##### 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 August 24, 2007
 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.)
 
 
    o þ
  Large accelerated filer oAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company þ  o þ




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##### Table of Contents



Explanatory Statement
 Restatement of previously issued financial statements
  Settlement with U.S. Navy
         Audit Committee Review and Regulatory Compliance Matters
   2




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##### Table of Contents



Change in Independent Registered Public Accounting Firm
  Restatement of Previously Filed Financial Statements
         Previously Filed Reports
  Additional Matters Regarding H.F. Lenfest
 Lenfest Acquisition Proposal
  Lenfest Letter Agreement
  3




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##### Table of Contents



4




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##### 



PART I  FINANCIAL INFORMATION
    
    
    6Item 1. Financial Statements (unaudited)
    
    
    6Condensed Consolidated Statements of Operations for the 13 and 26 week periods ended August 24,
2007 and August 25, 2006
    
    
    6Condensed Consolidated Balance Sheets as of August 24, 2007 and February 23, 2007
    
    
    7Condensed Consolidated Statements of Cash Flows for the 13 and 26 week periods ended August 24,
2007 and August 25, 2006
    
    
    8Notes to the Condensed Consolidated Financial Statements
    
    
    9Item 2. Managements Discussion and Analysis of Results of Operations and Financial
Condition
    
    
    26Item 4. Controls and Procedures
    
    
    33PART II  OTHER INFORMATION
    
    
    35Item 1. Legal Proceedings
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3. Defaults Upon Senior Securities
    
    
    36Item 4. Submission of Matters to Vote of Security Holders
    
    
    36Item 5. Other Information
    
    
    36Item 6. Exhibits
    
    
    36Signatures
    
    
    37Exhibit 31.1Exhibit 31.2Exhibit 32
   5




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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 ended
    
    
    Twenty-six weeks endedAugust 24,
    
    
    August 25,
    
    
    August 24,
    
    
    August 25,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    4,247
    
    
    $
    4,329
    
    
    $
    8,594
    
    
    $
    8,904Cost of goods sold
    
    
    3,704
    
    
    
    3,835
    
    
    
    7,156
    
    
    
    7,396Gross profit
    
    
    543
    
    
    
    494
    
    
    
    1,438
    
    
    
    1,508Operating expenses:Selling and administrative
    
    
    2,635
    
    
    
    2,144
    
    
    
    5,434
    
    
    
    4,636Claim settlement costs
    
    
    250
    
    
    
    
    
    
    
    3,639
    
    
    
    Research and development
    
    
    237
    
    
    
    263
    
    
    
    291
    
    
    
    4863,122
    
    
    
    2,407
    
    
    
    9,364
    
    
    
    5,122Operating loss
    
    
    (2,579
    )
    
    
    (1,913
    )
    
    
    (7,926
    )
    
    
    (3,614
    )Other expenses:Interest expense
    
    
    386
    
    
    
    284
    
    
    
    740
    
    
    
    566Other expense (income), net
    
    
    11
    
    
    
    (43
    )
    
    
    41
    
    
    
    7397
    
    
    
    241
    
    
    
    781
    
    
    
    573Loss before income taxes
    
    
    (2,976
    )
    
    
    (2,154
    )
    
    
    (8,707
    )
    
    
    (4,187
    )Provision for income taxes
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    9Loss before minority interest
    
    
    (2,976
    )
    
    
    (2,158
    )
    
    
    (8,707
    )
    
    
    (4,196
    )Loss attributable to minority interest
    
    
    (6
    )
    
    
    (10
    )
    
    
    (12
    )
    
    
    (17
    )Net loss
    
    $
    (2,970
    )
    
    $
    (2,148
    )
    
    $
    (8,695
    )
    
    $
    (4,179
    )Preferred stock dividend
    
    
    (90
    )
    
    
    (55
    )
    
    
    (180
    )
    
    
    (79
    )Loss applicable to common shareholders
    
    $
    (3,060
    )
    
    $
    (2,203
    )
    
    $
    (8,875
    )
    
    $
    (4,258
    )Per share information:Basic and diluted loss per share
applicable to common shareholders
    
    $
    (0.34
    )
    
    $
    (0.24
    )
    
    $
    (0.98
    )
    
    $
    (0.47
    )Basic and diluted weighted average
number of common shares
    
    
    9,030,000
    
    
    
    9,029,000
    
    
    
    9,029,000
    
    
    
    9,033,000
  6




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Environmental Tectonics Corporation
 
 Condensed Consolidated Balance Sheets
(in thousands, except share information)
 August 24,
    
    
    February 23,2007
    
    
    2007(unaudited)
    
    
    (restated)AssetsCurrent assets:Cash
    
    $
    427
    
    
    $
    2,215Restricted cash
    
    
    3,322
    
    
    
    20Accounts receivable, net of allowance for bad debts of $385 and $3,372
    
    
    4,041
    
    
    
