SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.____)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
ENVIRONMENTAL TECTONICS CORPORATION
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(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No Fee Required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously by written preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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ENVIRONMENTAL TECTONICS CORPORATION
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
April ___, 2003
TO THE SHAREHOLDERS OF ENVIRONMENTAL TECTONICS CORPORATION:
The Special Meeting of the Shareholders of Environmental Tectonics
Corporation (the "Company") will be held at the executive offices of the
Company, 125 James Way, County Line Industrial Park, Southampton, Pennsylvania
on _________, April ___, 2003, at 10:00 a.m. (Eastern Time) for the following
purposes:
1. To consider and vote on a proposal to ratify, adopt and approve
the issuance by the Company of shares of common stock in excess of
1,430,732, or 19.99% of the issued and outstanding shares of
common stock of the Company on February 19, 2003, a portion of
which will be at a price per share that is less than $6.05, which
was the closing market price of the common stock on February 19,
2003 (the "Lenfest Issuance"). The shares of common stock are
issuable upon conversion of a convertible note and upon exercise
of warrants issued or to be issued by the Company to H.F. Lenfest.
2. To transact such other business as may properly come before the
Special Meeting.
The Board of Directors has fixed the close of business on March 20,
2003 as the record date for the determination of shareholders entitled to notice
of and to vote at the Special Meeting and any adjournment or postponement of the
Special Meeting. A list of shareholders entitled to vote at the Special Meeting
will be available for inspection by any shareholder at the Company's executive
offices between Friday, March 28, 2003 and the date of the Special Meeting.
After careful consideration, the Board of Directors has determined that
the Lenfest Issuance is in the best interests of the Company's shareholders and
has unanimously approved the Lenfest Issuance. The Board of Directors
unanimously recommends that you approve the Lenfest Issuance. Four substantial
shareholders have entered into a voting agreement in which they have agreed to
vote shares controlled by them in favor of the Lenfest Issuance. As of the
record date, these shareholders owned 53.3% of the shares entitled to vote at
the Special Meeting.
The accompanying proxy statement provides detailed information about
the refinancing of the Company's indebtedness (the "Refinancing Transactions"),
including the Lenfest Issuance.
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE SIGN
AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN ORDER THAT YOUR SHARES MAY
BE VOTED. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY WITHDRAW YOUR PROXY AND
VOTE IN PERSON.
By Order of the Board of Directors
/s/ Ann M. Allen
ANN M. ALLEN, Secretary
ENVIRONMENTAL TECTONICS CORPORATION
125 James Way
County Line Industrial Park
Southampton, Pennsylvania 18966
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PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
April ___, 2003
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The Board of Directors of Environmental Tectonics Corporation, a
Pennsylvania corporation (the "Company"), has approved the issuance by the
Company of shares of common stock in excess of 1,430,732, or 19.99% of the
issued and outstanding shares of common stock of the Company on February 19,
2003, a portion of which will be at a price per share that is less than $6.05,
which was the closing market price of the common stock on February 19, 2003 (the
"Lenfest Issuance"). The shares of common stock are issuable upon conversion of
a convertible note and upon exercise of warrants issued or to be issued by the
Company in connection with the refinancing of the Company's indebtedness (the
"Refinancing Transactions") and more particularly in connection with a senior
subordinated convertible debt financing provided to the Company by H.F. Lenfest
(the "Lenfest Financing").
This proxy statement is being sent to the shareholders of the Company
in connection with the solicitation of proxies by the Company's Board of
Directors for use at a Special Meeting of the Company's shareholders to be held
on ________, April __, 2003, to consider and vote upon the Lenfest Issuance.
After careful consideration, the Company's Board of Directors has determined
that the Lenfest Issuance is in the best interests of the Company's shareholders
and unanimously recommends that its shareholders vote in favor of the Lenfest
Issuance.
Pursuant to the Company's Bylaws and in accordance with Pennsylvania
law, the affirmative vote of at least a majority of the votes cast at the
Special Meeting is required to approve and adopt the Lenfest Issuance. Four of
the Company's shareholders have entered into a stockholders voting agreement
with H.F. Lenfest. In the voting agreement, these shareholders agreed, among
other things, to vote shares of the Company's common stock controlled by them,
in an amount equal to 53.3% of the shares entitled to vote at the Special
Meeting, in favor of the Lenfest Issuance.
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All shares of the Company's common stock represented by properly
executed proxies received prior to or at the Special Meeting and not revoked
will be voted in accordance with the instructions indicated in such proxies. If
no instructions are indicated, proxies will be voted "FOR" the approval and
adoption of the Lenfest Issuance and at the discretion of the persons named in
the proxy with respect to other matters as may properly come before the Special
Meeting. A shareholder of the Company may revoke his, her or its proxy at any
time prior to its use at the Special Meeting by delivering a signed notice of
revocation or a later-dated and signed proxy to the Company's corporate
secretary.
No person has been authorized to give any information or make any
representation other than those contained in this proxy statement, and, if given
or made, such information or representation must not be relied upon as having
been authorized. This proxy statement does not constitute a solicitation of a
proxy in any jurisdiction from any person to whom it is unlawful to make such
proxy solicitation in such jurisdiction. The delivery of this proxy statement
shall not, under any circumstances, create any implication that there has been
no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
The Company's Board of Directors does not know of any additional
matters that will be presented for consideration at the Special Meeting.
Execution of a proxy, however, confers on the designated proxyholders
discretionary authority to vote the covered shares of common stock on other
business, if any may properly come before the Special Meeting.
This proxy statement and the accompanying form of proxy are first being
mailed to the Company's shareholders on or about April ___, 2003.
The Refinancing Transactions have not been approved or disapproved by
the Securities and Exchange Commission, nor has the Commission passed upon the
fairness or merits of the Refinancing Transactions or upon the accuracy of the
information contained in this document. Any representation to the contrary is
unlawful.
The date of this proxy statement is April __, 2003.
TABLE OF CONTENTS
Page
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QUESTIONS AND ANSWERS ABOUT THE REFINANCING TRANSACTIONS.................................................... 1
SUMMARY..................................................................................................... 3
WHERE YOU CAN FIND MORE INFORMATION......................................................................... 5
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION................................................. 5
THE SPECIAL MEETING......................................................................................... 6
General................................................................................................ 6
Voting and Revocation of Proxies....................................................................... 6
Voting Securities, Record Date and Required Vote....................................................... 6
Quorum and Adjournment................................................................................. 6
PROPOSAL - APPROVAL OF LENFEST ISSUANCE..................................................................... 7
Background............................................................................................. 7
The Refinancing Transactions........................................................................... 8
Effect Upon Existing Holders of Common Stock........................................................... 10
American Stock Exchange Voting Requirements............................................................ 10
Stockholders Voting Agreement.......................................................................... 11
Vote Required.......................................................................................... 11
Recommendations of the Board of Directors; Reasons for the Authorization of the Lenfest Issuance....... 11
VOTING AGREEMENTS........................................................................................... 13
General................................................................................................ 13
Voting and Proxies..................................................................................... 13
Prohibited Actions..................................................................................... 13
BENEFICIAL OWNERSHIP OF THE COMPANY'S COMMON STOCK.......................................................... 14
SHAREHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING........................................................... 16
OTHER MATTERS............................................................................................... 16
QUESTIONS AND ANSWERS ABOUT THE REFINANCING TRANSACTIONS
Why am I receiving this proxy statement and proxy card?
