SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended
December 31, 1996
Commission File Number 1-10955
ENVIRONMENTAL ELEMENTS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-1303748
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3700 Koppers St., Baltimore, Maryland 21227
(Address of Principal Executive Offices) (Zip Code)
(410) 368-7000
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
6,941,170 shares of common stock, $.01 par value per share, as of January 31,
1997.
<PAGE>
ENVIRONMENTAL ELEMENTS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 1996
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 1996 and March 31, 1996 ................... 3
Consolidated Statements of Operations for
the Periods Ended December 31, 1996 and 1995 ........... 4
Consolidated Statements of Cash Flows for
the Nine Months Ended December 31, 1996 and 1995 ....... 5
Notes to Consolidated Financial Statements ................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 8
PART II: OTHER INFORMATION
Item 6. ........................................................... 11
Certain of the statements included in this Form 10-Q are forward-looking
statements. These statements involve risks and uncertainties that could cause
the actual results to differ from those expressed or implied by such statements.
These factors include loss of new orders, increased competition, changes in
environmental regulations, and other factors, including but not limited to,
continued operating losses, further declines in markets for the Company's
products and services, and insufficient capital resources. Information on
factors that could affect the Company's financial results are set forth in the
Company's filings with the Securities and Exchange Commission including the
report on Form 10-K for the Company's fiscal year ended March 31, 1996.
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
Environmental Elements Corporation and Subsidiaries
Consolidated Balance Sheets
As of December 31, 1996 and March 31, 1996
<TABLE>
<CAPTION>
December 31, March 31,
1996 1996
(Unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 1,153,000 $ 2,124,000
Accounts and retainages receivable, net of allowance for doubtful
accounts of $125,000 and $296,000, respectively................. 9,780,000 10,027,000
Unbilled contract costs and fees.................................. 5,375,000 4,825,000
Inventories....................................................... 1,105,000 1,451,000
Prepaid expenses and other current assets......................... 1,918,000 2,011,000
Net current assets of discontinued operations..................... -- 64,000
____________ ____________
Total Current Assets.......................................... 19,331,000 20,502,000
____________ ____________
Property and equipment:
Capital lease, building and improvements.......................... 8,238,000 8,269,000
Machinery, equipment, furniture and fixtures...................... 3,703,000 6,527,000
____________ ____________
11,941,000 14,796,000
Less - Accumulated depreciation and amortization.................. 4,055,000 6,092,000
____________ ____________
Property and Equipment, Net................................... 7,886,000 8,704,000
Other assets.......................................................... 981,000 973,000
____________ ____________
Total Assets.................................................. $ 28,198,000 $ 30,179,000
____________ ____________
LIABILITIES AND SHAREHOLDERS' INVESTMENT Current liabilities:
Borrowings under line of credit................................... $ 5,500,000 $ --
Accounts payable.................................................. 8,297,000 12,186,000
Billings in excess of contract costs and fees..................... 2,443,000 2,391,000
Accrued payroll and related expenses ............................. 489,000 675,000
Accrued and other current liabilities............................. 2,365,000 1,883,000
Deferred taxes.................................................... 100,000 100,000
____________ ____________
Total Current Liabilities..................................... 19,194,000 17,235,000
Long-term capital lease obligation.................................... 2,558,000 2,662,000
Deferred taxes........................................................ 100,000 100,000
Other non-current liabilities......................................... 237,000 176,000
Net long-term liabilities of discontinued operations.................. 154,000 155,000
Commitments and contingencies
____________ ____________
Total Liabilities............................................. 22,243,000 20,328,000
____________ ____________
Shareholders' investment:
Common stock...................................................... 69,000 69,000
Paid-in capital................................................... 27,811,000 27,763,000
Cumulative translation adjustment................................. (56,000) (136,000)
Retained deficit.................................................. (21,861,000) (17,738,000)
Treasury stock, at cost........................................... (8,000) (107,000)
____________ ____________
Total Shareholders' Investment................................ 5,955,000 9,851,000
____________ ____________
Total Liabilities and Shareholders' Investment................ $ 28,198,000 $ 30,179,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE>
Environmental Elements Corporation and Subsidiaries
Consolidated Statements of Operations
For the Periods Ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1996 1995 1996 1995
