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 August 27, 2010
 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
 þ 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 Income Statements (unaudited) for the thirteen and twenty-six week periods ended August 27, 2010 and August 28, 2009
    
    
    3Condensed Consolidated Balance Sheets (unaudited) as of August 27, 2010 and February 26, 2010
    
    
    4Condensed Consolidated Statements of Cash Flows (unaudited) for the twenty-six week periods ended
August 27, 2010 and August 28, 2009
    
    
    5Notes to the Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    18Item 4T. Controls and Procedures
    
    
    29PART II  OTHER INFORMATION
    
    
    29Item 1. Legal Proceedings
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3. Defaults Upon Senior Securities
    
    
    30Item 4. Other Information
    
    
    30Item 5. Exhibits
    
    
    30Signatures
    
    
    31
  2




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##### 



PART I  FINANCIAL INFORMATION
 Item 1. Financial Statements (unaudited)
 Environmental Tectonics Corporation
Condensed Consolidated Income Statements
 (unaudited)
(in thousands, except share and per share information)
 Thirteen week
    
    
    Twenty-six weekPeriods ended
    
    
    periods endedAugust 27,
    
    
    August 28,
    
    
    August 27,
    
    
    August 28,2010
    
    
    2009
    
    
    2010
    
    
    2009Net sales
    
    $
    13,244
    
    
    $
    9,860
    
    
    $
    25,365
    
    
    $
    19,441Cost of goods sold
    
    
    8,450
    
    
    
    4,904
    
    
    
    15,441
    
    
    
    10,058Gross profit
    
    
    4,794
    
    
    
    4,956
    
    
    
    9,924
    
    
    
    9,383Operating expenses:Selling and marketing
    
    
    1,020
    
    
    
    1,270
    
    
    
    2,122
    
    
    
    2,524General and administrative
    
    
    1,623
    
    
    
    1,568
    
    
    
    3,086
    
    
    
    3,170Research and development
    
    
    240
    
    
    
    227
    
    
    
    564
    
    
    
    4552,883
    
    
    
    3,065
    
    
    
    5,772
    
    
    
    6,149Operating income
    
    
    1,911
    
    
    
    1,891
    
    
    
    4,152
    
    
    
    3,234Other expenses:Interest expense
    
    
    189
    
    
    
    350
    
    
    
    417
    
    
    
    866Loss on extinguishment of debt
    
    
    
    
    
    
    224
    
    
    
    
    
    
    
    224Other, net
    
    
    56
    
    
    
    66
    
    
    
    128
    
    
    
    121245
    
    
    
    640
    
    
    
    545
    
    
    
    1,211Income before income taxes
    
    
    1,666
    
    
    
    1,251
    
    
    
    3,607
    
    
    
    2,023Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income before noncontrolling interest
    
    
    1,666
    
    
    
    1,251
    
    
    
    3,607
    
    
    
    2,023Income attributable to noncontrolling interest
    
    
    
    
    
    
    2
    
    
    
    5
    
    
    
    4Net income
    
    
    1,666
    
    
    
    1,249
    
    
    
    3,602
    
    
    
    2,019Preferred stock dividend
    
    
    (568
    )
    
    
    (460
    )
    
    
    (1,145
    )
    
    
    (695
    )Income applicable to common shareholders
    
    $
    1,098
    
    
    $
    789
    
    
    $
    2,457
    
    
    $
    1,324Per share information:Earnings per common share:Basic
    
    $
    0.12
    
    
    $
    0.09
    
    
    $
    0.27
    
    
    $
    0.15Diluted
    
    $
    0.08
    
    
    $
    0.06
    
    
    $
    0.17
    
    
    $
    0.09Weighted average common shares:Basic
    
    
    9,090,000
    
    
    
    9,069,000
    
    
    
    9,088,000
    
    
    
    9,063,000Diluted
    
    
    20,719,000
    
    
    
    21,122,000
    
    
    
    20,718,000
    
    
    
    21,266,000
  3




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##### 



Environmental Tectonics Corporation
Condensed Consolidated Balance Sheets
 (in thousands, except share information)
 August 27,
    
    
    February 26,2010
    
    
    2010(unaudited)ASSETSCash and cash equivalents
    
    $
    854
    
    
    $
    2,408Restricted cash
    
    
    5,477
    
    
    
    2,751Accounts receivable, net
    
    
    2,918
    
    
    
    17,356Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    8,108
    
    
    
    3,576Inventories, net
    
    
    3,667
    
    
    
    5,114Deferred tax assets, current
    
    
    5,699
    
    
    
    4,983Prepaid expenses and other current assets
    
    
    2,592
    
    
    
    545Total current assets
    
    
    29,315
    
    
    
    36,733Property, plant and equipment, at cost, net
    
    
    13,698
    
    
    
    13,643Construction in progress
    
    
    352
    
    
    
    316Software development costs, net
    
    
    831
    
    
    
    691Other assets
    
    
    204
    
    
    