    2,094Costs and estimated earnings in excess of billings on uncompleted long-term
contracts
    
    
    1,466
    
    
    
    2,816Inventories
    
    
    5,471
    
    
    
    4,739Deferred tax asset
    
    
    74
    
    
    
    71Prepaid expenses and other current assets
    
    
    421
    
    
    
    213Total current assets
    
    
    15,222
    
    
    
    12,168Property, plant and equipment, at cost, net of accumulated depreciation of
$13,120 and $12,760
    
    
    3,761
    
    
    
    4,054Construction in progress
    
    
    11,176
    
    
    
    8,460Software development costs, net of accumulated amortization of $11,495 and $10,949
    
    
    2,047
    
    
    
    2,158Goodwill
    
    
    455
    
    
    
    455Other assets
    
    
    16
    
    
    
    30Total assets
    
    $
    32,677
    
    
    $
    27,325Liabilities and Stockholders DeficiencyLiabilitiesCurrent liabilities:Accounts payable  trade
    
    
    2,210
    
    
    
    2,254Billings in excess of costs and estimated earnings on uncompleted long-term
contracts
    
    
    1,251
    
    
    
    1,400Customer deposits
    
    
    2,378
    
    
    
    794Accrued claim settlement costs
    
    
    3,550
    
    
    
    Accrued interest and dividends
    
    
    1,357
    
    
    
    668Accrued liabilities
    
    
    1,510
    
    
    
    1,539Total current liabilities
    
    
    12,256
    
    
    
    6,655Long-term obligations:Credit facility payable to bank
    
    
    5,000
    
    
    
    Subordinated convertible debt
    
    
    9,087
    
    
    
    8,83014,087
    
    
    
    8,830Total liabilities
    
    
    26,343
    
    
    
    15,485Commitments and contingencies
    
    
    
    
    
    
    Minority interest
    
    
    41
    
    
    
    53Cumulative convertible participating preferred stock, Series B, $.05 par value,
15,000 shares authorized; 6,000 shares issued and outstanding at August 24, 2007
and February 23, 2007, respectively
    
    
    6,000
    
    
    
    6,000Cumulative convertible participating preferred stock, Series C, $.05 par value,
3,300 shares authorized, issued and outstanding at August 24, 2007
    
    
    3,300
    
    
    
    Stockholders DeficiencyCommon stock; $.05 par value; 20,000,000 shares authorized; 9,028,459 shares issued and outstanding at August 24, 2007 and February 23, 2007,
respectively
    
    
    451
    
    
    
    451Additional paid-in capital
    
    
    16,539
    
    
    
    16,662Accumulated other comprehensive loss
    
    
    (125
    )
    
    
    (149
    )Accumulated deficit
    
    
    (19,872
    )
    
    
    (11,177
    )Total stockholders (deficiency) equity
    
    
    (3,007
    )
    
    
    5,787Total liabilities and stockholders deficiency
    
    $
    32,677
    
    
    $
    27,325
  7




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##### Table of Contents



Environmental Tectonics Corporation
 
 Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 Twenty-six weeks endedAugust 24,
    
    
    August 25,2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (8,695
    )
    
    $
    (4,179
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    906
    
    
    
    920Accretion of debt discount
    
    
    257
    
    
    
    217Increase (decrease) in allowance for accounts receivable and inventories
    
    
    433
    
    
    
    (407
    )Loss attributable to minority interest
    
    
    (12
    )
    
    
    (17
    )Stock
compensation expense
    
    
    57
    
    
    
    274Deferred income taxes
    
    
    (3
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,049
    )
    
    
    1,353Costs and estimated earnings in excess of billings on uncompleted
long-term contracts
    
    
    1,350
    
    
    
    (2,256
    )Inventories
    
    
    (1,063
    )
    
    
    (1,376
    )Prepaid expenses and other current assets
    
    
    (208
    )
    
    
    236Other assets
    
    
    14
    
    
    
    (1
    )Accounts payable
    
    
    (44
    )
    
    
    (776
    )Billings in excess of costs and estimated earnings on uncompleted
long-term contracts
    
    
    (149
    )
    
    
    429Customer deposits
    
    
    1,584
    
    
    
    79Accrued claim settlement costs
    
    
    3,550
    
    
    
    Other accrued liabilities
    
    
    480
    
    
    
    (380
    )Net cash used in operating activities
    
    
    (3,592
    )
    
    
    (5,884
    )Cash flows from investing activities:Acquisition of equipment
    
    
    (67
    )
    
    
    (158
    )Capitalized software development costs
    
    
    (435
    )
    
    
    (66
    )Payments for construction in progress
    
    
    (2,716
    )
    
    
    Net cash used in investing activities
    
    
    (3,218
    )
    
    
    (224
    )Cash flows from financing activities:Proceeds from borrowings under line of credit
    
    
    5,000
    
    
    
    Proceeds from notes payable, Lenfest
    
    
    4,000
    
    
    
