SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended
SEPTEMBER 30, 1997
Commission File Number 1-10955
------------------------------
ENVIRONMENTAL ELEMENTS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-1303748
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3700 Koppers St., Baltimore, Maryland 21227
(Address of Principal Executive Offices) (Zip Code)
(410) 368-7000
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
6,985,329 shares of common stock, $.01 par value per share, as of November 4,
1997.
<PAGE>
ENVIRONMENTAL ELEMENTS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1997
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1997 and March 31, 1997 .................... 3
Consolidated Statements of Operations for
the Periods Ended September 30, 1997 and 1996 ............ 4
Consolidated Statements of Cash Flows for
the Six Months Ended September 30, 1997 and 1996 ......... 5
Notes to Consolidated Financial Statements .................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 8
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......... 11
Item 6. Exhibits and Reports on Form 8-K............................. 11
---------------------------------------
Certain of the statements included in this Form 10-Q are forward-looking
statements. These statements involve risks and uncertainties that could cause
the actual results to differ from those expressed or implied by such statements.
These factors include loss of new orders, increased competition, changes in
environmental regulations, and other factors, including but not limited to,
continued operating losses, further declines in markets for the Company's
products and services, and insufficient capital resources. Information on
factors that could affect the Company's financial results are set forth in the
Company's filings with the Securities and Exchange Commission including the
report on Form 10-K for the Company's fiscal year ended March 31, 1997.
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
Environmental Elements Corporation and Subsidiaries
Consolidated Balance Sheets
As of September 30, 1997 and March 31, 1997
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997
====================================================================================================
(Unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 1,412,000 $ 1,684,000
Accounts and retainages receivable, net of allowance for doubtful
accounts of $162,000 and $113,000, respectively ............... 6,135,000 6,317,000
Unbilled contract costs and fees ................................ 8,710,000 6,248,000
Inventories ..................................................... 1,112,000 967,000
Prepaid expenses and other current assets ....................... 1,941,000 1,990,000
Assets held for sale ............................................ -- 864,000
------------ ------------
Total Current Assets ........................................ 19,310,000 18,070,000
------------ ------------
Property and equipment:
Capital lease, building and improvements ........................ 7,058,000 6,960,000
Machinery, equipment, furniture and fixtures .................... 2,984,000 2,809,000
------------ ------------
10,042,000 9,769,000
Less - Accumulated depreciation and amortization ................ 3,716,000 3,326,000
------------ ------------
Property and Equipment, Net ................................. 6,326,000 6,443,000
------------ ------------
Other assets ........................................................ 858,000 894,000
------------ ------------
Total Assets ................................................ $ 26,494,000 $ 25,407,000
============ ============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Borrowings under line of credit ................................. $ 2,800,000 $ 2,585,000
Accounts payable ................................................ 11,618,000 9,724,000
Billings in excess of contract costs and fees ................... 1,012,000 1,660,000
Accrued payroll and related expenses ............................ 483,000 618,000
Accrued and other current liabilities ........................... 1,563,000 1,824,000
Deferred taxes .................................................. 100,000 100,000
------------ ------------
Total Current Liabilities ................................... 17,576,000 16,511,000
Long-term capital lease obligation .................................. 2,336,000 2,449,000
Deferred taxes ...................................................... 100,000 100,000
Other non-current liabilities ....................................... 326,000 240,000
Net long-term liabilities of discontinued operations ................ 64,000 69,000
------------ ------------
Total Liabilities ........................................... 20,402,000 19,369,000
------------ ------------
Commitments and contingencies
Shareholders' investment:
Common stock .................................................... 70,000 70,000
Paid-in capital ................................................. 27,874,000 27,864,000
Cumulative translation adjustment ............................... (80,000) (82,000)
Retained deficit ................................................ (21,772,000) (21,814,000)
------------ ------------
Total Shareholders' Investment .............................. 6,092,000 6,038,000
------------ ------------
Total Liabilities and Shareholders' Investment .............. $ 26,494,000 $ 25,407,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
