##### 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 November 26, 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.)
 (Address of principal executive offices, Zip Code)
  o þ
 o þ
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-accelerated Filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



PART I  FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements (unaudited)
    
    
    3Condensed Consolidated Income Statements (unaudited) for the thirteen and thirty-nine week
periods ended November 26, 2010 and November 27, 2009
    
    
    3Condensed Consolidated Balance Sheets (unaudited)as of November 26, 2010 and February 26, 2010
    
    
    4Condensed Consolidated Statements of Cash Flows (unaudited) for the thirty-nine week periods
ended November 26, 2010 and November 27, 2009
    
    
    5Notes to the Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 4. Controls and Procedures
    
    
    31PART II  OTHER INFORMATION
    
    
    32Item 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. (Removed and Reserved)
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    33Signatures
    
    
    34EX-31.1EX-31.2EX-32
   2




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##### Table of Contents



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
    
    
    Thirty-nine weekperiods ended
    
    
    periods endedNovember 26,
    
    
    November 27, 2009
    
    
    November 26,
    
    
    November 27, 20092010
    
    
    (restated)
    
    
    2010
    
    
    (restated)Net sales
    
    $
    16,148
    
    
    $
    10,974
    
    
    $
    41,513
    
    
    $
    30,415Cost of goods sold
    
    
    10,058
    
    
    
    6,530
    
    
    
    25,499
    
    
    
    16,588Gross profit
    
    
    6,090
    
    
    
    4,444
    
    
    
    16,014
    
    
    
    13,827Operating expenses:Selling and marketing
    
    
    1,302
    
    
    
    1,323
    
    
    
    3,424
    
    
    
    3,847General and administrative
    
    
    2,068
    
    
    
    1,582
    
    
    
    5,154
    
    
    
    4,752Research and development
    
    
    108
    
    
    
    (201
    )
    
    
    672
    
    
    
    2543,478
    
    
    
    2,704
    
    
    
    9,250
    
    
    
    8,853Operating income
    
    
    2,612
    
    
    
    1,740
    
    
    
    6,764
    
    
    
    4,974Other expenses:Interest expense
    
    
    205
    
    
    
    164
    
    
    
    622
    
    
    
    1,030Loss on extinguishment of debt
    
    
    
    
    
    
    91
    
    
    
    
    
    
    
    315Other, net
    
    
    85
    
    
    
    121
    
    
    
    213
    
    
    
    242290
    
    
    
    376
    
    
    
    835
    
    
    
    1,587Income before income taxes
    
    
    2,322
    
    
    
    1,364
    
    
    
    5,929
    
    
    
    3,387Income tax benefit
    
    
    
    
    
    
    2,606
    
    
    
    
    
    
    
    2,606Net income
    
    
    2,322
    
    
    
    3,970
    
    
    
    5,929
    
    
    
    5,993Income (loss) attributable to the
noncontrolling interest
    
    
    6
    
    
    
    (8
    )
    
    
    11
    
    
    
    (4
    )Net income attributable to Environmental
Tectonics Corporation
    
    
    2,316
    
    
    
    3,978
    
    
    
    5,918
    
    
    
    5,997Preferred stock dividend
    
    
    (558
    )
    
    
    (594
    )
    
    
    (1,703
    )
    
    
    (1,289
    )Income applicable to common shareholders
    
    $
    1,758
    
    
    $
    3,384
    
    
    $
    4,215
    
    
    $
    4,708Per share information:Basic earnings per common share:Distributed earnings per share:Common
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Preferred
    
    $
    0.05
    
    
    $
    0.05
    
    
    $
    0.15
    
    
    $
    0.17Undistributed earnings per share:Common
    
    $
    0.09
    
    
    $
    0.16
    
    
    $
    0.20
    
    
    $
    0.28Preferred
    
    $
    0.09
    
    
    $
    0.16
    
    
    $
    0.20
    
    
    $
    0.28Diluted earnings per common share
    
    $
    0.08
    
    
    $
    0.16
    
    
    $
    0.20
    
    
    $
    0.28Basic weighted average common shares:Common shares
    
    
    9,092,000
    
    
    
    9,071,000
    
    
    
    9,089,000
    
    
    
    9,066,000Participating Preferred shares
    
    
    11,368,000
    
    
    
    12,043,000
    
    
    
    11,506,000
    
    
    
    7,484,000Total number of shares
    
    
    20,460,000
    
    
    
    21,114,000
    
    
    
    20,595,000
    
    
    
    16,550,000Diluted weighted average common shares:Basic common shares
    
    
    20,460,000
    
    
    
    21,114,000
    
    
    
    20,595,000
    
    
    
    16,550,000Dilutive effect of stock warrants and options
    
    
    381,000
    
    
    
    187,000
    
    
    
    359,000
    
    
    
    205,000Total number of shares
    
    
    20,841,000
    
    
    
    21,301,000
    
    
    
    20,954,000
    
    
    
    16,755,000
  3




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##### Table of Contents



Environmental Tectonics Corporation
 
 Condensed
Consolidated Balance Sheets
(unaudited)
(in thousands, except share information)
 November 26,
    
