UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------------------------------------------
FORM 10-Q
FOR QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 27, 2005
COMMISSION FILE NO. 1-10655
ENVIRONMENTAL TECTONICS CORPORATION
------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-1714256
-------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization Identification No.)
COUNTY LINE INDUSTRIAL PARK
SOUTHAMPTON, PENNSYLVANIA 18966
---------------------------------------------
(Address of principal executive offices)
(Zip Code)
(215) 355-9100
---------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
Yes x No
--------- ---------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No x
--------- ---------
The number of shares outstanding of the registrant's common stock as of
June 30, 2005 is: 9,019,376.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENVIRONMENTAL TECTONICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
THIRTEEN WEEKS ENDED
MAY 27, 2005 May 28, 2004
----------- -----------
Net sales $ 5,915 $ 6,175
Cost of goods sold 4,433 5,181
----------- -----------
Gross profit 1,482 994
----------- -----------
Operating expenses:
Selling and administrative 2,627 2,430
Research and development 7 209
----------- -----------
2,634 2,639
----------- -----------
Operating loss (1,152) (1,645)
----------- -----------
Other expenses:
Interest expense 550 344
Other, net 24 85
----------- -----------
574 429
----------- -----------
Loss before income taxes (1,726) (2,074)
Benefit from income taxes -- (614)
----------- -----------
Loss before minority interest (1,726) (1,460)
Profit/(loss) attributable to
minority interest (3) 1
----------- -----------
Net loss $ (1,723) $ (1,461)
=========== ===========
Per share information:
Basic and diluted loss per share $ (.19) $ (.19)
Basic and diluted weighted average shares 9,019,000 7,635,000
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
2
ENVIRONMENTAL TECTONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
MAY 27, FEBRUARY 25,
2005 2005
-------- --------
(UNAUDITED)
--------
(AMOUNTS IN THOUSANDS,
EXCEPT SHARE INFORMATION)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,816 $ 12,041
Cash equivalents restricted 4,285 4,680
Accounts receivable, net 8,943 8,018
Costs and estimated earnings in excess of billings on uncompleted
long-term contracts 3,389 3,333
Inventories 8,306 7,928
Deferred tax asset 1,786 1,786
Prepaid expenses and other current assets 1,751 1,668
-------- --------
Total current assets 35,276 39,454
-------- --------
Property, plant and equipment, at cost, net of accumulated
depreciation of $11,668 at May 27, 2005 and $11,491 at
February 25, 2005 4,253 4,331
Software development costs, net of accumulated amortization of $8,954
at May 27, 2005 and $8,658 at February 25, 2005 3,465 3,567
Goodwill and intangibles 477 477
Other assets, net 1 80
-------- --------
TOTAL ASSETS $ 43,472 $ 47,909
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES:
Current portion of long-term debt $ 275 $ 275
Accounts payable - trade 1,570 2,893
Billings in excess of costs and estimated earnings on uncompleted
long-term contracts 1,787 1,533
Customer deposits 1,687 2,247
Accrued liabilities 1,780 2,688
-------- --------
Total current liabilities 7,099 9,636
-------- --------
Long-term debt, less current portion:
Credit facility payable to banks -- --
Long-term bonds, net 3,820 4,095
Subordinated debt 8,082 7,992
-------- --------
11,902 12,087
-------- --------
Deferred income taxes 1,786 1,786
-------- --------
TOTAL LIABILITIES 20,787 23,509
-------- --------
Minority interest 42 45
STOCKHOLDERS' EQUITY
Common stock; $.05 par value; 20,000,000 shares authorized; 9,019,376
issued and outstanding at May 27, 2005 and February 25, 2005 450 450
Capital contributed in excess of par value of common stock 16,561 16,561
Accumulated other comprehensive loss (126) (137)
Retained earnings 5,758 7,481
-------- --------
Total stockholders' equity 22,643 24,355
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 43,472 $ 47,909
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
3
ENVIRONMENTAL TECTONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THIRTEEN WEEKS ENDED
--------------------------------------
MAY 27, 2005 May 28, 2004
------------ ------------
(AMOUNTS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,723) $ (1,461)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 709 474
Non-cash interest expense 90 77
Provision for losses on accounts receivable and
inventories 144 1
Minority interest (3) 1
Changes in operating assets and liabilities:
Accounts receivable (1,022) 8,687
Costs and estimated earnings in excess of billings on
uncompleted long-term contracts (56) 210
Inventories (425) 374
Prepaid expenses and other current assets (240) (532)
Other assets -- (1)
Accounts payable (1,323) (687)
Billings in excess of costs and estimated earnings on
uncompleted long-term contracts 254 817
Customer deposits (560) (577)
Other accrued liabilities (908) (88)
-------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (5,063) 7,295
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment (99) (58)
Capitalized software development costs (194) (379)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (293) (437)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under credit facility -- (30)
Repayment of long-term bonds (275) (275)
Cash equivalents, restricted 395 (733)
Proceeds from issuance of common stock / warrants -- 724
Capitalized lease payments -- (13)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 120 (327)
-------- --------
Effect of exchange rate changes on cash 11 (47)
Net (decrease) increase in cash and cash equivalents (5,225) 6,484
Cash and cash equivalents at beginning of period 12,041 1,366
-------- --------
Cash and cash equivalents at end of period $ 6,816 $ 7,850
======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid 457 220
Income taxes paid 4 1
SUPPLEMENTAL INFORMATION ON NON-CASH OPERATING AND INVESTING ACTIVITIES:
During the thirteen-week period ending May 28, 2004, $593 was reclassified from
inventory to fixed assets.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
4
ENVIRONMENTAL TECTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Environmental Tectonics Corporation ("ETC" or the "Company"), Entertainment
Technology Corporation ("EnTCo"), ETC International Corporation and
ETC-Delaware, Inc. ("ETC Delaware"), its wholly-owned subsidiaries, ETC Europe,
its 99% owned subsidiary, and ETC-PZL Aerospace Industries, Ltd. ("ETC-PZL"),
its 95% owned subsidiary.
The accompanying consolidated financial statements have been prepared
by ETC, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission, and reflect all adjustments which, in the opinion of
management, are necessary for a fair presentation of the results for the interim
periods presented. All such adjustments are of a normal recurring nature.
Certain information in footnote disclosures normally included in
financial statements prepared in conformity with accounting principles generally
accepted in the United States of America has been condensed or omitted pursuant
to such rules and regulations and the financial results for the periods
presented may not be indicative of the full year's results, although the Company
believes the disclosures are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended February 25, 2005.
2. EARNINGS PER SHARE
Our calculation of earnings per share (EPS) in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share", is as follows:
Thirteen weeks ended May 27, 2005 Thirteen weeks ended May 28, 2004
--------------------------------- ---------------------------------
Loss Shares Per Share Loss Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
(amounts in thousands, except share and per share information)
Basic EPS
Net loss applicable to
common stockholders $1,723 9,019,000 $0.19 $1,461 7,635,000 $0.19
Effect of dilutive
securities
Options - -
Warrants - -
Diluted EPS
Net loss applicable to
common stockholders
plus assumed conversions $1,723 9,019,000 $0.19 $1,461 7,635,000 $0.19
5
ENVIRONMENTAL TECTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
At May 27, 2005 the Company had outstanding employee common stock options
totaling 276,162 shares which were not included in the computation of diluted
earnings per share, as the effect of such would be anti-dilutive. Additionally,
the Company had subordinated debt with a face value of $10,000,000 which was
convertible at an exercise price of $6.05 per share, equating to 1,652,893
shares if fully converted to common shares. Upon each conversion of the
subordinated note, the holder is entitled to receive a warrant to purchase
additional shares of common stock equal to ten percent of the shares issued
pursuant to such conversion. If the entire amount of subordinated debt were to
be converted into common shares, warrants to purchase an additional 165,289
shares would be issued, bringing the total shares to be issued to 1,818,182.
None of these shares were included in the computation of diluted earnings per
share as the effect would be anti-dilutive.
At May 28, 2004, the Company had outstanding employee common stock options
totaling 357,802 shares which were not included in the computation of diluted
earnings per share, as the effect of such options would be anti-dilutive.