    Repayment of notes payable, Lenfest
    
    
    (4,000
    )Proceeds from issuance of common stock / warrants
    
    
    
    
    
    
    3Increase in restricted cash
    
    
    (3,302
    )
    
    
    (2
    )Proceeds from issuance of preferred stock
    
    
    3,300
    
    
    
    6,000Net cash provided by financing activities
    
    
    4,998
    
    
    
    6,001Other comprehensive losses
    
    
    24
    
    
    
    61Net decrease in cash and cash equivalents
    
    
    (1,788
    )
    
    
    (46
    )Cash at beginning of period
    
    
    2,215
    
    
    
    3,566Cash at end of period
    
    $
    427
    
    
    $
    3,520Supplemental schedule of cash flow information:Interest paid
    
    
    113
    
    
    
    207Income taxes paid
    
    
    
    
    
    
    4Supplemental information on non-cash operating and investing activities:None
  8




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Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements
 1.
Restatement of Previously Issued Financial Statements and Subsequent
Events
  Settlement with U.S. Navy
         Audit Committee Review and Regulatory Compliance Matters
   9




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 Change in Independent Registered Public Accounting Firm
  Restatement of Previously Filed Financial Statements
         Subsequent
Events
 Additional Matters Regarding H.F. Lenfest
 Lenfest Acquisition Proposal
  Lenfest Letter Agreement
  10




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
  Restated Statements of Operations amounts:
  (unaudited)
(in thousands, except share and per share information)
 As Originally
    
    
    Claim Receivable
    
    
    AsReported
    
    
    Impairment
    
    
    RestatedNet sales
    
    $
    4,718
    
    
    $
    
    
    
    $
    4,718Cost of goods sold
    
    
    3,688
    
    
    
    
    
    
    
    3,688Gross profit
    
    
    1,030
    
    
    
    
    
    
    
    1,030Operating expenses:Selling and administrative
    
    
    2,568
    
    
    
    
    
    
    
    2,568Claim settlement costs
    
    
    
    
    
    
    3,004
    
    
    
    3,004Research and development
    
    
    43
    
    
    
    
    
    
    
    432,611
    
    
    
    3,004
    
    
    
    5,615Operating loss
    
    
    (1,581
    )
    
    
    (3,004
    )
    
    
    (4,585
    )Other expenses:Interest expense
    
    
    291
    
    
    
    
    
    
    
    291Other income, net
    
    
    (43
    )
    
    
    
    
    
    
    (43
    )248
    
    
    
    
    
    
    
    248Loss before income taxes
    
    
    (1,829
    )
    
    
    (3,004
    )
    
    
    (4,833
    )Provision for income taxes
    
    
    4
    
    
    
    
    
    
    
    4Loss before minority interest
    
    
    (1,833
    )
    
    
    (3,004
    )
    
    
    (4,837
    )Income attributable to minority interest
    
    
    33
    
    
    
    
    
    
    
    33Net loss
    
    $
    (1,866
    )
    
    $
    (3,004
    )
    
    $
    (4,870
    )Preferred stock dividend
    
    
    (90
    )
    
    
    
    
    
    
    (90
    )Loss applicable to common shareholders
    
    $
    (1,956
    )
    
    $
    (3,004
    )
    
    $
    (4,960
    )Per share information:Basic and diluted loss per share
applicable to common shareholders
    
    $
    (0.22
    )
    
    $
    (0.33
    )
    
    $
    (0.55
    )Basic and diluted weighted average
number of common shares
    
    
    9,027,000
    
    
    
    9,027,000
    
    
    
    9,027,000
 11




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
  (unaudited)
(in thousands, except share and per share information)
 As Originally
    
    
    Claim Receivable
    
    
    AsReported
    
    
    Impairment
    
    
    RestatedNet sales
    
    $
    13,622
    
    
    $
    
    
    
    $
    13,622Cost of goods sold
    
    
    11,084
    
    
    
    
    
    
    
    11,084Gross profit
    
    
    2,538
    
    
    
    
    
    
    
    2,538Operating expenses:Selling and administrative
    
    
    7,204
    
    
    
    
    
    
    
    7,204Claim settlement costs
    
    
    
    
    
    
    3,004
    
    
    
    3,004Research and development
    
    
    529
    
    
    
    
    
    
    
    5297,733
    
    
    
    3,004
    
    
    
    10,737Operating loss
    
    
    (5,195
    )
    
    
    (3,004
    )
    
    
    (8,199
    )Other expenses:Interest expense
    
    
    857
    
    
    
    
    
    
    
    857Other income, net
    
    
    (36
    )
    
    
    
    
    
    
    (36
    )821
    
    
    
    
    
    
    
    821Loss before income taxes
    
    
    (6,016
    )
    
    
    (3,004
    )
    
    
    (9,020
    )Provision for income taxes
    
    
    13
    
    
    
    
    
    
    
    13Loss before minority interest
    
    
    (6,029
    )
    
    
    (3,004
    )
    
