UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended May 30, 2008
 Commission File Number 1-10655
 ENVIRONMENTAL TECTONICS CORPORATION
 Pennsylvania
    
    23-1714256(State or other jurisdiction of incorporation or 
organization)
    
    (I.R.S. Employer Identification No.)
 
 (Address of principal executive offices, Zip Code)
   þ o
  Large accelerated filer o
    
    Accelerated filer
o
    
    Non-accelerated filer o
    
    Smaller reporting company
þ(Do not check if a smaller reporting company)
  o þ




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PART I  FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements (unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the 13 week periods ended May 30, 2008 and
May 25, 2007
    
    
    3Condensed Consolidated Balance Sheets as of May 30, 2008 and February 29, 2008
    
    
    4Condensed Consolidated Statements of Cash Flows for the 13 week periods ended May 30, 2008 and
May 25, 2007
    
    
    5Notes to the Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    14Item 4. Controls and Procedures
    
    
    20PART II  OTHER INFORMATION
    
    
    22Item 1. Legal Proceedings
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3. Defaults Upon Senior Securities
    
    
    23Item 4. Submission of Matters to Vote of Security Holders
    
    
    23Item 5. Other Information
    
    
    23Item 6. Exhibits
    
    
    23Signatures
    
    
    24
   2




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##### 



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements (unaudited)
 Environmental Tectonics Corporation
 
 Condensed Consolidated Statements of Operations
 (unaudited)
 (in thousands, except share and per share information)
 Thirteen Weeks EndedMay 30,
    
    
    May 25,2008
    
    
    2007Net sales
    
    $
    9,975
    
    
    $
    4,347Cost of goods sold
    
    
    7,480
    
    
    
    3,452Gross profit
    
    
    2,495
    
    
    
    895Operating expenses:Selling and administrative
    
    
    3,313
    
    
    
    2,799Claim settlement costs
    
    
    
    
    
    
    3,389Research and development
    
    
    295
    
    
    
    543,608
    
    
    
    6,242Operating loss
    
    
    (1,113
    )
    
    
    (5,347
    )Other expenses:Interest expense
    
    
    436
    
    
    
    354Other, net
    
    
    (61
    )
    
    
    30375
    
    
    
    384Loss before income taxes
    
    
    (1,488
    )
    
    
    (5,731
    )Provision for income taxes
    
    
    
    
    
    
    Loss before minority interest
    
    
    (1,488
    )
    
    
    (5,731
    )Income (loss) attributable to minority interest
    
    
    3
    
    
    
    (6
    )Net loss
    
    $
    (1,491
    )
    
    $
    (5,725
    )Preferred stock dividend
    
    
    (232
    )
    
    
    (89
    )Loss applicable to common shareholders
    
    $
    (1,723
    )
    
    $
    (5,814
    )Per share information:Basic and diluted loss per share applicable to
common shareholders
    
    $
    (0.19
    )
    
    $
    (0.64
    )Basic and diluted weighted average number of
common shares
    
    
    9,035,000
    
    
    
    9,029,000
  3




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##### 



Environmental Tectonics Corporation
 
 Condensed Consolidated Balance Sheets
 (in thousands, except share information)
 May 30, 2008
    
    
    February 29, 2008(unaudited)ASSETSCash and cash equivalents
    
    $
    965
    
    
    $
    1,871Restricted cash
    
    
    2,457
    
    
    
    4,526Accounts receivable, net of allowance for bad debts
of $741 and $746, respectively
    
    
    6,187
    
    
    
    3,231Costs and estimated earnings in excess of billings
on uncompleted long-term contracts
    
    
    1,901
    
    
    
    3,422Inventories, net
    
    
    5,404
    
    
    
    6,773Prepaid expenses and other current assets
    
    
    1,008
    
    
    
    833Total current assets
    
    
    17,922
    
    
    
    20,656Lease receivable, net of current portion
    
    
    304
    
    
    
    Property, plant and equipment, at cost, net
    
    
    15,356
    
    
    
    15,208Construction in progress
    
    
    209
    
    
    
    147Software development costs, net of accumulated
amortization of $12,462 and $12,161, respectively
    
    
    1,368
    
    
    
    1,614Total assets
    
    $
    35,159
    
    
    $
    37,625LIABILITIESCurrent portion of long-term debt
    
    $
    9
    
    
    $
    9Accounts payable  trade
    
    
    3,320
    
    
    
    3,060Billings in excess of costs and estimated earnings
on uncompleted long-term contracts
    
    
    5,465
    
    
    
    6,491Customer deposits
    
    
    3,386
    
    
    
    2,989Accrued claim settlement costs
    
    
    
    
    
