UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended
SEPTEMBER 30, 1999
ENVIRONMENTAL ELEMENTS CORPORATION
(Exact name of registrant as specified in its charter)
1-10955
(Commission File Number)
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 November 5,
1999.
<PAGE>
ENVIRONMENTAL ELEMENTS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1999
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1999 and March 31, 1999 ................... 3
Consolidated Statements of Operations for
the Periods Ended September 30, 1999 and 1998 ........... 4
Consolidated Statements of Cash Flows for
the Six Months Ended September 30, 1999 and 1998......... 5
Notes to Consolidated Financial Statements ................. 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 8-12
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......... 13
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, 1999
2
<PAGE>
Environmental Elements Corporation and Subsidiaries
Consolidated Balance Sheets
As of September 30, 1999 and March 31, 1999
<TABLE>
<CAPTION>
September 30, March 31,
- -------------------------------------------------------------------------------------------------------------
1999 1999
- -------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 642,000 $ 1,619,000
Accounts and retainage receivable, net of allowance for doubtful
accounts of $271,000 and $221,000, respectively ............................ 10,072,000 9,441,000
Unbilled contract costs and fees ............................................ 12,448,000 12,315,000
Inventories ................................................................. 1,291,000 1,407,000
Prepaid expenses and other current assets ................................... 1,591,000 1,814,000
------------ ------------
Total Current Assets ....................................................... 26,044,000 26,596,000
------------ ------------
Property and equipment:
Capital lease, building and improvements .................................... 7,293,000 7,293,000
Machinery, equipment, furniture and fixtures ................................ 3,280,000 3,120,000
------------ ------------
10,573,000 10,413,000
Less - Accumulated depreciation and amortization ............................ 5,210,000 4,827,000
------------ ------------
Property and equipment,net ................................................ 5,363,000 5,586,000
Non-current retainage receivable .............................................. 402,000 277,000
Other assets .................................................................. 901,000 721,000
------------ ------------
Total Assets ............................................................... $ 32,710,000 $ 33,180,000
------------ ------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Accounts payable ............................................................ 11,735,000 $ 13,110,000
Billings in excess of contract costs and fees ............................... 442,000 824,000
Accrued payroll and related expenses ........................................ 930,000 1,044,000
Accrued and other current liabilities ....................................... 2,613,000 2,056,000
------------ ------------
Total Current Liabilities .................................................. 15,720,000 17,034,000
Long-term capital lease obligation ............................................ 1,828,000 1,963,000
Long-term line of credit ...................................................... 8,100,000 6,100,000
Other non-current liabilities ................................................. 488,000 475,000
------------ ------------
Total Liabilities .......................................................... 26,136,000 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 ............................................................. 28,228,000 28,222,000
Cumulative translation adjustment ........................................... (163,000) (196,000)
Retained deficit ............................................................ (21,562,000) (20,489,000)
------------ ------------
Total Stockholders' Investment .............................................. 6,574,000 7,608,000
------------ ------------
Total Liabilities and Stockholders' Investment .............................. $ 32,710,000 $ 33,180,000
------------ ------------
</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 September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales........................................................ $ 13,557,000 20,757,000 $ 25,363,000 $ 37,301,000
Cost of sales................................................ 12,635,000 18,464,000 22,219,000 32,930,000
------------------------------ ------------------------
Gross Profit.............................................. 922,000 2,293,000 3,144,000 4,371,000
------------------------------ ------------------------
Selling, general and administrative expenses................. 1,958,000 1,804,000 3,739,000 3,507,000
------------------------------ ------------------------
Operating (Loss) Income .................................. (1,036,000) 489,000 (595,000) 864,000
Interest and other expense, net.............................. (258,000) (143,000) (478,000) (311,000)
------------------------------ ------------------------
(Loss) Income Before Income Taxes......................... (1,294,000) 346,000 (1,074,000) 553,000
Provision for income taxes................................... - - - -
------------------------------ ------------------------
Net (Loss) Income......................................... $ (1,294,000) $ 346,000 $ (1,074,000) $ 553,000
------------------------------ ------------------------
(Loss) Earnings per share:
Basic..................................................... $ (0.18) $ 0.05 $ (0.15) $ 0.08
