UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For the Fiscal Year ended March 31, 1999
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 Commission File Number 1-10955
-----------------------------------
ENVIRONMENTAL ELEMENTS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-1303748
(State or other jurisdiction (I.R.S. Employer
of 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
SECURITIES REGISTERED PURSUANT TO SECTION
12(b) OF THE ACT: Common stock, par value $0.01
per share, New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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 by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10K.
|X|
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of June 4, 1999 was approximately $19.2 million based upon the
closing price of $3.5625. The number of shares outstanding of the registrant's
Common Stock as of June 4, 1999 was 7,092,205.
Documents Incorporated by Reference
Portions of the definitive Proxy Statement relating to registrant's Annual
Meeting of Stockholders to be held July 30, 1999 are incorporated by reference
in Part III of this Form 10-K, with the exception of portions that are not
incorporated by reference by their terms. Portions of the registrant's Annual
Report to Stockholders for the year ended March 31, 1999 are incorporated by
reference in Parts I, II and IV of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Environmental Elements Corporation (the "Company") designs and supplies
proprietary, large-scale, custom-engineered air pollution control systems which
enable customers to operate their facilities in compliance with regulatory
standards limiting particulate and gaseous emissions. The Company's business
strategy is to provide a broad array of proprietary state-of-the-art
technologies to traditionally intensive users of air pollution control systems,
including two primary customer groups -- electric utilities and private power
generators and pulp and paper producers-- in addition to municipal solid waste
facilities and other industrial customers.
The Company has historically concentrated on systems that reduce particulate
emissions from combustion exhaust streams, specifically electrostatic
precipitators and fabric filter systems (also known as baghouses). For each of
these product lines, the Company has developed proprietary designs for durable,
cost-effective systems. The Company has developed, acquired distribution rights
for, or licensed from others, dry and semi-dry scrubbers for use in gaseous
emissions control.
The Company enters into contracts for original equipment systems, major
rehabilitation and rebuilding services, and ongoing maintenance and repair
services. The Company offers a range of systems and technologies to address the
air pollution control needs of customers in its selected markets. While the
Company, in certain instances, may provide a combination of its systems as an
integrated pollution control solution, its customers typically purchase
individual systems which, in certain instances, may operate in conjunction with
other systems supplied by others. The Company's contracts with its customers
generally require it to design and supply an air pollution control device which
removes specified amounts of gaseous or particulate matter from combustion
exhaust gases. The Company is generally contractually responsible to its
customers for all phases of the design, fabrication, start-up and testing and
(if included in the scope of the Company's contract) field construction of its
systems. The Company's successful completion of its contractual obligations is
generally determined by a performance test or tests of the Company's systems
which are generally conducted by a customer-selected independent testing agency
which verifies that the system is removing gaseous or particulate emissions in
amounts required by the contract. In connection with the expansion of the
Company's technological offerings and a shift in the Company's mix of business,
additional measures of performance may be afforded or required. Such measures
may include availability or reliability guarantees and guarantees with respect
to the consumption of power, reagent, water or other components of variable
operating costs.
The Company generally does not manufacture or fabricate its systems or
engage in field construction activities utilizing its own employees, other than
field supervisory personnel. The Company fabricates, through its joint venture
production facility in the People's Republic of China, precipitator internals
for use by the Company's licensee in China and for the Company's use in other
selected markets. In fiscal 1996, the Company elected to discontinue the
manufacturing and certain direct hire construction activities previously
conducted by its aftermarket subsidiary, Environmental Elements Services
Corporation, and relocated the aftermarket business to the Company's Baltimore
headquarters, where it now conducts such business directly.
The Company performs design and process engineering for its systems that
remove gaseous or particulate matter. The Company determines the size, geometry,
mechanical, electrical and structural characteristics of the device needed to
meet its contractual obligations, and creates the detail design and
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develops specifications for all structural, electrical, mechanical, piping, and
chemical components necessary to make the system. In performing its contracts
the Company purchases various components (either standard inventory items or
items made by vendors to the Company's design and specifications), enters into
and supervises subcontracts for field construction (if included in the scope of
the Company's contract), and manages all technical and commercial aspects of the
performance of its contracts, including the start-up of its systems.
In general, the Company's original equipment contracts vary in length from
12 to 36 months and require performance of a particular project within a
specified time frame. Almost all of the Company's contracts are undertaken on a
fixed price basis. Fixed price contracts require the Company to bear certain
risks of cost overruns, and from time to time the Company experiences a loss in
connection with a contract.
The Company and its predecessor have been engaged in the air pollution
control business since 1946.