    
    February 26,2010
    
    
    2010ASSETSCash and cash equivalents
    
    $
    1,356
    
    
    $
    2,408Restricted cash
    
    
    5,478
    
    
    
    2,751Accounts receivable, net
    
    
    10,018
    
    
    
    17,356Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    8,600
    
    
    
    3,576Inventories, net
    
    
    3,330
    
    
    
    5,114Deferred tax assets, current
    
    
    5,951
    
    
    
    4,983Prepaid expenses and other current assets
    
    
    2,165
    
    
    
    545Total current assets
    
    
    36,898
    
    
    
    36,733Property, plant and equipment, at cost, net
    
    
    13,213
    
    
    
    13,643Construction in progress
    
    
    248
    
    
    
    316Software development costs, net
    
    
    878
    
    
    
    691Other assets
    
    
    137
    
    
    
    346Total assets
    
    $
    51,374
    
    
    $
    51,729LIABILITIESCurrent portion of long-term debt
    
    $
    68
    
    
    $
    285Accounts payable  trade
    
    
    4,464
    
    
    
    1,783Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    3,899
    
    
    
    13,944Customer deposits
    
    
    1,745
    
    
    
    1,799Accrued interest and dividends
    
    
    691
    
    
    
    782Other accrued liabilities
    
    
    2,623
    
    
    
    2,814Total current liabilities
    
    
    13,490
    
    
    
    21,407Long-term obligations, less current portion:Credit facility payable to bank
    
    
    13,182
    
    
    
    9,808Other long-term debt
    
    
    
    
    
    
    1213,182
    
    
    
    9,820Deferred tax liabilities
    
    
    3,856
    
    
    
    3,066Unearned interest
    
    
    12
    
    
    
    22Total liabilities
    
    
    30,540
    
    
    
    34,315Commitments and contingencies
    
    
    
    
    
    
    STOCKHOLDERS EQUITYCumulative convertible participating preferred stock, Series D, $.05 par
value, 11,000 shares authorized; 386 and 155 shares outstanding at
November 26, 2010 and February 26, 2010
    
    
    386
    
    
    
    155Cumulative convertible participating preferred stock, Series E, $.05 par
value, 25,000 shares authorized; 22,241 and 23,741 shares outstanding at
November 26, 2010 and February 26, 2010
    
    
    22,241
    
    
    
    23,741Common
stock, $.05 par value, 50,000,000 shares authorized; 9,093,712 and 9,083,573 shares issued and outstanding at November 26, 2010 and February
26, 2010
    
    
    454
    
    
    
    454Additional paid-in capital
    
    
    12,450
    
    
    
    14,050Accumulated other comprehensive loss
    
    
    (72
    )
    
    
    (431
    )Accumulated deficit
    
    
    (14,674
    )
    
    
    (20,593
    )Total stockholders equity before noncontrolling interest
    
    
    20,785
    
    
    
    17,376Noncontrolling interest
    
    
    49
    
    
    
    38Total stockholders equity
    
    
    20,834
    
    
    
    17,414Total liabilities and stockholders equity
    
    $
    51,374
    
    
    $
    51,729
  4




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##### Table of Contents



Environmental Tectonics Corporation
 
 Condensed Consolidated Statements of Cash Flows

(unaudited)
(in thousands)
 Thirty-nine weekperiods endedNovember 26,
    
    
    November 27,2010
    
    
    2009Cash flows from operating activities:Net income attributable to Environmental Tectonics Corporation
    
    $
    5,918
    
    
    $
    5,997Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    1,109
    
    
    
    1,458Decrease in valuation allowance for deferred tax assets
    
    
    (2,456
    )
    
    
    (2,606
    )Loss on extinguishment of debt
    
    
    
    
    
    
    315Accretion of debt discount
    
    
    165
    
    
    
    225Increase in allowances for accounts receivable and inventories, net
    
    
    252
    
    
    
    497Stock compensation expense
    
    
    73
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    7,334
    
    
    
    (4,141
    )Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    (4,358
    )
    
    
    (2,010
    )Inventories
    
    
    1,536
    
    
    
    840Prepaid expenses and other assets
    
    
    (1,576
    )
    
    
    48Deferred tax assets, net
    
    
    2,278
    
    
    
    Accounts payable
    
    
    2,681
    
    
    
    128Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    (10,045
    )
    
    
    159Customer deposits
    
    
    (54
    )
    
    
    (233
    )Accrued interest and dividends
    
    
    (91
    )
    
    
    Other accrued liabilities
    
    
    (189
    )
    
    
    488Net cash provided by operating activities
    
    
    2,577
    
    
    
    1,165Cash flows from investing activities:Acquisition of equipment
    
    
    (990
    )
    
    
    (1,337
    )Capitalized software development costs
    
    
    (474
    )
    
    
    (279
    )Net cash used in investing activities
    
    
    (1,464
    )
    
    
    (1,616
    )Cash flows from financing activities:Borrowings under line of credit, net
    
    
    3,374
    
    
    
    1,333Repurchase of preferred stock, Series E
    
    
    (1,500
    )
    