------------------------------ ------------------------
Diluted................................................... $ (0.18) $ 0.05 $ (0.15) $ 0.08
------------------------------ ------------------------
Weighted average common shares outstanding:
Basic..................................................... 7,093,705 7,045,322 7,092,820 7,041,424
Diluted................................................... 7,093,705 7,143,823 7,092,820 7,186,449
</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 Six Months Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ................................................... $(1,074,000) $ 553,000
Non-cash items:
Depreciation and amortization ...................................... 443,000 438,000
Stock contributions to savings plan ................................ -- 52,000
Stock-based compensation ........................................... 6,000 --
Changes in operating assets and liabilities:
Increase in accounts and retainages receivable, net ................ (756,000) (5,723,000)
(Increase) decrease in unbilled contract costs and fees ............ (133,000) 868,000
Decrease (increase) in inventories ................................. 116,000 (79,000)
Decrease in prepaid expenses and other current assets .............. 223,000 308,000
(Decrease) increase in accounts payable ............................ (1,375,000) 5,717,000
(Decrease) increase in billings in excess of contract costs and fees (382,000) 1,355,000
(Decrease) increase in accrued payroll and related expenses ........ (114,000) 178,000
Increase in accrued and other current liabilities .................. 557,000 71,000
(Decrease) in net liabilities of discontinued operations ........... -- (11,000)
Increase in other non-current liabilities .......................... 13,000 13,000
----------- -----------
Net Cash Flows (Used in) Provided by Operating Activities ........ (2,476,000) 3,740,000
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment ................................. (160,000) (136,000)
(Increase) decrease in other assets ................................. (239,000) 21,000
----------- -----------
Net Cash Flows Used in Investing Activities ...................... (399,000) (115,000)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in borrowings under line of credit .............. 2,000,000 (2,500,000)
Payments under capital lease obligation ............................. (135,000) (124,000)
Change in cumulative translation adjustment ......................... 33,000 (41,000)
----------- -----------
Net Cash Flows Provided by (Used in) Financing Activities ........ 1,898,000 (2,665,000)
----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents ............. (977,000) 960,000
Cash and Cash Equivalents, beginning of period ........................ 1,619,000 958,000
----------- -----------
Cash and Cash Equivalents, end of period .............................. $ 642,000 $ 1,918,000
----------- -----------
</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. 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 stock transactions during the six months ended
September 30, 1999 with regards to the issuance of common stock as matching
contributions under the 401K savings plan. In non-cash stock transactions
during the six months ended September 30, 1998, the Company issued 13,753
shares of its common stock as matching contributions under its 401k savings
plan.
Amounts paid in cash for interest during the six months ended September 30,
1999 and 1998 were $470,000 and $398,000, respectively. Amounts paid for
taxes during the six months ended September 30, 1999 and 1998 were $70,300
and $10,000, respectively.
6
<PAGE>
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
six months ended September 30, 1999 and 1998 were as follows:
(in thousands) 9/30/99 9/30/98
GEOGRAPHIC AREA:
United States 18,501 33,993
- --------------------------------------------------------------
Canada 3,630 2,234
- --------------------------------------------------------------
Other International 3,232 1,074
- --------------------------------------------------------------
Total 25,363 37,301
- --------------------------------------------------------------
6. COMPREHENSIVE (LOSS) INCOME:
Comprehensive (loss) income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner sources. The Company's comprehensive (loss)
income for the periods presented is listed below:
<TABLE>
<CAPTION>
For the Six Months Ended September 30,
--------------------------------------
1999 1998
---- ----
<S> <C> <C>
Net (Loss) Income as Reported $(1,074,000) $553,000
Effect of Foreign Currency Translation Gain (Loss) 32,000 (31,000)
--------------------------------
Comprehensive Net (Loss) Income $(1,042,000) $522,000
================================
</TABLE>
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, 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales ....................................... 100.0% 100.0% 100.0% 100.0%
Cost of Sales ............................... 93.2 89.0 87.6 88.3
----- ----- ----- -----
Gross Profit ................................ 6.8 11.0 12.4 11.7
Selling, general and administrative expenses 14.4 8.7 14.7 9.4
----- ----- ----- -----
Operating (Loss) Income ............... (7.6%) 2.4% (2.3%) 2.3%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1998
Sales decreased 34.7% or $7,200,000 to $13,557,000 from $20,757,000. The
decrease in sales for the three-month period is primarily related to lower
sales from the Company's power industry customers, lower summer activity in
repair and rebuild projects, and by the cancellation of the construction
phase of one contract totaling $4.7 million, offset in part by growth in
maintenance and field service revenues, and by higher revenues from the
Company's industrial customers.
