UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For the Fiscal Year ended March 31, 1997
Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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
incorporation or organization) (I.R.S. Employer Identification No.)
3700 Koppers St., Baltimore, Maryland 21227
(Address of Principal Executive Offices) (Zip Code)
(410) 368-7000
Registrant's telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common stock, par value $0.01 per share, New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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 by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of June 6, 1997 was approximately $10.5 million based upon the
closing price of $2.25. The number of shares outstanding of the registrant's
Common Stock as of June 6, 1997 was 6,967,401.
Documents Incorporated by Reference
Portions of the definitive Proxy Statement relating to registrant's Annual
Meeting of Stockholders to be held July 31, 1997 are incorporated by reference
in Part III of this Form 10-K, with the exception of portions that are not
incorporated by reference by their terms.
Portions of the registrant's Annual Report to Stockholders for the year ended
March 31, 1997 are incorporated by reference in Parts I, II and IV of this Form
10-K.
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PART I
ITEM 1. BUSINESS
General
Environmental Elements Corporation (the "Company") designs and supplies
proprietary, large-scale, custom-engineered air pollution control systems which
enable customers to operate their facilities in compliance with regulatory
standards limiting particulate and gaseous emissions. The Company's business
strategy is to provide a broad array of proprietary state-of-the-art
technologies to traditionally intensive users of air pollution control systems,
including two primary customer groups -- electric utilities and private power
generators and pulp and paper producers-- in addition to municipal solid waste
facilities and other industrial customers.
The Company has historically concentrated on systems that reduce particulate
emissions from combustion exhaust streams, specifically electrostatic
precipitators and fabric filter systems (also known as baghouses). For each of
these product lines, the Company has developed proprietary designs for durable,
cost-effective systems. The Company has developed, acquired distribution rights
for, or licensed from others, dry and semi-dry scrubbers for use in gaseous
emissions control.
The Company enters into contracts for original equipment systems, major
rehabilitation and rebuilding services, and ongoing maintenance and repair
services. The Company offers a range of systems and technologies to address the
air pollution control needs of customers in its selected markets. While the
Company, in certain instances, may provide a combination of its systems as an
integrated pollution control solution, its customers typically purchase
individual systems which, in certain instances, may operate in conjunction with
other systems supplied by others. The Company's contracts with its customers
generally require it to design and supply an air pollution control device which
removes specified amounts of gaseous or particulate matter from combustion
exhaust gases. The Company is generally contractually responsible to its
customers for all phases of the design, fabrication, start-up and testing and
(if included in the scope of the Company's contract) field construction of its
systems. The Company's successful completion of its contractual obligations is
generally determined by a performance test or tests of the Company's systems
which are generally conducted by a customer-selected independent testing agency
which verifies that the system is removing gaseous or particulate emissions in
amounts required by the contract. In connection with the expansion of the
Company's technological offerings and a shift in the Company's mix of business,
additional measures of performance may be afforded or required. Such measures
may include availability or reliability guarantees and guarantees with respect
to the consumption of power, reagent, water or other components of variable
operating costs.
The Company generally does not manufacture or fabricate its systems or
engage in field construction activities utilizing its own employees, other than
field supervisory personnel. The Company fabricates, through its joint venture
production facility in the People's Republic of China, precipitator internals
for use by the Company's licensee in China and for our use in other selected
markets. In fiscal 1996, the Company elected to discontinue the manufacturing
and certain direct hire construction activities previously conducted by its
aftermarket subsidiary, Environmental Elements Services Corporation, and
relocated the aftermarket business to the Company's Baltimore headquarters,
where it now conducts such business directly.
The Company performs process engineering for its systems, including but not
limited to, the determination of the size, geometry and mechanical, electrical
and structural characteristics of the device needed to meet its contractual
obligations for gaseous or particulate removal, and performs the detail design
of and develops specifications for all structural, electrical, mechanical,
piping, and chemical
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components necessary to make the system. The Company purchases various
components consisting of both off-the-shelf items and items made to its design
and specifications by vendors; enters into subcontracts for field construction
(if included in the scope of the Company's contract), which it supervises; and
manages all technical and commercial aspects of the performance of its
contracts, including the start-up of its systems.
In general, the Company's original equipment contracts vary in length from
12 to 36 months and require performance of a particular project within a
specified time frame. Almost all of the Company's contracts are undertaken on a
fixed price basis. Fixed price contracts require the Company to bear certain
risks of cost overruns, and from time to time the Company experiences a loss in
connection with a contract.
The Company and its predecessor have been engaged in the air pollution
control business since 1946.
Product Lines and Services
The Company supplies electrostatic precipitators primarily to power
generation and pulp and paper customers. An electrostatic precipitator removes
particulate matter from combustion exhaust streams. The particulate in the gases
is electrically charged as it passes positively charged high-voltage electrodes
and is then attracted to oppositely charged collecting plates. The collected
material is periodically removed from the plates by rapping or vibration. The
Company's precipitators include computerized power control systems which allow
the precipitators to respond automatically to changing operating conditions. The
Company's installed base of electrostatic precipitators is one of the largest in
North America.
The Company supplies a wide range of fabric filter systems to control and
recover dust and other particulates in a variety of utility and industrial
applications for power-generation, pulp and paper, incineration, and other
industrial customers.
The Company offers state-of-the-art semi-dry scrubbing systems for the
reduction of acid gases such as sulfur oxides and hydrogen chloride emissions. A
semi-dry scrubbing system removes objectionable gaseous pollutants and certain
heavy metals from exhaust emissions by causing a chemical reaction, typically
using lime as a reagent, which transforms the pollutants into a readily
disposable particulate. The Company offers its semi-dry scrubbers primarily for
municipal solid waste incineration facilities.
The Company offers a fluidized bed flue gas desulfurization dry reactor,
(known as a circulating dry scrubber or "CDS"(R) which has special
application to both the power generation and municipal solid waste incineration
acid rain retrofit markets. During fiscal 1996 and fiscal 1997, the Company
successfully started up its first two CDS(R) systems and successfully
completed its performance obligations. The CDS(R) technology is licensed from
Lurgi GmbH.
The Company supplies original equipment systems, the majority of which are
replacements of aged existing air pollution control systems. In addition,
because of the extreme conditions under which air pollution control systems
operate, maintenance, repair, and rebuilding of these systems is an ongoing
requirement and creates additional demand for the Company's services and
products. The Company engages in complete and partial rehabilitation and
rebuilding of air pollution control systems, often involving design and
installation work, and also provides ongoing maintenance services and spare
parts on a routine or emergency-response basis. Such services may include the
provision of rebuild project materials, construction services, and field
engineering services including inspection, testing, rebuild supervision, and
equipment performance evaluation services.
In fiscal 1997, the Company entered into its first alliance agreement with a
customer under which the Company provides dedicated engineering and field
service personnel who will perform inspection, engage in problem-solving and
material planning, and make parts recommendations on a system-wide basis, with
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a goal of reducing our customer's total life cycle costs. The Company intends to
continue to focus on opportunities for similar alliances with other important
customers.
Industry Demand Factors
The market for air pollution control systems and technologies is directly
dependent upon governmental regulation and enforcement of air quality standards.
During the past two decades, federal, state, and municipal governments have
recognized that contamination of the air poses significant threats to public
health and safety, and, in response, have enacted legislation designed to reduce
or eliminate a variety of air pollutants. The Company believes that governmental
regulation of air pollution and its sources will continue to increase and that
it is well positioned to assist customers in its targeted markets to solve their
air pollution control problems.
Given the existence of stringent domestic air emissions standards, domestic
demand for the Company's systems and technologies generally arises from the
following principle sources: need for replacement, rehabilitation and rebuilding
of air pollution control systems on aging electric utilities and on pulp and
paper manufacturing facilities; construction of new electricity-generating
facilities, particularly those operated under cogeneration and "private power"
arrangements; continued expansion of pulp and paper manufacturing capacity; and
construction of new municipal solid waste incineration facilities. Demand from
any one of these sources may vary significantly from year to year depending on
economic, regulatory, and other factors including industry cycles.
Emerging international demand for the Company's products is driven primarily
by a combination of electric generation and other infrastructure improvement and
the passage or enforcement of existing regulations limiting gaseous and
particulate emissions in developing countries.
Markets Served
The Company has historically followed a strategy of limiting its business to
systems and technologies for air pollution control and focusing within that
business on selected markets in which the Company believes it can build upon its
reputation for expertise and reliability. The Company's current targeted markets
are electric utilities and private power generators, pulp and paper producers,
developers of municipal solid waste incineration facilities, and certain other
process industries throughout the United States, Canada, and selected areas of
central Europe, Asia and the Pacific Rim. The Company started up two
precipitator projects in Poland in fiscal 1996, and in fiscal 1997, the
Company's baghouse and spray dryer emissions control system for a municipal and
medical waste incinerator in the United Kingdom commenced operations. In its
1997 fiscal year, the Company received and commenced execution of an award to
supply reverse air fabric filter emissions systems at a municipal solid waste
incineration plant in Korea. The Company's precipitator technology will be
installed in a power plant in China, through a contract awarded to the Company's
licensee in fiscal 1997.
Currently, the Company offers a select line of systems and technologies to
meet the various needs of electric utilities and other electric power generators
for control of air emissions at new and existing facilities. The Company's
principal product sold to the electric-generating market is its Rigitrode(R)
electrostatic precipitator, which combines the reliability traditionally
associated with European heavy-duty, bottom-rapped designs and the cost
efficiency associated with top-rapped American models. (In a top-rapped
precipitator, the force used to dislodge dust from the collection plate is
applied to the top of the plate.) The Company is bidding, and will continue to
bid, a number of large contract opportunities in the utility market.
The Company also offers to the utility industry a range of fabric filter
systems to control particulate emissions. In recent years, the Company has been
particularly successful in marketing its fabric filter systems to private power
projects which either cogenerate electricity and thermal energy or generate
electricity alone for sale to utilities and in fiscal 1995 started-up a pulse
jet fabric filter system in the utility market . In addition, in response to
anticipated substantial demand for solutions to the
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requirements of acid rain legislation, the Company, under license from Lurgi
GmbH, has introduced a state-of-the-art CDS(R) system for the control of sulfur
oxide emissions. The Company also offers a proprietary semi-dry scrubbing
system using rotary atomizer technology which the Company believes offers the
advantages of lighter weight, ease of maintenance, and economy of operation
that are particularly significant to smaller electricity-generating facilities.
The Company has installed over 500 electrostatic precipitators at pulp and
paper plants in the United States and Canada. The Company attributes its success
in this market to the competitive advantages of its Rigitrode(R) precipitator
and to its reputation for reliability and service. The Company has established
long-standing relationships, in many cases covering more than 25 years, with
leading firms in the industry.
Municipal solid waste and private waste-to-energy facilities, as well as
hazardous waste incineration plants, must comply with stringent federal and
state environmental standards. Existing regulations require new solid waste
incineration facilities to control both sulfur oxides and hydrogen chloride
emissions. Such systems generally include an acid gas scrubbing tower and a
modular baghouse for collection of particulates. In fiscal 1997, we successfully
placed into operation our emissions system on a municipal and medical waste
incinerator in England and a waste-to-energy facility in New York. Also in
fiscal 1997, we were awarded a contract to retrofit a waste-to-energy facility
in Georgia. The Company has identified the incineration market as one which will
provide an opportunity to market its semi-dry scrubbing systems in the future.
In addition to serving the principal markets described above, the Company
sells its systems to customers in petroleum refining and certain materials
processing industries, including mining, metals conversion, cement production,
and steel manufacturing. The Company's sales in these markets consist primarily
of wet scrubbers and electrostatic precipitators. The Company believes that it
is competitive in these other markets.
Bookings and Backlog Information
The information required by this item is contained under the caption
"Bookings and Backlog" in "Management's Discussion and Analysis" in the
Company's 1997 Annual Report to Shareholders.
Research and Development
The Company has an ongoing program for development and commercialization of
new air pollution control technologies and enhancement of existing technologies.
The Company spent approximately $139,000, $347,000, and $512,000 on product
development during fiscal 1997, 1996, and 1995, respectively. Among other
important product development activities, the Company has developed wide plate
spacing precipitators and has introduced them into the utility market.
The Company has recently advanced its research and development operations
beyond its historical product development activities to funded research
programs. The Company is developing, and has applied for patents on an advanced
technology for the control of sub-micron sized particulate emissions from
utility and industrial boilers in order to respond to increasingly stringent
regulations for fine particulate emissions.
Patents
The Company owns or has the rights to a number of patents, patent
applications, and other proprietary technologies which are important to various
aspects of its business. While these patents are not considered material to the
conduct of the Company's business as a whole, the Company views its pending
patent applications with respect to its fine particulate agglomerator technology
as potentially providing the Company with a significant advantage in the
marketing of its precipitators. Generally, however, the Company believes that
its ability to compete in the air pollution control industry depends primarily
on its engineering and technological expertise, rather than on patent
protection.
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Sales and Marketing
The Company's sales and marketing efforts are organized along market lines
- -- power industry, industrial, and aftermarket. The Company has integrated field
service resources of the original equipment and aftermarket divisions into
regional sales representation for each of its markets, allowing it to build
long-term customer relationships. The sales efforts are technical in nature and
involve its sales and marketing professionals, supported by the Company's senior
technical and management professionals. A significant portion of the Company's
sales are made through architectural and engineering firms, which play an
important role in the preparation of specifications for air pollution control
systems. The Company's sales and marketing group consists of industry and
regional sales managers and sales representatives.
Although the Company seeks to obtain repeat business from its customers, it
does not depend on any single customer to maintain its level of activity from
year to year. Three customers accounted for 33% of the Company's sales in fiscal
1997; one customer accounted for 21% of the Company's sales in fiscal 1996; and
another customer accounted for 10% of the Company's sales in fiscal year 1995.
At fiscal year end 1997, however, approximately 63% of the Company's accounts
and retainages receivable were due from companies within the pulp and paper
industry and approximately 13% were due from companies within the power
industry.
All of the Company's foreign sales were generated from the United States.