PRODUCT LINES AND SERVICES
The Company supplies electrostatic precipitators primarily to power
generation and pulp and paper customers. An electrostatic precipitator removes
particulate matter from combustion exhaust streams. The particulate in the gases
is electrically charged as it passes positively charged high-voltage electrodes
and is then attracted to oppositely charged collecting plates. The collected
material is periodically removed from the plates by rapping or vibration. The
Company's precipitators include computerized power control systems which allow
the precipitators to respond automatically to changing operating conditions. The
Company's installed base of electrostatic precipitators is one of the largest in
North America.
The Company supplies a wide range of fabric filter systems to control and
recover dust and other particulates in a variety of utility and industrial
applications for power-generation, pulp and paper, incineration, and other
industrial customers.
The Company offers state-of-the-art semi-dry scrubbing systems for the
reduction of acid gases such as sulfur oxides and hydrogen chloride emissions. A
semi-dry scrubbing system removes objectionable gaseous pollutants and certain
heavy metals from exhaust emissions by causing a chemical reaction, typically
using lime as a reagent, which transforms the pollutants into a readily
disposable particulate. The Company offers its semi-dry scrubbers primarily for
municipal solid waste incineration facilities.
The Company offers a fluidized bed flue gas desulfurization dry reactor,
(known as a circulating dry scrubber or "CDS"(R)) which has special application
to both the power generation and municipal solid waste incineration acid rain
retrofit markets. During fiscal 1996 and fiscal 1997, the Company successfully
started up its first two CDS(R) systems and successfully completed its
performance obligations. The CDS(R) technology is licensed from Lurgi GmbH.
The Company supplies original equipment systems, the majority of which are
replacements of aged existing air pollution control systems. In addition,
because of the extreme conditions under which air pollution control systems
operate, maintenance, repair, and rebuilding of these systems is an ongoing
requirement and creates additional aftermarket demand for the Company's services
and products. The Company engages in complete and partial rehabilitation and
rebuilding of air pollution control systems, often involving design and
installation work, and also provides ongoing maintenance services and spare
parts on a routine or emergency-response basis. Such services may include the
provision of rebuild project materials, construction services, and field
engineering services including inspection, testing, rebuild supervision, and
equipment performance evaluation services. The Company provides such products
and services from its headquarters and, beginning in fiscal 1999, from regional
maintenance centers located near its customers. The Company believes that its
strategy related to aftermarket products and services represents a significant
long-term opportunity. Accordingly, during fiscal 1999
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the Company established three new regional maintenance centers in Florida,
Virginia and Texas, and intends to establish additional maintenance centers
where it believes that additional business can be gained or customer
relationships can be enhanced.
In fiscal 1997 the Company entered into its first alliance agreement with a
customer. Under this agreement the Company provides dedicated engineering and
field service personnel who perform inspection, engage in problem-solving and
material planning, and make parts recommendations on a system-wide basis, with a
goal of reducing our customer's total life cycle costs. During fiscal 1998, the
alliance resulted in a large order from the customer for new systems upgrades.
During fiscal 1999 the alliance resulted in a multi-year contract with the
customer to provide engineering services, new equipment, and systems upgrades in
order to achieve compliance with new regulations governing nitrogen oxide
emissions promulgated by the Environmental Protection Agency in September, 1998.
The Company intends to continue to focus on opportunities for similar alliances
with other important customers.
INDUSTRY DEMAND FACTORS
The market for air pollution control systems and technologies is directly
dependent upon governmental regulation and enforcement of air quality standards.
During the past two decades, federal, state, and municipal governments have
recognized that contamination of the air poses significant threats to public
health and safety, and, in response, have enacted legislation designed to reduce
or eliminate a variety of air pollutants. The Company believes that governmental
regulation of air pollution and its sources will continue to increase and that
it is well positioned to assist customers in its targeted markets to solve their
air pollution control problems.
Given the existence of stringent domestic air emissions standards, domestic
demand for the Company's systems and technologies generally arises from the
following principal sources: the need for replacement, rehabilitation and
rebuilding of air pollution control systems on aging electric utilities and on
pulp and paper manufacturing facilities; construction of new
electricity-generating facilities, particularly those operated under
cogeneration and "private power" arrangements; continued expansion of pulp and
paper manufacturing capacity; and construction of new municipal solid waste
incineration facilities. Demand from any one of these sources may vary
significantly from year to year depending on economic, regulatory, and other
factors including industry cycles.
Emerging international demand for the Company's products is driven primarily
by a combination of electric generation and other infrastructure improvement and
the passage or enforcement of existing regulations limiting gaseous and
particulate emissions in developing countries.