Cost of sales decreased 31.6% or $5,829,000 to $12,635,000 from $18,464,000.
The decrease in dollars resulted from the decrease in sales volume for the
current year quarter. As a percentage of sales, cost of sales increased to
93.2% from 89.0%. The increase in percentage of sales is primarily due to a
charge of $500,000 for contract claims related to two projects. Excluding
that charge, cost of sales as a percentage of sales was essentially level
compared to the prior year, at 89.5%.
8
<PAGE>
Selling, general and administrative expenses increased 8.5% or $154,000 to
$1,958,000 from $1,804,000. The increase in dollars was primarily due to the
Company's increased selling expense. As a percentage of sales, selling,
general and administrative expenses increased to 14.4% from 8.7%. The
increase in percentage was primarily a result of the above referenced
decrease in sales volume.
For the reasons set forth above, there was an operating loss of $1,036,000,
or 7.6% of sales, for the quarter, versus operating income of $489,000, or
2.4% of sales, in the prior year quarter.
Interest and other expense, net of interest and other income, increased
80.4%, or $115,000, to $258,000 from $143,000. The increase is primarily due
to increased borrowing during the quarter.
Loss before income taxes was $1,294,000, or 9.5% of sales, in the current
year quarter, compared to income before income taxes of $346,000, or 1.7% of
sales, for the prior year period.
There was no provision for income taxes in either quarter reported because
the effects of the Company's net operating loss carryforwards from prior
years substantially eliminated taxes on current year income.
SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
SIX MONTHS ENDED SEPTEMBER 30, 1998
Sales decreased 32.0% or $11,938,000 to $25,363,000 from $37,301,000. The
decrease in sales for the six-month period are primarily related to lower
sales from the Company's power industry customers, lower summer activity in
repair and rebuild projects, and by the cancellation of the construction
phase of one contract totaling $4.7 million, offset in part by growth in
maintenance and field service revenues, and by higher revenues from the
Company's industrial customers.
Cost of sales decreased 32.5% or $10,711,000 to $22,219,000 from
$32,930,000. The decrease in dollars resulted from the decrease in sales
volume for the current year period. As a percentage of sales, cost of sales
was essentially level, at 87.6%, vs. 88.3% in the prior year period.
Selling, general and administrative expenses increased 6.6% or $232,000 to
$3,739,000 from $3,507,000. The increase in dollars was primarily due to
increased selling expense. As a percentage of sales, selling, general and
administrative expenses increased to 14.7% from 9.4%. The increase in
percentage was primarily a result of the above referenced decrease in sales
volume.
For the reasons set forth above, there was an operating loss of $595,000, or
2.3% of sales,
9
<PAGE>
for the six month period, versus operating income of $864,000, or 2.3% of
sales, in the prior year period.
Interest and other expense, net of interest and other income, increased
53.7%, or $167,000, to $478,000 from $311,000. The increase is primarily due
to increased borrowing during the six-month period.
Loss before income taxes was $1,074,000, or 4.2% of sales, in the current
year period, compared to income before income taxes of $553,000, or 1.5% of
sales, for the prior year period.