You are receiving a proxy statement and proxy card because you own
shares of common stock of the Company. This proxy statement describes the issues
on which the Company would like you, as a shareholder, to vote. It also gives
you information on these issues so that you can make an informed decision.
Why is the Board of Directors recommending approval of the Lenfest Issuance?
After considering a number of factors, the Company's Board of Directors
determined that the Refinancing Transactions, including the Lenfest Issuance,
are advisable and in the best interests of the Company's shareholders. The Board
of Directors therefore recommends that you vote "FOR" approval and adoption of
the Lenfest Issuance.
What am I voting on?
On February 19, 2003, the Company completed the Refinancing
Transactions described in this proxy statement. In connection with the
Refinancing Transactions, the Company issued to H.F. Lenfest securities
convertible or exercisable into shares of common stock in excess of 19.99% of
its issued and outstanding shares of common stock on that date. Prior to
shareholder approval, Mr. Lenfest is not permitted to convert or exercise these
securities into a number of shares of common stock in excess of 1,325,732
shares, which amount represents 1,430,732 shares or 19.99% of the issued and
outstanding shares of common stock as of February 19, 2003, less 105,000 shares
of common stock issuable to ETC Asset Management, LLC upon exercise in full of
its new warrant. In accordance with terms of the Refinancing Transactions, the
Company is required to obtain shareholder approval to satisfy its obligations
under the Lenfest Issuance. You are being asked to consider and vote to approve
the issuance of shares of common stock in excess of 19.99% of its issued and
outstanding shares of common stock on February 19, 2003, a portion of which will
be at a price per share that is less than $6.05, which was the closing market
price per share of the common stock on February 19, 2003.
What vote is required to approve the Lenfest Issuance?
In order to meet the Company's obligations to Mr. Lenfest, the Lenfest
Issuance must be adopted and approved by a majority of the votes cast at the
Special Meeting. In connection with the Lenfest Issuance, certain shareholders
of the Company entered into a voting agreement pursuant to which they agreed to
vote an aggregate of 53.3% of the outstanding shares of common stock in favor of
the Lenfest Issuance. Accordingly, these shareholders have the ability to
approve the Lenfest Issuance.
What happens if the shareholders do not approve the Lenfest Issuance?
If the Lenfest Issuance is not approved by a vote of the shareholders,
the exercise price of each of Lenfest's warrants will be reduced from the
current exercise price, which is the lesser of $4.00 or two-thirds of the
average daily high and low closing price of the common stock during the 25 day
trading period immediately preceding the date of exercise (the "Market Price"),
to the lesser of $2.00 or two-thirds of the Market Price.
How do I vote?
After carefully reading and considering the information contained in
this proxy statement, you may cast your vote in one of the following ways:
o by completing the accompanying proxy card and returning it in the
enclosed envelope; or
o by appearing and voting in person at the Special Meeting.
If your shares are held in "street name," which means that your shares
are held in the name of a bank, broker or other financial institution instead of
in your own name, you must either direct the financial institution as to how to
vote your shares or obtain a proxy from the financial institution to vote at the
Special Meeting.
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May I change my vote?
After mailing in your proxy, you may change your vote by following any
of these procedures. If you are a shareholder "of record," meaning that the
shares you own are registered in your name as of March 20, 2003, then to revoke
your proxy, you must do one of the following before the vote is taken at the
Special Meeting:
o send written notice revoking your proxy to the Company's corporate
secretary at 123 James Way, County Line Industrial Park,
Southampton, Pennsylvania 18966; or
o sign and return a proxy with a later date.
If you are not a holder of record but you are a "beneficial holder,"
meaning that your shares are registered in another name (for example, in "street
name"), you must follow the procedures required by the holder of record, which
is usually a brokerage firm, bank or other financial institution, to revoke a
proxy. You should contact the holder of record directly for more information on
these procedures. In any event, you may not change your vote or revoke your
proxy after the vote is taken at the Special Meeting.
How do I vote in person?
If you plan to attend the Special Meeting and wish to vote in person,
we will give you a ballot when you arrive. If your shares are held in "street
name," you must bring an account statement or letter from the brokerage firm or
bank showing that you were the beneficial owner of the shares on March 20, 2003,
the record date for determining which of our shareholders are entitled to notice
of, and to vote at, the Special Meeting, in order to vote at the Special
Meeting. In addition, if you want to vote your shares that are held in street
name, you must obtain a "legal proxy" from the holder of record and present it
at the Special Meeting.
Who can answer my questions about the Refinancing Transactions?
If you have additional questions about the Refinancing Transactions,
you should contact Duane D. Deaner, the Company's Chief Financial Officer, at
(215) 355-9100.
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SUMMARY
The following summary is intended only to highlight information
contained in this proxy statement. This summary is not intended to be complete
and is qualified in its entirety by the more detailed information contained in
this proxy statement and the documents otherwise referred to in this proxy
statement. You are urged to review this entire proxy statement carefully,
including the documents otherwise referred to in this proxy statement.
Refinancing Transactions (See page 7)
On February 19, 2003, the Company completed the Refinancing
Transactions with PNC Bank and H.F. Lenfest, pursuant to which the Company
received new financing in the aggregate amount of $29,800,000. A portion of the
proceeds from the Refinancing Transactions was used to satisfy the Company's
existing obligations to Wachovia Bank, the Company's former lender, and to
permit PNC to issue a letter of credit as credit support for the Company's
outstanding revenue bonds. The remaining proceeds will be used for working
capital purposes and general corporate purposes directly related to growth. In
connection with the senior subordinated financing provided by Lenfest (the
"Lenfest Financing"), the Company issued to Lenfest a promissory note which is
convertible into shares of common stock and warrants to purchase shares of
common stock. The Company may also be required to issue additional warrants in
the future if Lenfest elects to convert his convertible note into shares of
common stock or if the Company grants any of the 568,368 available, but unissued
stock options under its employee stock option plan. Upon full conversion of the
promissory note and full exercise of the warrants, the Company will be obligated
to issue to Lenfest shares of common stock in excess of 1,430,732 or 19.99% of
its issued and outstanding shares of common stock on February 19, 2003 (the
"Lenfest Issuance"). The conversion price of the convertible note is $6.05,
which was the market price per share of the common stock as of February 19,
2003. The exercise price of Lenfest's warrants is equal to the lesser of $4.00
or two-thirds of the Market Price, which equals the average daily high and low
closing price of the common stock during the 25 trading day period immediately
preceding the date of exercise. If the Company's shareholders do not approve the
Lenfest Issuance, then the exercise price of Lenfest's warrants will be adjusted
to the lesser of 2.00 or two-thirds of the Market Price.
The Special Meeting (See page 6)
At the Special Meeting, shareholders will consider and vote on the
proposal to ratify, adopt and approve the Lenfest Issuance. The Special Meeting
is scheduled to be held at 10:00 a.m. (Eastern Time), on ________, ________,
2003, at the executive offices of the Company, 125 James Way, County Line
Industrial Park, Southampton, Pennsylvania 18966.