    
    Issuance of preferred stock, Series D
    
    
    231
    
    
    
    Issuance of common stock
    
    
    30
    
    
    
    1Preferred stock dividends
    
    
    (1,703
    )
    
    
    (374
    )(Payments) borrowings of other debt obligations
    
    
    (229
    )
    
    
    140(Increase) decrease in restricted cash for performance guarantee
    
    
    (2,727
    )
    
    
    1,436Net cash (used in) provided by financing activities
    
    
    (2,524
    )
    
    
    2,536Effect of exchange rate changes on cash
    
    
    359
    
    
    
    368Net decrease in cash
    
    
    (1,052
    )
    
    
    2,453Cash at beginning of period
    
    
    2,408
    
    
    
    520Cash at end of period
    
    $
    1,356
    
    
    $
    2,973Supplemental schedule of cash flow information:Interest paid
    
    $
    309
    
    
    $
    364Income taxes paid
    
    
    256
    
    
    
    Supplemental information on non-cash operating and investing activities:Accrued dividends on preferred stock
    
    $
    559
    
    
    $
    319
    5




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
 3. Earnings Per Common Share
      
    
    Series D Preferred Stock of $55,000 at $0.94 per share, equating to 58,511 shares of
common stock, issued in April 2009;
    
    Series D Preferred Stock of $100,000 at $1.11 per share, equating to 90,090 shares
of common stock, issued in July 2009;
    
    Series D Preferred Stock of $231,000 at $3.02 per share, equating to 76,490 shares
of common stock, issued in August 2010;
    
    Series E Preferred Stock of $22,241,000 at $2.00 per share, equating to 11,120,500
shares of common stock, issued in July 2009.
  
    
    Series D Preferred Stock of $55,000 at $0.94 per share, equating to 58,511 shares of
common stock, issued in April 2009;
    
    Series D Preferred Stock of $100,000 at $1.11 per share, equating to 90,090 shares
of common stock, issued in July 2009;
    
    Series E Preferred Stock of $23,741,000 at $2.00 per share, equating to 11,870,500
shares of common stock, issued in July 2009.
  
    
    Series B Preferred Stock of $3,000,000 at $4.95 per share, equating to 606,061
shares of common stock, issued in April 2006;
    
    Series B Preferred Stock of $3,000,000 at $6.68 per share, equating to 449,102
shares of common stock, issued in July 2006;
    
    Series C Preferred Stock of $3,300,000 at $3.03 per share, equating to 1,089,109
shares of common stock, issued in August 2007.
  8




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##### Table of Contents



Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
   Thirteen week
    
    
    Thirty-nine weekperiods ended
    
    
    periods endedNovember 27,
    
    
    November 27, 2009
    
    
    
    
    
    
    November 27, 20092009
    
    
    (as originally
    
    
    November 27, 2009
    
    
    (as originally(restated)
    
    
    reported)
    
    
    (restated)
    
    
    reported)(amounts in thousands except share and per share information)Earnings per share:Basic earnings per share:Net income attributable to Environmental Tectonics Corporation
    
    $
    3,978
    
    
    $
    3,978
    
    
    $
    5,997
    
    
    $
    5,997Less preferred stock dividends
    
    
    (594
    )
    
    
    (594
    )
    
    
    (1,289
    )
    
    
    (1,289
    )Income applicable to common shareholders
    
    $
    3,384
    
    
    $
    3,384
    
    
    $
    4,708
    
    
    $
    4,708Basic earnings per share:Common weighted average number of shares
    
    
    9,071,000
    
    
    
    9,071,000
    
    
    
    9,066,000
    
    
    
    9,066,000Participating preferred weighted average number of common
shares
    
    
    12,043,000
    
    
    
    
    
    
    
    7,484,000
    
    
    
    Total weighted average number of shares
    
    
    21,114,000
    
    
    
    9,071,000
    
    
    
    16,550,000
    
    
    
    9,066,000Distributed earnings per share:Common
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Preferred
    
    $
    0.05
    
    
    $
    
    
    
    $
    0.17
    
    
    $
    Undistributed earnings per share:Common
    
    $
    0.16
    
    
    $
    0.37
    
    
    $
    0.28
    
    
    $
    0.52Preferred
    
    $
    0.16
    
    
    $
    
    
    
    $
    0.28
    
    
    $
    Diluted earnings per share:Total weighted average number of shares
    
    
    21,114,000
    
    
    
    9,071,000
    
    
    
    16,550,000
    
    
    
    9,066,000Dilutive effect of preferred stock
    
    
    
    
    
    
    12,019,000
    
    
    
    
    
    
    
    12,019,000Dilutive effect of stock options and stock warrants
    
    
    187,000
    
    
    
    187,000
    
    
    
    205,000
    
    
    
    205,000Total diluted weighted average number of shares
    
    
    21,301,000
    
    
    
    21,277,000
    
    
    
    16,755,000
    
    
    
    21,290,000Diluted earnings per share
    
    $
    0.16
    
    
    $
    0.19
    
    
    $
    0.28
    
    
    $
    0.28
 9




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##### Table of Contents



Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
 4. Inventories
  November 26,
    