There was no provision for income taxes in either quarter reported because
the effects of the Company's net operating loss carryforwards from prior
years substantially eliminated taxes on current year income.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $977,000 and borrowings under the
Company's line of credit increased by $2.0 million during the six months
ended September 30, 1999. This was caused principally by the $2.5 million in
cash used by operating activity during the six months ended September 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 $10.3 million and $7.8 million at September 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 the prior fiscal year ended March 31,
1999 to increase the Company's secured open line of credit from $10 million
to $12 million. During the six months ended September 30, 1999, the Company
and its bank agreed to expand the line of credit to $15 million for a
two-year term.
Subsequent to September 30, 1999, on November 1, 1999, the Company moved the
trading venue and listing of its common shares from the New York Stock
Exchange to the American Stock Exchange, continuing to trade under the stock
symbol "EEC".
The Company's backlog of unfilled orders at September 30, 1999 increased
36.0% to $67.5 million from $49.7 million at September 30, 1998. New orders
received during the six months ended September 30, 1999 increased 20.4% from
the same period last year, to $20.7 million. The new orders total was offset
by the cancellation in September 1999 of the construction phase of one
contract totaling $4.7 million. The Company believes that there has been
evidence of improvement over the past two years in the market for its
products, technologies and services, but also believes that, in the short
term, the market is exceptionally difficult to predict accurately due to
regulatory and other factors, both domestic and international in nature. The
Company has attempted to adjust its organization so that it can operate and
be profitable on highly variable business levels at or above those
experienced in the current and prior fiscal year. However, there can be no
assurance that such business levels will occur, that the Company's actions
will be successful, or that future losses would not adversely affect the
Company's liquidity and capital resource position. The Company believes it
has liquidity and capital resources sufficient to maintain its business at
its current level of activity due to the following: no significant capital
expenditures are expected; historically the Company has required little
investment in operating working capital; and its banking arrangements, i.e.
those currently available and those which could be obtained, would be
adequate to maintain its ongoing business at its current level of activity
during the next year.
11
<PAGE>
YEAR 2000
The Company 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.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of securities
holders at the Annual Meeting of Stockholders held on July 30,
1999:
(a) The stockholders ratified the selection of Arthur Andersen LLP
to serve as independent public accountants of the Company for
the fiscal year ending March 31, 2000. The matter was approved
by a vote of 5,985,095 for, 30,671 against, 30,864 abstaining
and 1,045,575 nonvotes.
(b) The stockholders elected F. Bradford Smith (5,758,232 for,
273,798 against, 14,600 abstaining and 1,045,575 nonvotes),
Samuel T. Woodside (5,910,206 for, 133,843 against, 2,581
abstaining and 1,045,575 nonvotes) and James S. Potts
(5,977,878 for, 66,090 against, 2,662 abstaining and 1,045,575
nonvotes) as Class III directors for a three-year term
expiring at the 2002 Annual Meeting or until their successors
are duly elected and qualified. The names of all other
directors whose terms of office as directors continued after
the meeting are as follows: Edward H. Verdery, Richard E. Hug,
John C. Nichols and Barry Koh.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 - Second Amendment to Security Agreement dated August 31,
1999 between the Registrant and Mercantile Safe Deposit and
Trust Company filed herewith.
10.2 - Third Amendment to Line of Credit Promissory Note dated
August 31, 1999 between the Registrant and Mercantile Safe
Deposit and Trust Company filed herewith.
10.3 - Fourth Amendment to Revolving Credit and Letter of
Credit Agreement dated August 31, 1999 between the Registrant
and Mercantile Safe Deposit and Trust Company filed herewith.
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
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
Vice President and
Chief Financial Officer
Date: November 12, 1999
14
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
10.1 Second Amendment to Security Agreement dated
August 31, 1999 between the Registrant and Mercantile
Safe Deposit and Trust Company
10.2 Third Amendment to Line of Credit Promissory Note
dated August 31, 1999 between the Registrant and
Mercantile Safe Deposit and Trust Company
10.3 Fourth Amendment to Revolving Credit and Letter of
Credit Agreement dated August 31, 1999 between the
Registrant and Mercantile Safe Deposit and Trust
Company
27.1 Financial Data Schedule
15
EXHIBIT 10.1
- ------------
SECOND AMENDMENT TO SECURITY AGREEMENT
--------------------------------------
THIS SECOND AMENDMENT is made as of this 31st day of August, 1999 by
and among ENVIRONMENTAL ELEMENTS CORPORATION, a Delaware corporation
("Borrower") and MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY, a Maryland banking
corporation ("Bank").