    346Total assets
    
    $
    44,400
    
    
    $
    51,729LIABILITIESCurrent portion of long-term debt
    
    $
    122
    
    
    $
    285Accounts payable  trade
    
    
    1,554
    
    
    
    1,783Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    6,091
    
    
    
    13,944Customer deposits
    
    
    1,687
    
    
    
    1,799Accrued interest and dividends
    
    
    868
    
    
    
    782Other accrued liabilities
    
    
    3,002
    
    
    
    2,814Total current liabilities
    
    
    13,324
    
    
    
    21,407Long-term obligations, less current portion:Credit facility payable to bank
    
    
    8,653
    
    
    
    9,808Other long-term debt
    
    
    
    
    
    
    128,653
    
    
    
    9,820Deferred tax liabilities
    
    
    3,598
    
    
    
    3,066Unearned interest
    
    
    15
    
    
    
    22Total liabilities
    
    
    25,590
    
    
    
    34,315Commitments and contingencies
    
    
    
    
    
    
    STOCKHOLDERS EQUITYCumulative convertible participating preferred stock, Series D, $.05 par
value, 11,000 shares authorized; 155 shares outstanding
    
    
    155
    
    
    
    155Cumulative convertible participating preferred stock, Series E, $.05 par
value, 25,000 shares authorized; 22,241 and 23,741 shares outstanding at
August 27, 2010 and February 26, 2010
    
    
    22,241
    
    
    
    23,741Common stock, $.05 par value, 50,000,000 shares authorized; 9,090,635
and 9,083,573 shares issued and outstanding at August 27, 2010 and February
26, 2010
    
    
    454
    
    
    
    454Additional paid-in capital
    
    
    12,974
    
    
    
    14,050Accumulated other comprehensive loss
    
    
    (66
    )
    
    
    (431
    )Accumulated deficit
    
    
    (16,991
    )
    
    
    (20,593
    )Total stockholders equity before noncontrolling interest
    
    
    18,767
    
    
    
    17,376Noncontrolling interest
    
    
    43
    
    
    
    38Total stockholders equity
    
    
    18,810
    
    
    
    17,414Total liabilities and stockholders equity
    
    $
    44,400
    
    
    $
    51,729
  4




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##### 



Environmental Tectonics Corporation
Condensed Consolidated Statements of Cash Flows
 (unaudited)
(in thousands)
 Twenty-six week periodsendedAugust 27,
    
    
    August 28,2010
    
    
    2009Cash flows from operating activities:Net income
    
    $
    3,602
    
    
    $
    2,019Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    727
    
    
    
    982Decrease in valuation allowance for deferred tax assets
    
    
    (867
    )
    
    
    Accretion of debt discount
    
    
    55
    
    
    
    132Increase in allowances for accounts receivable and inventories, net
    
    
    104
    
    
    
    444Income attributable to noncontrolling interest
    
    
    5
    
    
    
    4Stock compensation expense
    
    
    49
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    14,434
    
    
    
    1,023Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    (4,532
    )
    
    
    (2,072
    )Inventories
    
    
    1,347
    
    
    
    (359
    )Prepaid expenses and other assets
    
    
    (1,960
    )
    
    
    247Deferred tax assets, net
    
    
    683
    
    
    
    Accounts payable
    
    
    (229
    )
    
    
    (44
    )Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    (7,853
    )
    
    
    (2,359
    )Customer deposits
    
    
    (112
    )
    
    
    (712
    )Accrued interest and dividends
    
    
    86
    
    
    
    Other accrued liabilities
    
    
    181
    
    
    
    1,232Net cash provided by operating activities
    
    
    5,720
    
    
    
    537Cash flows from investing activities:Acquisition of equipment
    
    
    (636
    )
    
    
    (698
    )Capitalized software development costs
    
    
    (322
    )
    
    
    (176
    )Net cash used in investing activities
    
    
    (958
    )
    
    
    (874
    )Cash flows from financing activities:(Repayment) borrowings under line of credit
    
    
    (1,155
    )
    
    
    700Repurchase of preferred stock
    
    
    (1,500
    )
    
    
    Issuance of common stock
    
    
    20
    
    
    
    1Payment of preferred stock dividends
    
    
    (1,145
    )
    
    
    Payments of other debt obligations
    
    
    (175
    )
    
    
    (5
    )Increase in restricted cash for performance guarantee
    
    
    (2,726
    )
    
    
    (12
    )Net cash (used in) provided by financing activities
    
    
    (6,681
    )
    
    
    684Effect of exchange rate changes on cash
    
    
    365
    
    
    
    99Net decrease in cash
    
    
    (1,554
    )
    
    
    446Cash at beginning of period
    
    
    2,408
    
    
    
    520Cash at end of period
    
    $
    854
    
    
    $
    966Supplemental schedule of cash flow information:Interest paid
    
    $
    174
    
    
    $
    209Income taxes paid
    
    
    220
    
    
    
    Supplemental information on non-cash operating and investing activities:Accrued dividends on preferred stock
    
