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, 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 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
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:
7,084,008 shares of common stock, $.01 par value per share, as of February 5,
1999.
<PAGE>
ENVIRONMENTAL ELEMENTS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 1998
PART I: FINANCIAL INFORMATION
Item 1.Financial Statements
Consolidated Balance Sheets as of
December 31, 1998 and March 31, 1998 ....................... 3
Consolidated Statements of Operations for
the Periods Ended December 31, 1998 and 1997 ............... 4
Consolidated Statements of Cash Flows for
the Nine Months Ended December 31, 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 DECEMBER 31, 1998 AND MARCH 31, 1998
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 2,558,000 $ 958,000
Accounts and retainage receivable, net of allowance for doubtful
accounts of $268,000 and $218,000, respectively..................... 11,592,000 9,709,000
Unbilled contract costs and fees...................................... 9,120,000 13,877,000
Inventories........................................................... 876,000 760,000
Prepaid expenses and other current assets............................. 1,027,000 1,970,000
------------ ------------
Total Current Assets............................................. 25,173,000 27,274,000
------------ ------------
PROPERTY AND EQUIPMENT:
Capital lease, building and improvements.............................. 7,258,000 7,200,000
Machinery, equipment, furniture and fixtures.......................... 3,108,000 3,032,000
------------ ------------
10,366,000 10,232,000
Less -- Accumulated depreciation and amortization..................... 4,634,000 4,084,000
------------ ------------
Property and equipment, net...................................... 5,732,000 6,148,000
------------ ------------
OTHER ASSETS............................................................... 742,000 940,000
------------ ------------
Total Assets.......................................................... $ 31,647,000 $ 34,362,000
------------ ------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable...................................................... $ 14,652,000 $ 16,378,000
Billings in excess of contract costs and fees......................... 3,835,000 1,462,000
Accrued payroll and related expenses.................................. 552,000 509,000
Accrued and other current liabilities................................. 1,892,000 1,875,000
------------ ------------
Total Current Liabilities........................................ 20,931,000 20,224,000
LONG-TERM CAPITAL LEASE OBLIGATION......................................... 2,093,000 2,217,000
NOTE PAYABLE............................................................... 1,000,000 5,200,000
OTHER NON-CURRENT LIABILITIES.............................................. 465,000 456,000
------------ ------------
Total Liabilities..................................................... 24,489,000 28,097,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INVESTMENT:
Common stock, par value $.01 per share; 20,000,000 shares authorized;
7,054,898 and 7,034,759 shares issued, respectively................. 71,000 71,000
Paid-in capital....................................................... 28,123,000 28,047,000
Accumulated comprehensive income...................................... (177,000) (89,000)
Retained deficit...................................................... (20,859,000) (21,764,000)
------------ ------------
Total Stockholders' Investment................................... 7,158,000 6,265,000
------------ ------------
Total Liabilities and Stockholders' Investment................... $ 31,647,000 $ 34,362,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
ENVIRONMENTAL ELEMENTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES............................................$ 16,998,000 $12,386,000 $54,299,000 $37,766,000
COST OF SALES.................................... 14,723,000 10,580,000 47,653,000 32,470,000
Gross Profit................................ 2,275,000 1,806,000 6,646,000 5,296,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..... 1,793,000 1,784,000 5,300,000 4,900,000
Operating Income............................ 482,000 22,000 1,346,000 396,000
INTEREST AND OTHER EXPENSE, NET.................. (131,000) (167,000) (442,000) (499,000)
Income before Income Taxes.................. 351,000 (145,000) 904,000 (103,000)
PROVISION FOR INCOME TAXES....................... -- -- -- --
--------------------------- ---------------------------
Net income (loss)...........................$ 351,000 $ (145,000) $ 904,000 $ (103,000)
--------------------------- ---------------------------
EARNINGS (LOSS) PER SHARE:
BASIC.......................................$ 0.05 $ (0.02) $ 0.13 $ (0.01)
--------------------------- ---------------------------
DILUTED.....................................$ 0.05 $ (0.02) $ 0.13 $ (0.01)
--------------------------- ---------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC....................................... 7,052,832 6,988,892 7,045,241 6,979,785
