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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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**QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

** **

**For the quarterly period ended September 30,2008**

 

**COMMISSION FILE NUMBER 0-10449**

 

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**TVI CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Maryland**                                                     | ** ** | **52-1085536**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or incorporation) |       | (I.R.S. Employer  Identification No.) |

 

**7100 Holladay Tyler Road, GlennDale, MD 20769**

(Address of principal executive offices, includingzip code)

** **

**(301) 352-8800**

(Registrant’s telephone number, including area code)

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.    Yes  x    No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-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.

 
| Large Accelerated Filer | o                                                           |   | Accelerated Filer              |   | o      |
|-----------------------------------|-------------------------------------------------------------|--------|-------------------------------------|--------|--------|
|                              |                                                        |   |                                |   |   |
| Non-Accelerated Filer             | o  (do not  check if a smaller reporting company) |   | Smaller Reporting Company |   | x      |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).    Yes  o    No  x

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date: 34,366,371 shares of Common Stock issued andoutstanding as of November 24, 2008.

 

 

 

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**TVI CORPORATION**

**QUARTERLY REPORT ON FORM 10-Q**

**FOR THE NINE MONTHS ENDED**

**SEPTEMBER 30, 2008**

 

**TABLE OF CONTENTS**

 
| ** **                                                                                               | **Page** |
|----------------------------------------------------------------------------------------------------------|----------|
| PART I  – FINANCIAL INFORMATION                                                                | 3        |
| Item 1. Consolidated Financial Statements                                                           | 3        |
| Consolidated Balance Sheets                                                                              | 3        |
| Consolidated Statements of  Operations                                                                   | 4        |
| Consolidated Statements of  Cash Flows                                                                   | 6        |
| Notes to Consolidated  Financial Statements                                                              | 7        |
| Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 16       |
| Item 3. Qualitative and Quantitative  Disclosures about Market Risk                                 | 24       |
| Item 4. Controls and Procedures                                                                     | 24       |
| PART II – OTHER  INFORMATION                                                                   | 24       |
| Item 1. Legal Proceedings                                                                           | 24       |
| Item 1A. Risk Factors                                                                                    | 25       |
| Item 2. Unregistered Sales of Equity  Securities and Use of Proceeds                                | 28       |
| Item 3. Defaults Upon Senior  Securities                                                            | 28       |
| Item 4. Submission of Matters to a  Vote of Security Holders                                        | 28       |
| Item 5. Other Information                                                                           | 28       |
| Item 6. Exhibits                                                                                    | 29       |
| SIGNATURES                                                                                               | 30       |
| EXHIBIT INDEX                                                                                            | 31       |

 

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**PART I – FINANCIAL INFORMATION**

 

**Item 1.****                                   ****Financial Statements.**

 

TVICORPORATION

CONSOLIDATED BALANCE SHEETS

SEPTEMBER30, 2008 and DECEMBER 31, 2007

(inthousands, except per share data)

 
| ** **                                                                                                                                                                         | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| ASSETS                                                                                                                                                                             |       |                         |       |                        |       |
| CURRENT ASSETS                                                                                                                                                                     |       |                         |       |                        |       |
| Cash                                                                                                                                                                               |       | $                            | 521        |                        | $          | 328 |   |
| Accounts receivables trade, less allowance  for doubtful accounts                                                                                                                  |       | 5,299                        |       | 6,158                       |       |
| Inventories, net                                                                                                                                                                   |       | 5,908                        |       | 5,203                       |       |
| Income taxes receivable                                                                                                                                                            |       | 370                          |       | 2,858                       |       |
| Deferred income taxes, net                                                                                                                                                         |       | 999                          |       | 209                         |       |
| Assets held for sale                                                                                                                                                               |       | 2,500                        |       | —                      |       |
| Prepaid expenses and other current assets                                                                                                                                          |       | 847                          |       | 1,700                       |       |
| Total current assets                                                                                                                                                               |       | 16,444                       |       | 16,456                      |       |
| PROPERTY, PLANT AND EQUIPMENT, NET                                                                                                                                                 |       | 10,929                       |       | 19,398                      |       |
| OTHER ASSETS                                                                                                                                                                       |       |                         |       |                        |       |
| Goodwill                                                                                                                                                                           |       | —                       |       | 3,602                       |       |
| Intangible assets, net                                                                                                                                                             |       | 327                          |       | 1,372                       |       |
| Deferred income taxes, net                                                                                                                                                         |       | 357                          |       | 3,090                       |       |
| Other                                                                                                                                                                              |       | 178                          |       | 178                         |       |
| Total other assets                                                                                                                                                                 |       | 862                          |       | 8,242                       |       |
| TOTAL ASSETS                                                                                                                                                                       |       | $                            | 28,235     |                        | $          | 44,096 |   |
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT)  EQUITY                                                                                                                               |       |                         |       |                        |       |
| CURRENT LIABILITIES                                                                                                                                                                |       |                         |       |                        |       |
| Line of credit                                                                                                                                                                     |       | $                            | 8,583      |                        | $          | — |   |
| Accounts payable, trade                                                                                                                                                            |       | 6,349                        |       | 4,116                       |       |
| Accrued expenses                                                                                                                                                                   |       | 3,630                        |       | 4,648                       |       |
| Current portion of long-term debt                                                                                                                                                  |       | 19,393                       |       | 2,292                       |       |
| Total current liabilities                                                                                                                                                          |       | 37,955                       |       | 11,056                      |       |
| Long-term debt, net of current portion                                                                                                                                             |       | —                       |       | 23,144                      |       |
| TOTAL LIABILITIES                                                                                                                                                                  |       | 37,955                       |       | 34,200                      |       |
| STOCKHOLDERS’ (DEFICIT) EQUITY                                                                                                                                                |       |                         |       |                        |       |
| Preferred stock—$1.00 par value; 1,200  shares authorized, no shares issued and outstanding at September 30,  2008 and December 31, 2007                            |       | —                       |       | —                      |       |
| Common stock—$0.01 par value; 98,800 shares  authorized, 34,366 and 34,169 shares issued and outstanding at  September 30, 2008 and December 31, 2007, respectively |       | 344                          |       | 342                         |       |
| Additional paid-in capital                                                                                                                                                         |       | 26,938                       |       | 26,798                      |       |
| Accumulated deficit                                                                                                                                                                |       | (37,002                      | )          | (17,244                     | )          |
| TOTAL STOCKHOLDERS’ (DEFICIT) EQUITY                                                                                                                                          |       | (9,720                       | )          | 9,896                       |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’  (DEFICIT) EQUITY                                                                                                                         |       | $                            | 28,235     |                        | $          | 44,096 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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TVICORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

FORTHE THREE MONTHS ENDED SEPTEMBER 30, 2008 and 2007

(inthousands, except per share data)

(unaudited)

 
| ** **                                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|
| NET REVENUE                                                        |       | $        | 10,972     |     | $          | 7,276 |   |
| COST OF REVENUE                                                    |       | 6,840    |       | 4,683    |       |
| GROSS PROFIT                                                       |       | 4,132    |       | 2,593    |       |
| OPERATING EXPENSES                                                 |       |     |       |     |       |
| Selling, general and administrative  expenses                      |       | 2,719    |       | 3,952    |       |
| Research and development expenses                                  |       | 148      |       | 294      |       |
| Total operating expenses                                           |       | 2,867    |       | 4,246    |       |
| OPERATING INCOME (LOSS) BEFORE OTHER  CHARGES AND EXPENSES         |       | 1,265    |       | (1,653   | )          |
| ASSET IMPAIRMENT CHARGE                                            |       | 4,168    |       | —   |       |
| INTEREST AND OTHER EXPENSE, NET                                    |       | 556      |       | 664      |       |
| INCOME (LOSS) BEFORE INCOME TAX PROVISION  (BENEFIT)               |       | (3,459   | )          | (2,317   | )          |
| INCOME TAX PROVISION (BENEFIT)                                     |       | 1,226    |       | (724     | )          |
| LOSS FROM CONTINUING OPERATIONS                                    |       | (4,685   | )          | (1,593   | )          |
| LOSS FROM DISCONTINUED OPERATIONS, NET OF  TAX                     |       | (5,933   | )          | (2,342   | )          |
| IMPAIRMENT CHARGE RELATED TO DISCONTINUED OPERATIONS,  NET OF TAX  |       | (3,155   | )          | —   |       |
| NET LOSS                                                           |       | $        | (13,773    | )        | $          | (3,935 | ) |
| LOSS PER COMMON SHARE, CONTINUING  OPERATIONS — BASIC         |       | $        | (0.14      | )        | $          | (0.05 | ) |
| LOSS PER COMMON SHARE, DISCONTINUED  OPERATIONS —BASIC        |       | $        | (0.26      | )        | $          | (0.07 | ) |
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES  OUTSTANDING—BASIC   |       | 34,332   |       | 33,778   |       |
| LOSS PER COMMON SHARE, CONTINUING  OPERATIONS —DILUTED        |       | $        | (0.14      | )        | $          | (0.05 | ) |
| LOSS PER COMMON SHARE, DISCONTINUED  OPERATIONS—DILUTED       |       | $        | (0.26      | )        | $          | (0.07 | ) |
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES  OUTSTANDING—DILUTED |       | 34,332   |       | 33,778   |       |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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TVICORPORATION

CONSOLIDATEDSTATEMENTS OF OPERATIONS

FORTHE NINE MONTHS ENDED SEPTEMBER 30, 2008 and 2007

(inthousands, except per share data)

(unaudited)

 
| ** **                                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|
| NET REVENUE                                                        |       | $        | 23,503     |     | $          | 22,204 |   |
| COST OF REVENUE                                                    |       | 16,176   |       | 15,174   |       |
| GROSS PROFIT                                                       |       | 7,327    |       | 7,030    |       |
| OPERATING EXPENSES                                                 |       |     |       |     |       |
| Selling, general and administrative  expenses                      |       | 9,290    |       | 13,141   |       |
| Research and development expenses                                  |       | 1,184    |       | 1,430    |       |
| Total operating expenses                                           |       | 10,474   |       | 14,571   |       |
| OPERATING LOSS BEFORE OTHER CHARGES AND  EXPENSES                  |       | (3,147   | )          | (7,541   | )          |
| ASSET IMPAIRMENT CHARGE                                            |       | 4,168    |       | 12,000   |       |
| INTEREST AND OTHER EXPENSE, NET                                    |       | 1,761    |       | 1,778    |       |
| LOSS BEFORE INCOME TAX BENEFIT                                     |       | (9,076   | )          | (21,319  | )          |
| INCOME TAX BENEFIT                                                 |       | (376     | )          | (3,853   | )          |
| LOSS FROM CONTINUING OPERATIONS                                    |       | (8,700   | )          | (17,466  | )          |
| LOSS FROM DISCONTINUED OPERATIONS, NET OF  TAX                     |       | (7,903   | )          | (3,892   | )          |
| IMPAIRMENT CHARGE RELATED TO DISCONTINUED OPERATIONS,  NET OF TAX  |       | (3,155   | )          | —   |       |
| NET LOSS                                                           |       | $        | (19,758    | )        | $          | (21,358 | ) |
| LOSS PER COMMON SHARE, CONTINUING  OPERATIONS —BASIC          |       | $        | (0.25      | )        | $          | (0.52 | ) |
| LOSS PER COMMON SHARE, DISCONTINUED  OPERATIONS —BASIC        |       | $        | (0.32      | )        | $          | (0.12 | ) |
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES  OUTSTANDING—BASIC   |       | 34,224   |       | 33,491   |       |
| LOSS PER COMMON SHARE, CONTINUING  OPERATIONS —DILUTED        |       | $        | (0.25      | )        | $          | (0.52 | ) |
| LOSS PER COMMON SHARE, DISCONTINUED  OPERATIONS—DILUTED       |       | $        | (0.32      | )        | $          | (0.12 | ) |
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES  OUTSTANDING—DILUTED |       | 34,224   |       | 33,491   |       |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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TVICORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FORTHE NINE MONTHS ENDED SEPTEMBER 30, 2008 and 2007

(inthousands)

(unaudited)

 
| ** **                                                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| OPERATING ACTIVITIES                                                         |       |     |       |     |       |
| Net loss                                                                     |       | $        | (19,758    | )        | $          | (21,358 | ) |
|                                                                         |       |     |       |     |       |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |     |       |     |       |
| Asset impairment charges                                                     |       | 9,605    |       | 12,000   |       |
| Depreciation and amortization                                                |       | 2,711    |       | 3,703    |       |
| Deferred income taxes                                                        |       | 1,909    |       | (4,749   | )          |
| Non cash interest expense                                                    |       | 92       |       | —   |       |
| Gain on sale of assets                                                       |       | (150     | )          | —   |       |
| Provision for doubtful accounts                                              |       | 78       |       | 632      |       |
| Write off of capitalized loan costs                                          |       | 57       |       | —   |       |
| Stock-based compensation expense                                             |       | 67       |       | 272      |       |
| Interest associated with non-compete  obligations                            |       | —   |       | 247      |       |
| Earnings on marketable securities  reinvested                                |       | —   |       | (26      | )          |
| Changes in operating assets and  liabilities:                                |       |     |       |     |       |
| Accounts receivable, trade                                                   |       | 604      |       | 1,860    |       |
| Inventories, net                                                             |       | (1,321   | )          | 746      |       |
| Prepaid expenses and other current assets                                    |       | 887      |       | 1,444    |       |
| Income taxes receivable                                                      |       | 2,522    |       | 776      |       |
| Accounts payable, trade                                                      |       | 2,233    |       | 2,258    |       |
| Accrued expenses                                                             |       | (801     | )          | 1,599    |       |
| Net cash used in operating activities                                        |       | (1,265   | )          | (596     | )          |
| INVESTING ACTIVITIES                                                         |       |     |       |     |       |
| Purchases of marketable securities                                           |       | —   |       | (800     | )          |
| Sales of marketable securities                                               |       | —   |       | 3,260    |       |
| Payments for patents                                                         |       | (79      | )          | (16      | )          |
| Purchases of property, plant and equipment                                   |       | (1,126   | )          | (2,549   | )          |
| Proceeds from sale of property, plant and  equipment                         |       | 260      |       | —   |       |
| Cash payments on non-compete agreements                                      |       | —   |       | (197     | )          |
| Net cash used in investing activities                                        |       | (945     | )          | (302     | )          |
| FINANCING ACTIVITIES                                                         |       |     |       |     |       |
| Net borrowings on line of credit                                             |       | 6,063    |       | 1,094    |       |
| Payments on long-term debt                                                   |       | (3,523   | )          | (1,875   | )          |
| Payments on bank commitment fee and other                                    |       | (137     | )          | —   |       |
| Proceeds from exercise of stock options                                      |       | —   |       | 47       |       |
| Net cash provided by (used in) financing  activities                         |       | 2,403    |       | (734     | )          |
| NET INCREASE (DECREASE) IN CASH                                              |       | 193      |       | (1,632   | )          |
| Cash at beginning of period                                                  |       | 328      |       | 1,757    |       |
| Cash at end of period                                                        |       | $        | 521        |     | $          | 125 |   |
| SUPPLEMENTAL CASH FLOW DATA                                                  |       |     |       |     |       |
| Cash payments for interest                                                   |       | $        | 1,604      |     | $          | 1,610 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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TVICORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)

FORTHE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

 

1. Organization and Basisof Presentation.

 

*Organization*

 

TVICorporation (“TVI”), a Maryland corporation formed in 1977, together with itssubsidiaries (the “Company”), manufactures and supplies rapidly deployableshelter systems, powered-air respirators, filter canisters, infrared andthermal sensor products, rents power and air supply equipment and mobile kitchens,and provides related services. The Company’s customers include the military,first responders, first receivers, medical caregivers and the commercial andhospitality sectors. The Company provides to these customers the equipment,services and training necessary to house, protect and treat their constituents.The Company’s mission is to provide integrated facilities and personalprotection solutions that enable our customers to prepare and perform events ofany complexity ranging from hospitality and entertainment to military exercisesto catastrophes world-wide.

