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, 1997
Commission File Number 1-10955
------------------------------
ENVIRONMENTAL ELEMENTS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-1303748
(State or other jurisdiction (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 filesuch 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:
6,993,486 shares of common stock, $.01 par value per share, as of February 6,
1998.
<PAGE>
ENVIRONMENTAL ELEMENTS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 1997
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 1997 and March 31, 1997 ................. 3
Consolidated Statements of Operations for
the Periods Ended December 31, 1997 and 1996 ......... 4
Consolidated Statements of Cash Flows for
the Nine Months Ended December 31, 1997 and 1996 ..... 5
Notes to Consolidated Financial Statements .............. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 8
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.........................12
---------------------------------------
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, 1997.
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
Environmental Elements Corporation and Subsidiaries
Consolidated Balance Sheets
As of December 31, 1997 and March 31, 1997
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 865,000 $ 1,684,000
Accounts and retainages receivable, net of allowance for doubtful
accounts of $192,000 and $113,000, respectively......................... 5,813,000 6,317,000
Unbilled contract costs and fees.......................................... 10,911,000 6,248,000
Inventories............................................................... 826,000 967,000
Prepaid expenses and other current assets................................. 1,546,000 1,990,000
Assets held for sale...................................................... -- 864,000
---------- -----------
Total Current Assets.................................................. 19,961,000 18,070,000
---------- -----------
Property and equipment:
Capital lease, building and improvements.................................. 7,200,000 6,960,000
Machinery, equipment, furniture and fixtures.............................. 3,000,000 2,809,000
---------- -----------
10,200,000 9,769,000
Less - Accumulated depreciation and amortization.......................... 3,888,000 3,326,000
---------- -----------
Property and Equipment, Net........................................... 6,312,000 6,443,000
---------- -----------
Other assets, net............................................................. 887,000 894,000
---------- -----------
Total Assets.......................................................... $27,160,000 $25,407,000
========== ===========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Borrowings under line of credit........................................... $ 4,200,000 2,585,000
Accounts payable.......................................................... 11,463,000 9,724,000
Billings in excess of contract costs and fees............................. 674,000 1,660,000
Accrued payroll and related expenses ..................................... 459,000 618,000
Accrued and other current liabilities..................................... 1,485,000 1,824,000
Deferred taxes............................................................ 100,000 100,000
----------- -----------
Total Current Liabilities............................................. 18,381,000 16,511,000
Long-term capital lease obligation............................................ 2,336,000 2,449,000
Deferred taxes................................................................ 100,000 100,000
Other non-current liabilities................................................. 348,000 309,000
----------- -----------
Total Liabilities..................................................... 21,165,000 19,369,000
----------- -----------
Commitments and contingencies
Shareholders' investment:
Common stock.............................................................. 70,000 70,000
Paid-in capital........................................................... 27,916,000 27,864,000
Cumulative translation adjustment......................................... (74,000) (82,000)
Retained deficit.......................................................... (21,917,000) (21,814,000)
----------- -----------
Total Shareholders' Investment........................................ 5,995,000 6,038,000
----------- -----------
Total Liabilities and Shareholders' Investment........................ $27,160,000 $25,407,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
Environmental Elements Corporation and Subsidiaries
Consolidated Statements of Operations
For the Periods Ended December 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Sales........................................................ $ 12,386,000 $ 10,062,000 $ 37,766,000 $ 35,819,000
Cost of sales................................................ 10,580,000 9,206,000 32,470,000 31,285,000
------------ ------------ ------------ ------------
Gross Profit......................................... 1,806,000 856,000 5,296,000 4,534,000
------------ ------------ ------------ ------------
Selling, general and administrative expenses................. 1,784,000 1,927,000 4,900,000 5,910,000
Restructuring charge......................................... -- 2,215,000 -- 2,215,000
------------ ------------ ------------ ------------
1,784,000 4,142,000 4,900,000 8,125,000
------------ ------------ ------------ ------------
Operating Income (Loss).............................. 22,000 (3,286,000) 396,000 (3,591,000)
Interest and other expense, net of income.................... (167,000) (183,000) (499,000) (475,000)
------------ ------------ ------------ ------------
Loss before Income Taxes............................. (145,000) (3,469,000) (103,000) (4,066,000)
Provision for income taxes................................... -- -- -- --
------------ ------------ ------------ ------------
Net Loss............................................. $ (145,000) $ (3,469,000) $ (103,000) $ (4,066,000)
