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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 JUNE 30, 1997 Commission file number 0-17804
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CECO FILTERS, INC.
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DELAWARE 23-2399315
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1027-29 CONSHOHOCKEN ROAD, CONSHOHOCKEN, PA 19428-0683
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 610-825-8585
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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
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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 $.001 PER SHARE OUTSTANDING at 6/30/97 6,867,667
---------------------------------
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CECO FILTERS, INC.
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 1997
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INDEX
Part I - Financial Information:
Condensed consolidated balance sheet as of
June 30, 1997 and December 31, 1996 2
Condensed consolidated statement of operations
for the three-month and six-month periods ended
June 30, 1997 and 1996 3
Condensed consolidated statement of cash flows
for the six-month periods ended June 30, 1997 and 1996 4
Notes to condensed consolidated financial statements 5
Management's discussion and analysis of the
financial condition and results of operations 6 to 9
Report on Review by Independent Accountants 10
Signature 11
1
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CECO FILTERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
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JUNE 30, DECEMBER 31,
1997 1996
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ASSETS
Current assets:
Cash $ 724,376 $ 374,186
Accounts receivable 806,845 2,077,045
Inventories 490,816 565,371
Prepaid expenses and other current assets 42,100 40,439
Deferred income taxes 58,735 58,735
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Total current assets 2,122,872 3,115,776
Property and equipment, net 1,774,792 1,782,087
Intangible assets, at cost, net 107,484 88,144
Investment in CECO Environmental Corp. 230,000 230,000
---------- ----------
$4,235,148 $5,216,007
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term obligations $ -- $ 400,000
Current portion of long-term debt 66,959 83,100
Current portion of capital lease obligation 6,043 6,043
Accounts payable and accrued expenses 684,464 1,205,795
Accrued income taxes 32,686 276,976
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Total current liabilities 790,152 1,971,914
Long-term debt, less current portion 1,094,336 1,132,869
Capital lease obligation, less current portion 6,262 9,882
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1,890,750 3,114,665
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Shareholders' equity:
Common stock, $.001 par value; 20,000,000
shares authorized, 6,867,667 shares issued
and outstanding 6,868 6,868
Capital in excess of par value 915,984 915,984
Retained earnings 1,421,546 1,178,490
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Total shareholders' equity 2,344,398 2,101,342
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$4,235,148 $5,216,007
========== ==========
See accompanying notes to condensed consolidated financial statements.
2
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CECO FILTERS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $2,927,091 $1,874,440 $5,467,487 $4,025,097
--------- --------- --------- ---------
Costs and expenses:
Cost of sales 1,482,156 964,867 2,797,027 2,105,189
Selling and administrative 1,019,619 733,168 1,897,766 1,520,748
Management fees, CECO
Environmental Corp. 60,000 60,000 120,000 120,000
Depreciation and amortization 99,630 85,268 199,260 179,318
--------- --------- --------- ---------
2,661,405 1,843,303 5,014,053 3,925,255
--------- --------- --------- ---------
Income from operations 265,686 31,137 453,434 99,842
Interest expense ( 20,745) ( 40,591) ( 49,378) ( 84,050)
--------- --------- --------- ---------
Income (loss) before provision
(credit) for income taxes 244,941 ( 9,454) 404,056 15,792
Provision (credit) for income taxes 97,400 ( 2,000) 161,000 8,000
--------- --------- --------- ---------
Net income (loss) $ 147,541 ($ 7,454) $ 243,056 $ 7,792
========= ========= ========= =========
Net income (loss) per share * $ .02 ($ .00) $ .03 $ .00
========= ========= ========= =========
</TABLE>
* Based on weighted average shares outstanding of 6,867,667 for each period.
See accompanying notes to condensed consolidated financial statements.