 

TVI’swholly-owned subsidiaries include Signature Special Event Services, Inc.(“SSES”), a provider of power, air and kitchen (“PAK”) equipment for specialevents and disaster recovery and Safety Tech International, Inc. (“STI”),a supplier of Powered Air Purifying Respirators (“PAPRs”) for chemical,biological, radiological and nuclear (“CBRN”) protection. As discussed in Note11, TVI has committed to a plan to exit the SSES tent rental business and thushas classified the results of this business as discontinued operations and therelated assets as available for sale.

 

TheCompany’s headquarters is located in Glenn Dale, Maryland where it manufacturesits shelters and filter canisters. The Company also has operations inFrederick, Maryland where it manufactures its PAPRs products and Eldersburg,Maryland where it stores and manufactures its HVAC and mobile kitchen units.

 

*Operating Segments*

 

TheCompany determines and discloses its segments in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 131, “*Disclosures about Segments of an Enterprise andRelated Information (as amended),”* which uses a “management”approach for determining segments. The management approach designates theinternal organization that is used by management for making operating decisionsand assessing performance as the source of the Company’s reportable segments.

 

TheCompany conducts its business through three primary business divisions: itsShelters and Related Products division (shelter systems, thermal products andother related products), its Personal Protection Equipment division (PAPRs andfilters) and its SSES Rental Services division (PAK rentals).

 

*Basis of Presentation*

 

Theaccompanying consolidated financial statements of the Company have beenprepared in accordance with generally accepted accounting principles in theUnited States (“GAAP”) for interim financial information. Accordingly, they donot include all of the information and footnotes required by GAAP for completefinancial statements. In the opinion of management, all material adjustments(consisting of normal recurring items) considered necessary for a fairpresentation have been included. This quarterly report and the accompanying consolidatedfinancial statements should be read in conjunction with the Company’s auditedfinancial statements and notes thereto presented in its Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007, as amended (the “2007 AnnualReport”). Footnotes which would substantially duplicate the disclosures in theCompany’s audited financial statements for the year ended December 31,2007 contained in the 2007 Annual Report have been omitted. The interimfinancial information contained in this quarterly report is not necessarilyindicative of the results to be expected for any other interim period or forthe full year ending December 31, 2008.

 

*Fair Valueof Financial Instruments*

 

Thecarrying amounts of financial instruments approximate fair value due to theshort-term nature of their underlying terms or the variable nature of theinterest charged.

 

*Use of Estimates*

 

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities at the date of the financial statements and reported amounts ofrevenues and expenses during the reporting period and related disclosure ofcontingent liabilities. Actual results could differ from those estimates.

 

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2. Financial Condition.

 

Althoughthe Company has achieved operating income before other charges and expensesfrom continuing operations of approximately $1.3 million for the third quarterof 2008, the Company continues to incur net losses, including a net loss of$13.8 million for the three months ended September 30, 2008, and a netloss of $19.8 million for the nine months ended September 30, 2008. As of September 30,2008, the Company has an accumulated deficit of $37 million. The Company’sability to continue achieving operating profitability depends upon the timingof achieving certain aspects of its turnaround plan, including continuedfinancing. There is no assurance that the Company will be successful incompleting that turnaround plan, that it will achieve profitability or that itwill be able to obtain adequate financing.

 

TheCompany continues to utilize all available financing under its Credit Facility(see Note 8) to fund its operations. As more fully described in Note 8, on November 20,2008, the Company and its senior bank lender, Branch Banking and Trust Company(“BB&T”) entered into a Forbearance Agreement. As a result, managementbelieves that available cash and financing resources and operating cash flowwill be adequate to fund operations through the maturity of the ForbearanceAgreement, January 30, 2009, or April 30, 2009 if extended, as explainedin Note 8.

 

Thereis no assurance that the funding made available to the Company under theForbearance Agreement or through an alternative financing vehicle will continueto be available to the Company after January 30, 2009 (or April 30,2009 if extended). The unavailability of funding under the ForbearanceAgreement available after that date will have a material adverse effect on theCompany and could cause the Company to seek protection from its creditors underapplicable bankruptcy laws. Even if funding is available from BB&T or analternative financing vehicle, the amount of funding available to the Companymay be inadequate. If adequate funding is not available, the Company may berequired to delay, scale back or eliminate certain aspects of its operations orattempt to obtain additional financing from third-parties. Any additionalfinancing will require the consent of BB&T, may not be available on termsacceptable to the Company or at all and could involve highly dilutive issuancesof equity. Furthermore, the Company’s inability to fund its operations mayresult in a default under its bank covenants and lead to the acceleration ofpayment terms on its long-term bank debt, which would have a material adverseeffect on its business, financial condition and operations. In addition, anydefault by the Company under the Forbearance Agreement would have a materialadverse effect on the Company.

 

3. Basic and DilutedEarnings Per Share.

 

Basicearnings per share is calculated using the weighted-average number of commonshares outstanding during the period. Diluted earnings per share is calculatedusing the weighted-average number of common shares plus dilutive potentialcommon shares outstanding during the period. Potential common shares consist ofstock options. As of September 30, 2008, shares attributable toapproximately 1.7 million outstanding stock options were excluded from thecalculation of diluted earnings per share because their effect wasanti-dilutive.

 

The calculation of the Company’s average number of common sharesoutstanding – diluted for the three and nine months ended September 30,2008 and 2007 is as follows (in thousands):

 
| ** **                                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Average number of common shares outstanding  – basic   |       | 34,322                                               |       | 33,778                                              |       | 34,224 |   | 33,491 |   |
| Dilutive effect of stock options                            |       | —                                               |       | —                                              |       | — |   | — |   |
| Average number of common shares outstanding  – diluted |       | 34,322                                               |       | 33,778                                              |       | 34,224 |   | 33,491 |   |

 

4. Stock-BasedCompensation.

 

TheCompany adopted the 1998 Incentive Stock Option Plan (“1998 Plan”), whichprovides for non-qualified and incentive stock options to be issued enablingthe holder thereof to purchase Common Stock of the Company at predeterminedexercise prices. Incentive stock options may be granted to purchase shares ofCommon Stock at a price not less than fair market value on the date of grant.Only employees may receive incentive stock options; all other qualifiedparticipants may receive non-qualified stock options with an exercise pricedetermined by the Company’s Board of Directors. The Plan also provides for theoutright award of shares of Common Stock. The 1998 Plan permitted the grant ofoptions and shares for up to 10 million shares of the Company’s CommonStock. The 1998 Plan expired by its terms on May 7, 2008.

 

OnApril 1, 2008, the Board adopted the 2008 Equity Incentive Plan (“2008Plan”). The 2008 Plan was approved by the Company’s stockholders at theCompany’s 2008 Annual Meeting of Stockholders held on June 20, 2008. The2008 Plan replaces the 1998 Plan and is a broad-based incentive plan thatprovides for the grant of incentive stock options, stock options that do notconstitute incentive stock options, restricted stock, restricted stock units,stock appreciation rights, phantom stock and performance

 

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awards to employees,directors and consultants. The 2008 Plan reserves 3,250,000 shares of commonstock, subject to adjustment upon a reclassification, recapitalization, stocksplit, reverse stock split, stock dividend, combination of shares or otherchange in the Company’s capital structure. As of September 30, 2008,approximately 3.1 million shares of the Company’s Common Stock remain availableto be granted under the 2008 Plan.

 

Optionawards are generally granted with an exercise price equal to the market priceof the Company’s stock at the date of grant. Options granted to employeesgenerally have a ten-year contractual term while options granted to directorsand others generally have a five-year term. Option awards vest upon termsdetermined by the Board of Directors. The Company issues new shares to satisfyits obligations related to the exercise of options.

 

The fair values of stock options granted were estimated as of the dateof grant using the Black-Scholes-Merton option pricing model for grants priorto January 1, 2007 and the Binomal option pricing model for grants subsequentto January 1, 2007. The determination was made to change from theBlack-Scholes method to the Binomial method to improve the estimate of fairvalue. The Black-Scholes-Merton model was originally developed for use inestimating the fair value of traded options, which have differentcharacteristics from TVI’s employee incentive and non-qualified stock options.The model is also sensitive to changes in assumptions, which can materiallyaffect the fair value estimate. The Company used the following assumptions fordetermining the fair value of options granted under the Binomial andBlack-Scholes-Merton option pricing models:

 
| ** **              | ** ** | **Three Months Ended Sept 30,** | ** ** | **Nine Months Ended Sept 30,** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **              | ** ** | **2008(1)**                                         | ** ** | **2007**                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Expected volatility     |       | (1)                                                 |       | 55.1%                                              |       | 65.0% |   | 45.9% - 57.8% |   |
| Expected term           |       | (1)                                                 |       | 6.25 years                                         |       | 5.85 years |   | 5-6.25 years |   |
| Risk-free rate          |       | (1)                                                 |       | 4.2%                                               |       | 2.08% |   | 4.2% - 4.8% |   |
| Expected dividend yield |       | (1)                                                 |       | 0.00%                                              |       | 0.00% |   | 0.00% |   |

 

----

(1) There were no options granted during thethree months ended September 30, 2008.

 

Theexpected volatility was determined with reference to the historical volatilityof the Company’s stock. The Company uses historical data to estimate optionexercise and employee termination within the valuation model; separate groupsof employees that have similar historical exercise behavior are consideredseparately for valuation purposes. The expected term of options grantedrepresents the period of time that options granted are expected to beoutstanding; the range given above results from certain groups of employeesexhibiting different behavior. The risk-free rate for periods within thecontractual life of the option is based on the U.S. Treasury rate in effect atthe time of grant.

 

Totalcompensation cost charged to income for share-based payment arrangementsamounted to approximately $17,000 and $0 for the three months ended September 30,2008 and 2007, respectively, and $67,000 and $272,000 for the nine months endedSeptember 30, 2008 and 2007, respectively. There was no income tax benefitrecognized in income for share-based payment arrangements for the nine monthperiod ended September 30, 2008 and the total income tax benefitrecognized in income for share based payment arrangements amounted to $50,000for the nine month period ended September 30, 2007. No compensation costrelated to share-based payment arrangements was capitalized as part ofinventory or property, plant or equipment.

 

A summary of the activity under the 1998 and 2008 Plans for the ninemonths ended September 30, 2008 is as follows:

 
| ** **                                             | ** ** | **Number  of Shares  (000’s)** | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** | **Weighted  Average  Remaining  Contractual  Term in  Years** | ** ** | **Aggregate  Intrinsic  Value  ($000’s)** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------|------------|
| Outstanding at January 1, 2008                    |       | 1,991                                    |       | $                                                      | 1.56       |                                                               |       |                                           |       |   |
| Granted                                                |       | 263                                      |       | 0.32                                                   |       |                                                               |       |                                           |       |
| Exercised                                              |       | —                                   |       | —                                                 |       |                                                               |       |                                           |       |
| Canceled or expired                                    |       | (578                                     | )          | 1.58                                                   |       |                                                               |       |                                           |       |
| Outstanding at September 30, 2008                 |       | 1,676                                    |       | 1.36                                                   |       | 7.78                                                               |       | $                                              | —     |   |
| Vested or expected to vest at  September 30, 2008 |       | 1,399                                    |       | 1.57                                                   |       | 7.58                                                               |       | $                                              | —     |   |
| Exercisable at September 30, 2008                      |       | 614                                      |       | 2.91                                                   |       | 5.54                                                               |       | $                                              | —     |   |
|                                                        |            |                                          |            |                                                        |            |                                                                    |            |                                                |            |  |  |

 

Theweighted average grant-date fair value of options granted during the ninemonths ended September 30, 2008 and 2007 was $0.19 and $0.34,respectively. There were no options exercised during the nine months ended September 30,2008. The total intrinsic value of options exercised during the nine monthsended September 30, 2008 and 2007 was $0 and $129,000, respectively.

 

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Asof September 30, 2008, there was approximately $210,000 of totalunrecognized compensation cost related to nonvested share-based compensationarrangements under the 1998 Plan and 2008 Plan. That cost is expected to be recognizedover a weighted-average period of 1.9 years. The total fair value of sharesvested during the nine months ended September 30, 2008 and 2007 wasapproximately $152,000 and $432,000, respectively.

 

Cashreceived from option exercises under all share-based payment arrangements forthe nine months ended September 30, 2008 and 2007 amounted to $0 and$47,000, respectively. There was no tax benefit realized for the tax deductionsfrom those option exercises.