Additionally, the Company had subordinated debt with a face value of
$10,000,000, which was convertible at an exercise price of $6.05 per share,
equating to 1,652,893 shares if fully converted to common shares. Upon each
conversion of the subordinated note, the holder is entitled to receive a warrant
to purchase additional shares of common stock equal to ten percent of the shares
issued pursuant to such conversion. If the entire amount of subordinated debt
were to be converted into common shares, warrants to purchase an additional
165,289 shares would be issued, bringing the total shares to be issued to
1,818,182. Additionally, there were outstanding warrants to purchase the
Company's stock totaling 803,048 shares. None of these shares were included in
the computation of diluted earnings per share as the effect would be
anti-dilutive.
3. STOCK OPTIONS
The Company accounts for stock options under SFAS No. 123, "Accounting
for Stock-Based Compensation," as amended by SFAS No. 148, which contains a fair
value-based method for valuing stock-based compensation that entities may use,
which measures compensation cost at the grant date based on the fair value of
the award. Compensation is then recognized over the service period, which is
usually the vesting period. Alternatively, SFAS No. 123 permits entities to
continue accounting for employee stock options and similar equity instruments
under Accounting Principles Board (APB) Opinion 25, "Accounting for Stock Issued
to Employees." Entities that continue to account for stock options using APB
Opinion 25 are required to make pro forma disclosures of net income and earnings
per share, as if the fair value-based method of accounting defined in SFAS No.
123 had been applied. (See Note 9, Recent Accounting Pronouncements, "Accounting
for Share Based Payments", for a discussion of SFAS No. 123.)
At May 27, 2005, the Company had one stock-based employee compensation
plan. The Company accounts for this plan under the recognition and measurement
principles of APB Opinion 25, "Accounting for Stock Issued to Employees," and
related interpretations. Stock-based employee compensation costs are not
reflected in net income, as all options granted under the plan had an exercise
price equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, to stock-based employee compensation (in thousands, except per share
amounts).
6
ENVIRONMENTAL TECTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Thirteen weeks ended
------------------------------------
May 27, 2005 May 28, 2004
------------ ------------
Net loss, as reported $1,723 $ 1,461
Less: stock-based compensation costs
determined under fair market value based
methods for all awards - (7)
------- -------
Net loss, pro forma $ 1,723 $ 1,468
Loss per share of common stock-basic:
As reported $ 0.19 $ 0.19
Pro forma $ 0.19 $ 0.19
Loss per share of common stock--diluted:
As reported $ 0.19 $ 0.19
Pro forma $ 0.19 $ 0.19
There were no grants of stock options during the thirteen weeks ended May 27,
2005 or May 28, 2004.
4. ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows:
May 27, February 25,
2005 2005
------- ------------
(amounts in thousands)
U.S. Government receivables billed and unbilled contract costs subject to
negotiation $ 4,428 $ 3,202
U.S. commercial receivables billed 2,854 2,331
International receivables billed and unbilled contract costs subject to
negotiation 2,243 2,971
------- -------
9,525 8,504
Less allowance for doubtful accounts (582) (486)
------- -------
$ 8,943 $ 8,018
======= =======
U.S. Government receivables billed and unbilled contract costs subject to
negotiation:
Unbilled contract costs subject to negotiation as of May 27, 2005 and
February 25, 2005, respectively, represent claims made against the U.S.
Government under a contract for a submarine rescue decompression chamber
project. These costs totaling $3,004,000 were recorded beginning in fiscal year
2002 and include $105,000 recorded during fiscal year 2005. In November 2003,
the U.S. Government completed an audit of the claim, rejecting most of the items
due to audit or engineering reasons. The Company was not provided a copy of the
Government's Technical Report that questioned approximately half of the claim
costs. The Company has submitted a written rebuttal to the draft report and has
formally requested a copy of the Technical Report. On July 22, 2004, the U.S.
Government's Contracting Officer issued a final decision on the claim, denying
the claim in full. The Company has updated the claim for additional costs
expended on claimable items since the original submission and has converted the
claim to a complaint which will be filed in the Court of Federal Claims in July
2005. Additionally, the Company is reviewing the costs on the project for
additional claim items which would be filed in a supplemental claim, if
required.
7
ENVIRONMENTAL TECTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
This U. S. Government claim has followed the typical process of claim
notification, preparation, submittal and government audit and review by the
contracting officer. Historically, the Company's experience has indicated that
most claims are initially denied in part or in full by the contracting officer
(or no decision is forthcoming, which is then taken to be a deemed denial) which
then forces the Company to seek relief in a court of law.
The Company considers the recorded costs to be realizable due to the
fact that the costs relate to customer caused delays, errors and changes in
specifications and designs, disputed liquidated damages and other out of scope
items. The U.S. Government, citing failure to deliver the product within
contract terms, has assessed liquidated damages but has not offset or withheld
any progress payments due to the Company under the contract. The Company
disputes the basis for these liquidated damages, noting that applicable U.S.
Government purchasing regulations allow for a waiver of these charges if the
delay is beyond the control and not due to the fault or negligence of the
Company. However, following accounting principles generally accepted in the
United States of America, the Company has reduced contract values and
corresponding revenue recognition for an estimated amount of $330,000 to cover a
delay through the extended delivery period.
International receivables billed and unbilled contract costs subject to
negotiation:
International receivables billed include $700,000 at May 27, 2005 and
February 25, 2005 related to a contract with the Royal Thai Air Force ("RTAF").
In October 1993, the Company was notified by the RTAF that the RTAF was
terminating a $4,600,000 simulator contract with the Company. Although the
Company had performed in excess of 90% of the contract, the RTAF alleged a
failure to completely perform. In connection with this termination, the RTAF
made a call on a $230,000 performance bond, as well as a draw on an
approximately $1,100,000 advance payment letter of credit. Work under this
contract had stopped while under arbitration, but on October 1, 1996, the Thai
Trade Arbitration Counsel rendered its decision under which the contract was
reinstated in full and the Company was given a period of nine months to complete
the remainder of the work. Except as noted in the award, the rights and
obligations of the parties remained as stated in the original contract including
the potential invoking of penalties or termination of the contract for delay. On
December 22, 1997, the Company successfully performed acceptance testing and the
unit passed with no discrepancy reports. Although the contract was not completed
in the time allotted, the Company has requested an extension on the completion
time due to various extenuating circumstances, including allowable "force
majeure" events, one of which was a delay in obtaining an export license to ship
parts required to complete the trainers. On August 30, 2001, the Company
received a payment of $230,000 representing the amount due on the performance
bond.
The open balance of $700,000 due on the contract represents the total
net exposure to the Company on this contract. On June 16, 2003, the Company
filed for arbitration in Thailand seeking recovery of the open balance of
$700,000 due on this contract. On October 8, 2003, the Thai government filed
their defense with the Thai Arbitration Institute (TAI). All arbitrators have
been chosen, including a third (umpire) arbitrator. The Company is currently
preparing witness statements in anticipation of the arbitration hearings which
are expected to begin in the next few months.
8
ENVIRONMENTAL TECTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Since the circumstances that caused a delay are commonly considered
"force majeure" events, and since the contract under question allows for
consideration of "force majeure" events, the Company believes that the open
balance related to this contract is collectible and will continue to treat this
balance as collectible until a final unappealable legal decision is rendered by
a competent Thai tribunal. The Company continues to enjoy a favorable
relationship with the RTAF. It currently provides maintenance for the RTAF
trainers that are the subject of the dispute and has sold a significant amount
of additional equipment to the RTAF since this dispute began. Thus, we do not
feel the initiation of legal action against the RTAF has affected our ability to
obtain additional contracts with the RTAF. At this point, the Company is not
able to determine what, if any, impact the extended completion period will
ultimately have upon the receipt of final payment.
Historically, the Company has had positive experience with regard to
its contract claims in that recoveries have exceeded the carrying value of
claims, including significant settlement agreements in fiscal 2003, 2004 and
2005. However, there is no assurance that the Company will always have positive
experience with regard to recoveries for its contract claims.
Net claims receivables were $3,004,000 at May 27, 2005 and February 25,
2005.