Record Date and Vote Required (See page 6)
The record date for the Special Meeting is March 20, 2003, and only
shareholders of record as of that date are entitled to vote at the Special
Meeting. The Lenfest Issuance will be approved and adopted if a majority of the
votes cast at the Special Meeting vote in favor of the Lenfest Issuance. William
F. Mitchell, Chairman and Chief Executive Officer of the Company, Pete L.
Stephens, M.D., a director of the Company, Emerald Advisors, Inc. and ETC Asset
Management, LLC ("EAM") have entered into a stockholders voting agreement with
Lenfest agreeing, to vote all shares of common stock controlled by them, in an
amount equal to approximately 53.3% of the shares entitled to vote at the
Special Meeting, in favor of the Lenfest Issuance. Accordingly, these
shareholders have the ability to approve the Lenfest Issuance.
The Lenfest Financing (See page 7)
The agreements entered into by the Company in connection with the
Lenfest Financing are attached as exhibits to a Current Report on Form 8-K which
the Company filed with the Commission on February 25, 2003. You may easily
access this report at the internet website maintained by the Commission at
http://www.sec.gov or through the Company's internet website at
http//www.etcusa.com. Alternatively, you may request a free copy of this report
from the Company by contacting Duane D. Deaner, the Company's Chief Financial
Officer, at (215) 355-9100. Collectively, the documents attached to this report
are the legal documents that govern the Company's and Lenfest's rights in
connection with the Lenfest Financing. The Company encourages you to read each
of these documents in its entirety.
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Recommendation of the Board of Directors of the Company (See page 11)
The Company's Board of Directors has unanimously approved the Lenfest
Financing and all other transactions entered into in connection therewith,
including the Lenfest Issuance, and unanimously recommends that the shareholders
of the Company vote "FOR" the approval of the Lenfest Issuance.
Reasons for the Lenfest Financing (See page 11)
In reaching its decision to approve the Lenfest Financing, the
Company's Board of Directors considered a number of factors, including, among
others:
o the Wachovia credit facility was scheduled to expire on February
28, 2003 and Wachovia had not offered the Company the opportunity
to extend the credit facility;
o a short-term extension of the Wachovia credit facility would not
meet the Company's long-term financial needs and would not have
been made on terms more beneficial to the Company than the terms of
the Refinancing Transactions;
o after an intensive year long search by the Company, the Board of
Directors believes that the terms of the Lenfest Financing are
significantly better than the terms of any other proposed
subordinated financing presented to and considered by the Company's
Board of Directors during such time period;
o the Company could not complete the Refinancing Transactions,
including the Lenfest Financing, without completing the Lenfest
Issuance; and
o a conversion of the promissory note issued to Lenfest, in whole or
in part, into shares of common stock rather than repayment of the
promissory note by the Company would preserve the Company's cash
for use in satisfying its working capital requirements, which is in
the Company's best interest.
Interests of Certain Persons in the Lenfest Financing (See page 10)
In connection with the Lenfest Financing, EAM, a shareholder of the
Company and a holder of a warrant to purchase 332,820 shares of common stock,
agreed to waive certain rights set forth in its warrant in exchange for the
issuance by the Company of an additional warrant to purchase 105,000 shares of
common stock with terms similar to those contained in Lenfest's warrants.
Voting Agreements (See page 13)
In connection with the Lenfest Financing, William F. Mitchell, Chairman
and Chief Executive Officer of the Company, Pete L. Stephens, M.D., a director
of the Company, Emerald Advisors, Inc., and EAM entered into a stockholders
voting agreement with Lenfest on February 18, 2003. These shareholders agreed to
vote all shares of common stock controlled by them in favor of the Lenfest
Issuance. As of February 19, 2003, these shareholders collectively had the right
to vote an aggregate of 3,813,748 shares of the Company's common stock, which
represents, as of such date, approximately 53.3% of the total issued and
outstanding shares of common stock entitled to vote at the Special Meeting.
American Stock Exchange Voting Requirements (See page 10)
On February 25, 2003, the Company filed an application with the
American Stock Exchange to list 1,430,732 shares of common stock (which amount
represents 19.99% of the issued and outstanding shares of common stock as of
February 19, 2003). Section 713 of the Listing Standards, Policies and
Requirements of the American Stock Exchange requires the Company to obtain
shareholder approval prior to issuing shares of common stock representing more
than 20% of its currently issued and outstanding shares of common stock at a
price per share that is less than the greater of book or market value of its
common stock. Upon shareholder approval, the Company intends to file an
additional application with the American Stock Exchange to list the remaining
shares issuable upon conversion of the promissory note issued to Lenfest and
exercise of Lenfest's warrants.
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Shareholder Approval (See page 11)
In the event the Lenfest Issuance is not approved by a vote of the
shareholders, the exercise price of each Lenfest warrant will be reduced, from
the current exercise price, which is the lesser of $4.00 or two-thirds of the
Market Price, to the lesser of $2.00 or two-thirds of the Market Price.
WHERE YOU CAN FIND MORE INFORMATION
The Company (File No. 1-10655) files annual, quarterly and current
reports, proxy statements and other information with the Securities and Exchange
Commission. The agreements and instruments documenting the Lenfest Financing are
attached as exhibits to a Current Report on Form 8-K which the Company filed
with the Commission on February 25, 2003. You may read and copy this report or
any other reports, statements and other information filed by the Company at the
Securities and Exchange Commission's public reference room, at 450 Fifth Street,
N.W., Washington, D.C., as well as at public reference rooms in New York, New
York, and Chicago, Illinois. Please call (800) SEC-0330 for further information
on the public reference rooms. The Company's filings are also available to the
public from commercial document retrieval services and at the internet web site
maintained by the SEC at http://www.sec.gov, or can be accessed through the
Company's web site at http://www.etcusa.com.
You can also obtain any of these documents from the Company without
charge, by requesting them in writing or by telephone from the Company by
calling (215) 355-9100, or at the address set forth in the notice of the special
meeting of the Company's shareholders.
If you would like to request documents from the Company, please do so
by April 7, 2003 to receive them before the Special Meeting.
The Company has not authorized anyone to provide you with information
that is different from, or in addition to, what is contained or referred to in
this proxy statement. The information contained in this document speaks only as
of the date of this document unless the information specifically indicates that
another date applies.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This proxy statement and the documents to which the Company refers you
and which the Company incorporates into this proxy statement by reference
contain 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 these 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 revenue, costs of raw materials, income or loss,
earnings or loss per share, capital expenditures, growth prospects, dividends,
the effects of currency fluctuations, capital structure and other financial
items, (ii) statements of 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 regulating
authorities, (iii) statements of future economic performance, (iv) statements of
assumptions and other statements about the Company or its business, and (v)
statements preceded by, followed by or that include the words "may", "could",
"should", "proforma," "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 which, in whole
or in part, are beyond the Company's control. The following factors, among
others, could cause the Company's financial performance to differ materially
from the goals, plans, objectives, intentions and expectations expressed in such
forward-looking statements: (1) the strength of the United States and global
economies in general and the strength of the regional and local economies in
which the Company conducts operations; (2) the effects of, and changes in, U.S.