Export sales were less than 10% of consolidated sales in fiscal years 1997,
1996, and 1995. In order to take advantage of certain overseas market
opportunities, the Company has established licensing agreements with companies
in Brazil and the People's Republic of China under which the Company is entitled
to royalties based upon sales in the licensed territory. These agreements do not
currently represent a material source of income. In addition to the license, the
Company has established, with its Chinese licensee, a production joint venture
in China which will produce certain precipitator components for use by the
Company and its licensee.
Suppliers and Subcontractors
Like other companies in its industry, the Company relies on outside
suppliers, manufacturers and fabricators to supply parts and components in
accordance with the Company's specifications. In addition, in cases in which the
Company's scope of work includes installation of equipment, the Company selects
and supervises subcontractors for this work. To date, the Company has not
experienced difficulties either in obtaining fabricated components incorporated
in its systems or in obtaining qualified subcontractors. It has been the
Company's recent experience, however, that in times of recession or other
industry downturns, the Company is more likely to be faced with subcontractor
performance problems and construction claims asserted by certain of its
subcontractors. In response, the Company is required to more aggressively manage
its construction activities and contracts, and, in some cases, be subject to
unanticipated costs.
The Company's vendor sources for various components, materials and parts
used in its systems, including control switches, electrical components, and
other components, include a substantial number of firms. The Company does not
depend on any one of these vendors to a material extent, and in any event the
Company believes that alternative vendors would be available if needed. With
respect to fabricators, the Company has satisfactory relationships with
fabricators throughout the United States and Canada. Similarly, with respect to
installation subcontractors, the Company has satisfactory relations with firms
throughout the United States and Canada. Based on the number of vendors,
fabricators, and subcontractors and the availability of alternative sources, the
Company does not believe that the loss of its relationship with any one firm
would have a material adverse effect on its business.
The Company operates under an agreement with Teco Industries of Maryland,
Inc., an equipment manufacturer, pursuant to which the manufacturer meets the
Company's domestic requirements for
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production of certain internal components of electrostatic precipitators (i.e.,
electrodes and collecting plates) at pre-determined prices and terms. The
agreement expires on June 30, 1997. The loss of this supplier, or the supplier's
inability to perform, could subject the Company to a temporary delay and
possible cost increases. The Company does not believe, however, that such loss
would have a material adverse effect on the Company because the Company has at
least one other adequate source for these components. The Company has
established relationships with one or more international sources for such
components in connection with international marketing expansion.
Competition
The Company faces substantial competition in each of its principal markets.
Some of the Company's competitors are larger and have greater financial and
other resources than the Company. The Company competes primarily on the basis of
its engineering and technological expertise and quality of equipment and service
provided. The Company believes that the cost of entry into most of its markets,
its experience and reputation for reliability and service, and its knowledge of
the plants and operations of its customers are principal factors that enhance
its ability to compete effectively for rehabilitation and rebuild contracts as
well as new installations. Additionally, the Company believes that the
successful performance of its installed systems is a key factor in dealing with
its customers, which typically prefer to make significant purchases from a
company with a solid performance history.
Virtually all contracts for the Company's systems and technologies are
obtained through competitive bidding. Customers typically purchase these systems
and technologies after a thorough evaluation of price, service, experience, and
quality. Although price is an important factor and may in some cases be the
governing factor, it is not always determinative, and contracts are often
awarded on the basis of life cycle costs and/or product reliability.
Regulation
Significant environmental laws have been enacted in response to public
concern about the environment. These laws and the implementing regulations
affect nearly every industrial activity. The need to comply with these laws
creates demand for the Company's services. The principal federal legislation
that has created a substantial and growing demand for the Company's systems and
technologies and therefore has the most significant effect on the company's
business is the Clean Air Act of 1970, as amended (the "Clean Air Act"). This
legislation requires compliance with ambient air quality standards and empowers
the Environmental Protection Agency ("EPA") to establish and enforce limits on
the emission of various pollutants from specific types of facilities. The states
have primary responsibility for implementing these standards and, in some cases,
have adopted standards more stringent than those established by the EPA.
In 1990, amendments to the Clean Air Act were adopted which address, among
other things, the country's acid rain problem by imposing strict controls on the
emissions of sulfur oxides caused by the combustion of coal and other solid
fuels. The power generation market is the first to face the compliance standards
set by the amendments. Under the legislation, coal-burning power plants are
required to comply with new emissions standards in two phases. The first phase,
beginning with enactment of the amendments and generally ending in 1995 or 1996,
required reduced emissions levels leading to full compliance, with limited
exceptions, by the end of the second phase in the year 2000.
In its operations, the Company is subject to federal, state and local laws
and regulations concerning environmental, safety, occupational and health
standards. Expenditures required in fiscal 1997 by such laws were not material
to the Company's business and the Company is not at a competitive disadvantage
by reason of compliance with such laws.
Bonding and Insurance
The Company is from time to time required to provide bonds guaranteeing that
it will enter into contracts as bid, guaranteeing performance of its contract
obligations, and/or guaranteeing prompt
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payment of its suppliers and subcontractors. The Company's current surety
commitment is, in management's opinion, sufficient to support the Company's
current levels of bonded business. In addition, the Company has a bank revolving
credit and letter of credit agreement which provides for issuance of letters of
credit for various purposes, including as substitutes for performance or payment
bonds.
The Company currently maintains different types of insurance, including
comprehensive liability and property coverages. The Company does not carry a
separate errors and omissions policy, but limited errors and omissions coverage
is provided under its comprehensive liability policy. While a successful claim
or claims in an amount in excess of the Company's insurance coverage or for
which there is no coverage (including claims arising out of the provision by the
Company of engineering services without a product) could have a material adverse
effect on the Company, the Company believes that it presently maintains adequate
insurance coverage for its business as presently constituted. To the extent that
the Company performs or will perform engineering only services for customers,
the Company will, to the extent practicable, obtain the benefit of contractual
terms which limit or eliminate the exposure which would otherwise be insured by
an errors and omissions policy.
Employees
As of March 31, 1997, the Company had 134 full-time employees, of whom 121
were engineers and other professionals and technical employees. The Company also
hires contract and other temporary personnel to meet the requirements of
particular contracts, as well as contract personnel to carry out construction
supervisory functions. The Company's professional staff includes chemical
engineers, electrical engineers, mechanical engineers, civil engineers, and
computer scientists. Although the Company depends on professional employees for
performance of its services, it has not experienced any difficulty in employing
such personnel to satisfy its requirements. None of the Company's employees is
represented by a union. The Company considers its relations with its employees
to be good.
ITEM 2. PROPERTIES
Substantially all of the Company's operations, including administration,
engineering, design, and sales operations are conducted from its Baltimore
headquarters, located in a modern office building with approximately 100,000
square feet of leased space. The Company occupies approximately 50,000 square
feet of this space and subleases a portion of the remaining space. See Note 6 of
the "Notes to Consolidated Financial Statements" in the Company's 1997 Annual
Report to Shareholders, incorporated by reference herein, for a description of
the rent and other lease terms.
The Company additionally leases approximately 31,000 square feet of office
and warehouse space in Baltimore, Maryland for its research and development, and
aftermarket operations.
Shortly after the close of fiscal 1997, the Company sold a 20,000 square
foot office and light manufacturing facility located in Jeffersonville, Indiana,
which was previously used in its aftermarket business, which was relocated to
Baltimore during fiscal 1996.
In fiscal 1995, the Company sold its privatized waste water treatment
facility in East Aurora, New York, which it previously treated as a discontinued
operation. The Company maintains limited operational responsibility. See Note 2
of the "Notes of Consolidated Financial Statements" in the Company's 1997 Annual
Report to Shareholders.
The Company believes that its existing facilities are adequate to meet its
current needs and that suitable additional or substitute space will be available
as needed to accommodate any expansion of operations.
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ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time a party to various legal actions arising in
the ordinary course of its business, some of which may involve claims for
substantial sums. Management considers that any liability from pending lawsuits
and claims will not have any material effect on the financial position or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal year 1997.
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PART II
ITEM5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "EEC."
As of June 6, 1997, there were 248 record holders of the Company's Common
Stock. The closing price of the Common Stock on June 6, 1997 was $2.25.
The additional information required by this item is contained under
"Investor Information" on page 25 and in Note 10 of the "Notes to Consolidated
Financial Statements" on page 21 of the Company's 1997 Annual Report to
Shareholders. Such information is incorporated herein by reference to the Annual
Report.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data provided on page 23 of the
Company's 1997 Annual Report to Shareholders should be read in conjunction with
"Management's Discussion and Analysis" and the Consolidated Financial Statements
and the "Notes to Consolidated Financial Statements" included in the Company's
1997 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is contained on pages 8 through 10 of
the Company's 1997 Annual Report to Shareholders. Such information is
incorporated herein by reference to the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in the Consolidated
Financial Statements and Notes to Consolidated Financial Statements appearing on
pages 11 through 21 of the Company's 1997 Annual Report to Shareholders and the
Quarterly Financial Data appearing in Note 10 of the "Notes to Consolidated
Financial Statements" appearing on page 21 of the Company's 1997 Annual Report
to Shareholders. Such information is incorporated herein by reference to the
Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors - The information with respect to Directors required by this
item is incorporated by reference to the Registrant's 1997 Proxy Statement to be
filed with the Securities and Exchange Commission, under the headings "Election
of Directors," "Directors Continuing in Office," and "Certain Information
Regarding the Board of Directors and Committees of the Board."
(b) Executive Officers - Information regarding executive offices of the
Company appears in the Company's definitive proxy statement for the 1997 Annual
Meeting of Stockholders.
In addition, the following information is being provided in response to the
requirements of Item 405 of Regulation S-K. To the Registrant's knowledge,
during the fiscal year ended March 31, 1997, all filing requirements applicable
to officers, directors, and greater than 10% beneficial owners of the common
shares of the Registrant under Section 16(a) of the Securities Exchange Act of
1934, as amended, were complied with, except that each of Mr. F. Bradford Smith
and Mr. E. H. Verdery, directors and executive officers of the Registrant, filed
one late report relating to one transaction.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
the Registrant's 1997 Proxy Statement to be filed with the Securities and
Exchange Commission, under the headings "Executive Compensation and Related
Information."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
the Registrant's 1997 Proxy Statement to be filed with the Securities and
Exchange Commission, under the heading "Security Ownership."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the Registrant's 1997 Proxy Statement to be filed with the Securities and
Exchange Commission, under the heading "Certain Relationships and Related
Transactions" and under the heading "Employment and Non-Competition Agreements."
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. The following consolidated financial statements included in the 1997
Annual Report to Shareholders for the year ended March 31, 1997 are incorporated
herein by reference under Item 8 of this Report:
Page Number in
Annual Report
Consolidated Statements of Operations for the years
ended March 31, 1997, 1996, and 1995 11
Consolidated Balance Sheets as of March 31, 1997
and 1996 12
Consolidated Statements of Cash Flows for the
years ended March 31, 1997, 1996, and 1995 13
Consolidated Statements of Stockholders' Investment
as of March 31, 1997, 1996, and 1995 14
Notes to Consolidated Financial Statements 15-21
Management's Responsibility for Financial Statements 22
Report of Independent Public Accountants 22
Page Number
in 10-K
2. Financial Statement Schedules (included on pages
S-1 of this Report):
Report of Independent Public Accountants on Schedules S-1
Valuation and Qualifying Accounts for the years ended
March 31, 1997, 1996, and 1995 (Schedule II) S-2
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All other schedules have been omitted, since the required information is
included in the consolidated financial statements, including the notes thereto,
or the circumstances requiring inclusion of such schedules are not present.
3. Exhibits
3.1- Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Form S-1 Registration Statement
(File No. 33-35802) filed with the Commission on May 25, 1990).
3.2- Certificate of Amendment of the Registrant (incorporated by
reference to Form 10-K filed with the Commission on June 24,
1991).
3.3- Bylaws of the Registrant (incorporated by reference to Form S-1
Registration Statement (File No. 33-35802) filed with the
Commission on May 25, 1990).
4.1- Articles IV, V, VI, VIII, IX, X and XI of the Registrant's
Restated Certificate of Incorporation, as amended (included in
Exhibit 3.1 and Exhibit 3.2).
4.2- Articles I, II, V and VII of the Registrant's Bylaws (included
in Exhibit 3.3).
10.1- Articles of Lease dated April 15, 1975 between Balkop Properties
Corp., as landlord, and Koppers Company, Inc., and Assignment of
Lease dated June 20, 1989 to Registrant, as assignee, and Beazer
Materials and Services, Inc., as assignor (incorporated by
reference to Form S-1 Registration Statement (File No. 33-35802)
filed with the Commission on May 25, 1990).
10.2- The Registrant's Retirement Plan, as amended (incorporated by
reference to Form 10-K filed with the Commission on June 28,
1995).
10.2(a)- First Amendment, dated December 28, 1995, to the Registrant's
Retirement Plan, as amended (incorporated by reference to Form
10-K filed with the Commission on June 26, 1996).
10.2(b)- Second Amendment, dated December 28, 1995, to the Registrant's
Retirement Plan, as amended (incorporated by reference to Form
10-K filed with the Commission on June 26, 1996).
10.3- The Registrant's 401(k) Retirement Savings Plan, as amended
(incorporated by reference to the Registrant's Form 10-K filed
with the Commission on June 28, 1995).
10.3(a)- First Amendment, dated December 28, 1995, to the Registrant's
401(k) Retirement Savings Plan, as amended (incorporated by
reference to Form 10-K filed with the Commission on June 26,
1996).
10.4- The Registrant's Employee Stock Option Plan, as amended,
(incorporated by reference to Form S-8 Registration Statement
(File No. 33-38400) filed with the Commission on December 21,
1990).
10.5- Environmental Elements Corporation Supplemental Pension
Agreement dated March 1, 1995, between Registrant and Richard E.
Hug (incorporated by reference to Form 10-K filed with the
Commission on June 26, 1996).
10.5(a)- Environmental Elements Corporation Supplemental Pension
Agreement dated July 1, 1996 between Registrant and John C.
Nichols, filed herewith.
13
<PAGE>
10.6- Revolving Credit and Letter of Credit Agreement dated November
24, 1993 between the Registrant and Mercantile-Safe Deposit and
Trust Company (incorporated by reference to Form 10-Q filed with
the Commission on February 14, 1994).
