<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended MARCH 31, 1998 Commission file number 0-7099
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CECO ENVIRONMENTAL CORP.
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NEW YORK 13-2566064
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
505 UNIVERSITY AVENUE, SUITE 1400, TORONTO, ONTARIO, CANADA M5G 1X3
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 416-593-6543
-----------------------------
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Former name, former address and former fiscal year, if changed since last
report.
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 and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the close of the period covered by this report.
Class: COMMON, PAR VALUE $.01 PER SHARE
--------------------------------
OUTSTANDING at March 31, 1998 8,250,896
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CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES
-----------------------------------------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 1998
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INDEX
-----
Part I - Financial Information:
Condensed consolidated balance sheet as of
March 31, 1998 and December 31, 1997 2
Condensed consolidated statement of operations
for the three-month periods ended
March 31, 1998 and 1997 3
Condensed consolidated statement of cash flows for the
three-month periods ended March 31, 1998 and 1997 4
Notes to condensed consolidated financial statements 5 & 6
Management's discussion and analysis of the
financial condition and results of operations 7 to 9
Signature 10
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CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES
-----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
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<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash $ 387,983 $ 847,827
Marketable securities - trading 650,498 634,150
Accounts receivable 3,643,438 2,979,414
Inventories 646,185 771,068
Costs and estimated earnings in excess of
billings on uncompleted contracts 533,614 235,454
Prepaid expenses and other current assets 283,427 230,458
Prepaid and refundable income taxes 56,000 150,200
Deferred income taxes 33,477 33,477
----------- -----------
Total current assets 6,234,622 5,882,048
Property and equipment, net 2,057,093 1,947,482
Goodwill, net 5,043,660 5,834,858
Other intangible assets, at cost, net 1,354,563 272,696
Deferred income taxes 23,896 23,896
----------- -----------
Total assets $14,713,834 $13,960,980
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations $ 900,000 $ -
Current portion of long-term debt 307,078 333,871
Current portion of capital lease obligation 5,554 5,554
Accounts payable and accrued expenses 3,366,401 1,873,965
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,091,779 2,517,310
Due former owners of Busch Co. 7,076 502,592
----------- -----------
Total current liabilities 5,677,888 5,233,292
Long-term debt, less current portion 1,686,551 1,732,993
Capital lease obligation, less current portion 2,320 3,821
----------- -----------
Total liabilities 7,366,759 6,970,106
----------- -----------
Minority interest 186,886 248,289
----------- -----------
Shareholders' equity:
Preferred stock, $.01 par value; 10,000,000
shares authorized, none issued - -
Common stock, $.01 par value; 100,000,000
shares authorized, 8,388,816 and 8,107,048
shares issued, respectively 83,888 81,070
Capital in excess of par value 10,139,013 9,860,063
Accumulated deficit (2,714,043) (2,849,879)
----------- -----------
7,508,858 7,091,254
Less treasury stock, at cost (348,669) (348,669)
----------- -----------
Net shareholders' equity 7,160,189 6,742,585
----------- -----------
Total liabilities and shareholders' equity $14,713,834 $13,960,980
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES
-----------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
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<S> <C> <C>
Revenues:
Net sales - products $2,414,989 $2,491,876
Contract revenues 4,239,846 48,520
---------- ----------
Total revenues 6,654,835 2,540,396
---------- ----------
Costs and expenses:
Cost of revenues - products 1,285,010 1,287,871
Cost of revenues - contracts 3,028,955 27,000
Selling and administrative 1,878,420 916,464
Depreciation and amortization 141,709 119,366
---------- ----------
6,334,094 2,350,701
---------- ----------
Income from operations 320,741 189,695
Investment income 16,932 21,995
Interest expense (49,308) (28,633)
---------- ----------
Income before provision for income taxes 288,365 183,057
Provision for income taxes 129,000 63,600
---------- ----------
Income before minority interest 159,365 119,457
Minority interest (23,529) (30,479)
---------- ----------
Net income $ 135,836 $ 88,978
=========== ===========
Net income per share, basic and diluted $ .02 $ .01
=========== ===========
Weighted average number of common shares outstanding:
Basic 8,156,973 7,200,628
========== ==========
Diluted 8,547,598 7,763,933
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
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<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income $ 135,836 $ 88,978
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 113,749 99,630
Goodwill amortization - CECO Filters, Inc. 27,960 19,736
Minority interest 23,529 30,479
(Increase) decrease in operating assets:
Accounts receivable (94,317) 805,710
Inventories 124,883 (32,325)
Costs and estimated earnings in excess of
billings on uncompleted contracts (274,274) -
Prepaid expenses and other current assets (35,228) (15,988)
Prepaid and refundable income taxes 94,200 -
Purchases of marketable securities (876,155) (237,783)
Proceeds from sales of marketable securities 859,806 181,000