5
and foreign governmental trade, monetary and fiscal policies and laws; (3) the
impact of domestic or foreign military or political conflicts and turmoil; (4)
the timely development of competitive new products and services by the Company
and the acceptance of such products and services by customers; (5) willingness
of customers to substitute competitors' products and services and vice versa;
(6) the impact on operations of changes in U.S. and governmental laws and public
policy, including environmental regulations; (7) the level of export sales
impacted by export controls, changes in legal and regulatory requirements,
policy changes affecting the markets, changes in tax laws and tariffs, exchange
rate fluctuations, political and economic instability, and accounts receivable
collection; (8) technological changes; (9) regulatory or judicial proceedings;
(10) the impact of any current or future litigation involving the Company; and
(11) the success of the Company at managing the risks involved in the foregoing.
The Company cautions that the foregoing list of important factors is
not exclusive.
These and other factors may cause actual results to differ materially
from any forward-looking statement. Forward-looking statements are only
predictions. The forward-looking events discussed in this proxy statement, the
documents to which the Company refers you and other statements made from time to
time by the Company or its representatives, may not occur, and actual events and
results may differ materially and are subject to risks, uncertainties and
assumptions about the Company. The Company is not obligated to publicly update
or revise any forward-looking statement, whether as a result of new information,
future events or otherwise and does not undertake to do so. In light of these
risks, uncertainties and assumptions, the forward-looking events discussed in
this proxy statement, the documents to which the Company refers you and other
statements made from time to time by the Company or its representatives, might
not occur.
THE SPECIAL MEETING
General
This proxy statement is furnished in connection with the solicitation
by the Board of Directors of the Company, of proxies in the accompanying form
for use at the Special Meeting of shareholders to be held at 10 a.m. (Eastern
Time) on ________, ________, 2003, at the Company's executive offices at 125
James Way, County Line Industrial Park, Southampton, Pennsylvania 18966 and at
any adjournment or postponement thereof. This proxy statement and the
accompanying form of proxy are being first sent or given to shareholders on or
about April ___, 2003. In addition to the use of the mails, directors, officers
and employees of the Company may solicit proxies personally or by telephone. The
expense of soliciting proxies will be borne by the Company.
Voting and Revocation of Proxies
When a proxy in the enclosed form is properly executed and returned in
time to be voted at the Special Meeting, the shares represented thereby will be
voted at the Special Meeting in accordance with the instructions marked thereon.
The Board of Directors is not aware of any matters other than those that are
described in this proxy statement that may be brought before the Special
Meeting. However, signed proxies will be voted "FOR" or "AGAINST" any other
matter that properly comes before the Special Meeting or any adjournment or
postponement thereof, at the discretion of the persons named as proxyholders as
provided in the SEC's rules and regulations. Any such proxy may be revoked at
any time before its exercise by (i) executing and delivering a later dated proxy
to the corporate secretary of the Company, (ii) giving written notice of
revocation to the corporate secretary of the Company, or (iii) by voting in
person at the Special Meeting. The mailing address of the Company is 125 James
Way, County Line Industrial Park, Southampton, Pennsylvania 18966.
Voting Securities, Record Date and Required Vote
Shareholders of record at the close of business on March 20, 2003 (the
"Record Date"), are entitled to notice of, and to vote at, the Special Meeting.
On the Record Date, the Company had outstanding ________ shares of common stock.
Each issued share of common stock is entitled to one vote on all matters coming
before the Special Meeting. The Lenfest Issuance will be ratified, adopted and
approved if shares constituting a majority of the votes cast at the Special
Meeting are voted in favor of the proposal.
Quorum and Adjournment
The presence, in person or by proxy, of shareholders entitled to cast a
majority of the votes which all shareholders are entitled to cast shall
constitute a quorum at the Special Meeting. Shares voted as abstentions on any
6
matter will be counted as shares that are present and entitled to vote for
purposes of determining the presence of a quorum at the Special Meeting and as
unvoted, although present and entitled to vote, for purposes of determining the
approval of each matter as to which the shareholder has abstained. Consequently,
abstentions and withheld votes have the same effect as a vote against the
proposal. If a broker submits a proxy that indicates the broker does not have
discretionary authority as to certain shares to vote on one or more matters,
those shares will be counted as shares that are present and entitled to vote for
purposes of determining the presence of a quorum at the Special Meeting, but
will not be considered as present and entitled to vote with respect to
determining the approval of such matters. If a quorum is not present, the
Special Meeting may be adjourned from time to time until a quorum is obtained.
PROPOSAL
APPROVAL OF LENFEST ISSUANCE
On February 19, 2003, the Company completed a transaction with PNC Bank
and H.F. Lenfest, pursuant to which the Company received new financing in the
aggregate amount of $29,800,000. The Company used a portion of the proceeds from
the financing to satisfy its existing obligations to Wachovia Bank, the
Company's former lender, and to permit PNC to issue a letter of credit as credit
support for the Company's outstanding revenue bonds. The Company will use the
remaining proceeds for working capital purposes, and general corporate purposes
directly related to growth. These financings are collectively referred to as the
Refinancing Transactions.
In accordance with the terms of the senior subordinated convertible
debt financing provided by Lenfest (the "Lenfest Financing"), the Company issued
a convertible promissory note and warrants to Lenfest, and may be required to
issue additional warrants to Lenfest in the future. Additionally, in connection
with the Lenfest Financing, the Company issued warrants to ETC Asset Management,
LLC ("EAM"), a holder of securities of the Company. The shares of common stock
issuable upon full conversion of Lenfest's promissory note, upon exercise in
full of Lenfest's warrants, and upon exercise in full of EAM's warrants, issued
in connection with the Refinancing Transactions, will exceed 1,430,732 or 19.99%
of the Company's issued and outstanding shares of common stock on February 19,
2003. Lenfest's warrants and EAM's warrants are exercisable for six years at an
exercise price per share equal to the lesser of (i) $4.00 or (ii) two-thirds of
the average daily high and low closing price of the common stock during the 25
day trading period immediately preceding the date of exercise (the "Market
Price"). As of February 19, 2003, the closing market price of the Company's
common stock was $6.05 per share. Because the exercise price per share of
Lenfest's warrants and EAM's warrants is less than $6.05, the rules and
regulations of AMEX require the Company to obtain shareholder approval prior to
the issuance of shares of common stock in excess of the 1,430,732 shares. The
Board of Directors of the Company is requesting that shareholders of the Company
consider and vote on the Board of Directors' proposal to ratify, adopt and
approve the issuance of shares of common stock in excess of the 1,430,732 or
19.99% of the currently issued and outstanding shares of common stock, in
accordance with the terms of the Lenfest Financing and as more fully described
below.
Background
The Wachovia Facility
---------------------
The Company established a credit facility with Wachovia (formerly First
Union National Bank) on March 27, 1997. The Wachovia facility consisted of a
revolving line of credit in the maximum aggregate principal amount of
$10,000,000. In connection with the Wachovia facility, Tandem Capital
Corporation, a subsidiary of Sirrom Capital Corporation, provided subordinated
financing to the Company in the aggregate amount of $6,500,000 in exchange for
(i) 12% subordinated debentures in the original principal amount of $4,000,000,
with a detachable warrant to purchase 332,820 shares of common stock (the
"Tandem Warrant"), and (ii) 25,000 shares of the Company's preferred stock at a
purchase price of $100 per share. The shares of preferred stock were
subsequently converted into shares of common stock.