============ ============ ============ ============
Net Loss per share of common stock and ------------ ------------ ------------ ------------
common stock equivalents............................. $ (0.02) $ (0.50) $ (0.01) $ (0.59)
============ ============ ============ ============
</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, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
Net loss................................................ $ (103,000 $(4,066,000)
Non-cash items:
Depreciation and amortization....................... 623,000 571,000
Loss on disposal of assets.......................... -- 575,000
Stock contribution to savings plan.................. -- 42,000
Decrease in accounts and retainages receivable, net..... 504,000 247,000
Increase in unbilled contract costs and fees............ (4,663,000) (550,000)
Decrease in inventories................................. 141,000 346,000
Decrease in prepaid expenses and other current assets.. 444,000 93,000
Increase (decrease) in accounts payable................. 1,739,000 (3,889,000)
(Decrease) increase in billings in excess of contract
costs and fees........................................ (986,000) 52,000
Decrease in accrued payroll and related expenses........ (159,000) (186,000)
(Decrease) increase in accrued and other current
liabilities........................................... (339,000) 482,000
Increase in other non-current liabilities............... 39,000 124,000
---------- ----------
Net Cash Flows Used in Operating Activities (2,760,000) (6,159,000)
---------- ----------
Cash flows from investing activities:
Additions to property and equipment..................... (431,000) (328,000)
Proceeds from sale of assets held....................... 864,000 --
Increase in other assets................................ (54,000) (8,000)
---------- ----------
Net Cash Flows Provided by (Used in)
Investing Activities (379,000) (336,000)
---------- ----------
Cash flows from financing activities:
Increase in borrowings under line of credit............. 1,615,000 5,500,000
Change in cumulative translation adjustment............. 8,000 80,000
Payments under capital lease obligation................. (113,000) (104,000)
Issuance of common stock................................ 52,000 48,000
---------- ----------
Net Cash Flows Provided by Financing Activities 1,562,000 5,524,000
---------- ----------
Net Decrease in Cash and Cash Equivalents (819,000) (971,000)
Cash and cash equivalents, beginning of period.............. 1,684,000 2,124,000
---------- ----------
Cash and cash equivalents, end of period.................... $ 865,000 1,153,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these documents.
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, 1997 and
1996 totaled 6,989,000 and 6,924,000, respectively. The weighted average
number of shares used in the computations of per share data for the nine
months ended December 31, 1997 and 1996 totaled 6,980,000 and 6,913,000,
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,
1997 and 1996, the Company issued 28,166 and 16,260 shares, respectively of
its common stock asmatching contributions under its 401k savings plan.
Amounts paid in cash for interest during the nine months ended December 31,
1997 and 1996 were $333,000 and $401,000, respectively. Amounts paid for
income taxes in the nine months ended December 31, 1997 and 1996 were
$10,000 and $12,000, respectively.
6
<PAGE>
5. RECLASSIFICATIONS:
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year presentation.
6. NEW ACCOUNTING STANDARDS:
During early 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings 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 common stock equivalents will not be
considered in the compilation of basic earnings per share) and diluted
earnings per share. The implementation of this pronouncement will not have a
material impact on the Company's earnings per share disclosure in the
accompanying consolidated financial statements.
7
<PAGE>
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
The following information should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in
this Quarterly Report and the audited Financial Statements and Management's
Discussion and Analysis contained in the Company's Form 10-K for the fiscal
year ended March 31, 1997.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationships to sales of
selected items in the Company's consolidated statements of operations
(unaudited) for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales ........................................ 100.0% 100.0% 100.0% 100.0%
Cost of Sales ................................ 85.4 91.5 86.0 87.3
----- ----- ----- -----
Gross Profit .......................... 14.6 8.5 14.0 12.7
Selling, general and administrative expenses . 14.4 19.2 13.0 16.5
Restructuring Charge ......................... -- 22.0 -- 6.2
----- ----- ----- -----
Operating Income (Loss) ............... 0.2% (32.7%) 1.0% (10.0%)
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO
THREE MONTHS ENDED DECEMBER 31, 1996
Sales increased 23.1% or $2,324,000 to $12,386,000 from $10,062,000.
Increased sales are primarily related to the Company's Power, Industrial
and International customers and are offset in part by decreases for the
three-month period in sales to its Aftermarket customers.
Cost of sales increased 14.9% or $1,374,000 to $10,580,000 from $9,206,000.
The increase in dollars resulted primarily from the increase in sales volume
for the current year quarter. As a percentage of sales, cost of sales
decreased to 85.4% from 91.5%, primarily due to improved project execution.
Selling, general and administrative expenses decreased 7.4% or $143,000 to
$1,784,000 from $1,927,000. As a percentage of sales, selling, general and
administrative expenses decreased to
8
<PAGE>
14.4% from 19.2%. The decrease in both dollars and percentage was primarily
a result of the Company's restructuring efforts during prior years, and the
resultant increased efficiencies during the current year quarter.