MARKETS SERVED
The Company has historically followed a strategy of limiting its business to
systems and technologies for air pollution control and focusing within that
business on selected markets in which the Company believes it can build upon its
reputation for expertise and reliability. The Company's current targeted markets
are electric utilities and private power generators, pulp and paper producers,
developers of municipal solid waste incineration facilities, and certain other
process industries throughout the United States, Canada, and selected areas of
central Europe, Asia and the Pacific Rim. The Company started up two
precipitator projects in Poland in fiscal 1996, and in fiscal 1997, the
Company's baghouse and spray dryer emissions control system for a municipal and
medical waste incinerator in the United Kingdom commenced operations. In its
1997 fiscal year, the Company received and commenced execution of an award to
supply reverse air fabric filter emissions systems at a municipal solid waste
incineration plant in Korea. The Company's precipitator technology will be
installed in a power plant in China, through a contract awarded to the Company's
licensee in fiscal 1997. In fiscal 1998, the Company received two additional
orders for equipment and the Company signed international license
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agreements in South Korea, Finland, Russia and India.
Currently, the Company offers a select line of systems and technologies to
meet the various needs of electric utilities and other electric power generators
for control of air emissions at new and existing facilities. The Company's
principal product sold to the electric-generating market is its Rigitrode(R)
electrostatic precipitator, which combines the reliability traditionally
associated with European heavy-duty, bottom-rapped designs and the cost
efficiency associated with top-rapped American models. (In a top-rapped
precipitator, the force used to dislodge dust from the collection plate is
applied to the top of the plate.) The Company is bidding, and will continue to
bid, a number of large contract opportunities in the utility market.
The Company also offers to the utility industry a range of fabric filter
systems to control particulate emissions. In recent years, the Company has been
successful in marketing its fabric filter systems to private power projects that
either cogenerate electricity and thermal energy or generate electricity alone
for sale to utilities. In addition, in response to anticipated substantial
demand for solutions to the requirements of acid rain legislation, the Company,
under license from Lurgi GmbH, has introduced a state-of-the-art CDS(R)
system for the control of sulfur oxide emissions. The Company also offers a
proprietary semi-dry scrubbing system using rotary atomizer technology which the
Company believes offers the advantages of lighter weight, ease of maintenance,
and economy of operation that are particularly significant to smaller
electricity-generating facilities.
The Company has installed over 500 electrostatic precipitators at pulp and
paper plants in the United States and Canada. The Company attributes its success
in this market to the competitive advantages of its Rigitrode(R) precipitator
and to its reputation for reliability and service. The Company has established
long-standing relationships, in many cases covering more than 25 years, with
leading firms in the industry.
Municipal solid waste and private waste-to-energy facilities, as well as
hazardous waste incineration plants, must comply with stringent federal and
state environmental standards. Existing regulations require new solid waste
incineration facilities to control both sulfur oxides and hydrogen chloride
emissions. Such systems generally include an acid gas scrubbing tower and a
modular baghouse for collection of particulates. In fiscal 1997, the Company
successfully placed into operation an emissions system on a municipal and
medical waste incinerator in England and a waste-to-energy facility in New York.
Also in fiscal 1997, the Company was awarded a contract to retrofit a
waste-to-energy facility in Georgia and, in fiscal 1998, was awarded a contract
to retrofit a waste-to-energy facility in Florida. The Company has identified
the incineration market as one which will provide an opportunity to market its
semi-dry scrubbing systems in the future.
In addition to serving the principal markets described above, the Company
sells its systems to customers in petroleum refining and certain materials
processing industries, including mining, metals conversion, cement production,
and steel manufacturing. The Company's sales in these markets consist primarily
of wet scrubbers and electrostatic precipitators. The Company believes that it
is competitive in these other markets.
BOOKINGS AND BACKLOG INFORMATION
The information required by this item is contained under the caption
"Bookings and Backlog" in "Management's Discussion and Analysis" in the
Company's 1999 Annual Report to Shareholders.
RESEARCH AND DEVELOPMENT
The Company has an ongoing program for development and commercialization of
new air pollution control technologies and enhancement of existing technologies.
The Company spent approximately $475,000, $317,000, and $139,000, on product
development during fiscal 1999, 1998, and 1997, respectively. Among other
important product development activities, the Company has developed and
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acquired patent protection of an advanced technology for the control of
sub-micron sized particulate emissions from utility and industrial boilers in
order to respond to increasingly stringent regulations for fine particulate
emissions. This technology has undergone full-scale commercial demonstration
during fiscal 1998 and 1999, and is being marketed to commercial customers
worldwide. The Company has also developed and introduced into the utility market
wide plate spacing precipitators and has developed precipitator dust plates
which are shipped and site-assembled more easily than earlier generation dust
plates. The Company, in fiscal 1998, developed a software-based voltage
controller with adaptive programming capabilities to enhance precipitator
performance.