    
    February 26,2010
    
    
    2010(unaudited)(in thousands)Raw materials
    
    $
    
    
    
    $
    Work in process
    
    
    2,995
    
    
    
    4,764Finished goods
    
    
    335
    
    
    
    350Total
    
    $
    3,330
    
    
    $
    5,114
   5. Accounts Receivable
  November 26,
    
    
    February 26,2010
    
    
    2010(unaudited)(in thousands)U.S. government
    
    $
    7,165
    
    
    $
    438U.S. commercial
    
    
    2,049
    
    
    
    1,403International
    
    
    1,224
    
    
    
    15,93010,438
    
    
    
    17,771Less: allowance for doubtful accounts
    
    
    (420
    )
    
    
    (415
    )$
    10,018
    
    
    $
    17,356
 10




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 6. Long-Term Obligations and Credit Arrangements
 Bank Credit and Facility
 Increased PNC Bank Credit Facility and Issuance of New Guarantee
      Amendments to the Credit Agreement
    11




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
  Dedicated Line of Credit Agreement with PNC Bank
    Lenfest Credit Facility
  ETC-PZL Project Financing
  Lenfest Financing Transaction
  12




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 Preferred Stock
   Series D Preferred Stock
     Series E Preferred Stock
    13




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 Common Stock Warrants
     November 26,
    
    
    February 26,2010
    
    
    2010(amounts in thousands)Note payable to bank
    
    $
    12,977
    
    
    $
    9,600ETC-PZL project financing
    
    
    273
    
    
    
    486Automobile loan
    
    
    
    
    
    
    7Total debt obligations
    
    
    13,250
    
    
    
    10,093Less current maturities
    
    
    68
    
    
    
    285Long-term obligations, net of current maturities
    
    $
    13,182
    
    
    $
    9,808
 14




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##### Table of Contents



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
or 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 atNovember 26, 2010 using:Liabilities
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(amounts in thousands)Credit facility payable to bank
    
    $
    
    
    
    $
    
    
    
    $
    12,994
    
    
    $
    12,994ETC-PZL contract financing
    
    
    
    
    
    
    
    
    
    
    263
    
    
    
    263Total
    
    $
    
    
    
    $
    
    
    
    $
    13,257
    
    
    $
    13,257
 Fair Value Measurement atFebruary 26, 2010 using:Liabilities
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(amounts in thousands)Credit facility payable to bank
    
    $
    
    
    
    $
    
    
    
    $
    10,551
    
    
    $
    10,551ETC-PZL contract financing
    
    
    
    
    
    
    
    
    
    
    453
    
    
    
    453Interest rate swap agreements
    
    
    
    
    
    
    85
    
    
    
    
    
    
    
    85Total
    
    $
    
    
    
    $
    85
    
    
    $
    11,004
    
    
    $
    11,089
 15




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 8. Income Taxes
      November 26,
    
    
    February 26,2010
    
    
    2010(amounts in thousands)Deferred tax assets:Net operating loss and credits
    
    $
    14,421
    
    
    $
    15,607Vacation reserve
    
    
    80
    
    
    
    80Inventory reserve
    
    
    476
    
    
    
    880Receivable reserve
    
    
    158
    
    
    
    156Warranty reserve
    
    
    117
    
    
    
    117Compensation and other reserves
    
    
    111
    
    
    
    32Other, net
    
    
    96
    
    
    
    7415,459
    
    
    
    16,946Valuation Allowance
    
    
    (9,508
    )
    
    
    (11,963
    )Total current deferred tax asset
    
    
    5,951
    
    
    
    4,983Deferred tax liabilities:Amortization of capitalized software
    
    
    403
    
    
    
    350Depreciation
    
    
    3,453
    
    
    
    2,716Total non-current deferred tax liability
    
    
    3,856
    
    
    
    3,066Net deferred tax asset
    
    $
    2,095
    
    
    $
    1,917
 16




---



##### Table of Contents



Environmental Tectonics Corporation  Notes to the Consolidated Financial Statements, continued
 9. Commitments and Contingencies
 Mends International, Ltd.
   Administrative Agreement with U.S. Navy
  17




---



##### Table of Contents



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
November 26, 2010:Net sales
    
    $
    11,334
    
    
    $
    4,814
    
    
    $
    
    
    
    $
    16,148Interest expense
    
    
    127
    
    
    
    78
    
    
    
    
    
    
    
    205Depreciation and amortization
    
    
    261
    
    
    
    121
    
    
    
    
    
    
    
    382Operating income (loss)
    
    
    2,506
    
    
    
    1,009
    
    
    
    (903
    )
    
    
    2,612Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Identifiable assets
    
    
    25,009
    
    
    
    6,333
    
    
    
    20,032
    
    
    
    51,374Expenditures for segment assets
    
    
    315
    
    
    
    147
    
    
    
    44
    
    
    
    506Thirteen week period ended
November 27, 2009:Net sales
    
    $
    5,720
    
    
    $
    5,254
    
    
    $
    
    
    
    $
    10,974Interest expense
    
    
    252
    
    
    