5. INVENTORIES
Inventories are valued at the lower of cost or market using the first
in, first out (FIFO) method and consist of the following (net of reserves of
$778,000 at May 27, 2005 and $731,000 at February 25, 2005):
May 27, February 25,
2005 2005
------ ------
(amounts in thousands)
Raw materials $ 288 $ 290
Work in process 5,703 5,293
Finished goods 2,315 2,345
------ ------
Total $8,306 $7,928
====== ======
6. STOCKHOLDERS' EQUITY
The components of stockholders' equity at February 25, 2005 and for the
quarter ended May 27, 2005 were as follows:
(amounts in thousands, except share information)
Common stock Additional Accumulated
paid in other comp. Retained
shares amount capital loss earnings Total
------ ------ ------- ---- -------- -----
Balance at February 25, 2005 9,019,376 $450 $16,561 $(137) $7,481 $24,355
Net loss for the thirteen weeks ended
May 27, 2005 (1,723) (1,723)
Foreign currency translation adjustment 11 11
-------
Total comprehensive loss (1,712)
-------
Balance at May 27, 2005 9,019,376 $450 $16,561 $(126) $5,758 $22,643
9
ENVIRONMENTAL TECTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7 LONG TERM OBLIGATIONS AND CREDIT ARRANGEMENTS
The following table lists the long-term debt and other long-term obligations of
the Company as of May 27, 2005.
Payments due by Period
Obligation Total Less than 1 year 1-3 years 4-5 years After 5 years
---------- ----- ---------------- --------- --------- -------------
Current portion of long-term
debt $ 275 $ 275 $ -- $ -- $ --
Subordinated debt, net of
unamortized discount of $1,918 8,082 -- -- 8,082 --
Long term bonds 3,820 -- 825 550 2,445
------- ------- ------- ------- -------
Total obligations $12,177 $ 275 $ 825 $ 8,632 $ 2,445
======= ======= ======= ======= =======
As part of our subordinated debt agreement, the Company must meet certain
financial covenants including a Leverage Ratio, a Fixed Charge Ratio and a
Tangible Net Worth Ratio. At May 27, 2005, the Company failed to meet these
covenants but has obtained a waiver of such violations from the subordinated
lender. This waiver applies to the period through May 27, 2006. Except as
specified, the waiver does not constitute a modification or alteration of any
other terms or conditions in the respective agreements, or a release of any of
the lender's rights or remedies, all of which are reserved, nor does it release
the Company or any guarantor from any of its duties, obligations, covenants or
agreements including the consequences of any event of default, except as
specified.
Refinancing
The Company has historically financed operations through a combination
of cash generated from operations, equity offerings, subordinated borrowings and
bank debt. On February 19, 2003, the Company refinanced its operations (the
"Refinancing"). The Refinancing was effected through the issuance of
subordinated convertible notes to H.F. Lenfest and a credit agreement (the
"Agreement") with PNC Bank, National Association ("PNC"). The total proceeds
from this refinancing were $29,800,000.
Bank Credit and Facility
The PNC Agreement has had numerous amendments the most recent of which
is discussed below. Currently, the facility is for $5,000,000 and use of the
facility is restricted to the issuance of international letters of credit. The
facility is secured by (i) the grant of a first and prior security interest in
all of the personal property of EnTCo, and ETC Delaware, each a wholly-owned
subsidiary of the Company, in favor of PNC; (ii) the Company's grant of a first
and prior security interest in all of the Company's accounts, deposits and all
other negotiable and non-negotiable instruments owned by the Company in favor of
PNC; (iii) the Company's grant of a first and prior mortgage
10
ENVIRONMENTAL TECTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
on all of the Company's real property in favor of PNC; and (iv) the Company's
grant of a first and prior security interest in all of the Company's rights to
(a) all of the shares of capital stock of each of EnTCo and ETC Delaware and (b)
65% of the shares of capital stock owned by the Company of each of its foreign
subsidiaries in favor of PNC. In addition, the PNC credit agreement requires
that EnTCo and ETC Delaware guarantee the Company's obligations under the PNC
facility. The current $5 million letter of credit facility is also personally
guaranteed by Mr.Lenfest.
On February 22, 2005, the Agreement was amended. This amendment
required the Company to increase the deposit as security in the restricted cash
account to an amount equal to 100% of the sum of the amount available to be
drawn on the Bond Letter of Credit ($4,225,000 at May 27, 2005). Additionally
the EXIM borrowing facility was cancelled and the Tangible Net Worth covenant
was reduced to $12,000,000 for all future reporting periods beginning with
February 25, 2005. The rate on the Reimbursement Letter of Credit which backs
the Company's long-term bonds was reduced to 0.75% per annum.
As of May 27, 2005 the Company had used approximately $1,959,000 of the
facility for international letters of credit.
Subordinated Convertible Debt
In connection with the financing provided by Mr. Lenfest on February
19, 2003, the Company entered into a Convertible Note and Warrant Purchase
Agreement with Mr. Lenfest (the "Note"), pursuant to which the Company issued to
Mr. Lenfest (i) a senior subordinated convertible promissory note in the
original principal amount of $10,000,000 (the "Note") and (ii) warrants to
purchase 803,048 shares of the Company's common stock. Upon the occurrence of
certain events, the Company would be obligated to issue additional warrants to
Mr. Lenfest. The Note accrues interest at the rate of 10% per annum and matures
on February 18, 2009. (For the period from December 1, 2003 through November 30,
2005, the rate has been reduced to 8% per annum.) At the Company's option, the
quarterly interest payments may be deferred and added to the outstanding
principal. The Note entitles Mr. Lenfest to convert all or a portion of the
outstanding principal of, and accrued and unpaid interest on, the note into
shares of common stock at a conversion price of $6.05 per share. The warrants
may be exercised into shares of common stock at an exercise price equal to the
lesser of $4.00 per share or two-thirds of the average of the high and low sale
prices of the common stock for the 25 consecutive trading days immediately
preceding the date of exercise.
The obligations of the Company to Mr. Lenfest under the Note are
secured by a second lien on all of the assets of the Company, junior in rights
to the lien in favor of PNC Bank, including all real property owned by the
Company.
11
ENVIRONMENTAL TECTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Prior to the consummation of the refinancing, Advanced Technology Asset
Management, LLC ("ATAM") (formerly ETC Asset Management, LLC), a shareholder of
the Company and a holder of warrants to purchase 332,820 shares of the Company's
common stock, consented to the transactions contemplated under the PNC Agreement
and the financing provided by Mr. Lenfest, including the below market issuance
of warrants to Mr. Lenfest. As a result of its consent, ATAM waived, solely in
connection with such issuance, the anti-dilution rights contained in its
warrant. In exchange for ATAM's consent, the Company issued to ATAM warrants to
purchase an additional 105,000 shares of common stock. Except for the number of
shares issuable upon exercise of the warrants, the new ATAM warrants have
substantially the same terms as the warrants issued to Mr. Lenfest. In March
2004, ATAM exercised all its warrants and received a total of 437,820 shares of
common stock of the Company. The Company received proceeds of $586,410 from the
exercise of these warrants.
As a condition of amending the Agreement on August 24, 2004, Mr.
Lenfest, holder of the Company's subordinated debt, agreed to issue to PNC on
the Company's behalf a limited guarantee to secure up to $5,000,000 in principal
amount of any letters of credit issued under the amended facility. In
consideration for issuing this guarantee, Mr. Lenfest will receive a fee of
0.75% per annum of the average amount of letters of credit outstanding, payable
on a quarterly basis, and was issued a warrant to purchase 200,000 shares of
stock under the same terms and conditions as his existing warrant for 803,048
shares.
On February 14, 2005, Mr. Lenfest exercised all of his outstanding
warrants and received 1,003,048 shares of common stock for approximately $3.9
million. Additionally, on February 14, 2005, Mr. Lenfest purchased 373,831
shares of the Company's common stock for approximately $2.0 million.
Under the Note the Company must meet certain financial covenants
including a Leverage Ratio, a Fixed Charge Ratio and a Tangible Net Worth Ratio.
At May 27, 2005 the Company failed to meet each of these financial covenants but
has obtained a waiver from the subordinated lender. This waiver applies to the
period through May 27, 2006. Except as specified, the waiver does not constitute
a modification or alteration of any other terms or conditions in the Note, or a
release of any of the lender's rights or remedies, all of which are reserved,
nor does it release the Company or any guarantor from any of its duties,
obligations, covenants or agreements including the consequences of any event of
default, except as specified.
Long-Term Bonds
On March 15, 2000, the Company issued approximately $5,500,000 of
unregistered Taxable Variable Rate Demand/Fixed Rate Revenue Bonds (Series of
2000). Net proceeds from these bonds were used to repay a $4,100,000 advance
taken on the Company's revolving credit facility and to finance construction of
an addition to the Company's main plant in Southampton, Pennsylvania. The bonds
are secured by an irrevocable direct pay Letter of Credit issued by PNC which
expires on February 17, 2006 and which is secured by all assets of the Company.