    
    2,275Accrued interest and dividends
    
    
    2,774
    
    
    
    2,287Other accrued liabilities
    
    
    2,023
    
    
    
    1,803Total current liabilities
    
    
    16,977
    
    
    
    18,914Long-term obligations, less current portion:Credit facility payable to bank
    
    
    9,610
    
    
    
    8,810Subordinated convertible debt
    
    
    9,440
    
    
    
    9,366Other long-term debt
    
    
    14
    
    
    
    1619,064
    
    
    
    18,192Unearned interest
    
    
    134
    
    
    
    Total liabilities
    
    
    36,175
    
    
    
    37,106Commitments and contingencies
    
    
    
    
    
    
    Minority interest
    
    
    53
    
    
    
    50Cumulative convertible preferred stock, Series B,
$.05 par value, 15,000 shares authorized; 6,000
shares issued and outstanding at May 30, 2008 and
February 29, 2008
    
    
    6,000
    
    
    
    6,000Cumulative convertible participating preferred
stock, Series C, $.05 par value, 3,300 shares
authorized, issued and outstanding at May 30, 2008
and February 29, 2008
    
    
    3,300
    
    
    
    3,300STOCKHOLDERS DEFICIENCYCommon stock, $.05 par value, 20,000,000 shares
authorized; 9,035,355 shares issued and outstanding
at May 30, 2008 and February 29, 2008
    
    
    451
    
    
    
    451Additional paid-in capital
    
    
    15,936
    
    
    
    16,139Accumulated other comprehensive loss
    
    
    (44
    )
    
    
    (121
    )Accumulated deficit
    
    
    (26,712
    )
    
    
    (25,300
    )Total stockholders deficiency
    
    
    (10,369
    )
    
    
    (8,831
    )Total liabilities and stockholders deficiency
    
    $
    35,159
    
    
    $
    37,625
  4




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Environmental Tectonics Corporation
 
 Condensed Consolidated Statements of Cash Flows
 (unaudited)
 (in thousands)
 Thirteen Weeks EndedMay 30,
    
    
    May 25,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (1,491
    )
    
    $
    (5,725
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    556
    
    
    
    452Accretion of debt discount
    
    
    74
    
    
    
    126Increase in allowances for accounts receivable and inventories, net
    
    
    245
    
    
    
    289Income (loss) attributable to minority interest
    
    
    3
    
    
    
    (6
    )Stock compensation expense
    
    
    29
    
    
    
    29Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,951
    )
    
    
    (784
    )Costs and estimated earnings in excess of billings on
uncompleted long-term contracts
    
    
    1,521
    
    
    
    1,103Inventories
    
    
    1,119
    
    
    
    (259
    )Prepaid expenses and other assets
    
    
    (478
    )
    
    
    (82
    )Accounts payable
    
    
    260
    
    
    
    (78
    )Billings in excess of costs and estimated earnings on
uncompleted long-term contracts
    
    
    (1,026
    )
    
    
    (108
    )Customer deposits
    
    
    397
    
    
    
    99Accrued interest and dividends
    
    
    255
    
    
    
    325Accrued claim settlement costs
    
    
    (2,275
    )
    
    
    3,300Other accrued liabilities
    
    
    354
    
    
    
    (671
    )Net cash used in operating activities
    
    
    (3,408
    )
    
    
    (1,990
    )Cash flows from investing activities:Acquisition of equipment
    
    
    (435
    )
    
    
    (90
    )Capitalized software development costs
    
    
    (23
    )
    
    
    (25
    )Payments for construction in progress
    
    
    (63
    )
    
    
    (1,610
    )Net cash used in investing activities
    
    
    (521
    )
    
    
    (1,725
    )Cash flows from financing activities:Borrowings under line of credit
    
    
    800
    
    
    
    Proceeds from note payable
    
    
    
    
    
    
    2,000Payments of other debt obligations
    
    
    (2
    )
    
    
    Decrease (increase) in restricted cash
    
    
    2,069
    
    
    
    (1
    )Net cash provided by financing activities
    
    
    2,867
    
    
    
    1,999Effect of exchange rate changes on cash
    
    
    156
    
    
    
    (25
    )Net decrease in cash
    
    
    (906
    )
    
    
    (1,742
    )Cash at beginning of period
    
    
    1,871
    
    
    
    2,215Cash at end of period
    
    $
    965
    
    
    $
    473Supplemental schedule of cash flow information:Interest paid
    
    
    137
    
    
    
    Income taxes paid
    
    
    
    
    
    
    
 
  5




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Environmental Tectonics Corporation
 
 Notes to the Condensed Consolidated Financial Statements
 1. Subsequent Event
 Stock Exchange Listing
      2. Summary of Significant Accounting Policies
 Basis of Presentation
     6