    
    (9,033
    )Income attributable to minority interest
    
    
    16
    
    
    
    
    
    
    
    16Net loss
    
    $
    (6,045
    )
    
    $
    (3,004
    )
    
    $
    (9,049
    )Preferred stock dividend
    
    
    (169
    )
    
    
    
    
    
    
    (169
    )Loss applicable to common shareholders
    
    $
    (6,214
    )
    
    $
    (3,004
    )
    
    $
    (9,218
    )Per share information:Basic and diluted loss per share
applicable to common shareholders
    
    $
    (0.69
    )
    
    $
    (0.33
    )
    
    $
    (1.02
    )Basic and diluted weighted average
number of common shares
    
    
    9,031,000
    
    
    
    9,031,000
    
    
    
    9,031,000
 12




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
  (unaudited)
(in thousands, except share and per share information)
 As Originally
    
    
    Claim Receivable
    
    
    AsReported
    
    
    Impairment
    
    
    RestatedNet sales
    
    $
    17,419
    
    
    $
    
    
    
    $
    17,419Cost of goods sold
    
    
    15,348
    
    
    
    
    
    
    
    15,348Gross profit
    
    
    2,071
    
    
    
    
    
    
    
    2,071Operating expenses:Selling and administrative
    
    
    9,434
    
    
    
    
    
    
    
    9,434Claim settlement costs
    
    
    
    
    
    
    3,004
    
    
    
    3,004Research and development
    
    
    569
    
    
    
    
    
    
    
    56910,003
    
    
    
    3,004
    
    
    
    13,007Operating loss
    
    
    (7,932
    )
    
    
    (3,004
    )
    
    
    (10,936
    )Other expenses:Interest expense
    
    
    1,151
    
    
    
    
    
    
    
    1,151Other income, net
    
    
    (58
    )
    
    
    
    
    
    
    (58
    )1,093
    
    
    
    
    
    
    
    1,093Loss before income taxes
    
    
    (9,025
    )
    
    
    (3,004
    )
    
    
    (12,029
    )Benefit from income taxes
    
    
    (77
    )
    
    
    
    
    
    
    (77
    )Loss before minority interest
    
    
    (8,948
    )
    
    
    (3,004
    )
    
    
    (11,952
    )Loss attributable to minority interest
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )Net loss
    
    $
    (8,940
    )
    
    $
    (3,004
    )
    
    $
    (11,944
    )Preferred stock dividend
    
    
    (259
    )
    
    
    
    
    
    
    (259
    )Loss applicable to common shareholders
    
    $
    (9,199
    )
    
    $
    (3,004
    )
    
    $
    (12,203
    )Per share information:Basic and diluted loss per share
applicable to common shareholders
    
    $
    (1.02
    )
    
    $
    (0.33
    )
    
    $
    (1.35
    )Basic and diluted weighted average
number of common shares
    
    
    9,030,000
    
    
    
    9,030,000
    
    
    
    9,030,000
 13




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##### Table of Contents



Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
 Restated Balance Sheets amounts:
  (in thousands, except share and per share information)
 As OriginallyReportedadjusted forPreferred
    
    
    ClaimStock
    
    
    Receivable
    
    
    AsReclass
    
    
    Impairment
    
    
    RestatedAssetsCurrent assets:Cash
    
    $
    4,002
    
    
    $
    
    
    
    $
    4,002Restricted cash
    
    
    19
    
    
    
    
    
    
    
    19Accounts receivable, net of allowance
for bad debts of $376 and $3,380
    
    
    8,381
    
    
    
    (3,004
    )
    
    
    5,377Costs and estimated earnings in excess
of billings on uncompleted long-term
contracts
    
    
    4,679
    
    
    
    
    
    
    
    4,679Inventories
    
    
    12,782
    
    
    
    
    
    
    
    12,782Prepaid expenses and other current assets
    
    
    428
    
    
    
    
    
    
    
    428Total current assets
    
    
    30,291
    
    
    
    (3,004
    )
    
    
    27,287Property, plant and equipment, at cost, net of
accumulated depreciation of $12,643
    
    
    4,099
    
    
    
    
    
    
    
    4,099Software development costs, net of accumulated
amortization of $10,773
    
    
    2,008
    
    
    
    
    
    
    
    2,008Goodwill
    
    
    455
    
    
    
    
    
    
    
    455Other assets
    
    
    29
    
    
    
    
    
    
    
    29Total assets
    
    $
    36,882
    
    
    $
    (3,004
    )
    
    $
    33,878Liabilities and Stockholders EquityLiabilitiesCurrent liabilities:Notes payable
    
    
    3,000
    
    
    
    
    
    
    
    3,000Accounts payable  trade
    
    
    1,818
    
    
    
    
    
    
    
    1,818Billings in excess of costs and
estimated earnings on uncompleted
long-term contracts
    
    
    2,035
    
    
    
    
    
    
    
    2,035Customer deposits
    
    
    1,401
    
    
    