RECITALS
--------
A. The Bank previously agreed to extend credit to the Borrower pursuant
to a certain Revolving Credit and Letter of Credit Agreement dated November 24,
1993, as amended by a letter agreement dated May 26, 1994 from Nicholas C.
Richardson to Thomas B. McCord, a Second Amendment to Revolving Credit and
Letter of Credit Agreement dated October 25, 1995, a Third Amendment to
Revolving Credit and Letter of Credit Agreement dated June 12, 1998, and a
Fourth Amendment to Revolving Credit and Letter of Credit Agreement of even date
herewith (collectively, the "Agreement"), in the form of a line of credit
facility in an original principal amount not to exceed Ten Million Dollars
($10,000,000.00), which was reduced to Seven Million Dollars ($7,000,000.00),
then increased to Twelve Million Dollars ($12,000,000.00), and is currently
being increased to Fifteen Million Dollars ($15,000,000.00).
B. The indebtedness under the Agreement is evidenced by a Line of
Credit Promissory Note dated November 24, 1993 from Borrower to Bank, as amended
by a certain First Amendment to Line of Credit Promissory Note dated October 25,
1995, certain letter agreements between the Bank and the Borrower, a certain
Second Amendment to Line of Credit Promissory Note dated June 12, 1998, and a
certain Third Amendment to Line of Credit Promissory Note of even date herewith
(collectively, the "Note").
C. The repayment of the indebtedness evidenced by the Note is secured
by a Security Agreement dated October 25, 1995 between Borrower and Bank, as
amended by a First Amendment to Security Agreement dated July 12, 1998.
D. The Buyer has requested that the Bank extend the term and increase
the amount of such line of credit facility, and the Bank has agreed, and the
parties now wish to amend the Security Agreement.
WITNESSETH
----------
NOW, THEREFORE, in consideration of the premises and the mutual
covenants set forth herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree that the Security Agreement is hereby modified and amended as follows (the
Security Agreement, as amended, is hereinafter referred to as the "Security
Agreement"):
1. Recitals. The parties acknowledge and agree that the foregoing
Recitals are true and correct, and are incorporated herein by reference.
16
<PAGE>
2. Amendments to Security Agreement.
---------------------------------
A. The aggregate amount of the credit facility described in
the Recitals of the Security Agreement, the repayment of which is secured by the
Security Agreement, is hereby increased from Twelve Million Dollars
($12,000,000.00) to Fifteen Million Dollars ($15,000,000.00).
B. All references in the Security Agreement to the "Note"
shall mean the Line of Credit Promissory Note, as heretofore amended and as
amended on even date, and all references to the Loan Agreement shall mean the
Revolving Credit and Letter of Credit Agreement, as heretofore amended and as
amended on even date, as well as any future amendments or modifications thereof.
3. Effect of Amendment. Except as modified and amended herein, the
Security Agreement shall be and remain in full force and effect. In the event of
any conflict between the terms and provisions of the Security Agreement and this
Second Amendment, the terms and provisions of this Second Amendment shall
prevail. Nothing contained herein shall constitute a novation under the Note.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
executed and sealed, intending this to be a sealed instrument, as of the date
first above written.
WITNESS/ATTEST: ENVIRONMENTAL ELEMENTS CORPORATION
____________________________ By:________________________________(SEAL)
Name: James B. Sinclair
Title: Vice-President and
Chief Financial Officer
MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY
____________________________ By:________________________________(SEAL)
Philip G. Enstice,
Senior Vice-President
17
EXHIBIT 10.2
- ------------
THIRD AMENDMENT TO LINE OF CREDIT PROMISSORY NOTE
-------------------------------------------------
THIS THIRD AMENDMENT (this "Amendment") is made as of this 31st day of
August, 1999 by and among ENVIRONMENTAL ELEMENTS CORPORATION, a Delaware
corporation ("Borrower") and MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY, a
Maryland banking corporation ("Bank").
