##### Table of Contents



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 29, 2009
 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.)
 
   þ o
  o o
  Large Accelerated Filer o
Accelerated Filer o
Non-accelerated Filer o(Do not check if a smaller reporting company)
Smaller reporting company þ  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 29, 2009 and May 30, 2008
    
    
    3Condensed Consolidated Balance Sheets as of May 29, 2009 and February 27, 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the 13 week periods ended May 29, 2009 and May 30, 2008
    
    
    5Notes to the Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 4. Controls and Procedures
    
    
    25PART II  OTHER INFORMATION
    
    
    25Item 1. Legal Proceedings
    
    
    25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3. Defaults Upon Senior Securities
    
    
    26Item 4. Submission of Matters to Vote of Security Holders
    
    
    26Item 5. Other Information
    
    
    26Item 6. Exhibits
    
    
    26Signatures
    
    
    27EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
   2




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##### Table of Contents



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 29, 2009
    
    
    May 30, 2008Net sales
    
    $
    9,581
    
    
    $
    9,975Cost of goods sold
    
    
    5,154
    
    
    
    7,480Gross profit
    
    
    4,427
    
    
    
    2,495Operating expenses:Selling and administrative
    
    
    2,856
    
    
    
    3,313Research and development
    
    
    228
    
    
    
    2953,084
    
    
    
    3,608Operating income (loss)
    
    
    1,343
    
    
    
    (1,113
    )Other expenses:Interest expense
    
    
    516
    
    
    
    436Other, net
    
    
    55
    
    
    
    (61
    )571
    
    
    
    375Income (loss) before income taxes
    
    
    772
    
    
    
    (1,488
    )Provision for income taxes
    
    
    
    
    
    
    Income (loss) before minority interest
    
    
    772
    
    
    
    (1,488
    )Income attributable to minority interest
    
    
    2
    
    
    
    3Net income (loss)
    
    
    770
    
    
    
    (1,491
    )Preferred stock dividend
    
    
    (235
    )
    
    
    (232
    )Income (loss) applicable to common
shareholders
    
    $
    535
    
    
    $
    (1,723
    )Per share information:Basic and diluted income (loss) per share
applicable to common shareholders
    
    $
    0.06
    
    
    $
    (0.19
    )Basic and diluted weighted average number
of common shares
    
    
    9,054,000
    
    
    
    9,035,000
  3




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##### Table of Contents



Environmental Tectonics Corporation
Condensed Consolidated Balance Sheets
(in thousands, except share information)
 May 29,
    
    
    February 27,2009
    
    
    2009ASSETSCash and cash equivalents
    
    $
    287
    
    
    $
    520Restricted cash
    
    
    4,461
    
    
    
    4,454Accounts receivable, net of allowance for bad debt of $430 and $364
    
    
    5,825
    
    
    
    5,100Costs and estimated earnings in excess of billings on uncompleted long-term contracts
    
    
    2,779
    
    
    
    2,460Inventories, net
    
    
    4,617
    
    
    
    4,435Prepaid expenses and other current assets
    
    
    480
    
    
    
    479Total current assets
    
    
    18,449
    
    
    
    17,448Property, plant and equipment, at cost, net
    
    
    16,058
    
    
    
    15,786Construction in progress
    
    
    
    
    
    
    275Software development costs, net of accumulated amortization of $13,380 and $13,105
    
    
    842
    
    
    
    1,013Other assets
    
    
    189
    
    
    
    406Total assets
    
    $
    35,538
    
    
    $
    34,928LIABILITIESCurrent portion of long-term debt
    
    $
    9
    
    
    $
    9Accounts payable  trade
    
    
    2,425
    
    
    
    2,105Billings in excess of costs and estimated earnings on uncompleted long-term contracts
    
    
    2,818
    
    
    
    4,155Customer deposits
    
    
    1,431
    
    
    
    2,397Accrued interest and dividends
    
    
    4,761
    
    
    
    4,197Other accrued liabilities
    
    
    2,447
    
    
    
    2,251Total current liabilities
    
    
    13,891
    
    
    
    15,114Long-term obligations, less current portion:Credit facility payable to bank
    