    (88
    )
    
    
    
    
    
    
    164Depreciation and amortization
    
    
    178
    
    
    
    261
    
    
    
    
    
    
    
    439Operating income (loss)
    
    
    1,123
    
    
    
    938
    
    
    
    (321
    )
    
    
    1,740Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Identifiable assets
    
    
    11,797
    
    
    
    6,094
    
    
    
    29,125
    
    
    
    47,016Expenditures for segment assets
    
    
    460
    
    
    
    179
    
    
    
    
    
    
    
    639
 Thirteen week
    
    
    Thirteen weekReconciliation to consolidated net
    
    period ended
    
    
    period endedincome attributable to Environmental
    
    November 26,
    
    
    November 27,Tectonics Corporation:
    
    2010:
    
    
    2009Operating income
    
    $
    2,612
    
    
    $
    1,740Interest expense
    
    
    (205
    )
    
    
    (164
    )Other, net
    
    
    (85
    )
    
    
    (121
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (91
    )Income tax benefit
    
    
    
    
    
    
    2,606Gain (loss) attributable to
noncontrolling interest
    
    
    6
    
    
    
    (8
    )Net income attributable to
Environmental Tectonics
Corporation
    
    $
    2,316
    
    
    $
    3,978
 18




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##### Table of Contents



Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
 Training Services
    
    Control Systems
    
    
    
    
    
    CompanyGroup (TSG)
    
    Group (CSG)
    
    Corporate
    
    Total(amounts in thousands)Thirty-nine week period ended
November 26, 2010:Net sales
    
    $
    27,941
    
    
    $
    13,572
    
    
    $
    
    
    
    $
    41,513Interest expense
    
    
    444
    
    
    
    178
    
    
    
    
    
    
    
    622Depreciation and amortization
    
    
    758
    
    
    
    351
    
    
    
    
    
    
    
    1,109Operating income (loss)
    
    
    5,288
    
    
    
    2,932
    
    
    
    (1,456
    )
    
    
    6,764Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Identifiable assets
    
    
    25,009
    
    
    
    6,333
    
    
    
    20,032
    
    
    
    51,374Expenditures for segment assets
    
    
    889
    
    
    
    347
    
    
    
    228
    
    
    
    1,464Thirty-nine week period ended
November 27, 2009:Net sales
    
    $
    19,026
    
    
    $
    11,389
    
    
    $
    
    
    
    $
    30,415Interest expense
    
    
    679
    
    
    
    351
    
    
    
    
    
    
    
    1,030Depreciation and amortization
    
    
    710
    
    
    
    748
    
    
    
    
    
    
    
    1,458Operating income (loss)
    
    
    4,955
    
    
    
    1,084
    
    
    
    (1,065
    )
    
    
    4,974Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Identifiable assets
    
    
    11,797
    
    
    
    6,094
    
    
    
    29,125
    
    
    
    47,016Expenditures for segment assets
    
    
    871
    
    
    
    466
    
    
    
    
    
    
    
    1,337
 Thirty-nine week
    
    
    Thirty-nine weekReconciliation to consolidated net
    
    period ended
    
    
    period endedincome attributable to Environmental
    
    November 26,
    
    
    November 27,Tectonics Corporation:
    
    2010:
    
    
    2009:Operating income
    
    $
    6,764
    
    
    $
    4,974Interest expense
    
    
    (622
    )
    
    
    (1,030
    )Other, net
    
    
    (213
    )
    
    
    (242
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (315
    )Income tax benefit
    
    
    
    
    
    
    2,606Gain (loss) attributable to
noncontrolling interest
    
    
    11
    
    
    
    (4
    )Net income attributable to
Environmental Tectonics
Corporation
    
    $
    5,918
    
    
    $
    5,997
 Concentration of Sales Greater than 10%
     19




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##### Table of Contents



Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
  11. Subsequent Event
  
 Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 FORWARD-LOOKING STATEMENTS
      20




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##### Table of Contents



Overview
    
    
    Increased production under U.S. Government contracts
  
    
    Exchange of long term debt, establishment of additional facility, and increase in bank
line
   
    
    Impact of net operating loss carryforwards and tax asset valuation allowance
  21




---



##### Table of Contents




    
    Continued expanded use of our NASTAR Center
      
    
    Continued capital and consulting spending to enhance and market worldwide our Authentic
Tactical Fighting Systems (ATFS) and other technologies.
  Critical Accounting Policies
   22




---



##### Table of Contents



Results of Operations
 Thirteen week period ended November 26, 2010 compared to the thirteen week period ended November
27, 2009
  Summary Table of ResultsThirteen weekThirteen week
    
    
    period endedperiod ended
    
    
    November 27,November 26,
    
    
    2009
    
    
    Variance
    
    
    Variance2010
    
    
    (restated)
    
    
    $
    
    
    %(amounts in thousands)
    
    
    ( ) =UnfavorableSales:Domestic
    
    $
    3,419
    
    
    $
    4,392
    
    
    $
    (973
    )
    
    
    (22.2
    )%US Government
    
    
    6,878
    
    
    
    2,321
    
    
    
