SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended
September 30, 1998
Commission File Number 1-10955
------------------------------
ENVIRONMENTAL ELEMENTS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-1303748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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
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:
7,049,512 shares of common stock, $.01 par value per share, as of
November 4, 1998.
<PAGE>
ENVIRONMENTAL ELEMENTS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1998
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1998 and March 31, 1998....................... 3
Consolidated Statements of Income for
the Periods Ended September 30, 1998 and 1997............... 4
Consolidated Statements of Cash Flows for
the Six Months Ended September 30, 1998 and 1997............ 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. Exhibits and Reports on Form 8-K............................. 13
Signatures.............................................................14
---------------------------------------
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,
operating losses, 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, 1998.
2
<PAGE>
Environmental Elements Corporation and Subsidiaries
Consolidated Balance Sheets
As of September 30, 1998 and March 31, 1998
<TABLE>
<CAPTION>
September 30, March 31,
- ---------------------------------------------------------------------------------------------------------
1998 1998
- ---------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 1,918,000 $ 958,000
Accounts and retainage receivable, net of allowance for doubtful
accounts of $234,000 and $218,000, respectively.................... 15,432,000 9,709,000
Unbilled contract costs and fees..................................... 13,009,000 13,877,000
Inventories.......................................................... 839,000 760,000
Prepaid expenses and other current assets............................ 1,662,000 1,970,000
------------ ------------
Total Current Assets............................................... 32,860,000 27,274,000
------------ ------------
Property and equipment:
Capital lease, building and improvements............................. 7,242,000 7,200,000
Machinery, equipment, furniture and fixtures......................... 3,126,000 3,032,000
------------ ------------
10,368,000 10,232,000
Less - Accumulated depreciation and amortization..................... 4,481,000 4,084,000
------------ ------------
Property and equipment,net......................................... 5,887,000 6,148,000
------------ ------------
Other assets........................................................... 879,000 940,000
------------ ------------
Total Assets....................................................... $ 39,626,000 $ 34,362,000
============ ============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Accounts payable..................................................... $ 22,095,000 $16,378,000
Billings in excess of contract costs and fees........................ 2,817,000 1,462,000
Accrued payroll and related expenses................................. 687,000 509,000
Accrued and other current liabilities................................ 1,946,000 1,875,000
------------ ------------
Total Current Liabilities.......................................... 27,545,000 20,224,000
Long-term capital lease obligation..................................... 2,093,000 2,217,000
Note Payable........................................................... 2,700,000 5,200,000
Other non-current liabilities.......................................... 458,000 456,000
------------ ------------
Total Liabilities.................................................. 32,796,000 28,097,000
------------ ------------
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.01 per share; 20,000,000 shares authorized;
7,049,512 and 7,034,759 shares issued, respectively................ 71,000 71,000
Paid-in capital...................................................... 28,099,000 28,047,000
Accumulated comprehensive income..................................... (130,000) (89,000)
Retained deficit ................................................... (21,210,000) (21,764,000)
------------ ------------
Total Stockholders' Investment..................................... 6,830,000 6,265,000
------------ ------------
Total Liabilities and Stockholders' Investment..................... $ 39,626,000 $ 34,362,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
Environmental Elements Corporation and Subsidiaries
Consolidated Statements of Income
For the Periods Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales................................................ $20,757,000 $11,456,000 $37,301,000 $25,380,000
Cost of sales........................................ 18,464,000 9,723,000 32,930,000 21,890,000
---------------------------- ----------------------------
Gross Profit.................................... 2,293,000 1,733,000 4,371,000 3,490,000
---------------------------- ----------------------------
Selling, general and administrative expenses......... 1,804,000 1,538,000 3,507,000 3,116,000
---------------------------- ----------------------------
Operating Income............................... 489,000 195,000 864,000 374,000
Interest and other expense, net...................... (143,000) (167,000) (311,000) (332,000)
----------------------------- -----------------------------
Income before Income Taxes...................... 346,000 28,000 553,000 42,000
Provision for income taxes........................... -- -- -- --
----------------------------- -----------------------------
Net income...................................... $ 346,000 $ 28,000 $ 553,000 $ 42,000
============================= =============================
Earnings per share:
Basic........................................... $ 0.05 $ -- $ 0.08 $ 0.01
============================= =============================
Diluted......................................... $ 0.05 $ -- $ 0.08 $ 0.01
============================= =============================
Weighted average common shares outstanding:
Basic........................................... 7,045,322 6,979,328 7,041,424 6,975,113
Diluted......................................... 7,143,823 7,012,895 7,186,449 7,003,682
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
Environmental Elements Corporation and Subsidiaries
Consolidated Statements of Cash Flows
As of September 30, 1998 and 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................... $ 553,000 $ 42,000
Non-cash items:
Depreciation and amortization........................................... 438,000 435,000
Stock contributions to savings plan..................................... 52,000 10,000
Changes in operating assets and liabilities:..............................