10.6(a)- Waiver and Amendment dated May 26, 1994, to the Revolving Credit
and Letter of Credit Agreement dated November 24, 1993 between
the Registrant and Mercantile-Safe Deposit and Trust Company
(incorporated by reference to Form 10-K filed with the
Commission on June 29, 1994).
10.6(b)- Extension Agreement dated November 18, 1994 to the Revolving
Credit and Letter of Credit Agreement dated November 23, 1993
between the Registrant and Mercantile-Safe Deposit and Trust
Company (incorporated by reference to Form 10-K filed with the
Commission on June 28, 1995).
10.6(c)- Second Amendment to Revolving Credit and Letter of Credit
Agreement, First Amendment to Line of Credit Promissory Note and
Security Agreement, dated October 25, 1995 between the
Registrant and Mercantile-Safe Deposit and Trust Company
(incorporated by reference to Form 10-Q filed with the
Commission on February 14, 1996).
10.6(d)- Amendment to Revolving Credit and Letter of Credit Agreement
dated May 10, 1996 between the Registrant and Mercantile-Safe
Deposit and Trust Company (incorporated by referenced to Form
10-K filed with the Commission on June 26, 1996).
10.6(e)- Letter Amendment dated May 5, 1997 to Revolving Credit and
Letter of Credit Agreement between the Registrant and
Mercantile-Safe Deposit and Trust Company dated November 23,
1993.
10.7- License, Cooperation and Supply Agreement dated May 5, 1988
between the Registrant and Komline-Sanderson Engineering
Corporation (incorporated by reference to Form S-1 Registration
Statement (File No. 33-35802) filed with the Commission on May
25, 1990).
10.8- Description of Executive Bonus Plan, with respect to executive
officers, adopted February 19, 1997, filed herewith.
10.9- Shareholders' Agreement dated February 2, 1990 by and among the
Registrant and certain shareholders of the Registrant
(incorporated by reference to Amendment No. 1 to Form S-1
Registration Statement (File No. 33-35802) filed with the
Commission on July 5, 1990).
10.10- Employment Agreement dated March 29, 1996 between Registrant and
Edward H. Verdery (incorporated by reference to Form 10-K filed
with the Commission on June 26, 1996).
10.11- Separation and Non-Competition Agreement dated April 1, 1997
between Registrant and F. Bradford Smith, filed herewith.
10.12- Agreement dated May 26, 1993 between the Registrant and Teco
Industries of Maryland, Inc. filed with the Commission on August
13, 1993.
11- Statement re: Computation of Income per Share, filed herewith.
13- A copy of the 1997 Annual Report to Shareholders is attached
hereto. Such report, except for those portions thereof which are
incorporated by reference in this Form 10-K, is furnished for
the information of the Commission and is not deemed "filed."
21- Subsidiaries of the Registrant (incorporated by reference to
Form 10-K filed with the Commission on June 26, 1996).
(b) No reports on Form 8-K were filed during the quarter ended March 31, 1997.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ E. H. Verdery June 16, 1997
- ------------------------------------- -------------
E. H. Verdery Date
Chairman of the Board of Directors,
President and Chief Executive Officer
June , 1997
- ------------------------------------- -------------
Fred Hittman Date
Director
/s/ Richard E. Hug June 18, 1997
- ------------------------------------- -------------
Richard E. Hug Date
Director
/s/ Russell R. Jones June 16, 1997
- ------------------------------------- -------------
Russell R. Jones Date
Director
/s/ John C. Nichols June 18, 1997
- ------------------------------------- -------------
John C. Nichols Date
Director and Secretary
June , 1997
- ------------------------------------- -------------
F. Bradford Smith Date
Director
/s/ Samuel T. Woodside June 18, 1997
- ------------------------------------- -------------
Samuel T. Woodside Date
Director
15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To Board of Directors and Shareholders of the Environmental Elements
Corporation:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in the Environmental Elements
Corporation and subsidiaries' annual report to shareholders incorporated by
reference in this Form 10-K, and have issued our report thereon dated May 19,
1997. Our audits were made for the purpose of forming an opinion on those
consolidated financial statements taken as a whole. The schedule listed in the
index above is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen, LLP
Baltimore, Maryland,
May 19, 1997
S-1
<PAGE>
Schedule II
ENVIRONMENTAL ELEMENTS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
Reserve for
Allowance for Discontinued
Doubtful Accounts Operations
----------------- ----------
Balance, March 31, 1994 $ 502,000 $ 319,000
Charged (credited) to profit and loss (248,000) --
(Deductions) additions (4,000) (211,000)
------------ -----------
Balance, March 31, 1995 250,000 108,000
Charged (credited) to profit and loss 46,000 --
(Deductions) additions -- (17,000)
----------- -----------
Balance, March 31, 1996 296,000 91,000
Charged (credited) to profit and loss (59,000) --
(Deductions) additions (124,000) (91,000)
------------ -----------
Balance, March 31, 1997 $ 113,000 $ --
=========== ===========
S-2
<PAGE>
EXHIBIT INDEX
3.1- Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Form S-1 Registration Statement
(File No. 33-35802) filed with the Commission on May 25, 1990).
3.2- Certificate of Amendment of the Registrant (incorporated by
reference to Form 10-K filed with the Commission on June 24,
1991).
3.3- Bylaws of the Registrant (incorporated by reference to Form S-1
Registration Statement (File No. 33-35802) filed with the
Commission on May 25, 1990).
4.1- Articles IV, V, VI, VIII, IX, X and XI of the Registrant's
Restated Certificate of Incorporation, as amended (included in
Exhibit 3.1 and Exhibit 3.2).
4.2- Articles I, II, V and VII of the Registrant's Bylaws (included
in Exhibit 3.3).
10.1- Articles of Lease dated April 15, 1975 between Balkop Properties
Corp., as landlord, and Koppers Company, Inc., and Assignment of
Lease dated June 20, 1989 to Registrant, as assignee, and Beazer
Materials and Services, Inc., as assignor (incorporated by
reference to Form S-1 Registration Statement (File No. 33-35802)
filed with the Commission on May 25, 1990).
10.2- The Registrant's Retirement Plan, as amended (incorporated by
reference to Form 10-K filed with the Commission on June 28,
1995).
10.2(a)- First Amendment, dated December 28, 1995, to the Registrant's
Retirement Plan, as amended (incorporated by reference to Form
10-K filed with the Commission on June 26, 1996).
10.2(b)- Second Amendment, dated December 28, 1995, to the Registrant's
Retirement Plan, as amended (incorporated by reference to form
10-K filed with the Commission on June 26, 1996).
10.3- The Registrant's 401(k) Retirement Savings Plan, as amended
(incorporated by reference to the Registrant's Form 10-K filed
with the Commission on June 28, 1995).
10.3(a)- First Amendment, dated December 28, 1995, to the Registrant's
401(k) Retirement Savings Plan, as amended (incorporated by
reference to Form 10-K filed with the Commission on June 26,
1996).
10.4- The Registrant's Employee Stock Option Plan, as amended,
(incorporated by reference to Form S-8 Registration Statement
(File No. 33-38400) filed with the Commission on December 21,
1990).
10.5- Environmental Elements Corporation Supplemental Pension
Agreement dated March 1, 1995, between Registrant and Richard E.
Hug (incorporated by reference to Form 10-K filed with the
Commission on June 26, 1996).
10.5(a)- Environmental Elements Corporation Supplemental Pension
Agreement dated July 1, 1996 between Registrant and John C.
Nichols, filed herewith.
<PAGE>
10.6- Revolving Credit and Letter of Credit Agreement dated November
24, 1993 between the Registrant and Mercantile-Safe Deposit and
Trust Company (incorporated by reference to Form 10-Q filed with
the Commission on February 14, 1994).
10.6(a)- Waiver and Amendment dated May 26, 1994, to the Revolving Credit
and Letter of Credit Agreement dated November 24, 1993 between
the Registrant and Mercantile-Safe Deposit and Trust Company
(incorporated by reference to Form 10-K filed with the
Commission on June 29, 1994).
10.6(b)- Extension Agreement dated November 18, 1994 to the Revolving
Credit and Letter of Credit Agreement dated November 23, 1993
between the Registrant and Mercantile-Safe Deposit and Trust
Company (incorporated by reference to Form 10-K filed with the
Commission on June 28, 1995).
10.6(c)- Second Amendment to Revolving Credit and Letter of Credit
Agreement, First Amendment to Line of Credit Promissory Note and
Security Agreement, dated October 25, 1995 between the
Registrant and Mercantile-Safe Deposit and Trust Company
(incorporated by reference to Form 10-Q filed with the
Commission on February 14, 1996).
10.6(d)- Amendment to Revolving Credit and Letter of Credit Agreement
dated May 10, 1996 between the Registrant and Mercantile-Safe
Deposit and Trust Company (incorporated by referenced to Form
10-K filed with the Commission on June 26, 1996).
10.6(e)- Letter Amendment dated May 5, 1997 to Revolving Credit and
Letter of Credit Agreement between the Registrant and
Mercantile-Safe Deposit and Trust Company dated November 23,
1993.
10.7- License, Cooperation and Supply Agreement dated May 5, 1988
between the Registrant and Komline-Sanderson Engineering
Corporation (incorporated by reference to Form S-1 Registration
Statement (File No. 33-35802) filed with the Commission on May
25, 1990).
10.8- Description of Executive Bonus Plan, with respect to executive
officers, adopted February 19, 1997, filed herewith.
10.9- Shareholders' Agreement dated February 2, 1990 by and among the
Registrant and certain shareholders of the Registrant
(incorporated by reference to Amendment No. 1 to Form S-1
Registration Statement (File No. 33-35802) filed with the
Commission on July 5, 1990).
10.10- Employment Agreement dated March 29, 1996 between Registrant and
Edward H. Verdery (incorporated by reference to Form 10-K filed
with the Commission on June 26, 1996).
10.11- Separation and Non-Competition Agreement dated April 1, 1997
between Registrant and F. Bradford Smith, filed herewith.
10.12- Agreement dated May 26, 1993 between the Registrant and Teco
Industries of Maryland, Inc. filed with the Commission on August
13, 1993.
11- Statement re: Computation of Income per Share, filed herewith.
13- A copy of the 1997 Annual Report to Shareholders is attached
hereto. Such report, except for those portions thereof which are
incorporated by reference in this Form 10-K,
<PAGE>
is furnished for the information of the Commission and is not
deemed "filed."
21- Subsidiaries of the Registrant (incorporated by reference to
Form 10-K filed with the Commission on June 26 , 1996.)
Exhibit 10.5(a)
ENVIRONMENTAL ELEMENTS CORPORATION
SUPPLEMENTAL PENSION AGREEMENT
THIS AGREEMENT is made this 1st day of July, 1996, by and
between Environmental Elements Corporation ("Corporation") and John C. Nichols
("Executive").
WHEREAS, the Executive performed valuable services for the
Corporation and the Corporation desires to provide the Executive with certain
supplemental retirement benefits to replace a benefit shortfall under the
Retirement Plan of Environmental Elements Corporation ("Retirement Plan") that
will occur as a result of benefit limitations imposed by changes in the law, the
imposition of salary caps under the Retirement Plan and changes in the benefit
formula under the Retirement Plan.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and undertakings hereinafter set forth, and other good and
valuable consideration, receipt of which is hereby acknowledged, the Corporation
and the Executive hereby agree as follows:
1. Recitals. The foregoing recitals are made a part of this
Agreement.
2. Supplemental Pension Payment. Commencing July 1, 1996, the
Corporation shall pay the amount of $146.95 per month as a supplemental pension
payment to the Executive for the remainder of the Executive's life. Each monthly
supplemental pension payment shall be paid on or before the first day of each
calendar month to which the payment is attributable.
3. Corporation's Obligations To be Unsecured. The Corporation
and the Executive understand and agree that the Corporation's obligations under
this Agreement shall not be secured in any manner. The Corporation shall not be
required to reserve or otherwise set aside, physically or legally, any funds for
the payment of its obligations hereunder. Neither the Executive nor any other
person shall be deemed to have any property interest, legal or equitable, in any
specific asset of the Corporation as a result of entering into this Agreement
and, to the extent that any person acquires any rights to receive payments under
the provisions of this Agreement, such rights shall be no greater than, nor
shall they have any preference or priority over, the rights of any unsecured
creditor of the Corporation.
4. Other Plans. Nothing in this Agreement shall be construed
to affect the rights of the Executive, other beneficiaries, or his estate to
receive any retirement or death benefits under any pension, insurance, other
deferred compensation, or other retirement plans of the Corporation.
<PAGE>
5. Non-Alienation Provision. Neither the Executive nor any
other person or persons who may become entitled to payment of any amount under
this Agreement shall have any right to anticipate, commute, pledge, encumber,
alienate, sell, transfer, assign or otherwise dispose of the right to receive
payments hereunder, all of which payments and the rights thereto are expressly
hereby declared to be non-assignable and not subject to the debts, contracts,
liabilities, engagements or torts of the Executive or such persons.
6. Withholding of Taxes. The Corporation shall have the right
to withhold from all amounts payable pursuant to this Agreement any federal,
state or local taxes of any kind required by law to be withheld.
7. Amendments. This Agreement shall not be amended nor
modified otherwise than by a written agreement executed by the parties hereto or
their respective successors, assigns and legal representatives.
8. Binding Agreement. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto, and their respective heirs,
legatees, beneficiaries, personal representatives and other legal
representatives, successors and assigns.
9. Controlling Law. This Agreement shall be construed
according to the laws of the State of Maryland, other than the conflict of laws
principles thereof.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed under seal as of the day and year first above written.