RECITALS
--------
A. The Bank previously agreed to extend credit to the Borrower pursuant
to a certain Revolving Credit and Letter of Credit Agreement dated November 24,
1993, as amended by a letter agreement dated May 26, 1994 from Nicholas C.
Richardson to Thomas B. McCord, a Second Amendment to Revolving Credit and
Letter of Credit Agreement dated October 25, 1995, a Third Amendment to
Revolving Credit and Letter of Credit Agreement dated June 12, 1998, and a
Fourth Amendment to Revolving Credit and Letter of Credit Agreement of even date
herewith (collectively, the "Agreement"), in the form of a line of credit
facility in an original principal amount not to exceed Ten Million Dollars
($10,000,000.00), which was reduced to Seven Million Dollars ($7,000,000.00),
and then increased to Twelve Million Dollars ($12,000,000.00).
B. The indebtedness under the Agreement is evidenced by a Line of
Credit Promissory Note dated November 24, 1993 from Borrower to Bank, as amended
by a certain First Amendment to Line of Credit Promissory Note dated October 25,
1995, certain letter agreements between the Bank and the Borrower, and a certain
Second Amendment to Line of Credit Promissory Note dated June 12, 1998
(collectively, the "Note").
C. The Borrower has requested that the Bank extend the term, lower the
interest rate and increase the amount of such line of credit facility, and the
Bank has agreed, subject to the terms and conditions hereinafter described.
WITNESSETH
----------
NOW, THEREFORE, in consideration of the premises and the mutual
covenants set forth herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree that the Note is hereby modified and amended as follows (the Note, as
amended, is hereinafter referred to as the "Note"):
1. Recitals. The parties acknowledge and agree that the foregoing
Recitals are true and correct, and are incorporated herein by reference.
2. Amendments to Note.
-------------------
A. The aggregate principal amount of the credit facility
evidenced by the Note is hereby increased from Twelve Million Dollars
($12,000,000.00) to Fifteen Million Dollars ($15,000,000.00), and all references
to $12,000,000.00 in the Note (as previously amended) are hereby increased to
$15,000,000.00.
18
<PAGE>
B. The maturity date for the term of the Note, as set forth on
Page 1 of the Note, is hereby extended until July 1, 2001. The Bank agrees to
provide to Borrower at least fifty-four (54) weeks' prior written notice if Bank
elects not to renew the term of the Note on July 1, 2001 (or the expiration of
any renewal term thereafter). The foregoing notice shall not be required if the
Bank elects to terminate the credit facility following a default hereunder or
under the Agreement.
C. The interest rate under the Note shall hereinafter be equal
to the Bank's Prime Rate, as announced from time to time.
D. All references in the Note to the "Agreement" shall mean
the Revolving Credit and Letter of Credit Agreement, as previously amended and
as amended on even date by the Fourth Amendment to Revolving Credit and Letter
of Credit Agreement, as well as any future amendments or modifications thereof.
3. Effect of Amendment. Except as heretofore and hereby modified and
amended, the Note shall be and remain in full force and effect. In the event of
any conflict between the terms and provisions of the Note and this Amendment,
the terms and provisions of this Amendment shall prevail.
4. No Defenses; No Novation. Borrower acknowledges and confirms that it
has no right of set-off or defense of any kind or description regarding the
payment of any principal or interest under the Agreement or the Note, that it
has no claims or causes of action against the Bank, and that upon execution of
the Fourth Amendment to Revolving Credit and Letter of Credit Agreement there
shall exist no default (or any event which, with the passing of time or giving
of notice would constitute a default) under the Agreement or the Note. This
Amendment shall not extinguish or discharge the indebtedness evidenced by the
Note, nor constitute a novation thereof.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
executed and sealed, intending this to be a sealed instrument, as of the date
first above written.