<S> <C>
Sales..................................................... $10,062,000 $12,830,000 $35,819,000 $47,610,000
Cost of sales............................................. 9,206,000 10,896,000 31,285,000 42,477,000
___________ ___________ ___________ ___________
Gross Profit...................................... 856,000 1,934,000 4,534,000 5,133,000
___________ ___________ ___________ ___________
Selling, general and administrative expenses.............. 1,927,000 2,046,000 5,910,000 7,368,000
Restructuring charge...................................... 2,215,000 -- 2,215,000 950,000
___________ ___________ ___________ ___________
4,142,000 2,046,000 8,125,000 8,318,000
___________ ___________ ___________ ___________
Operating Loss.................................... (3,286,000) (112,000) (3,591,000) (3,185,000)
Interest and other expense, net of income................. (183,000) (94,000) (475,000) (233,000)
___________ ___________ ___________ ___________
Loss from Continuing Operations
before Income Taxes............................ (3,469,000) (206,000) (4,066,000) (3,418,000)
Provision for income taxes................................ -- -- -- --
___________ ___________ ___________ ___________
Loss from Continuing Operations................... (3,469,000) (206,000) (4,066,000) (3,418,000)
Gain on disposal of discontinued
operations, net......................................... -- -- -- 351,000
___________ ___________ ___________ ___________
Net Loss.......................................... $(3,469,000) $ (206,000) $(4,066,000) $(3,067,000)
___________ ___________ ___________ ___________
Per share of common stock and common stock equivalents:
Loss from continuing operations....................... $ (0.50) $ (0.03) $ (0.59) $ (0.50)
Income from discontinued operations................... 0.00 0.00 0.00 0.05
___________ ___________ ___________ ___________
Net Loss.......................................... $ (0.50) $ (0.03) $ (0.59) $ (0.45)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE>
Environmental Elements Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
<S> <C>
Cash flows from operating activities:
Net loss........................................................... $(4,066,000) $(3,067,000)
Non-cash items:
Depreciation and amortization.................................. 571,000 920,000
Gain on disposal of discontinued operations, net............... -- (351,000)
Loss on disposal of assets..................................... 575,000 --
Stock contribution to savings plan............................. 42,000 64,000
Decrease in accounts and retainages receivable, net................ 247,000 7,693,000
(Increase) decrease in unbilled contract costs and fees............ (550,000) 3,900,000
Decrease in inventories............................................ 346,000 258,000
(Increase) decrease in prepaid expenses and other current assets... 93,000 (443,000)
Decrease in accounts payable....................................... (3,889,000) (9,733,000)
Increase in billings in excess of contract costs and fees.......... 52,000 1,065,000
Decrease in accrued payroll and related expenses................... (186,000) (714,000)
Increase (decrease) in accrued and other current liabilities....... 482,000 (1,497,000)
Decrease in net assets of discontinued operations.................. 63,000 305,000
Increase (decrease) in other non-current liabilities............... 61,000 (3,000)
___________ ___________
Net Cash Flows Used in Operating Activities.................... (6,159,000) (1,603,000)
___________ ___________
Cash flows from investing activities:
Decrease in short-term investments................................. -- 2,047,000
Additions to property and equipment................................ (328,000) (681,000)
Increase in other assets........................................... (8,000) (14,000)
Proceeds from disposal of discontinued operations.................. -- 351,000
___________ ___________
Net Cash Flows Used in Investing Activities.................... (336,000) 1,703,000
___________ ___________
Cash flows from financing activities:
Increase (decrease) in borrowings under line of credit............. 5,500,000 (865,000)
Change in cumulative translation adjustment........................ 80,000 33,000
Payments under capital lease obligation............................ (104,000) (96,000)
Issuance of common stock........................................... 48,000 --
___________ ___________
Net Cash Flows Provided by (Used in) Financing Activities 5,524,000 (928,000)
___________ ___________
Net Decrease in Cash and Cash Equivalents (971,000) (828,000)
Cash and cash equivalents, beginning of period......................... 2,124,000) 3,748,000
___________ ___________
Cash and cash equivalents, end of period............................... $ 1,153,000 $ 2,920,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
ENVIRONMENTAL ELEMENTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL INFORMATION:
The interim consolidated financial statements included herein for
Environmental Elements Corporation and Subsidiaries (the Company) have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In management's
opinion, the interim financial data presented herein include all adjustments
(which include only normal recurring adjustments) necessary for a fair
presentation. Certain information and footnote disclosures normally included
in the consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Results for interim periods are not
necessarily indicative of results to be expected for the full year.