    
    11,910
    
    
    
    10,510Promissory note payable
    
    
    1,900
    
    
    
    1,891Subordinated convertible debt
    
    
    9,748
    
    
    
    9,664Other long-term debt
    
    
    5
    
    
    
    723,563
    
    
    
    22,072Unearned interest
    
    
    32
    
    
    
    152Total liabilities
    
    
    37,486
    
    
    
    37,338Commitments and contingencies
    
    
    
    
    
    
    Minority interest
    
    
    44
    
    
    
    42Cumulative convertible participating preferred stock, Series B, $.05 par value,
15,000 shares authorized; 6,000 shares issued and outstanding
    
    
    6,000
    
    
    
    6,000Cumulative convertible participating preferred stock, Series C, $.05 par value,
3,300 shares authorized, issued and outstanding
    
    
    3,300
    
    
    
    3,300STOCKHOLDERS DEFICIENCYCumulative convertible participating preferred stock, Series D, $1,000 par value,
11,000 shares authorized; 55 shares outstanding
    
    
    55
    
    
    
    Cumulative convertible participating preferred stock, Series E
    
    
    
    
    
    
    Common stock, $.05 par value, 20,000,000 shares authorized; 9,069,351 and 9,049,351
shares issued and outstanding
    
    
    453
    
    
    
    452Additional paid-in capital
    
    
    15,164
    
    
    
    15,399Accumulated other comprehensive loss
    
    
    (688
    )
    
    
    (557
    )Accumulated deficit
    
    
    (26,276
    )
    
    
    (27,046
    )Total stockholders deficiency
    
    
    (11,292
    )
    
    
    (11,752
    )Total liabilities and stockholders deficiency
    
    $
    35,538
    
    
    $
    34,928
  4




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Environmental Tectonics Corporation
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 Thirteen Weeks EndedMay 29, 2009
    
    
    May 30, 2008Cash flows from operating activities:Net income (loss)
    
    $
    770
    
    
    $
    (1,491
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    567
    
    
    
    556Accretion of debt discount
    
    
    95
    
    
    
    74Increase in allowances for accounts receivable and inventories, net
    
    
    316
    
    
    
    245Income attributable to minority interest
    
    
    2
    
    
    
    3Stock compensation expense
    
    
    
    
    
    
    29Changes in operating assets and liabilities:Accounts receivable
    
    
    (791
    )
    
    
    (2,951
    )Costs and estimated earnings in excess of billings on
uncompleted long-term contracts
    
    
    (319
    )
    
    
    1,521Inventories
    
    
    (432
    )
    
    
    1,119Prepaid expenses and other assets
    
    
    214
    
    
    
    (478
    )Accounts payable
    
    
    320
    
    
    
    260Billings in excess of costs and estimated earnings on
uncompleted long-term contracts
    
    
    (1,337
    )
    
    
    (1,026
    )Customer deposits
    
    
    (966
    )
    
    
    397Accrued interest and dividends
    
    
    329
    
    
    
    255Accrued claim settlement costs
    
    
    
    
    
    
    (2,275
    )Other accrued liabilities
    
    
    76
    
    
    
    354Net cash used in operating activities
    
    
    (1,156
    )
    
    
    (3,408
    )Cash flows from investing activities:Acquisition of equipment
    
    
    (289
    )
    
    
    (435
    )Capitalized software development costs
    
    
    (104
    )
    
    
    (23
    )Payments for construction in progress
    
    
    
    
    
    
    (63
    )Net cash used in investing activities
    
    
    (393
    )
    
    
    (521
    )Cash flows from financing activities:Borrowings under line of credit
    
    
    1,400
    
    
    
    800Issuance of preferred stock  Series D
    
    
    55
    
    
    
    Issuance of common stock
    
    
    1
    
    
    
    Payments of other debt obligations
    
    
    (2
    )
    
    
    (2
    )(Increase) decrease in restricted cash
    
    
    (7
    )
    
    
    2,069Net cash provided by financing activities
    
    
    1,447
    
    
    
    2,867Effect of exchange rate changes on cash
    
    
    (131
    )
    