At February 25, 2005 they were also fully cash collateralized. The bonds carry a
maturity date of April 1, 2020, bear a variable interest rate which adjusts each
week to a rate required to remarket the bonds at full principal value (currently
at 3.19% on May 6, 2005) with a cap of 17%, and are subject to mandatory
redemption of $275,000 per year for 19 years and $245,000 for the 20th year.
12
ENVIRONMENTAL TECTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
On June 30, 2005 the Company directed the trustee for the bonds to
issue a redemption notice for all of the Company's outstanding bonds. The
Company intends on August 1, 2005 to utilize the restricted cash now being held
by PNC to redeem all outstanding bonds. As of May 27, 2005, all deferred
financing charges associated with this bond issue had been fully amortized to
the statement of operations.
Although it is expected that the bonds will be redeemed on August 1,
2005, they are classified as long-term on the balance sheet. This is due to the
fact that the decision to redeem the bonds and mailing of the notification of
redemption to the bondholders both occurred after the end of the fiscal quarter,
namely May 27, 2005. Additionally, the notice to redeem is revocable up to the
point that the trust account is funded to effect the redemption, which will not
occur until the day of actual redemption.
Operating Capital
Given the Company's inability to borrow cash under the amended
Agreement, the Company may need to obtain additional sources of capital in order
to continue growing and operating its business. This capital may be difficult to
obtain and the cost of this additional capital is likely to be relatively high.
However, because we have established businesses in many markets, significant
fixed assets including a building, and other valuable business assets which can
be used for security, we believe that we will be able to locate such additional
capital and that the actions by PNC will not have a long-term material adverse
effect on our business.
The Company believes that existing cash balances at May 27, 2005 and
cash expected to be generated from operating activities will be sufficient to
meet its future obligations through at least May 27, 2006.
In reference to the Company's outstanding claims with the U.S. Navy, to
the extent the Company is unsuccessful in recovering a significant portion of
recorded claim contract costs, and to the extent that significant additional
legal expenses are required to bring the dispute to resolution, such events
could have a material adverse effect on the Company's liquidity and results of
operations. Historically, the Company has had a favorable experience in that
recoveries have exceeded recorded claims, including significant settlement
agreements in fiscal 2003, 2004 and 2005. (See Note 4 to the Consolidated
Financial Statements, Accounts Receivable).
8. BUSINESS SEGMENT PRESENTATION:
The Company primarily manufactures under contract various types of
high-technology equipment that it has designed and developed. The Company
considers its business activities to be divided into two segments: Aircrew
Training Systems (ATS) and the Industrial Group. The ATS business segment
produces devices which create and monitor the physiological effects of motion,
including spatial disorientation and centrifugal forces for the medical,
training, research and entertainment markets. The Industrial Group produces
chambers that create environments that are used for sterilization, research, and
medical applications. The following segment information reflects the accrual
basis of accounting:
13
ENVIRONMENTAL TECTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(amounts in thousands) ATS Industrial Group Total
Thirteen weeks ended May 27, 2005
Net sales $ 3,475 $ 2,440 $ 5,915
Interest expense 375 175 550
Depreciation and amortization 294 179 473
Operating loss (92) (851) (943)
Income tax -- -- --
Goodwill and intangibles 477 -- 477
Identifiable assets 16,426 7,677 24,103
Expenditures for segment assets 67 32 99
Thirteen weeks ended May 28, 2004
Net sales $ 4,401 $ 1,774 $ 6,175
Interest expense 237 107 344
Depreciation and amortization 327 147 474
Operating loss (744) (632) (1,376)
Income tax benefit 320 224 544
Goodwill and intangibles 477 -- 477
Identifiable assets 19,541 8,251 27,792
Expenditures for segment assets 41 17 58
Reconciliation to consolidated amounts 2006 2005
---- -----
Corporate assets 19,369 19,345
------ -------
Total assets $43,472 $47,137
======= =======
Segment operating loss $ (943) $(1,376)
Interest expense (550) (344)
Income tax benefit -- 544
------ -------
Total loss for segments (1,493) (1,176)
Corporate home office expenses (209) (269)
Interest and other expenses (24) (85)
Income tax benefit -- 70
Minority interest 3 (1)
------ -------
Net loss (1,723) $(1,461)
====== =======
Segment operating income consists of net sales less applicable costs
and expenses relating to these revenues. Unallocated general corporate expenses
and other expenses such as letter of credit fees have been excluded from the
determination of the total profit/loss for segments. Corporate home office
expenses are primarily central administrative office expenses. Interest and
other expenses include banking and letter of credit fees. Property, plant and
equipment are not identified with specific business segments, as these are
common resources shared by all segments.
Approximately 22% of sales totaling $1,318,000 in the thirteen weeks
ended May 27, 2005 were made to one domestic customer in the ATS segment.
Approximately 44% of sales totaling $2,688,000 in the thirteen weeks ended May
28, 2004 were made to three international customers in the ATS segment.
Included in the segment information for the thirteen weeks ended May
27, 2005 are export sales of $2,378,000. Of this amount, there are sales to or
relating to governments or commercial accounts in China of $546,000. Sales to
the U.S. Government and its agencies aggregated $1,492,000 for the period.
Included in the segment information for the thirteen weeks
14
ENVIRONMENTAL TECTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
ended May 28, 2004 are export sales of $3,678,000. Of this amount, there are
sales to or relating to governments or commercial accounts in Malaysia
($1,225,000), Australia ($745,000), and Egypt ($718,000). Sales to the U.S.
Government and its agencies aggregated $447,000 for the period.
9. RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Share-Based Payments
In December 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123 (revised 2004), Share-Based Payments. This
statement replaces FASB Statement No. 123, Accounting for Stock-Based
compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. This statement requires companies to recognize in financial
statements the compensation cost relating to share-based transactions including
share options, restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans. The cost of these
arrangements will be measured based on the fair value of the equity or liability
instruments issued. Public companies will be required to apply Statement 123(R)
as of the first annual reporting period that begins after June 15, 2005. The
Company is not able at this time to determine what impact, if any, adoption of
Statement 123(R) will have on the results of operations.
Accounting for Inventory Costs
In November 2004, the FASB issued FASB Statement 151, Inventory Costs,
an amendment of ARB No. 43, Chapter 4. While retaining the general principle
that inventories are presumed to be stated at cost, Statement 151 amends ARB No.
43 to clarify that:
o abnormal amounts of idle facilities, freight, handling costs,
and spoilage should be recognized as charges of the current
period.
o allocation of fixed production overheads to inventories should
be based on the normal capacity of the production facilities.
The Statement defines normal capacity as the production expected to be
achieved over a number of periods or seasons under normal circumstances, taking
into account the loss of capacity resulting from planned maintenance.
Statement 151 is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005 and should be applied prospectively. Early
application is permitted. The Company is not able at this time to determine what
impact, if any, adoption of Statement 151 will have on the results of
operations.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements are based on the Company's current expectations and
projections about future events. These forward-looking statements are subject to
known and unknown risks, uncertainties and assumptions about the Company and its
subsidiaries that may cause actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such
forward-looking statements.
These forward-looking statements include statements with respect to the
Company's vision, mission, strategies, goals, beliefs, plans, objectives,
expectations, anticipations, estimates, intentions, financial condition, results
of operations, future performance and business of the company, including but not
limited to, (i) projections of revenues, costs of raw materials, income or loss,
earnings or loss per share, capital expenditures, growth prospects, dividends,
capital structure, other financial items and the effects of currency
fluctuations, (ii) statements of our plans and objectives of the Company or its
management or Board of Directors, including the introduction of new products, or
estimates or predictions of actions of customers, suppliers, competitors or
regulatory authorities, (iii) statements of future economic performance, (iv)
statements of assumptions and other statements about the Company or its
business, (v) statements made about the possible outcomes of litigation
involving the Company; and (vi) statements preceded by, followed by or that
include the words, "may," "could," "should," "looking forward," "would,"
"believe," "expect," "anticipate," "estimate," "intend," "plan," or the negative
of such terms or similar expressions. These forward-looking statements involve
risks and uncertainties which are subject to change based on various important
factors. Some of these risks and uncertainties, in whole or in part, are beyond
the Company's control. Factors that might cause or contribute to such a material
difference include, but are not limited to, those discussed in the Company's
Annual Report on Form 10-K for the fiscal year ended February 25, 2005, in the
section entitled "Risks Particular to Our Business." Shareholders are urged to
review these risks carefully prior to making an investment in the Company's
common stock.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by
or on behalf of the Company.