2. PER SHARE DATA:
Per share data has been presented on a fully diluted basis and is based upon
the combined weighted average number of shares of common stock outstanding
during each quarter. The weighted average number of shares used in the
computations of per share data for the quarters ended December 31, 1996 and
1995 totaled 6,924,000 and 6,884,000, respectively. The weighted average
number of shares used in the computations of per share data for the nine
months ended December 31, 1996 and 1995 totaled 6,913,000 and 6,875,000,
respectively.
3. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist principally of purchased parts held for use in contracts
and as spare parts.
4. SUPPLEMENTAL CASH FLOW INFORMATION:
In non-cash financing transactions during the nine months ended December 31,
1996 and 1995, the Company issued 16,260 and 25,565 treasury shares,
respectively, of its common stock as matching contributions under its 401k
savings plan. As a result of this issuance, retained earnings decreased
$57,000 and $65,000 during the nine months ended December 31, 1996 and 1995,
respectively. The Company's shares in treasury are intended to be used for
matching shares in the Company's 401k savings plan and for employee stock
options.
In December 1996 the Company issued 22,588 shares of common stock to its
outside directors as payment of annual directors' fees.
Amounts paid in cash for interest during the nine months ended December 31,
1996 and 1995 were $401,000 and $253,000, respectively. Amounts paid for
income taxes in the nine months ended December 31, 1996 and 1995 were
$12,000 and $138,000 respectively.
6
<PAGE>
5. RESTRUCTURING
During the quarter ended September 30, 1995, the Company took a series of
actions 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 the quarter ended
December 31, 1996, the Company identified costs associated with those
matters of $2.2 million in excess of the amount recorded as a restructuring
charge in the September 1995 quarter. Accordingly, the Company has recorded
an additional charge of $2.2 million in the quarter ended December 31, 1996
which represents the excess of expected final costs (related primarily to
loss on disposition of property and cessation of operations) over costs
estimated in September 1995. The final disposition of facilities and
equipment is expected to result in positive cash flow of approximately $1.2
million during the period beginning January 1, 1997.
6. RECLASSIFICATIONS:
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year presentation.
7
<PAGE>
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
The following information should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in
this Quarterly Report and the audited Financial Statements and Management's
Discussion and Analysis contained in the Company's Form 10-K for the fiscal
year ended March 31, 1996.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationships to sales of
selected items in the Company's consolidated statements of operations
(unaudited) for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C>
Sales.................................................... 100.0% 100.0% 100.0% 100.0%
Cost of Sales............................................ 91.5 85.0 87.3 89.2
---- ---- ---- ----
Gross Profit...................................... 8.5 15.0 12.7 10.8
Selling, general and administrative expenses............. 19.2 15.9 16.5 15.5
Restructuring charge..................................... 22.0 - 6.2 2.0
---- ---- ---- ----
Operating Loss.................................... (32.7%) (.9%) (10.0%) (6.7%)
---- ---- ---- ----
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO
THREE MONTHS ENDED DECEMBER 31, 1995
Sales decreased 22% or $2,768,000 to $10,062,000 from $12,830,000. This
decrease in sales reflects contract booking activity, job progress and
inclusion, in 1995, of sales of direct hire construction activities, a
business segment the Company substantially exited in late fiscal 1996.
Cost of sales decreased 16% or $1,690,000 to $9,206,000 from $10,896,000.
While cost of sales decreased, such costs increased as a percent of sales
due primarily to provisions for estimated costs associated with the final
close out of three contracts.
Selling, general and administrative expenses decreased 6% or $119,000 to
$1,927,000 from $2,046,000 primarily as a result of the Company's
restructuring in the third quarter of fiscal 1996 and the resultant
reductions in business costs.
During the quarter ended September 30, 1995, the Company took a series of
actions 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. The Company recorded a
charge of $950,000 in
8
<PAGE>
the quarter ended September 30, 1995 representing the estimated cost of
these actions. Since that time the Company has been engaged in the
final disposition of facilities and equipment related to the
Jeffersonville-based aftermarket operation, in the final determination of
costs associated with certain direct hire construction activities, and in
the final wind up of certain other aftermarket activities and accounts.
During the quarter ended December 31, 1996, the Company identified costs
associated with those matters of $2.2 million in excess of the amount
recorded as a restructuring charge in the September 1995 quarter.