3
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CECO FILTERS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1996
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INCREASE (DECREASE) IN CASH
<S> <C> <C>
Cash flows from operating activities:
Net income $ 243,056 $ 7,792
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 199,260 179,318
(Increase) decrease in operating assets:
Accounts receivable 1,270,200 887,826
Inventories 74,555 ( 29,032)
Prepaid expenses and other current assets ( 1,661) ( 54,087)
(Decrease) in operating liabilities:
Accounts payable and accrued expenses ( 521,331) ( 463,896)
Accrued income taxes ( 244,290) ( 5,901)
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Net cash provided by operating activities 1,019,789 522,020
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Cash flows from investing activities:
Additions to property and equipment and intangible assets ( 211,305) ( 65,926)
Advance to officer - ( 23,200)
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Net cash (used in) investing activities ( 211,305) ( 89,126)
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Cash flows from financing activities:
Repayments of short-term obligations ( 400,000) ( 300,000)
Repayments of long-term debt and capital lease obligation ( 58,294) ( 152,128)
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Net cash (used in) financing activities ( 458,294) ( 452,128)
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Net increase (decrease) in cash 350,190 ( 19,234)
Cash at beginning of period 374,186 184,248
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Cash at end of period $724,376 $165,014
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 20,745 $ 84,050
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Income taxes $373,850 $ 23,800
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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CECO FILTERS, INC.
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 June 30, 1997 and the
results of operations for the three-month and six-month periods ended
June 30, 1997 and 1996 and cash flows for the six-month periods ended
June 30, 1997 and 1996. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto, together with management's discussion and analysis of
financial condition and results of operations, contained in the
Company's 1996 Annual Report to stockholders. The results of operations
for the six-month period ended June 30, 1997 are not necessarily
indicative of the results to be expected for the full year, or any
future interim period.
2. Margolis & Company P.C., the Company's auditors, has performed a limited
review of the financial information as of and for the three-month and
six-month periods ended June 30, 1997 and 1996 which is included herein.
Their report on such review accompanies this filing.
3. Inventories consisted of the following:
JUNE 30, DECEMBER 31,
1997 1996
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Raw materials $369,095 $410,949
Finished goods 121,721 154,422
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$490,816 $565,371
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4. Related Party Transactions
Management Fees
The Company incurred management fees amounting to $120,000 during the
six-month periods ended June 30, 1997 and 1996, pursuant to an agreement
between the Company and CECO Environmental Corp. ("CEC"), a majority
shareholder of the Company. Under such agreement, effective July 1,
1994, CEC provides management and financial consulting services to the
Company in exchange for a management fee.
5. Recent Accounting Statement
In February, 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which is required to be adopted
on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will be
excluded. This change is not expected to impact primary or fully diluted
earnings per share for the three-month and six-month periods ended June
30, 1997 and 1996.
5
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CECO FILTERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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General
CECO Filters, Inc. ("CECO") is comprised of the CECO Group of companies - CECO
Filters, Inc., Air Purator Corporation, Compliance Systems International, Inc.,
and U.S. Facilities Management Company, Inc. (collectively referred to as "the
Company") - which provide innovative solutions to air quality problems through
particle and chemical control technologies and services.
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. Air Purator Corporation ("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. Compliance Systems International ("CSI") offers
innovative patented technologies, Catenary Grid(R) and Narrow Gap Venturi(TM),
designed for use with heat and mass transfer operations and particulate control.
CSI also offers a complete range of air quality consulting services using a
proprietary network of industry experts with years of air quality and
purification system knowledge. Our newest subsidiary, U.S. Facilities Management
Company, Inc. ("USFM"), provides facilities management and software as well as
outsourced plant-wide maintenance management to help customers achieve their
performance goals.
Results of Operations
The following table sets forth income line items shown on the condensed
consolidated statement of operations, as a percentage of net sales for the
periods indicated. This table should be read in conjunction with the condensed
consolidated financial statements and notes thereto.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
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Costs and expenses:
Cost of sales 50.7 51.5 51.2 52.3
Selling and administrative 34.8 39.1 34.7 37.8
Management fees - CECO Environmental Corp. 2.0 3.2 2.2 3.0
Depreciation and amortization 3.4 4.5 3.6 4.4
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90.9 98.3 91.7 97.5
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Income from operations 9.1 1.7 8.3 2.5
Interest expense ( .7 ) ( 2.2 ) ( .9 ) ( 2.1 )
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Income (loss) before provision
(credit) for income taxes 8.4 ( .5 ) 7.4 .4
Provision (credit) for income taxes ( 3.4 ) ( .1 ) 2.9 .2
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Net income (loss) 5.0% ( .4%) 4.5% .2%
===== ===== ===== =====
</TABLE>
6
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CECO FILTERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
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Results of Operations - Continued
Comparison of Six Months ended June 30, 1997 to Six Months ended June 30, 1996
Sales were approximately $5.5 million and $4.0 million for the six-month periods
ended June 30, 1997 and 1996, respectively, an increase of 35.8% from 1996 to
1997. This increase in sales from 1996 to 1997 resulted primarily from more
sales orders and higher backlog at the end of 1996. APC's sales increased by 71%
compared to the same period in the previous year. Sales of our core CECO filter
media benefited from contractual supply agreements in the private sector. These
increases were offset by a reduction of new system sales of CSI scrubbers and
CECO mist eliminators caused by capital spending constraints in our targeted
market segments.