    
    156Net decrease in cash
    
    
    (233
    )
    
    
    (906
    )Cash at beginning of period
    
    
    520
    
    
    
    1,871Cash at end of period
    
    $
    287
    
    
    $
    965Supplemental schedule of cash flow information:Interest paid
    
    $
    103
    
    
    $
    137Income taxes paid
    
    
    
    
    
    
    Supplemental information on non-cash operating and investing
activities:Accrued dividends on preferred stock
    
    $
    235
    
    
    $
    232
  5




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Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements
 1. Subsequent Event
   Lenfest Credit Facility
    Exchange of Existing Instruments for Series E Preferred Stock
   6




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Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
  Increased PNC Bank Credit Facility and Issuance of New Guarantee
    Unaudited Pro Forma Balance Sheet
  7




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Environmental Tectonics Corporation
Pro forma Balance Sheet as of May 29, 2009
 (amounts in thousands)Pro formaMay 29, 2009
    
    
    Pro forma adjustments (unaudited)
    
    
    May 29, 2009(unaudited)
    
    
    Increase (decrease)
    
    
    (unaudited)ASSETSCash and cash equivalents
    
    $
    287
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    287Restricted cash
    
    
    4,461
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,461Accounts receivable, net
    
    
    5,825
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,825Costs and estimated earnings in excess of billings on
uncompleted long-term contracts
    
    
    2,779
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,779Inventories, net
    
    
    4,617
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,617Prepaid expenses and other current assets
    
    
    480
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    480Total current assets
    
    
    18,449
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,449Property, plant and equipment, at cost, net
    
    
    16,058
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,058Construction in progress
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Software development costs, net
    
    
    842
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    842Other assets
    
    
    189
    
    
    
    
    
    
    (e)
    200
    
    
    
    
    
    
    
    389Total assets
    
    $
    35,538
    
    
    $
    
    
    
    $
    200
    
    
    $
    
    
    
    $
    35,738LIABILITIESCurrent portion of long-term debt
    
    $
    9
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    9Accounts payable  trade
    
    
    2,425
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,425Billings in excess of costs and estimated earnings on
uncompleted long-term contracts
    
    
    2,818
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,818Customer deposits
    
    
    1,431
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,431Accrued interest and dividends
    
    
    4,761
    
    
    (b)
    (4,441
    )
    
    
    
    
    
    
    
    
    
    
    320Other accrued liabilities
    
    
    2,447
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,447Total current liabilities
    
    
    13,891
    
    
    
    (4,441
    )
    
    
    
    
    
    
    
    
    
    
    9,450Long-term obligations, less current portion:Credit facility payable to bank
    
    
    11,910
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,910Promissory note payable
    
    
    1,900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,900Subordinated convertible debt
    
    
    9,748
    
    
    (a)
    252
    
    
    (c)
    (10,000
    )
    
    
    
    
    
    
    Other long-term debt
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    523,563
    
    
    
    252
    
    
    
    (10,000
    )
    
    
    
    
    
    
    13,815Unearned interest
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32Total liabilities
    
    
    37,486
    
    
    
    (4,189
    )
    
    
    (10,000
    )
    
    
    
    
    
    
    23,297Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Minority interest
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44Cumulative convertible participating preferred stock,
Series B
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    (d)
    (6,000
    )
    
    
    Cumulative convertible participating preferred stock,
Series C
    
    
    3,300
    
    
    
    
    
    
    
    
    
    
    (d)
    (3,300
    )
    
    
    STOCKHOLDERS (DEFICIENCY) EQUITYCumulative
convertible participating preferred stock, Series D
    
    
    55
    
    
    
    
    
    
    (e)
    100
    
    
    
    
    
    
    
    155Cumulative convertible participating preferred stock, Series E
    
    
    
    
    
    (b)
    4,441
    
    
    (c)
    10,000
    
    
    (d)
    9,300
    
    
    
    23,741Common stock
    
    
    453
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    453Additional paid-in capital
    
    
    15,164
    
    
    
    
    
    
    (e)
    100
    
    
    
    
    
    
    
    15,264Accumulated other comprehensive loss
    
    
    (688
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (688
    )Accumulated deficit
    
