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
JUNE 30, 1998
Commission File Number 1-10955
------------------------------
ENVIRONMENTAL ELEMENTS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 52-1303748
<S><C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
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:
7,042,248 shares of common stock, $.01 par value per share, as of July 27, 1998.
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ENVIRONMENTAL ELEMENTS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1998
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1998 and March 31, 1998 ........................... 3
Consolidated Statements of Income for
the Periods Ended June 30, 1998 and 1997 ................... 4
Consolidated Statements of Cash Flows for
the Three Months Ended June 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.............................. 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, 1998.
2
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Environmental Elements Corporation and Subsidiaries
Consolidated Balance Sheets
As of June 30, 1998 and March 31, 1998
<TABLE>
<CAPTION>
June 30, March 31,
- ---------------------------------------------------------------------------------------------
1998 1998
- ---------------------------------------------------------------------------------------------
<S><C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,363,000 $ 958,000
Accounts and retainage receivable, net of allowance for
doubtful accounts of $251,000 and $218,000, respectively 11,935,000 9,709,000
Unbilled contract costs and fees 11,015,000 13,877,000
Inventories 1,226,000 760,000
Prepaid expenses and other current assets 1,713,000 1,970,000
------------ ------------
Total Current Assets 27,252,000 27,274,000
------------ ------------
Property and equipment:
Capital lease, building and improvements 7,200,000 7,200,000
Machinery, equipment, furniture and fixtures 3,044,000 3,032,000
------------ ------------
10,244,000 10,232,000
Less -- Accumulated depreciation and amortization 4,282,000 4,084,000
------------ ------------
Property and equipment, net 5,962,000 6,148,000
------------ ------------
Other assets 900,000 940,000
------------ ------------
Total Assets $ 34,114,000 $ 34,362,000
============ ============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Accounts payable $ 16,944,000 $ 16,378,000
Billings in excess of contract costs and fees 2,617,000 1,462,000
Accrued payroll and related expenses 619,000 509,000
Accrued and other liabilities 2,073,000 1,875,000
------------ ------------
Total Current Liabilities 22,253,000 20,224,000
Long-term capital lease obligation 2,217,000 2,217,000
Note Payable 2,700,000 5,200,000
Other non-current liabilities 455,000 456,000
------------ ------------
Total Liabilities 27,625,000 28,097,000
------------ ------------
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.01 per share; 20,000,000 shares
authorized; 7,042,248 and 7,034,759 shares issued,
respectively 71,000 71,000
Paid-in capital 28,076,000 28,047,000
Accumulated comprehensive income (101,000) (89,000)
Retained deficit (21,557,000) (21,764,000)
------------ ------------
Total Stockholders' Investment 6,489,000 6,265,000
------------ ------------
Total Liabilities and Stockholders' Investment $ 34,114,000 $ 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 June 30, 1998 and 1997
(Unaudited)
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<CAPTION>
Three Months Ended
June 30,
- -----------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------
<S><C>
Sales $16,543,000 $13,924,000
Cost of sales 14,465,000 12,167,000
--------------------------
Gross Profit 2,078,000 1,757,000
--------------------------
Selling, general and administrative expenses 1,704,000 1,578,000
--------------------------
Operating Income 374,000 179,000
Interest and other expense, net (167,000) (165,000)
--------------------------
Income before Income Taxes 207,000 14,000
Provision for income taxes -- --
--------------------------
Net income $ 207,000 $ 14,000
==========================
Earnings per share:
Basic $ 0.03 $ --
==========================
Diluted $ 0.03 $ --
==========================
Weighted average common shares outstanding
Basic 7,037,483 6,970,853
Diluted 7,229,074 6,970,853
</TABLE>
The accompanying notes are an integral part of these statements.