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Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
 Significant Accounting Policies
  Fair Value Measurements
 Fair Value Measurements Effective Date of FASB Statement No. 157
 3. Inventories
  May 30,
    
    
    February 29,2008
    
    
    2008(unaudited)(in thousands)Raw materials
    
    $
    91
    
    
    $
    90Work in process
    
    
    4,442
    
    
    
    5,916Finished goods
    
    
    871
    
    
    
    767Total
    
    $
    5,404
    
    
    $
    6,773
  7




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Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 4. Accounts Receivable:
  May 30,
    
    
    February 29,2008
    
    
    2008(unaudited)(in thousands)U.S. government receivables
    
    $
    636
    
    
    $
    315U.S. commercial receivables
    
    
    2,642
    
    
    
    2,573International receivables
    
    
    3,650
    
    
    
    1,0896,928
    
    
    
    3,977Less: allowance for doubtful accounts
    
    
    (741
    )
    
    
    (746
    )$
    6,187
    
    
    $
    3,231
 5. Long-Term Obligations and Credit Arrangements:
      
  8




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Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
     (in thousands)May 30,
    
    February 29,2008
    
    2008(unaudited)Credit facility payable to bank
    
    $
    9,610
    
    
    $
    8,810Subordinated convertible debt, net of
unamortized discount of $560 and $634
    
    
    9,440
    
    
    
    9,366Other debt obligations
    
    
    23
    
    
    
    2519,073
    
    
    
    18,201Less current portion
    
    
    9
    
    
    
    9$
    19,064
    
    
    $
    18,192
 6. Income Taxes
 Accounting for Income Taxes
 9




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Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
 7. Liquidity Matters
  ,
 8. Commitments and Contingencies
 Lenfest Acquisition Proposal
  10




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Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
 9. Segment Information (unaudited):
  (amounts in thousands)TSG
    
    CSG
    
    TotalThirteen weeks ended May 30, 2008:Net sales
    
    $
    4,300
    
    
    $
    5,675
    
    
    $
    9,975Interest expense
    
    
    253
    
    
    
    183
    
    
    
    436Depreciation and amortization
    
    
    145
    
    
    
    411
    
    
    
    556Operating (loss) income
    
    
    (942
    )
    
    
    296
    
    
    
    (646
    )Income tax
    
    
    
    
    
    
    
    
    
    
    Goodwill and intangibles
    
    
    
    
    
    
    
    
    
    
    Identifiable assets
    
    
    8,395
    
    
    
    6,465
    
    
    
    14,860Expenditures for segment assets
    
    
    399
    
    
    
    59
    
    
    
    458Thirteen weeks ended May 25, 2007:Net sales
    
    $
    1,269
    
    
    $
    3,078
    
    
    $
    4,347Interest expense
    
    
    234
    
    
    
    120
    
    
    
    354Depreciation and amortization
    
    
    137
    
    
    
    315
    
    
    
    452Operating loss
    
    
    (963
    )
    
    
    (4,146
    )
    
    
    (5,109
    )Income tax
    
    
    
    
    
    
    
    
    
    
    Goodwill and intangibles
    
    
    455
    
    
    
    
    
    
    
    455Identifiable assets
    
    
    7,428
    
    
    
    3,790
    
    
    
    11,218Expenditures for segment assets
    
    
    60
    
    
    
    55
    
    
    
    115
 May 30,
    
    
    May 25,2008
    
    
    2007Reconciliation to consolidated
amountsSegment assets
    
    $
    14,860
    
    
    $
    11,218Corporate assets
    
    
    20,299
    
    
    
    15,381Total assets
    
    $
    35,159
    
    
    $
    26,599Segment operating loss
    
    $
    (646
    )
    
    $
    (5,109
    )Interest expense
    
    
    436
    
    
    
    354Income tax expense
    
    
    
    
    
    
    Total loss for segments
    
    
    (1,082
    )
    
    
    (5,463
    )Corporate home office expenses
    
    
    467
    
    
    
    238Other (income) expenses
    
    
    (61
    )
    
    
    30Minority interest
    
    
    3
    
    
    
    (6
    )Net loss
    
    $
    (1,491
    )
    
    $
    (5,725
    )
  11




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Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
  10. Legal Proceedings
 Walt Disney World Co.
   Mends International, Ltd.
  Settlement with U.S. Navy
    12




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Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
      13




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 FORWARD-LOOKING STATEMENTS
         
    
    high bid and proposal activity which utilized engineering resources which
otherwise would have been applied to existing contract requirements, resulting in
delayed revenue recognition on long-term contracts;
 14