    
    
    
    
    1,401Accrued liabilities
    
    
    2,134
    
    
    
    
    
    
    
    2,134Total current liabilities
    
    
    10,388
    
    
    
    
    
    
    
    10,388Long-term obligations:Subordinated convertible debt
    
    
    8,709
    
    
    
    
    
    
    
    8,709Total liabilities
    
    
    19,097
    
    
    
    
    
    
    
    19,097Commitments and contingenciesMinority interest
    
    
    77
    
    
    
    
    
    
    
    77Cumulative convertible participating preferred
stock, Series B, $.05 par value, 15,000 shares
authorized; 6,000 shares issued and
outstanding
    
    
    6,000
    
    
    
    
    
    
    
    6,000Stockholders EquityCommon stock; $.05 par value; 20,000,000
shares authorized; 9,026,958 issued and
outstanding
    
    
    451
    
    
    
    
    
    
    
    451Additional paid-in capital
    
    
    16,455
    
    
    
    
    
    
    
    16,455Accumulated other comprehensive loss
    
    
    (179
    )
    
    
    
    
    
    
    (179
    )Accumulated deficit
    
    
    (5,019
    )
    
    
    (3,004
    )
    
    
    (8,023
    )Total stockholders equity
    
    
    11,708
    
    
    
    (3,004
    )
    
    
    8,704Total liabilities and stockholders equity
    
    $
    36,882
    
    
    $
    (3,004
    )
    
    $
    33,878
 14




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
  (in thousands, except share and per share information)
 As OriginallyReportedadjusted forPreferred
    
    
    ClaimStock
    
    
    Receivable
    
    
    AsReclass
    
    
    Impairment
    
    
    RestatedAssetsCurrent assets:Cash
    
    $
    2,215
    
    
    $
    
    
    
    $
    2,215Restricted cash
    
    
    20
    
    
    
    
    
    
    
    20Accounts receivable, net of allowance
for bad debts of $368 and $3,372
    
    
    5,098
    
    
    
    (3,004
    )
    
    
    2,094Costs and estimated earnings in excess
of billings on uncompleted long-term
contracts
    
    
    2,816
    
    
    
    
    
    
    
    2,816Inventories
    
    
    4,739
    
    
    
    
    
    
    
    4,739Deferred tax asset
    
    
    71
    
    
    
    
    
    
    
    71Prepaid expenses and other current assets
    
    
    213
    
    
    
    
    
    
    
    213Total current assets
    
    
    15,172
    
    
    
    (3,004
    )
    
    
    12,168Property, plant and equipment, at cost, net of
accumulated depreciation of $12,760
    
    
    4,054
    
    
    
    
    
    
    
    4,054Construction in progress
    
    
    8,460
    
    
    
    
    
    
    
    8,460Software development costs, net of accumulated
amortization of $10,949
    
    
    2,158
    
    
    
    
    
    
    
    2,158Goodwill
    
    
    455
    
    
    
    
    
    
    
    455Other assets
    
    
    30
    
    
    
    
    
    
    
    30Total assets
    
    $
    30,329
    
    
    $
    (3,004
    )
    
    $
    27,325Liabilities and Stockholders EquityLiabilitiesCurrent liabilities:Accounts payable  trade
    
    
    2,254
    
    
    
    
    
    
    
    2,254Billings in excess of costs and
estimated earnings on uncompleted
long-term contracts
    
    
    1,400
    
    
    
    
    
    
    
    1,400Customer deposits
    
    
    794
    
    
    
    
    
    
    
    794Accrued liabilities
    
    
    2,207
    
    
    
    
    
    
    
    2,207Total current liabilities
    
    
    6,655
    
    
    
    
    
    
    
    6,655Long-term obligations:Subordinated convertible debt
    
    
    8,830
    
    
    
    
    
    
    
    8,830Total liabilities
    
    
    15,485
    
    
    
    
    
    
    
    15,485Commitments and contingenciesMinority interest
    
    
    53
    
    
    
    
    
    
    
    53Cumulative convertible participating preferred
stock, Series B, $.05 par value, 15,000 shares
authorized; 6,000 shares issued and
outstanding
    
    
    6,000
    
    
    
    
    
    
    
    6,000Stockholders EquityCommon stock; $.05 par value; 20,000,000
shares authorized; 9,028,459 issued and
outstanding
    
    
    451
    
    
    
    
    
    
    
    451Additional paid-in capital
    
    
    16,662
    
    
    
    
    
    
    
    16,662Accumulated other comprehensive loss
    
    
    (149
    )
    
    
    
    
    
    
    (149
    )Accumulated deficit
    
    
    (8,173
    )
    
    
    (3,004
    )
    
    
    (11,177
    )Total stockholders equity
    
    
    8,791
    
    
    
    (3,004
    )
    
    
    5,787Total liabilities and stockholders equity
    
    $
    30,329
    
    
    $
    (3,004
    )
    