ATTEST: ENVIRONMENTAL ELEMENTS CORPORATION
/s/ Blair A. Freed /s/ Edward H. Verdery
_______________________ By:__________________________________(SEAL)
Edward H. Verdery
President and Chief Executive Offer
WITNESS:
/s/ Barbara Williams /s/ John C. Nichols
_______________________ _____________________________________(SEAL)
John C. Nichols
Exhibit 10.6(e)
[Mercantile logo] MERCANTILE-SAFE DEPOSIT & TRUST COMPANY
Nicholas C. Richardson
Assistant Vice President
Telephone - (410) 237-5216
Facsimile - (410) 237-5703
May 5, 1997
Edward H. Verdery
Chairman of the Board and
Chief Executive Officer
Environmental Elements Corporation
P.O. Box 1318
3700 Koppers Street
Baltimore, Maryland 21203
Dear Ted:
This letter is in answer to your request for an extension of the temporary
reduction in the Minimum Tangible Net Worth requirement outlined in the Loan
Agreement associated with Mercantile-Safe Deposit & Trust Company's Secured
Revolving Credit Agreement with Environmental Elements Corporation.
Mercantile-Safe Deposit & Trust Company will continue to reduce the Minimum
Tangible Net Worth required to be maintained by Environmental Elements
Corporation to $6,000,000 as of March 31, 1997. This requirement will revert to
$7,000,000 on April 1, 1998. This two year Revolving Credit is due to expire on
25 October 1998.
Respectfully,
/s/ Nicholas C. Richardson
---------------------------
Nicholas C. Richardson
Two Hopkins Plaza/P.O. Box 1477/Baltimore, Maryland 21203
Exhibit 10.8
Description of Executive Bonus Plan
With Respect to Executive Officers
Adopted on February 19, 1997
E. H. Verdery
E. H. Verdery, the President and Chief Executive Officer, is entitled to
receive an incentive bonus in the amount of $10,000.00 with respect to each
calendar quarter, commencing with the last quarter of fiscal 1997 and ending
with the last quarter of fiscal 1998, in which the Company reports, on a
consolidated basis, a net break-even or profit before taxes.
Exhibit 10.11
SEPARATION AND NON-COMPETITION AGREEMENT
THIS SEPARATION AND NON-COMPETITION AGREEMENT is made as of the first
day of April, 1997, by and between ENVIRONMENTAL ELEMENTS CORPORATION, a
Delaware corporation with principal offices at 3700 Koppers Street, Baltimore,
Maryland 21227 (hereinafter referred to as "Company") and F. BRADFORD SMITH,
(hereinafter referred to as "Mr. Smith").
Background
1. Mr. Smith has resigned his employment with the Company
effective March 31, 1997, and has further resigned from the office of Chairman
of the Board of Directors of the Company effective March 10, 1997 and from all
other offices of the Company and of its subsidiaries effective March 31, 1997.
2. The Company and Mr. Smith are desirous of reaching an
agreement concerning the terms of the separation of Mr. Smith from the Company.
NOW, THEREFORE, in consideration of the premises and mutual covenants,
understandings, and agreements contained in this Agreement and attached Exhibit,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged by both parties, it is hereby agreed by and between the
parties as follows:
1. The Company and Mr. Smith agree to separation terms regarding
severance and other matters in connection with Mr. Smith's resignation in
accordance with Exhibit A (attached), which is incorporated as part of this
Agreement.
2. (i) For a term expiring on March 31, 1998, Mr. Smith will not
engage in, acquire any interest in, become employed by, or provide consulting
services to, or otherwise participate in, either directly or indirectly, other
than through the ownership of publicly traded stock, any other business in
competition with the business of Company. The Company's "business" shall be
limited to the businesses that the Company is in at the time of the signing of
this Agreement.
(ii) Mr. Smith will not disclose to any person or other entity
any trade secrets, customer or supplier names, computer programs, cost and
pricing data, product development efforts, know-how and show-how, proposal and
contract management strategy, and other confidential technical or financial
information concerning the business or affairs of the Company, which he has
acquired in the course of or as an incident to his employment by the Company.
3. This Agreement and the attached Exhibit constitutes the
entire understanding of Company and Mr. Smith with respect to the separation of
Mr. Smith from the Company.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Separation
and Non-Competition Agreement to be executed on the date indicated below, and
have heruento set their hand and seals.
ATTEST: ENVIRONMENTAL ELEMENTS
CORPORATION
/s/ John C. Nichols By: /s/ E. H. Verdery
- --------------------------------- -----------------------------------
E. H. Verdery
President
WITNESS:
/s/ John C. Nichols /s/ F. B. Smith
- --------------------------------- -----------------------------------
F. Bradford Smith
<PAGE>
ENVIRONMENTAL
ELEMENTS
C O R P O R A T I O N S I N C E 1 9 4 6
------------------------------------------------------------------------
3700 KOPPERS STREET o BALTIMORE, MARYLAND 21227 o TELEPHONE 410-368-6859
E.H. VERDERY
President and
Chief Executive Officer
February 28, 1997
Mr. F. Bradford Smith
Chairman of the Board
Environmental Elements Corporation
3700 Koppers Street
Baltimore, Maryland 21227
Dear Brad:
Based on discussions with the Compensation Committee on February 19, 1997, you
have decided to resign as an employee of EEC effective March 31, 1997. This
letter sets forth the agreements reached between you and EEC regarding your
severance and other matters in connection with your resignation. You and EEC
acknowledge that you both intend to be bound by the arrangements set forth
below.
In lieu of any other severance arrangements, or company policy or precedent, you
and EEC agree as follows:
o Your last day as an employee of EEC will be March 31, 1997;
o Beginning April 1, 1997, you will receive severance pay of one
year's salary of $180,000, payable every two weeks at your
current rate of pay. With the exception of pension credit, you
will receive no other employee benefits after March 31, 1997;
o You will be credited for pension plan purposes with full time
employment for calendar year 1997 and your entire severance pay
will be included in the pension plan base;
o On April 1, 1997 you will be paid for all your accrued but unused
vacation for calendar year 1997;
o EEC will acquire the leased car currently provided to you and
will sell it to you for $1 as soon as possible. You will have
continued use of the car until that time. All operating expenses
will be your responsibility after the sale.
o An office will made available for your nonexclusive use when you
are in Baltimore providing services to EEC and your telephone
will continue to be answered and messages taken during the
severance period;
<PAGE>
o You will retain the laptop computer and software you currently
use and we will maintain your access to the EEC network as long
as you require it to provide services to the company as a
Director; and
o Effective April 1, 1997, you will become an Outside Director and
will receive compensation set by the Compensation Committee for
Outside Directors.
Brad, I believe this covers the substance of the agreement between you and EEC
and I would ask that you indicate your acceptance below.
Sincerely,
/s/ E.H. Verdery
- ----------------
E.H. Verdery
Accepted: /s/ F. Bradford Smith Date: 3/28/97
--------------------- -------
F.Bradford Smith
cc: Members of the Board of Directors
Exhibit 11
ENVIRONMENTAL ELEMENTS CORPORATION
STATEMENT REGARDING COMPUTATION OF INCOME PER SHARE
FOR THE YEARS ENDED MARCH 31, 1997, 1996, AND 1995
PRIMARY: 1997 1996 1995
---- ---- ----
Common shares outstanding .................. 6,923,688 6,879,699 6,846,099
Dilutive effect of common stock equivalents:
Stock options ........................... -- -- 7,970
--------- --------- ---------
Weighted average number of shares .......... 6,923,688 6,879,699 6,854,069
========= ========= =========
FULLY DILUTED:
Common shares outstanding .................. 6,923,688 6,879,699 6,846,099
Dilutive effect of common stock equivalents:
Stock options ........................... -- -- 23,196
________ ________ ________
Weighted average number of shares .......... 6,923,688 6,879,699 6,869,295
========= ========= =========
Exhibit 13
- --------------------------------------------------------------------------------
================================================================================
ENVIRONMENTAL
ELEMENTS
C O R P O R A T I O N
Customer Satisfaction is Our Focus. Innovation Is Our Heritage . . .
ENVIRONMENTAL
ELEMENTS
C O R P O R A T I O N
1 9 9 7 A N N U A L R E P O R T
================================================================================
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<S> <C>
Environmental Elements Corporation has been a TABLE OF CONTENTS
leading supplier of air pollution control systems and -----------------
services for more than fifty years. The Company Letter to Shareholders . . . 1
designs and supplies large-scale, custom-engineered
equipment and systems which enable its customers to Technology Highlights . . . 3
comply with governmental regulations limiting
particulate and gaseous emissions. Financial Highlights . . . 7
Management's Discussion & Analysis . . . 8
As part of Koppers Company, Inc. from 1946 to
1983, it built a solid reputation as a premier supplier Consolidated Financial Statements . . .11
of air pollution control systems to the pulp and paper
industry, while developing a significant share in other Management's Responsibility for
industrial, municipal, and power generation markets. Financial Statements . . .22
Following a leveraged buyout led by senior
management in 1983, it was taken public in 1990 Report of Independent Public Accountants . . .22
and subsequently listed on the New York Stock
Exchange in 1991. Selected Consolidated Financial Data . . .23
Board of Directors and Senior Management . . .24
Throughout its long history, the Company has been
on the leading edge of particulate control technology General Information . . . . . . Back Cover
and has led the industry with many innovations in
the design of electrostatic precipitators, fabric filters,
and scrubbing systems. The Company is always striving
to develop and refine its technologies and
services in response to customer needs, while
optimizing the quality, cost, and performance of its air
pollution control systems.
Today, Environmental Elements Corporation is
North America's leader in particulate removal, while
slowly gaining strength in the international
marketplace. The Company is well positioned to
benefit from the 1990 Clean Air Act Amendments
and the regulatory trend towards fine particulate
control.
The 1997 Annual Meeting will be held at 9:00 a.m. on Thursday, July 31, 1997, at the Company's headquarters building.
Environmental Elements Corporation o 3700 Koppers Street o Baltimore, MD 21227 o (410) 368-7000 o 1-800-333-4331
Please call us if you need directions.
</TABLE>
<PAGE>
- -----------------------------======================-----------------------------
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
DEAR FELLOW SHAREHOLDER:
- ------------------------
Improved results were achieved in fiscal 1997 despite the continued lack of
activity in all of our traditional markets. The overall domestic market for air
pollution control products and services continued at low levels as a result of
regulatory uncertainty and utility deregulation. In addition, the final sale and
shutdown of our Jeffersonville, Indiana, facility as part of moving the
aftermarket business to Baltimore further impacted results with a restructuring
charge that exceeded $2 million. An improved financial condition was realized
toward the end of the year, with the Company achieving a slight profit in the
fourth quarter. Also during the latter half of the year, we were encouraged to
see an increase in activity in the municipal solid waste market, which supported
our expectation that this market would recover in conjunction with the
resolution of a recent court ruling.
MARGIN IMPROVED ON LOWER SALES
Despite a 22% decline in sales from fiscal 1996, the improved margin on
fiscal 1997 sales nearly equaled the margin contributed last year, reflecting
the continued success of our process improvement initiatives. Our continued
efforts to reduce expenses led to a net reduction in SG&A of $1.2 million before
the restructuring charge. Year-to-year the operating loss before the
restructuring charge was cut in half on lower sales volume. It is clear that no
form of cost reduction can overcome the lack of market for our products;
however, the trimming of costs where appropriate will maintain the progress we
have achieved to date.
DOMESTIC AND INTERNATIONAL PRESENCE
Through continued market focus, we have succeeded in maintaining our domestic
share of new equipment sales as well as increasing our share of the available
aftermarket business. Further improvement in the Company's share of the
international segment has been strengthened by the start up and delivery of
equipment from our joint venture factory in the People's Republic of China. The
timely completion of this facility and the quality of product being produced is
very encouraging. The business development and technical training phases of the
venture were completed with our Chinese partners in the fourth quarter. The
successful completion of the engineering and material deliveries on the first
Chinese project at Sudong has built our credibility and has already opened the
market for several additional orders in the current fiscal year.
INNOVATION LEADERSHIP CONTINUES WITH AGGLOMERATOR
Environmental Elements Corporation has consistently led the air pollution
control industry in the development of innovative designs and in the improvement
of existing technologies. During this past year we have continued that
leadership and have expanded our commitment by including a totally new product
that addresses the emerging requirements for fine particulate control. Our Fine
Particulate Agglomerator (global patents pending) has received a strong,
positive market reception as demonstrated by the award of two new contracts for
this advanced technology. We expect the Agglomerator to significantly impact the
dynamics in the marketplace, particularly as the new ambient air quality
standards for particulate removal are implemented. In keeping with our
leadership role, several other product improvements are in the test and pilot
stage. Research and development will continue to be an important focus of the
Company using both external and internal funding sources. There are few air
pollution control companies that can equal Environmental Elements Corporation in
this vital area.
SIGNIFICANT ORDERS RECEIVED
There were a number of important orders received in 1997, including:
o Two orders from Carolina Power & Light worth in excess of $9 million to
engineer and deliver replacement precipitators for their Robinson and
Sutton stations. These are the fourth and fifth major orders from CP&L in
the last four years.
- --------------------------------------------------------------------------------
Environmental Elements Corporation - 1 -
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
o A $9.2 million order from Savannah Energy to engineer and retrofit a
rotary atomizer semi-dry scrubber for the Savannah, Georgia,
waste-to-energy facility.
o A $5.2 million order from Union Camp Corporation to engineer and retrofit
a new salt cake recovery precipitator for their mill in Franklin,
Virginia.
o Two orders from Raytheon Engineers and Constructors for Meade Corporation
totalling $4.2 million to retrofit two precipitators at their mill in
Stevenson, Alabama.
o A three year alliance agreement with Wisconsin Electric Power Company
wherein EEC will provide a full range of air pollution control systems and
services throughout their system.
MARKET CONDITIONS CAUSING INDUSTRY CONSOLIDATION
Regulatory delays and uncertainties over the past several years have
negatively impacted the domestic air pollution control market. An initial surge
of orders following the passage of the Clean Air Act Amendments of 1990 has been
followed by a steady decline in nearly all segments of the market, with the
exception of the service and spare parts segments. As a result, most air
pollution control companies have been forced to downsize and, in some cases, to
exit certain business segments. We have not been immune to these external
forces; however, our focus on providing superior customer service and supporting
our customer base with improved products and technology has helped the Company
through these difficult times. In fact, we have emerged a stronger, more
capable, and more effective organization. Customer satisfaction will continue to
be our focus, thereby favorably positioning Environmental Elements Corporation
for new business opportunities.