OVERVIEW
We are principally engaged in the design, manufacture and sale of
software driven products used to create and monitor the physiological effects of
motion on humans, real time interactive training programs, and equipment and to
control, modify, simulate and measure environmental conditions. These products
include pilot training systems ("PTS"), disaster management software and
products, entertainment products, sterilizers, environmental and hyperbaric
chambers and other products that involve similar manufacturing techniques and
engineering technologies.
The following factors had an adverse impact on our performance for the
fiscal quarter ended May 27, 2005:
16
o unfavorable global economic and political conditions;
o continued product development and marketing costs associated
with our ATFS technology;
o continuing product enhancement costs in our simulation line;
o higher costs of capital and amortization of deferred finance
charges; and
o litigation and claims costs.
Our sales efforts continued to be hampered by unfavorable global
economic and political conditions. We saw many of our potential new contracts
delayed by budget constraints and delays of our customers located throughout the
world. This was especially true in our ATS business, where most of the sales are
to international customers.
In the first quarter of fiscal 2006 we continued our education and
marketing efforts to introduce our Authentic Tactical Flight Simulator ("ATFS")
to the U.S. military. The evolution of these exciting and state-of-the-art
technologies is an important step in our goal of integrating flight and
aeromedical training in a simulator device. This technology allows a fighter
pilot to practice tactical air combat maneuvers such as dodging enemy missiles,
ground fire and aircraft obstacles while experiencing the real life environment
of a high-G Force fighter aircraft. These flight trainers provide a low cost and
extremely less risky alternative to actual air flight. We believe that armed
forces agencies of various governments will appreciate the efficiency of these
technologies, especially in this time of fiscal conservatism and budgetary
constraints throughout the world. Given the continuing budget cutbacks in the
U.S. military, this product offers a low cost and safe alternative to the
current approach to training.
Given the highly advanced nature of our disaster management line of
simulation products, additional funds were required to enhance applications and
functionality of our proprietary software. We expect this effort to continue in
fiscal 2006.
One of the greatest challenges we face is adequately funding the cash
requirements of large, long-term multi-year projects. Although these contracts
normally incorporate milestone payments, the cash flows associated with
production and material requirements tend to vary significantly over time. These
projects are usually cash positive in the early stages and cash negative during
the production phase. Funding these contracts requires a significant amount of
operating funds and may hamper other types of business. In fiscal 2005, our bank
took certain actions which effectively eliminated our ability to borrow cash
under our existing agreement to support operations. These actions also resulted
in us being required to issue additional common stock warrants in consideration
for a limited guarantee to secure the Company's letter of credit bank facility
which increased amortization expense associated with the deferred finance
charges on these warrants. Although we had a strong cash balance at fiscal 2005
year end, during the first quarter of fiscal 2006 cash flow from operations was
negative as we paid legal bills, primarily related to litigation, and value
added taxes in England resulting from a settlement agreement. We may need to
obtain additional sources of capital in order to continue growing and operating
our business. Because we have established businesses in many markets,
significant fixed assets including a building, and other business assets which
can be used for security, we believe that we will be able to locate such
additional sources of capital and that the bank actions will not have a
long-term material adverse effect on our business.
17
In addition, we face the following challenges and business goals in
order to make fiscal 2006 a successful year:
o Aircrew Training Systems
o Market all the aeromedical products we technologically
enhanced in fiscal 2004 and 2005.
We have heavily invested in enhancing functionality and
product capability of three ATS products: our centrifuge-based
flight simulator, our General Aviation Trainer (GAT), and our
Gyro-IPT. Repeat sales of these state-of-the-art simulators
will allow us to recoup the costs of our non-recurring
engineering and design effort.
o Continue to evolve ATFS.
Our challenge will be to find funding to continue this
critical development objective, either through U.S. government
grants or a customer order.
Entertainment
o Develop a business model for the entertainment line which
addresses the three types of contractual arrangements which
are common in the amusement and educational venues: outright
purchases, leasing and revenue sharing. Additionally, we will
need to locate the capital required to support this type of
business structure.
o Expand the entertainment line by repeat sales and the
introduction of story line enhancements.
o Continue our rebuilding efforts for "big-ticket" amusement
products which have been severely hampered by the amusement
market's negative perception of our capabilities in the
entertainment industry due to actions by a former customer
with whom we are currently in litigation.
Environmental
o Bring the environmental line back to profitability by
refocusing the selling effort towards domestic contracts for
standardized products.
ADMS
o Develop a service business to supplant the sale of our
Advanced Disaster Management Systems (ADMS). During fiscal
2005, we received a contract to perform airport certification
and emergency drill training using software and technology
developed for the ADMS line at the Baltimore-Washington
International Airport. We believe this is a new and
undeveloped market with good potential.
Claims and Litigation
o Continue to pursue outstanding commercial litigation and the
Company's claim against the U.S. government.
At May 27, 2005, we were involved in major commercial and
government litigation which will require a significant amount
of our time and effort. These activities will potentially
detract from other business issues and require significant
funding.
18
Liquidity
o We do not currently have a bank facility which can be used to
borrow funds for operations.
During fiscal 2005, our bank took certain actions which
effectively eliminated our ability to borrow cash under our
existing agreement to support operations. Thus, we may need to
obtain additional sources of capital in order to continue
growing and operating our business. This capital may be
difficult to obtain and the cost of this additional capital is
likely to be relatively high.
Critical Accounting Policies
The discussion and analysis of the Company's financial condition and
results of operation are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amount of assets and liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities at the date of the
Company's financial statements. Actual results may differ from these estimates
under different assumptions or conditions.
Critical accounting policies are defined as those that reflect
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. The Company
believes that its critical accounting policies include those described below.
For a detailed discussion on the application of these and other accounting
policies, see Note 1 to the Consolidated Financial Statements, Summary of
Significant Accounting Policies in the Company's Annual Report on Form 10-K for
the fiscal year ended February 25, 2005, which was filed with the Securities and
Exchange Commission on May 26, 2005.
There have been no changes to our critical accounting policies since
fiscal 2005 year- end. The reader is referred to the Company's Annual Report on
Form 10-K for the fiscal year ended February 25, 2005 in the section entitled
"Critical Accounting Policies" under the Management's Discussion and Analysis of
Financial Condition and Results of Operations.
19
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MAY 27, 2005 COMPARED TO THIRTEEN WEEKS ENDED MAY 28, 2004
($000) Summary Table of Results
FY 06 FY 05 $ variance % variance
( )=unfavorable
SALES
DOMESTIC $ 2,045 $ 2,050 $ (5) -- %
US GOV'T 1,492 447 1,045 233.8
INT'L 2,378 3,678 (1,300) (35.4)
------- ------- ------- -------
TOTAL SALES 5,915 6,175 (260) (4.2)
GROSS PROFIT 1,482 994 488 49.1
SG&A EXPENSES 2,627 2,430 (197) (8.1)
R&D EXPENSES 7 209 202 96.7
INTEREST EXP 550 344 (206) (59.9)
OTHER EXP.,NET 24 85 61 71.8
INCOME TAXES -- (614) (614) (100.0)
MINORITY INTEREST (3) 1 4 400.0
------- ------- -------
NET LOSS $(1,723) $(1,461) $ (262) (17.9%)
======= ======= ======= ========
NET LOSS PER SHARE
(DILUTED) $ (.19) $ (.19) $ -- $ --
======= ======= ======= =======
NET LOSS
The Company had a net loss of $1,723,000, or $0.19 per share (diluted),
during the first quarter of fiscal 2006 compared to a net loss of $1,461,000, or
$.19 per share (diluted), for the first quarter of fiscal 2005, representing a
variance of $262,000. This decrease was due primarily to a decrease in sales, an
increase in selling, general and administrative expenses and interest expense
and a reduced income tax benefit partially offset by an increased gross margin
and reduced R&D expenses.
20
SALES
Sales for the first quarter of fiscal 2006 were $5,915,000 as compared
to $6,175,000 for the first quarter of fiscal 2005, a decrease of $260,000 or
4.2%. The sales decrease primarily reflected a significant decrease in both
domestic and international PTS (down $893,000, 98.8% and $1,389,000, 44.7%,
respectively) and U.S. Government hyperbaric sales (down $252,000, 99.3%)
partially offset by increases across the board in the other business units, most
notably domestic and international environmental sales (up $350,000, 36.3% in
total) and domestic sterilizer sales, up $116,000, 87.1%. The decrease
domestically in PTS sales reflected the sale in the prior period of a GAT for
use by the U.S. Air Force and reduced activity internationally for a centrifuge
project in Malaysia. The reduction in Hyperbaric sales reflected less POC
revenue for the U.S. Navy decompression chamber project, which is the subject of
an outstanding claim. Higher environmental and sterilizer sales reflected
generally increased activity.