DILUTED..................................... 7,180,011 6,988,892 7,151,111 6,979,785
</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, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................$ 904,000 $ (103,000)
Non-cash items:
Depreciation and amortization......................................... 612,000 823,000
Stock contributions to savings plan................................... 76,000 52,000
Changes in operating assets and liabilities
(Increase) decrease in accounts and retainages receivable, net........ (1,883,000) 504,000
Decrease (increase) in unbilled contract costs and fees............... 4,757,000 (4,663,000)
(Increase) decrease in inventories.................................... (116,000) 141,000
Decrease in prepaid expenses and other current assets................. 943,000 444,000
(Decrease) increase in accounts payable............................... (1,726,000) 1,739,000
Increase (decrease) in billings in excess of contract costs and fees.. 2,373,000 (986,000)
Disposal of assets held for sale...................................... -- 864,000
Increase (decrease) in accrued payroll and related expenses........... 43,000 (159,000)
Increase (decrease) in accrued and other current liabilities.......... 17,000 (339,000)
(Decrease) in net liabilities of discontinued operations.............. (10,000) (3,000)
Increase in other non-current liabilities............................. 19,000 42,000
----------- ------------
Net Cash Flows Provided by (Used in) Operating Activities............. 6,009,000 (1,844,000)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................................ (134,000) (431,000)
Decrease (increase) in other assets........................................ 137,000 (54,000)
----------- ------------
Net Cash Flows Provided by (Used in) Investing Activities............. 3,000 (485,000)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in borrowings under line of credit..................... (4,200,000) 1,615,000
Payments under capital lease obligation.................................... (124,000) (113,000)
Change in cumulative translation adjustment................................ (88,000) 8,000
----------- ------------
Net Cash Flows (Used in) Provided by Financing Activities............. (4,412,000) 1,510,000
Net Increase (Decrease) in Cash and Cash Equivalents.................. 1,600,000 (819,000)
Cash and Cash Equivalents, beginning of period.................................. 958,000 1,684,000
----------- ------------
Cash and Cash Equivalents, end of period........................................$ 2,558,000 $ 865,000
=========== ============
</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. Convertible securities that were outstanding at December
31, 1997 were not included in the computation of diluted loss per share as
their effect would have been anti-dilutive.
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,
1998 and 1997, the Company issued 20,974 and 19,291 shares, respectively, of
its common stock as matching contributions under its 401k savings plan.
Amounts paid in cash for interest during the nine months ended December 31,
1998 and 1997 were $444,000 and $333,000, respectively. Amounts paid for
income taxes in the nine months ended December 31, 1998 and 1997 were $21,000
and $10,000, respectively.
6
<PAGE>
5. NEW ACCOUNTING STANDARDS:
The Company adopted SFAS No. 130, "Reporting Comprehensive Income." during
the nine months ended December 31, 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>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 2
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 Nine Months Ended
Ended December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
Sales.....................................100.0% 100.0% 100.0% 100.0%
Cost of Sales............................. 86.6 85.4 87.8 86.0
Gross Profit.............................. 13.4 14.6 12.2 14.0
Selling, general and administrative
expenses.................................. 10.5 14.4 9.8 13.0
---- ---- --- ----
Operating Income....................... 2.9% 0.2% 2.4% 1.0%
==== ==== ==== ====
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO
THREE MONTHS ENDED DECEMBER 31, 1997
Sales increased 37.2% or $4,612,000 to $16,998,000 from $12,386,000. The
increase in sales for the three-month period is primarily related to
increased sales to the Company's Power customers.
Cost of sales increased 39.2% or $4,143,000 to $14,723,000 from $10,580,000.
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
86.6% from 85.4%. 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 0.5% or $9,000 to
$1,793,000 from $1,784,000. 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 10.5% from 14.4%. The
decrease in percentage was
8
<PAGE>
primarily a result of increased efficiencies during the current year quarter
on higher sales volumes.
For the reasons set forth above, operating income increased 2090.9%, or
$460,000, to $482,000, or 2.9% of sales, for the quarter, versus operating
income of $22,000, or 0.2% of sales, in the prior year quarter.