 

Other information regarding options outstanding and exercisable as of September 30,2008 is as follows:

 
| ** **                    | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**            | ** ** |
|-------------------------------|------------|------------------------------|------------|-----------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number of  Shares**   | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Life in  Years** | ** ** | **Number of  Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| $0.27 — 0.84             |       | 1,141,000                    |       | $                                       | 0.42       |   | 8.97 |   | 128,334 |   | $ | 0.70 |   |
| 1.21 — 1.99              |       | 50,000                       |       | 1.86                                    |       | 3.43 |   | 36,667 |   | 1.82 |   |
| 2.01 — 2.98              |       | 115,000                      |       | 2.17                                    |       | 5.86 |   | 86,668 |   | 2.17 |   |
| 3.16 — 3.99              |       | 244,500                      |       | 3.67                                    |       | 4.59 |   | 237,000 |   | 3.67 |   |
| 4.00 — 4.72              |       | 120,000                      |       | 4.53                                    |       | 6.65 |   | 120,000 |   | 4.53 |   |
| 5.50                          |       | 5,000                        |       | 5.50                                    |       | 5.92 |   | 5,000 |   | 5.50 |   |
|                          |       | 1,675,500                    |       | $                                       | 1.36       |   | 7.78 |   | 613,669 |   | $ | 2.91 |   |

 

5. Inventories, Net.

 

Inventories as of September 30, 2008 and December 31, 2007consist of (in thousands):

 
| ** **       | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------|------------|----------|------------|----------|------------|
| Finished goods   |       | $        | 1,281      |     | $          | 331 |   |
| Work in progress |       | 57       |       | 232      |       |
| Raw materials    |       | 3,759    |       | 3,214    |       |
| Other            |       | 811      |       | 1,426    |       |
| Total            |       | $        | 5,908      |     | $          | 5,203 |   |

 

Otherinventories consist of field service, demonstration and other sales supportinventory. At September 30, 2008 and December 31, 2007, inventoryreserves for excess and obsolete inventories were approximately $430,000 and$680,000, respectively. During the three months ended September 30, 2008,the Company reduced its other inventory to its estimated fair value andrecorded an impairment charge of approximately $524,000.

 

6. Goodwill.

 

The$3.6 million of goodwill as of December 31, 2007 relates to TVI’sacquisition of STI in November 2005, as reduced by an impairment charge of$12 million in June 2007. As a result of events of default under theCredit Facility which necessitated the Company’s need to enter into theForbearance Agreement with BB&T, management performed an analysis of itsestimate of the fair value of its goodwill in accordance with SFAS No. 142. The fair value of STI as of September 30,2008 was determined using a discounted cash flow analysis and took into accountnot only our ability to continue to fund operations based on entering into theForbearance Agreement, but also took into account the possibility that theturnaround plan may not be successful, that profitability may not be achievedor that adequate funding on acceptable terms may not be available. As a resultof its analysis, management determined that the fair value of STI, usingthe discounted cash flow analysis, was less than the carrying value. Accordingly,the Company recorded a goodwill impairment charge of $3.6 million, or $0.10 pershare for the three months ended September 30, 2008 and $0.11 per sharefor the nine months ended September 30, 2008.

 

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7. Significant Customers.

 

Forthe three months ended September 30, 2008, net revenue from the Company’slargest and second largest customers was from our Personal Protection Equipmentsegment and totaled approximately $3.1 million, or 29% of net revenue fromcontinuing operations and approximately $2.2 million, or 20% of net revenuefrom continuing operations, respectively. For the three months ended September 30, 2007, there were nocustomers representing more than 10% of net revenue from continuing operations

 

Forthe nine months ended September 30, 2008, net revenue from the Company’slargest customer was from our Personal Protection Equipment segment and totaledapproximately $3.5 million or 15% of net revenue from continuingoperations.  For the nine months ended September 30,2008, net revenue from the Company’s second largest customer was from both ourShelters and Related Products and Personal Protection Equipment segments andtotaled approximately $3.3 million, or 14% of net revenue from continuingoperations.  For the nine months ended September 30,2007, net revenue from the Company’s largest customer was from our Shelters andRelated Products segments and totaled approximately $2.3 million, or 10% of netrevenue from continuing operations. There were no other customers representing more than 10% of net revenuefrom continuing operations.

 

8.Debt Obligations.

 

Debt obligations at September 30, 2008 and December 31, 2007consist of the following (in thousands):

 
| ** **                | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
| Revolving credit facility |       | $        | 8,583      |     | $          | 23,144 |   |
| Term facility             |       | 19,393   |       | 2,292    |       |
| Total debt                |       | 27,976   |       | 25,436   |       |
| Less current portion      |       | 27,976   |       | 2,292    |       |
| Long-term debt            |       | $        | —     |     | $          | 23,144 |   |

 

TVIand certain of its subsidiaries have credit arrangements with Branch Banking &Trust Company (“BB&T”). On February 22, 2008, TVI and certain of itssubsidiaries entered into an Amended and Restated Financing and SecurityAgreement with BB&T, which restructured the previous credit arrangementswith BB&T (as subsequently amended, the “Credit Agreement”). As amended on July 3,2008, the Credit Agreement provided TVI with a revolving credit facility in themaximum principal amount of $11.0 million, subject to a working capitalborrowing base (the “Revolving Facility”), and a $22.5 million six-year termloan facility (the “Term Facility,” together with the Revolving Facility, the“Credit Facility”). Borrowings under the Revolving Facility are governed by aborrowing base on eligible accounts receivable and inventory. Subject to theborrowing base, amounts may be borrowed, repaid and re-borrowed by the Companyon a revolving basis until February 20, 2009, which term may be extendedby BB&T.

 

Theobligations under the Credit Agreement are secured by a first priority securityinterest in all, or substantially all, of the personal property of TVI andcertain of its subsidiaries (the “Collateral”).

 

TheCredit Agreement contains customary affirmative and negative covenants that,among other things, limit the ability of TVI to incur additional indebtedness,issue equity, create liens, pay dividends, make certain types of investments,make certain capital expenditures, sell assets, merge with other companies or enterinto certain other transactions outside of the ordinary course of business. TVIis also required to maintain certain financial covenants specified in theCredit Agreement, including (i) a Fixed Charge Coverage Ratio, calculatedas EBITDAR to Debt Service (each term as defined in the Credit Agreement), (ii) aconsolidated ratio of Funded Debt to EBITDA, (iii) consolidated netoperating income of not less than zero ($0.00) and (iv) a minimum level ofTangible Net Worth (as defined in the Credit Agreement). In addition, capitalexpenditures by TVI and its subsidiaries may not exceed $4.0 million in anyfiscal year without BB&T’s prior written consent.

 

UntilNovember 20, 2008, when BB&T and the Company executed the ForbearanceAgreement discussed below, the Revolving Facility bore interest at a floatingrate equal to prime plus 1.0% per annum. Similarly, until BB&T and theCompany executed the Forbearance Agreement discussed below, the Term Facilitybore interest at a floating rate of prime plus 1.5%. Interest is payablemonthly on amounts borrowed under the Revolving Facility with principal andaccrued interest due and payable in full on the maturity date of February 20,2009, unless renewed, subject to the provisions of the Forbearance Agreementdiscussed below. Payments on the Term Facility were interest-only for the firstsix months and were then set to amortize ratably over the remaining term, whichexpires on February 22, 2014. In addition, the Term Facility requires TVIto make annual mandatory prepayments on the Term Facility of (i) 100% ofExcess Cash Flow (as defined under the Credit Agreement) if TVI’s Funded Debtto EBITDA ratio for such fiscal year is greater than or equal to 3.0 to 1.0, or(ii) 50% of Excess Cash Flow if TVI’s Funded Debt to EBITDA ratio for suchfiscal year is less than 3.0 to 1.0.

 

TheCredit Agreement contains customary events of default, including, but notlimited to (a) non-payment of amounts due, (b) material breach ofrepresentations, warranties or covenants under the Credit Agreement, (c) cross-defaultprovisions relating to other indebtedness or obligations, (d) bankruptcyor similar proceedings, and (e) material adverse changes. Upon theoccurrence of an 

 

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event of default, theamounts outstanding under the Credit Facility may be accelerated and may becomeimmediately due and payable and BB&T may exercise other remedies availableto it under the Credit Agreement, including without limitation, exercising itsrights in the Collateral.

 

TheCompany notified BB&T that, for the testing periods ended as of March 31,2008, June 30, 2008 and September 30, 2008, it was not in compliancewith various financial covenant requirements, which noncompliance, if notwaived by BB&T, would constitute a continuing event of default under theCredit Facility. Upon an event of default of this nature under the CreditFacility, among other things, BB&T has the right to accelerate the paymentof all of the outstanding indebtedness as of September 30, 2008. BB&Thas granted to the Company a waiver with respect to the noncompliance by theCompany of the minimum EBITDA requirement as of March 31, 2008 and June 30,2008. No amendments were made to the Credit Facility and there was no effect onthe Company’s consolidated financial statements as a result of thenoncompliance or corresponding grant of waiver by BB&T as of March 31,2008 and June 30, 2008. As of September 30, 2008, the Company failedto maintain a funded debt to EBITDA ratio of not more than 3.75 to 1.0, filedto maintain a tangible net worth of not less than $4 million, failed to pay theOctober principal payment under the Term Facility and failed to repay itsBorrowing Base Deficiency (as defined in the agreement). These defaults gaverise to the Forbearance Agreement discussed below.

 

OnNovember 20, 2008, BB&T and the Company entered into a ForbearanceAgreement.  The agreement provides thatBB&T will provide the Company with approximately $3.5 million (the“Forbearance Line”) of unsecured working capital financing for a period lastingfrom the date of execution through January 30, 2009.  Further BB&T will allow the Company todefer paying any principal amounts due under the Term Loan for the life of theForbearance Agreement.

 

Undercertain conditions, the term may be extended until April 30, 2009.  Those conditions include a requirement thatthe Company incur no event of default under the terms of the ForbearanceAgreement.  An event of forbearancedefault, in general, consists of spending in excess of the amount of fundsavailable under the Work Capital line plus the Forbearance Line and failing tocomply with certain requirements stipulated in the Forbearance Agreement.  Those requirements include delivery of a cashbudget by December 20, 2008 for the period extending from January 2,2009 through April 30, 2009 and engagement of a turnaround consultant whowill review the Company’s strategy to-date, help prepare a strategic plan goingforward and review the cash budget to be delivered by December 20, 2008.

 

TheForbearance Agreement requires that the interest rates on the Working Capitalline and the term loan increase by fifty basis points each to Prime plus 1.5%and Prime plus 2.0% respectively. BB&T will also receive a warrant to purchase 4.9% of the outstandingcommon stock of the Company.  The maximumnumber of shares available under the warrant will decline if the Company isable to retire the total outstanding debt based on a prescribed schedule endingin April of 2010.

 

Giventhat the term of the Forbearance Agreement ends on January 31, 2009 (April 30,2009 if extended), the Company has classified 100% of the debt due BB&T ascurrent.

 

TheCredit Agreement also provides that BB&T will issue letters of credit forthe account of TVI in aggregate undrawn amounts of up to $750,000. Annual feesfor letters of credit issued for the account of TVI will equal 2.0% of the faceamount of such letters of credit. The amount of any outstanding letters ofcredit issued or committed to be issued by BB&T will reduce, dollar fordollar, the aggregate amount available under the Revolving Facility.

 

TVIpaid a fee of $125,000, which was capitalized and will be amortized over theone-year term of the Revolving Facility, in connection with the execution ofthe February 22, 2008 amendment and restatement to the Credit Facility,and also paid certain administrative and professional expenses incurred byBB&T in connection with the drafting and negotiation of the February 22,2008 amendment and restatement to the Credit Agreement. TVI must also pay amonthly fee equal to an annual rate of 0.25% of the unused Revolving Facility.Beginning in March 2009, TVI will also be obligated to pay to BB&T aterm loan fee of between 1% and 3% of consolidated annual EBITDA for eachfiscal year ending on or after December 31, 2008 based on actual EBITDAfor such fiscal year, and will be subject to a $500,000 early termination fee ifthe loans are repaid in full prior to the maturity date of the Term Facility.

 

AtSeptember 30, 2008, the Company had one letter of credit outstanding withBB&T to secure performance on a tent rental contract. It was issued on June 6,2008 in the amount of $48,527 and expires on June 6, 2009.

 

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9. Segment Reporting.

 

TheCompany’s reportable segments are comprised of three distinct groups of similarproducts and services: Shelters and Related Products, Personal ProtectionEquipment and SSES Rental Services. The Company evaluates performance based onincome (loss) from operations of the respective segments.

 

The following are reconciliations of reportable segment revenues fromcontinuing operations, operating income (loss) before other charges andexpenses from continuing operations, assets, and other significant items (inthousands):

 
| ** **                                                                             | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| Net revenue from continuing operations:                                                |       |                                                    |       |   |   |
| Shelters and related products                                                          |       | $                                                       | 7,894      |   | $ | 9,675 |   |
| Personal protection equipment                                                          |       | 11,511                                                  |       | 4,987 |   |
| SSES rental services                                                                   |       | 4,098                                                   |       | 7,542 |   |
|                                                                                   |       | $                                                       | 23,503     |   | $ | 22,204 |   |
| Operating income (loss) before other  charges and expenses from continuing operations: |       |                                                    |       |   |   |
| Shelters and related products                                                          |       | $                                                       | (1,919     | ) | $ | (4,451 | ) |
| Personal protection equipment                                                          |       | 783                                                     |       | (926 | ) |
| SSES rental services                                                                   |       | (2,011                                                  | )          | (2,164 | ) |
|                                                                                   |       | $                                                       | (3,147     | ) | $ | (7,541 | ) |
| Depreciation and amortization:                                                         |       |                                                    |       |   |   |
| Shelters and related products                                                          |       | $                                                       | 293        |   | $ | 400 |   |
| Personal protection equipment                                                          |       | 576                                                     |       | 234 |   |
| SSES rental services                                                                   |       | 1,842                                                   |       | 3,069 |   |
| Less discontinued operations                                                           |       | (1,051                                                  | )          | (2,222 | ) |
|                                                                                   |       | $                                                       | 1,660      |   | $ | 1,481 |   |
| Capital expenditures, gross:                                                           |       |                                                    |       |   |   |
| Shelters and related products                                                          |       | $                                                       | 8          |   | $ | 154 |   |
| Personal protection equipment                                                          |       | 852                                                     |       | 768 |   |
| SSES rental services                                                                   |       | 266                                                     |       | 1,627 |   |
|                                                                                   |       | $                                                       | 1,126      |   | $ | 2,549 |   |

 
|                          |   | **As of**                    |       |
|-------------------------------|--------|------------------------------|------------|
|                          |   | **September 30,  2008** | ** ** | **December 31,  2007** |   |
| Total assets:                 |   |                         |       |   |   |
| Shelters and related products |   | $                            | 6,671      |   | $ | 9,713 |   |
| Personal protection equipment |   | 11,481                       |       | 12,921 |   |
| SSES rental services          |   | 10,083                       |       | 21,462 |   |
|                          |   | $                            | 28,235     |   | $ | 44,096 |   |

 

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10. Deferred Income Taxes.