On January 11, 2000, the Company utilized $4,100,000 of the proceeds
available under the Wachovia facility to repay all amounts due and owing by the
Company to Tandem under Tandem's debentures. On February 25, 2000, the Company
signed an amendment to its credit facility which increased the amount that it
was eligible to borrow under the credit facility to $15,000,000. On March 15,
2000, the Company issued approximately $5,100,000 of taxable bonds. Net proceeds
from these bonds were used to repay the initial $4,100,000 advance under the
credit facility and to finance the construction of an addition to the Company's
main plant located in Southampton, Pennsylvania. In January 2001, EAM acquired
7
the Tandem Warrant from a successor in interest to Tandem and, as a result, the
Company issued a new warrant in EAM's name in exchange for the Tandem Warrant,
which the Company cancelled. EAM's 2001 warrant contains a provision that
requires the Company to obtain the consent of EAM prior to any below "fair
market value" issuance by the Company. If the Company were to be unable to
obtain the consent of EAM, EAM would be entitled to receive, upon exercise of
its 2001 warrant, a significant amount of additional shares of common stock, as
determined in accordance with the terms of the 2001 warrant.
The initial expiration date of the Wachovia facility was May 27, 1999.
In mid-2001, Wachovia suggested that the Company needed additional capital to
adequately fund its operations and that the Company should seek such additional
capital from a source other than Wachovia. In late 2001, Wachovia notified the
Company that it should find another bank to replace the existing credit
facility. Subsequently, the Company and Wachovia entered into a number of
amendments to the Wachovia credit agreement, which ultimately extended the term
of the Wachovia facility to February 28, 2003. Prior to entering into certain of
these amendments, Wachovia required that the Company pay an extension fee
ranging up to $60,000. Due to the discussions with Wachovia, the Company began
an extensive search to engage a lender that would provide financing to replace
the Wachovia facility. To assist the Company during its search for new
financing, the Company retained a regional investment banking firm. During July
2002, the Company began negotiating the terms of a refinancing of the Wachovia
facility with PNC. During the negotiations, PNC informed the Company that PNC
would require, as a condition to its providing financing to the Company, that
the Company obtain subordinated financing of at least $10,000,000. Shortly
thereafter, the Company began negotiating with an investor which had been
introduced and recommended to the Company by the Company's investment banker.
This investor agreed to provide the Company with $10,000,000 of subordinated
financing in exchange for (i) a 12.5% promissory note in the original principal
amount of $10,000,000 and (ii) warrants to purchase 12% of the issued and
outstanding shares of common stock, on a fully diluted basis, at an exercise
price of $0.05 per share. In addition, the terms of this proposed subordinated
financing provided that if the Company did not achieve certain financial goals,
the subordinated investor would receive warrants to purchase an additional 13%
of the issued and outstanding shares of common stock, on a fully diluted basis,
also at an exercise price of $0.05 per share. After extensive discussions, in
December 2002, the Board of Directors of the Company rejected the proposed terms
of the subordinated financing and authorized the officers of the Company to
continue the search for a subordinated lender. Additionally, the Company and the
investment banker ended their relationship.
During this search process, the Company determined that, at November
22, 2002, it was in violation of one of its covenants under the Wachovia credit
agreement, specifically the requirement to maintain a specified minimum funds
flow ratio. This violation resulted from the impact of certain non-recurring
costs, charges to earnings and the reclassification of long-term debt
obligations as short-term debt obligations due to the pending expiration of the
Wachovia facility and the fact that the Company did not have a firm financing
proposal in place. Although the Company did not receive a waiver of this
technical violation, Wachovia did not take any action against the Company upon
receiving notification from the Company of the violation.
During December 2002, the Company initiated discussions with Lenfest.
These discussions resulted in Lenfest's agreement to provide subordinated
financing to the Company in accordance with the terms and conditions set forth
below, and PNC agreed to the terms and conditions agreed to by Lenfest.
The Bonds Under The Wachovia Facility
-------------------------------------
The Company has outstanding revenue bonds in the aggregate amount of
approximately $5,100,000. The Company used the net proceeds from the bonds to
repay a $4,100,000 advance taken by the Company under the Wachovia facility and
to finance construction of an addition to the Company's main plant in
Southampton, Pennsylvania. Wachovia Securities, Inc., in its capacity as
remarketing agent, marketed the bonds to the public. In connection with the
issuance of the bonds, Wachovia issued a $5,600,000 irrevocable direct pay
letter of credit, which secured the Company's payment obligations on the bonds.
The letter of credit was then secured by all of the assets of the Company and
was scheduled to expire on March 15, 2005.
The Refinancing Transactions
The PNC Facility
----------------
On February 19, 2003, the Company established a senior credit facility
with PNC. The PNC facility includes: (i) a revolving credit facility in the
maximum aggregate principal amount of $12,000,000 to be used for the Company's
8
working capital and general corporate purposes, including capital expenditures,
with a sublimit for issuances of letters of credit in the maximum amount of
$7,500,000, (ii) a cash collateralized line of credit facility in the aggregate
amount of $2,800,000 for the issuance of standby and trade letters of credit,
and (iii) a standby letter of credit in the amount of $5,025,410 as credit
support for the Company's bonds.
The terms of the revolving loan and the line of credit are set forth in
a credit agreement between the Company and PNC. To evidence the Company's
obligation to repay the revolving loan, the credit agreement required the
Company to execute a promissory note in favor of PNC, in the maximum principal
amount of $12,000,000. The promissory note matures on February 18, 2006. In
addition, the PNC credit agreement provides for the issuance by PNC of letters
of credit under the line of credit.
The obligations of the Company to PNC under the PNC credit agreement
are secured by (i) the grant of a first and prior security interest in all of
the personal property of the Company, Entertainment Technology Corporation
("Entertainment") and ETC Delaware, Inc. ("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 Entertainment and ETC Delaware owned by the
Company 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 Entertainment and ETC Delaware guarantee the Company's
obligations under the PNC facility.
The Bonds Under the PNC Facility
--------------------------------
The letter of credit issued by PNC that secures the Company's payment
obligations under the bonds replaces the letter of credit previously issued by
Wachovia on behalf of the Company for the same purpose. In connection with the
issuance of the letter of credit by PNC, the terms of the trust indenture
governing the bonds required the Company to remarket the bonds, and enter into a
supplemental trust indenture, with Wachovia, as trustee and a remarketing
agreement with Wachovia Securities. In addition, to secure the Company's payment
obligations to PNC under the letter of credit, the Company entered into a
reimbursement and security agreement with PNC.