DOMESTIC SALES
Overall, domestic sales in the first quarter of fiscal 2006 were
$2,045,000 as compared to $2,050,000 in the first quarter of fiscal 2005, a
decrease of $5,000, as the aforementioned significant reduction in PTS sales
coupled with reduced simulation sales was almost completely offset by increases
in the other product areas. Domestic sales represented 34.6% of the Company's
total sales in the first quarter of fiscal 2006, up from 33.2% for the first
quarter of fiscal 2005. U.S. Government sales in the first quarter of fiscal
2006 were $1,492,000 as compared to $447,000 in the first quarter of fiscal 2005
and represented 25.2% of total sales in the first quarter of fiscal 2006 versus
7.2% for the first quarter of fiscal 2005.
INTERNATIONAL SALES
International sales for the first quarter of fiscal 2006 were
$2,378,000 as compared to $3,678,000 in the first quarter of fiscal 2005, a
decrease of $1,300,000 or 35.4%, and represented 40.2% of total sales, as
compared to 59.6% in the first quarter of fiscal 2005. Throughout the Company's
history, most of the sales for PTS have been made to international customers. In
the first quarter of fiscal 2006, international sales totaling at least ten
percent of total international sales were made to China ($546,000). In the first
quarter of fiscal 2005, international sales totaling at least ten percent of
total international sales were made to Malaysia ($1,225,000), Australia
($745,000) and Egypt ($718,000). Fluctuations in sales to international
countries from year to year primarily reflect POC revenue recognition on the
level and stage of development and production on multi-year long-term contracts.
GROSS PROFIT
Gross profit for the first quarter of fiscal 2006 was $1,482,000 as
compared to $994,000 in the first quarter of fiscal 2005, an increase of
$488,000 or 49.1%. This increase reflected a 9.0 percentage point increase in
the gross profit rate as a percent of sales which completely offset the
aforementioned sales decrease. The increased gross profit rate as a percent of
sales reflected improvements in the environmental, PTS and simulation product
area rates, which were partially offset by reduced rates in the other product
areas. The primary impact on gross profit resulted from higher U.S. Government
PTS sales at a higher gross profit rate.
21
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses for the first quarter of fiscal
2006 were $2,627,000 as compared to $2,430,000 in the first quarter of fiscal
2005, an increase of $197,000 or 8.1%. Most of the variance resulted from higher
legal costs associated with the Company's ongoing litigation with Disney.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses, which are charged to operations as
incurred, were $7,000 for the first quarter of fiscal 2006 as compared to
$209,000 for the first quarter of fiscal 2005, reflecting a decrease of $202,000
or 96.7%. The decrease primarily reflected the receipt in our Turkish subsidiary
of grant funds from the Turkish Government for qualified technical research. Our
Turkish subsidiary currently has three reimbursement programs. Most of the
Company's research efforts, which were and continue to be a significant cost of
its business, are included in cost of sales for applied research for specific
contracts, as well as research for feasibility and technology updates.
INTEREST EXPENSE
Interest expense for the first quarter of fiscal 2006 was $550,000 as
compared to $344,000 for the first quarter of fiscal 2005, representing an
increase of $206,000 or 59.9%. This increase primarily reflected increased
amortization of deferred finance expenses from the Company's February 2003
refinancing and additional amortization of deferred financing charges associated
with the issuance in fiscal 2005 of common stock warrants in connection with a
limited guarantee issued in the Company's favor by Mr. Lenfest to PNC to secure
international letters of credit. As of May 27, 2005 all deferred financing
charges associated with the Company's issuance of long-term bonds in February
2003 had been fully amortized to the statement of operations.
OTHER INCOME/EXPENSE, NET
Other income/expense, net, was a net expense of $24,000 for the first
quarter of fiscal 2006 versus a net expense of $85,000 for the first quarter of
fiscal 2005, a decrease of $61,000 or 71.8%. This decrease primarily reflected
reduced bank charges.
INCOME TAXES
Although the company reported a pre-tax operating loss during the
current fiscal quarter, no offsetting income tax benefit and corresponding
deferred tax asset was recorded, due to the uncertain nature of their ultimate
realization based on past performance and the potential that sufficient taxable
income may not be generated in the near future. The Company will recognize these
benefits only as reassessment demonstrates that they are realizable. Realization
is entirely dependent upon future earnings in specific tax jurisdictions.
As of February 25, 2005 the Company had approximately $7.2 million of
federal and $12.5 million of state net loss carry forwards available to offset
future income taxes, expiring in 2025. The Company has established a full
valuation allowance of the same amount against these carry forward benefits.
While the need for this valuation allowance is subject to periodic review, if
the allowance is reduced, the tax benefits of the carry forwards will be
recorded in future operations as a reduction of the company's income tax
expense.
22
The Company's tax benefit for the first quarter of fiscal 2005
reflected an estimated 30% rate domestically and a consolidated estimated rate
of 29.6%. The domestic tax rate reflected the estimated impact of timing
differences and foreign sales and domestic research and development tax credits.
The international rate reflects no tax benefit for ETC Europe, a subsidiary of
the Company, since we are not assured there will be future tax liabilities to
utilize any current tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
During the thirteen weeks ended May 27, 2005, operating activities
required $5,063,000 of the Company's cash. This reflected the net operating
loss, an increase in accounts receivable and inventories, and a decrease in
accounts payable, customer deposits and other accrued liabilities. Cash
requirements to support operations included the payment of significant legal
bills and value added taxes in the Company's European subsidiary, both
associated with the international claim settlement in February, 2005, and an
increase in trade receivables due to the nature and timing of milestone billings
on various contracts. Acting as partial offsets were add-backs for non-cash
expenses such as depreciation, software amortization and amortization of
deferred finance charges.
The Company's investing activities required $293,000 during the
thirteen weeks ended May 27, 2005 which consisted of purchases of capital
equipment and capitalized software.
The Company's financing activities generated $120,000 during the
thirteen weeks ended May 27, 2005, as a scheduled annual repayment on the
Company's long-term bonds was completely offset by a reduction in the Company's
cash collateral restricted cash account. The cash collateral account serves as
security for the Company's long-term bonds. On June 30, 2005 the Company
directed the trustee for the bonds to issue a redemption notice for all of the
Company's outstanding bonds. The Company intends on August 1, 2005 to utilize
the restricted cash now being held by PNC to redeem all outstanding bonds. As of
May 27, 2005, all the deferred financing charges associated with this bond issue
had been fully amortized to the statement of operations.
Refinancing
The Company has historically financed operations through a combination
of cash generated from operations, equity offerings, subordinated borrowings and
bank debt. On February 19, 2003, the Company refinanced its operations (the
"Refinancing"). The Refinancing was effected through the issuance of
subordinated, convertible notes to H.F. Lenfest, an individual, and a credit
agreement (the "Agreement") with PNC Bank, National Association ("PNC"). The
total proceeds from this refinancing were $29,800,000.
Bank Credit and Facility
The PNC Agreement has had numerous amendments the most recent of which
is discussed below. Currently, the facility is for $5,000,000 and use of the
facility is restricted to the issuance of international letters of credit. The
facility is secured by (i) the grant of a first and prior security interest in
all of the personal property of the Company, EnTCo, and ETC Delaware, each a
wholly-owned subsidiary of the Company, in favor of PNC; (ii) the Company's
grant of a first and prior security interest in all of the Company's accounts,
deposits and all other negotiable and non-negotiable instruments owned by the
Company in favor of PNC; (iii) the Company's grant of a first and prior mortgage
on all of the Company's real property in favor of PNC; and (iv) the Company's
grant of a first and prior security interest in all of the Company's rights to
(a) all of the shares of capital stock of each of EnTCo and ETC Delaware and (b)
65% of the shares of capital stock owned by the Company of each of its foreign
subsidiaries in favor of PNC. In addition, the PNC credit agreement requires
that EnTCo and ETC Delaware guarantee the Company's obligations under the PNC
facility. The current $5 million letter of credit facility is also personally
guaranteed by Mr. Lenfest.