The Company has recently advanced its research and development operations
beyond its historical product development activities to funded research
programs. Through a Cooperative Research and Development Agreement with the U.S.
Department of Energy, the Company is working on the enhancement of particulate
removal capabilities in certain applications. Under a Department of Energy SBIR
grant, the Company is augmenting its CDS capabilities for mercury and fine
particulate control, and under a U.S. Department of Defense STTR grant the
Company is studying glow discharge plasma technology.
PATENTS
The Company owns or has the rights to a number of patents, patent
applications, and other proprietary technologies which are important to various
aspects of its business. While many individual patents are not considered
material to the conduct of the Company's business as a whole, the Company views
its newly acquired patent protection with respect to its Fine Particulate
AgglomeratorTM technology as potentially providing the Company with a
significant advantage in the marketing of its precipitators. Generally, however,
the Company believes that its ability to compete in the air pollution control
industry depends primarily on its engineering and technological expertise,
rather than on patent protection.
SALES AND MARKETING
The Company's sales and marketing efforts are organized to provide emphasis
and focus by both market and product area. Primary market areas include the
power industry, the industrial market, and aftermarket products and services.
The Company has integrated its maintenance and field service resources with a
regional sales network, linked to its regional service centers, allowing it to
build long-term customer relationships and provide solutions to customers' needs
in a highly responsive manner. The sales efforts are technical in nature and
involve its sales and marketing professionals, supported by the Company's senior
technical and management professionals, who provide product-based expertise to
all regional and market areas. A significant portion of the Company's sales are
made through architectural and engineering firms, which play an important role
in the preparation of specifications for air pollution control systems. The
Company's sales and marketing group consists of industry and regional sales
managers and sales representatives.
Although the Company seeks to obtain repeat business from its customers, it
does not depend on any single customer to maintain its level of activity from
year to year. Three customers accounted for 56% of the Company's sales in fiscal
1999, no customer accounted for more than 10% of the Company's sales in fiscal
1998 and three customers accounted for 33% of the Company's sales in fiscal
1997. At fiscal year end 1999, approximately 56% of the Company's accounts and
retainages receivable were due from companies within the power industry and
approximately 23% were due from companies within the pulp and paper industry.
All of the Company's overseas foreign sales are generated through royalties
from international licensees or from export sales, which were less than 10% of
consolidated sales in fiscal years 1999, 1998, and 1997. In order to take
advantage of certain overseas market opportunities, the Company has
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established licensing agreements with companies in the People's Republic of
China, India, Russia, South Korea, Finland, and Brazil under which the Company
is entitled to royalties based upon sales in the licensed territory. These
agreements do not currently represent a material source of income. In addition
to the licenses, the Company has established, with its Chinese licensee, a joint
venture in China, which commenced production, in fiscal 1998, of certain
precipitator components for use by the Company and its licensee. With its Indian
licensee, during fiscal 1999, the Company trained certain of the licensee's
engineers to perform engineering activities for global application, including
both international projects and projects delivered in North America.
SUPPLIERS AND SUBCONTRACTORS
Like other companies in its industry, the Company relies on outside
suppliers, manufacturers and fabricators to supply parts and components in
accordance with the Company's specifications. In addition, in cases in which the
Company's scope of work includes installation of equipment, the Company selects
and supervises subcontractors for this work. To date, the Company has not
experienced difficulties either in obtaining fabricated components incorporated
in its systems or in obtaining qualified subcontractors. It has been the
Company's recent experience, however, that in times of recession or other
industry downturns, the Company is more likely to be faced with subcontractor
performance problems and construction claims asserted by certain of its
subcontractors. In response, the Company is required to more aggressively manage
its construction activities and contracts, and, in some cases, be subject to
unanticipated costs.
The Company's vendor sources for various components, materials and parts
used in its systems, including certain electrodes, collecting plates, control
switches, electrical components, and other components, include a substantial
number of firms. The Company does not depend on any one of these vendors to a
material extent, and in any event the Company believes that alternative vendors
would be available if needed. With respect to fabricators, the Company has
satisfactory relationships with fabricators throughout the United States and
Canada. Similarly, with respect to installation subcontractors, the Company has
satisfactory relations with firms throughout the United States and Canada. Based
on the number of vendors, fabricators, and subcontractors and the availability
of alternative sources, the Company does not believe that the loss of its
relationship with any one firm would have a material adverse effect on its
business.
COMPETITION
The Company faces substantial competition in each of its principal markets.