The Lenfest Financing
---------------------
On February 19, 2003, Lenfest provided $10,000,000 of senior
subordinated convertible debt financing to the Company. The terms of the Lenfest
Financing are set forth in a Convertible Note and Warrant Purchase Agreement
between the Company and Lenfest. The senior subordinated convertible note issued
to Lenfest accrues interest at the rate of 10% per annum and matures on February
18, 2009. The convertible note entitles Lenfest to convert all or part of the
outstanding principal thereunder into shares of common stock at a conversion
price of $6.05 per share. The convertible note permits the Company to defer its
quarterly interest payments to Lenfest. If the Company chooses to defer an
interest payment, the amount of interest deferred is added to the outstanding
principal balance of the convertible note and accrues interest at the rate of
10% per annum. At his option, Lenfest may convert any deferred interest into
shares of common stock.
In connection with the Lenfest Financing, the Company issued to Lenfest
warrants to purchase 803,048 shares of the common stock, representing 10% of the
shares of common stock on a fully diluted, as converted basis. The warrants are
exercisable for six years at an exercise price per share equal to the lesser of
$4.00 or two-thirds of the average daily high and low closing price of the
common stock during the 25 day trading period immediately preceding the date of
exercise. In addition, if Lenfest converts his promissory note, the Company is
required to issue additional warrants to Lenfest entitling Lenfest to purchase a
number of shares of common stock equal to 10% of the shares of common stock
issued upon conversion of the promissory note. Also, if the Company grants any
of the 568,368 unissued stock options under its employee stock option plan, then
the Company is required to issue additional warrants to Lenfest entitling
Lenfest to purchase a number of shares of common stock equal to 10% of the
shares of common stock issuable upon exercise of such granted stock options. The
exercise price of Lenfest's warrants is automatically reduced to the lowest per
share price paid for a share of common stock if any subsequent issuance of
securities by the Company is at a price per share that is less than the exercise
9
price of Lenfest's warrants. In addition, upon each adjustment of the exercise
price, the number of shares of common stock issuable under the Lenfest warrants
is adjusted accordingly.
As a condition to the Lenfest Financing, the Company is required to
register the resale of the shares of common stock issuable upon conversion of
the convertible note and exercise of Lenfest's warrants. The registration rights
agreement contains customary terms and conditions for agreements of such nature,
including, the right of Lenfest to request during the term of the registration
rights agreement (i) on up to four occasions, that shares of common stock held
by him be registered for resale with the Commission on any registration
statement available to the Company and (ii) on up to two occasions during any 12
month period, request that shares of common stock held by him be registered for
resale with the Commission on Form S-3. In addition, Lenfest is entitled to have
shares of common stock owned by him included in any registration statement filed
by the Company at any time during the term of the registration rights agreement,
subject to customary underwriters' cutbacks.
The obligations of the Company to Lenfest are secured by (i) the grant
of a security interest, subordinated solely to the security interest granted by
the Company to PNC, and any other security interest that by its terms ranks
senior to the security interest granted to Lenfest, in all personal property of
the Company, Entertainment and ETC Delaware; and (ii) the Company's grant of a
second mortgage on all of the Company's real property in favor of Lenfest.
Entertainment and ETC Delaware each also guaranteed the Company's obligations to
Lenfest.
In addition, pursuant to the terms of the Lenfest Financing, the
Company's Board of Directors approved the appointment of H.F. "Gerry" Lenfest,
the President of The Lenfest Group, to the Board of Directors.
A portion of the Lenfest Financing constitutes a below "fair market
value" issuance by the Company, in accordance with the terms of EAM's 2001
warrant. As a result, the Company requested and EAM provided its consent to the
transactions contemplated under the PNC credit agreement and the Lenfest
Financing and thereby agreed to waive certain rights under its 2001 warrant. If
the Company had not obtained such consent, EAM would have been entitled to
receive a significant number of additional shares of common stock pursuant to
the antidilution provisions set forth in the 2001 warrant. For example, based
upon the current exercise price of $4.00 per share, upon full exercise of the
Lenfest warrants, EAM would have been entitled to receive an additional 170,570
shares of common stock. In addition, if the exercise price of Lenfest's warrants
is reduced due to a reduction of the Market Price or in accordance with the
antidilution provisions contained in such warrants, then the number of
additional shares of common stock issuable to EAM would have increased
proportionately. Instead, the Company issued to EAM a new warrant to purchase an
additional 105,000 shares of common stock in exchange for EAM's consent to the
Lenfest Financing. The 105,000 shares of common stock issuable upon exercise of
EAM's warrant are included in the listing application filed with AMEX. As a
result, unlike Lenfest's warrants, EAM's new warrant does not limit EAM's
ability to exercise the warrant in full and therefore the issuance of such
shares of common stock does not require shareholder approval. Except for the
foregoing and except for the potential reduction in the exercise price of
Lenfest's warrants in the event shareholder approval is not obtained, EAM's new
warrant has substantially the same terms as Lenfest's warrants.
Effect Upon Existing Holders of Common Stock
Approval of this proposal will have a potentially dilutive effect on
the shareholders of the Company. Such approval will permit the Company to
satisfy its contractual obligations under the terms of its agreement with
Lenfest. The listing of such additional shares, however, will permit Lenfest to
convert his convertible note and exercise his warrants, into more shares of
common stock and therefore in the future will result in an increase in the
number of shares of common stock outstanding and eligible to be traded in the
public markets.
Except for additional warrants issued to Lenfest upon conversion of the
principal amount of the convertible note resulting from deferred payments of
interest, the maximum number of shares of common stock issuable upon conversion
of the convertible note and exercise of all of Lenfest's warrants shall be
2,678,067.
American Stock Exchange Voting Requirements
Shares of the Company's common stock are traded on AMEX. Section 713 of
AMEX'S Listing Standards, Policies and Requirements requires shareholder
approval of the issuance of securities convertible into common stock if such
underlying common stock would be, upon issuance, equal to or in excess of 20% of
10
the currently outstanding common stock before such issuance and would be issued
at a price less than the greater of book or market value of the common stock. On
February 25, 2003, the Company filed an application with AMEX to list 1,430,732
shares of common stock, which represents 19.99% of the issued and outstanding
shares of common stock as of February 19, 2003. Upon the receipt of shareholder
approval, the Company intends to file another application with AMEX to list the
remaining shares issuable upon conversion of the convertible note and exercise
of Lenfest's warrants.
The Lenfest purchase agreement requires the Company to seek shareholder
approval of the transaction with Lenfest, and accordingly the Company is doing
so. Except for the rules and regulation of AMEX, shareholder approval is not
otherwise required as a matter of Pennsylvania law or other applicable laws or
rules.
Stockholders Voting Agreement
Prior to completing the Lenfest Financing, certain shareholders holding
shares of common stock representing more than 50% of the voting power of the
issued and outstanding shares of common stock entitled to vote at the special
meeting of shareholders entered into a stockholders voting agreement. William F.
Mitchell, Chairman and President of the Company, Pete L. Stephens, M.D., a
director of the Company, EAM, and Emerald Advisors, Inc., granted to Mr.
Mitchell an irrevocable proxy to vote all shares of common stock held by him or
it in favor of this proposal. Accordingly, these shareholders have the ability
to ensure that this proposal is approved, ratified and adopted at the Special
Meeting.
To protect the Company from violating or defaulting on its obligations
under the Lenfest purchase agreement, the convertible note and Lenfest's
warrants contain a provision that precludes Lenfest, or any other holders of the
convertible note and Lenfest's warrants, from converting the principal amounts
under the convertible note, or exercising Lenfest's warrants, into more than
1,325,732 shares of common stock (which such amount represents 1,430,732 or
19.99% of the issued and outstanding shares of common stock as of February 19,
2003, less 105,000 shares of common stock issuable to EAM upon exercise in full
of the its new warrant) prior to the Company obtaining shareholder approval.