IMPROVED RESULTS AND GROWTH ARE ANTICIPATED IN FISCAL 1998
We believe that the low volumes seen in fiscal 1997 were unusual and that
market conditions are improving. Encouraging signs are already being seen with a
significant increase in the number of inquiries received for new equipment to be
purchased in fiscal 1998. This is particularly true in the power generation and
the municipal solid waste segments. Assuming we maintain our current share and a
similar portion of the identified projects actually go to contract, our bookings
and backlog are expected to increase substantially over fiscal 1997 levels.
Market conditions and timing are very difficult to predict; however, there have
been strong indications and budgetary decisions by our customers that support
our positive expectations. With a conservative and realistic approach to
managing our business, we are prepared for expansion and growth on several
fronts. International participation is essential, and we intend to grow our
share of those markets by applying the same focus on innovation and customer
satisfaction that has earned us the dominant share of the U.S. market we have
enjoyed in the past.
To our shareholders and associates, we are strengthened by your support and
dedication. I give you my personal assurance that we will not be satisfied with
anything less than consistently profitable quarters and increasing shareholder
value, regardless of market conditions.
Sincerely,
/s/ E.H. Verdery
-------------------------------------------------
E.H. Verdery
Chairman of the Board and Chief Executive Officer
June 1997
- --------------------------------------------------------------------------------
- - 2 - Environmental Elements Corporation
<PAGE>
- ------------------------------=====================-----------------------------
TECHNOLOGY HIGHLIGHTS
- --------------------------------------------------------------------------------
PRECIPITATOR TECHNOLOGY -----------------------------------
The Company's heritage of innovation is ------------------------------
exemplified by its ability to develop novel
solutions to customer needs in lieu of more
traditional approaches. As equipment and
technology age, customers are faced with
the dilemma of having to update air
pollution control capabilities while at the
same time needing to minimize the impact of
upgrades on daily business operations. When
Champion International Corporation was
faced with this challenge, Environmental
Elements Corporation devised a solution
that was nothing short of "magic."
The Roanoke Rapids, North Carolina, pulp [Photograph appears here]
and paper mill found it necessary to
completely replace a 20-year-old
precipitator on a recovery boiler. The
boiler supports approximately 65% of the
mill's pulp production and chemical
recovery and 35% of the mill's steam. The
challenge was to replace the old
precipitator using existing real estate
while avoiding costly extended outages.
Proposals were entertained from a number of
air pollution control vendors, but only
Environmental Elements proposed a unique
turnkey plan that fully met Champion's
needs.
The Company constructed a new ------------------------------
state-of-the-art precipitator in an open
area adjacent to the old unit, which Champion's new precipitator
remained in operation during the operating in its temporary
construction. Tie-ins to the boiler flue location showing the "magic"
gas ducts to bypass the old precipitator duct.
were done during regularly scheduled
maintenance outages, thereby avoiding
costly extra outages. Using these tie-ins
and temporary ductwork -- referred to by
the project team as "The Magic Duct" -- the ============================
new precipitator went into full operation
"on-the-run" in its temporary location. The
old precipitator was then dismantled, and
modifications to the existing support "Environmental
structure were made. Upon completion, the
new unit was rolled into its final Elements Corporation
location, and the permanent ductwork and
auxiliary equipment were installed during a devised a solution
regularly scheduled nine day outage.
that was
Environmental Elements' innovative
solution provided Champion with a nothing short of
technologically advanced air pollution
control system operating at 99.8% `magic'."
efficiency while enabling the plant to
remain in full operation throughout the
upgrade process. The Company looks forward
to other opportunities to work its "magic" ============================
for customers.
-----------------------------------
- --------------------------------------------------------------------------------
Environmental Elements Corporation - 3 -
<PAGE>
- -----------------------------=====================------------------------------
TECHNOLOGY HIGHLIGHTS
- --------------------------------------------------------------------------------
- ----------------------------------- MUNICIPAL SOLID WASTE TECHNOLOGY
------------------------------- There is a growing need for the ability
to safely dispose of municipal solid waste,
particularly as an increasing number of
landfills reach capacity. Environmental
Elements Corporation is delivering this
essential technology worldwide. When the
Tyseley Waste Disposal Facility near
downtown Birmingham, England, needed to
have an efficient, cost effective emissions
control system for their municipal and
medical waste incinerators, Environmental
Elements had the air pollution control
solution they were seeking.
This international design is similar to
[Photograph appears here] the U.S. supplied acid gas removal system
design that has already been provided on 17
units handling over 7,800 tons per day of
municipal waste.
In 1996 the Company installed two spray
dryer absorber systems, each equipped with
direct drive rotary atomizers and pulse jet
baghouses with acid resistant fiberglass
filters. Because of Environmental Elements
Corporation's extensive experience in this
specialized field of air pollution control,
the Company was able to provide the
customer extended warranties on the
------------------------------- atomizers, slakers, pumps, and filter bags.
In addition, the Company's design provided
EEC's system eliminates toxic the customer with the lowest life cycle
pollutants on the 1,300 ton per costs available.
day Tyseley Waste Disposal
Facility in Birmingham, England. Due to the sensitivity of the facility's
location in a populated area, project
success was critical to the relationship
=========================== with residents. Environmental Elements' air
pollution control equipment at the
municipal solid waste disposal facility has
performed at an enhanced level and above
all expectations. Measured emissions are
"The need for significantly lower than regulatory
requirements and contractual guarantees.
municipal solid This has helped ease the concerns of area
residents and has further enhanced the
waste disposal will customer's satisfaction with the project.
The system's highly efficient acid gas
continue to grow . . . removal has resulted in levels of
consumables that are significantly lower
Environmental than guarantees, yielding additional
savings in operating costs to Tyseley.
Elements Corporation
The need for municipal solid waste
stands ready to deliver." disposal will continue to grow, along with
demands for the increased control of
emissions. Environmental Elements Corpora-
tion stands ready to deliver our proven
technology that will meet these challenges
=========================== in a worldwide market.
- -----------------------------------
- --------------------------------------------------------------------------------
- - 4 - Environmental Elements Corporation
<PAGE>
- ------------------------------=====================-----------------------------
TECHNOLOGY HIGHLIGHTS
- --------------------------------------------------------------------------------
CIRCULATING DRY SCRUBBER TECHNOLOGY -----------------------------------
Introduction of the Circulating Dry ------------------------------
Scrubber (CDS(R)) technology to North
America by Environmental Elements Corpora-
tion is yet another example of the
Company's leadership as an innovator. The
CDS(R) will become the technology of choice
for the power generating industry as
deregulation increases the economic
pressures of air pollution control costs in
conjunction with requirements for
environmental performance.
The CDS(R) greatly improves the capture
of sulfur dioxide (SO2), a by-product of
power generating processes. SO2 emissions [Photograph appears here]
are the principle cause of "acid rain,"
which causes significant environmental
damage. The CDS(R) system eliminates these
harmful emissions with a capital cost
factor comparable to less effective,
traditional technol-ogies and with
significantly reduced annual operating
costs. With more power generating capacity
being built to support a growing economy,
this technology will become an increasingly
desirable option for new solid fueled power
facilities.
Black Hills Power and Light's 80
Megawatt coal-fired plant in Gillette,
Wyoming, was the site for one of the first ------------------------------
CDS(R) installations in North America. In
addition to the technological demands, the The lowest total cost sulfur
project was challenging in two other dioxide removal technology
aspects as well. First, the site arrives in North America.
experiences some of the most severe weather
conditions to be found in the United
States. Second, the project was completed
on an accelerated schedule to meet an early
commercial operating date, thus helping
Black Hills Power and Light to generate ============================
operating income earlier than anticipated.
The CDS(R) was installed with a new
electrostatic precipitator which achieved "Developing
two significant milestones for the
technology. Use of the Company's rigid technologies to meet and
discharge electrode completed the
"Americanization" of this technology which exceed the air pollution
previously used the less cost effective
European design. Additionally, the control needs of its
precipitator was decreed "best available
control technology" by the regulatory customers in the
community, a distinction previously
associated with fabric filter technology next millennium."
for stringent particulate emission
requirements.
Environmental Elements Corporation is ============================
committed to developing technologies to
meet and exceed the air pollution control
needs of its customers in the next
millennium. The CDS(R) is an important
technology by which the Company will
achieve this mission.
-----------------------------------
- --------------------------------------------------------------------------------
Environmental Elements Corporation - 5 -
<PAGE>
- ------------------------------=====================-----------------------------
TECHNOLOGY HIGHLIGHTS
- --------------------------------------------------------------------------------
- ----------------------------------- AGGLOMERATOR TECHNOLOGY AND ALLIANCES
------------------------------- The Company's commitment to innovation
permeates its corporate culture, including
customer relationships and the development
of vital new technology. Environmental
Elements' alliance with Wisconsin Electric
Power Company (WEPCO) is a unique and
exciting blend of these two components.
[Photograph appears here]
The alliance between Environmental
Elements Corporation and WEPCO is believed
to be one of the first arrangements of its
kind in the United States. Under the
alliance, Environmental Elements will
service, repair, and replace, as required,
------------------------------- primary and secondary air pollution control
equipment for all of WEPCO's power plants.
The members of the Agglomerator In addition, the Company has dedicated
R&D team: (seated, left to right) engineering and field service personnel to
Walter Brinkley, Stuart Pass, and work with WEPCO to develop programs that
Paul Feldman; (standing) Steve reduce operating and mainten-ance costs.
Cross, Andy Becker, Kevin Mills, Increased responsiveness to the customer's
and Dennis Helfritch needs, overall reduction of costs,
simplified procurement, and improved
reliability are among the numerous benefits
fostered by this forward-thinking
=========================== partnership. The deregulation of the
electric utility industry will create more
opportunities of this type.
"Environmental Elements A particularly exciting aspect of the
arrangement is the opportunity it provides
Corporation . . . for the co-development, implementation, and
commercializa-tion of new technology. One
maximizing such opportunity is in the ongoing develop-
ment of the Company's Fine Particulate
technology leadership Agglomerator, for which global patents are
currently pending. The Agglomerator was
through strategic successfully demonstrated during 1996 at a
coal-fired boiler. A second full-scale
alliances." Agglomerator installation is underway at
WEPCO's Presque Isle Station.
Environmental Elements' Fine Particulate
=========================== Agglomerator is a breakthrough technology
for the advanced control of fine submicron
sized particulate emissions from utility
and industrial boilers. As regulations for
fine particulate emissions become
increasingly stringent, new technologies
must be developed to meet these
requirements. Although larger particles can
now be easily captured using conventional
particulate control equipment such as
electrostatic precipitators and fabric
filters, the collection of fine particles
that contribute to respiratory illness is
much more difficult. The Company's
Agglomerator addresses this fine
particulate collection need by creating
rapid interparticle contact through which
fine particles adhere to larger particles,
resulting in dramatically reduced emissions
of fine particulate with the overall
improved performance for a given size
precipitator.
Environmental Elements Corporation is
maximizing its technology leadership
through strategic relationships, such as
the alliance with WEPCO. The Company will
continue to pursue opportunities that
further enhance its leadership position.
- -----------------------------------
- --------------------------------------------------------------------------------
- - 6 - Environmental Elements Corporation
<PAGE>
- ------------------------------====================------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
for the years ended March 31, 1997 1996 1995
=====================================================================================================================
(in thousands except per share and employee data)
<S> <C>
Continuing Operations
Bookings.................................................. $44,000 $57,100 $79,300
Backlog................................................... 33,800 37,400 41,500
Sales..................................................... 47,654 61,214 77,923
Operating Loss............................................ (3,391) (3,354) (1,856)
Loss from Continuing Operations........................... (4,015) (3,855) (2,068)
Net Income (Loss)......................................... (4,015) (3,504) 37
Per Share Data:
Loss from Continuing Operations........................... (0.58) (0.56) (0.30)
Net Income (Loss)......................................... (0.58) (0.51) 0.01
Cash and Short-term Investments.............................. 1,684 2,124 6,563
Working Capital.............................................. 1,559 3,267 7,670
Stockholders' Investment..................................... $ 6,038 $ 9,851 $13,333
Current Ratio................................................ 1.09x 1.19x 1.28x
Weighted Average Shares Outstanding.......................... 6,924 6,880 6,869
Ending Shares Outstanding.................................... 6,967 6,902 6,862
Number of Full-time Employees................................ 134 156 231
</TABLE>
- --------------------------------------------------------------------------------
Environmental Elements Corporation - 7 -
<PAGE>
- -----------------------==================================-----------------------
MANAGEMENT'S DISCUSSION & ANALYSIS
- --------------------------------------------------------------------------------
GENERAL
The Company designs and supplies systems and equipment and provides
aftermarket products and services that enable its customers to comply with
regulations limiting particulate and gaseous emissions. The Company generally is
contractually responsible for all phases of design, fabrication and, if included
in the scope of the Company's contract, field construction of its equipment and
systems. The Company faces substantial competition in each of its principal
markets. Substantially all contracts for the Company's systems are awarded
through competitive bidding, and are undertaken on a fixed-price basis. Like
others in its industry, the Company relies on outside suppliers, manufacturers,
and fabricators to supply parts and components in accordance with the Company's
designs and specifications. When the Company's scope of work includes
installation of equipment, the Company selects and supervises subcontractors for
this work. The Company's successful completion of its contractual obligations is
usually determined by performance testing of its systems.
Information pertaining to continuing operations in the Company's consolidated
financial statements reflects the activities of its air pollution control
business. Information relating to discontinued operations is discussed in Note 2
of "Notes to Consolidated Financial Statements."
BOOKINGS AND BACKLOG
Bookings represent work for which the Company has entered into a signed
agreement or has received a notice to proceed. Bookings during fiscal 1997 were
$44.0 million, a 23% decrease from fiscal 1996 bookings. It is the Company's
opinion that the effects of uncertainty created by regulatory rule making have
been a significant factor contributing to the reduction of orders in fiscal
1997.
The Company expects that about 87% of the March 31, 1997 backlog will be
executed during its next fiscal year. Due to timing effects of bookings,
differences in project gross margins, and varying lengths of time required to
perform contracts (typically 12-36 months), annual bookings activity and backlog
levels at period end are not necessarily predictive of future operating results.