 

The components of the deferred tax assets and liabilities at September 30,2008 and December 31, 2007 are as follows (in thousands):

 
| ** **                                   | ** ** | **As of**               | ** ** |
|----------------------------------------------|------------|------------------------------|------------|
| ** **                                   | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
| Deferred income tax assets—current      |       |                         |       |   |   |
| Vacation accrual                             |       | $                            | 142        |   | $ | 173 |   |
| Inventory reserve                            |       | 168                          |       | 263 |   |
| Allowance for doubtful accounts              |       | 285                          |       | 354 |   |
| Net operating losses                         |       | 864                          |       | — |   |
| Accrued warranty liability                   |       | 26                           |       | 47 |   |
|                                         |       | 1,485                        |       | 837 |   |
| Deferred income tax assets—long-term    |       |                         |       |   |   |
| Depreciation and amortization                |       | 119                          |       | 71 |   |
| Net operating losses                         |       | 8,461                        |       | 5,144 |   |
| Intangible amortization                      |       | 2,363                        |       | 1,939 |   |
|                                         |       | 10,943                       |       | 7,154 |   |
| Less valuation allowance                     |       | 8,461                        |       | 2,572 |   |
|                                         |       | 2,482                        |       | 4,582 |   |
| Deferred income tax liability—current   |       |                         |       |   |   |
| Prepaid expenses                             |       | 323                          |       | 550 |   |
| Inventory reserve                            |       | 99                           |       | 78 |   |
| Net operating losses                         |       | 64                           |       | — |   |
|                                         |       | 486                          |       | 628 |   |
| Deferred income tax liability—long-term |       |                         |       |   |   |
| Depreciation and amortization                |       | 2,125                        |       | 1,492 |   |
|                                         |       | $                            | 1,356      |   | $ | 3,299 |   |

 

Asof September 30, 2008 the Company has recorded a valuation allowance toreduce its deferred income tax assets to amounts that management considers morelikely than not to be realized. As of September 30, 2008, all netoperating losses available for carryback are classified as a current deferredtax asset and the remaining losses which are available for carryforward asclassified as a long-term deferred tax asset. During the nine months ended September 30,2008, the long-term deferred tax asset of $8.5 million related to the netoperating loss carryforwards was reduced to zero.  Such valuation allowance was considerednecessary due to the uncertainty related to the Company’s ability tocontinue financing its operations under its current financing structure whichmay significantly affect the utilization of these carryforwards. Although theCompany may generate taxable income in future years, events related torestructuring, refinancing, or capitalizing the business may significantlylimit the availability of these future deductions. As a result, as of September 30,2008, management believes that it is more likely than not that this deferredtax asset will be not realized.

 

11. DiscontinuedOperations and Assets Held for Sale.

 

In the thirdquarter of 2008, management approved and committed to a plan to exit the tentrental business in our SSES Rental Services segment and sell the relatedassets. Accordingly, for the nine months ended September 30, 2008 and2007, the operating results of our tent rental division are reported as discontinuedoperations. In addition, as of September 30, 2008, we recorded animpairment charge of $4.4 million ($2.6 million net of tax) to adjust thecarrying value of the tent rental assets to their estimated fair value andclassified the assets as Assets Held for Sale on the balance sheet. On October 16,2008, TVI and EventStar, Inc. entered into a Bill of Sale to sell certaintent rental assets classified as available for sale for $500,000.  On November 4, 2008 TVI and Karl’sRental Center entered into a Letter of Intent for the sale of the remainingavailable for sale tent rental assets for $2.1 million. We expect tocomplete the sale to Karl’s Rental Center in the fourth quarter.

 

As a result ofthe transactions outlined above, loss from discontinued operations, net oftaxes was $9.1 million and $2.3 million for the three months ended September 30,2008 and 2007, respectively, and $11.1 million and $3.9 million for the ninemonths ended September 30, 2008 and 2007, respectively.

 

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12.  New Accounting Pronouncements.

 

In September 2006, the FinancialAccounting Standards Board issued SFAS No. 157 “Fair Value Measurements”,which defines fair value, establishes a framework for consistently measuringfair value under generally accepted accounting principles, and expandsdisclosures about fair value measurements. SFAS No. 157 became effectivefor the Company on January 1, 2008 and did not have an impact on theCompany’s financial statements.

 

In November 2007, the EITF issued Issue No. 07-1 (“EITF07-1”), Accounting for Collaborative Arrangements Related to the Developmentand Commercialization of Intellectual Property. Companies may enter intoarrangements with other companies to jointly develop, manufacture, distribute,and market a product. Often the activities associated with these arrangementsare conducted by the collaborators without the creation of a separate legalentity (that is, the arrangement is operated as a “virtual joint venture”). Thearrangements generally provide that the collaborators will share, based oncontractually defined calculations, the profits or losses from the associatedactivities. Periodically, the collaborators share financial information relatedto product revenues generated (if any) and costs incurred that may trigger asharing payment for the combined profits or losses. EITF 07-1 requirescollaborators in such an arrangement to present the result of activities forwhich they act as the principal on a gross basis and report any paymentsreceived from (made to) other collaborators based on other applicable GAAP or,in the absence of other applicable GAAP, based on analogy to authoritative accountingliterature or a reasonable, rational, and consistently applied accountingpolicy election. EITF 07-1 is effective for collaborative arrangements in placeat the beginning of the annual period beginning after December 15, 2008.The Company does not currently expect the adoption of EITF 07-1 to have amaterial impact on its financial statements.

 

In February 2007, the Financial Accounting Standards Board issuedSFAS No. 159 “The Fair Value Option for Financial Assets and FinancialLiabilities – including an amendment of FASB Statement No. 115”. SFAS No. 159permits entities to choose to measure eligible items at fair value at specifiedelection dates and report unrealized gains and losses on items for which thefair value option has been elected in earnings at each subsequent reportingdate. SFAS No. 159 became effective for the Company on January 1,2008 and did not have an impact on the Company’s financial statements.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities—an amendment of FASBStatement No. 133” (“SFAS 161”), which requires enhanced disclosuresabout an entity’s derivative and hedging activities and thereby improves thetransparency of financial reporting. SFAS 161 is effective for fiscal yearsbeginning after November 15, 2008. The Company does not expect that theadoption of SFAS 160 will have a significant impact on its financialstatements.

 

In April 2008, the FASB issued FASB Staff Position No. 142-3,“Determination of the Useful Life of Intangible Assets” (“FSP No. 142-3”)to improve the consistency between the useful life of a recognized intangibleasset (under SFAS No. 142) and the period of expected cash flows used tomeasure the fair value of the intangible asset (under SFAS No. 141(R)).FSP No. 142-3 amends the factors to be considered when developing renewalor extension assumptions that are used to estimate an intangible asset’s usefullife under SFAS No. 142. The guidance in the new staff position is to beapplied prospectively to intangible assets acquired after December 31,2008. In addition, FSP No. 142-3 increases the disclosure requirementsrelated to renewal or extension assumptions. The Company is currently assessingthe impact of the adoption of FSP No. 142-3 on its financial statements.

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy ofGenerally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 is intended toimprove financial reporting by identifying a consistent framework, orhierarchy, for selecting accounting principles to be used in preparingfinancial statements in conformity with U.S. generally accepted accountingprinciples (GAAP) for nongovernmental entities.  The statement establishesthat the GAAP hierarchy should be directed to entities because it is the entity(not its auditor) that is responsible for selecting accounting principles forfinancial statements that are presented in conformity with GAAP.  Thisstatement is effective 60 days following the SEC’s approval of the PublicCompany Accounting Oversight Board amendments to AU Section 411, The *Meaning of Present Fairly in Conformity with Generally AcceptedAccounting Principles*.  The Company does not believeimplementation of SFAS 162 will have a material impact on its financial statements.

 

In June 2008, the FASB issued FASB Staff Position EmergingIssues Task Force (EITF) No. 03-6-1, “Determining Whether InstrumentsGranted in Share-Based Payment Transactions Are Participating Securities” (“FSPEITF No. 03-6-1”).  Under FSP EITF No. 03-6-1, unvestedshare-based payment awards that contain rights to receive non-forfeitabledividends (whether paid or unpaid) are participating securities, and should beincluded in the two-class method of computing EPS. FSP EITF No. 03-6-1 iseffective for fiscal years beginning after December 15, 2008, and theCompany does not expect it to have a material impact on the Company’s financialstatements. 

 

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**ITEM 2.****                             ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

 

**CAUTIONARY NOTE REGARDING THE USEOF FORWARD-LOOKING**

**STATEMENTS CONCERNING OUR BUSINESS**

 

Thefollowing section of this report entitled “Management’s Discussion and Analysisof Financial Condition and Results of Operations” and other sections of thisReport contain “forward-looking statements,” as that term is defined in thePrivate Securities Litigation Reform Act of 1995, which are based onmanagement’s expectations, estimates, projections and assumptions. Thesestatements may be identified by the use of forward-looking words or phrasessuch as “should”, “believes”, “expects”, “might result”, “anticipates”,“projects”, “estimates” and others. These forward-looking statements involverisks and uncertainties and are not guarantees of future performance, as actualresults could differ materially from our current expectations.

 

Suchrisks and uncertainties include but are not limited to: actions of theCompany’s bank, our ability to comply with bank covenants, including covenantsunder our Forbearance Agreement with the bank, and debt repayment obligationsand our ability to obtain future financing on satisfactory terms or at all; ourability to effectively implement our turnaround plan; achieving the intendedbenefits of our acquisitions and integrating the operations, technologies,products and services of those businesses; achieving financial expectations;market acceptance of our products; unanticipated costs or charges; our abilityto meet the requirements of the NASDAQ Capital Market for continued listing ofour common stock; adverse consequences from government investigations, lawsuitsor private actions; general economic and business conditions; adverse changesin governmental regulations; the possibility that our products contain unknowndefects that could result in product liability claims; and competitive factorsin our target markets. Numerous other factors could cause or contribute to suchdifferences. Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as to the date of this report. TheCompany assumes no obligation to update any such forward-looking statements evenif experience or future changes make it clear that projected results expressedor implied in such statements will not be realized.

 

The following discussion and analysis of our financial condition andresults of operations should be read in conjunction with our ConsolidatedFinancial Statements and Notes thereto contained herein.

 

**Overview**

 

Weare an international manufacturer and supplier of military and civilianemergency first responder and first receiver products, personal protectionproducts and quick-erect shelter systems, and a provider of event equipmentrentals.  We conduct our business throughthree primary business divisions: Shelters and Related Products, PersonalProtection Equipment and SSES Rental Services. Through our Shelters and RelatedProducts division, we manufacture and supply shelter systems, thermal markingdevices, filtration systems and infection control products primarily for themilitary, homeland security agencies, hospitals, law enforcement agencies andfire departments and public health agencies. Our shelter systems includenuclear, biological and chemical decontamination systems, hospital surgecapacity systems and infection control systems, most of which employ ourproprietary articulating frame. Through our Personal Protection Equipmentdivision we manufacture and supply PAPRs and disposable filter canisters forthe military, first responder, healthcare and industrial markets. Through ourSSES Rental Services division we are a provider of equipment rental servicesfor disaster relief, military, government, industrial, sporting, hospitalityand other special event needs.

 

InApril 2007, we underwent a significant change in senior management. Since April 2007,we have restructured the management personnel and approach of our business andour three operating divisions, significantly reduced fixed and variable costs,primarily lease and personnel costs, sold under-producing assets andtransitioned away from higher effort and lower margin opportunities to higherprofitability and higher margin opportunities. In February 2008 werestructured our debt with our lender, Branch Banking and Trust Company(“BB&T”). While the restructuring of our debt gave us the ability to moreefficiently use our collateral and manage cash while we executed our turnaroundefforts, we continued to encounter financial difficulties.  As a result of defaults under our CreditFacility (as more fully described in Liquidity and Capital Resources - *Amended and Restated Financing and Security Agreementwith BB&T),* we entered into a Forbearance Agreement withBB&T on November 20, 2008. While we have established certainmilestones ranging from sales targets and market penetration to purelyfinancial measures, we reached our most significant milestone, operatingprofitability in the third quarter of 2008. Our ability to achieve operatingprofitability again for the fourth quarter of 2008 is dependent upon the timingof achieving certain aspects of our turnaround plan. In addition, our abilityto continue to finance our operations during our turnaround will have a directeffect on achieving continued operating profitability.

 

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**Results of Operations for the Three Months Ended September 30,2008 Compared With the Three Months Ended September 30, 2007**

* *

*Net Revenue:*

 

Net revenue from continuing operations increased $3.7 million, or 51%,to $11.0 million for the third quarter of 2008, from $7.3 million for the thirdquarter of 2007. Net revenue from continuing operations in each of ouroperating segments during the three months ended September 30, 2008 and2007 was as follows:

 
| **Segment**                   | ** ** | **2008**               | ** ** | **2007** | ** ** |
|-------------------------------|------------|------------------------|------------|----------|------------|
| ** **                    | ** ** | **(in millions)** | ** ** |
| Shelters and Related Products |       | $                      | 3.0        |     | $          | 3.7 |   |
| Personal Protection Equipment |       | 6.7                    |       | 1.7      |       |
| SSES Rental Services          |       | 1.3                    |       | 1.9      |       |
|                          |       | $                      | 11.0       |     | $          | 7.3 |   |

 

Theincrease in consolidated net revenue is attributable to an increase in revenueof $5.0 million from our Personal Protection Equipment (“PPE”) segment relatedto two new products.  Our filter linebegan production of C2A1 filters in April 2008, we completed our firstshipment to the Army in May 2008 and we reached full capacity of the linein August 2008 when we added our third shift. In addition, we beganshipping our C420 PAPRs with hydration kits, to the National Guard in January 2008.The decrease in our Shelters and Related Products segment resulted from atransition in market focus from primarily commercial markets to an increasedfocus on military markets.  SSES RentalServices segment experienced a decline from revenue bundled with our tentrentals offset by revenue from hurricanes Gustav and Ike of $450,000.