Vote Required
In the event this proposal is not approved by a vote of the
shareholders, the exercise price of each Lenfest warrant will be reduced, from
the current exercise price, which is the lesser of 4.00 or two-thirds of the
Market Price, to the lesser of $2.00 or two-thirds of the Market Price.
To approve this proposal, the affirmative vote of a majority of the
votes cast at the Special Meeting is required.
Recommendations of the Board of Directors; Reasons for the Lenfest Issuance
Based primarily on its consideration of the factors referred to below,
the Board of Directors of the Company believes that this proposal, and the
authorization of additional shares of common stock to be listed on the American
Stock Exchange in connection therewith, is in the best interests of the Company
and its shareholders.
Among the factors considered by the Board of Directors in approving and
recommending to the shareholders this proposal were (i) the Wachovia facility
was scheduled to expire on February 28, 2003 and Wachovia had not offered the
Company the opportunity to extend the credit facility, (ii) a short-term
extension of the Wachovia facility would not meet the Company's long-term
financial needs and would not have been made on terms more beneficial to the
Company than the terms of the Refinancing Transactions, (iii) after an intensive
year long search by the Company, the Board of Directors believes that the terms
of the Lenfest Financing should have a more positive impact on the financial
condition of the Company and its prospects than the terms of any other proposed
subordinated financing presented to the Company during its search, (iv) the
Company could not complete the Refinancing Transactions, including the Lenfest
Financing, without completing the Lenfest Issuance, (v) the terms of the Lenfest
purchase agreement require the Company to list the shares of common stock
issuable upon conversion of the note and exercise of the warrants on the AMEX,
(vi) without shareholder approval the exercise price of Lenfest's warrants will
be reduced, which would result, upon exercise of Lenfest's warrants, in a
reduction of cash received by the Company and (vii) a conversion of the
promissory note, in whole or in part, into shares of common stock rather than
repayment of the principal amount of the promissory note at its maturity date
will provide the Company with flexibility with regards to funding its working
capital requirements, and is in the Company's best interest.
11
THE BOARD OF DIRECTORS, AFTER REVIEWING THE FINANCIAL POSITION AND
RESULTS OF OPERATIONS OF THE COMPANY DETERMINED THAT THE LENFEST FINANCING AND
THIS PROPOSAL IS IN THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS. TO
APPROVE THIS PROPOSAL, THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE
ISSUED AND OUTSTANDING SHARES OF COMMON STOCK ENTITLED TO VOTE AT THE SPECIAL
MEETING IS REQUIRED.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL
OF THIS PROPOSAL.
12
VOTING AGREEMENTS
The following description is a summary of the material provisions of a
stockholders voting agreement which certain of the Company's stockholders
entered into in connection with the Lenfest Financing. The stockholders voting
agreement is attached as Exhibit 9.1 to the Current Report on 8-K which the
Company filed with the Commission on February 25, 2003.
General
In connection with the Lenfest Financing, William F. Mitchell, Chairman
and Chief Executive Officer of the Company, Pete L. Stephens, M.D., a director
of the Company, Emerald Advisors, Inc., and ETC Asset Management, LLC entered
into a stockholders voting agreement with Lenfest on February 18, 2003. These
four shareholders agreed, among other things, to vote shares of common stock
controlled by them in favor of the Lenfest Issuance. As of February 19, 2003,
these shareholders collectively had the right to vote an aggregate of 3,813,748
shares of the Company's common stock, which represents, as of such date,
approximately 53.3% of the total issued and outstanding shares of common stock
entitled to vote at the Special Meeting.
Voting And Proxies
The stockholders voting agreement provides that the shareholder parties
thereto shall vote the shares of common stock controlled by each them in favor
of the Lenfest Issuance at any meeting of the Company's shareholders (or at any
adjournment thereof) called to approve and adopt the Lenfest Issuance. Pursuant
to the terms of the stockholders voting agreement, each such shareholder granted
an irrevocable proxy to Mr. Mitchell for the sole purpose of voting in favor of
the Lenfest Issuance. The grant by each such shareholder of the irrevocable
proxy remains in effect until the earlier of (i) June 18, 2003, the date by
which shareholder approval is required to be obtained; and (ii) the day
immediately following the date of a special meeting of shareholders held for the
purpose of approving the Lenfest Issuance, or any adjournment thereof.
Prohibited Actions
Each shareholder who signed the stockholders voting agreement also
agreed not to enter into any other voting arrangement, or grant a proxy or power
of attorney with respect to the Company's common stock held by them or to take
any other action that would be inconsistent with their obligations under the
stockholders voting agreement. In addition, except for limited exceptions, each
shareholder agreed not to sell, assign, encumber or otherwise dispose of shares
of common stock held by him or it during the term of the stockholders voting
agreement.
13
BENEFICIAL OWNERSHIP OF THE COMPANY'S COMMON STOCK
Principal Shareholders
The following table sets forth information, as of February 19, 2003, as
to beneficial owners, either directly or indirectly, of 5% or more of the
outstanding shares of common stock.
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership(1) Common Stock
--------------------------- ----------------------------- ----------------
William F. Mitchell (2) 3,813,748 53.3%
c/o Environmental Tectonics
Corporation
123 James Way
County Line Industrial Park
Southampton, PA 18966
Pete L. Stephens, M.D. (3) 682,600(4) 9.5%
31 Ribaut Drive
Hilton Head Island, SC 29926
ETC Asset Management, LLC 1,079,020(5) 14.2%
50 Midtown Park East
Mobile, AL 36606
Emerald Advisors, Inc. 1,461,240(6) 20.4%
1703 Oregon Pike
Suite 101
Lancaster, PA 17601
H.F. Lenfest (3) 1,325,732(7) 15.6%
c/o The Lenfest Group
1332 Enterprise Drive
West Chester, PA 19380
---------------------
(1) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934. Unless otherwise noted, the
Company believes that all persons named in the table have sole voting and
investment power with respect to all shares of common stock beneficially
owned by them.
(2) Chairman of the Board, President and Director of the Company. Shares of
common stock include 155,200 shares held by Mr. Mitchell's wife. Shares of
common stock also include shares of common stock for which Mr. Mitchell
holds an irrevocable proxy, which he received, from Dr. Stephens (682,600
shares), EAM (641,200 shares), and Emerald Advisors, Inc. (865,550 shares)
pursuant to the terms of a stockholders voting agreement, which the parties
entered into as of February 19, 2003, and which expires on the earlier of
June 18, 2003, the date by which shareholder approval is required to be
obtained; and (ii) the day immediately following the date of a special
meeting of shareholders held for the purpose of approving the Lenfest
Issuance, or any adjournment thereof.
(3) Director of the Company.
(4) Includes 292,770 shares of common stock held by or for the benefit of Dr.
Stephens' wife and two of his children.
