net losses, there are no
dilutive securities as of December 27, 2009 and December 28, 2008. The following
reconciles amounts reported in the financial statements:
2009
|
2008
|
|||||||
Loss
per share
|
||||||||
Loss
available to stockholders
|
$ | (1,186,434 | ) | $ | (743,639 | ) | ||
Weighted
average shares outstanding - basic
|
3,102,647 | 3,102,647 | ||||||
Net
earnings (loss) per share - basic
|
$ | (0.38 | ) | $ | (0.24 | ) | ||
Assumed
exercise of dilutive stock options and warrants
|
- | - | ||||||
Weighted
average shares outstanding - diluted
|
3,102,647 | 3,102,647 | ||||||
Net
earnings (loss) per share - diluted
|
$ | (0.38 | ) | $ | (0.24 | ) | ||
Anti-dilutive
restricted stock outstanding
|
15,000 | 15,000 | ||||||
Anti-dilutive
shares underlying stock options outstanding
|
186,000 | 200,000 | ||||||
Anti-dilutive
convertible debentures
|
2,125,000 | 2,125,000 |
Note
10 – Fair value measurements:
The fair
value topic of the Codification defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. The
accounting guidance also establishes a fair value hierarchy which requires an
entity to maximize the use of observable inputs, where available, and minimize
the use of unobservable inputs when measuring fair value. There are three levels
of inputs that may be used to measure fair value:
Level 1 — Unadjusted quoted
prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs
other than quoted prices included in Level 1. Level 2 inputs include quoted
prices for identical assets or liabilities in non-active markets, quoted prices
for similar assets or liabilities in active markets and inputs other than quoted
prices that are observable for substantially the full term of the asset or
liability.
Level 3 — Unobservable inputs
reflecting management’s own assumptions about the input used in pricing the
asset or liability. We currently do not have any Level 3 financial assets or
liabilities.
F-16
GLENROSE INSTRUMENTS
INC.
At December 27, 2009, the company had
short term investments of $10,060,916 that are comprised of money market funds
of $8,626,490 and certificates of deposits of $1,434,426. Money market funds are
categorized as level 1 and certificates of deposit are categorized as level 2.
The company determines the fair value of certificates of deposits using
information provided by the issuing bank which includes discounted expected cash
flow estimates using current market rates offered for deposits with similar
remaining maturities.
Note
11 – Investments:
In the
year ended December 28, 2008, the company classified its marketable securities,
included in short-term investments, as available-for-sale. Available-for-sale
securities, which included certificates of deposit, were reported at fair value
with unrealized gains and losses included in stockholders’ equity. The company
had an unrealized loss of $27,840 recorded in accumulated other comprehensive
loss in the available-for-sale securities for the year ended December 28, 2008.
The following is a summary of marketable, available-for-sale securities as of
December 28, 2008.
Gross
|
Gross
|
|||||||||||||||
Unrealized
|
Unrealized
|
Fair
|
||||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
Debt
securities:
|
||||||||||||||||
U.S.
Treasury bills
|
$ | 2,497,701 | $ | 22,223 | $ | - | $ | 2,519,924 | ||||||||
Corporate
bonds
|
4,572,992 | 8,175 | (58,238 | ) | 4,522,929 | |||||||||||
$ | 7,070,693 | $ | 30,398 | $ | (58,238 | ) | $ | 7,042,853 |
The
available-for-sale securities held by the company as of December 28, 2008
matured during the first and second quarters of 2009. Proceeds from maturities
of securities classified as available for sale were $7,108,876 for the year
ending December 27, 2009 and gross gains of $38,181 were realized on these
maturities. As of December 27, 2009 the Company’s short-term investments consist
solely of certificates of deposits and money market funds which are reported at
fair value with unrealized gains and losses included in earnings.