    4,557
    
    
    
    196.3International
    
    
    5,851
    
    
    
    4,261
    
    
    
    1,590
    
    
    
    37.3Total sales
    
    
    16,148
    
    
    
    10,974
    
    
    
    5,174
    
    
    
    47.1Gross profit
    
    
    6,090
    
    
    
    4,444
    
    
    
    1,646
    
    
    
    37.0Selling and marketing expenses
    
    
    1,302
    
    
    
    1,323
    
    
    
    21
    
    
    
    1.6General and administrative expenses
    
    
    2,068
    
    
    
    1,582
    
    
    
    (486
    )
    
    
    (30.7
    )Research and development expenses
    
    
    108
    
    
    
    (201
    )
    
    
    (309
    )
    
    
    (153.7
    )Operating income
    
    
    2,612
    
    
    
    1,740
    
    
    
    872
    
    
    
    50.1Interest expense, net
    
    
    205
    
    
    
    164
    
    
    
    (41
    )
    
    
    (25.0
    )Other expense, net
    
    
    85
    
    
    
    121
    
    
    
    36
    
    
    
    29.8Loss on extinguishment of debt
    
    
    
    
    
    
    91
    
    
    
    91
    
    
    
    100.0Income taxes
    
    
    
    
    
    
    (2,606
    )
    
    
    (2,606
    )
    
    
    (100.0
    )Gain (loss) attributable to the noncontrolling interest
    
    
    6
    
    
    
    (8
    )
    
    
    (14
    )
    
    
    175.0Net income attributable to Environmental Tectonics Corporation
    
    
    2,316
    
    
    
    3,978
    
    
    $
    (1,662
    )
    
    
    (41.8
    )Preferred stock dividend
    
    
    (558
    )
    
    
    (594
    )
    
    
    36
    
    
    
    6.0Income applicable to common shareholders
    
    $
    1,758
    
    
    $
    3,384
    
    
    $
    (1,626
    )
    
    
    (48.0
    )Per share information:Basic earnings per common share:Distributed earnings per share:Common
    
    $
    
    
    
    $
    Preferred
    
    $
    0.05
    
    
    $
    0.05Undistributed earnings per share:Common
    
    $
    0.09
    
    
    $
    0.16Preferred
    
    $
    0.09
    
    
    $
    0.16Diluted earnings per common share
    
    $
    0.08
    
    
    $
    0.16
  23




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##### Table of Contents



Sales
  (amounts in thousands)Thirteen week period ended
    
    
    Thirteen week period endedNovember 26, 2010
    
    
    November 27, 2009Inter-
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Inter-Domestic
    
    
    USG
    
    
    national
    
    
    Total
    
    
    Domestic
    
    
    USG
    
    
    national
    
    
    TotalSegment sales:Training Services Group:Pilot Training Services
    
    $
    38
    
    
    $
    6,066
    
    
    $
    4,606
    
    
    $
    10,710
    
    
    $
    
    
    
    $
    1,912
    
    
    $
    2,290
    
    
    $
    4,202Simulation
    
    
    447
    
    
    
    
    
    
    
    64
    
    
    
    511
    
    
    
    122
    
    
    
    
    
    
    
    1,209
    
    
    
    1,331ETC-PZL and other
    
    
    118
    
    
    
    
    
    
    
    (5
    )
    
    
    113
    
    
    
    
    
    
    
    
    
    
    
    187
    
    
    
    187Total
    
    $
    603
    
    
    $
    6,066
    
    
    $
    4,665
    
    
    $
    11,334
    
    
    $
    122
    
    
    $
    1,912
    
    
    $
    3,686
    
    
    $
    5,720Control Systems Group:Environmental
    
    $
    337
    
    
    $
    812
    
    
    $
    829
    
    
    $
    1,978
    
    
    $
    142
    
    
    $
    409
    
    
    $
    88
    
    
    $
    639Sterilizers
    
    
    1,930
    
    
    
    
    
    
    
    
    
    
    
    1,930
    
    
    
    2,499
    
    
    
    
    
    
    
    14
    
    
    
    2,513Hyperbaric
    
    
    9
    
    
    
    
    
    
    
    333
    
    
    
    342
    
    
    
    983
    
    
    
    `
    
    
    
    450
    
    
    
    1,433Service and spares
    
    
    540
    
    
    
    
    
    
    
    24
    
    
    
    564
    
    
    
    646
    
    
    
    
    
    
    
    23
    
    
    
    669Total
    
    
    2,816
    
    
    
    812
    
    
    
    1,186
    
    
    
    4,814
    
    
    
    4,270
    
    
    
    409
    
    
    
    575
    
    
    
    5,254Company total
    
    $
    3,419
    
    
    $
    6,878
    
    
    $
    5,851
    
    
    $
    16,148
    
    
    $
    4,392
    
    
    $
    2,321
    
    
    $
    4,261
    
    
    $
    10,974
  Domestic Sales
  U.S. Government Sales
  International Sales
 .
 Gross Profit
  24