Accordingly, the Company has recorded an additional charge of $2.2 million
in the quarter ended December 31, 1996 which represents the excess of
expected final costs (related primarily to loss on disposition of property
and cessation of operations) over costs estimated in September 1995. Signed
real estate contracts for the sale of the facilities are in hand, and the
final disposition of facilities and equipment is expected to be completed
before or shortly after the Company's March 31, 1997 fiscal year end. The
final disposition is expected to result in positive cash flow of
approximately $1.2 million during the period beginning January 1, 1997.
Interest and other expense, net of income, increased $89,000. The net
increase is primarily a result of an increase in interest expense due to
increased borrowings on the Company's line of credit.
There was no provision for income taxes in either quarter reported.
NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO
NINE MONTHS ENDED DECEMBER 31, 1995
Sales decreased 25% or $11,791,000 to $35,819,000 from $47,610,000 due
primarily to booking activity, job progress and inclusion, in 1995, of sales
of direct hire construction activities, a business segment the Company
substantially exited in late fiscal 1996.
Cost of sales decreased 26% or $11,192,000 to $31,285,000 from $42,477,000,
primarily as a result of the sales decrease. Cost of sales as a percentage
of sales improved due to the absence in fiscal 1997 of low margin direct
hire construction work, which the Company exited in late fiscal 1996, offset
somewhat by the estimated contract close out costs discussed above.
Selling, general and administrative expenses decreased 20% or $1,458,000 to
$5,910,000 from $7,368,000 primarily as a result of the Company's
restructuring in the third quarter of fiscal 1996 and the resultant
reductions in business costs. Selling, general and administrative expenses
as a percentage of sales remained essentially constant due to the decrease
in expenses and sales.
Interest and other expense, net of income, increased $242,000. The net
increase is primarily a result of an increase in interest expense due to
increased borrowings on the Company's line of credit.
There was no provision for income taxes in either period reported.
The fiscal 1995 gain on disposal of discontinued operations of $351,000 was
due primarily to collection of a contingent purchase price related to the
prior sale of the Company's Water Treatment Privatization Project.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents declined by $971,000 and borrowings under the
Company's line of credit increased by $5.5 million during the nine months
ended December 31, 1996. This was caused principally by: (1) a $4.1 million
increase in the Company's net working capital investment in contracts in
process; and (2) the Company's $4.1 million net loss for the nine months
ended December 31, 1996. Historically the Company has required minimal
investment in net working capital in contracts, but it does experience
fluctuations in these amounts depending upon the stage of completion of its
various contracts and upon the payment terms negotiated as a part of the
overall original contract terms and conditions. ("Net working capital
invested in contracts" consists of accounts and retainages receivable plus
unbilled contract costs and fees, minus accounts payable and minus billings
in excess of contract costs and fees. These net amounts were $4.4 million
and $275,000 at December 31, 1996 and March 31, 1996, respectively.) The
Company seeks to manage project cash flows in its payment terms negotiations
with customers and suppliers, and in adherence to project budgets and
schedules.
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 the nine months
ended December 31, 1996, 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
materialize or continue, or that the actions taken will result in breakeven
operations. If the Company were 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. 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 approximately $1.2 million of net proceeds
from the sale of remaining aftermarket facilities, 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 million
secured open line of credit through October 1998, subject to review by the
bank after the close of the Company's current fiscal year.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) No reports on Form 8-K were filed during the quarter ended
December 31, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENVIRONMENTAL ELEMENTS CORPORATION
(Registrant)
/s/ F. B. Smith
________________________
F. B. Smith
Chairman of the Board and
Chief Financial Officer
Date: February 14, 1997
11
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] MAR-31-1997
[PERIOD-END] DEC-31-1996
[CASH] 1,153,000
[SECURITIES] 0
[RECEIVABLES] 15,155,000
[ALLOWANCES] 125,000
[INVENTORY] 1,105,000
[CURRENT-ASSETS] 19,331,000
[PP&E] 11,941,000
[DEPRECIATION] 4,055,000
[TOTAL-ASSETS] 28,198,000
[CURRENT-LIABILITIES] 19,194,000
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 69,000
[OTHER-SE] 5,886,000
[TOTAL-LIABILITY-AND-EQUITY] 28,198,000
[SALES] 35,819,000
[TOTAL-REVENUES] 35,819,000
[CGS] 31,285,000
[TOTAL-COSTS] 8,125,000
[OTHER-EXPENSES] 475,000
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 0
[INCOME-PRETAX] (4,066,000)
[INCOME-TAX] 0
[INCOME-CONTINUING] (4,066,000)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (4,066,000)
[EPS-PRIMARY] (.59)
[EPS-DILUTED] (.59)
</TABLE>