    $
    27,325
 15




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 2. Summary of Significant Accounting Policies
 Basis of Presentation
     Use of Estimates
  Inventories
  August 24,
    
    
    February 23,2007
    
    
    2007(unaudited)(in thousands)Raw materials
    
    $
    93
    
    
    $
    95Work in process
    
    
    4,726
    
    
    
    3,820Finished goods
    
    
    652
    
    
    
    824Total
    
    $
    5,471
    
    
    $
    4,739
 16




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 Revenue Recognition
     Net loss per common share
  Share-Based Compensation
   17




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
    Income Taxes
  3. Accounts Receivable:
  August 24,
    
    
    February 23,2007
    
    
    2007(unaudited)
    
    
    (restated)(in thousands)U.S. government receivables billed and
unbilled contract costs
subject to negotiation
    
    $
    211
    
    
    $
    3,135U.S. commercial receivables billed
    
    
    1,611
    
    
    
    1,525International receivables billed
    
    
    2,604
    
    
    
    8064,426
    
    
    
    5,466Less: allowance for doubtful accounts
    
    
    (385
    )
    
    
    (3,372
    )$
    4,041
    
    
    $
    2,094
  18




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 4. Stockholders Deficiency
  AccumulatedAdditional
    
    
    other
    
    
    
    
    
    
    TotalCommon Stock
    
    
    paid-in
    
    
    comprehensive
    
    
    Accumulated
    
    
    stockholdersShares
    
    
    Amount
    
    
    capital
    
    
    loss
    
    
    deficit
    
    
    deficiencyBalance, February 23,
2007*
    
    
    9,028,459
    
    
    $
    451
    
    
    $
    16,662
    
    
    $
    (149
    )
    
    $
    (11,177
    )
    
    $
    5,787Net loss for the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,695
    )
    
    
    (8,695
    )Interest hedge valuation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32
    )
    
    
    
    
    
    
    (32
    )Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    56Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,671
    )Stock compensation
expense
    
    
    
    
    
    
    
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    57Dividends payable on
preferred stock
    
    
    
    
    
    
    
    
    
    
    (180
    )
    
    
    
    
    
    
    
    
    
    
    (180
    )Balance, August 24, 2007
    
    
    9,028,459
    
    
    $
    451
    
    
    $
    16,539
    
    
    $
    (125
    )
    
    $
    (19,872
    )
    
    $
    (3,007
    )
 
 *
    
    restated for reserve of claim receivable. See Note 1  Subsequent Events in the accompanying
notes. 5. Long-Term Obligations and Credit Arrangements:
 Bank Credit and Facility
       19




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
    (in thousands)August 24,
    
    February 23,2007
    
    2007(unaudited)Note payable to bank
    
    $
    5,000
    
    
    $
    Subordinated convertible debt, net
of unamortized discount of $913 and $1,170
    
    
    9,087
    
    
    
    8,830$
    14,087
    
    
    $
    8,830
  (in thousands):2008
    
    $
    2009
    
    
    14,0872010
    
    
    2011
    
    
    2012 and thereafter
    
    
    Total future obligations
    
    $
    14,087
      20




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
            21




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##### Table of Contents



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 2008, through August 24, 2007
    
    
    257Accretion 2007
    
    
    454Accretion prior years
    
    
    985Carrying value at August 24, 2007
    
    $
    9,087
        22




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 6. Segment Information (unaudited):
  (in thousands)TSG
    
    CSG
    
    TotalThirteen weeks ended and as of August
24, 2007:Net sales
    
    $
    1,862
    
    
    $
    2,385
    
    
    $
    4,247Interest expense
    
    
    313
    
    
    
    72
    
    
    
    385Depreciation and amortization
    
    
    120
    
    
    
    334
    
    
    
    454Operating loss
    
    
    (830
    )
    
    
    (1,346
    )
    
    
    (2,176
    )Income tax
    
    
    
    
    
    
    
    
    
    
    Goodwill and intangibles
    
    
    455
    
    
    
    
    
    
    
    455Identifiable assets
    
    
    7,551
    
    
    
    5,016
    
    
    
    12,567Expenditures for segment assets
    
    
    242
    
    
    
    170
    
    
    
    412Thirteen weeks ended and as of August
25, 2006:Net sales
    
    $
    2,985
    
    
    $
    1,344
    
    
    $
    4,329Interest expense
    
    
    212
    
    
    
    72
    
    
    
    284Depreciation and amortization
    
    
    289
    
    
    
    168
    
    
    
    457Operating loss
    
    
    (509
    )
    
    
    (1,202
    )
    
    
    (1,711
    )Income tax
    
    
    4
    
    
    
    
    
    
    
    4Goodwill and intangibles
    
    
    455
    
    
    
    
    
    
    
    455Identifiable assets
    
    
    18,551
    
    
    
    6,672
    
    
    
    25,223Expenditures for segment assets
    
    
    55
    
    
    
    20
    
    
    