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##### Table of Contents



Selling and Marketing Expenses
  General and Administrative Expenses
  Research and Development Expenses
  Loss on Extinguishment of Debt
  Interest Expense
  Other Expense, Net
  Income Taxes
    25




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##### Table of Contents



Results of Operations
 Thirty-nine week period ended November 26, 2010 compared to the thirty-nine week period ended
November 27, 2009
  Summary Table of ResultsThirty-nineThirty-nine
    
    
    week periodweek period
    
    
    endedended
    
    
    November 27,November 26,
    
    
    2009
    
    
    Variance
    
    
    Variance2010
    
    
    (restated)
    
    
    $
    
    
    %(amounts in thousands)
    
    
    ( ) =UnfavorableSales:Domestic
    
    $
    8,755
    
    
    $
    9,228
    
    
    $
    (473
    )
    
    
    (5.1
    )%US Government
    
    
    17,451
    
    
    
    5,833
    
    
    
    11,618
    
    
    
    199.2International
    
    
    15,307
    
    
    
    15,354
    
    
    
    (47
    )
    
    
    (0.3
    )Total sales
    
    
    41,513
    
    
    
    30,415
    
    
    
    11,098
    
    
    
    36.5Gross profit
    
    
    16,014
    
    
    
    13,827
    
    
    
    2,187
    
    
    
    15.8Selling and marketing expenses
    
    
    3,424
    
    
    
    3,847
    
    
    
    423
    
    
    
    11.0General and administrative expenses
    
    
    5,154
    
    
    
    4,752
    
    
    
    (402
    )
    
    
    (8.5
    )Research and development expenses
    
    
    672
    
    
    
    254
    
    
    
    (418
    )
    
    
    (164.6
    )Operating income
    
    
    6,764
    
    
    
    4,974
    
    
    
    1,790
    
    
    
    36.0Interest expense, net
    
    
    622
    
    
    
    1,030
    
    
    
    408
    
    
    
    39.6Other expense, net
    
    
    213
    
    
    
    242
    
    
    
    29
    
    
    
    12.0Loss on extinguishment of debt
    
    
    
    
    
    
    315
    
    
    
    315
    
    
    
    100.0Income tax benefit
    
    
    
    
    
    
    (2,606
    )
    
    
    (2,606
    )
    
    
    (100.0
    )Gain (loss) attributable to the noncontrolling interest
    
    
    11
    
    
    
    (4
    )
    
    
    (15
    )
    
    
    (375.0
    )Net income attributable to Environmental Tectonics Corporation
    
    
    5,918
    
    
    
    5,997
    
    
    
    (79
    )
    
    
    (1.3
    )Preferred stock dividend
    
    
    (1,703
    )
    
    
    (1,289
    )
    
    
    (414
    )
    
    
    (32.1
    )Income applicable to common shareholders
    
    $
    4,215
    
    
    $
    4,708
    
    
    $
    (493
    )
    
    
    (10.5
    )Per share information:Basic earnings per common share:Distributed earnings per share:Common
    
    $
    
    
    
    $
    Preferred
    
    $
    0.15
    
    
    $
    0.17Undistributed earnings per share:Common
    
    $
    0.20
    
    
    $
    0.28Preferred
    
    $
    0.20
    
    
    $
    0.28Diluted earnings per common share
    
    $
    0.20
    
    
    $
    0.28
 Net Income
  26




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##### Table of Contents



Sales
  (amounts in thousands)Thirty-nine week period ended
    
    
    Thirty-nine week period endedNovember 26, 2010
    
    
    November 27, 2009Inter-
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Inter-Segment sales:
    
    Domestic
    
    
    USG
    
    
    national
    
    
    Total
    
    
    Domestic
    
    
    USG
    
    
    national
    
    
    TotalTraining Services Group:Pilot Training Services
    
    $
    98
    
    
    $
    15,021
    
    
    $
    11,207
    
    
    $
    26,326
    
    
    $
    71
    
    
    $
    4,372
    
    
    $
    9,276
    
    
    $
    13,719Simulation
    
    
    674
    
    
    
    
    
    
    
    325
    
    
    
    999
    
    
    
    407
    
    
    
    
    
    
    
    3,962
    
    
    
    4,369ETC-PZL and other
    
    
    245
    
    
    
    
    
    
    
    371
    
    
    
    616
    
    
    
    294
    
    
    
    
    
    
    
    644
    
    
    
    938Total
    
    $
    1,017
    
    
    $
    15,021
    
    
    $
    11,903
    
    
    $
    27,941
    
    
    $
    772
    
    
    $
    4,372
    
    
    $
    13,882
    
    
    $
    19,026Control Systems Group:Environmental
    
    $
    558
    
    
    $
    2,430
    
    
    $
    2,692
    
    
    $
    5,680
    
    
    $
    855
    
    
    $
    1,461
    
    
    $
    393
    
    
    $
    2,709Sterilizers
    
    
    4,772
    
    
    
    
    
    
    
    
    
    
    
    4,772
    
    
    
    4,283
    
    
    
    
    
    
    
    14
    
    
    
    4,297Hyperbaric
    
    
    974
    
    
    
    
    
    
    
    532
    
    
    
    1,506
    
    
    