    
    (26,276
    )
    
    (a)
    (252
    )
    
    
    
    
    
    
    
    
    
    
    (26,528
    )Total stockholders (deficiency) equity
    
    
    (11,292
    )
    
    
    4,189
    
    
    
    10,200
    
    
    
    9,300
    
    
    
    12,397Total liabilities and stockholders (deficiency) equity
    
    $
    35,538
    
    
    $
    
    
    
    $
    200
    
    
    $
    
    
    
    $
    35,738
 
 Pro forma adjustments:(a)
    
    To expense as extinguishment of debt the unamortized debt discount on the Subordinated convertible debt(b)
    
    Exchange of $2,361 of accrued interest due on Subordinated note payable plus $2,080 of accrued dividends due on Series B and Series C preferred stock for $4,441 of Series E
Preferred Stock(c)
    
    Exchange of Subordinated note payable for $10,000 of Series E Preferred Stock(d)
    
    Exchange of $6,000 of Series B and $3,300 of Series C preferred stock for $9,300 of Series E preferred stock(e)
    
    Issuance of $100 of Series D preferred stock as loan origination fee for additional Lenfest $10,000 collateral on PNC line of credit plus 10% warrant coverage on the $5 million
increase in the line of credit 8




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Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
 2. Summary of Significant Accounting Policies
 Basis of Presentation
    Earnings Per Common Share
    
    
    $3,000,000 at $4.95 per share, equating to 606,061 shares of common stock;
    
    $3,000,000 at $6.68 per share, equating to 449,102 shares of common stock;
    
    $3,300,000 at $3.03 per share, equating to 1,089109 shares of common stock;
    
    $55,000 at $0.94 per share, equating to 55,811 shares of common stock (issued in
April 2009)
  9




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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
 Recent Accounting Pronouncements
 Business Combinations
 Determining Whether
an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock The Meaning of Indexed to a Companys Own Stock. Whether Options (Including
Embedded Conversion Options) Are Indexed to both an Entitys Own Stock and Currency Exchange
Rates
 10




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Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 Equity Method Investment Accounting
Considerations.
 Accounting for Defensive Intangible Assets.
 3. Inventories
  May 29,
    
    
    February 27,2009
    
    
    2009(unaudited)(in thousands)Raw materials
    
    $
    98
    
    
    $
    92Work in process
    
    
    3,740
    
    
    
    3,564Finished goods
    
    
    779
    
    
    
    779Total
    
    $
    4,617
    
    
    $
    4,435
  4. Accounts Receivable:
  May 29,
    
    
    February 27,2009
    
    
    2009(unaudited)(in thousands)U.S. government receivables
    
    $
    2,451
    
    
    $
    551U.S. commercial receivables
    
    
    445
    
    
    
    1,002International receivables
    
    
    3,359
    
    
    
    3,9116,255
    
    
    
    5,464Less: allowance for doubtful accounts
    
    
    (430
    )
    
    
    (364
    )$
    5,825
    
    
    $
    5,100
 5. Long-Term Obligations and Credit Arrangements:
    11




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Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
         12




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




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Environmental Tectonics Corporation
Notes to the Consolidated Financial Statements, continued
   Determining Whether an Instrument (or Embedded Feature) is indexed to an
entitys Own Stock
         14




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Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
   (in thousands)Face Value
    
    $
    10,000Less value of conversion feature
    
    
    (1,400
    )Less value of warrants
    
    
    (1,209
    )7,391Accretion 2010
    
    
    84Accretion 2009
    
    
    298Accretion 2008
    
    
    536Accretion prior years
    
    
    1,439Carrying value at May 29, 2009
    
    $
    9,748
  (in thousands)May 29,
    
    February 27,2009
    
    2009Note payable to bank
    
    $
    11,910
    
    
    $
    10,510Automobile loan
    
    
    14
    
    
    
    16Promissory note, net of unamortized
discount of $100 and $109 at May 29, 2009
and February 27, 2009, respectively
    
    
    1,900
    
    
    
    1,891Subordinated convertible debt, net of
unamortized discount of $252 and $336 at
May 29, 2009 and February 27, 2009,
respectively
    