WITNESS/ATTEST: ENVIRONMENTAL ELEMENTS CORPORATION
____________________________ By:________________________________(SEAL)
Name: James B. Sinclair
Title: Vice-President and
Chief Financial Officer
MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY
____________________________ By:________________________________(SEAL)
Philip G. Enstice,
Senior Vice-President
19
EXHIBIT 10.3
- ------------
FOURTH AMENDMENT TO REVOLVING CREDIT
AND LETTER OF CREDIT AGREEMENT
------------------------------
THIS FOURTH AMENDMENT is made as of this 31st day of August, 1999 by
and among ENVIRONMENTAL ELEMENTS CORPORATION, a Delaware corporation
("Borrower") and MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY, a Maryland banking
corporation ("Bank").
RECITALS
--------
A. The Bank previously agreed to extend credit to the Borrower pursuant
to a certain Revolving Credit and Letter of Credit Agreement dated November 24,
1993, as amended by a letter agreement dated May 26, 1994 from Nicholas C.
Richardson to Thomas B. McCord, a Second Amendment to Revolving Credit and
Letter of Credit Agreement dated October 25, 1995, and a Third Amendment to
Revolving Credit and Letter of Credit Agreement dated June 12, 1998
(collectively, the "Agreement"), in the form of a line of credit facility in an
original principal amount not to exceed Ten Million Dollars ($10,000,000.00),
which was subsequently reduced to Seven Million Dollars ($7,000,000.00), and
then increased to Twelve Million Dollars ($12,000,000.00).
B. The indebtedness under the Agreement is evidenced by a Line of
Credit Promissory Note dated November 24, 1993 from Borrower to Bank, as
modified by a certain First Amendment to Line of Credit Promissory Note dated
October 25, 1995, certain letter agreements between the Bank and Borrower, a
certain Second Amendment to Line of Credit Promissory Note dated June 12, 1998,
and a certain Third Amendment to Line of Credit Promissory Note of even date
herewith (collectively, the "Note").
C. The repayment of the indebtedness evidenced by the Note is secured
by a Security Agreement dated October 25, 1995 between Borrower and Bank, as
amended by a First Amendment to Security Agreement dated June 12, 1998 and a
Second Amendment to Security Agreement of even date herewith (the "Security
Agreement").
D. The Borrower has requested that the Bank extend the term and
increase the amount of the line of credit facility, and the Bank has agreed,
subject to the terms and conditions hereinafter described.
WITNESSETH
----------
NOW, THEREFORE, in consideration of the premises and the mutual
covenants set forth herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree that the Agreement is hereby modified and amended as follows (the
Agreement, as amended, is hereinafter referred to as the "Agreement"):
1. Recitals. The parties acknowledge and agree that the foregoing
Recitals are true and correct, and are incorporated herein by reference.
20
<PAGE>
2. Amendments to Agreement.
------------------------
A. The aggregate principal amount of the credit facility
described in the first Recital of the Agreement is hereby increased to Fifteen
Million Dollars ($15,000,000.00).
B. The definition of "Note" on Page 3 of the Agreement is
hereby modified to mean the Line of Credit Promissory Note, as heretofore
amended and as amended on even date herewith.
C. The definition of "Other Agreements" on Page 4 of the
Agreement is hereby modified to include this Fourth Amendment, the Third
Amendment to Line of Credit Promissory Note, and the Second Amendment to
Security Agreement of even date herewith between the Borrower and Bank.
D. The definition of "Revolving Credit Commitment" on Page 5
of the Original Agreement is hereby deleted in its entirety and the following is
inserted in its place:
"Revolving Credit Commitment" shall mean, at any given time,
an amount equal to up to Fifteen Million Dollars ($15,000,000.00),
minus the amount of any Letters of Credit then issued and outstanding
under this Agreement."
E. Section 2.01 of the Agreement is hereby amended by
extending the Line of Credit Termination Date until July 1, 2001, as may be
extended by the Bank in writing from time to time thereafter. Notwithstanding
the foregoing, the parties acknowledge and agree that the Bank will annually
review the financial status of the Borrower and its performance under the terms
and provisions of the Agreement, and the Bank shall have the right as a result
of such review not to renew the term of the Note, in the Bank's sole discretion,
upon at least fifty-four (54) week's prior written notice to Borrower.