(5) Includes 500,000 shares of common stock, and 437,820 shares of common stock
underlying a presently exercisable warrant to purchase shares of common
stock owned by EAM, of which T. Todd Martin, III is manager. Also includes
76,000 shares of common stock owned by Mr. Martin, 26,900 shares owned by
Allied Williams Co., Inc., a corporation of which Mr. Martin is an officer
and director, 17,000 shares owned by Equity Management, LLC, a limited
14
liability company of which Mr. Martin is Manager, 14,300 shares owned by
Mr. Martin jointly with his spouse, and 7,000 shares owned by trusts of
which Mr. Martin is trustee.
(6) As reported in a Schedule 13D filed on March 5, 2003, Emerald Advisors,
Inc. has shared voting power with respect to 865,550 shares of common stock
and sole dispositive power over 1,461,240 shares of common stock.
(7) These shares consist of 1,325,732 shares of common stock issuable upon
conversion of a promissory note in the principal amount of $10,000,000 and
exercise of warrants to purchase shares of common stock. The 1,325,732
shares represents 1,430,732 or 19.99% of the issued and outstanding shares
of common stock on February 19, 2003, less 105,000 shares issuable to EAM
upon exercise of a warrant issued by the Company to ETC Asset Management.
Upon shareholder approval at the Special Meeting of the Lenfest Issuance,
the Company will be obligated to issue up to 1,352,335 additional shares of
common stock if Lenfest fully converts the promissory note and exercises
his warrants.
Security Ownership of Management
The following table sets forth, as of February 19, 2003, the number of
shares and percentage of the Company's Common Stock owned beneficially by each
director and each named executive officer set forth in the Summary Compensation
Table. The table also sets forth the holdings of all directors and executive
officers as a group.
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership(1) Common Stock
--------------------------- ----------------------------- ----------------
William F. Mitchell (2) 3,813,748 53.3%
c/o Environmental Tectonics Corporation
123 James Way
County Line Industrial Park
Southampton, PA 18966
Pete L. Stephens, M.D. (3) 682,600(4) 9.5%
31 Ribaut Drive
Hilton Head Island, SC 29926
Richard E. McAdams (3) 51,307(5) *
c/o Environmental Tectonics Corporation
County Line Industrial Park
Southampton, PA 18966
Howard W. Kelley (3) 0 *
c/o Sally Corporation
745 West Forsyth Street
Jacksonville, FL 32204
H.F. Lenfest (3) 1,325,732(6) 15.6%
c/o The Lenfest Group
1332 Enterprise Drive
West Chester, PA 19380
George K. Anderson, MD, MPH (3) 0 *
8034 Kidwell Hill Court
Vienna, VA 22182
All directors and executive officers as a 5,190,787(7) 60.9%
group (6 persons)
15
-------------------
* less than 1%
(1) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934. Unless otherwise noted, the
Company believes that all persons named in the table have sole voting and
investment power with respect to all shares of the Company's Common Stock
beneficially owned by them.
(2) Chairman of the Board, President and Director of the Company. Shares of
Common Stock include 155,200 shares held by Mr. Mitchell's wife. Shares of
common stock also include shares of common stock for which Mr. Mitchell
holds an irrevocable proxy, which he received, from Dr. Stephens (682,600
shares), EAM (641,200 shares), and Emerald Advisors, Inc. (865,550 shares)
pursuant to the terms of a stockholders voting agreement, which the parties
entered into as of February 19, 2003 and which expires on the earlier of
(i) June 18, 2003, the date by which shareholder approval is required to be
obtained; and (ii) the day immediately following the date of a special
meeting of shareholders held for the purpose of approving the Lenfest
Issuance, or any adjournment thereof.
(3) Director of the Company.
(4) Includes 292,770 shares of common stock held by or for the benefit of Dr.
Stephens' wife and two of his children.
(5) Includes options to purchase 36,550 shares of common stock issuable under
the Company's Incentive Stock Option Plan that are presently exercisable.
(6) These shares consist of 1,325,732 shares of common stock issuable upon
conversion of a promissory note in the principal amount of $10,000,000 and
exercise of warrants to purchase shares of common stock. The 1,325,732
shares represents 1,430,732 or 19.99% of the issued and outstanding shares
of common stock on February 19, 2003, less 105,000 shares issuable to ETC
Asset Management, LLC upon exercise of a warrant issued by the Company to
EAM. Upon shareholder approval at the Special Meeting of the Lenfest
Issuance, the Company will be obligated to issue up to 1,352,335 additional
shares of common stock if Lenfest fully converts the promissory note and
exercises his warrants.
(7) Includes 36,550 shares of common stock which may be acquired by Director
McAdams upon the exercise of options granted under the Company's Incentive
Stock Option Plan that are presently exercisable, and 1,325,732 shares of
common stock which may be acquired by H.F. Lenfest upon conversion of a
promissory note in the principal amount of $10,000,000 that is presently
convertible and the exercise of warrants to purchase shares of common stock
which are presently exercisable.
SHAREHOLDER PROPOSALS FOR THE NEXT
ANNUAL MEETING
The Company's 2003 Annual Meeting of shareholders will be held on or
about August 29, 2003.
Proposals, which shareholders desire to have included in the Proxy
Statement for the 2003 Annual Meeting of shareholders, must be received at the
Company's executive offices, County Line Industrial Park, Southampton,
Pennsylvania 18966 on or before April 2, 2003.
OTHER MATTERS
The Company knows of no other business, which will be presented for
consideration at the Special Meeting. However, if other matters come before the
Special Meeting, it is the intention of the proxyholders to vote upon such
matters as they, in their discretion, may determine.
By Order of the Board of Directors
ANN M. ALLEN, Secretary
16
ENVIRONMENTAL TECTONICS CORPORATION
SPECIAL MEETING TO BE HELD ON APRIL ___, 2003
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, revoking all prior proxies, hereby appoints William F.
Mitchell, with full power of substitution, as the undersigned's proxy to vote at
the Special Meeting of Shareholders called for April __, 2003 and at any
adjournment or postponement thereof:
Please mark your [X] votes as in this example.
1. Proposal to ratify, adopt and approve the issuance by the Company of
shares of common stock in excess of 1,430,732, or 19.99% of the issued and
outstanding shares of common stock of the Company on February 19, 2003, a
portion of which will be at a price per share that is less than $6.05, which was
the market value of the common stock on February 19, 2003. The shares of common
stock are issuable upon conversion of a convertible note and upon exercise of
warrants issued or to be issued by the Company to H.F. Lenfest.
|_| FOR |_| AGAINST |_| ABSTAIN
2. In his discretion, the proxy is authorized to vote upon such other
business as may properly come before the meeting.
|_| FOR |_| AGAINST |_| ABSTAIN
This proxy, when properly executed, will be voted in the manner
directed and designated herein by the undersigned shareholder. In the absence of
designation, this Proxy will be voted "FOR" the Lenfest Issuance.
I plan to attend the Special Meeting on April __, 2003 [ ]
In Witness Whereof, the Undersigned has set his hand and seal.
_______________________________(SEAL)
Shareholder's Signature
_______________________________(SEAL)
Shareholder's Signature
Dated:_______________________, 2003
NOTE: Please sign exactly as name appears herein. When signing as attorney,
executor, administrator, trustee, guardian, etc. please give full title
as such.