 

*Gross Profit:*

 

Grossprofit from continuing operations increased $1.5 million, or 59%, to $4.1million for the third quarter of 2008, compared with $2.6 million for the thirdquarter of 2007. Gross margin was 38% for the third quarter of 2008 comparedwith 36% for the third quarter of 2007. The increase in the gross profit isprimarily due to operating and production improvements within each of oursegments. In our Shelters and Related Products segment, we made changes to ourpricing structure to improve our market position and reduced fixedmanufacturing overhead expense.  In ourPersonal Protection Equipment segment, we began shipping products off ourfilter canister line whose gross profit has been approximately break-even,offset by increases in our gross profit from shipments of our C420 PAPRs withhydration kits.  In our SSES RentalServices segment we improved our pricing and discontinued performing jobs withlittle or no margin.

 

*Selling, General and Administrative:*

 

Selling,general and administrative (“SG&A”) expense from continuing operations was$2.7 million for the third quarter of 2008, a decrease of $1.2 million, or 31%,compared with $4.0 million for the third quarter of 2007. The decrease isprimarily attributable to cost cutting efforts, the most significant of whichincluded reductions of sales and marketing salaries of approximately $150,000,sales and marketing expense of approximately $120,000, legal and professionalfees of approximately $800,000, and bad debt expense of approximately $225,000.

 

*Research and Development:*

 

Researchand development (“R&D”) expense from continuing operations was $148,000 forthe third quarter of 2008, a decrease of $146,000, or 50%, compared with$294,000 for the three months ended September 30, 2007. The three monthsended September 30, 2007 included an expense relating to a R&Dcontract which was terminated on June 30, 2008 and the reclassification offilter plant operating costs which became reported as cost of sales when thefilter line began production in April 2008. R&D expense is comprisedof development efforts related to both our Shelters and Related Products andPersonal Protection Equipment divisions. We expect to begin making additionalinvestments in R&D as our operating cash flow and liquidity improve.

 

*Operating Income (Loss) Before Other Charges and Expenses:*

 

Wehad operating income before other charges and expenses of $1.3 million for thethird quarter of 2008 compared to an operating loss before other charges andexpenses of $1.7 million for the third quarter of 2007, reflecting the increasein gross profit and decline in SG&A expenses discussed above. Operatingincome before other charges and expenses was 12% of net revenue for the thirdquarter of 2008, compared to operating loss before other charges and expensesof 23% of net revenue for the third quarter of 2007.

 

*Asset Impairment Charges:*

 

We had asset impairment charges of $3.6 million, or $0.10 per share,related to our goodwill and $524,000, or $0.02 per share, related todemonstration inventory for the three months ended September 30, 2008. Dueto the uncertainties related to our ability to obtain financing in sufficientamounts and upon satisfactory terms to continue our turnaround, we determinedthat our goodwill had no 

 

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remainingvalue as of September 30, 2008.  Theimpairment of our demonstration inventory was the result of determining thatcertain items were no longer being used in the marketing activities of ourShelters and Related Products segment and represents a charge to reduce itscarrying value to estimated fair value. The Company does not amortize goodwill but tests goodwill impairment atleast on an annual basis, or earlier when events or changes in circumstancessuggest the carrying amount may not be fully recoverable. Such evaluation isperformed by comparing the implied fair value of a reporting unit to itscarrying value, including goodwill. An impairment loss is recognized in thecurrent period if the carrying amount of an intangible asset is not recoverableand its carrying amount exceeds its fair value. There were no asset impairments for the three months ended September 30,2007.

 

*Income Tax Expense (Benefit):*

 

Our income taxes for the three months ended September 30, 2008were negatively impacted by the increase in our valuation allowance of $4.7million recorded on our net operating loss carryforwards. The uncertaintyrelated to our ability to continue financing our operations under our currentfinancing structure may significantly affect the utilization of thesecarryforwards. Although we may generate taxable income in future years, eventsrelated to restructuring, refinancing, or capitalizing the business maysignificantly limit the availability of these future deductions. As a result,we believe that it is more likely than not that this deferred tax asset will benot realized.  For the three months endedSeptember 30, 2007, we had an income tax benefit which was negativelyimpacted by a $500,000 valuation allowance on the net operating lossesgenerated in our SSES Rental Services segment resulting in an income taxbenefit of $724,000.

 

*Net Loss from Continuing Operations:*

 

Wehad a net loss from continuing operations of $4.7 million for the third quarterof 2008, compared with a net loss of $1.6 million for the third quarter of2007, reflecting the matters set forth above. Loss per share was $0.14 for thethird quarter of 2008, compared with loss per share of $0.05 for the thirdquarter of 2007.

 

*Discontinued Operations, Net of Tax:*

 

Wehad a loss from discontinued operations, net of tax of $9.1 million for thethird quarter of 2008, an increase of $6.8 million compared with $2.3 millionfor the third quarter of 2007.  Includedin the loss from discontinued operation, net of taxes for the third quarter of2008 is an impairment charge related to assets held for sale, goodwill andbrand name intangibles net of tax of $3.2 million.  There was no impairment charge related todiscounted operations for the third quarter of 2007.  Loss per share from discontinued operationswas $0.26 for the third quarter of 2008, compared with loss per share fromdiscontinued operations of $0.07 for the third quarter of 2007.

 

**Results of Operations for the Nine Months Ended September 30,2008 Compared With the Nine Months Ended September 30, 2007**

* *

*Net Revenue:*

 

Net revenue from continuing operations increased $1.3 million, or 6%,to $23.5 million for the nine months ended September 30, 2008, from $22.2million for the nine months ended September 30, 2007. Net revenue fromcontinuing operations in each of our operating segments during the nine monthsended September 30, 2008 and 2007 was as follows:

 
| **Segment**                   | ** ** | **2008**               | ** ** | **2007** | ** ** |
|-------------------------------|------------|------------------------|------------|----------|------------|
| ** **                    | ** ** | **(in millions)** | ** ** |
| Shelters and Related Products |       | $                      | 7.9        |     | $          | 9.7 |   |
| Personal Protection Equipment |       | 11.5                   |       | 5.0      |       |
| SSES Rental Services          |       | 4.1                    |       | 7.5      |       |
|                          |       | $                      | 23.5       |     | $          | 22.2 |   |

 

Theincrease in consolidated net revenue from continuing operations is attributableto an increase in revenue of $6.5 million from our PPE segment related to twonew products.  Our filter line beganproduction of C2A1 filter canisters in April 2008, we completed our firstshipment in May 2008 and we reached full capacity in August 2008 whenwe added our third shift.  In addition,we began shipping our C420 PAPRs with hydration kits to the National Guard in January 2008.  This increase is offset by decreases in ourShelters and Related Products and SSES Rental Services divisions.  The decrease in our SSES Rental Servicesdivision is related to the closing of our operations in California and thedecline of revenue from jobs where our equipment was bundled with our tents,offset by revenue from hurricanes Gustav and Ike of $450,000.  The lower revenue in our Shelters and RelatedProducts division resulted from a transition in market focus from primarilycommercial markets to an increased focus on military markets. Our change inrevenue mix is a trend that we expect to continue for the foreseeable future.

 

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*Gross Profit:*

 

Grossprofit from continuing operations increased $297,000, or 4%, to $7.3 millionfor the nine months ended September 30, 2008, compared with $7.0 millionfor the nine months ended September 30, 2007. Gross profit was 31% for thenine months ended September 30, 2008 compared with 32% for the nine monthsended September 30, 2007. Although our consolidated gross profit wasrelatively unchanged, we made changes in each of our segments that affected ourgross margin.  In our Shelters andRelated Products segment, we made changes to our pricing structure to improveour market position and reduced fixed overhead expense.  In our Personal Protection Equipment segment,we began shipping products off our filter canister line whose gross profit hasbeen approximately break-even, offset by increases in our PAPRs gross profitfrom shipments of our C420 PAPRs with hydration kits.  In our SSES Rental Services segment weimproved our pricing and discontinued performing jobs with little or no margin.

 

*Selling, General and Administrative:*

 

SG&Aexpense from continuing operations was $9.3 million for the nine months ended September 30,2008, a decrease of $3.9 million, or 29%, compared with $13.1 million for thenine months ended September 30, 2007. The decrease is primarilyattributable to cost cutting efforts, the most significant of which includedreductions of sales and marketing salaries of approximately $250,000, sales andmarketing expense of approximately $300,000, legal and professional fees ofapproximately $2.1 million related to the investigations into improper businesspractices of prior management, and bad debt expense of approximately $450,000.

 

*Research and Development:*

 

R&Dexpense from continuing operations was $1.2 million for the nine months ended September 30,2008, a decrease of $246,000, or 17%, compared with $1.4 million for the ninemonths ended September 30, 2007. The decrease is primarily attributable toreporting filter plant operations as cost of revenue when the filter line beganproduction. R&D expense is comprised of development efforts related to bothour Shelters and Related Products and Personal Protection Equipment divisions. Weexpect to begin making additional investments in R&D as our operating cashflow and liquidity improve.

 

*Operating Loss Before Other Charges and Expenses:*

 

Wehad an operating loss before other charges and expenses of $3.1million for thenine months ended September 30, 2008 compared to $7.5 million for the ninemonths ended September 30, 2007, reflecting the increase in gross profitand the decline in operating expenses discussed above. Operating loss beforeother charges and expenses was 13% of net revenue for the nine months ended September 30,2008, compared to 34% for the nine months ended September 30, 2007.

 

*Asset Impairment Charge:*

 

Wehad asset impairment charges of $3.6 million, or $0.11 per share, related toour goodwill and $524,000, or $0.02 per share, related to demonstrationinventory for the nine months ended September 30, 2008. Due to theuncertainties related to our ability to obtain financing in sufficient amountsand upon satisfactory terms to continue our turnaround, we determined that ourgoodwill had no remaining value as of September 30, 2008.  The impairment of our demonstration inventorywas the result of determining that certain items were no longer being used inthe marketing activities of our Shelters and Related Products segment andrepresents a charge to reduce its carrying value to estimated fair value. Forthe nine months ended September 30, 2007, we recorded a goodwillimpairment charge of $12.0 million, or $0.36 per share, related to the goodwillassociated with STI within our Personal Protection Equipment segment. TheCompany does not amortize goodwill but tests goodwill impairment at least on anannual basis, or earlier when events or changes in circumstances suggest thecarrying amount may not be fully recoverable. Such evaluation is performed bycomparing the implied fair value of a reporting unit to its carrying value,including goodwill. An impairment loss is recognized in the current period ifthe carrying amount of an intangible asset is not recoverable and its carryingamount exceeds its fair value.

 

*Income Tax Expense (Benefit):*

 

Ourincome taxes for the nine months ended September 30, 2008 and 2007 werenegatively impacted by the increase in the valuation allowance of $5.9 millionand $1.6 million, respectively, recorded on our net operating losscarryforwards. The uncertainty related to our ability to continuefinancing our operations under our current financing structure maysignificantly affect the utilization of these carryforwards. Although we maygenerate taxable income in future years, events related to restructuring,refinancing, or capitalizing the business may significantly limit theavailability of these future deductions. As a result, we believe that it ismore likely than not that this deferred tax asset will be not realized.

 

*Net Loss from Continuing Operations:*

 

Wehad a net loss from continuing operations of $8.7 million for the nine monthsended September 30, 2008, compared with $17.5 million for the nine monthsended September 30, 2007, reflecting the matters set forth above. Loss pershare from continuing operations was $0.25 for the nine months ended September 30,2008, compared with loss per share of $0.52 for the nine months ended September 30,2007.

 

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*Discontinued Operations, Net of Tax:*

 

Wehad a loss from discontinued operations, net of taxes of $11.1 million for thenine months ended September 30, 2008, an increase of $7.2 million comparedwith $3.9 million for the same period in 2007. Included in the loss fromdiscontinued operations, net of taxes for the nine months ended September 30,2008 is an impairment charge related to assets held for sale and brand nameintangibles, net of tax, of $3.2 million. The remaining increase is mostly dueto the impairment charge related to the valuation of the tent assets.  Loss per share from discontinued operationswas $0.32 for the nine months ended September 30, 2008, compared with lossper share from discontinued operations of $0.12 for the nine months ended September 30,2007.

** **

**Liquidity and Capital Resources**

 

Managementmeasures our liquidity on the basis of our ability to meet short-term andlong-term operational funding needs. Significant factors affecting themanagement of liquidity are cash flows from operating activities, capitalexpenditures, access to bank lines of credit and our ability to attractlong-term capital under satisfactory terms. TVI and certain of its subsidiariesare party to an amended and restated financing and security agreement and otherrelated agreements (together, the “Credit Agreement”) with BB&T. The CreditAgreement, as amended, provides for an $11.0 million revolving working capitalcredit facility (the “Revolving Facility”) and a $22.5 million term creditfacility (the “Term Facility”) (the Revolving Facility and the Term Facility,collectively, the “Credit Facility”). TVI and certain of its subsidiaries arealso party to a Forbearance Agreement with BB&T, which was effective on November 20,2008.  Borrowings under the ForbearanceAgreement are additionally capped by a loan base amount (the “Borrowing Base”),which is a function of defined levels of eligible accounts receivable andinventory plus a Borrowing Base Deficiency Cap of $3,543,000. We are monitoringour cash position on a daily basis and are limiting our capital expenditures atthis time and have delayed payments to certain vendors to conserve cashresources. We have fully utilized our borrowing capacity under the CreditFacility and anticipate that we will need to fully-utilize the borrowingcapacity under the Forbearance Agreement during the forbearance period.  In addition, we may need to obtain fundingfrom third-parties in order to fund our planned initiatives. For additionalinformation regarding the Credit Facility and the Company’s borrowing abilityunder the facility see the discussion of the Amended and Restated Financing andSecurity Agreement with BB&T and Forbearance Agreement below.