    $
    569
    
    
    $
    695
   5




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##### 



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements
 1. Nature of Business:
    2. Summary of Significant Accounting Policies
 Basis of Presentation
     Significant Accounting Policies
  6




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##### 



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 Recent Accounting Pronouncements
 Multiple-Deliverable Revenue Arrangements Revenue Arrangements with Multiple Deliverables
 Revenue Arrangements with Multiple Deliverables
  7




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##### 



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 3. Earnings Per Common Share :
   
    
    $55,000 of Series D Preferred Stock convertible at $0.94 per share, equating to
58,511 shares of common stock, issued in April 2009;
    
    $100,000 of Series D Preferred Stock convertible at $1.11 per share, equating to
90,090 shares of common stock, issued in July 2009;
    
    $22,241,000 of Series E Preferred Stock convertible at $2.00 per share, equating to
11,120,500 shares of common stock, issued in July 2009.
   Thirteen week period ended
    
    
    Thirteen week period endedAugust 27, 2010
    
    
    August 28, 2009Income
    
    
    Weighted
    
    
    Per
    
    
    Income
    
    
    Weighted
    
    
    Per(amounts in
    
    
    average
    
    
    share
    
    
    (amounts in
    
    
    average
    
    
    sharethousands)
    
    
    shares
    
    
    amount
    
    
    thousands)
    
    
    shares
    
    
    amountNet income
    
    $
    1,666
    
    
    
    
    
    
    
    
    
    
    $
    1,249Less: preferred stock dividends
    
    
    (568
    )
    
    
    
    
    
    
    
    
    
    
    (460
    )Basic earnings per share:Basic earnings available to common shareholders
    
    $
    1,098
    
    
    
    9,090,000
    
    
    $
    0.12
    
    
    $
    789
    
    
    
    9,069,000
    
    
    $
    0.09Effect of dilutive securities:Preferred stock
    
    
    
    
    
    
    11,269,000
    
    
    
    
    
    
    
    
    
    
    
    12,019,000Stock options and warrants
    
    
    
    
    
    
    360,000
    
    
    
    
    
    
    
    
    
    
    
    34,000Diluted earnings per share:Basic earnings available to common shareholders
    
    $
    1,098
    
    
    
    
    
    
    
    
    
    
    $
    789Add: preferred stock dividend
    
    
    568
    
    
    
    
    
    
    
    
    
    
    
    460Income available to common shareholders plus effect
of dilutive securities
    
    $
    1,666
    
    
    
    20,719,000
    
    
    $
    0.08
    
    
    $
    1,249
    
    
    
    21,122,000
    
    
    $
    0.06
 8




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##### 



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 Twenty-six week period ended
    
    
    Twenty-six week period endedAugust 27, 2010
    
    
    August 28, 2009Income
    
    
    Weighted
    
    
    Per
    
    
    Income
    
    
    Weighted
    
    
    Per(amounts in
    
    
    average
    
    
    share
    
    
    (amounts in
    
    
    average
    
    
    sharethousands)
    
    
    shares
    
    
    amount
    
    
    thousands)
    
    
    shares
    
    
    amountNet income
    
    $
    3,602
    
    
    
    
    
    
    
    
    
    
    $
    2,019Less: preferred stock dividends
    
    
    (1,145
    )
    
    
    
    
    
    
    
    
    
    
    (695
    )Basic earnings per share:Basic earnings available to common shareholders
    
    $
    2,457
    
    
    
    9,088,000
    
    
    $
    0.27
    
    
    $
    1,324
    
    
    
    9,063,000
    
    
    $
    0.15Effect of dilutive securities:Preferred stock
    
    
    
    
    
    
    11,269,000
    
    
    
    
    
    
    
    
    
    
    
    12,019,000Stock options and warrants
    
    
    
    
    
    
    361,000
    
    
    
    
    
    
    
    
    
    
    
    184,000Diluted earnings per share:Basic earnings available to common shareholders
    
    $
    2,457
    
    
    
    
    
    
    
    
    
    
    $
    1,324Add: preferred stock dividend
    
    
    1,145
    
    
    
    
    
    
    
    
    
    
    
    695Income available to common shareholders plus effect
of dilutive securities
    
    $
    3,602
    
    
    
    20,718,000
    
    
    $
    0.17
    
    
    $
    2,019
    
    
    
    21,266,000
    
    
    $
    0.09
 9




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##### 



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 4. Inventories
  August 27,2010
    
    
    February 26,(unaudited)
    
    
    2010(in thousands)Raw materials
    
    $
    
    
    
    $
    Work in process
    
    
    3,444
    
    
    
    4,764Finished goods
    
    
    223
    
    
    
    350Total
    
    $
    3,667
    
    
    $
    5,114
  5. Accounts Receivable:
  August 27,2010
    
    
    February 26,(unaudited)
    
    
    2010(in thousands)U.S. government
    
    $
    1,276
    
    
    $
    438U.S. commercial
    
    
    591
    
    
    
    1,403International
    
    
    1,471
    
    
    