Some of the Company's competitors are larger and have greater financial and
other resources than the Company. The Company competes primarily on the basis of
its engineering and technological expertise and quality of equipment and service
provided. The Company believes that the cost of entry into most of its markets,
its experience and reputation for reliability and service, and its knowledge of
the plants and operations of its customers are principal factors that enhance
its ability to compete effectively for repair and rebuild contracts as well as
new installations. Additionally, the Company believes that the successful
performance of its installed systems is a key factor in dealing with its
customers, which typically prefer to make significant purchases from a company
with a solid performance history.
Virtually all contracts for the Company's systems and technologies are
obtained through competitive bidding. Customers typically purchase these systems
and technologies after a thorough evaluation of price, technical content,
service, experience, and quality. Although price is an important factor and may
in some cases be the governing factor, it is not always determinative, and
contracts are often awarded on the basis of life cycle costs and/or product
reliability.
REGULATION
Significant environmental laws have been enacted in response to public
concern about the
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environment. These laws and the implementing regulations affect nearly every
industrial activity. The need to comply with these laws creates demand for the
Company's services. The principal federal legislation that has created a
substantial and growing demand for the Company's systems and technologies, and
therefore has the most significant effect on the company's business, is the
Clean Air Act of 1970, as amended (the "Clean Air Act"). This legislation
requires compliance with ambient air quality standards and empowers the
Environmental Protection Agency ("EPA") to establish and enforce limits on the
emission of various pollutants from specific types of facilities. The states
have primary responsibility for implementing these standards and, in some cases,
have adopted standards more stringent than those established by the EPA.
In 1990, amendments to the Clean Air Act were adopted which address, among
other things, the country's acid rain problem by imposing strict controls on the
emissions of sulfur oxides caused by the combustion of coal and other solid
fuels. The power generation market is the first to face the compliance standards
set by the amendments. Under the legislation, coal-burning power plants are
required to comply with new emissions standards in two phases. The first phase,
beginning with enactment of the amendments and generally ending in 1995 or 1996,
required reduced emissions levels leading to full compliance, with limited
exceptions, by the end of the second phase in the year 2000. During 1997, the
EPA approved regulations that are expected to significantly increase the number
of companies subject to regulation for ozone related emissions, and for
emissions of particles at a much smaller size than previously regulated. During
1998, the EPA issued regulations requiring utilities in 22 states to
significantly reduce emissions of nitrogen oxides (NOx) by the year 2003, in
order to control smog creation.
In its operations, the Company is subject to federal, state and local laws
and regulations concerning environmental, safety, occupational and health
standards. Expenditures required in fiscal 1999 by such laws were not material
to the Company's business and the Company is not at a competitive disadvantage
by reason of compliance with such laws.
BONDING AND INSURANCE
The Company is from time to time required to provide bonds guaranteeing that
it will enter into contracts as bid, guaranteeing performance of its contract
obligations, and/or guaranteeing prompt payment of its suppliers and
subcontractors. The Company's current surety commitment is, in management's
opinion, sufficient to support the Company's current levels of bonded business.
In addition, the Company has a bank revolving credit and letter of credit
agreement which provides for issuance of letters of credit for various purposes,
including as substitutes for performance or payment bonds.
The Company currently maintains different types of insurance, including
comprehensive liability and property coverage. The Company does not carry a
separate errors and omissions policy, but limited errors and omissions coverage
is provided under its comprehensive liability policy. While a successful claim
in an amount in excess of the Company's insurance coverage, or for which there
is no coverage, (including claims arising out of the provision by the Company of
engineering services without a product) could have a material adverse effect on
the Company, the Company believes that it presently maintains adequate insurance
coverage for its business. To the extent that the Company performs or will
perform engineering only services for customers, the Company will, to the extent
practicable, obtain the benefit of contractual terms which limit or eliminate
the exposure which would otherwise be insured by an errors and omissions policy.
EMPLOYEES
As of March 31, 1999, the Company had 142 full-time employees, of whom more
than 90% were engineers and other professionals and technical employees. The
Company also hires contract and other
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temporary personnel to meet the requirements of particular contracts, as well as
contract personnel to carry out construction supervisory functions. The
Company's professional staff includes chemical engineers, electrical engineers,
mechanical engineers, civil engineers, and computer scientists. Although the
Company depends on professional employees for performance of its services, it
has not experienced any difficulty in employing such personnel to satisfy its
requirements. None of the Company's employees is represented by a union. The
Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
Substantially all of the Company's operations, including administration,
engineering, design, and sales operations are conducted from its Baltimore
headquarters, located in a modern office building with approximately 100,000
square feet of leased space. The Company occupies approximately 56,000 square
feet of this space and subleases substantially all of the remaining space. See
Note 6 of the "Notes to Consolidated Financial Statements" in the Company's 1999
Annual Report to Shareholders, incorporated by reference herein, for a
description of the rent and other lease terms.