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 995,432 (324,677)
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,596,968) -
Income taxes payable - (189,840)
---------------- -------
Net cash provided by (used in) operating activities (501,547) 424,920
---------- ---------
Cash flows from investing activities:
Acquisition of IFM, net of cash acquired, comprised of the following:
Excess of current liabilities over current assets, net of cash acquired 169,756 -
Equipment (125,132) -
Goodwill (144,493) -
Additions to property and equipment and intangible assets (65,164) (32,804)
Acquisition of additional shares of CECO Filters, Inc. (10,363) -
----------- ---------
Net cash (used in) investing activities (175,396) (32,804)
---------- --------
Cash flows from financing activities:
Net borrowings (repayments) of short-term obligations 798,524 (400,000)
Net (repayments) of long-term debt and capital lease obligation (85,909) (23,845)
Due to former owners of Busch Co. (495,516) -
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Net cash provided by (used in) financing activities 217,099 (423,845)
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Net (decrease) in cash (459,844) (31,729)
Cash at beginning of period 847,827 412,174
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Cash and cash equivalents at end of period $ 387,983 $380,445
========== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the quarter for:
Interest $ 49,308 $ 28,633
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Income taxes $ 34,800 $270,040
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the financial position as of March 31, 1998 and the
results of operations and cash flows for the three-month periods ended
March 31, 1998 and 1997. The results of operations for the three-month
period ended March 31, 1998 are not necessarily indicative of the
results to be expected for the full year.
2. Acquisition of Businesses
During March 1998, pursuant to an Asset Purchase Agreement, the
Company acquired substantially all of the assets, and the business, of
Integrated Facilities Management, Inc. ("IFM") for $150,000 in cash.
IFM, located in Mesa, Arizona, provides a full range of services for
inter-facility general repair, preventive maintenance and
inter-facility construction needs exclusively for owners and users of
industrial, commercial, educational, healthcare and manufacturing
facilities. The acquisition was accounted for as a purchase. The Asset
Purchase Agreement provides that, notwithstanding the actual closing
date, the closing was deemed to be effective as of January 1, 1998.
The condensed consolidated statement of operations for the three-month
period ended March 31, 1998, therefore, includes the operations of IFM
since January 1, 1998.
On September 25, 1997, the Company acquired substantially all of the
assets, and the business, of Busch Co. During April 1998, the Company
completed a valuation of certain patents acquired as part of this
acquisition, utilizing the services of an independent consultant. The
valuation resulted in the reclassification of $1,047,000 from goodwill
to other intangible assets. An additional amortization charge of
approximately $43,000 for the three months ended March 31, 1998
resulted from this reclassification.
On a pro forma basis, results of operations for the three-month
periods ended March 31, 1998 and 1997, would have been as follows, if
the acquisitions had been made as of January 1, 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
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<S> <C> <C>
Total revenues $6,654,835 $6,598,317
Income before provision for income taxes 288,365 410,202
Net income 135,836 181,536
Net income per share, basic and diluted .02 .03
</TABLE>
3. Inventories consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
Raw materials $388,489 $409,639
Work-in-process 13,373 157,911
Finished goods 244,323 203,518
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$646,185 $771,068
======= =======
</TABLE>
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CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(unaudited)
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4. Investment in CECO Filters, Inc.
In February 1998, the Company exchanged 281,768 additional shares of
its common stock for 281,768 shares of CECO common stock with an
unrelated third party. Also, during March 1998, the Company acquired
10,360 more shares of CECO's common stock on the open market for cash.
As of March 31, 1998, the Company owned 91.7% of CECO's common stock.
Summarized financial information of CECO as of and for its three
months ended March 31, 1998, is as follows:
Financial position:
Working capital (deficiency) ($ 111,652)
==========
Total assets $10,024,463
==========
Net shareholders' equity $ 2,192,504
==========
Results of operations:
Total revenues $ 6,654,835
==========
Income before income taxes $ 323,106
==========
Net income $ 194,106
==========
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CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES
-----------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(unaudited)
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Financial Condition, Liquidity and Capital Resources - The Company
The Company's consolidated cash and marketable securities position decreased
from $1,481,977 at December 31, 1997 to $1,038,481 at March 31, 1998. This
decrease of $443,496 is attributable to the use of cash in operating
activities of $501,547, use of cash in investing activities of $175,396, which
were offset by cash provided by financing activities of $217,099. The
investments in marketable securities are primarily in high yield bonds of
major U.S. corporations, as well as U.S. Treasury Bills. CECO Filters, Inc.