    15,9303,338
    
    
    
    17,771Less: allowance for doubtful accounts
    
    
    (420
    )
    
    
    (415
    )$
    2,918
    
    
    $
    17,356
 6. Long-Term Obligations and Credit Arrangements:
 Lenfest Financing Transaction
  Lenfest Credit Facility
  10




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Environmental Tectonics Corporation  Notes to the Consolidated Financial Statements, continued
 Bank Credit and Facility
 Increased PNC Bank Credit Facility and Issuance of New Guarantee
      Amendments to the Credit Agreement
     11




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##### 



Environmental Tectonics Corporation  Notes to the Consolidated Financial Statements, continued
 Dedicated Line of Credit Agreement with PNC Bank
    ETC-PZL Project Financing
   August 27,
    
    
    February 26,2010
    
    
    2010(amounts in thousands)Note payable to bank
    
    $
    8,477
    
    
    $
    9,600ETC-PZL project financing
    
    
    296
    
    
    
    486Automobile loan
    
    
    2
    
    
    
    7Total debt obligations
    
    
    8,775
    
    
    
    10,093Less current maturities
    
    
    122
    
    
    
    285Long-term obligations, net of current maturities
    
    $
    8,653
    
    
    $
    9,808
 12




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##### 



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 7. 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 atAugust 27, 2010 using:Liabilities
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(amounts in thousands)Credit facility payable to bank
    
    $
    
    
    
    $
    
    
    
    $
    9,023
    
    
    $
    9,023ETC-PZL contract financing
    
    
    
    
    
    
    
    
    
    
    270
    
    
    
    270Total
    
    $
    
    
    
    $
    
    
    
    $
    9,293
    
    
    $
    9,293
 13




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##### 



Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
 8. Income Taxes
      August 27,
    
    
    February 26,2010
    
    
    2010(amounts in thousands)Deferred tax assets:Net operating loss and credits
    
    $
    14,610
    
    
    $
    15,607Vacation reserve
    
    
    80
    
    
    
    80Inventory reserve
    
    
    918
    
    
    
    880Receivable reserve
    
    
    157
    
    
    
    156Warranty reserve
    
    
    117
    
    
    
    117Compensation and other reserves
    
    
    158
    
    
    
    32Other, net
    
    
    19
    
    
    
    7416,059
    
    
    
    16,946Valuation Reserve
    
    
    (10,360
    )
    
    
    (11,963
    )Total current deferred tax asset
    
    
    5,699
    
    
    
    4,983Deferred tax liabilities:Amortization of capitalized software
    
    
    393
    
    
    
    350Depreciation
    
    
    3,205
    
    
    
    2,716Total non-current deferred tax liability
    
    
    3,598
    
    
    
    3,066Net deferred tax asset
    
    $
    2,101
    
    
    $
    1,917
 14




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##### 



Environmental Tectonics Corporation
Notes to the Consolidated Financial Statements, continued
 9. Commitments and Contingencies
 Mends International, Ltd.
  Administrative Agreement with U.S. Navy
  15




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##### 



Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
 10. Segment Information (unaudited):
  Training Services
    
    Control Systems
    
    
    
    
    
    CompanyGroup (TSG)
    
    Group (CSG)
    
    Corporate
    
    Total(amounts in thousands)Thirteen week period ended
August 27, 2010:Net sales
    
    $
    8,675
    
    
    $
    4,569
    
    
    $
    
    
    
    $
    13,244Interest expense
    
    
    183
    
    
    
    6
    
    
    
    
    
    
    
    189Depreciation and amortization
    
    
    305
    
    
    
    76
    
    
    
    
    
    
    
    381Operating income (loss)
    
    
    1,373
    
    
    
    813
    
    
    
    (275
    )
    
    
    1,911Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Identifiable assets
    
    
    21,101
    
    
    
    3,611
    
    
    
    19,688
    
    
    
    44,400Expenditures for segment
assets
    
    
    198
    
    
    
    119
    
    
    
    62
    
    
    
    379Thirteen week period ended
August 28, 2009:Net sales
    
    $
    6,391
    
    
    $
    3,469
    
    
    $
    
    
    
    $
    9,860Interest expense
    
    
    128
    
    
    
    222
    
    
    
    
    
    
    
    350Depreciation and amortization
    
    
    345
    
    
    
    76
    
    
    
    
    
    
    
    421Operating income (loss)
    
    
    1,938
    
    
    
    316
    
    
    
    (363
    )
    
    
    1,891Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Identifiable assets
    
    
    5,388
    
    
    
    5,629
    
    
    
    25,616
    
    
    
    36,633Expenditures for segment
assets
    
    
    170
    
    
    
    132
    
    
    
    
    
    
    
    302
 Thirteen weeks
    
    
    Thirteen weeksended August 27,
    
    
    ended August 28,Reconciliation to consolidated net income:
    
    2010:
    
    
    2009Operating income
    
    $
    1,911
    
    
    $
    1,891Interest expense
    
    
    (189
    )
    