    
    9,748
    
    
    
    9,664$
    23,572
    
    
    $
    22,081Accrued Interest and Dividends to Lenfest
  (amounts in thousands)May 29,
    
    February 27,2009
    
    2009Accrued dividends on Series B Preferred Stock
    
    $
    1,497
    
    
    $
    1,347Accrued dividends on Series C Preferred Stock
    
    
    582
    
    
    
    500Accrued dividends on Series D Preferred Stock
    
    
    1
    
    
    
    Total accrued dividends
    
    
    2,080
    
    
    
    1,847Accrued interest on Subordinated Debt
    
    
    2,635
    
    
    
    2,323Other accrued interest
    
    
    46
    
    
    
    27Total accrued interest
    
    
    2,681
    
    
    
    2,350Total accrued interest and dividends
    
    $
    4,761
    
    
    $
    4,197
 15




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Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 6. Fair Value of Financial Instrument
  
    
    Level 1: Observable inputs such as quoted prices in active markets for identical assets
of liabilities;
    
    Level 2: Inputs other than quoted prices that are observable for the asset or liability,
either directly or indirectly; these include quoted prices for similar assets or
liabilities in active markets and quoted prices or identical assets or liabilities in
markets that are not active;
    
    Level 3: Unobservable inputs that are supported by little or no market activity, which
require the reporting entitys judgment or estimation.
  Fair Value Measurement atMay 29, 2009 using(amounts in thousands)Liabilities
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalCredit facility payable to bank
    
    $
    
    
    
    $
    
    
    
    $
    14,521
    
    
    $
    14,521Interest rate swap agreements
    
    
    
    
    
    
    245
    
    
    
    
    
    
    
    245Subordinated convertible debt
    
    
    
    
    
    
    
    
    
    
    9,203
    
    
    
    9,203Promissory note payable
    
    
    
    
    
    
    
    
    
    
    1,521
    
    
    
    1,521Total
    
    $
    
    
    
    $
    245
    
    
    $
    25,245
    
    
    $
    25,490
   7. Income Taxes
 Accounting for Income Taxes
  16




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
  8. Liquidity Matters
  9. Commitments and Contingencies
 Mends International, Ltd.
  Administrative Agreement with U.S. Navy
  10. Stock Exchange Listing
 Delisting from NYSE AMEX LLC
   17




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 11. Segment Information (unaudited):
  (amounts in thousands)TSG
    
    CSG
    
    TotalThirteen weeks ended May 29, 2009:Net sales
    
    $
    6,915
    
    
    $
    2,666
    
    
    $
    9,581Interest expense
    
    
    299
    
    
    
    217
    
    
    
    516Depreciation and amortization
    
    
    150
    
    
    
    417
    
    
    
    567Operating income (loss)
    
    
    1,894
    
    
    
    (170
    )
    
    
    1,724Identifiable assets
    
    
    7,629
    
    
    
    5,556
    
    
    
    13,185Expenditures for segment assets
    
    
    241
    
    
    
    155
    
    
    
    396Thirteen 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
    )Identifiable assets
    
    
    8,395
    
    
    
    6,465
    
    
    
    14,860Expenditures for segment assets
    
    
    399
    
    
    
    59
    
    
    
    458
 May 29,
    
    
    May 30,2009
    
    
    2008Reconciliation to consolidated amountsSegment assets
    
    $
    13,185
    
    
    $
    14,860Corporate assets
    
    
    22,353
    
    
    
    20,299Total assets
    
    $
    35,538
    
    
    $
    35,159Segment operating income (loss)
    
    $
    1,724
    
    
    $
    (646
    )Interest expense
    
    
    516
    
    
    
    436Income tax expense
    
    
    
    
    
    
    Total income (loss) for segments
    
    
    1,208
    
    
    
    (1,082
    )Corporate home office expenses
    
    
    381
    
    
    
    467Other expenses (income)
    
    
    55
    
    
    
    (61
    )Minority interest
    
    
    2
    
    
    
    3Net income (loss)
    