The Company's backlog of orders at June 30, 1997 was approximately $1.5 million
as compared to $3.3 million at June 30, 1996. There can be no assurance that
order backlog will translate into higher revenues in the future. The success of
the Company's operating results can be significantly impacted by the
introduction of new products and/or new manufacturing technologies by
competitors, rapid change in the demand for its product, decrease in the average
selling price over the life of a product as competition increases, and the
Company's implementation of its target marketing approach.
The Company's overall cost of sales decreased as a percentage of sales for the
six months ended June 30, 1997 (51.2%) compared to the six months ended June 30,
1996 (52.3%). The decrease can be attributed to decreases in raw material costs
as well as lower costs incurred to service the Company's products.
The Company's selling and administrative expenses amounted to $1,897,766 for the
six-month period ended June 30, 1997 compared to $1,520,748 for the six-month
period ended June 30, 1996, representing an increase of $377,018 or 24.8%. A
substantial portion of the selling and administrative expenses are fixed in
nature. However, sales and customer service positions were increased as part of
the Company's overall restructuring to strengthen marketing approach and
accommodate anticipated growth. In addition, a portion of this increase in
selling and administrative expenses resulted from the newly formed subsidiary,
USFM.
During 1994, the Company entered into a management and consulting agreement with
CECO Environmental Corp. ("CEC"), a majority shareholder of the Company. The
terms of the agreement require payment of fees of $20,000 per month from
January, 1995 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 Company
incurred management fees to CEC of $120,000 during each of the six-month periods
ended June 30, 1997 and 1996.
7
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CECO FILTERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
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Results of Operations - Continued
Interest expense decreased during the six-month period ended June 30, 1997, when
compared to the same period in 1996. The decrease in interest expense can be
attributed to non-utilization of the line of credit.
The Company generated pre-tax income of $404,056 for the six-month period ended
June 30, 1997 as compared to pre-tax income of $15,792 for the six-month period
ended June 30, 1996. This change is attributed principally to the increase in
sales as well as the increase in gross margins for the six-month period ended
June 30, 1997 compared to the same period in 1996.
The provision for federal and state tax income taxes for the six-month period
ended June 30, 1997 amounted to $161,000 compared to $8,000 for the six-month
period ended June 30, 1996.
Comparison of Three Months ended June 30, 1997 to Three Months ended June 30,
1996
Sales were approximately $2.9 million and $1.9 million for the three-month
periods ended June 30, 1997 and June 30, 1996, respectively. This represents an
increase of 56.2%.
The Company's overall cost of sales slightly decreased as a percentage of sales
for the three months ended June 30, 1997 compared to the three months ended June
30, 1996. The decrease can be attributed to lower raw material costs as well as
lower costs incurred to service the Company's products. The Company continues to
use the latest technology available in an effort to reduce both cost of sales
(and the maintenance of optimal inventory levels) and operating expenses, and
ultimately increase overall company profits.
The Company's selling and administrative expenses amounted to $1,019,619 for the
three-month period ended June 30, 1997 compared to $733,168 for the three-month
period ended June 30, 1996, representing an increase of $286,451 or 39%, for
same reasons described in the six-month comparison described previously.
The Company paid CEC $60,000 during each of the three-month periods ended June
30, 1997 and 1996 in connection with its management and consulting agreement.
Interest expense decreased during the three-month period ended June 30, 1997,
when compared to the same period in 1996, due to lower utilization of the line
of credit.
The Company generated pre-tax income of $244,941 for the three-month period
ended June 30, 1997, as compared to pre-tax loss of $9,454 for the three-month
period ended June 30, 1996. This change is attributed principally to the
increase in sales as well as the increase in gross margins.