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
    
    the continuing cost of development and marketing efforts for our Authentic
Tactical Fighting Systems (ATFS);
    
    continued spending to modify our main facility in Southampton, Pa., and to build
equipment for the National Aerospace Training and Research (NASTAR) Center;
    
    
    continued development of software for our Advanced Disaster Management Scenario
(ADMS) product line;
  
    
    continuing public company legal and other costs;
  
    
    relatively high cost of capital (preferred stock) and debt-related amortization
and interest expense.
  
    
    cash limitations;
  15




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16




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Results of Operations
 Thirteen weeks ended May 30, 2008 compared to thirteen weeks ended May 25, 2007
  Summary Table of Results13 weeks ended
    
    
    13 weeks ended
    
    
    Variance
    
    
    VarianceMay 30, 2008
    
    
    May 25, 2007
    
    
    $
    
    
    %(amounts in thousands)
    
    
    ( ) =UnfavorableSales:Domestic
    
    $
    5,322
    
    
    $
    2,441
    
    
    $
    2,881
    
    
    
    118.0
    %US Government
    
    
    991
    
    
    
    569
    
    
    
    422
    
    
    
    74.2International
    
    
    3,662
    
    
    
    1,337
    
    
    
    2,325
    
    
    
    173.9Total Sales
    
    
    9,975
    
    
    
    4,347
    
    
    
    5,628
    
    
    
    129.5Gross Profit
    
    
    2,495
    
    
    
    895
    
    
    
    1,600
    
    
    
    178.8Selling, general and administrative
    
    
    3,313
    
    
    
    2,799
    
    
    
    (514
    )
    
    
    (18.4
    )Claim settlement costs
    
    
    
    
    
    
    3,389
    
    
    
    3,389
    
    
    
    100.0Research & development
    
    
    295
    
    
    
    54
    
    
    
    (241
    )
    
    
    (446.3
    )Operating loss
    
    
    (1,113
    )
    
    
    (5,347
    )
    
    
    4,234
    
    
    
    79.2Interest expense, net
    
    
    436
    
    
    
    354
    
    
    
    (82
    )
    
    
    (23.2
    )Other expense, net
    
    
    (61
    )
    
    
    30
    
    
    
    91
    
    
    
    303.3Income taxes
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    n/aMinority interest
    
    
    3
    
    
    
    (6
    )
    
    
    (9
    )
    
    
    (150.0
    )Net loss
    
    $
    (1,491
    )
    
    $
    (5,725
    )
    
    $
    4,234
    
    
    
    74.0
    %Net loss per common share
    
    $
    (0.19
    )
    
    $
    (0.64
    )
    
    $
    0.45
    
    
    
    70.3
    %
 Net Loss
  Sales
  Domestic Sales
  17




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International Sales
  Gross Profit
  Selling and Administrative Expenses
  Claim Settlement Costs
  Research and Development Expenses
  Interest Expense
  Other Income/Expense, Net
  Liquidity and Capital Resources
  18




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Backlog
 ,
  19




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Item 4. Controls and Procedures
    Internal Control  Integrated Framework Internal Control  Integrated Framework,
   
    
    The Company did not file its Quarterly Reports on Form 10-Q for the quarters
ended May 25, 2007, August 24, 2007 and November 23, 2007 on a timely basis.
    
    Management had a lack of expertise in accounting for complex transactions.
    
    The Company lacked an independent review of the accounting records.
    
    Management exhibited a lack of training in compliance with government contracts.
        20




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21




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Walt Disney World Co.
   Mends International, Ltd.
    22




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 Number
    
    Item3.1
    
    Registrants Articles of Incorporation, as amended, were filed as
Exhibit 3.1 to Registrants Form 10-K for the year ended February
28, 1997 and are incorporated herein by reference.3.2
    
    Registrants amended and restated By-Laws were filed as Exhibit 3.2
to Registrants Form 8-K dated May 25, 2005, and are incorporated
herein by reference.31.1
    
    Certification dated July 14, 2008 pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 made by William F. Mitchell, Chief Executive Officer.31.2
    
    Certification dated July 14, 2008 pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 made by Duane D. Deaner, Chief Financial Officer.32
    
    Certification dated July 14, 2008 pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 made by William F. Mitchell, Chief Executive Officer, and
Duane D. Deaner, Chief Financial Officer.
 23




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Signatures
  ENVIRONMENTAL TECTONICS CORPORATION
 Date:   July 14, 2008
    By:
    /s/ William F. MitchellWilliam F. MitchellPresident and Chief

Executive Officer

(Principal Executive Officer) Date:   July 14, 2008
    By:
    /s/ Duane DeanerDuane Deaner,Chief Financial Officer

(Principal Financial and Accounting Officer)