    $
    770
    
    
    $
    (1,491
    )
   18




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##### Table of Contents



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;
    
    the continuing cost of development and marketing efforts for our Authentic
Tactical Fighting Systems (ATFS);
 19




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##### Table of Contents




    
    continued technology upgrades 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;
  
    
    relatively high cost of capital (preferred stock) and debt-related amortization
and interest expense.
  
    
    cash limitations;
   20




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##### Table of Contents



21




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##### Table of Contents



Results of Operations
 Thirteen weeks ended May 29, 2009 compared to thirteen weeks ended May 30, 2008
  Summary Table of Results
 13 weeks ended
    
    13 weeks ended
    
    Variance
    
    VarianceMay 29, 2009
    
    May 30, 2008
    
    $
    
    %(amounts in thousands)
    
    ( ) =UnfavorableSales:Domestic
    
    $
    1,959
    
    
    $
    5,322
    
    
    $
    (3,363
    )
    
    
    (63.2
    )%US Government
    
    
    1,836
    
    
    
    991
    
    
    
    845
    
    
    
    85.3International
    
    
    5,786
    
    
    
    3,662
    
    
    
    2,124
    
    
    
    58.0Total Sales
    
    
    9,581
    
    
    
    9,975
    
    
    
    (394
    )
    
    
    (3.9
    )Gross Profit
    
    
    4,427
    
    
    
    2,495
    
    
    
    1,932
    
    
    
    77.4Selling, general and administrative
    
    
    2,856
    
    
    
    3,313
    
    
    
    457
    
    
    
    13.8Research & development
    
    
    228
    
    
    
    295
    
    
    
    67
    
    
    
    22.7Operating income (loss)
    
    
    1,343
    
    
    
    (1,113
    )
    
    
    2,456
    
    
    
    220.7Interest expense, net
    
    
    516
    
    
    
    436
    
    
    
    (80
    )
    
    
    (18.3
    )Other expense (income), net
    
    
    55
    
    
    
    (61
    )
    
    
    (116
    )
    
    
    (190.2
    )Income taxes
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    n/aMinority interest
    
    
    2
    
    
    
    3
    
    
    
    1
    
    
    
    33.3Net income (loss)
    
    $
    770
    
    
    $
    (1,491
    )
    
    $
    2,261
    
    
    
    151.6
    %Net income (loss) per common share
    
    $
    0.06
    
    
    $
    (0.19
    )
    
    $
    0.25
    
    
    
    131.6
    %
 Net Income
  Sales
  Domestic Sales
   22




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##### Table of Contents



International Sales
   Gross Profit
  Selling and Administrative Expenses
  Research and Development Expenses
  Interest Expense
  Other Income/Expense, Net
  Income Taxes
  Liquidity and Capital Resources
  23




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##### Table of Contents



1.
    
    Approximately $23.4 million of the Companys existing subordinated debt and
preferred stock along with the associated accrued interest and dividends were exchanged
for a new Series E Preferred Stock in Stockholders Equity.2.
    
    The Companys current $15 million Credit Agreement with PNC Bank was increased
by $5 million, which funds can be used for operations and issuing letters of credit.
Lenfest has a personal guarantee for the ETCs obligation to PNC Bank and has pledged
$10 million in marketable securities to collateralize this guarantee.3.
    
    Lenfest has agreed to make available up to $7.5 million to support the
obtaining of and subsequent performance under three significant U.S. Government
contracts, one of which has already been awarded to the Company in January 2009.
  Backlog
 ,
  24




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##### Table of Contents



Item 4. Controls and Procedures
      
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Mends International, Ltd.
  Administrative Agreement with U.S. Navy
    25




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##### Table of Contents



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 13, 2009 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 13, 2009 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 13, 2009 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.
 26




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##### Table of Contents



Signatures
  ENVIRONMENTAL TECTONICS CORPORATION
(Registrant)Date:   July 13, 2009
    By:
    /s/ William F. MitchellWilliam F. MitchellPresident and Chief
Executive Officer
(Principal Executive Officer)Date:   July 13, 2009
    By:
    /s/ Duane DeanerDuane Deaner,Chief Financial Officer
(Principal Financial and Accounting Officer) 27