F. Section 2.01 of the Agreement is hereby amended by
adding the following provision at the end of Section 2.1:
Notwithstanding anything to the contrary contained herein, the
total advances at any time under the Line of Credit plus the face
amount of outstanding Letters of Credit shall not exceed the aggregate
of the following: (i) seventy-five percent (75%) of eligible
Receivables (i.e. Receivables of 120 days or fewer); fifty percent
(50%) of retainage owed to Borrower under existing customer contracts;
and fifty percent (50%) of costs incurred and fees accrued by Borrower
under existing customer contracts which have not yet been billed to
such customers, but will be billed in the ordinary course of business.
The Borrower shall submit monthly to Bank a Borrowing Base Certificate
(the form of which is attached hereto as Exhibit A), subject to such
modifications and adjustments as the Bank may reasonably deem
appropriate as a result of its independent review of the calculations
and supporting data and documentation relating to such Certificate. The
Bank shall not be obligated to make any advance under the Agreement on
the basis of a Borrowing Base Certificate which reports data that is
more than thirty (30) days old.
G. Section 2.04(A) of the Agreement is hereby deleted in
its entirety and the following is inserted in its place:
21
<PAGE>
The principal amount of all advances made hereunder shall bear
interest at a fluctuating rate equal to the Bank's Prime Rate, as
announced from time to time. The interest rate shall be adjusted as of
the effective date of each change in the Bank's Prime Rate.
H. Section 2.06 of the Agreement is hereby deleted in
its entirety and the following is inserted in its place:
The Borrower agrees to pay to the Bank an annual facility fee
equal to one-half of one percent (0.5%) of the total credit facility
available under the Agreement, which shall be paid quarterly in arrears
(i.e. 0.5% of $15,000,000.00 equals $75,000.00, paid quarterly in the
amount of $18,750.00).
I. Section 3.01 of the Agreement is hereby deleted in
its entirety and the following is inserted in its place:
Subject to the terms hereof, the Bank will from time to time
until the Line of Credit Termination Date, make available Letters of
Credit in an aggregate amount not to exceed Fifteen Million Dollars
($15,000,000.00) minus the total principal amount then - outstanding
under the Line of Credit.
J. Section 6.05 of the Agreement is hereby amended by
increasing the required minimum Tangible Net Worth of Borrower to Six Million
Five Hundred Thousand Dollars ($6,500,000.00), which shall be reviewed quarterly
by the Bank. For purposes hereof, the Borrower's net worth shall be determined
at the end of each calendar quarter, based on the audited financial statements
or the 10-Q financial reports of the Borrower.
K. Borrower agrees it shall constitute a default under the
Agreement if the Borrower experiences a net operating loss during any fiscal
year, as determined by the Bank based upon the audited annual financial
statements of the Borrower.
3. Representations and Warranties. The Borrower hereby confirms that
all of the representations and warranties set forth in Section IV of the
Agreement are accurate, complete and correct as of the date of this Fourth
Amendment, and are incorporated herein by reference.
4. Effect of Amendment. Except as modified and amended herein, the
Agreement shall be and remain in full force and effect. In the event of any
conflict between the terms and provisions of the Agreement and this Fourth
Amendment, the terms and provisions of this Fourth Amendment shall prevail.
Nothing contained herein shall constitute a novation under the Note.
22
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Amendment to be executed under seal, intending this to be a sealed instrument,
as of the date first above written.
WITNESS/ATTEST: ENVIRONMENTAL ELEMENTS CORPORATION
_________________________ By:____________________________________(SEAL)
Name: James B. Sinclair
Title: Vice-President and
Chief Financial Officer
MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY
_________________________ By:____________________________________(SEAL)
Philip G. Enstice,
Senior Vice-President
23
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<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 642,000
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<RECEIVABLES> 22,791,000
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0
0
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