The provision for federal and state income taxes for the three-month period
ended June 30, 1997 amounted to $97,400 as compared to the credit for federal
and state income taxes of $2,000 for the three-month period ended June 30, 1996.
8
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CECO FILTERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
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Financial Condition, Liquidity and Capital Resources
The Company's consolidated cash position increased from $374,186 at December 31,
1996 to $724,376 at June 30, 1997. This increase of $350,190 is attributed
principally to the generation of cash from operating activities of $1,019,789,
offset by acquisitions of capital assets of $211,305 and payments of debt of
$458,294.
The Company maintains a $1,250,000 line of credit with a commercial bank of
which no amounts were outstanding as of June 30, 1997. The credit facility is
available for working capital needs, investment activities and other general
corporate needs.
Expenditures for property and equipment and intangible assets amounted to
$211,305 for the six months ended June 30, 1997 compared to $62,926 for the
six-month period ended June 30, 1996. The Company intends to continue to invest
in capital equipment to support its continued growth.
The Company believes that the existing sources of liquidity and funds expected
to be generated from operations will provide adequate cash to fund the Company's
anticipated working capital and other cash needs in the short term. As the
Company's business continues to grow in the long term, additional working
capital funds may be required and to the extent these additional funds are not
generated by operations, the Company may seek access to debt or equity markets.
9
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[MARGOLIS & COMPANY LETTERHEAD}
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
CECO Filters, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of CECO
Filters, Inc. as of June 30, 1997 and the related condensed consolidated
statements of operations for the three-month and six-month periods ended June
30, 1997 and 1996, and of cash flows for the six-month periods ended June 30,
1997 and 1996. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1996 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
January 26, 1997, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1996 is fairly stated,
in all material respects, in relation to the balance sheet from which it has
been derived.
Certified Public Accountants
Bala Cynwyd, PA
July 16, 1997
10
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CECO FILTERS, INC.
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 FILTERS, INC.
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(REGISTRANT)
DATE: July 31, 1997
STEVEN I. TAUB, PRESIDENT
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11
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CECO FILTERS, INC.
APPENDIX A TO ITEM 601(c) OF REGULATION S-B
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CECO FILTERS, INC. AND SUBSIDIARIES AS OF AND FOR THE
SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
ITEM NUMBER AMOUNT ITEM DESCRIPTION
- ----------- ------ ----------------
5-02(1) $ 724,376 Cash and cash items
5-02(2) - Marketable securities
5-02(3)(a)(1) 806,845 Notes and accounts receivable, trade
5-02(4) - Allowances for doubtful accounts
5-02(6) 490,816 Inventories
5-02(9) 2,122,872 Total current assets
5-02(13) 3,506,784 Property, plant and equipment
5-02(14) 1,731,992 Accumulated depreciation
5-02(18) 4,235,148 Total assets
5-02(21) 790,152 Total current liabilities
5-02(22) 1,161,295 Bonds, mortgages and similar debt
5-02(28) - Preferred stock, mandatory redemption
5-02(29) - Preferred stock, no mandatory redemption
5-02(30) 6,868 Common stock
5-02(31) 2,337,530 Other stockholders' equity
5-02(32) 4,235,148 Total liabilities and stockholders' equity
5-03(b)1(a) 5,467,487 Net sales of tangible products
5-03(b)1 5,467,487 Total revenues
5-03(b)2(a) 2,797,027 Cost of tangible goods sold
5-03(b)2 5,014,053 Total costs and expenses applicable to
sales and revenues
5-03(b)3 49,378 Other costs and expenses
5-03(b)5 - Provision for doubtful accounts and notes
5-03(b)(8) 49,378 Interest and amortization of debt discount
5-03(b)(10) 404,056 Income (loss) before taxes and other items
5-03(b)(11) 161,000 Income tax expense (credit)
5-03(b)(14) 243,056 Income/loss continuing operations
5-03(b)(15) - Discontinued operations
5-03(b)(17) - Extraordinary items
5-03(b)(18) - Cumulative effect, changes in accounting
principles
5-03(b)(19) 243,056 Net income or loss
5-03(b)(20) .03 Earnings (loss) per share, primary
5-03(b)(20) .03 Earnings (loss) per share, fully diluted