23
On February 22, 2005, the Agreement was amended. This amendment
required the Company to increase the deposit as security in the restricted cash
account to an amount equal to 100% of the sum of the amount available to be
drawn on the Bond Letter of Credit ($4,225,000 at May 27, 2005). Additionally
the EXIM borrowing facility was cancelled and the Tangible Net Worth covenant
was reduced to $12,000,000 for all future reporting periods beginning with
February 25, 2005. The rate on the Reimbursement Letter of Credit which backs
the Company's long-term bonds was reduced to 0.75% per annum.
As of May 27, 2005 the Company had used approximately $1,959,000 of the
facility for international letters of credit.
Subordinated Convertible Debt
In connection with the financing provided by Mr. Lenfest on February
19, 2003, the Company entered into a Convertible Note and Warrant Purchase
Agreement with Mr. Lenfest (the "Note"), pursuant to which the Company issued to
Mr. Lenfest (i) a senior subordinated convertible promissory note in the
original principal amount of $10,000,000 (the "Note") and (ii) warrants to
purchase 803,048 shares of the Company's common stock. Upon the occurrence of
certain events, the Company will be obligated to issue additional warrants to
Mr. Lenfest. The note accrues interest at the rate of 10% per annum and matures
on February 18, 2009. (For the period from December 1, 2003 through November 30,
2005, the rate has been reduced to 8% per annum.) At the Company's option, the
quarterly interest payments may be deferred and added to the outstanding
principal. The note entitles Mr. Lenfest to convert all or a portion of the
outstanding principal of, and accrued and unpaid interest on, the note into
shares of common stock at a conversion price of $6.05 per share. The warrants
may be exercised into shares of common stock at an exercise price equal to the
lesser of $4.00 per share or two-thirds of the average of the high and low sale
prices of the common stock for the 25 consecutive trading days immediately
preceding the date of exercise.
The obligations of the Company to Mr. Lenfest under the Convertible
Note and Warrant Purchase Agreement are secured by a second lien on all of the
assets of the Company, junior in rights to the lien in favor of PNC Bank,
including all real property owned by the Company.
Prior to the consummation of the refinancing, Advanced Technology Asset
Management, LLC ("ATAM") (formerly ETC Asset Management, LLC), a shareholder of
the Company and a holder of warrants to purchase 332,820 shares of the Company's
common stock, consented to the transactions contemplated under the PNC Agreement
and the financing provided by Mr. Lenfest, including the below market issuance
of warrants to Mr. Lenfest. As a result of its consent, ATAM waived, solely in
connection with such issuance, the anti-dilution rights contained in its
warrant. In exchange for ATAM's consent, the Company issued to ATAM warrants to
purchase an additional 105,000 shares of common stock. Except for the number of
shares issuable upon exercise of the warrants, the new ATAM warrants have
substantially the same terms as the warrants issued to Mr. Lenfest. In March
2004, ATAM exercised all its warrants and received a total of 437,820 shares of
common stock of the Company. The Company received proceeds of $586,410 from the
exercise of these warrants.
24
As a condition of amending the Agreement on August 24, 2004, Mr.
Lenfest, holder of the Company's subordinated debt, agreed to issue to PNC on
the Company's behalf a limited guarantee to secure up to $5,000,000 in principal
amount of any letters of credit issued under the amended facility. In
consideration for issuing this guarantee, Mr. Lenfest will receive a fee of
0.75% per annum of the average amount of letters of credit outstanding, payable
on a quarterly basis, and was issued a warrant to purchase 200,000 shares of
stock under the same terms and conditions as his original warrant for 803,048
shares.
On February 14, 2005, Mr. Lenfest exercised all of his outstanding
warrants and received 1,003,048 shares of common stock for approximately $3.9
million. Additionally, on February 14, 2005, Mr. Lenfest purchased 373,831
shares of the Company's common stock for approximately $2.0 million.
Under the Note the Company must meet certain financial covenants
including a Leverage Ratio, a Fixed Charge Ratio and a Tangible Net Worth Ratio.
At May 27, 2005 the Company failed to meet each of these financial covenants but
has obtained a waiver from Mr. Lenfest. This waiver applies to the period
through May 27, 2006. Except as specified, the waiver does not constitute a
modification or alteration of any other terms or conditions in the Note, or a
release of any of the lender's rights or remedies, all of which are reserved,
nor does it release the Company or any guarantor from any of its duties,
obligations, covenants or agreements including the consequences of any event of
default, except as specified.
Long-Term Bonds
On March 15, 2000, the Company issued approximately $5,500,000 of
unregistered Taxable Variable Rate Demand/Fixed Rate Revenue Bonds (Series of
2000). Net proceeds from these bonds were used to repay a $4,100,000 advance
taken on the Company's revolving credit facility and to finance construction of
an addition to the Company's main plant in Southampton, Pennsylvania. The bonds
are secured by an irrevocable direct pay Letter of Credit issued by PNC which
expires on February 17, 2006 and which is secured by all assets of the Company.
At February 25, 2005 they were also fully cash collateralized. The bonds carry a
maturity date of April 1, 2020, bear a variable interest rate which adjusts each
week to a rate required to remarket the bonds at full principal value (currently
at 3.19% on May 6, 2005) with a cap of 17%, and are subject to mandatory
redemption of $275,000 per year for 19 years and $245,000 for the 20th year.
On June 30, 2005 the Company directed the trustee for the bonds to
issue a redemption notice for all of the Company's outstanding bonds. The
Company intends on August 1, 2005 to utilize the restricted cash now being held
by PNC to redeem all outstanding bonds. As of May 27, 2005, all deferred
financing charges associated with this bond issue had been fully amortized to
the statement of operations.
Although it is expected that the bonds will be redeemed on August 1,
2005, they are classified as long-term on the balance sheet. This is due to the
fact that the decision to redeem the bonds and mailing of the notification of
redemption to the bondholders both occurred after the end of the fiscal quarter,
namely May 27, 2005. Additionally, the notice to redeem is revocable up to the
point that the trust account is funded to effect the redemption, which will not
occur until the day of actual redemption.
25
Operating Capital
Given the Company's inability to borrow cash under the amended
Agreement, the Company may need to obtain additional sources of capital in order
to continue growing and operating its business. This capital may be difficult to
obtain and the cost of this additional capital is likely to be relatively high.
However, because we have established businesses in many markets, significant
fixed assets including a building, and other valuable business assets which can
be used for security, we believe that we will be able to locate such additional
capital and that the actions by PNC will not have a long-term material adverse
effect on our business.
The Company believes that existing cash balances at May 27, 2005 and
cash expected to be generated from operating activities will be sufficient to
meet its future obligations through at least May 27, 2006.
In reference to the Company's outstanding claims with the U.S. Navy, to
the extent the Company is unsuccessful in recovering a significant portion of
recorded claim contract costs, and to the extent that significant additional
legal expenses are required to bring the dispute to resolution, such events
could have a material adverse effect on the Company's liquidity and results of
operations. Historically, the Company has had a favorable experience in that
recoveries have exceeded recorded claims, including significant settlement
agreements in fiscal 2003, 2004 and 2005. (See Note 4 to the Consolidated
Financial Statements, Accounts Receivable).
The following table presents our contractual cash flow commitments on
long-term debt and operating leases. See Note 7 to the Consolidated Financial
Statements for additional information on our long-term debt and operating
leases.
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
---------------------------------------------------------------------------------
TOTAL LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
----- ---------------- --------- --------- -------------
Long-term debt, including
current maturities $12,177 $275 $ 825 $8,632 $2,445
Operating leases 740 156 318 188 78
------- ---- ------ ------ ------
Total $12,917 $431 $1,143 $8,820 $2,523
o Long-term debt is reported net of unamortized discount of
$1,918,000 on the Company's subordinated debt. See "Note 7.
Long-Term Obligations and Credit Arrangements" to the
Consolidated Financial Statements.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements during the fiscal quarter
ended May 27, 2005 that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to the Company's investors.
Contract Claims (See Note 4 to the Consolidated Financial Statements,
Accounts Receivable)
Historically, the Company has had positive experience with regard to
its contract claims in that recoveries have exceeded the carrying value of
claims, including significant settlement agreements in fiscal 2003, 2004 and
2005. As of May 27, 2005, claims recorded against the U.S. Government totaled
$3,004,000.
Claim costs have been incurred in connection with customer caused
delays, errors in specifications and designs, other out-of-scope items and
exchange losses and may not be received in full during fiscal 2006. In
conformity with accounting principles generally accepted in the United States of
America, revenue recorded for a claim may not exceed the incurred contract costs
related to the claim.
