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, 1999
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:
7,093,705 shares of common stock, $.01 par value per share, as of August 3,
1999.
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ENVIRONMENTAL ELEMENTS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1999
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<CAPTION>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheets as of
June 30, 1999 and March 31, 1999 ....................................................... 3
Consolidated Statements of Operations for
the Three Months Ended June 30, 1999 and 1998 ......................................... 4
Consolidated Statements of Cash Flows for
the Three Months Ended June 30, 1999 and 1998........................................... 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
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---------------------------------------
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, 1999.
2
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Environmental Elements Corporation and Subsidiaries
Consolidated Balance Sheets
As of June 30, 1999 and March 31, 1999
<TABLE>
<CAPTION>
June 30, March 31,
- ----------------------------------------------------------------------------------------------------
1999 1999
- ----------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $1,932,000 $ 1,619,000
Accounts and retainage receivable, net of allowance for doubtful
accounts of $243,000 and $221,000, respectively...................... 8,576,000 9,441,000
Unbilled contract costs and fees....................................... 13,220,000 12,315,000
Inventories............................................................ 1,327,000 1,407,000
Prepaid expenses and other current assets.............................. 1,310,000 1,814,000
------------ ------------
Total Current Assets................................................. 26,365,000 26,596,000
------------ ------------
Property and equipment:
Capital lease, building and improvements............................... 7,293,000 7,293,000
Machinery, equipment, furniture and fixtures........................... 3,140,000 3,120,000
------------ ------------
10,433,000 10,413,000
Less - Accumulated depreciation and amortization....................... 5,011,000 4,827,000
------------ ------------
Property and equipment,net........................................... 5,422,000 5,586,000
Non-current retainage receivable......................................... 357,000 277,000
Other assets............................................................. 938,000 721,000
------------ ------------
Total Assets......................................................... $33,082,000 $ 33,180,000
============ ============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Accounts payable....................................................... 11,343,000 $ 13,110,000
Billings in excess of contract costs and fees.......................... 571,000 824,000
Accrued payroll and related expenses................................... 883,000 1,044,000
Accrued and other current liabilities.................................. 1,798,000 2,056,000
------------ ------------
Total Current Liabilities............................................ 14,595,000 17,034,000
Long-term capital lease obligation....................................... 1,963,000 1,963,000
Long-term line of credit................................................. 8,200,000 6,100,000
Other non-current liabilities............................................ 472,000 475,000
------------ ------------
Total Liabilities.................................................... 25,230,000 25,572,000
============ ============
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.01 per share; 20,000,000 shares authorized;..
7,093,705 and 7,090,705 shares issued and outstanding, respectively.. 71,000 71,000
Paid-in capital........................................................ 28,225,000 28,222,000
Cumulative translation adjustment...................................... (177,000) (196,000)
Retained deficit....................................................... (20,267,000) (20,489,000)
------------ ------------
Total Stockholders' Investment....................................... 7,852,000 7,608,000
------------ ------------
Total Liabilities and Stockholders' Investment....................... $33,082,000 $ 33,180,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
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<TABLE>
<CAPTION>
Environmental Elements Corporation and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended June 30, 1999 and 1998
(Unaudited)
Three Months Ended
June 30,
- ------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Sales...................................................... $11,806,000 $16,543,000
Cost of sales.............................................. 9,584,000 14,465,000
------------------------
Gross Profit.......................................... 2,222,000 2,078,000
------------------------
Selling, general and administrative expenses............... 1,781,000 1,704,000
------------------------
Operating Income...................................... 441,000 374,000
Interest and other expense,net............................. (220,000) (167,000)
------------------------
Income before Income Taxes............................ 221,000 207,000
Provision for income taxes................................. - -
------------------------
Net income............................................ $ 221,000 $ 207,000
------------------------
Earnings per share:
Basic................................................. $ 0.03 $ 0.03
------------------------
Diluted............................................... $ 0.03 $ 0.03
------------------------
Weighted average common shares outstanding:
Basic................................................. 7,091,661 7,037,483
Diluted............................................... 7,126,429 7,229,074
</TABLE>
The accompanying notes are an integral part of these statements.