    
    (350
    )Other, net
    
    
    (56
    )
    
    
    (66
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (224
    )Noncontrolling interest
    
    
    
    
    
    
    (2
    )Net income
    
    $
    1,666
    
    
    $
    1,249
 Training Services
    
    Control Systems
    
    
    
    
    
    CompanyGroup (TSG)
    
    Group (CSG)
    
    Corporate
    
    Total(amounts in thousands)Twenty-six week period ended
August 27, 2010:Net sales
    
    $
    16,607
    
    
    $
    8,758
    
    
    $
    
    
    
    $
    25,365Interest expense
    
    
    317
    
    
    
    100
    
    
    
    
    
    
    
    417Depreciation and amortization
    
    
    497
    
    
    
    230
    
    
    
    
    
    
    
    727Operating income (loss)
    
    
    2,782
    
    
    
    1,923
    
    
    
    (553
    )
    
    
    4,152Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Identifiable assets
    
    
    21,101
    
    
    
    3,611
    
    
    
    19,688
    
    
    
    44,400Expenditures for segment
assets
    
    
    574
    
    
    
    200
    
    
    
    184
    
    
    
    958Twenty-six week period ended
August 28, 2009:Net sales
    
    $
    13,306
    
    
    $
    6,135
    
    
    $
    
    
    
    $
    19,441Interest expense
    
    
    427
    
    
    
    439
    
    
    
    
    
    
    
    866Depreciation and amortization
    
    
    495
    
    
    
    487
    
    
    
    
    
    
    
    982Operating income (loss)
    
    
    3,832
    
    
    
    146
    
    
    
    (744
    )
    
    
    3,234Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Identifiable assets
    
    
    5,388
    
    
    
    5,629
    
    
    
    25,616
    
    
    
    36,633Expenditures for segment
assets
    
    
    411
    
    
    
    287
    
    
    
    
    
    
    
    698
 16




---



##### 



Twenty-six weeks
    
    
    Twenty-six weeksended August 27,
    
    
    ended August 28,Reconciliation to consolidated net income (loss):
    
    2010:
    
    
    2009Operating income
    
    $
    4,152
    
    
    $
    3,234Interest expense
    
    
    (417
    )
    
    
    (866
    )Other, net
    
    
    (128
    )
    
    
    (121
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (224
    )Noncontrolling interest
    
    
    (5
    )
    
    
    (4
    )Net income
    
    $
    3,602
    
    
    $
    2,019
 Concentration of Sales Greater than 10%
      17




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 FORWARD-LOOKING STATEMENTS
         18




---



##### 




    
    Increased production under U.S. Government contracts
   
    
    Exchange of long term debt, establishment of additional facility, and increase in bank
lineAdequate cash availability, both from operations and under our loan agreements, is an
important factor which allows us to efficiently produce and fulfill delivery obligations
under our large multi-year contracts. These contracts require significant cash outlays for
materials during certain phases of production. Additionally, as our backlog and performance
have grown, cash requirements for general operations have expanded.On April 24, 2009, we entered into a transaction with H. F. Lenfest, a member of our Board
of Directors and a significant shareholder, that provided for the following: (i) a
$7,500,000 credit facility to be provided by Lenfest to ETC; (ii) exchange of a Subordinated
Note held by Lenfest, together with all accrued interest and warrants issuable under the
Subordinated Note, and all Series B Preferred Stock and Series C Preferred Stock held by
Lenfest, together with all accrued dividends thereon, for a new class of preferred stock,
Series E Preferred Stock, of the Company; and (iii) an increase of the existing $15,000,000
revolving line of credit with PNC Bank to $20,000,000. During fiscal 2011, the Company has
repurchased $1,500,000 of the Series E Preferred Stock.
    
    Impact of net operating loss carryforwards and tax reserves
   
    
    Continued expanded use of our NASTAR Center
   19




---



##### 




    
    Continued capital and consulting spending to enhance and market worldwide our Authentic
Tactical Fighting Systems (ATFS) and other technologies.
  
    
    Common stock dilution.
      20




---



##### 



Results of Operations
 Thirteen week period ended August 27, 2010 compared to the thirteen week period ended August 28, 2009
  Summary Table of ResultsThirteen week
    
    
    Thirteen weekperiod ended
    
    
    period ended
    
    
    Variance
    
    
    VarianceAugust 27, 2010
    
    
    August 28, 2009
    
    
    $
    
    
    %(amounts in thousands)
    
    
    (   ) =UnfavorableSales:Domestic
    
    $
    2,418
    
    
    $
    2,877
    
    
    $
    (459
    )
    
    
    (16.0
    )%US Government
    
    
    6,587
    
    
    
    1,676
    
    
    
    4,911
    
    
    
    293.0International
    
    
    4,239
    
    
    
    5,307
    
    
    
    (1,068
    )
    
    
    (20.1
    )Total sales
    
    
    13,244
    
    
    
    9,860
    
    
    
    3,384
    
    
    