26
In November 2003, the U.S. Government completed an audit of the
submarine rescue decompression chamber project claim, rejecting most of the
items due to audit or engineering reasons. The Company was not provided a copy
of the Government's Technical Report which questioned approximately half of the
claim costs. The Company has submitted a written rebuttal to the draft report
and has formally requested a copy of the Technical Report. On July 22, 2004 the
U.S. Government's Contracting Officer issued a final decision on the claim,
basically denying the claim in full. The Company has updated the claim for
additional costs expended on claimable items since the original submission and
has converted the claim to a complaint which was filed in the court of Federal
Claims in July 2005. Additionally, the Company is reviewing the costs on the
project for additional claim items which would be filed in a supplemental claim,
if required.
This U. S. Government claim has followed the typical process of claim
notification, preparation, submittal and government audit and review by the
contracting officer. Historically, the Company's experience has indicated that
most claims are initially denied in part or in full by the contracting officer
(or no decision is forthcoming, which is then taken to be a deemed denial) which
then forces the Company to seek relief in a court of law.
The Company considers the recorded costs to be realizable due to the
fact that the costs relate to customer caused delays, errors and changes in
specifications and designs, disputed liquidated damages and other out of scope
items. The U.S. Government, citing failure to deliver the product within
contract terms, has assessed liquidated damages but has not offset or withheld
any progress payments due to the Company under the contract. The Company
disputes the basis for these liquidated damages, noting that applicable U.S.
Government purchasing regulations allow for a waiver of these charges if the
delay is beyond the control and not due to the fault or negligence of the
Company. However, following accounting principles generally accepted in the
United States of America, the Company has reduced contract values and
corresponding revenue recognition for an estimated amount of $330,000 to cover a
delay through the extended delivery period.
The open balance of $700,000 due on the contract represents the total
net exposure on this contract. On June 16, 2003, the Company filed for
arbitration in Thailand seeking recovery of this open balance. On October 8,
2003, the Thai government filed their defense with the Thai Arbitration
Institute (TAI). All arbitrators have been chosen, including a third (umpire)
arbitrator. The Company is currently preparing witness statements in
anticipation of the arbitration hearings which are expected to begin in the next
few months. Since the circumstances that caused a delay are commonly considered
"force majeure" events, and since the contract under question allows for
consideration of "force majeure" events, the Company believes that the open
balance related to this contract is collectible and will continue to treat this
balance as collectible until a final unappealable legal decision is rendered by
a competent Thai tribunal. The Company continues to enjoy a favorable
relationship with the RTAF. It currently provides maintenance for the RTAF
trainers that are the subject of the dispute and has sold a significant amount
of additional equipment to the RTAF since this dispute began. Thus, we do not
feel the initiation of legal action against the RTAF has affected our ability to
obtain additional contracts with the RTAF. At this point, the Company is not
able to determine what, if any, impact the extended completion period will
ultimately have upon the receipt of final payment.
27
Backlog
Our sales backlog at May 27, 2005 and February 25, 2005, for work to be
performed and revenue to be recognized under written agreements after such
dates, was $17,039,000 and $19,084,000, respectively. In addition, our training,
maintenance and upgrade contracts backlog at May 27, 2005 and February 25, 2005,
for work to be performed and revenue to be recognized after such dates under
written agreements, was $1,756,000 and $2,232,000, respectively. Of the May 27,
2005 backlog, we have contracts for approximately $13,320,000 for aircrew
training systems and maintenance support, including $3,218,000 for the Japanese
Defense Agency.
The Company's order flow does not follow any seasonal pattern as the
Company receives orders in each fiscal quarter of its fiscal year.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is exposed to various market risks, including changes in
interest rates. Market risk is the potential loss arising from adverse changes
in market rates and prices, such as interest rates and foreign currency exchange
rates. The Company does not enter into derivatives or other financial
instruments for trading or speculative purposes. The Company also has not
entered into financial instruments to manage and reduce the impact of changes in
interest rates and foreign currency exchange rates although we may enter into
such transactions in the future. A portion of the Company's indebtedness bears
interest at rates that vary with the prime rate of interest. Accordingly, any
increases in the applicable prime rate of interest will reduce the Company's
earnings. With respect to currency risk, where the Company has a contract which
is denominated in a foreign currency, it often establishes local in-country bank
accounts and funds in-country expenses in the local currency, thus creating a
"natural" currency hedge for a portion of the contract.
ITEM 4. CONTROLS AND PROCEDURES.
Under the supervision and with the participation of the Company's
management, including the Company's chief executive officer and chief financial
officer, the Company has evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures as of May 27, 2005 (the
"Evaluation Date"), and, based on this evaluation, the Company's chief executive
officer and chief financial officer have concluded that these controls and
procedures were effective as of the Evaluation Date. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the Evaluation Date.
Disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) are the
Company's internal controls and other procedures that are designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files under the
Exchange Act is accumulated and communicated to the Company's management,
including the Company's chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required disclosure.
29
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 2003, Boenning & Scattergood, Inc. ("B&S") filed suit against
us in the Court of Common Pleas in Philadelphia, Pennsylvania, seeking payment
of $902,000 for financing fees allegedly due to B&S pursuant to the terms of an
agreement for investment banking services which was entered into with a
predecessor of B&S (the "B&S Agreement"). B&S alleged that it contacted the
investors in our February 2003 financing transaction and that it earned the
claimed financing fees pursuant to the terms of the B&S Agreement. We have
responded to the complaint and have also filed a counterclaim for breach of
contract and professional malpractice. We believe that we have valid defenses to
each of the claims of B&S and intend to vigorously defend ourselves against
these claims. We have had some settlement discussions with B&S but, as of the
date of the filing of this Report on Form 10-Q, no agreement had been reached.
At this time, we are unable to predict the outcome of this matter.
In June 2003, Entertainment Technology Corporation ("EnTCo"), our
wholly-owned subsidiary, filed suit against Walt Disney World Co. and other
entities ("Disney") in the United States District Court for the Eastern District
of Pennsylvania, alleging breach of contract for, among other things, failure to
pay all amounts due under contract for the design and production of the
amusement park ride "Mission: Space" located in Disney's Epcot Center. In
response, in August 2003, Disney filed counterclaims against both EnTCo and us
(under a guarantee) for, among other things, alleged failures in performance and
design in the contract. Disney is seeking damages in excess of $65 million plus
punitive damages. Both EnTCo and we believe that we have valid defenses to each
of Disney's counterclaims and intend to vigorously defend ourselves against
these counterclaims. At this time, discovery is completed and the case is
scheduled to be placed in the trial pool on September 19, 2005. Neither EnTCo
nor we are able to predict the outcome of this matter.
Certain other claims, suits, and complaints arising in the ordinary
course of business have been filed or are pending against us. In our opinion,
after consultation with legal counsel handling these specific maters, all such
matters are reserved for or adequately covered by insurance or, if not so
covered, are without merit or are of such kind, or involve such amounts, as
would not have a significant effect on our financial position or results of
operations if disposed of unfavorably.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The constituent instruments defining the rights of the holders of any
class of securities were not modified nor were the rights evidenced by any class
of registered securities materially limited or qualified during the period
covered by this report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Number Item
------ ----
3.1 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 Bylaws were filed as Exhibit 3.2 to
Registrant's Form 8-K dated May 25, 2005, and are incorporated herein
by reference.
31.1 Certification dated July 11, 2005 pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 made
by William F. Mitchell, Chief Executive Officer.
31.2 Certification dated July 11, 2005 pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 made
by Duane D. Deaner, Chief Financial Officer.
32 Certification dated July 11, 2005 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.
(b) Reports on Form 8-K
On May 27, 2005, the Company filed a Current Report on Form 8-K
reporting its financial results for the fourth quarter of fiscal 2005 as well as
its financial results for fiscal 2005 and disclosing the adoption of amended and
restated Bylaws of the Company, effective as of May 25, 2005.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENVIRONMENTAL TECTONICS CORPORATION
(Registrant)
Date: July 11, 2005 By:/s/ William F. Mitchell
---------------------------------
William F. Mitchell
President and Chief
Executive Officer
(Principal Executive Officer)
Date: July 11, 2005 By:/s/ Duane Deaner
---------------------------------
Duane Deaner,
Chief Financial Officer
(Principal Financial and Accounting Officer)
32