Note
12 - Income taxes:
Components
of the provision for income taxes for the years ended December 27, 2009 and
December 28, 2008 are as follows:
Provision
(benefit) for income taxes
|
2009
|
2008
|
||||||
Current
taxes:
|
||||||||
Federal
|
$ | (344 | ) | $ | (124,050 | ) | ||
State
|
- | - | ||||||
Total
current taxes
|
(344 | ) | (124,050 | ) | ||||
Deferred
taxes:
|
||||||||
Federal
|
300,177 | 452 | ||||||
State
|
- | 67 | ||||||
Total
deferred taxes
|
300,177 | 519 | ||||||
Total
income taxes
|
$ | 299,833 | $ | (123,531 | ) |
The
income tax expense for the years ended December 27, 2009 and December 28, 2008
varied from the amount computed by applying the federal statutory income tax
rate to income (loss) before taxes. Reconciliation between the
federal statutory taxes and effective taxes follows:
Reconciliation
between federal statutory taxes and effective taxes
|
2009
|
2008
|
||||||
Federal
taxes at the statutory rate applied to income (loss)
|
$ | (301,445 | ) | $ | (294,838 | ) | ||
before
taxes
|
||||||||
Add
(deduct):
|
||||||||
State
income tax expense (benefit) net of federal benefit
|
(23,099 | ) | (18,237 | ) | ||||
Stock-based
compensation
|
45,706 | 93,974 | ||||||
Adjustment
to valuation allowance
|
342,972 | 85,153 | ||||||
Other
accruals and adjustments
|
235,699 | 10,417 | ||||||
Total
income tax expense (benefit)
|
$ | 299,833 | $ | (123,531 | ) |
F-17
GLENROSE INSTRUMENTS INC.
Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
company’s deferred taxes at December 27, 2009 and December 28, 2008, are as
follows:
Deferred
taxes
|
2009
|
2008
|
||||||
Depreciable
assets
|
$ | (440,493 | ) | $ | (375,352 | ) | ||
Intangible
assets
|
97,357 | 113,361 | ||||||
Accrued
liabilities
|
275,327 | 263,409 | ||||||
Accrued
interest
|
42,361 | 169,442 | ||||||
NOL
carryforwards
|
931,939 | 692,836 | ||||||
Valuation
allowance
|
(906,491 | ) | (563,519 | ) | ||||
440,493 | 675,529 | |||||||
Net
deferred taxes
|
$ | - | $ | 300,177 |
The
company recorded a tax provision of $299,833 in 2009 compared to tax benefit of
$123,531 in 2008. As of December 27, 2009, the company had a deferred tax asset
balance of $440,493 a portion of which is related to the net operating losses of
the company’s Lionville subsidiary. These Lionville losses are subject to
separate return limitation year treatment and may only be utilized against
income from Lionville. As of December 28, 2008, the company believed that it was
more likely than not that it would not realize the balance of these Lionville
assets, and therefore reduced the deferred tax asset by a valuation allowance in
the amount of $563,519. During 2009, the company further reduced the net
deferred tax asset to $0 by increasing the valuation allowance to $906,491 as
the company believes it is more likely than not that it will not realize the
balance of the deferred tax asset. For the year ended December 27, 2009, income
taxes resulted in a tax provision of $299,833. As of December 27, 2009 the
company had net operating losses carryforwards of $1,287,039 associated with
Lionville which will expire by December 2016. Additional loss carryforwards
of $1,182,277 are available on a consolidated basis and expire by December 2028
and 2029, respectively. Those loss carryforwards are fully
reserved.
As
of December 27, 2009, the company had no accrued liability for unrecognized tax
benefits related to various federal and state income tax matters. The company
does not expect that the amounts of unrecognized tax benefits will change
significantly within the next 12 months. The company recognizes interest and
penalties relating to uncategorized tax benefits in operating expenses. The
company’s tax years from 2006 to 2009 remain subject to examination by major tax
jurisdictions.
The
company’s executive officers include Arvin Smith, Dr. Richard Chapman and Dr.
Shelton Clark. Collectively, they are the Chief Operating Decision Maker,
or CODM, as defined by Disclosures about Segments of an Enterprise and Related
Information. The office of the CODM is responsible for assessing the
performance of each segment, as well as the allocation of company resources.
Other than general and administrative services incurred at GlenRose Instruments,
ESI currently constitutes 100% of the activity of the company. Costs incurred by
GlenRose Instruments are aggregated and reported separately from the Eberline
Services activity.