4
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<TABLE>
<CAPTION>
Environmental Elements Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended June 30, 1999 and 1998
(Unaudited)
- ---------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................ $ 221,000 $ 207,000
Non-cash items:
Depreciation and amortization......................................... 207,000 218,000
Stock contributions to savings plan................................... -- 27,000
Stock-based compensation.............................................. 3,000 2,000
Changes in operating assets and liabilities:
Decrease (increase) in accounts and retainages receivable, net........ 785,000 (2,226,000)
(Increase) decrease in unbilled contract costs and fees............... (905,000) 2,862,000
Decrease (increase) in inventories.................................... 80,000 (466,000)
Decrease in prepaid expenses and other current assets................. 504,000 257,000
(Decrease) increase in accounts payable............................... (1,767,000) 566,000
(Decrease) increase in billings in excess of contract costs and fees.. (253,000) 1,155,000
(Decrease) increase in accrued payroll and related expenses........... (161,000) 110,000
(Decrease) increase in accrued and other current liabilities.......... (258,000) 198,000
Decrease in other non-current liabilities............................. (3,000) (1,000)
---------- ----------
Net Cash Flows (Used in) Provided by Operating Activities........... (1,547,000) 2,909,000
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment................................... (20,000) (12,000)
(Increase) decrease in other assets................................... (239,000) 21,000
---------- ----------
Net Cash Flows (Used in) Provided by Investing Activities........... (259,000) 9,000
---------- ----------
Cash flows from financing activities:
Increase (decrease) in borrowings under line of credit................ 2,100,000 (2,500,000)
Change in cumulative translation adjustment........................... 19,000 (13,000)
---------- ----------
Net Cash Flows Provided by (Used in) Financing Activities .......... 2,119,000 (2,513,000)
---------- ----------
Net Increase in Cash and Cash Equivalents........................... 313,000 405,000
Cash and Cash Equivalents, beginning of period........................... 1,619,000 958,000
---------- ----------
Cash and Cash Equivalents, end of period................................. $1,932,000 $1,363,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.(Unaudited)
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. The difference between the basic and diluted earnings per
share is the dilutive effect of stock options outstanding.
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:
There were no non-cash financing transactions during the three months ended
June 30, 1999 with regards to the issuance of common stock as matching
contributions under its 401K savings plan. In non-cash financing
transactions during the three months ended June 30, 1998, the Company issued
6,489 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,
1999 and 1998 were $150,000 and $226,000, respectively. Amounts paid for
income taxes in the three months ended June 30, 1999 and 1998 were $40,000
and $10,000, respectively.
6
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5. SEGMENT INFORMATION :
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." during fiscal year 1999. The Company
does not allocate resources and assess performance based on separate
operating segments. Therefore, the Company has determined that it currently
does not have reportable segments. Rather, the Company's resources are
allocated based on specific project needs. Sales by geographic area for the
three months ended June 30, 1999 and 1998 were as follows:
(in thousands) 6/30/99 6/30/98
- --------------------------------------------------------------
GEOGRAPHIC AREA:
United States 10,031 14,804
- --------------------------------------------------------------
Canada 1,400 1,080
- --------------------------------------------------------------
Other International 375 659
- --------------------------------------------------------------
Total 11,806 16,543
- --------------------------------------------------------------
6. COMPREHENSIVE INCOME:
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. The Company's comprehensive income for
the periods presented is listed below:
For the Three months Ended June 30,
-----------------------------------
1999 1998
---- ----
Net Income as Reported $221,000 $207,000
Effect of Foreign Currency
Translation Gain (Loss) 19,000 (13,000)
--------------------------------
Comprehensive Net Income $240,000 $194,000
================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 2
7
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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, 1999.
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,
1999 1998
---- ----
Sales.......................................... 100.0% 100.0%
Cost of Sales.................................. 81.2 87.4
---- ----
Gross Profit................................... 18.8 12.6
Selling, general and administrative expenses... 15.1 10.3
---- ----
Operating Income 3.7% 2.3%
==== ====
....................................
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1998
Sales decreased 28.6% or $4,737,000 to $11,806,000 from $16,543,000. The
decrease in sales for the three-month period is primarily related to
decreased sales to the Company's power, repair/rebuild and spares customers,
offset in part by increased sales to the Company's industrial, maintenance
and international customers.
Cost of sales decreased 33.7% or $4,881,000 to $9,584,000 from $14,465,000.
The decrease in dollars resulted from the decrease in sales volume for the
current year quarter. As a percentage of sales, cost of sales decreased to
81.2% in the current period from the prior year's 87.4%.
Gross Profit increased 6.9%, or $144,000, to $2,222,000 from $2,078,000. The
increase for the three-month period was due to growth in gross profit from
maintenance and field service revenues, and by royalty fees
8
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from international licensees. Additionally, margins were positively impacted
by one project containing a greater portion of engineering work, and a
correspondingly lower portion of construction work, that generated $536,000,
or 24.1% of gross profit during the quarter. As a percentage of sales, gross
profit increased to 18.8% from 12.6%.