SALES AND INCOME
During fiscal year 1996, the Company recorded a restructuring charge of
$951,000 reflecting a series of actions the Company took which included the
relocation of its aftermarket operations from Jeffersonville, Indiana to its
office in Baltimore, the de-emphasis of direct hire fabrication and construction
activities and a corresponding emphasis on its aftermarket parts, services and
materials businesses, and the closing of its office in the United Kingdom.
During fiscal year 1997, the Company identified costs associated with those
matters of $2.2 million in excess of the amount recorded as a restructuring
charge in fiscal year 1996. Accordingly, the Company recorded an additional
charge of $2.2 million during fiscal year 1997 which represents the excess of
expected final costs (related primarily to loss on disposition of property and
cessation of operations) over costs estimated in fiscal year 1996. The sale of
the facilities took place during the first quarter of fiscal year 1998. As of
March 31, 1997, a restructuring reserve of approximately $122,000 is included in
accrued and other current liabilities in the accompanying balance sheet.
The following table sets forth the amounts and percentage relationships to
sales of selected items in the Company's consolidated statements of operations
for the periods indicated. This table excludes the restructuring charges
described above.
- --------------------------------------------------------------------------------
- - 8 - Environmental Elements Corporation
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
for the years ended March 31, 1997 1996 1995 1997 1996 1995
========================================================================================================================
(in millions) (percentage of net sales)
<S> <C>
Sales.................................................. $47.7 $61.2 $77.9 100.0% 100.0% 100.0%
Cost of Sales.......................................... 41.0 54.6 69.1 86.1 89.2 88.7
Gross profit........................................... 6.6 6.6 8.8 13.9 10.8 11.3
Selling, general and administrative expense............ 7.8 9.0 10.7 16.4 14.7 13.7
Operating income (loss)................................ (1.2) (2.4) (1.9) (2.5) (3.9) (2.4)
Interest and other expense, net........................ (0.6) (0.5) (0.2) (1.3) (0.8) (0.3)
Continuing operations pre-tax income (loss)............ $(1.8) $(2.9) $(2.1) (3.8)% (4.7)% (2.7)%
</TABLE>
Fiscal 1997 Compared to Fiscal 1996
Fiscal 1997 sales decreased 22% or $13.5 million to $47.7 million from $61.2
million the year before. The decrease in sales reflects contract booking
activity, mix, and job progress. Lower available orders in the air pollution
control marketplace has resulted in reduced bookings and a resultant decrease in
sales. Despite the 22% drop in sales, fiscal year 1997 results reflect
significant improvement in contract gross margin levels producing virtually
identical gross profit dollars, $6.6 million, in fiscal years 1997 and 1996.
Cost of sales decreased 25% or $13.6 million to $41.0 million from $54.6
million. Cost of sales decreased as a percentage of sales to 86.1% from 89.2%.
This reflects the favorable results of a formal productivity improvement
program, an increased contribution of higher margin aftermarket business and the
completion, early in the year, of two low margin projects which the Company
strategically accepted in prior years in order to successfully introduce a new
technology into the marketplace.
Selling, general and administrative expenses decreased 13% or $1.2 million to
$7.8 million from $9.0 million. Cost reductions from restructuring actions taken
during the prior fiscal year, together with further restructuring and other cost
reductions during the current fiscal year, were the primary factors in the
decrease. Selling, general and administrative expenses, as a percentage of
sales, increased to 16.4% from 14.7% because selling, general and administrative
expenses were not reduced at the same rate as sales.
Interest and other expense, net, increased $123,000. The increase is
primarily a result of an increase in interest expense due to increased
borrowings on the Company's line of credit.
Fiscal 1996 Compared to Fiscal 1995
Fiscal 1996 sales decreased 21% or $16.7 million to $61.2 million from $77.9
million the year before. The decrease in sales reflects contract booking
activity, mix, and job progress.
Cost of sales decreased 21% or $14.5 million to $54.6 million from $69.1
million. Cost of sales increased as a percentage of sales to 89.2% from 88.7%
primarily as a result of direct hire construction cost overruns.
Selling, general and administrative expenses decreased 16% or $1.7 million to
$9.0 million from $10.7 million. Cost reductions from restructuring were the
primary factors in the decrease. Selling, general and administrative expenses,
as a percentage of sales, increased to 14.7% from 13.7% because selling, general
and administrative expenses were not reduced at the same rate as sales.
- --------------------------------------------------------------------------------
Environmental Elements Corporation - 9 -
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
- --------------------------------------------------------------------------------
Interest and other expense, net, increased $322,000. The increase was
primarily due to a decrease in interest income on the Company's investment
portfolio as a result of lower interest rates and a decrease in cash available
for investment.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents declined by $440,000 and borrowings under the
Company's line of credit increased by $2.6 million. This was caused principally
by: (1) a $906,000 increase in the Company's net working capital investment in
contracts in process; and (2) the Company's $4.0 million net loss for fiscal
year 1997. 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 retainage receivable plus unbilled contract costs and fees, minus
accounts payable and minus billings in excess of contract costs and fees. These
net amounts were $1.2 million and $275,000 on March 31, 1997 and March 31, 1996,
respectively.) The Company seeks to manage project cash flows in its payment
terms negotiations with customers and suppliers and by adherence to project
budgets and schedules.
Because the Company's business is not capital intensive, the Company has not
traditionally experienced significant capital expenditures. As a result of
investments in fiscal 1994 and 1995 to upgrade its infrastructure, the Company
believes it has the flexibility to minimize or delay additional capital
expenditures for at least the next year.
Although the Company experienced an operating loss during fiscal year 1997,
the Company believes that its operating trends are improving. The Company has
taken steps which it believes are sufficient to permit it to operate at a
break-even level for at least the next two quarters. However, there can be no
assurance that such improved trends will continue, or that the actions taken
will result in break-even operations. If the Company is not able to sustain a
trend of improved operating results, operating losses could continue to
adversely affect the Company's liquidity and capital resource positions. Under
those circumstances, the Company believes that its current liquidity and capital
resources, i.e. those currently available and those which could be obtained,
would be adequate to maintain its ongoing business during the next year. The
Company's sale of its aftermarket facility took place in April 1997 and yielded
$938,000 cash ($75,000 of which was on deposit as of March 31, 1997). The
Company anticipates capital expenditures of less than $300,000 during fiscal
1998, of which none was committed as of March 31, 1997. In addition to the
Company's liquidity and capital resource positions, the Company believes that it
has the ability to generate cash flows through a number of alternatives,
including utilizing certain fixed asset financing options and the ability to
further reduce operating costs. The Company's bank recently agreed to reaffirm
the Company's $7.0 million secured open line of credit through October 1998.
DIVIDENDS
The Board of Directors did not declare a dividend during fiscal 1997 due to
the Company's operating results. Any future determination as to the payment of
dividends on common stock will depend on future profitability and capital
requirements of the Company and/or on such other factors as the Board of
Directors may consider. The Company intends to retain most of its future
earnings to finance growth and development of its business.
- --------------------------------------------------------------------------------
- - 10 - Environmental Elements Corporation
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
for the years ended March 31, 1997 1996 1995
============================================================================================================================
<S> <C>
Sales................................................... $47,654,000 $61,214,000 $77,923,000
Cost of sales........................................... 41,023,000 54,593,000 69,100,000
----------- ----------- -----------
Gross profit.................................... 6,631,000 6,621,000 8,823,000
----------- ----------- -----------
Selling, general and administrative expenses............ 7,807,000 9,024,000 10,679,000
Restructuring charge.................................... 2,215,000 951,000 --
----------- ----------- -----------
10,022,000 9,975,000 10,679,000
----------- ----------- -----------
Operating loss.................................. (3,391,000) (3,354,000) (1,856,000)
Interest and other expense, net......................... (624,000) (501,000) (179,000)
----------- ----------- -----------
Loss from continuing operations
before income taxes........................... (4,015,000) (3,855,000) (2,035,000)
Provision for income taxes.............................. -- -- 33,000
----------- ----------- -----------
Loss from continuing operations............ (4,015,000) (3,855,000) (2,068,000)
Gain on disposal of discontinued operations, net........ -- 351,000 2,105,000
----------- ----------- -----------
Net income (loss)............................... $(4,015,000) $(3,504,000) $ 37,000
=========== =========== ===========
Per share of common stock and common stock equivalents:
Loss from continuing operations..................... $ (0.58) $ (0.56) $ (0.30)
Income from discontinued operations................. -- -- 0.31
----------- ----------- -----------
Net income (loss)................................... $ (0.58) $ (0.56) $ 0.01
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
Environmental Elements Corporation - 11 -
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
as of March 31, 1997 1996
=================================================================================================================================
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 1,684,000 $ 2,124,000
Accounts and retainage receivable, net of allowance for doubtful
accounts of $113,000 and $296,000 in 1997 and 1996, respectively............ 6,317,000 10,027,000
Unbilled contract costs and fees................................................ 6,248,000 4,825,000
Inventories..................................................................... 967,000 1,451,000
Prepaid expenses and other current assets....................................... 1,990,000 2,011,000
Assets held for sale............................................................ 864,000 --
Net current assets of discontinued operations................................... -- 64,000
------------ ------------
Total Current Assets........................................................ 18,070,000 20,502,000
------------ ------------
Property and equipment:
Capital lease, building and improvements........................................ 6,960,000 8,269,000
Machinery, equipment, furniture and fixtures.................................... 2,809,000 6,527,000
------------ ------------
9,769,000 14,796,000
Less--Accumulated depreciation and amortization................................. 3,326,000 6,092,000
------------ ------------
Property and equipment, net................................................. 6,443,000 8,704,000
------------ ------------
Other assets........................................................................ 894,000 973,000
------------ ------------
Total Assets................................................................ $ 25,407,000 $ 30,179,000
------------ ============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Borrowings under line of credit................................................. $ 2,585,000 $ --
Accounts payable................................................................ 9,724,000 12,186,000
Billings in excess of contract costs and fees................................... 1,660,000 2,391,000
Accrued payroll and related expenses............................................ 618,000 675,000
Accrued and other current liabilities........................................... 1,824,000 1,883,000
Deferred taxes.................................................................. 100,000 100,000
------------ ------------
Total Current Liabilities................................................... 16,511,000 17,235,000
Long-term capital lease obligation.................................................. 2,449,000 2,662,000
Deferred taxes...................................................................... 100,000 100,000
Other non-current liabilities....................................................... 240,000 176,000
Net long-term liabilities of discontinued operations................................ 69,000 155,000
------------ ------------
Total Liabilities........................................................... 19,369,000 20,328,000
Commitments and contingencies ------------ ------------
Stockholders' investment:
Common stock, par value $.01 per share, 6,963,346 shares issued................. 70,000 69,000
Additional paid-in capital...................................................... 27,864,000 27,763,000
Cumulative translation adjustment............................................... (82,000) (136,000)
Retained deficit................................................................ (21,814,000) (17,738,000)
Treasury stock, 17,902 shares held in 1996...................................... -- (107,000)
------------ ------------
Total Stockholders' Investment.............................................. 6,038,000 9,851,000
------------ ------------
Total Liabilities and Stockholders' Investment.............................. $ 25,407,000 $ 30,179,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
- - 12 - Environmental Elements Corporation
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
for the years ended March 31, 1997 1996 1995
===============================================================================================================================
<S> <C>
Cash flows from operating activities:
Net income (loss)...................................................... $(4,015,000) $(3,504,000) $ 37,000
Non-cash items:
Depreciation and amortization...................................... 764,000 1,242,000 969,000
Gain on disposal of discontinued operations,
net of provision for income taxes............................... -- (351,000) (2,105,000)
Deferred tax benefit ............................................. -- -- (100,000)
Stock contributions to savings plan................................ 46,000 87,000 108,000
(Increase) decrease in accounts and retainage receivable, net.......... 3,710,000 8,428,000 (6,757,000)
(Increase) decrease in unbilled contract costs and fees................ (1,423,000) 1,944,000 (3,234,000)
Decrease in inventories............................................... 484,000 783,000 78,000
(Increase) decrease in prepaid expenses and other current assets... (843,000) (755,000) 8,000
Increase (decrease) in accounts payable................................ (2,462,000) (7,032,000) 7,110,000
Increase (decrease) in billings in excess of contract costs and fees.. (731,000) 678,000 (1,494,000)
Increase (decrease) in accrued payroll and related expenses............ (57,000) (461,000) 210,000
Decrease in accrued and other current liabilities...................... (59,000) (2,760,000) (425,000)
Decrease in net liabilities of discontinued operations................. (22,000) (24,000) (682,000)
Increase (decrease) in other non-current liabilities................... 64,000 (425,000) (278,000)
----------- ----------- -----------
Net Cash Flows Used in Operating Activities...................... (4,544,000) (2,150,000) (6,555,000)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from short-term investments................................... -- 2,815,000 3,437,000
Purchases of property and equipment.................................... (99,000) (901,000) (1,984,000)
Disposals of property and equipment, net............................... 1,596,000 -- 200,000
Proceeds from disposal of discontinued operations...................... -- 351,000 3,287,000
(Increase) decrease in other assets.................................... 79,000 (613,000) (33,000)
----------- ----------- -----------
Net Cash Flows Provided by Investing Activities.................. 1,576,000 1,652,000 4,907,000
----------- ----------- -----------
Cash flows from financing activities:
Increase (decrease) in borrowings under line of credit................ 2,585,000 (865,000) 865,000
Issuance of common stock............................................... 102,000 -- --
Payments under capital lease obligation................................ (213,000) (196,000) (179,000)
Change in cumulative translation adjustment............................ 54,000 (65,000) 49,000
----------- ----------- -----------
Net Cash Flows Provided by (Used in) Financing Activities ....... 2,528,000 (1,126,000) 735,000
----------- ----------- -----------
Net Decrease in Cash and Cash Equivalents........................ (440,000) (1,624,000) (913,000)
Cash and Cash Equivalents, beginning of year............................... 2,124,000 3,748,000 4,661,000
----------- ----------- -----------
Cash and Cash Equivalents, end of year..................................... $ 1,684,000 $ 2,124,000 $ 3,748,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
Environmental Elements Corporation - 13 -
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Additional Cumulative Retained
Common Treasury Paid-in Translation Earnings
Changes in Amounts Stock Stock Capital Adjustment (Deficit) Total
================================================================================
<S> <C>
Balance, March 31, 1994 $ 69,000 $(445,000) $27,763,000 $(120,000) $(14,128,000) $13,139,000
Net income................................ -- -- -- -- 37,000 37,000
Issuance of common stock from treasury
under employee savings plan ........... -- 151,000 -- -- (43,000) 108,000
Translation adjustment.................... -- -- -- 49,000 -- 49,000
-------- --------- ----------- --------- ------------ -----------
Balance, March 31, 1995 69,000 (294,000) 27,763,000 (71,000) (14,134,000) 13,333,000
Net loss.................................. -- -- -- -- (3,504,000) (3,504,000)
Issuance of common stock from treasury
under employee savings plan............ -- 187,000 -- -- (100,000) 87,000
Translation adjustment.................... -- -- -- (65,000) -- (65,000)
-------- --------- ----------- --------- ------------ -----------
Balance, March 31, 1996 69,000 (107,000) 27,763,000 (136,000) (17,738,000) 9,851,000
Net loss.................................. -- -- -- -- (4,015,000) (4,015,000)
Issuance of common stock from treasury
under employee savings plan........... -- 107,000 -- -- (61,000) 46,000
Issuance of common stock.................. 1,000 -- 101,000 -- -- 102,000
Translation adjustment.................... -- -- -- 54,000 -- 54,000
-------- --------- ----------- --------- ------------ -----------
Balance, March 31, 1997 $ 70,000 $ -- $27,864,000 $ (82,000) $(21,814,000) $ 6,038,000
======== ========= =========== ========= ============ ===========
</TABLE>
Changes in Common Shares
Balance, March 31, 1994 6,832,366
Issuance of common stock from treasury
under employee savings plan................................. 29,840
---------
Balance, March 31, 1995 6,862,206
Issuance of common stock from treasury
under employee savings plan................................. 40,116
---------
Balance, March 31, 1996 6,902,322
Issuance of common stock from treasury
under employee savings plan................................. 17,902
Issuance of common stock...................................... 43,122
---------
Balance, March 31, 1997 6,963,346
=========
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
- - 14 - Environmental Elements Corporation
<PAGE>
- -------------------==========================================-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The Company (incorporated in Delaware on March 15, 1983) designs and supplies
proprietary, large-scale, custom-engineered air pollution control systems which
enable customers to operate their facilities in compliance with regulatory
standards limiting particulate and gaseous emissions.