During the prior year quarter the company recorded restructuring charges of
$2.2 million. There were no such charges during the current year quarter.
For the reasons set forth above, operating income was $22,000, or 0.2% of
sales, for the quarter compared to an operating loss of $3.3 million, or
(32.7%) of sales, in the prior year quarter.
Interest and other expense, net of interest and other income, decreased
8.7%, or $16,000, to $167,000 from $183,000. The net decrease is due to
decreased borrowings on the Company's line of credit.
There was a loss before income taxes of $145,000 in the current year
quarter, compared to a loss of $3.5 million for the prior year period.
There was no provision for income taxes in either quarter reported, due to a
loss incurred in each three-month period.
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO
NINE MONTHS ENDED DECEMBER 31, 1996
Sales increased 5.4% or $1,947,000 to $37,766,000 from $35,819,000. This
increase in sales for the nine month period reflects increases in sales to
the Company's Power, International, Field Service, and Spare Parts customers
offset in part by decreases in sales to its Industrial and Aftermarket
customers.
Cost of sales increased 3.8% or $1,185,000 to $32,470,000 from $31,285,000,
primarily as a result of the sales increase. As a percentage of sales, cost
of sales decreased to 86.0% from 87.3%, primarily due to improved project
execution.
Selling, general and administrative expenses for the nine-month period
decreased 17.1% or $1,010,000 to $4,900,000 from $5,910,000. As a percentage
of sales, selling, general and administrative expenses for the current year
period decreased to 13.0% from 16.5%. The decrease in both dollars and
percentage was primarily a result of the Company's restructuring efforts
during prior years, and the resultant increased efficiencies during the
current year period.
There were no restructuring charges for the current year period.
Restructuring charges for the prior year period totaled $2.2 million.
For the reasons set forth above, operating income was $396,000, or 1.0% of
sales, for the current year period compared to an operating loss of $3.6
million, or (10.0%) of sales, in the prior year period.
9
<PAGE>
Interest and other expense, net of interest and other income, increased
5.1%, or $24,000, to $499,000 from $475,000. The net increase is primarily
due to increased borrowings on the Company's line of credit.
The Company recorded a net loss of $103,000 for the current year period,
compared to a loss of $4.1 million for the prior year period.
There was no provision for income taxes in either nine-month period
reported, due to the loss incurred in each period.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents declined by $819,000 and borrowings under the
Company's line of credit increased by $1.6 million during the nine months
ended December 31, 1997. This was caused principally by a $3.4 million
increase in the Company's net working capital invested in contracts in
process offset by proceeds of $864,000 from disposal of assets held for
sale.
Historically the Company has required minimal investment in net working
capital in contracts, but it does experience fluctuations in these amounts
depending upon the stage of completion of its various contracts and upon the
payment terms negotiated as apart 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 $4.6 million and $1.2 million at December 31,
1997 and March 31, 1997, respectively.) The Company seeks to manage project
cash flows in its payment terms negotiations with customers and suppliers,
and in adherence to project budgets and schedules.
New orders received during the nine months ended December 31, 1997 increased
84% from the same period last year, to $64.7 million. The Company believes
that there is evidence of improvement in the market for its products,
technologies and services, but also believes that, in the short term, the
market is exceptionally difficult to predict accurately due to regulatory
and other factors, both domestic and international in nature. The Company
has attempted to adjust its organization so that it can operate and be
profitable on highly variable business levels at or above those experienced
in the current and prior fiscal year. However, there can be no assurance
that such business levels will occur, that the Company's actions will be
successful, or that future losses would not adversely affect the Company's
liquidity and capital resource position. The Company believes it has
liquidity and capital resources sufficient to maintain its business at its
current level of activity 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>
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, 1997.
12
<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: February 13, 1998
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 865,000
<SECURITIES> 0
<RECEIVABLES> 16,724,000
<ALLOWANCES> 192,000
<INVENTORY> 826,000
<CURRENT-ASSETS> 19,961,000
<PP&E> 10,200,000
<DEPRECIATION> 3,888,000
<TOTAL-ASSETS> 27,160,000
<CURRENT-LIABILITIES> 18,381,000
<BONDS> 0
0
0
<COMMON> 70,000
<OTHER-SE> 5,925,000
<TOTAL-LIABILITY-AND-EQUITY> 27,160,000
<SALES> 37,766,000
<TOTAL-REVENUES> 37,766,000
<CGS> 32,470,000
<TOTAL-COSTS> 4,900,000
<OTHER-EXPENSES> 499,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (103,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (103,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (103,000)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