 

TheCompany continues to incur net losses, including a net loss of $13.8 millionfor the three months ended September 30, 2008 and a net loss of $19.8million for the nine months ended September 30, 2008. As of September 30,2008, we had an accumulated deficit of $37 million and a working capitaldeficit of $21.5 million, a decrease of $26.9 million, or 498%, from a workingcapital surplus of $5.4 million as of December 31, 2007. The mostsignificant effect on our working capital since year-end was the result ofcertain events of default under the Credit Facility and resulting ForbearanceAgreement which change the nature of our borrowing under our Term Facility toshort-term.  Although BB&T did notdeclare an acceleration of the debt, the resulting Forbearance Agreement isshort-term in nature and BB&T has not waived any of its remedies under theCredit Facility related to the prior defaults. Cash as of September 30,2008 totaled $521,000, an increase of 59% from December 31, 2007. Other workingcapital changes are primarily attributable to the decrease in income taxreceivable of $2.4 million, the decrease in accounts receivable of $859,000,and the increase in accounts payable of $2.2 million. As of September 30,2008 we had approximately $190,000 available under the terms of the RevolvingFacility. Since availability under the Revolving Facility and ForbearanceAgreement is based on our Borrowing Base plus Borrowing Base Deficiency,limited to a maximum of $11.0 million, the amount that we may draw under theline fluctuates on a day-to-day basis and we must manage our resourcesaccordingly.

 

Wehave utilized all available financing under our Credit Facility.  However, the Forbearance Agreement increasedour financing availability by approximately $3.5 million.  As a result, we believe that available cashand financing resources and operating cash flow will be adequate to fundoperations through the expiration of the Forbearance Agreement on January 30,2009 (or April 30, 2009, if extended). If adequate funding is notavailable, the Company may be required to delay, scale back or eliminatecertain aspects of its operations or attempt to obtain additional financingfrom third-parties. Any additional financing will require the consent of the Company’ssenior bank lender and may not be available on terms acceptable to the Companyor at all. Furthermore, the Company’s inability to fund its operations mayresult in a default under its bank covenants and lead to the acceleration ofpayment terms on its bank debt, which would have a material adverse effect onits business, financial condition and operations.

 

Accounts receivable as of September 30, 2008 were $5.3 million, adecrease of $859,000, or 13.9%, from $6.2 million as of December 31, 2007.Days-sales outstanding, or DSO, as of September 30, 2008 was 44 days,improving from 60 days as of December 31, 2007. The decrease in accountsreceivable is primarily attributable to our improved DSO and an increase incollections of past due receivables that were outstanding as of December 31,2007. Generally, we provide net 30 payment terms to our customers. However,receipt of payments from international and governmental entities is oftendelayed and the collection of our receivables from these customers can requireextra effort and expense. The collection delays have a direct short-term impacton the amount of cash provided by operations during our reporting periods. Thefollowing table reflects additional information related to our accountsreceivable at September 30, 2008 (in thousands):

 

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| ** **                                                  | ** ** | **Accounts Receivable Days Past Due** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                  | ** ** | **61 - 90  Days**                               | ** ** | **91 - 120  Days** | ** ** | **121 Days  and Over** | ** ** |
| Outstanding at September 30, 2008                      |       | $                                                         | 194        |   | $ | 219 |   | $ | 748 |   |
| Collected through October 31, 2008                     |       | 123                                                       |       | 66 |   | 128 |   |
| Allowance for doubtful accounts at  September 30, 2008 |       | 36                                                        |       | 42 |   | 646 |   |
|                                                             |            |                                                           |            |  |  |  |  |  |  |  |

 

Inventoryas of September 30, 2008 was $5.9 million, an increase of 14% from December 31,2007. Annualized inventory turnover was 4.7 times at September 30, 2008compared to 3.0 times for the year ended December 31, 2007. The increasein inventory consisted of approximately $1.7 million in our Personal ProtectionEquipment division, offset by a decrease of approximately $400,000 in ourShelters and Related Products division and $700,000 in our marketingdemonstration inventory. The increase in inventory at our Personal ProtectionEquipment division is primarily the result of raw material purchases andfinished goods associated with filter and PAPR orders. The decrease in ourmarketing demonstration inventory relates to amortization discussed below, animpairment charge of $524,000 to adjust the carrying value of the demonstrationinventory to its fair value, and a reclass of $170,000 from demonstrationinventory that we intend to sell to raw materials, offset by the purchase of anair frame shelter. The decrease in inventory at our Shelters and RelatedProducts division is the result of shipping finished goods inventory andconverting items from obsolete inventory into saleable inventory. Our marketingdemonstration inventory is excluded from the calculation of our inventoryturnover. In addition, we record a reserve against our inventory held for saleand we amortize our marketing demonstration inventory over its estimated usefullife to reduce the amounts to the estimated lower of cost or market value. Ourreserve has decreased by $250,000 since December 31, 2007, primarily as aresult of selling or converting older or obsolete inventory.

 

Currentliabilities as of September 30, 2008 were $38 million, an increase of 243%from December 31, 2007. This increase was attributable, most significantlyto the events of default under our Credit Facility that gave rise to theshort-term Forbearance Agreement and the classification of all of our debt ascurrent, and in part to our increase in inventory and production activity tosupport our increase in sales of manufactured products, and to delayingpayments to our vendors. Delaying payments to our vendors may result in adverseeffects in the future such as refusal by such vendors to continue providinggoods and services to TVI, requiring advance payment for purchases or demandsby such vendors for other unfavorable terms.

 

Longterm debt at September 30, 2008 was $0 compared to $23.1 million at December 31,2007. This decrease is due to the short-term Forbearance Agreement and theclassification of all of our debt as current as well as principal repaymentstotaling $3.1 million in the second and third quarters of 2008.

 

Cashflow used in operating activities was $1,265,000 for the nine months ended September 30,2008, compared to $596,000 for the nine months ended September 30, 2007.Cash used in investing activities totaled $945,000 for the nine months ended September 30,2008 primarily from purchases of property, plant and equipment of $1.1 million,offset by $260,000 from proceeds of the sales of property, plant and equipment,compared to $302,000 for the nine months ended September 30, 2007,primarily from a $3.3 million reduction in marketable securities offset by $2.5million in purchases of property, plant and equipment. Cash provided byfinancing activities totaled $2.4 million for the nine months ended September 30,2008 primarily due to borrowings under the Credit Facility.

 

*Amended and Restated Financing and Security Agreement withBB&T*. On October 31,2006, in connection with our acquisition of SSES LLC, TVI and certain of itssubsidiaries entered into credit arrangements with BB&T. On February 22,2008, TVI and certain of its subsidiaries amended and restated their creditarrangements with BB&T by entering into the Credit Agreement. The CreditFacility currently provides for an $11.0 million Revolving Facility and a $22.5million Term Facility. Previously, the credit arrangements with BB&Tprovided for a $25.0 million revolving credit facility and a $5.0 millionacquisition line of credit. Borrowings under the Revolving Facility aregoverned by a Borrowing Base on eligible accounts receivable and inventory.Subject to the Borrowing Base, amounts under the Revolving Facility may beborrowed, repaid and re-borrowed by the Company on a revolving basis until February 20,2009, which term may be extended by BB&T.

 

Theobligations under the Credit Agreement are secured by a first priority securityinterest in all, or substantially all, of the personal property of TVI andcertain of its subsidiaries.

 

TheCredit Agreement contains customary affirmative and negative covenants that,among other things, limit the ability of TVI to incur additional indebtedness,issue equity, create liens, pay dividends, make certain types of investments,make certain capital expenditures, sell assets, merge with other companies orenter into certain other transactions outside of the ordinary course ofbusiness. TVI is also required to maintain certain financial covenantsspecified in the Credit Agreement, including (i) a Fixed Charge CoverageRatio, calculated as EBITDAR to Debt Service (each term as defined in theCredit Agreement), (ii) a consolidated ratio of Funded Debt to EBITDA, (iii) consolidatednet operating income of not less than zero ($0.00) and (iv) a minimumlevel of Tangible Net Worth (as defined in the Credit Agreement). In addition,TVI and its subsidiaries may not exceed $4.0 million in any fiscal year withoutBB&T’s prior written consent.

 

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UntilNovember 20, 2008, when BB&T and the Company executed the ForbearanceAgreement discussed below, the Revolving Facility bore interest at a floatingrate equal to prime plus 1.0% per annum. Similarly, until BB&T and theCompany executed the Forbearance Agreement discussed below, the Term Facilitybore interest at a floating rate of prime plus 1.5%. Interest is payablemonthly on amounts borrowed under the Revolving Facility with principal andaccrued interest due and payable in full on the maturity date of February 20,2009, unless renewed, subject to the provisions of the Forbearance Agreementdiscussed below. Payments on the Term Facility were interest-only for the firstsix months and were then set to amortize ratably over the remaining term, whichexpires on February 22, 2014. In addition, the Term Facility requires TVIto make annual mandatory prepayments on the Term Facility of (i) 100% ofExcess Cash Flow (as defined under the Credit Agreement) if TVI’s Funded Debtto EBITDA ratio for such fiscal year is greater than or equal to 3.0 to 1.0, or(ii) 50% of Excess Cash Flow if TVI’s Funded Debt to EBITDA ratio for suchfiscal year is less than 3.0 to 1.0.

 

TheCredit Agreement contains customary events of default, including, but notlimited to (a) non-payment of amounts due, (b) material breach ofrepresentations, warranties or covenants under the Credit Agreement, (c) cross-defaultprovisions relating to other indebtedness or obligations, (d) bankruptcyor similar proceedings, and (e) material adverse changes. Upon theoccurrence of an event of default, the amounts outstanding under the CreditFacility may be accelerated and may become immediately due and payable andBB&T may exercise other remedies available to it under the CreditAgreement, including without limitation, exercising its rights in theCollateral.

 

TheCompany notified BB&T that, for the testing periods ended as of March 31,2008, June 30, 2008 and September 30, 2008, it was not in compliancewith various financial covenant requirements, which noncompliance, if not waivedby BB&T, would constitute a continuing event of default under the CreditFacility. Upon an event of default of this nature under the Credit Facility,among other things, BB&T has the right to accelerate the payment of all ofthe outstanding indebtedness as of September 30, 2008. BB&T hasgranted to the Company a waiver with respect to the noncompliance by theCompany of the minimum EBITDA requirement as of March 31, 2008 and June 30,2008. No amendments were made to the Credit Facility and there was no effect onthe Company’s consolidated financial statements as a result of thenoncompliance or corresponding grant of waiver by BB&T as of March 31,2008 and June 30, 2008. As of September 30, 2008, the Company failedto maintain a funded debt to EBITDA ratio of not more than 3.75 to 1.0, failedto maintain a tangible net worth of not less than $4 million, failed to pay theOctober principal payment under the Term Facility and failed to repay itsBorrowing Base Deficiency (as defined in the Credit Agreement). As a result ofthese defaults, the Company entered into the Forbearance Agreement discussedbelow.

 

 The Credit Agreement also provides thatBB&T will issue letters of credit for the account of TVI in aggregateundrawn amounts of up to $750,000. Annual fees for letters of credit issued forthe account of TVI will equal 2.0% of the face amount of such letters ofcredit. The amount of any outstanding letters of credit issued or committed tobe issued by BB&T will reduce, dollar for dollar, the aggregate amountavailable under the Revolving Facility.

 

TVIpaid a fee of $125,000 in connection with the execution of the February 22,2008 amendment and restatement to the Credit Facility, and also paid certainadministrative and professional expenses incurred by BB&T in connectionwith the drafting and negotiation of the facility. TVI must also pay a monthlyfee equal to an annual rate of 0.25% of the unused Revolving Facility.Beginning in March 2009, TVI will also be obligated to pay to BB&T aterm loan fee of between 1% and 3% of consolidated annual EBITDA for eachfiscal year ending on or after December 31, 2008 based on actual EBITDAfor such fiscal year, and will be subject to a $500,000 early termination feeif the loans are repaid in full prior to the maturity date of the TermFacility.

 

*Forbearance Agreement with BB&T.*Inconnection with certain events of default under the Credit Facility alleged byBB&T, related to the Company’s failure to pay when due the October 2008term loan principal payment, required by the Credit Facility, and the Company’sfailure to pay borrowing base deficiencies, the Company initiated discussionswith BB&T regarding the entry into a forbearance agreement (or otherarrangement) to avoid acceleration by BB&T of its obligations under theCredit Facility. The Company contemplated that entry into the forbearanceagreement would resolve, among other things, the Company’s potential default ofcertain covenants of the Credit Facility, based on its results for the periodended September 30, 2008, with respect to a funded debt to EBITDA ratioand the tangible net worth covenants.  Asof November 24, 2008, the balance under the Revolving Facility was $8.4million and the balance under the Term Facility was $19.4 million.

 

As a result of these discussions, on November 20, 2008 the Companyand certain of its subsidiaries entered into a Forbearance Agreement withBB&T (the “Forbearance Agreement”). Under the Forbearance Agreement, BB&T agreed, among other things, totemporarily refrain and forbear from exercising and enforcing the remediesavailable to it with regard to the Credit Facility during the forbearanceperiod which ends January 30, 2009. The forbearance period may be extended through April 30, 2009 ifcertain conditions set forth in the Forbearance Agreement are satisfied,including, among other things: (i) the Company’s budget for the periodfrom January 30, 2009 through April 30, 2009 is satisfactory toBB&T; (ii) the Company is current on all interest payments and otherpayment obligations as required by the Forbearance Agreement; and (iii) noForbearance Default (as defined below) exists.

 

The Company’s borrowing base is calculated by taking (i) 85% ofthe amount of eligible receivables plus (ii) the lesser of (A) 50% ofthe amount of eligible inventory, or (B) $4,000,000 (the “BorrowingBase”).  If the aggregate outstandingprincipal balance of

 

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the revolving portion of the Credit Facility, including the aggregateface amount of any outstanding letters of credit from BB&T, is greater thanthe Borrowing Base, then a “Borrowing Base Deficiency” exists under the CreditAgreement.  The Forbearance Agreementprovides that the Company may carry a Borrowing Base Deficiency not to exceed$3,543,000 (the “Borrowing Base Deficiency Cap”) if the weekly amount that theCompany has borrowed beyond the Borrowing Base Deficiency Cap (the “AggregateNet Negative Variance”) at no time exceeds $177,150 (the “Negative VarianceCap”).  The Company may requestadditional advances from BB&T during the forbearance period provided that (a) BB&Tmay not terminate, limit or suspend the advances unless a Forbearance Defaultoccurs, (b) after giving effect to the Company’s request, the aggregateamount of the revolving loans under the Credit Facility would not exceed thelesser of (i) $7,000,000, or (ii) the Borrowing Base plus theBorrowing Base Deficiency Cap, and (c) after giving effect to theCompany’s request, the aggregate amount of the revolving loans under the CreditFacility would not exceed the Borrowing Base plus the Company’s weeklyprojected maximum Borrowing Base Deficiency plus the Negative Variance Cap.