Environmental Elements Corporation and Subsidiaries
Consolidated Statements of Operations
For the Periods Ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
- --------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996
==============================================================================================================
<S> <C>
Sales ......................................... $ 11,456,000 $ 11,784,000 $ 25,380,000 $ 25,757,000
Cost of sales ................................. 9,723,000 10,344,000 21,890,000 22,079,000
------------ ------------ ------------ ------------
Gross Profit .......................... 1,733,000 1,440,000 3,490,000 3,678,000
Selling, general and administrative expenses .. 1,538,000 1,943,000 3,116,000 3,983,000
------------ ------------ ------------ ------------
Operating Income (Loss) ............... 195,000 (503,000) 374,000 (305,000)
Interest and other expense, net of income ..... (167,000) (139,000) (332,000) (292,000)
------------ ------------ ------------ ------------
Income (Loss) before Income Taxes ..... 28,000 (642,000) 42,000 (597,000)
Provision for income taxes .................... -- -- -- --
------------ ------------ ------------ ------------
Net Income (Loss) ..................... $ 28,000 $ (642,000) $ 42,000 $ (597,000)
============ ============ ============ ============
Net Income (Loss) per share of common stock and
common stock equivalents .............. $ 0.00 $ (0.09) $ 0.01 $ (0.09)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
Environmental Elements Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1997 1996
===================================================================================================
<S> <C>
Cash flows from operating activities:
Net income (loss) ............................................... $ 42,000 $ (597,000)
Non-cash items:
Depreciation and amortization ............................... 435,000 425,000
Stock contribution to savings plan .......................... -- 23,000
Decrease in accounts and retainages receivable, net ............. 182,000 559,000
Increase in unbilled contract costs and fees .................... (2,462,000) (384,000)
(Increase) decrease in inventories .............................. (145,000) 684,000
Decrease in prepaid expenses and other current assets ........... 49,000 140,000
Decrease in assets held for sale ................................ 864,000 --
Increase (decrease) in accounts payable ......................... 1,894,000 (2,035,000)
Decrease in billings in excess of contract costs and fees ....... (648,000) (376,000)
Decrease in accrued payroll and related expenses ................ (135,000) (199,000)
(Decrease) increase in accrued and other current liabilities .... (261,000) 326,000
(Decrease) increase in net liabilities of discontinued operations (5,000) 152,000
Increase in other non-current liabilities ....................... 86,000 3,000
----------- -----------
Net Cash Flows Used in Operating Activities ................. (104,000) (1,279,000)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment ............................. (273,000) (77,000)
(Increase) decrease in other assets ............................. (9,000) 5,000
----------- -----------
Net Cash Flows Used in Investing Activities ................. (282,000) (72,000)
----------- -----------
Cash flows from financing activities:
Increase in borrowings under line of credit ..................... 215,000 --
Change in cumulative translation adjustment ..................... 2,000 (7,000)
Payments under capital lease obligation ......................... (113,000) (104,000)
Issuance of common stock ........................................ 10,000 --
----------- -----------
Net Cash Flows Provided by (Used in) Financing Activities ... 114,000 (111,000)
----------- -----------
Net Decrease in Cash and Cash Equivalents ................... (272,000) (1,462,000)
Cash and cash equivalents, beginning of period ...................... 1,684,000 2,124,000
----------- -----------
Cash and cash equivalents, end of period ............................ $ 1,412,000 $ 662,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
ENVIRONMENTAL ELEMENTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL INFORMATION:
The interim consolidated financial statements included herein for
Environmental Elements Corporation and Subsidiaries (the Company) have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In management's
opinion, the interim financial data presented herein include all adjustments
(which include only normal recurring adjustments) necessary for a fair
presentation. Certain information and footnote disclosures normally included
in the consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Results for interim periods are not
necessarily indicative of results to be expected for the full year.
2. PER SHARE DATA:
Per share data has been presented on a fully diluted basis and is based upon
the combined weighted average number of shares of common stock outstanding
during each quarter. The weighted average number of shares used in the
computations of per share data for the quarters ended September 30, 1997 and
1996 totaled 6,979,000 and 6,917,000, respectively. The weighted average
number of shares used in the computations of per share data for the six
months ended September 30, 1997 and 1996 totaled 6,975,000 and 6,912,000,
respectively.
3. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist principally of purchased parts held for use in contracts
and as spare parts.