The Company's operations depend, among other things, upon the ability to
generate sufficient revenues and gross margins in a competitive market from a
limited number of clients in specific industries. Future operations may be
affected by the level of orders available in the market and obtained by the
Company and its ability to generate sufficient gross margins.
Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation. Preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist primarily of investments in short-term, highly
liquid securities having an original maturity of three months or less at the
time of acquisition. Cash and cash equivalents are stated at cost plus accrued
interest, which approximates market value. As of March 31, 1997 and 1996,
$963,000 and $571,000, respectively, of repurchase agreements were included in
this caption.
Accounts and Retainage Receivable
As of March 31, 1997 and 1996, accounts and retainage receivable, net of
allowance for doubtful accounts, include current accounts receivable of
$5,817,000 and $7,788,000, respectively, and retainage of $500,000 and
$2,239,000, respectively. All retainages as of March 31, 1997 become due in
fiscal 1998, based on applicable contract terms.
Long-Term Contracts
The Company records sales from long-term contracts using the
percentage-of-completion method. Under this method, the Company recognizes as
sales that portion of the total contract price which the cost of work completed
bears to the estimated total cost of the work covered by the contract. Because
contracts may extend over more than one fiscal period, revisions of cost and
profit estimates are made periodically and are reflected in the accounting
period in which they are determined. If the estimate of total costs on a
contract indicates a loss, the total anticipated loss is recognized immediately.
Unbilled contract costs and fees represent sales recognized in excess of
amounts billed. All unbilled contract costs and fees are expected to be
collected in fiscal 1998. Billings in excess of contract costs and fees
represent billings in excess of sales recognized.
The Company provides for warranty expenses on contracts based on estimates
which take into account historical experience. Warranty expenses are included in
cost of sales and in accrued and other current liabilities, respectively, in the
accompanying consolidated financial statements.
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.
- --------------------------------------------------------------------------------
Environmental Elements Corporation - 15 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Property and Equipment
Major improvements are capitalized at cost, while replacements and
maintenance and repairs which do not improve or extend the life of the affected
assets are charged to expense as incurred. Depreciation and amortization of
property and equipment are computed on the straight-line method over estimated
useful lives of three to forty years by major asset class.
Other Assets
In December 1995, the Company made a strategic investment in an international
joint venture. Certain costs incurred to establish licenses and acquire plant
designs, equipment, and other assets have been recorded as other assets in the
accompanying balance sheet and are being amortized over the life of the related
equipment and agreements of 5 to 12 years. As of March 31, 1997 and 1996, costs
related to the joint venture included in other assets totaled approximately
$796,000 and $581,000, respectively.
Financial Instruments
Financial instruments as of March 31, 1997 and 1996, consist of cash and cash
equivalents, accounts and retainage receivables, borrowings under line of
credit, accounts payable, accrued expenses and capital lease obligation, as to
all of which the carrying amounts approximate fair value.
Income Taxes
The Company provides for income taxes using the liability method pursuant to
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes." Deferred income taxes are provided for temporary differences arising
between the tax basis of assets and liabilities and their respective book basis
as reported in the financial statements. Because the Company has operated at a
loss, income taxes are not material to the financial statements.
Per Share Data
Per share data has been presented on a fully diluted basis and is based upon
the weighted average number of shares of common stock outstanding during each
year. Primary per share data for each of the three years ended March 31, 1997,
1996 and 1995 was equal to fully diluted income per share data.
The weighted average number of shares used in the computations of per share
data for each of the years ended March 31, 1997, 1996 and 1995 totaled
6,924,000, 6,880,000, and 6,869,000, respectively.
Reclassification
Certain reclassifications have been made to the prior year's financial
statements in order to conform with current year presentations.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS No. 121 is effective
for financial statements with fiscal years beginning after December 15, 1995.
The adoption of SFAS No. 121 as of April 1, 1996 had no impact on the Company's
financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation." With respect to stock options
granted to employees, SFAS No. 123 permits companies to continue using the
accounting method promulgated by the Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees," to measure
compensation expense or to adopt the fair value based method prescribed by SFAS
No. 123. If APB No. 25's method is
- --------------------------------------------------------------------------------
- - 16 - Environmental Elements Corporation
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
continued, pro forma disclosures are required as if SFAS No. 123 accounting
provisions were followed. Management has elected to continue to measure
compensation expense under APB No. 25, with pro forma footnote disclosures of
the expense under the SFAS No. 123 method. (See Note 5.)
During February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earning Per Share," which becomes effective for financial statements
issued for periods ending after 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 the dilutive effect of common stock equivalents will not
be considered in the compilation of basic earnings per share) and diluted
earnings per share, which is equal to the current data presented on a fully
diluted basis. The adoption of this pronouncement will require restatement of
all prior-period earnings per share data presented.
Note 2
DISCONTINUED OPERATIONS
Prior to fiscal year 1990, the Company adopted plans to dispose of the Sound
Control Systems division (SCS) and the Water Treatment Privatization Project. As
a result, the accompanying consolidated financial statements include only the
Company's Air Pollution Control Systems business in continuing operations.
During fiscal year 1995, the Company sold its Water Treatment Privatization
Project. The Company retained certain operating responsibilities and contingent
liabilities until final turnover of the plant which took place in fiscal 1997.
During fiscal 1996, the Company received an additional payment of $351,000 in
connection with this sale. The 1995 gain on the transaction and the 1996
additional payment have been recorded in the "Gain on disposal of discontinued
operations, net" caption in the Consolidated Statements of Operations. No
further material payments are expected in connection with this transaction.
Note 3
CREDIT FACILITY
The Company and its subsidiaries have a bank credit facility, secured by
certain assets, and provides for revolving line of credit borrowings and letters
of credit issuances of up to $7,000,000, with interest charges at the bank's
prime rate plus 1/2% (9.0% at March 31, 1997). At March 31, 1997, borrowings of
$2,585,000 were outstanding under this facility, and a total of $1,866,000 of
letters of credit were outstanding. The credit facility expires on October 25,
1998. Under the provisions of the credit facility, the Company must comply with
certain financial and other covenants. At March 31, 1997, the Company was in
compliance with, or had obtained waivers for these covenants, through April 1,
1998.
During fiscal years 1997, 1996, and 1995, the maximum borrowings under lines
of credit totaled $5,500,000, $4,365,000, and $3,020,000, respectively. Average
borrowings during such years were $3,615,000, $1,363,000, and $898,000, and the
weighted average interest rates on such borrowings were 8.8%, 9.0%, and 7.7% in
fiscal years 1997, 1996 and 1995, respectively.
Note 4
INCOME TAXES
As of March 31, 1997, the Company had available, for Federal tax purposes,
estimated net operating loss carryforwards of approximately $ 22,285,000 to
offset future taxable income. The carryforwards will expire between 2008 and
2011. As of March 31, 1997, the Company also had an alternative minimum tax
credit carryforward of approximately $498,000 which has no expiration date. As
of March 31, 1997 and 1996, the Company had alternative minimum tax net
operating loss carryforwards of approximately $21,829,000 and $16,650,000,
respectively.
The provisions for income taxes included in results from continuing
operations as well as provisions in the amount of $100,000 in 1995 included in
the gain from disposition of discontinued operations are primarily related to
current state income taxes.
- --------------------------------------------------------------------------------
Environmental Elements Corporation - 17 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The reconciliation of the provision for income taxes computed at statutory
rates to the provision for income taxes provided on loss from continuing
operations consists primarily of a valuation reserve equal to Federal taxes at
the statutory rate, since the recovery of tax loss carryforwards is dependent on
profitable future operations. Other reconciling items are not material to the
financial statements.
The significant components of the deferred tax asset (liability), stated by
source of the difference between financial accounting and tax basis as of March
31, 1997 and 1996 are as follows:
Deferred income tax assets (liabilities):
- --------------------------------------------------------------------------------
1997 1996
================================================================================
Operating loss carryforward and tax credits .... $ 9,096,000 $ 6,988,000
Reserves, accrued liabilities and other......... 513,000 1,060,000
Valuation allowance............................. (9,525,000) (7,712,000)
Property, plant, equipment and other............ (284,000) (536,000)
------------ ------------
Net deferred income tax liability.......... $ (200,000) $ (200,000)
============ ============
Note 5
EMPLOYEE BENEFIT PLANS
Pension Plan
The Company maintains a defined benefit pension plan covering the majority of
employees. Contributions to the plan are based on the actuarially determined
costs thereof, and the Company's funding policy has been to contribute an amount
at least sufficient to meet the funding standards under the Employee Retirement
Income Security Act of 1974. Contributions are intended to provide not only for
benefits attributed to service to date, but also for those expected to be earned
in the future.
Pension expense for the years ended March 31, 1997, 1996, and 1995 consisted
of:
- --------------------------------------------------------------------------------
1997 1996 1995
================================================================================
Service............................ $ 360,000 $ 322,000 $ 494,000
Net amortization and deferral...... 122,000 120,000 (543,000)
Interest cost...................... 644,000 620,000 527,000
Actual return on asset............. (733,000) (722,000) (21,000)
---------- ---------- ----------
Net pension expense........... $ 393,000 $ 340,000 $ 457,000
========= ========== ==========
The funded status of the Plan as of the most recent actuarial valuation was:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
12/31/96 12/31/95
==================================================================================================================
<S> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$8,221,000 and $7,657,000 in 1997 and 1996, respectively......................... $8,428,000 $7,817,000
Projected benefit obligation for services rendered to date........................... $8,777,000 $8,149,000
Plan assets, consisting primarily of fixed income investments, at fair value......... 8,999,000 7,884,000
Projected benefit obligation less than or (in excess of) plan assets................. 222,000 (265,000)
---------- -----------
Unrecognized net loss from past experience different from that assumed
and changes in assumptions....................................................... 567,000 623,000
Prior service cost not yet recognized in net periodic cost........................... 310,000 358,000
Unrecognized net asset at transition................................................. -- (23,000)
---------- -----------
Prepaid pension cost................................................................. $1,099,000 $ 693,000
========== ===========
</TABLE>
For purposes of determining the actuarial present value of the projected
benefit obligation, weighted average discount rates of 8.1% were used in 1997
and 1996. Rates of increase in future compensation levels between 3.5% and 6.5%,
and an 8% expected long-term rate of return on plan assets were assumed for both
years.
- --------------------------------------------------------------------------------
- - 18 - Environmental Elements Corporation
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Savings Plan
The Company's Retirement Savings Plan (the "Savings Plan") is qualified under
sections 401(a) and 401(k) of the Internal Revenue Code. All employees of the
Company are eligible to participate in the Savings Plan upon completion of six
months of employment. Under the Savings Plan's salary deferral provisions,
participating employees may elect to defer specified portions of their
compensation. Elective contributions made by employees are fully vested at all
times. The Company makes matching contributions in the form of shares of common
stock at the rate of 50% of the first 3% of each participant's compensation
which is deferred for each calendar year. Employees fully vest in Company
contributions after the completion of five years of service. Contributions by
the Company were $83,000, $87,000, and $107,000 in 1997, 1996, and 1995,
respectively.
Stock Option Plan
The Company's Stock Option plan authorizes the granting to employees of
options to purchase up to an aggregate of 650,000 shares of common stock at
prices not less than fair market value at the date of grant. Options prior to
1995 may not be exercised during the first year after grant, and generally
thereafter 20% of the options granted become exercisable on each of the first
through fifth anniversaries of grant. For options granted after 1995, 20% are
exercisable immediately along with 20% on each of the four anniversaries.