 

Under the Forbearance Agreement, principal installment payments on theterm loan under the Credit Facility for October, November and December 2008and January 2009 (and, if the Forbearance Period is extended as providedin the Forbearance Agreement, for February, March and April 2009) aredeferred until the maturity of the term on February 22, 2014.  The Company must make mandatory prepaymentson the term loan under the Credit Facility. Any mandatory prepayments otherwise coming due during the forbearanceperiod (including, without limitation, any extensions) will be deferred andwill become due and payable at the end of the forbearance period.  During the forbearance period, interest willaccrue on the unpaid principal balance of revolving loans under the CreditFacility at BB&T’s prime rate plus 1.5% per annum and the term loan underthe Credit Facility at BB&T’s prime rate plus 2.0% per annum.  During the forbearance period, any netproceeds from sales of assets outside of the ordinary course of business will beapplied to the Company’s obligations under the Credit Facility and theForbearance Agreement as determined in BB&T’s reasonable discretion.

 

Under the Forbearance Agreement, the Company must hire a consultant by November 25,2008 to assist it in the preparation of a cash budget and cash flow projectionsfor the period through April 30, 2009, to evaluate its operations andprocedures, to provide recommendations for improvement.  The consultant’s engagement will terminate onor before December 31, 2008. The Company must provide BB&T withcertain updated and additional information including, weekly cash budgets, cashflow and Borrowing Base projections for each week.  By December 20, 2008, the Company mustprovide BB&T with a revised weekly cash budget, cash flow, Borrowing Baseand the weekly maximum Borrowing Base Deficiency projections for the Companyfor the period from January 30, 2009 through the week of April 30,2009.  By December 31, 2008, theCompany must provide BB&T with a final report from the consultantvalidating the Company’s strategic plan and budgets, and the final report ofthe consultant must be acceptable to BB&T in its reasonablediscretion.  In addition, the Companymust have weekly meetings with BB&T to provide it with a cash flow reportand variances from the budget.

 

The Forbearance Agreement provides for customary events of default thatconstitute “Forbearance Defaults” and include, but are not limited to, (a) theBorrowing Base Deficiency exceeds the Borrowing Base Deficiency Cap andcontinues for a period of two days, (b) the Aggregate Net Variance exceedsthe Negative Variance Cap without BB&T’s written consent, (c) failureto perform or comply with any of the terms, conditions or provisions of theForbearance Agreement (and not cured within any applicable grace or cureperiod), and (d) the occurrence of an event of default under the CreditFacility other than the events of default existing as of November 20,2008.  Upon the occurrence of anyForbearance Default, without notice or consent of the Company, BB&T maylimit, suspend or terminate advances, terminate the Forbearance Period, and mayenforce any and all rights and remedies available to it under the ForbearanceAgreement, Credit Facility and any documents executed and delivered inconnection with the Forbearance Agreement. The Forbearance Period will terminate automatically upon the occurrenceof an event of default resulting in the Company or any of its subsidiaries (i) applyingfor a receiver, trustee or liquidator of itself or any of its property;admitting in writing its inability to pay its debts as they mature; making ageneral assignment for the benefit of creditors; being declared bankrupt orinsolvent; filing a voluntary petition for bankruptcy or reorganization; consentingto, approving of or acquiescence to any such proceeding or appointment of areceiver of or trustee for any of its property; or by permitting anyjurisdiction or governmental authority to enjoin or otherwise prohibit theoperation of any of the Company’s or its subsidiary’s business or assets; or (ii) entryof an order for relief in any involuntary case brought against the Company orits subsidiaries under the U.S. bankruptcy code, or any such bankruptcy case isbrought against the Company or its subsidiaries and is not dismissed after 60days.

 

*Warrant.*Under theterms of the Forbearance Agreement, the Company issued a warrant to BB&T(the “Warrant”) to purchase up to an aggregate of 1,683,952 shares of theCompany’s common stock at a price of $0.164 per share.  The Warrant is exercisable, after April 30,2010.  The number of shares issuable uponexercise of the Warrant will be reduced (i) by 420,988 shares if the termloan balance under the Credit Facility is reduced by 50% of the balance on theWarrant’s issue date by July 31, 2009 and (ii) by 841,976 shares(including any prior reduction) if the term loan balance under the CreditFacility is paid in full by October 31, 2009.  If the obligations under the Credit Facilityare paid in full by April 30, 2010 the Warrant will expireunexercised.  These reductions inexercisability of the Warrant will not be available unless on the date of theapplicable reduction, (x) no event of default exists under the CreditFacility, and (y) BB&T has positive availability under the CreditFacility after excluding from the Borrowing Base the

 

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accounts and inventory that were not of the type eligible for inclusionin eligible receivables and eligible inventory set forth in the CreditAgreement, respectively on the closing date as set forth in the CreditFacility.

 

The foregoing summary of the Forbearance Agreement and the Warrant arenot complete and are qualified in their entirety by reference to the full textof the Forbearance Agreement and the Warrant. Copies of which are attached hereto as Exhibits 10.1 and 10.2,respectively.

 

We believe that we have adequate production equipment to support ourcurrent level of operations. We continue to make limited capital purchasesprimarily in support of the filter canister production line and other productexpansion initiatives and the replacement and refurbishment of our tent andequipment rental assets. We will invest in additional equipment to meetefficiency and delivery requirements should our production levels increasesignificantly. We currently intend to purchase any such equipment fromoperating funds or funds drawn under the Credit Facility, if available, to makesuch purchases.

 

**Critical Accounting Policies and Estimates**

 

Note3 of the Notes to Consolidated Financial Statements on Form 10-K, asamended, for the year ended December 31, 2007 describes the significantaccounting policies used in the preparation of the Company’s financialstatements.

 

Thepreparation of financial statements in conformity with generally acceptedaccounting principles in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities at the date of the financial statements and reported amounts ofrevenues and expenses during the reporting period and related disclosure ofcontingent liabilities. Actual results could differ from those estimates.

 

**Item 3.****                                   ****Qualitative and QuantitativeDisclosures about Market Risk.**

 

*Not Applicable.*

 

**Item 4.****                                   ****Controls and Procedures.**

 

*Disclosure Controls and Procedures*

 

Asof the end of the period covered by this Quarterly Report on Form 10-Q,our management, with the participation of our Chief Executive Officer and ourChief Financial Officer, carried out an evaluation of the effectiveness of thedesign and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act). Based upon that evaluation, our ChiefExecutive Officer and our Chief Financial Officer concluded that, as of the endof the period covered by this report, our disclosure controls and proceduresare functioning effectively to provide reasonable assurance that informationrequired to be disclosed by us in our reports filed or submitted under theExchange Act is (i) recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms and (ii) accumulatedand communicated to the Company’s management, including our principal executiveand principal financial officers, or persons performing similar functions, asappropriate to allow timely decisions regarding required disclosure.

 

*Changes in Internal Control Over Financial Reporting*

 

Therewere no changes in our internal control over financial reporting during thequarter ended September 30, 2008 that have materially affected, or arereasonably likely to materially affect, our internal control over financial reporting.

 

**PART II—OTHER INFORMATION**

 

**Item 1.****                                   ****Legal Proceedings.**

 

InMay 2007, the Securities and Exchange Commission (“SEC”) issued a noticethat it was commencing an informal non-public inquiry relating to the mattersinvestigated by the Audit Committee, as well as other transactions and matters.The SEC requested that the Company voluntarily produce documents relating toits investigation. On July 11, 2007, the Company learned that the informalinquiry commenced by the SEC had become a formal investigation and on October 23,2007 and on March 7, 2008, the SEC issued subpoenas to the Company toproduce documents that are substantially similar to the voluntary productionrequest. The SEC’s formal order of investigation states generally that thepurpose of the SEC’s investigation is to determine whether the federalsecurities laws have been violated and permits the SEC to subpoena documentsand compel witnesses to testify as to matters relating to its investigation.The Company believes that current and former Company employees have alsoreceived subpoenas from the SEC to produce documents and provide testimony. TheCompany believes that the focus of the formal investigation is substantiallythe same as the informal inquiry and intends to continue to fully cooperatewith the SEC regarding this matter.

 

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Weare, from time to time, a party to disputes arising from normal businessactivities, including various employee-related matters. In the opinion of ourmanagement, resolution of these matters will not have a material adverse effectupon our financial condition or future operating results.

 

**Item 1A.****                             RiskFactors.**

 

There have been no material changes to the riskfactors disclosed in Item 1A of Part II “Risk Factors,” in our quarterlyreport on Form 10-Q for the quarter ended June 30, 2008, with theexception of the following:

 

****We are currently in defaultunder our existing Credit Facility with BB&T and have entered into aforbearance agreement with BB&T, the Forbearance Agreement (as definedbelow), pursuant to which BB&T has agreed to forbear from exercising anyremedies available to it. ******We may not be able to comply with the ForbearanceAgreement or the financial covenants under the Credit Facility or repay ourindebtedness under the Credit Facility.**

 

In connection with certain events of default under the Credit Facilityalleged by BB&T, related to our failure to pay when due the October 2008term loan principal payment, required by the Credit Facility, and our failureto pay borrowing base deficiencies, we initiated discussions with BB&Tregarding the entry into a forbearance agreement (or other arrangement) toavoid acceleration by BB&T of our obligations under the Credit Facility. Wecontemplated that entry into the forbearance agreement would resolve, amongother things, our potential default of certain covenants of the CreditFacility, based on our results for the period ended September 30, 2008,with respect to a funded debt to EBITDA ratio and the tangible net worthcovenants.  As of November 24, 2008,the balance of revolving loans under the Credit Facility was $8.4 million andthe balance under the term loan under the Credit Facility was $19.4 million.

 

The Credit Facility is secured by a lien on substantially all of ourassets. The BB&T credit facility was amended and restated in February 2008as a result of, among other things, our non-compliance with certain financialcovenants during 2007. As amended and restated, the Credit Facility requires usto maintain a ratio of EBITDAR to Debt Service (as defined in the CreditAgreement) and a consolidated ratio of Funded Debt to EBITDA (as defined in theCredit Agreement)  that are similar tothe ratios under the prior credit facility. Compliance with these financialcovenants was required beginning in the third quarter of 2008 and in subsequentperiods. We are also required to maintain consolidated net operating income of notless than zero ($0.00) and a minimum level of Tangible Net Worth (as defined inthe Credit Agreement). These requirements commenced in the third quarter of2008 as well. In addition, we are required to maintain certain minimum levelsof EBITDA. We did not satisfy the minimum EBITDA requirement for the first andsecond quarters of 2008; however, BB&T granted waivers to us with respectto this covenant.

 

As a result of these discussions, on November 20, 2008 we andcertain of our subsidiaries entered into a Forbearance Agreement with BB&T(the “Forbearance Agreement”).  Under theForbearance Agreement, BB&T agreed, among other things, to temporarilyrefrain and forbear from exercising and enforcing the remedies available to itwith regard to the Credit Facility during the forbearance period which ends January 30,2009.  The forbearance period may beextended through April 30, 2009 if certain conditions set forth in theForbearance Agreement are satisfied, including, among other things: (i) ourbudget for the period from January 30, 2009 through April 30, 2009 issatisfactory to BB&T; (ii) we are current on all interest payments andother payment obligations as required by the Forbearance Agreement; and (iii) noForbearance Default (as defined below) exists.

 

Our borrowing base is calculated by taking (i) 85% of the amountof eligible receivables plus (ii) the lesser of (A) 50% of the amountof eligible inventory, or (B) $4,000,000 (the “Borrowing Base”).  If the aggregate outstanding principalbalance of the revolving portion of the Credit Facility, including theaggregate face amount of any outstanding letters of credit from BB&T, isgreater than the Borrowing Base, then a “Borrowing Base Deficiency” existsunder the Credit Agreement.  TheForbearance Agreement provides that we may carry a Borrowing Base Deficiencynot to exceed $3,543,000 (the “Borrowing Base Deficiency Cap”) if the weeklyamount that we have borrowed beyond the Borrowing Base Deficiency Cap (the“Aggregate Net Negative Variance”) at no time exceeds $177,150 (the “NegativeVariance Cap”).  We may requestadditional advances from BB&T during the forbearance period provided that (a) BB&Tmay not terminate, limit or suspend the advances unless a Forbearance Defaultoccurs, (b) after giving effect to our request, the aggregate amount ofthe revolving loans under the Credit Facility would not exceed the lesser of (i) $7,000,000,or (ii) the Borrowing Base plus the Borrowing Base Deficiency Cap, and (c) aftergiving effect to our request, the aggregate amount of the revolving loans underthe Credit Facility would not exceed the Borrowing Base plus our weeklyprojected maximum Borrowing Base Deficiency plus the Negative Variance Cap.

 

Under the Forbearance Agreement, principal installment payments on theterm loan under the Credit Facility for October, November and December 2008and January 2009 (and, if the Forbearance Period is extended as providedin the Forbearance Agreement, for February, March and April 2009) aredeferred until the maturity of the term on February 22, 2014.  We must make mandatory prepayments on theterm loan under the Credit Facility.  Anymandatory prepayments otherwise coming due during the

 

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forbearance period (including, without limitation, any extensions) willbe deferred and will become due and payable at the end of the forbearanceperiod.  During the forbearance period,interest will accrue on the unpaid principal balance of revolving loans underthe Credit Facility at BB&T’s prime rate plus 1.5% per annum and the termloan under the Credit Facility at BB&T’s prime rate plus 2.0% perannum.  During the forbearance period,any net proceeds from sales of assets outside of the ordinary course ofbusiness will be applied to our obligations under the Credit Facility and theForbearance Agreement as determined in BB&T’s reasonable discretion.