The
company currently operates three business segments: Environmental Services,
Analytical Laboratories and Instruments. ESI maintains separate general and
administrative functions consisting of all executive management, business
development, accounting and finance, and human resource personnel that support
the entire business. The Environmental Services segment provides engineering and
technical support to Los Alamos, the Department of Energy’s Hanford Reservation
Site, as well as other government and commercial agencies. The Analytical
Laboratories consist of three separate laboratories serving a wide variety of
federal, state and local governments. The laboratories are located in Richmond,
California, Oak Ridge, Tennessee, and Exton, Pennsylvania. A dedicated
laboratory manger is responsible for the operation of each laboratory.
Management monitors the performance of each laboratory separately. Intercompany
costs and sales are eliminated in the consolidated financial
statements.
The
Instruments segment was formed in 2006 with the intent to include the company’s
future instrument related acquisitions. Analytical instruments use a variety of
highly sophisticated measurement technologies and are used by the scientific
community, the government and industry to perform basic research, applied
research and development, process monitoring and control, and many other
applications. The company’s strategy is to acquire instrument companies, which
have well-established and proven technology and increase their operating margins
and revenues using techniques developed by the company’s management team during
the course of their careers in the analytical instruments industry. As of the
date of this report the company has not made any commitments, nor has it
acquired any instrument businesses.
F-18
GLENROSE INSTRUMENTS
INC.
The
company’s segment data show all general and administrative costs related to the
instruments segment captured during the period. Segment general and
administrative costs have been restated to reflect cost allocation based on
total segment cost of sales. That segment allocation may differ from allowable
government allocations per the terms of our contracts.
2009
|
2008
|
|||||||
Revenues
|
||||||||
Environmental
Services
|
$ | 25,469,474 | $ | 25,092,116 | ||||
Analytical
Laboratories
|
7,778,780 | 7,607,567 | ||||||
Instruments
|
- | - | ||||||
33,248,254 | 32,699,683 | |||||||
Cost of Sales
|
||||||||
Environmental
Services
|
23,360,119 | 22,996,208 | ||||||
Analytical
Laboratories
|
7,904,330 | 7,631,987 | ||||||
Instruments
|
- | - | ||||||
31,264,449 | 30,628,195 | |||||||
Gross Profit (Loss)
|
||||||||
Environmental
Services
|
2,109,355 | 2,095,908 | ||||||
Analytical
Laboratories
|
(125,550 | ) | (24,420 | ) | ||||
Instruments
|
- | - | ||||||
1,983,805 | 2,071,488 | |||||||
General and administrative
expenses
|
||||||||
Environmental
Services
|
1,390,155 | 1,563,695 | ||||||
Analytical
Laboratories
|
442,312 | 483,775 | ||||||
Instruments
|
379,460 | 549,539 | ||||||
2,211,927 | 2,597,009 | |||||||
Operating profit (Loss)
|
||||||||
Environmental
Services
|
719,200 | 532,213 | ||||||
Analytical
Laboratories
|
(567,862 | ) | (508,195 | ) | ||||
Corporate
& Instruments
|
(379,460 | ) | (549,539 | ) | ||||
(228,122 | ) | (525,521 | ) | |||||
Supplemental Disclosure
|
||||||||
Depreciation Expense
|
||||||||
Environmental
Services
|
194,212 | 277,764 | ||||||
Analytical
Laboratories
|
430,990 | 318,668 | ||||||
Instruments
|
- | - | ||||||
625,202 | 596,432 | |||||||
Capital Expenditures
|
||||||||
Environmental
Services
|
9,309 | 181,366 | ||||||
Analytical
Laboratories
|
228,620 | 736,849 | ||||||
Instruments
|
- | - | ||||||
237,929 | 918,215 | |||||||
Total Assets
|
||||||||
Environmental
Services
|
7,102,610 | 8,115,673 | ||||||
Analytical
Laboratories
|
3,751,562 | 4,092,783 | ||||||
Instruments
|
10,498,907 | 10,910,928 | ||||||
$ | 21,353,079 | $ | 23,119,384 |
F-19
GLENROSE INSTRUMENTS
INC.
Note
14 – Subsequent events:
The
company has evaluated all events or transactions through the date of this
filing. During this period, the company did not have any material
subsequent events that impacted its consolidated financial
statements.
F-20