In addition, the Company leases approximately 28,000 square feet of office
and warehouse space in Baltimore, Maryland for its research and development, and
inventory operations.
The Company is a party to a joint venture which, commencing in the 1998
fiscal year, operates a factory in Bengbu, Anhui Province, China, which
fabricates precipitator components.
Shortly after the close of fiscal 1997, the Company sold a 20,000 square
foot office and light manufacturing facility located in Jeffersonville, Indiana,
which was previously used in its aftermarket business, which was relocated to
Baltimore during fiscal 1996.
The Company believes that its existing facilities are adequate to meet its
current needs and that suitable additional or substitute space will be available
as needed to accommodate any expansion of operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time a party to various legal actions arising in
the ordinary course of its business, some of which may involve claims for
substantial sums. Management considers that any liability from pending lawsuits
and claims will not have any material effect on the financial position or
results of operations of the Company.
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 31, 1998:
(a) The stockholders elected Richard E. Hug a Class II director, by a vote
of 6,004,313 for, 109,460 against and 11,118 abstaining, for a
three-year term ending at the 2001 Annual Meeting, or until his
successor is duly elected and qualified. The names of all other
directors whose term of office as a director continued after the
meeting are as follows: Edward H. Verdery, F. Bradford Smith, John C.
Nichols, Barry Koh, James S. Potts and Samuel T. Woodside.
(b) The stockholders ratified the 1998 Environmental Elements Corporation
Stock Option Plan and the reserving of shares for issuance under the
Plan, by a vote of 5,265,439 for, 836,926 against and 22,527
abstaining.
(c) The stockholders ratified the selection of Arthur Andersen LLP to serve
as independent public
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accountants of the Company for the fiscal year ending March 31, 1999. The
matter was approved by a vote of 6,097,901 for, 13,660 against and 13,331
abstaining
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal year 1999.
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PART II
ITEM5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "EEC."
As of June 4, 1999, there were 231 record holders of the Company's Common
Stock. The closing price of the Common Stock on June 4, 1999 was $3.5625.
The additional information required by this item is contained under
"Investor Information" on page 25 and in Note 9 of the "Notes to Consolidated
Financial Statements" on page 21 of the Company's 1999 Annual Report to
Shareholders. Such information is incorporated herein by reference to the Annual
Report.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data provided on page 24 of the
Company's 1999 Annual Report to Shareholders should be read in conjunction with
"Management's Discussion and Analysis" and the Consolidated Financial Statements
and the "Notes to Consolidated Financial Statements" included in the Company's
1999 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is contained on pages 10 and 11 of the
Company's 1999 Annual Report to Shareholders. Such information is incorporated
herein by reference to the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in the Consolidated
Financial Statements and Notes to Consolidated Financial Statements appearing on
pages 12 through 21 of the Company's 1999 Annual Report to Shareholders. The
Quarterly Financial Data appears in Note 9 of the "Notes to Consolidated
Financial Statements" appearing on page 21 of the Company's 1999 Annual Report
to Shareholders. Such information is incorporated herein by reference to the
Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors - The information with respect to Directors required by this
item is incorporated by reference to the Registrant's 1999 Proxy Statement to be
filed with the Securities and Exchange Commission, under the headings "Election
of Directors," "Directors Continuing in Office," and "Certain Information
Regarding the Board of Directors and Committees of the Board."
(b) Executive Officers - Information regarding certain executive officers of
the Company appears in the Company's definitive proxy statement for the 1999
Annual Meeting of Stockholders.
(c) In addition, the following information is being provided in response to
the requirements of Item 405 of Regulation S-K. To the Registrant's knowledge,
during the fiscal year ended March 31, 1999, all filing requirements applicable
to officers, directors, and greater than 10% beneficial owners of the common
shares of the Registrant under Section 16(a) of the Securities Exchange Act of
1934, as amended, were complied with.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
the Registrant's 1999 Proxy Statement to be filed with the Securities and
Exchange Commission, under the headings "Executive Compensation and Related
Information."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
the Registrant's 1999 Proxy Statement to be filed with the Securities and
Exchange Commission, under the heading "Security Ownership."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the Registrant's 1999 Proxy Statement to be filed with the Securities and
Exchange Commission, under the heading "Certain Relationships and Related
Transactions" and under the heading "Employment and Non-Competition Agreements."