    75
 Reconciliation to consolidated amounts
    
    2007
    
    
    2006Segment assets
    
    $
    12,567
    
    
    $
    25,223Corporate assets
    
    
    20,110
    
    
    
    10,155Total assets
    
    $
    32,677
    
    
    $
    35,378Segment operating loss
    
    $
    (2,176
    )
    
    $
    (1,711
    )Interest expense
    
    
    386
    
    
    
    284Income tax expense
    
    
    
    
    
    
    4Total loss for segments
    
    
    (2,562
    )
    
    
    (1,999
    )Corporate home office expenses
    
    
    403
    
    
    
    202Other expenses, net
    
    
    11
    
    
    
    (43
    )Minority interest
    
    
    (6
    )
    
    
    (10
    )Net loss
    
    $
    (2,970
    )
    
    $
    (2,148
    )
 23




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##### Table of Contents



Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
 (in thousands)TSG
    
    CSG
    
    TotalTwenty-six weeks ended and as of
August 24, 2007:Net sales
    
    $
    3,131
    
    
    $
    5,463
    
    
    $
    8,594Interest expense
    
    
    548
    
    
    
    192
    
    
    
    740Depreciation and amortization
    
    
    257
    
    
    
    649
    
    
    
    906Operating loss
    
    
    (1,793
    )
    
    
    (5,492
    )
    
    
    (7,285
    )Income tax
    
    
    
    
    
    
    
    
    
    
    Goodwill and intangibles
    
    
    455
    
    
    
    
    
    
    
    455Identifiable assets
    
    
    7,551
    
    
    
    5,016
    
    
    
    12,567Expenditures for segment assets
    
    
    377
    
    
    
    125
    
    
    
    502Twenty-six weeks ended and as of
August 25, 2006:Net sales
    
    $
    5,418
    
    
    $
    3,486
    
    
    $
    8,904Interest expense
    
    
    418
    
    
    
    148
    
    
    
    566Depreciation and amortization
    
    
    534
    
    
    
    386
    
    
    
    920Operating loss
    
    
    (1,630
    )
    
    
    (1,277
    )
    
    
    (2,907
    )Income tax
    
    
    9
    
    
    
    
    
    
    
    9Goodwill and intangibles
    
    
    455
    
    
    
    
    
    
    
    455Identifiable assets
    
    
    18,551
    
    
    
    6,672
    
    
    
    25,223Expenditures for segment assets
    
    
    116
    
    
    
    42
    
    
    
    158
 Reconciliation to consolidated amounts
    
    2007
    
    
    2006Segment assets
    
    $
    12,567
    
    
    $
    25,223Corporate assets
    
    
    20,110
    
    
    
    10,155Total assets
    
    $
    32,677
    
    
    $
    35,378Segment operating loss
    
    $
    (7,285
    )
    
    $
    (2,907
    )Interest expense
    
    
    740
    
    
    
    566Income tax expense
    
    
    
    
    
    
    9Total loss for segments
    
    
    (8,025
    )
    
    
    (3,482
    )Corporate home office expenses
    
    
    641
    
    
    
    707Other expenses, net
    
    
    41
    
    
    
    7Minority interest
    
    
    (12
    )
    
    
    (17
    )Net loss
    
    $
    (8,695
    )
    
    $
    (4,179
    )
     24




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##### Table of Contents



Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
     7. Recent Accounting Pronouncements
    25




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
 FORWARD-LOOKING STATEMENTS
        
    
    continued unfavorable global economic and political conditions for our
aeromedical products
    
    the cost of development and marketing efforts for our Authentic Tactical
Fighting Systems (ATFS)
    
    spending to modify our main facility in Southampton, Pa., and to build equipment
for the National Aerospace Training and Research (NASTAR) Center
    
    claim settlement costs and expenses related to litigation
  26




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##### Table of Contents




    
    continued development of software for our Advanced Disaster Management Scenario
product line;
    
    spending to investigate and evaluate the best way to offer disaster training
services;
    
    limited revenue generation coupled with high development costs in our low-end
entertainment products;
    
    higher costs of capital and amortization of deferred finance charges;
    
    cash flow;
           27




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##### Table of Contents



Results of Operations
 Thirteen weeks ended August 24, 2007 compared to thirteen weeks ended August 25, 2006
  Summary Table of ResultsThirteen weeks endedAugust 24,
    
    August 25,
    
    Variance2007
    
    2006
    
    $
    
    %(amounts in thousands except share and per share information)( ) = UnfavorableSales:Domestic
    
    $
    2,400
    
    
    $
    1,451
    
    
    $
    949
    
    
    
    65.4
    %US Government
    
    
    79
    
    
    
    152
    
    
    
    (73
    )
    
    
    (48.0
    )International
    
    
    1,768
    
    
    
    2,726
    
    
    
    (958
    )
    
    
    (35.1
    )Total Sales
    
    
    4,247
    
    
    
    4,329
    
    
    