(Increase) decrease in accounts and retainages receivable, net.......... (5,723,000) 182,000
Decrease (increase) in unbilled contract costs and fees................. 868,000 (2,462,000)
(Increase) in inventories.............................................. (79,000) (145,000)
Decrease in prepaid expenses and other current assets................... 308,000 49,000
Increase in accounts payable............................................ 5,717,000 1,894,000
Increase (decrease) in billings in excess of contract costs and fees... 1,355,000 (648,000)
Disposal of assets held for sale........................................ -- 864,000
Increase (decrease) in accrued payroll and related expenses............. 178,000 (135,000)
Increase (decrease) in accrued and other current liabilities............ 71,000 (261,000)
Decrease in net liabilities of discontinued operations.................. (11,000) (5,000)
Increase in other non-current liabilities............................... 13,000 86,000
----------- -----------
Net Cash Flows Provided by (Used in) Operating Activities............. 3,740,000 (94,000)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment....................................... (136,000) (273,000)
Decrease (increase) in other assets....................................... 21,000 (9,000)
----------- -----------
Net Cash Flows (Used in) Investing Activities......................... (115,000) (282,000)
----------- -----------
Cash flows from financing activities:
(Decrease) increase in borrowings under line of credit.................... (2,500,000) 215,000
Payments under capital lease obligation................................... (124,000) (113,000)
Change in cumulative translation adjustment............................... (41,000) 2,000
----------- -----------
Net Cash Flows (Used in) Provided by Financing Activities............. (2,665,000) 104,000
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents.................. 960,000 (272,000)
Cash and Cash Equivalents, beginning of period.............................. 958,000 1,684,000
----------- -----------
Cash and Cash Equivalents, end of period.................................... $ 1,918,000 $ 1,412,000
=========== ===========
</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:
During the fiscal year ended March 31, 1998, the Company adopted SFAS No.
128, "Earnings Per Share." Basic earnings per common share was computed by
dividing net earnings by the weighted average number of shares of common
stock outstanding during the period. Diluted earnings per common share was
computed assuming the terms and conditions for the common stock options were
met and converted.
3. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist principally of purchased parts held for use in contracts
and as spare parts.
4. SUPPLEMENTAL CASH FLOW INFORMATION:
In non-cash financing transactions during the six months ended September 30,
1998 and 1997, the Company issued 13,753 and 11,134 shares, respectively, of
its common stock as matching contributions under its 401k savings plan.
Amounts paid in cash for interest during the six months ended September 30,
1998 and 1997 were $398,000 and $273,000, respectively. Amounts paid for
income taxes in the six months ended September 30, 1998 and 1997 were $10,000
and $8,000, respectively.
6
<PAGE>
5. NEW ACCOUNTING STANDARDS:
The Company adopted SFAS No. 130, "Reporting Comprehensive Income." during
the six months ended September 30, 1998. The adoption of SFAS No 130 did not
have a material effect on the Company's consolidated financial statements.
The components of comprehensive income included cumulative translation
adjustments.
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, 1998.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationships to sales of
selected items in the Company's consolidated statements of income (unaudited)
for the periods indicated:
Three Months Six Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Sales................................ 100.0% 100.0% 100.0% 100.0%
Cost of Sales........................ 89.0 84.9 88.3 86.3
----- ----- ----- -----
Gross Profit....................... 11.0 15.1 11.7 13.7
Selling, general and administrative
expenses........................... 8.7 13.4 9.4 12.3
----- ----- ----- -----
Operating Income................... 2.4% 1.7% 2.3% 1.5%
===== ===== ===== =====
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1997
Sales increased 81.2% or $9,301,000 to $20,757,000 from $11,456,000. The
increase in sales for the three-month period are primarily related to increased
sales to the Company's Power and Aftermarket customers.
Cost of sales increased 89.9% or $8,741,000 to $18,464,000 from $9,723,000. The
increase in dollars resulted from the increase in sales volume for the
current year quarter. As a percentage of sales, cost of sales increased to 89.0%
from 84.9%. The increase in percentage of sales is primarily due to a higher
proportion of revenue from larger projects that, although larger in size, have a
relatively lower gross profit margin.
Selling, general and administrative expenses increased 17.3% or $266,000 to
$1,804,000 from $1,538,000. The increase in dollars was primarily due to the
Company's increased business levels. As a percentage of sales, selling, general
and administrative expenses decreased to 8.7%
8
<PAGE>
from 13.4%. The decrease in percentage was primarily a result of increased
efficiencies during the current year quarter on higher sales volumes.
For the reasons set forth above, operating income increased 150.8%, or $294,000,
to $489,000, or 2.4% of sales, for the quarter, versus operating income of
$195,000, or 1.7% of sales, in the prior year quarter.
Interest and other expense, net of interest and other income, decreased 14.4%,
or $24,000, to $143,000 from $167,000. The decrease is primarily due to reduced
borrowing during the quarter.
Income before income taxes was $346,000, or 1.7% of sales, in the current year
quarter, compared to $28,000, or 0.2% of sales, for the prior year period.
There was no provision for income taxes in either quarter reported because the
effects of the Company's net operating loss carryforwards from prior years
substantially eliminated taxes on current year income.