12
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. The following consolidated financial statements included in the 1999
Annual Report to Shareholders for the year ended March 31, 1999 are incorporated
herein by reference under Item 8 of this Report:
Page Number in
Annual Report
Consolidated Statements of Operations for the years
ended March 31, 1999, 1998, and 1997 12
Consolidated Balance Sheets as of March 31, 1999
and 1998 13
Consolidated Statements of Cash Flows for the
years ended March 31, 1999, 1998, and 1997 14
Consolidated Statements of Stockholders' Investment
as of March 31, 1999, 1998, and 1997 15
Notes to Consolidated Financial Statements 16-21
Management's Responsibility for Financial Statements 22
Report of Independent Public Accountants 23
Page Number
in 10-K
2. Financial Statement Schedules (included on pages
S-1 of this Report):
Report of Independent Public Accountants on Schedules S-1
Valuation and Qualifying Accounts for the years ended
March 31, 1999, 1998, and 1997 (Schedule II) S-2
13
<PAGE>
All other schedules have been omitted, since the required information is
included in the consolidated financial statements, including the notes thereto,
or the circumstances requiring inclusion of such schedules are not present.
3. Exhibits
3.1- Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Form S-1 Registration Statement
(File No. 33-35802) filed with the Commission on May 25, 1990).
3.2- Certificate of Amendment of the Registrant (incorporated by
reference to Form 10-K filed with the Commission on June 24,
1991).
3.3- Bylaws of the Registrant (incorporated by reference to Form
S-1 Registration Statement (File No. 33-35802) filed with the
Commission on May 25, 1990).
4.1- Articles IV, V, VI, VIII, IX, X and XI of the Registrant's
Restated Certificate of Incorporation, as amended (included in
Exhibit 3.1 and Exhibit 3.2).
4.2- Articles I, II, V and VII of the Registrant's Bylaws (included
in Exhibit 3.3).
10.1- Articles of Lease dated April 15, 1975 between Balkop
Properties Corp., as landlord, and Koppers Company, Inc., and
Assignment of Lease dated June 20, 1989 to Registrant, as
assignee, and Beazer Materials and Services, Inc., as assignor
(incorporated by reference to Form S-1 Registration Statement
(File No. 33-35802) filed with the Commission on May 25, 1990).
10.2- The Registrant's Retirement Plan, as amended (incorporated by
reference to Form 10-K filed with the Commission on June 28,
1995).
10.2(a)- First Amendment, dated December 28, 1995, to the Registrant's
Retirement Plan, as amended (incorporated by reference to Form
10-K filed with the Commission on June 26, 1996).
10.2(b)- Second Amendment, dated December 28, 1995, to the Registrant's
Retirement Plan, as amended (incorporated by reference to Form
10-K filed with the Commission on June 26, 1996).
10.3- Omitted.
10.3(a)- Omitted.
10.3(b)- The Registrant's Replacement 401(k) Retirement Savings Plan,
dated July 1, 1997 (incorporated by reference to the
Registrant's Form 10-K filed with the Commission on June 25,
1998).
10.4- The Registrant's Employee Stock Option Plan, as amended,
(incorporated by reference to Form S-8 Registration Statement
(File No. 33-38400) filed with the Commission on December 21,
1990).
10.5- Environmental Elements Corporation Supplemental Pension
Agreement dated March 1, 1995, between Registrant and Richard E.
Hug (incorporated by reference to Form 10-K filed with the
Commission on June 26, 1996).
10.5(a) Environmental Elements Corporation Supplemental Pension
Agreement dated July 1, 1996 between Registrant and John C.
Nichols, (incorporated by reference to Form 10-K filed with the
Commission on June 23, 1997).
14
<PAGE>
10.6- Revolving Credit and Letter of Credit Agreement dated November
24, 1993 between the Registrant and Mercantile-Safe Deposit and
Trust Company (incorporated by reference to Form 10-Q filed with
the Commission on February 14, 1994).
10.6(a)- Waiver and Amendment dated May 26, 1994, to the Revolving Credit
and Letter of Credit Agreement dated November 24, 1993 between
the Registrant and Mercantile-Safe Deposit and Trust Company
(incorporated by reference to Form 10-K filed with the
Commission on June 29, 1994).
10.6(b)- Extension Agreement dated November 18, 1994 to the Revolving
Credit and Letter of Credit Agreement dated November 23, 1993
between the Registrant and Mercantile-Safe Deposit and Trust
Company (incorporated by reference to Form 10-K filed with the
Commission on June 28, 1995).
10.6(c)- Second Amendment to Revolving Credit and Letter of Credit
Agreement, First Amendment to Line of Credit Promissory Note and
Security Agreement, dated October 25, 1995 between the
Registrant and Mercantile-Safe Deposit and Trust Co
(incorporated by reference to Form 10-Q filed with the
Commission on February 14, 1996).