("CECO") maintains a $1,500,000 line of credit with a commercial bank of which
$900,000 was outstanding as of March 31, 1998.
Management believes that the expected revenues from the operations of CECO,
supplemented by the available line of credit, will be sufficient to provide
adequate cash to fund anticipated working capital and other cash needs during
the remainder of the year.
The Company and CECO entered into a five-year management and consulting
agreement during 1994 pursuant to which the Company provides management and
financial consulting services to CECO for a monthly fee of $20,000 until the
agreement expires in December 1998. The Company believes its consulting
agreement with CECO and interest income from its investments in marketable
securities, should provide sufficient revenue to meet its general and
administrative expenses.
Results of Operations - The Company
The Company's consolidated statement of operations for the three-month periods
ended March 31, 1998 and 1997 reflects the operations of the Company
consolidated with the operations of CECO. At March 31, 1998, the Company owned
approximately 92% of CECO. Minority interest in the consolidated statement of
operations has been presented as a reduction in net income.
The Company received $60,000 during each quarter for management and financial
consulting services provided to CECO. This amount is not reflected in the
consolidated results of operations since it is eliminated in consolidation.
Except as set forth above, the Company has no other income, revenues or
expenses other than as a result of its investment in CECO and its investment
in marketable securities, and except for its investment activities, the
Company does not engage in operations other than through its operating
subsidiary, CECO.
CECO is comprised of CECO Filters, Inc., Air Purator Corporation ("APC"), U.S.
Facilities Management Company, Inc. ("USFM") and New Busch Co., Inc.
(collectively referred to as "the CECO Group"), which provide innovative
solutions to air quality problems through particle and chemical control
technologies and services.
- -7-
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CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES
-----------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
(unaudited)
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CECO manufactures and markets filters known as fiber bed mist eliminators,
designed to trap, collect and remove solid soluble and liquid particulate
matter suspended in an air or other gas stream whether generated from a point
source emission or otherwise. CECO offers innovative patented technologies,
Catenary Grid(R) and Narrow Gap Venturi(TM), designed for use with heat and
mass transfer operations and particulate control. APC designs and manufactures
high performance filter media and bags for use in high temperature pulse-jet
baghouses, the most effective type of baghouse for capturing submicron
particulate from gas streams. USFM provides facilities management and
software, as well as outsourced plant-wide maintenance management to help
customers achieve their performance goals. Busch is engaged in designing,
manufacturing and supplying equipment used to control the environment in and
around industrial plants with a variety of proprietary and patented
technologies.
On March 16, 1998, CECO acquired substantially all of the assets of Integrated
Facilities Management ("IFM") of Mesa, Arizona in an all cash transaction,
effective January 1, 1998. IFM provides facility audits, preventative
maintenance, labor force augmentation, as-built warranty reconciliation,
pre-scheduled facility maintenance inspection, inter-facility construction
services and other trade services. IFM will be integrated into USFM. USFM will
continue to provide its unique environmental maintenance services. USFM also
includes a technology arm through its strategic alliance with Western VAR
Alliance. USFM can now offer complete facilities management and computerized
facility and maintenance management and co-sourced resources through a single
organization.
Results of Operations - CECO (Company's Subsidiary)
Comparison of Three Months Ended March 31, 1998 to Three Months Ended March 31,
1997
Revenues were approximately $6.7 million and $2.5 million for the three months
ended March 31, 1998 and 1997, respectively, an increase of 162%. The increase
in revenues from 1997 to 1998 resulted principally from the acquisition of
Busch Co. in September, 1997 and IFM in March, 1998, increasing revenues by
$3.8 million and $.8 million, respectively.
The CECO Group's backlog of orders and services at March 31, 1998 was
approximately $10.6 million as compared to approximately $3.9 million at March
31, 1997, an increase of $6.7 million or 171.7%. The increase is principally
attributable to the impact of the Busch Co. and IFM acquisitions. There can be
no assurance that order and service backlog will be replicated, or increased,
or translate into higher revenues in the future. The success of the CECO
Group's business depends on a multitude of factors that are out of the CECO
Group's control. The CECO Group's operating results can be significantly
impacted by the introduction of new products and services, new manufacturing
technologies, rapid change in the demand for its product and services,
decrease in the average selling price over the life of a product as
competition increases, and the CECO Group's dependence on the efforts of
middle men to sell a significant portion of its products and services.