    34.3Gross profit
    
    
    4,794
    
    
    
    4,956
    
    
    
    (162
    )
    
    
    (3.3
    )Selling and marketing expenses
    
    
    1,020
    
    
    
    1,270
    
    
    
    250
    
    
    
    19.7General and administrative expenses
    
    
    1,623
    
    
    
    1,568
    
    
    
    (55
    )
    
    
    (3.5
    )Research and development expenses
    
    
    240
    
    
    
    227
    
    
    
    (13
    )
    
    
    (5.7
    )Operating income
    
    
    1,911
    
    
    
    1,891
    
    
    
    20
    
    
    
    1.1Interest expense, net
    
    
    189
    
    
    
    350
    
    
    
    161
    
    
    
    46.0Other expense, net
    
    
    56
    
    
    
    66
    
    
    
    10
    
    
    
    15.2Loss on extinguishment of debt
    
    
    
    
    
    
    224
    
    
    
    224
    
    
    
    100.0Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    n/aNoncontrolling interest
    
    
    
    
    
    
    2
    
    
    
    2
    
    
    
    100.0Net income
    
    
    1,666
    
    
    
    1,249
    
    
    $
    417
    
    
    
    33.4
    %Preferred stock dividend
    
    
    (568
    )
    
    
    (460
    )
    
    
    (108
    )
    
    
    (23.5
    )Income applicable to common shareholders
    
    $
    1,098
    
    
    $
    789
    
    
    $
    309
    
    
    
    39.2Net income per common share (basic)
    
    $
    0.12
    
    
    $
    0.09
    
    
    $
    0.03
    
    
    
    33.3
    %Net income per common share (diluted)
    
    $
    0.08
    
    
    $
    0.06
    
    
    $
    0.02
    
    
    
    33.3
    %
 Net Income
 $
 21




---



##### 



Sales
  (amounts in thousands)Thirteen week period ended
    
    Thirteen week period endedAugust 27, 2010
    
    August 28, 2009Inter-
    
    
    
    
    
    
    
    
    
    
    
    
    
    Inter-Segment sales:
    
    Domestic
    
    USG
    
    national
    
    Total
    
    Domestic
    
    USG
    
    national
    
    TotalTraining Services Group:Pilot Training Services
    
    $
    59
    
    
    $
    4,952
    
    
    $
    2,868
    
    
    $
    7,879
    
    
    $
    35
    
    
    $
    1,115
    
    
    $
    3,070
    
    
    $
    4,220Simulation
    
    
    227
    
    
    
    
    
    
    
    165
    
    
    
    392
    
    
    
    84
    
    
    
    
    
    
    
    1,609
    
    
    
    1,693ETC-PZL and other
    
    
    94
    
    
    
    
    
    
    
    310
    
    
    
    404
    
    
    
    203
    
    
    
    
    
    
    
    275
    
    
    
    478Total
    
    $
    380
    
    
    $
    4,952
    
    
    $
    3,343
    
    
    $
    8,675
    
    
    $
    322
    
    
    $
    1,115
    
    
    $
    4,954
    
    
    $
    6,391Control Systems Group:Environmental
    
    $
    113
    
    
    $
    1,635
    
    
    $
    886
    
    
    $
    2,634
    
    
    $
    339
    
    
    $
    561
    
    
    $
    36
    
    
    $
    936Sterilizers
    
    
    1,117
    
    
    
    
    
    
    
    
    
    
    
    1,117
    
    
    
    1,566
    
    
    
    
    
    
    
    
    
    
    
    1,566Hyperbaric
    
    
    355
    
    
    
    `
    
    
    
    
    
    
    
    355
    
    
    
    289
    
    
    
    `
    
    
    
    303
    
    
    
    592Service and spares
    
    
    453
    
    
    
    
    
    
    
    10
    
    
    
    463
    
    
    
    361
    
    
    
    
    
    
    
    14
    
    
    
    375Total
    
    
    2,038
    
    
    
    1,635
    
    
    
    896
    
    
    
    4,569
    
    
    
    2,555
    
    
    
    561
    
    
    
    353
    
    
    
    3,469Company total
    
    $
    2,418
    
    
    $
    6,587
    
    
    $
    4,239
    
    
    $
    13,244
    
    
    $
    2,877
    
    
    $
    1,676
    
    
    $
    5,307
    
    
    $
    9,860
  Domestic Sales
  U.S. Government Sales
  International Sales
 .
 Gross Profit
  Selling and Marketing Expenses
  22




---



##### 



General and Administrative Expenses
  Research and Development Expenses
  Loss on Extinguishment of Debt
  Interest Expense
  Other Expense, Net
  Income Taxes
   23




---



##### 



Results of Operations
 Twenty-six week period ended August 27, 2010 compared to the twenty-six week period ended August 28, 2009
  Summary Table of ResultsTwenty-six
    
    
    Twenty-sixweek period
    
    
    week periodended
    
    
    ended
    
    
    Variance
    
    
    VarianceAugust 27, 2010
    
    
    August 28, 2009
    
    
    $
    
    
    %(amounts in thousands)
    