4. SUPPLEMENTAL CASH FLOW INFORMATION:
In non-cash financing transactions during the six months ended September 30,
1997, the Company issued 11,134 shares of its common stock as matching
contributions under its 401k savings plan. During the six months ended
September 30, 1996, the Company issued 10,945 treasury shares of its common
stock as matching contributions under its 401k savings plan.
Amounts paid in cash for interest during the six months ended September 30,
1997 and 1996 were $273,000 and $211,000, respectively. Amounts paid for
income taxes in the six months ended September 30, 1997 and 1996 were $8,000
and $12,000, respectively.
5. RECLASSIFICATIONS:
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year presentation.
6
<PAGE>
6. NEW ACCOUNTING STANDARDS:
During early 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which becomes effective December 15, 1997, and as
to which early adoption is not permitted. Under SFAS No. 128, a company will
be required to disclose basic earnings per share (with the principal
difference from current disclosure being that common stock equivalents will
not be considered in the compilation of basic earnings per share) and
diluted earnings per share. The implementation of this pronouncement will
not have a material impact on the Company's earnings per share disclosure in
the accompanying consolidated financial statements.
7
<PAGE>
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
The following information should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in
this Quarterly Report and the audited Financial Statements and Management's
Discussion and Analysis contained in the Company's Form 10-K for the fiscal
year ended March 31, 1997.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationships to sales of
selected items in the Company's consolidated statements of operations
(unaudited) for the periods indicated:
Three Months Ended Six Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Sales................................... 100.0% 100.0% 100.0% 100.0%
Cost of Sales........................... 84.9 87.8 86.3 85.7
----- ----- ----- ----
Gross Profit..................... 15.1 12.2 13.7 14.3
Selling, general and administrative
expenses.............................. 13.4 16.5 12.3 15.5
----- ----- ----- ----
Operating Income (Loss) ......... 1.7% (4.3%) 1.5% (1.2%)
===== ===== ===== ====
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1996
Sales decreased 2.8% or $328,000 to $11,456,000 from $11,784,000. This
decrease in sales reflects increases in sales to the Company's Power
and International customers and decreases for the three month period in
sales to its Industrial and Aftermarket customers.
Cost of sales decreased 6.0% or $621,000 to $9,723,000 from $10,344,000. As
a percentage of sales, cost of sales decreased to 84.9% from 87.8%. The
decrease in both dollars and percentage of sales resulted primarily from
improved project execution.
Selling, general and administrative expenses decreased 20.8% or $405,000 to
$1,538,000 from $1,943,000. As a percentage of sales, selling, general and
administrative expenses decreased to 13.4% from 16.5%. The decrease in both
dollars and percentage was primarily a result of the Company's restructuring
efforts during prior years, and the resultant increased efficiencies during
the current year quarter.
8
<PAGE>
For the reasons set forth above, operating income was $195,000, or 1.7% of
sales, for the quarter versus an operating loss of $503,000, or 4.3% of
sales, in the prior year quarter.
Interest and other expense, net of income, increased $28,000, to $167,000
from $139,000. The net increase is primarily a result of an increase in
interest expense, due to increased borrowings on the Company's line of
credit.
Net income before income taxes was $28,000 in the current year quarter,
versus a loss of $642,000 for the prior year period.
There was no provision for income taxes either quarter reported, due to the
effect of tax operating loss carryforwards on current year income, and a
loss incurred in the year earlier period.
SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO
SIX MONTHS ENDED SEPTEMBER 30, 1996
Sales decreased 1.5% or $377,000 to $25,380,000 from $25,757,000. This
slight decrease in sales for the six month period reflects increases in
sales to the Company's Power, International, Field Service, and Spare Parts
customers and decreases in sales to its Industrial and Rebuild customers.
Cost of sales decreased 0.9% or $189,000 to $21,890,000 from $22,079,000,
primarily as a result of the sales decrease.
Selling, general and administrative expenses decreased 21.8% or $867,000 to
$3,116,000 from $3,983,000. As a percentage of sales, selling, general and
administrative expenses decreased to 12.3% from 15.5%. The decrease in both
dollars and percentage was primarily a result of the Company's restructuring
efforts during prior years, and the resultant increased efficiencies during
the current year period.