CECO's overall cost of revenues increased as a percentage of revenues for the
three months ended March 31, 1998 (64.8%) compared to the three months ended
March 31, 1997 (51.8%). The increase is attributed to the impact of Busch Co.
where costs as a percentage of revenues amounted to 68.2%, and IFM, now called
USFM (Service), where costs as a percentage of revenues amounted to 90%, both
from January 1, 1998 through March 31, 1998. Without the
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CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES
-----------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
(unaudited)
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impact of Busch Co. and USFM (Service), the cost of revenues as a percentage
of revenues would have been 48.7%. The decrease, compared to the prior year
and without the impact of Busch Co. and USFM (Service), is attributed to lower
material costs, as well as lower costs incurred to service the CECO Group's
products. The CECO Group continues to use the latest technology available in
an effect to reduce both cost of revenues (and the maintenance of optimal
inventory levels) and operating expenses, and ultimately increase overall
company profits.
The CECO Group's selling and administrative expenses amounted to $1,782,207
for the three-month period ended March 31, 1998 compared to $878,147 for the
three-month period ended March 31, 1997, representing an increase of $904,060
or 103%. This increase is the direct result of selling and administrative
expenses of Busch Co and IFM.
During 1994, The CECO Group entered into a management and consulting agreement
with the Company. The terms of the agreement require payment of monthly fees
of $20,000 through December, 1998 in exchange for management and financial
consulting services involving corporate policies; marketing; strategic and
financial planning; and mergers, acquisitions and related matters. The CECO
Group incurred management fees to the Company of $60,000 during each of the
three-month periods ended March 31, 1998 and 1997.
Interest expense increased by $33,175, or 115.9% during the three-month period
ended March 31, 1998 as compared to the same period in 1997. The increase in
interest expense can be attributed to an increased utilization of the bank
line of credit during the three months ended March 31, 1998 compared to the
previous year, as well as additional borrowings incurred to fund the
acquisition of Busch Co.
The CECO Group earned pre-tax income of $323,106 for the three-month period
ended March 31, 1998 compared to $159,115 for the three-month period ended
March 31, 1997. This change is attributed principally to the increase in
revenues for the three-month period ended March 31, 1998 over the comparable
period in 1997.
The provision for federal and state income taxes for the three-month period
ended March 31, 1998 amounted to $129,000 compared to $63,600 for the
three-month period ended March 31, 1997 and reflects an effective income tax
rate of approximately 40% for each period.
Other Matters
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this document
and other materials filed or to be filed with the Securities and Exchange
Commission, as well as information included in oral or other written
statements made or to be made by the Company, contains statements that are
forward-looking. Such statements may relate to plans for future expansion,
business development activities, other capital spending, financing, or other
effects of regulation and competition. Such information involves important
risks and uncertainties that could significantly affect anticipated results in
the future and, accordingly, such results may differ from those expressed in
any forward-looking statements made by or on behalf of the Company. These
risks and uncertainties include, but are not limited to, those relating to
product and service development activities, dependence on existing management,
global economic and market conditions, and changes in federal or state laws.
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CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES
-----------------------------------------
SIGNATURE
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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.
CECO ENVIRONMENTAL CORP.
/s/ Phillip DeZwirek
--------------------------------
Phillip DeZwirek
Chief Financial Officer
Chief Executive Officer
Date: May 8, 1998
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES AS OF AND
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 387,983
<SECURITIES> 650,498
<RECEIVABLES> 3,643,438
<ALLOWANCES> 0
<INVENTORY> 646,185
<CURRENT-ASSETS> 6,234,622
<PP&E> 3,867,731
<DEPRECIATION> 1,810,638
<TOTAL-ASSETS> 14,713,834
<CURRENT-LIABILITIES> 5,677,888
<BONDS> 1,993,629
0
0
<COMMON> 83,888
<OTHER-SE> 7,076,301
<TOTAL-LIABILITY-AND-EQUITY> 14,713,834
<SALES> 2,414,989
<TOTAL-REVENUES> 6,654,835
<CGS> 1,285,010
<TOTAL-COSTS> 6,334,094
<OTHER-EXPENSES> 49,308
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,308
<INCOME-PRETAX> 288,365
<INCOME-TAX> 129,000
<INCOME-CONTINUING> 159,365
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 135,836
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