    (82
    )
    
    
    (1.9
    )Gross Profit
    
    
    543
    
    
    
    494
    
    
    
    49
    
    
    
    9.9Selling, general and administrative
    
    
    2,635
    
    
    
    2,144
    
    
    
    (491
    )
    
    
    (22.9
    )Claim settlement costs
    
    
    250
    
    
    
    
    
    
    
    (250
    )
    
    NaResearch and development
    
    
    237
    
    
    
    263
    
    
    
    26
    
    
    
    9.9Operating loss
    
    
    (2,579
    )
    
    
    (1,913
    )
    
    
    (666
    )
    
    
    (26.9
    )Interest expense, net
    
    
    386
    
    
    
    284
    
    
    
    (102
    )
    
    
    (35.9
    )Other expense (income), net
    
    
    11
    
    
    
    (43
    )
    
    
    (54
    )
    
    
    (125.6
    )Income taxes
    
    
    0
    
    
    
    4
    
    
    
    4
    
    
    
    100.0Minority interest
    
    
    (6
    )
    
    
    (10
    )
    
    
    (4
    )
    
    
    (40.0
    )Net loss
    
    
    ($2,970
    )
    
    
    ($2,148
    )
    
    
    ($822
    )
    
    
    (38.3
    )%Net loss per common share
    
    
    ($0.34
    )
    
    
    ($0.24
    )
    
    
    ($0.10
    )
    
    
    (41.7
    )%
 Net Loss
  Sales
 $
 Domestic Sales
 $ $
 28




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##### Table of Contents



International Sales
   Gross Profit
  Selling and Administrative Expenses
  Claim Settlement Costs
  Research and Development Expenses
  Interest Expense
  Other Income/Expense, Net
  29




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##### Table of Contents



Results of Operations
 Twenty-six weeks ended August 24, 2007 compared to twenty-six weeks ended August 25, 2006
  Summary Table of ResultsTwenty-six weeks ended
    
    
    VarianceAugust 24,
    
    
    August 25,2007
    
    
    2006
    
    
    $
    
    
    %(amounts in thousands except share and per share information)( ) = UnfavorableSales:Domestic
    
    $
    4,841
    
    
    $
    3,216
    
    
    $
    1,625
    
    
    
    50.5
    %US Government
    
    
    648
    
    
    
    418
    
    
    
    230
    
    
    
    55.0International
    
    
    3,105
    
    
    
    5,270
    
    
    
    (2,165
    )
    
    
    (41.1
    )Total Sales
    
    
    8,594
    
    
    
    8,904
    
    
    
    (310
    )
    
    
    (3.5
    )Gross Profit
    
    
    1,438
    
    
    
    1,508
    
    
    
    (70
    )
    
    
    (4.6
    )Selling, general and administrative
    
    
    5,434
    
    
    
    4,636
    
    
    
    (798
    )
    
    
    (17.2
    )Claim settlement costs
    
    
    3,639
    
    
    
    
    
    
    
    (3,639
    )
    
    NaResearch and development
    
    
    291
    
    
    
    486
    
    
    
    195
    
    
    
    40.1Operating loss
    
    
    (7,926
    )
    
    
    (3,614
    )
    
    
    (4,312
    )
    
    
    (119.3
    )Interest expense, net
    
    
    740
    
    
    
    566
    
    
    
    (174
    )
    
    
    (30.7
    )Other expense, net
    
    
    41
    
    
    
    7
    
    
    
    (34
    )
    
    
    (485.7
    )Income taxes
    
    
    0
    
    
    
    9
    
    
    
    9
    
    
    
    100.0Minority interest
    
    
    (12
    )
    
    
    (17
    )
    
    
    (5
    )
    
    
    (29.4
    )Net loss
    
    
    ($8,695
    )
    
    
    ($4,179
    )
    
    
    ($4,516
    )
    
    
    (108.1
    )%Net loss per common share
    
    
    ($0.98
    )
    
    
    ($0.47
    )
    
    
    ($0.51
    )
    
    
    (108.5
    )%
 Net Loss
  Sales
  Domestic Sales
 $ $
 30




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##### Table of Contents



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
    31




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##### Table of Contents



Backlog
 , $
  32




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##### Table of Contents



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 23, 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.
        33




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##### Table of Contents



34




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 U.S. Navy  See Note 1  Subsequent Events in the accompanying Notes to the Condensed
Consolidated Financial Statements.
 Walt Disney World Co.
  Other Matters
  35




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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 May 29, 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 May 29, 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 May 29, 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.
 36




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##### Table of Contents



Signatures
  ENVIRONMENTAL TECTONICS CORPORATION
 Date: May 29, 2008
    By:
    /s/ William F. MitchellWilliam F. MitchellPresident and Chief
Executive Officer
(Principal Executive Officer)Date: May 29, 2008
    By:
    /s/ Duane DeanerDuane Deaner,Chief Financial Officer
(Principal Financial and Accounting Officer)