    1,900
    
    
    
    `
    
    
    
    936
    
    
    
    2,836Service and spares
    
    
    1,434
    
    
    
    
    
    
    
    180
    
    
    
    1,614
    
    
    
    1,418
    
    
    
    
    
    
    
    129
    
    
    
    1,547Total
    
    
    7,738
    
    
    
    2,430
    
    
    
    3,404
    
    
    
    13,572
    
    
    
    8,456
    
    
    
    1,461
    
    
    
    1,472
    
    
    
    11,389Company total
    
    $
    8,755
    
    
    $
    17,451
    
    
    $
    15,307
    
    
    $
    41,513
    
    
    $
    9,228
    
    
    $
    5,833
    
    
    $
    15,354
    
    
    $
    30,415
  Domestic Sales
  U.S. Government Sales
  International Sales
  Gross Profit
  27




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##### Table of Contents



Selling and Marketing Expenses
  General and Administrative Expenses
 see
 Research and Development Expenses
  Loss on Extinguishment of Debt
  Interest Expense
  Other Expense, Net
  Income Taxes
    Liquidity and Capital Resources
   28




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##### Table of Contents



Total
    
    
    Amount
    
    
    Amount
    
    
    Total
    
    
    Amount
    
    
    AmountFacility
    
    
    Utilized
    
    
    Available
    
    
    Facility
    
    
    Utilized
    
    
    AvailableCredit facility*
    
    As of November 26, 2010:
    
    
    
    
    
    
    As of February 26, 2010:PNC line of credit
    
    $
    20,000
    
    
    $
    14,313
    
    
    $
    5,687
    
    
    $
    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
    
    
    $
    19,735
    
    
    $
    13,187
    
    
    $
    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
  29




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##### Table of Contents



Backlog
  November 26, 2010
    
    Business segment:Geographic area:
    
    TSG
    
    
    CSG
    
    
    Total
    
    
    %Domestic
    
    $
    989
    
    
    $
    7,910
    
    
    $
    8,899
    
    
    
    7.8
    %US Government
    
    
    35,846
    
    
    
    35,932
    
    
    
    71,778
    
    
    
    63.0International
    
    
    28,824
    
    
    
    4,521
    
    
    
    33,345
    
    
    
    29.2Total
    
    $
    65,659
    
    
    $
    48,363
    
    
    $
    114,022
    
    
    
    100.0
    %% of total
    
    
    57.6
    %
    
    
    42.4
    %
    
    
    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
    %
 ,
  30




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Control and Procedures
  Material Weaknesses in Internal Control Over Financial Reporting
    Remediation Efforts
   
    
    Company management will prepare, publish and enforce a detailed reporting
schedule which will allow adequate time for proper review by a newly formed
compliance disclosure committee. This committee will include Company accounting
personnel, the Companys General Counsel and the Companys key operations personnel.
The role of this committee will be to assure that all public filings have been
reviewed for regulatory compliance and adequate disclosure and that all suggested
revisions have been properly incorporated;
 
    
    Company management will review all procedural controls to ensure that (1) all
process participants clearly understand their respective individual roles and the
overall control environment, and (2) downstream controls and other checks and
balances in the control environment are functioning adequately; and
 
    
    if appropriate, for specific non-routine complex accounting transactions,
management will engage a separate accounting firm to support management in
accounting for these transactions.
  Changes in Internal Control Over Financial Reporting
  31




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Mends International, Ltd.
   Administrative Agreement with U.S. Navy
  Other Matters
  32




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##### Table of Contents



Item 1A. Risk Factors.
  
 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 3.1 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.10.4
    
    Amendment to Common Stock Warrant issued to H.F. Lenfest on April 23, 2009, executed
January 4, 2011, between the Registrant and H.F. Lenfest, was filed on January 7, 2011 as
Exhibit 10.1 to Form 8-K and is incorporated herein by reference.10.5
    
    Amendment to Stock Purchase Warrant issued to H.F. Lenfest on July 2, 2009, executed
January 4, 2011, between the Registrant and H.F. Lenfest, was filed on January 7, 2011 as
Exhibit 10.2 to Form 8-K and is incorporated herein by reference.10.6
    
    Secured Credit Facility and Warrant Purchase Agreement, dated April 24, 2009, between
Registrant and H.F. Lenfest, was filed on November 24, 2010 as Exhibit 10.1 to Form 8-K/A
and is incorporated herein by reference.31.1
    
    Certification dated January 10, 2011 made by William F. Mitchell, Chief Executive Officer.31.2
    
    Certification dated January 10, 2011 made by Duane D. Deaner, Chief Financial Officer.32
    
    Certification dated January 10, 2011 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.
 33




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##### Table of Contents



Signatures
  ENVIRONMENTAL TECTONICS CORPORATION
 Date:   January 10, 2011
    By:
    /s/ William F. MitchellWilliam F. MitchellPresident and Chief
Executive Officer

(Principal Executive Officer)Date:   January 10, 2011
    By:
    /s/ Duane DeanerDuane Deaner,Chief Financial Officer

(Principal Financial and Accounting Officer)