Selling, general and administrative expenses increased 4.5% or $77,000 to
$1,781,000 from $1,704,000. The increase in dollars was primarily due to
increased spending on research and development in the current year quarter
versus the prior year. As a percentage of sales, selling, general and
administrative expenses increased to 15.1% from 10.3%. The increase in
percentage was primarily a result of the lower sales volume during the
current year quarter.
For the reasons set forth above, operating income increased 17.9%, or
$67,000, to $441,000, or 3.7% of sales, for the quarter, versus operating
income of $374,000, or 2.3% of sales, in the prior year quarter.
Interest and other expense, net of interest and other income, increased
31.7%, or $53,000, to $220,000 from $167,000. The increase was primarily due
to increased borrowing under the Company's revolving credit line.
Income before income taxes increased 6.8%, to $221,000, or 1.9% of sales, in
the current year quarter, from $207,000, or 1.3% 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
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $313,000 and borrowings under the
Company's line of credit increased by $2.1 million during the three months
ended June 30, 1999. This was caused principally by $1.5 million in cash
used in operating activity and $259,000 of expenditures for property,
equipment and other assets during the three months ended June 30, 1999.
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 $9.9 million and $7.8 million at June 30, 1999
and March 31, 1999, 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 July 1999 to increase the Company's
secured open line of credit from $12 million to $15 million, for a two-year
term.
During the three months ended June 30, 1999, the Company increased its
bonding capacity by establishing an unsecured bonding line of $80 million
through its corporate insurance providers.
The Company's backlog of unfilled orders at June 30, 1999 increased 26.6% to
$82.3 million from $65.0 million at June 30, 1998. New orders received
during the three months ended June 30, 1999 increased 43.2% from the same
period last year, to $16.9 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.
10
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YEAR 2000
The Company has substantially completed its process to ensure Year 2000
compliance of all software and hardware that are date dependent. The process
consisted of four phases:
PHASE I - SYSTEMS REVIEW. This phase involved a review of date dependent
systems and was completed in 1997. This phase included the determination
that one system no longer met the needs of the corporation and therefore
should be replaced regardless of Year 2000 concerns.
PHASE II - COMPLIANCE ASSURANCE. Completed in 1998, this phase involved
obtaining certification from principal system providers that the Company's
enterprise systems are Year 2000 compliant. The Company does not intend on
testing these systems.
PHASE III - SYSTEM REPLACEMENT. Also completed in 1998, this phase involved
bringing on line a Year 2000 compliant system to replace the system
discussed above that no longer met the needs of the corporation.
PHASE IV - HARDWARE AUDIT. Completed in early 1999, this phase tested
personal computers for Year 2000 compliance. The few non-compliant systems
found are in non-date sensitive service.
The Company has no knowledge that any of its systems, major or minor, are
not Year 2000 compliant. No significant expenditures were required to
achieve Year 2000 compliance that would not have been required in the normal
course of operation. The Company is not aware of any non-compliance that
would have a material effect on its operations or result in material
remedial costs, including the risk and potential impact of non-compliance by
the Company's suppliers, subcontractors and customers. However, there can be
no absolute assurance that unanticipated non-compliance will not occur, or
that such non-compliance would not require material costs to remedy or that
it would not result in significant disruption if not remedied.
The Company does not intend to develop any contingency plans to address
possible system failures related to Year 2000 compliance because it believes
that the above mentioned systems will be compliant before January 2000.
The Company provides software based control systems to its customers that
are Year 2000 compliant.
PART II. OTHER INFORMATION
11
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) No reports on Form 8-K were filed during the quarter ended June
30, 1999.
12
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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: August 12, 1999
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> JUN-30-1999
<CASH> 1,932,000
<SECURITIES> 0
<RECEIVABLES> 22,039,000
<ALLOWANCES> 243,000
<INVENTORY> 1,327,000
<CURRENT-ASSETS> 26,365,000
<PP&E> 10,433,000
<DEPRECIATION> 5,011,000
<TOTAL-ASSETS> 33,082,000
<CURRENT-LIABILITIES> 14,595,000
<BONDS> 0
0
0
<COMMON> 71,000
<OTHER-SE> 7,781,000
<TOTAL-LIABILITY-AND-EQUITY> 33,082,000
<SALES> 11,806,000
<TOTAL-REVENUES> 11,806,000
<CGS> 9,584,000
<TOTAL-COSTS> 1,781,000
<OTHER-EXPENSES> 220,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 221,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 221,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 221,000
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