Options granted expire between five and ten years from the date of grant. As of
March 31, 1997, the weighted average exercise price for outstanding options was
$3.74 per share and expiration dates ranged from December 21, 1999 to July 31,
2005. The options price range per share is $2.13 to $17.00.
Changes in outstanding stock options during the year were:
- --------------------------------------------------------------------------------
1997 1996 1995
================================================================================
Outstanding March 31,........ 515,000 465,000 396,000
Granted...................... 181,000 83,000 102,000
Exercised.................... (11,000) -- --
Cancelled.................... (254,000) (33,000) (33,000)
--------- -------- --------
Outstanding March 31,........ 431,000 515,000 465,000
========= ======== ========
There were options for a total of 185,000 shares exercisable as of March 31,
1997 at a weighted average price of $4.44 per share.
The Company has computed for pro forma disclosure purposes the value of all
compensatory options granted during fiscal year 1996 and 1997, using
Black-Scholes option pricing model as prescribed by SFAS No. 123. Assumptions
used for the pricing model include 6.0% for the risk-free interest rate for
1996 and 1997, expected lives of 5 years, expected dividend yield of 0% each
year and expected volatility of 61% each year. Options were assumed to be
exercised upon vesting for the purposes of this valuation. Adjustments are
made for options forfeited prior to vesting. Had compensation costs for
compensatory options been determined consistent with SFAS No. 123, the Company's
pro forma net loss would have been $(4,106,000) and $(3,532,000) in fiscal years
1997 and 1996, respectively. Pro forma loss per share would have been $(0.59)
and $(0.51) in fiscal years 1997 and 1996, respectively.
Note 6
COMMITMENTS AND CONTINGENCIES
Commitments
The principal office facilities of the Company and its subsidiaries are
occupied under a lease expiring in January 2002, with bargain renewal periods
extending to January 2037. The lease has been capitalized
- --------------------------------------------------------------------------------
Environmental Elements Corporation - 19 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
using an 8.9% interest rate. Principal and interest on this lease commitment are
being amortized using the effective-interest method.
Future payments under the office building lease are $445,000 per year through
2002, and total, with bargain renewal options, $7,293,000. Of this amount,
$4,631,000 represents imputed interest and the balance of $2,662,000 as of March
31, 1997 is included in the consolidated financial statements as a current
liability ($213,000) and a long-term capital lease obligation ($2,449,000).
The Company and certain subsidiaries use office facilities and equipment
under operating leases. Rent expense for the years ended March 31, 1997, 1996,
and 1995 totaled $191,000, $155,000, and $146,000, respectively.
Litigation
The Company is, from time to time, a party to various legal actions arising
in the ordinary course of its business, some of which may involve claims for
substantial sums. In management's opinion, the resolution of these matters will
not have a material adverse effect on the Company's financial position.
Post-Employment Benefits
The Company provides limited health care and life insurance benefits for
certain employees upon retirement. In addition, employees terminated in
connection with the elimination of manufacturing operations in prior years were
eligible to receive certain health care and life insurance benefits upon
termination. These benefit plans are not funded.
The Company has determined that the total liability for post-retirement and
post-termination health care and life insurance benefits at March 31, 1997,
1996, and 1995 was $301,000, $211,000, and $594,000, respectively. The accrual
is determined by application of the terms of the current benefit plans, effects
of Medicare for eligible employees, relevant actuarial assumptions and
health-care cost trend rates projected at an annual rate of 5%. A 1% increase in
the annual trend rate would increase the accumulated post-retirement benefit
obligation by approximately $6,000; the annual costs would not be materially
affected. There is no effect on cash flow as a result of current recognition of
future post-retirement benefits.
Concentration of Credit Risk and Major Customers
As of March 31, 1997, approximately 63% of the Company's accounts and
retainages receivable were due from companies in the pulp and paper industry and
13% were due from companies in the power industry. Three customers accounted for
33% of the Company's sales in fiscal 1997; one customer accounted for 21% of the
Company's sales in fiscal 1996; another customer accounted for 10% of the
Company's sales in fiscal year 1995.
Note 7
RESTRUCTURING CHARGES
During fiscal year 1996, the Company recorded a restructuring charge of
$951,000 reflecting a series of actions the Company took which included the
relocation of its aftermarket operations from Jeffersonville, Indiana to its
office in Baltimore, the de-emphasis of direct hire fabrication and construction
activities and a corresponding emphasis on its aftermarket parts, services and
materials businesses, and the closing of its office in the United Kingdom.
During fiscal year 1997, the Company identified costs associated with those
matters of $2.2 million in excess of the amount recorded as a restructuring
charge in fiscal year 1996. Accordingly, the Company recorded an additional
charge of $2.2 million during fiscal year 1997 which represents the excess of
expected final costs (related primarily to loss on disposition of property and
cessation of operations) over costs estimated in fiscal year 1996. The sale of
the facilities took place during the first quarter of fiscal year 1998. As of
March 31, 1997, a restructuring reserve of approximately $122,000 remained and
is included in accrued and other current liabilities in the accompanying balance
sheet.
- --------------------------------------------------------------------------------
- - 20 - Environmental Elements Corporation
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8
ACQUISITION
In fiscal year 1995, the Company acquired certain assets of Field Service
Associates, Inc., which provides construction, repair and replacement parts
services for air cleaning equipment. The cash purchase was completed for a cost
of $314,000.
Note 9
SUPPLEMENTAL CASH FLOW INFORMATION
In non-cash financing transactions, the Company issued 17,902 treasury
shares, 40,116 treasury shares, and 29,840 treasury shares in fiscal 1997, 1996,
and 1995, respectively, as matching contributions under its Savings Plan. As a
result, retained earnings decreased $61,000, $100,000, and $43,000 in 1997, 1996
and 1995, respectively.
Amounts paid for interest during the years ended March 31, 1997, 1996, and
1995 were $615,000, $360,000, and $392,000, respectively. Amounts paid for
income taxes in fiscal year 1997 and 1996 were $14,000 and $133,000,
respectively. In fiscal year 1995, the Company had a net tax cash benefit of
$30,000.
Note 10
QUARTERLY AND SELECTED FINANCIAL DATA [UNAUDITED]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
fiscal year 1997 quarters ended 3/31/97 12/31/96 9/30/96 6/30/96
================================================================================================================
<S> <C>
Sales............................................. $11,835,000 $10,062,000 $11,784,000 $13,973,000
Gross profit...................................... 2,097,000 856,000 1,440,000 2,238,000
Net income (loss)................................. $ 51,000 $(3,469,000) $ (642,000) $ 45,000
Income (loss) per share
Continuing operations........................... $ .01 $ (.50) $ (.09) $ .01
Net income (loss) per share..................... $ .01 $ (.50) $ (.09) $ .01
Stock price.......................................
High.......................................... $ 3-3/4 $ 2-5/8 $ 2-5/8 $ 2-1/2
Low........................................... $ 2-1/8 $ 2-1/4 $ 2-1/4 $ 1-5/8
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
fiscal year 1996 quarters ended 3/31/96 12/31/95 9/30/95 6/30/95
================================================================================================================
<S> <C>
Sales............................................. $13,604,000 $12,830,000 $16,085,000 $18,695,000
Gross profit...................................... 1,488,000 1,934,000 1,405,000 1,794,000
Net income (loss) ................................ $ (437,000) $ (206,000) $(2,252,000) $ (609,000)
Income (loss) per share
Continuing operations........................... $ (.06) $ (.03) $ (.33) $ (.14)
Discontinued operations......................... -- -- -- .05
Net income (loss) per share....................... $ (.06) $ (.03) $ (.33) $ (.09)
Stock price.......................................
High.......................................... $ 2-5/8 $ 2-1/4 $ 3-1/2 $ 3
Low........................................... $ 2 $ 1-5/8 $ 2 $ 2-1/2
</TABLE>
- --------------------------------------------------------------------------------
Environmental Elements Corporation - 21 -
<PAGE>
- --------------====================================================--------------
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The consolidated financial statements of Environmental Elements Corporation
and subsidiaries have been prepared by the Company in accordance with generally
accepted accounting principles. The financial information presented is the
responsibility of management and accordingly includes amounts upon which
judgment has been applied, or estimates made, based on the best information
available.
The financial statements have been audited by Arthur Andersen LLP,
independent public accountants, for each of the three years in the period ended
March 31, 1997.
The consolidated financial statements, in the opinion of management, present
fairly the financial position, results of operations and cash flows of the
Company as of the stated dates and for the stated periods in conformity with
generally accepted accounting principles. The Company believes that its
accounting systems and related internal controls used to record and report
financial information provide reasonable assurance that financial records are
reliable and that transactions are recorded in accordance with established
policies and procedures.
/s/ E. H. Verdery
-----------------------
E. H. Verdery
Chairman and
Chief Executive Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors and Shareholders of
Environmental Elements Corporation:
We have audited the accompanying consolidated balance sheets of Environmental
Elements Corporation (a Delaware corporation) and subsidiaries as of March 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' investment and cash flows for each of the three years in the
period ended March 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Environmental Elements
Corporation and subsidiaries as of March 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Baltimore, Maryland
May 19, 1997
- --------------------------------------------------------------------------------
- - 22 - Environmental Elements Corporation
<PAGE>
- ----------------------====================================----------------------
SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
for the years ended March 31, 1997 1996 1995 1994 1993
====================================================================================================================================
<S> <C>
Consolidated Statements of Operations Data
Sales............................................ $47,654,000 $61,214,000 $77,923,000 $72,567,000 $ 80,721,000
Cost of sales.................................... 41,023,000 54,593,000 69,100,000 65,946,000 78,179,000
----------- ----------- ----------- ----------- ------------
Gross Profit............................. 6,631,000 6,621,000 8,823,000 6,621,000 2,542,000
----------- ----------- ----------- ----------- ------------
Selling, general & administrative expense........ 7,807,000 9,024,000 10,679,000 11,698,000 12,930,000
Restructuring charge............................. 2,215,000 951,000 -- 1,815,000 1,039,000
----------- ----------- ----------- ----------- ------------
10,022,000 9,975,000 10,679,000 13,513,000 13,969,000
----------- ----------- ----------- ----------- ------------
Operating Loss........................... (3,391,000) (3,354,000) (1,856,000) (6,892,000) (11,427,000)
Interest and other expense, net ................. (624,000) (501,000) (179,000) 104,000 78,000
----------- ----------- ----------- ----------- ------------
Loss from continuing
operations before Income Taxes........ (4,015,000) (3,855,000) (2,035,000) (6,788,000) (11,349,000)
Provision for income tax ....................... -- -- 33,000 57,000 54,000
----------- ----------- ----------- ----------- ------------
Loss from
continuing operations.................. (4,015,000) (3,855,000) (2,068,000) (6,845,000) (11,403,000)
Net effect of discontinued operations............ -- 351,000 2,105,000 41,000 676,000
Cumulative effect of change
in accounting principle....................... -- -- -- -- (515,000)
----------- ----------- ----------- ----------- ------------
Net Income (Loss)........................ $(4,015,000) $(3,504,000) $ 37,000 $(6,804,000) $(11,242,000)
=========== =========== =========== =========== ============
Earnings per share:
From Continuing Operations............... $ (0.58) $ (0.56) $ (0.30) $ (0.99) $ (1.62)
Net Income (Loss)........................ $ (0.58) $ (0.51) $ 0.01 $ (0.98) $ (1.60)
Average shares outstanding....................... 6,924,000 6,880,000 6,869,000 6,912,000 7,035,000
Balance Sheet Data
Working capital.................................. $ 1,559,000 $ 3,267,000 $ 7,670,000 $ 8,864,000 $ 16,898,000
Total assets..................................... 25,407,000 30,179,000 45,234,000 39,173,000 53,149,000
Short-term debt.................................. 2,798,000 195,000 1,044,000 164,000 150,000
Long-term debt .................................. 2,449,000 2,662,000 2,858,000 3,037,000 3,201,000
Stockholders' investment......................... $ 6,038,000 $ 9,851,000 $13,333,000 $13,139,000 $ 20,276,000
=========== =========== =========== =========== ============
</TABLE>
- --------------------------------------------------------------------------------
Environmental Elements Corporation - 23 -
<PAGE>
- --------------------========================================--------------------
BOARD OF DIRECTORS AND SENIOR MANAGEMENT
- --------------------------------------------------------------------------------
----------------------------------
[Photograph appears here]
----------------------------------
<TABLE>
<S> <C>
BOARD OF DIRECTORS
Fred Hittman+* Richard E. Hug+*++ Russell R. Jones+*
President & Chief Executive Officer Chairman Emeritus Former General Manager
Hittman Materials & Environmental Elements Bethlehem Steel Company
Medical Components, Inc. Corporation Sparrows Point Plant
Samuel T. Woodside+*++ John C. Nichols F. Bradford Smith*++
President & Chief Executive Officer Secretary Former Chairman of the Board
Energy Controls International Environmental Elements Environmental Elements
Corporation Corporation
Edward H. Verdery++
Chairman & Chief Executive Officer
Environmental Elements Corporation
(+) Audit Committee (*) Compensation Committee (++) Strategic Planning Committee
SENIOR MANAGEMENT
Edward H. Verdery S. Michael Dunseith James B. Sinclair
Chairman & Chief Executive Officer Senior Vice President of Vice President &
Business Development Chief Financial Officer
Printed on Recycled Paper
[Recycled logo]
</TABLE>
- --------------------------------------------------------------------------------
- - 24 - Environmental Elements Corporation
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,684,000
<SECURITIES> 0
<RECEIVABLES> 12,565,000
<ALLOWANCES> 0
<INVENTORY> 967,000
<CURRENT-ASSETS> 18,070,000
<PP&E> 9,769,000
<DEPRECIATION> 3,326,000
<TOTAL-ASSETS> 25,407,000
<CURRENT-LIABILITIES> 16,511,000
<BONDS> 0
0
0
<COMMON> 70,000
<OTHER-SE> 5,968,000
<TOTAL-LIABILITY-AND-EQUITY> 25,407,000
<SALES> 47,654,000
<TOTAL-REVENUES> 47,654,000
<CGS> 41,023,000
<TOTAL-COSTS> 10,022,000
<OTHER-EXPENSES> 624,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,015,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,015,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,015,000)
<EPS-PRIMARY> (.58)
<EPS-DILUTED> (.58)
</TABLE>