SIX MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
SIX MONTHS ENDED SEPTEMBER 30, 1997
Sales increased 47.0% or $11,921,000 to $37,301,000 from $25,380,000. The
increase in sales for the six-month period are primarily related to increased
sales to the Company's Power and Aftermarket customers.
Cost of sales increased 50.4% or $11,040,000 to $32,930,000 from $21,890,000.
The increase in dollars resulted from the increase in sales volume for the
current year period. As a percentage of sales, cost of sales increased to 88.3%
from 86.3%. The increase in percentage of sales is primarily due to a higher
proportion of revenue from larger projects that, although larger in size, have a
relatively lower gross profit margin.
Selling, general and administrative expenses increased 12.5% or $391,000 to
$3,507,000 from $3,116,000. The increase in dollars was primarily due to the
Company's increased business levels. As a percentage of sales, selling, general
and administrative expenses decreased to 9.4% from 12.3%. The decrease in
percentage was primarily a result of increased efficiencies during the current
year period on higher sales volumes.
For the reasons set forth above, operating income increased 131.0%, or $490,000,
to $864,000, or 2.3% of sales, for the six-month period, versus operating income
of $374,000, or 1.5% of sales, in the prior year period.
Interest and other expense, net of interest and other income, decreased 6.3%, or
$21,000, to $311,000 from $332,000. The decrease is primarily due to reduced
borrowing during the six-month period.
9
<PAGE>
Income before income taxes was $553,000, or 1.5% of sales, in the current year
period, compared to $42,000, or 0.2% of sales, for the prior year period.
There was no provision for income taxes in either quarter reported because the
effects of the Company's net operating loss carryforwards from prior years
substantially eliminated taxes on current year income.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $960,000 and borrowings under the
Company's line of credit decreased by $2.5 million during the six months ended
September 30, 1998. This was caused principally by the $3.7 million in cash
generated from operating activity during the six months ended September 30,
1998.
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 $3.5
million and $5.7 million at September 30, 1998 and March 31, 1998,
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.
The Company and its bank agreed during the prior fiscal year ended March 31,
1998 to increase the Company's secured open line of credit from $7 million to
$10 million. During the six months ended September 30, 1998, the Company and its
bank agreed to expand the line of credit to $12 million for a two year term.
The Company's backlog of unfilled orders at September 30, 1998 increased 27.1%
to $49.7 million from $39.1 million at September 30, 1997. New orders received
during the six months ended September 30, 1998 decreased 44% from the same
period last year, to $17.2 million. The Company believes that there has been
evidence of improvement over the past two years in the market for its products,
technologies and services, but also believes that, in the short term, the market
is exceptionally difficult to predict accurately due to regulatory and other
factors, both domestic and international in nature. The Company has attempted to
adjust its organization so that it can operate and be profitable on highly
variable business levels at or above those experienced in the current and prior
fiscal year. However, there can be no assurance that such business levels will
occur, that the Company's actions will be successful, or that future losses
would not adversely affect the Company's liquidity and capital resource
position. The Company believes it has liquidity and capital resources sufficient
to maintain its business at its current level of activity due to the following:
no significant capital expenditures are expected; historically the Company has
required little investment in operating working capital; and its banking
arrangements, i.e. those currently available and those which could be obtained,
would be adequate to maintain its ongoing business at its current level of
activity during the next year.
11
<PAGE>
YEAR 2000
The Company continues to evaluate the potential impact of the "Year 2000"
problem on its systems and operations. Currently, all equipment supplied by the
Company is Year 2000 compliant. The costs incurred to date in obtaining this
compliance have been immaterial, as most of the Company's products are not time
or date sensitive. The information technology systems used by the Company are
Year 2000 compliant. The costs incurred to date have been insignificant.
Management does not believe that a failure by some of its major customers,
subcontractors and suppliers to timely anticipate and correct their Year 2000
computer systems problems would have a material effect on the financial position
or results of operations of the Company. However, there can be no assurance that
unanticipated non-compliance will not occur, and such non-compliance could
require material costs to repair or could cause material disruptions if not
repaired.
12
<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 September
30, 1998.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENVIRONMENTAL ELEMENTS CORPORATION
(Registrant)
/s/ James B. Sinclair
_____________________
James B. Sinclair
Vice President and
Chief Financial Officer
Date: November 12, 1998
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<CASH> 1,918,000
<SECURITIES> 0
<RECEIVABLES> 28,675,000
<ALLOWANCES> 234,000
<INVENTORY> 839,000
<CURRENT-ASSETS> 32,860,800
<PP&E> 10,368,000
<DEPRECIATION> 4,481,000
<TOTAL-ASSETS> 39,626,000
<CURRENT-LIABILITIES> 27,545,000
<BONDS> 0
0
0
<COMMON> 71,000
<OTHER-SE> 6,759,000
<TOTAL-LIABILITY-AND-EQUITY> 39,626,000
<SALES> 37,301,000
<TOTAL-REVENUES> 37,301,000
<CGS> 32,930,000
<TOTAL-COSTS> 3,507,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 311,000
<INCOME-PRETAX> 553,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 553,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 553,000
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