For the reasons set forth above, operating income was $374,000, or 1.5% of
sales, for the quarter versus an operating loss of $305,000, or 1.2% of
sales, in the prior year quarter.
Interest and other expense, net of income, increased $40,000, to $332,000
from $292,000. The net increase is primarily a result of an increase in
interest expense, due to increased borrowings on the Company's line of
credit.
Net income before income taxes was $42,000 for the current year's six-month
period, versus a loss of $597,000 for the prior year period.
There was no provision for income taxes either quarter reported, due to the
effect of tax operating loss carryforwards on current year income, and a
loss incurred in the year earlier period.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents declined by $272,000 and borrowings under the
Company's line of credit increased by $215,000 during the six months
ended September 30, 1997. This was caused principally by a $1 million
increase in the Company's net working capital investment in contracts in
process; offset by proceeds of $864,000 from disposal of assets held for
sale.
Historically the Company has required minimal investment in net working
capital in contracts, but it does experience fluctuations in these amounts
depending upon the stage of completion of its various contracts and upon the
payment terms negotiated as a part of the overall original contract terms
and conditions. ("Net working capital invested in contracts" consists of
accounts and retainages receivable plus unbilled contract costs and fees,
minus accounts payable and minus billings in excess of contract costs and
fees. These net amounts were $2.2 million and $1.2 million at September 30,
1997 and March 31, 1997, respectively.) The Company seeks to manage project
cash flows in its payment terms negotiations with customers and suppliers,
and in adherence to project budgets and schedules.
New orders received during the six months ended September 30, 1997 increased
33% from the same period last year, to $30.7 million. The Company believes
that there is evidence of improvement in the market for its products,
technologies and services, but also believes that, in the short term, the
market is exceptionally difficult to predict accurately due to regulatory
and other factors, both domestic and international in nature. The Company
has attempted to adjust its organization so that it can operate and be
profitable on highly variable business levels at or above those experienced
in the current and prior fiscal year. However there can be no assurance that
such business levels will occur, that the Company's actions will be
successful, or that future losses would not adversely affect the Company's
liquidity and capital resource position. The Company believes it has
liquidity and capital resources sufficient to maintain its business at its
current level of activity, because no significant capital expenditures are
required, historically the Company has required little investment in
operating working capital, and its banking arrangements, i.e. those
currently available and those which could be obtained, would be adequate to
maintain its ongoing business at its current level of activity during the
next year.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of securities
holders at the Annual Meeting of Stockholders held on July 31,
1997:
(a) The stockholders ratified the selection of Arthur
Andersen LLP to serve as independent public accountants
of the Company for the fiscal year ending March 31,
1998. The matter was approved by a vote of 5,907,882
for, 23,592 against and 6,183 abstaining.
(b) The stockholders elected Edward H. Verdery (5,892,305
for and 45,352 withheld) and John C. Nichols (5,896,990
for and 40,667 withheld) as Class I directors for a
three year term expiring at the 2000 Annual Meeting or
until their successor is duly elected and qualified.
The names of all other directors whose term of office
as a director continued after the meeting are as
follows: Richard E. Hug, Russell R. Jones, F. Bradford
Smith and Samuel T. Woodside.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1997.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENVIRONMENTAL ELEMENTS CORPORATION
(Registrant)
/s/ James B. Sinclair
---------------------
James B. Sinclair
Vice President and
Chief Financial Officer
Date: November 7, 1997
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 1,412,000
<SECURITIES> 0
<RECEIVABLES> 14,845,000
<ALLOWANCES> 162,000
<INVENTORY> 1,112,000
<CURRENT-ASSETS> 19,310,000
<PP&E> 10,042,000
<DEPRECIATION> 3,716,000
<TOTAL-ASSETS> 26,494,000
<CURRENT-LIABILITIES> 17,576,000
<BONDS> 0
0
0
<COMMON> 70,000
<OTHER-SE> 6,022,000
<TOTAL-LIABILITY-AND-EQUITY> 26,494,000
<SALES> 25,380,000
<TOTAL-REVENUES> 25,380,000
<CGS> 21,890,000
<TOTAL-COSTS> 3,116,000
<OTHER-EXPENSES> 332,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 42,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 42,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,000
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