    
    (   ) =UnfavorableSales:Domestic
    
    $
    5,336
    
    
    $
    4,836
    
    
    $
    500
    
    
    
    10.3
    %US Government
    
    
    10,573
    
    
    
    3,512
    
    
    
    7,061
    
    
    
    201.1International
    
    
    9,456
    
    
    
    11,093
    
    
    
    (1,637
    )
    
    
    (14.8
    )Total sales
    
    
    25,365
    
    
    
    19,441
    
    
    
    5,924
    
    
    
    30.5Gross profit
    
    
    9,924
    
    
    
    9,383
    
    
    
    541
    
    
    
    5.8Selling and marketing expenses
    
    
    2,122
    
    
    
    2,524
    
    
    
    402
    
    
    
    15.9General and administrative expenses
    
    
    3,086
    
    
    
    3,170
    
    
    
    84
    
    
    
    2.6Research and development expenses
    
    
    564
    
    
    
    455
    
    
    
    (109
    )
    
    
    (24.0
    )Operating income
    
    
    4,152
    
    
    
    3,234
    
    
    
    918
    
    
    
    28.4Interest expense, net
    
    
    417
    
    
    
    866
    
    
    
    449
    
    
    
    51.9Other expense, net
    
    
    128
    
    
    
    121
    
    
    
    (7
    )
    
    
    (5.8
    )Loss on extinguishment of debt
    
    
    
    
    
    
    224
    
    
    
    224
    
    
    
    100.0Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    n/aNoncontrolling interest
    
    
    5
    
    
    
    4
    
    
    
    (1
    )
    
    
    (25.0
    )Net income
    
    
    3,602
    
    
    
    2,019
    
    
    
    1,583
    
    
    
    78.4
    %Preferred stock dividend
    
    
    (1,145
    )
    
    
    (695
    )
    
    
    (450
    )
    
    
    (64.7
    )Income applicable to common shareholders
    
    $
    2,457
    
    
    $
    1,324
    
    
    $
    1,133
    
    
    
    85.6Net income per common share (basic)
    
    $
    0.27
    
    
    $
    0.15
    
    
    $
    0.12
    
    
    
    80.0
    %Net income per common share (diluted)
    
    $
    0.17
    
    
    $
    0.09
    
    
    $
    0.08
    
    
    
    88.9
    %
 Net Income
  24




---



##### 



Sales
  (amounts in thousands)Twenty-six week period ended
    
    Twenty-six week period endedAugust 27, 2010
    
    August 28, 2009Inter-
    
    
    
    
    
    
    
    
    
    
    
    
    
    Inter-Segment sales:
    
    Domestic
    
    USG
    
    national
    
    Total
    
    Domestic
    
    USG
    
    national
    
    TotalTraining Services Group:Pilot Training Services
    
    $
    60
    
    
    $
    8,955
    
    
    $
    6,601
    
    
    $
    15,616
    
    
    $
    71
    
    
    $
    2,460
    
    
    $
    6,986
    
    
    $
    9,517Simulation
    
    
    227
    
    
    
    
    
    
    
    261
    
    
    
    488
    
    
    
    285
    
    
    
    
    
    
    
    2,753
    
    
    
    3,038ETC-PZL and other
    
    
    127
    
    
    
    
    
    
    
    376
    
    
    
    503
    
    
    
    294
    
    
    
    
    
    
    
    457
    
    
    
    751Total
    
    $
    414
    
    
    $
    8,955
    
    
    $
    7,238
    
    
    $
    16,607
    
    
    $
    650
    
    
    $
    2,460
    
    
    $
    10,196
    
    
    $
    13,306Control Systems Group:Environmental
    
    $
    221
    
    
    $
    1,618
    
    
    $
    1,863
    
    
    $
    3,702
    
    
    $
    713
    
    
    $
    1,052
    
    
    $
    305
    
    
    $
    2,070Sterilizers
    
    
    2,842
    
    
    
    
    
    
    
    
    
    
    
    2,842
    
    
    
    1,784
    
    
    
    
    
    
    
    
    
    
    
    1,784Hyperbaric
    
    
    965
    
    
    
    `
    
    
    
    199
    
    
    
    1,164
    
    
    
    917
    
    
    
    `
    
    
    
    486
    
    
    
    1,403Service and spares
    
    
    894
    
    
    
    
    
    
    
    156
    
    
    
    1,050
    
    
    
    772
    
    
    
    
    
    
    
    106
    
    
    
    878Total
    
    
    4,922
    
    
    
    1,618
    
    
    
    2,218
    
    
    
    8,758
    
    
    
    4,186
    
    
    
    1,052
    
    
    
    897
    
    
    
    6,135Company total
    
    $
    5,336
    
    
    $
    10,573
    
    
    $
    9,456
    
    
    $
    25,365
    
    
    $
    4,836
    
    
    $
    3,512
    
    
    $
    11,093
    
    
    $
    19,441
  Domestic Sales
  U.S. Government Sales
  International Sales
 .
 Gross Profit
  25