Interest and other expense, net of interest and other income, decreased
21.6%, or $36,000, to $131,000 from $167,000. The decrease is primarily due
to reduced borrowing during the quarter.
Income before income taxes was $351,000, or 2.1% of sales, in the current
year quarter, compared to a net loss before income taxes of $145,000, or
(1.2%) 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.
NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO
NINE MONTHS ENDED DECEMBER 31, 1997
Sales increased 43.8% or $16,533,000 to $54,299,000 from $37,766,000. The
increase in sales for the nine month period is primarily related to increased
sales to the Company's Power and Aftermarket customers.
Cost of sales increased 46.8% or $15,183,000 to $47,653,000 from $32,470,000.
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
87.8% from 86.0%. 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 8.2% or $400,000 to
$5,300,000 from $4,900,000. 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 9.8% from 13.0%. 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 239.9%, or
$950,000, to $1,346,000, or 2.4% of sales, for the nine-month period, versus
operating income of $396,000, or 1.0% of sales, in the prior year period.
Interest and other expense, net of interest and other income, decreased
11.4%, or $57,000, to $442,000 from $499,000. The decrease is primarily due
to reduced borrowing during the nine-month period.
Income before income taxes was $904,000, or 1.7% of sales, in the current
year period, compared to a net loss before income taxes of $103,000, or
(0.3%) 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
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $1,600,000 and borrowings under the
Company's line of credit decreased by $4.2 million during the nine months
ended December 31, 1998. This was caused principally by the $6.0 million in
cash generated from operating activity during the nine months ended December
31, 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 $2.2 million and $5.7 million at December 31, 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 three months 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 increased by $4.3 million during the
three months ended December 31, 1998, to $54.0 million from $49.7 million at
September 30, 1998. When compared to the prior year, the Company's backlog of
unfilled orders decreased 11.0% to $54.0 million from $60.7 million at
December 31, 1997. New orders received during the nine months ended December
31, 1998 decreased 40.5% from the same period last year, to $38.5 million
from $64.7 million.
Subsequent to December 31. 1998, on February 4, 1999, the Company announced
that one of its customers, Wisconsin Electric, a subsidiary of Wisconsin
Energy Corporation, is entering an agreement with the Company and DB Riley
Consolidated, Inc. of Massachusetts to reduce emissions, improve performance
and maintain capacity and reliability of Wisconsin Electric's fossil-fired
power plants. The agreement is envisioned as an important step toward
Wisconsin Electric's meeting of the Environmental Protection Agency's new
smog controlling rules limiting nitrogen oxide emissions, which were issued
in September, 1998. Under the agreement, the three companies will jointly
evaluate how to accomplish the EPA's goal. DB Riley and Environmental
Elements, both recognized leaders in the supply of air pollution control
equipment, will jointly manage, design, engineer, procure, fabricate, supply
and install boiler technology, particulate technology and emission control
equipment. Actual orders for specific work under the agreement will occur as
the scope of work is defined, and will be booked as new orders when they are
received, pursuant to the Company's standard policies related to contract
administration. The Company estimates its revenue from the project to be in
excess of $100 million over an estimated four year duration, however there
can be no assurance that such levels of business will occur as a result of
the agreement, or that, if they occur, that they will continue.
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
10
<PAGE>
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 level of 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 in
obtaining this level of compliance 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 December
31, 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: February 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000863893
<NAME> ENVIRONMENTAL ELEMENTS CORPORATION
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,558,000
<SECURITIES> 0
<RECEIVABLES> 20,980,000
<ALLOWANCES> 268,000
<INVENTORY> 876,000
<CURRENT-ASSETS> 25,173,000
<PP&E> 10,366,000
<DEPRECIATION> 4,634,000
<TOTAL-ASSETS> 31,647,000
<CURRENT-LIABILITIES> 20,931,000
<BONDS> 0
0
0
<COMMON> 71,000
<OTHER-SE> 7,087,000
<TOTAL-LIABILITY-AND-EQUITY> 31,647,000
<SALES> 54,299,000
<TOTAL-REVENUES> 54,299,000
<CGS> 47,653,000
<TOTAL-COSTS> 5,300,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 442,000
<INCOME-PRETAX> 904,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 904,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 904,000
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