 

Under the Forbearance Agreement, we must hire a consultant by November 25,2008 to assist us in the preparation of a cash budget and cash flow projectionsfor the period through April 30, 2009, to evaluate our operations andprocedures, to provide recommendations for improvement.  The consultant’s engagement will terminate onor before December 31, 2008. We must provide BB&T with certain updatedand additional information including, weekly cash budgets, cash flow andBorrowing Base projections for each week. By December 20, 2008, we must provide BB&T with a revisedweekly cash budget, cash flow, Borrowing Base and the weekly maximum BorrowingBase Deficiency projections for the period from January 30, 2009 throughthe week of April 30, 2009.  By December 31,2008, we must provide BB&T with a final report from the consultantvalidating our strategic plan and budgets, and the final report of theconsultant must be acceptable to BB&T in its reasonable discretion.  In addition, we must have weekly meetingswith BB&T to provide it with a cash flow report and variances from thebudget.

 

The Forbearance Agreement provides for customary events of default thatconstitute “Forbearance Defaults” and include, but are not limited to, (a) theBorrowing Base Deficiency exceeds the Borrowing Base Deficiency Cap andcontinues for a period of two days, (b) the Aggregate Net Variance exceedsthe Negative Variance Cap without BB&T’s written consent, (c) failureto perform or comply with any of the terms, conditions or provisions of theForbearance Agreement (and not cured within any applicable grace or cureperiod), and (d) the occurrence of an event of default under the CreditFacility other than the events of default existing as of November 20,2008.  Upon the occurrence of anyForbearance Default, without notice or our consent, BB&T may limit, suspendor terminate advances, terminate the Forbearance Period, and may enforce anyand all rights and remedies available to it under the Forbearance Agreement,Credit Facility and any documents executed and delivered in connection with theForbearance Agreement.  The ForbearancePeriod will terminate automatically upon the occurrence of an event of defaultresulting in us or any of our subsidiaries (i) applying for a receiver,trustee or liquidator of us or any of our property; admitting in writing ourinability to pay our debts as they mature; making a general assignment for thebenefit of creditors; being declared bankrupt or insolvent; filing a voluntarypetition for bankruptcy or reorganization; consenting to, approving of oracquiescence to any such proceeding or appointment of a receiver of or trusteefor any of our property; or by permitting any jurisdiction or governmentalauthority to enjoin or otherwise prohibit the operation of any of our or oursubsidiary’s business or assets; or (ii) entry of an order for relief inany involuntary case brought against us or our subsidiaries under the U.S.bankruptcy code, or any such bankruptcy case is brought against us or oursubsidiaries and is not dismissed after 60 days.

 

Under the terms of the Forbearance Agreement, we issued a warrant toBB&T (the “Warrant”) to purchase up to an aggregate of 1,683,952 shares ofour common stock at a price of $0.164 per share.  The Warrant is exercisable, after April 30,2010.  The number of shares issuable uponexercise of the Warrant will be reduced (i) by 420,988 shares if the termloan balance under the Credit Facility is reduced by 50% of the balance on theWarrant’s issue date by July 31, 2009 and (ii) by 841,976 shares(including any prior reduction) if the term loan balance under the CreditFacility is paid in full by October 31, 2009.  If the obligations under the Credit Facilityare paid in full by April 30, 2010 the Warrant will expireunexercised.  These reductions inexercisability of the Warrant will not be available unless on the date of theapplicable reduction, (x) no event of default exists under the CreditFacility, and (y) BB&T has positive availability under the CreditFacility after excluding from the Borrowing Base the accounts and inventorythat were not of the type eligible for inclusion in eligible receivables andeligible inventory set forth in the Credit Agreement, respectively on theclosing date as set forth in the Credit Facility.

 

We face uncertainty regarding the adequacy of our capital resources,including liquidity, and have limited access to additional financing.  Although BB&T has granted certain waiversof our non-compliance with covenants and any corresponding events of default inprior periods, there is no assurance that BB&T will provide a waiver in theevent of any future non-compliance with the Credit Facility or the ForbearanceAgreement. A failure to comply with these covenants and other provisions of theCredit Facility or the Forbearance Agreement in the future could result in anevent of default under the Credit Facility or the Forbearance Agreement, whichcould, among other things, permit BB&T to accelerate payment of the debtand exercise remedies available to it under the Credit Facility and theForbearance Agreement.

 

**The agreement governing our senior securedCredit Facility and the Forbearance Agreement both contain various covenantsthat significantly limit our discretion in the operation of our business andlimit our ability to make capital and other expenditures.**

 

Our Credit Facility and our Forbearance Agreement with BB&T containvarious terms and covenants that restrict our ability to, among other things:

 

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·                                          obtain additional financing in the future forworking capital, capital expenditures, acquisitions, general corporate or otherpurposes;

·                                          borrow under the revolving facility in excessof prescribed borrowing base limitations;

·                                          pay dividends and make other distributions;

·                                          plan for and react to changes in our businessand our industry and make us less flexible in responding to changing economicconditions;

·                                          merge, consolidate, sell or transfer all orsubstantially all of our assets; or

·                                          create liens.

 

The terms and covenants included in the Credit Facility and theForbearance Agreement also expose us to greater interest rate risk since theinterest rate under our Credit Facility is variable, make us more vulnerable toeconomic downturns and less able to withstand competitive pressures and we maybe unable to satisfy our financial obligations, including our payroll.  Our Credit Facility and Forbearance Agreementwith BB&T also require us to comply with other financial covenants as morefully described in the immediately preceding risk factor disclosure.

 

Our ability to borrow under the revolving portion of our CreditFacility is restricted by borrowing base limitations included in the CreditFacility and the Forbearance Agreement, which are a function of defined levels(both qualitative and quantitative) of accounts receivable and inventory. Forthe foreseeable future, our borrowing capacity under the senior secured CreditFacility will continue to be significantly limited. We intend to continue toclosely monitor our cash position and are limiting our capital and otherexpenditures.

 

Refer to “Management’s Discussion and Analysis of Financial Conditionand Results of Operations – Liquidity and Capital Resources” for a discussionof the terms of and limitations on borrowings under our Credit Facility andForbearance Agreement with BB&T.

 

**We may not have sufficient cash reserves to maintain and fundour operations and fund our obligations in the future.**

 

Wemay not have sufficient cash reserves to maintain our operations and fund ourobligations, including, without limitation, our obligations under theForbearance Agreement and the Credit Facility in the future.  We cannot guarantee that the amounts of cashavailable from operations together with our Credit Facility will be sufficientto fund operations.  In the event thatcash flows and available cash are not sufficient to meet our cash requirements,we may need to seek additional financing, which if obtained without BB&T’sconsent, would in almost all circumstances be deemed an event of default.  We can provide no assurance that additionalfinancing would be available or, if available, offered on acceptable terms, orthat we could obtain BB&T’s consent to such additional financing.  If adequate funds are not available onacceptable terms, we may be unable to operate our business and may be requiredto sell core assets or dissolve the business. If we raise additional funds by issuing equity securities, stockholdersmay experience dilution of their ownership interest and the newly issuedsecurities may have rights superior to those of our common stock.  If we issue or incur debt to raise funds, wemay be subject to limitations on our operations.

 

**We incurred significant losses in 2007 and inthe nine months ended September 30, 2008, and our failure to generatesufficient cash to meet our liquidity needs may materially and adversely affectour ability to service our indebtedness and operate our business.**

 

For the year ended December 31, 2007, we incurred a net loss of$29.6 million. Our net loss for the nine months ended September 30, 2008was $19.8 million. We also had negative cash flows from our operations duringthese periods because the gross profit generated from our operations was notsufficient to cover our operating cash requirements.

 

Our ability to make payments on our Credit Facility with BB&T, tocomply with the Forbearance Agreement and to fund any capital expenditures wemay make, if any, will depend, among other things, on our ability to generatecash in the future. This is in large part dependent upon our ability tosuccessfully implement our turnaround plan and, to a certain extent, is subjectto general economic, financial, competitive and other factors that are beyondour control. Should we fail to achieve forecasted results, we will need toidentify additional sources of financing in order to sustain our operations. Wecannot assure you that our business will generate sufficient cash flow fromoperations in the future, our currently anticipated revenues and cash flow willbe realized on schedule or in an amount sufficient to enable us to serviceindebtedness, or that adequate future borrowings will be available to us undercurrent or future credit facilities on reasonable terms or at all. If adequatefunding is not available, we may be required to delay, scale back or eliminatecertain aspects of our operations or attempt to obtain funds, which if obtainedwithout the consent of BB&T would in almost all circumstances be deemed anevent of default, through arrangements with third-parties that may require usto relinquish rights to certain of our technologies, products or potentialmarkets or that could impose onerous financial or other terms.

 

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**Recent uncertainty in the global credit markets could adversely affectour business and financial condition.**

 

The global credit markets have experienced significantdislocations and liquidity disruptions in 2008. These circumstances have materially impacted bank financings andliquidity in the debt markets, making financing terms for borrowers lessattractive through increased spreads and otherwise, and in certain cases haveresulted in the unavailability of certain types of debt financing.  Continued uncertainty in the credit marketsmay negatively impact our ability, as well as the ability of our suppliers andcustomers, to access additional debt financing or to refinance existing debt onfavorable terms or at all, which could negatively affect our ability to fundcurrent operations and future expansion and could adversely affect theoperations and financial condition of our suppliers and customers, therebyadversely affecting the supply of materials and inventions as well as demandfor our products.

** **

**Item 2.****                                   ****Unregistered Sales of EquitySecurities and Use of Proceeds.**

 

None.

 

**Item 3.****                                   ****Defaults upon SeniorSecurities.**

 

The information required to be disclosed pursuant tothis Item 3 with respect to the Company’s potential default of certaincovenants of the Credit Facility with BB&T, based on its results for theperiod ended September 30, 2008, including, among other things, the fundeddebt to EBITDA ratio and the tangible net worth covenants and its entry intothe Forbearance Agreement with BB&T is provided in Item 2 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” underthe caption “Liquidity and Capital Resources” and is incorporated by referencein response to this Item 3.  Pursuant tothe Forbearance Agreement, BB&T agreed, among other things, to temporarilyrefrain and forbear from exercising and enforcing the remedies available to itwith regard to the Credit Facility during the forbearance period which ends January 30,2009.

 

**Item 4.****                                   ****Submission of Matters to aVote of Security Holders.**

 

None.

 

**Item 5.****                                   ****Other Information.**

 

On November 20, 2008, the Company and certain ofits subsidiaries entered into the Forbearance Agreement with BB&T withregard to the Company’s Credit Facility under which BB&T is thelender.  In connection with its entryinto the Forbearance Agreement, the Company issued to BB&T a warrant (the“Warrant”) to purchase 1,683,952 shares of the Company’s common stock with anexercise price of $0.164 per share.  Theinformation required to be disclosed pursuant to Item 1.01 “Entry into aMaterial Definitive Agreement” of Form 8-K with respect to the Company’sentry into the Forbearance Agreement and the Warrant is provided in this reportin Item 2 “Management’s Discussion and Analysis of Financial Condition andResults of Operations” under the caption “Liquidity and Capital Resources” andis incorporated by reference in response to this Item 5.

 

Also on November 20, 2008, the Company received aletter (the “Letter”) from the NASDAQ OMX Group, Inc. with respect to thelisting of the Company’s common stock on the NASDAQ Capital Market(“NASDAQ”).  The Letter states that theCompany was no longer in compliance with the rules for continued listingset forth in NASDAQ Marketplace Rule 4310(c)(14) because the Company hadnot filed this report with the U.S. Securities and Exchange Commission (the“SEC”).  However, NASDAQ rules permitthe Company 60 calendar days to submit a plan to regain compliance, which planmust be submitted no later than January 20, 2009.  The Company believes it will regaincompliance with applicable NASDAQ rules upon the filing of this reportwith the SEC.  The Company issued a pressrelease announcing that it had received the Letter from NASDAQ on November 20,2008 (the “Press Release”).  Theinformation required to be disclosed pursuant to Item 3.01 “Notice of Delistingor Failure to Satisfy a Continued Listing Rule or Standard; Transfer ofListing” of Form 8-K with respect to the Letter is included in this Item5.

 

In addition, the Forbearance Agreement, the Warrantand the Press Release are filed as exhibits to this report pursuant to Item 6“Exhibits.”

 

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**Item 6.****                                   ****Exhibits.**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                       |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                |       | Limited Forbearance Agreement, dated as of November 20, 2008, by  and among the Company, CAPA Manufacturing Corp., Safety Tech  International, Inc. and Signature Special Event Services, Inc., and  Branch Banking and Trust Company. |
|                |       |                                                                                                                                                                                                                                                  |
| 10.2                |       | Warrant to Purchase Common Stock, dated as of November 20, 2008.                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                  |
| 31.1                |       | Certification of Chief Executive Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                  |
| 31.2                |       | Certification of Chief Financial Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                  |
| 32.1                |       | Certification of Chief Executive Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                  |
| 32.2                |       | Certification of Chief Financial Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                  |
| 99.1                |       | Letter dated November 20, 2008, to the Company from the NASDAQ  Stock Market, Inc.                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                  |
| 99.2                |       | Press release dated November 26, 2008.                                                                                                                                                                                                           |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                          |   | TVI CORPORATION                                   |
|-------------------------------|--------|---------------------------------------------------|
|                          |   | (Registrant)                                      |
|                          |   |                                              |
| Date:  November 26, 2008 |   | /s/ Harley A.  Hughes                             |
|                          |   | Harley A. Hughes                                  |
|                          |   | President and Chief Executive Officer             |
|                          |   |                                              |
|                          |   |                                              |
| Date:  November 26, 2008 |   | /s/ Sherri S.  Voelkel                            |
|                          |   | Sherri S. Voelkel                                 |
|                          |   | Senior Vice President and Chief Financial Officer |

 

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                       |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                |       | Limited Forbearance Agreement, dated as of November 20, 2008, by  and among the Company, CAPA Manufacturing Corp., Safety Tech  International, Inc. and Signature Special Event Services, Inc., and  Branch Banking and Trust Company. |
|                |       |                                                                                                                                                                                                                                                  |
| 10.2                |       | Warrant to Purchase Common Stock, dated as of November 20, 2008.                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                  |
| 31.1                |       | Certification of Chief Executive Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                  |
| 31.2                |       | Certification of Chief Financial Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                  |
| 32.1                |       | Certification of Chief Executive Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                  |
| 32.2                |       | Certification of Chief Financial Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                  |
| 99.1                |       | Letter dated November 20, 2008, to the Company from the NASDAQ  Stock Market, Inc.                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                  |
| 99.2                |       | Press release dated November 26, 2008.                                                                                                                                                                                                           |

 

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