4
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Environmental Elements Corporation and Subsidiaries
Consolidated Statements of Cash Flows
As of June 30, 1998 and 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------
<S><C>
Cash flows from operating activities:
Net income $ 207,000 $ 14,000
Non-cash items:
Depreciation and amortization 218,000 219,000
Stock contributions to savings plan 29,000 --
Changes in operating assets and liabilities
(Increase) in accounts and retainages receivable, net (2,226,000) (922,000)
Decrease (increase) in unbilled contract costs and fees 2,862,000 (3,832,000)
(Increase) in inventories (466,000) (170,000)
Decrease in prepaid expenses and other current assets 257,000 305,000
Increase in accounts payable 566,000 4,016,000
Increase (decrease) in billings in excess of contract costs and fees 1,155,000 (1,055,000)
Disposal of assets held for sale -- 864,000
Increase (decrease) in accrued payroll and related expenses 110,000 (133,000)
Increase (decrease) in accrued and other current liabilities 198,000 (142,000)
Decrease in net liabilities of discontinued operations (8,000) (6,000)
Increase in other non-current liabilities 7,000 79,000
----------- -----------
Net Cash Flows Provided by (Used in) Operating Activities 2,909,000 (833,000)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (12,000) (182,000)
Decrease in other assets 21,000 --
----------- -----------
Net Cash Flows Provided by (Used in) Investing Activities 9,000 (182,000)
----------- -----------
Cash flows from financing activities:
Issuance of common stock -- 10,000
(Decrease) increase in borrowings under line of credit (2,500,000) 515,000
Change in cumulative translation adjustment (13,000) 24,000
----------- -----------
Net Cash Flows (Used in) Provided by Financing Activities (2,513,000) 549,000
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 405,000 (466,000)
Cash and Cash Equivalents, beginning of period 958,000 1,684,000
----------- -----------
Cash and Cash Equivalents, end of period $ 1,363,000 $ 1,218,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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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 three months ended June 30,
1998 and 1997, the Company issued 6,489 and 4,055 shares, respectively of
its common stock as matching contributions under its 401k savings plan.
Amounts paid in cash for interest during the three months ended June 30,
1998 and 1997 were $226,000 and $80,000, respectively. Amounts paid for
income taxes in the three months ended June 30, 1998 and 1997 were $10,000
and $7,000, respectively.
6
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5. NEW ACCOUNTING STANDARDS:
The Company adopted SFAS No. 130, "Reporting Comprehensive Income." during
the three months ended June 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 Ended
June 30,
1998 1997
---- ----
Sales............................................ 100.0% 100.0%
Cost of Sales.................................... 87.4 87.4
---- ----
Gross Profit.............................. 12.6 12.6
Selling, general and administrative expenses..... 10.3 11.3
---- ----
Operating Income.......................... 2.3% 1.3%
==== ====
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1997
Sales increased 18.8% or $2,619,000 to $16,543,000 from $13,924,000. 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 18.9% or $2,298,000 to $14,465,000 from $12,167,000.
The increase in dollars resulted from the increase in sales volume for the
current year quarter. As a percentage of sales, cost of sales remained the
same in the current year period as in the prior year, at 87.4%.
Selling, general and administrative expenses increased 8.0% or $126,000 to
$1,704,000 from $1,578,000. 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 10.3% from 11.3%. The
decrease in percentage was primarily a result of the Company's
8
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restructuring efforts during prior years, and the resultant increased
efficiencies during the current year quarter.
For the reasons set forth above, operating income increased 108.9%, or
$195,000, to $374,000, or 2.3% of sales, for the quarter, versus operating
income of $179,000, or 1.3% of sales, in the prior year quarter.
Interest and other expense, net of interest and other income, increased
1.2%, or $2,000, to $167,000 from $165,000. Interest expense between the
quarters has remained consistent.
Income before income taxes was $207,000, or 1.3% of sales, in the current
year quarter, compared to $14,000, or 0.1% 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.
9
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $405,000 and borrowings under the
Company's line of credit decreased by $2.5 million during the three months
ended June 30, 1998. This was caused principally by the $2.9 million in cash
generated from operating activity during the three months ended June 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 $3.4 million and $5.7 million at June 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 quarter ended June 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 June 30, 1998 increased 97.6% to
$65.0 million from $32.9 million at June 30, 1997. New orders received
during the three months ended June 30, 1998 decreased 9% from the same
period last year, to $11.8 million. The Company believes that there has been
evidence of improvement over the past year 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.
10
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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 June
30, 1998.
11
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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: July 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,363,000
<SECURITIES> 0
<RECEIVABLES> 23,201,000
<ALLOWANCES> 251,000
<INVENTORY> 1,226,000
<CURRENT-ASSETS> 27,252,000
<PP&E> 10,244,000
<DEPRECIATION> 4,282,000
<TOTAL-ASSETS> 34,114,000
<CURRENT-LIABILITIES> 22,253,000
<BONDS> 0
0
0
<COMMON> 71,000
<OTHER-SE> 6,418,000
<TOTAL-LIABILITY-AND-EQUITY> 34,114,000
<SALES> 16,543,000
<TOTAL-REVENUES> 16,543,000
<CGS> 14,465,000
<TOTAL-COSTS> 1,704,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 167,000
<INCOME-PRETAX> 207,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 207,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 207,000
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