---



##### 



Selling and Marketing Expenses
  General and Administrative Expenses
  Research and Development Expenses
  Loss on Extinguishment of Debt
  Interest Expense
  Other Expense, Net
  Income Taxes
   Liquidity and Capital Resources
   26




---



##### 



Total
    
    
    Amount
    
    
    Amount
    
    
    Total
    
    
    Amount
    
    
    AmountFacility
    
    
    Utilized
    
    
    Available
    
    
    Facility
    
    
    Utilized
    
    
    AvailableCredit facility*
    
    As of August 27, 2010:
    
    
    As of February 26, 2010:PNC line of credit
    
    $
    20,000
    
    
    $
    10,036
    
    
    $
    9,964
    
    
    $
    20,000
    
    
    $
    11,128
    
    
    $
    8,872Lenfest credit line
    
    
    7,500
    
    
    
    
    
    
    
    7,500
    
    
    
    7,500
    
    
    
    
    
    
    
    7,500Dedicated line of credit
    
    
    5,422
    
    
    
    5,422
    
    
    
    
    
    
    
    5,422
    
    
    
    5,422
    
    
    
    Total
    
    $
    32,922
    
    
    $
    15,458
    
    
    $
    17,464
    
    
    $
    32,922
    
    
    $
    16,550
    
    
    $
    16,372
 
 *
    
    See Note 6  Long-tem Debt and Credit Arrangements in the accompanying Notes to the
Condensed Consolidated Financial Statements. Net cash provided by operating activities:
   Net cash used for investing activities:
  Net cash used for financing activities:
  Outlook
  27




---



##### 



Backlog
  August 27, 2010
    
    Business segment:Geographic area:
    
    TSG
    
    
    CSG
    
    
    Total
    
    
    %Domestic
    
    $
    993
    
    
    $
    4,747
    
    
    $
    5,740
    
    
    
    4.7
    %US Government
    
    
    40,959
    
    
    
    36,744
    
    
    
    77,703
    
    
    
    63.6International
    
    
    33,036
    
    
    
    5,632
    
    
    
    38,668
    
    
    
    31.7Total
    
    $
    74,988
    
    
    $
    47,123
    
    
    $
    122,111
    
    
    
    100.0
    %% of total
    
    
    61.4
    %
    
    
    38.6
    %
    
    
    100.0
    %
 February 26, 2010
    
    Business segment:Geographic area:
    
    TSG
    
    
    CSG
    
    
    Total
    
    
    %Domestic
    
    $
    210
    
    
    $
    3,772
    
    
    $
    3,982
    
    
    
    4.1
    %US Government
    
    
    49,111
    
    
    
    48
    
    
    
    49,159
    
    
    
    50.8International
    
    
    36,244
    
    
    
    7,579
    
    
    
    43,823
    
    
    
    45.1Total
    
    $
    85,565
    
    
    $
    11,399
    
    
    $
    96,964
    
    
    
    100.0
    %% of total
    
    
    88.2
    %
    
    
    11.8
    %
    
    
    100.0
    %
 ,
  28




---



##### 



Item 4T. Controls and Procedures
     PART II  OTHER INFORMATION
 Item 1. Legal Proceedings
 Mends International, Ltd.
  Administrative Agreement with U.S. Navy
  Other Matters
  29




---



##### 



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Item 3. Defaults Upon Senior Securities
  Item 4. Removed and Reserved
 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 July 6, 2009, and are incorporated
herein by reference.3.3
    
    Registrants amended and restated By-Laws were filed as Exhibit 3.1
to Registrants Form 8-K dated July 28, 2010, and are incorporated
herein by reference.10.1
    
    Amendment to Loan Documents dated as of May 7, 2010, between the
Registrant, H.F. Lenfest and PNC Bank, National Association was
filed on June 1, 2010 as Exhibit 1.1 to Form 8-K and is
incorporated by reference.10.2
    
    Amendment to Loan Documents dated as of June 2, 2010 between the
Registrant and PNC Bank, National Association was filed on July 12,
2010 as Exhibit 10.2 to Form 10-Q and is incorporated herein by
reference.10.3
    
    Amendment to Loan Documents dated as of August 18, 2010 between the
Registrant and PNC Bank, National Association was filed on August
20, 2010 as Exhibit 10.1 to Form 8-K and is incorporated herein by
reference.31.1
    
    Certification dated October 6, 2010 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 October 6, 2010 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 October 6, 2010 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.
 30




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##### 



Signatures
  ENVIRONMENTAL TECTONICS CORPORATION
(Registrant)Date: October 6, 2010
    By:
    /s/ William F. MitchellWilliam F. MitchellPresident and Chief
Executive Officer
(Principal Executive Officer)Date:   October 6, 2010
    By:
    /s/ Duane DeanerDuane Deaner,Chief Financial Officer
(Principal Financial and Accounting Officer)