10.6(d)- Amendment to Revolving Credit and Letter of Credit Agreement
dated May 10, 1996 between the Registrant and Mercantile-Safe
Deposit and Trust Company (incorporated by referenced to Form
10-K filed with the Commission on June 26, 1996).
10.6(e)- Letter Amendment dated May 5, 1997 to Revolving Credit and
Letter of Credit Agreement between the Registrant and
Mercantile-Safe Deposit and Trust Company dated November 23,
1993, (incorporated by reference to Form 10-K filed with the
Commission on June 23, 1997).
10.6(f- First Amendment to Security Agreement, Second Amendment to Line
of Credit Promissory Note, and Third Amendment to Revolving
Credit and Letter of Credit Agreement dated June 12, 1998,
between Registrant and Mercantile-Safe Deposit and Trust Company
(incorporated by reference to the Registrant's Form 10-K filed
with the Commission on June 25, 1999).
10.7- Omitted.
10.8- The Registrant's 1998 Stock Option Plan filed herewith.
10.9- Shareholders' Agreement dated February 2, 1990 by and among the
Registrant and certain shareholders of the Registrant
(incorporated by reference to Amendment No. 1 to Form S-1
Registration Statement (File No. 33-35802) filed with the
Commission on July 5, 1990).
10.10- Employment Agreement dated March 29, 1996 between Registrant and
E. H. Verdery (incorporated by reference to Form 10-K filed with
the Commission on June 26, 1996).
10.11- Omitted.
10.12- Omitted
11- Statement re: Computation of Earnings per Share, filed
herewith.
13- A copy of the 1999 Annual Report to Shareholders is attached
hereto. Such report, except for those portions thereof which are
incorporated by reference in this Form 10-K, is furnished for
the information of the Commission and is not deemed "filed."
15
<PAGE>
21- Subsidiaries of the Registrant (incorporated by reference to
Form 10-K filed with the Commission on June 26, 1996.)
(b) No reports on Form 8-K were filed during the quarter ended March 31, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Principal Accounting and Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ E. H. Verdery June 25, 1999
- ----------------- -------------
E. H. Verdery Date
Chairman of the Board of Directors,
President and Chief Executive Officer
/s/ S. Michael Dunseith June 25, 1999
- ----------------------- -------------
S. Michael Dunseith Date
Executive Vice President and Chief Operating Officer
/s/ Richard E. Hug June 25, 1999
- ------------------ ------------------
Richard E. Hug Date
Director
/s/ Barry Koh June 25, 1999
- -------------------- ------------------
Barry Koh Date
Director
/s/ John C. Nichols June 25, 1999
- ------------------- ------------------
John C. Nichols Date
Director and Secretary
/s/ James S. Potts June 25, 1999
- ------------------ ------------------
James S. Potts Date
Director
/s/ F. Bradford Smith June 25, 1999
- --------------------- ------------------
F. Bradford Smith Date
Director
16
<PAGE>
/s/ Samuel T. Woodside June 25, 1999
- ---------------------- ------------------
Samuel T. Woodside Date
Director
17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To the Board of Directors and Shareholders of Environmental Elements
Corporation:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in the Environmental Elements
Corporation and subsidiaries' annual report to shareholders incorporated by
reference in this Form 10-K, and have issued our report thereon dated May 14,
1999. Our audits were made for the purpose of forming an opinion on those
consolidated financial statements taken as a whole. The schedule listed in the
index above is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen, LLP
Baltimore, Maryland,
May 14, 1999
S-1
<PAGE>
SCHEDULE II
ENVIRONMENTAL ELEMENTS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
RESERVE FOR
ALLOWANCE FOR DISCONTINUED
DOUBTFUL ACCOUNTS OPERATIONS
----------------- ----------
Balance, March 31, 1996 296,000 91,000
Charged (credited) to profit and loss (59,000) --
(Deductions) additions (124,000) ( 91,000)
---------------- ---------------
Balance, March 31, 1997 113,000 --
Charged (credited) to profit and loss -- --
(Deductions) additions 105,000 --
----------------- ---------------
Balance, March 31, 1998 218,000
Charged (credited) to profit and loss (58,000) --
(Deductions) additions 61,000 --
----------------- ---------------
Balance, March 31, 1999 $ 221,000 $ --
================== ===============
S-2
<PAGE>
EXHIBIT INDEX
3. Exhibits
3.1- Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Form S-1 Registration Statement
(File No. 33-35802) filed with the Commission on May 25, 1990).
3.2- Certificate of Amendment of the Registrant (incorporated by
reference to Form 10-K filed with the Commission on June 24,
1991).
3.3- Bylaws of the Registrant (incorporated by reference to Form S-1
Registration Statement (File No. 33-35802) filed with the
Commission on May 25, 1990).
4.1- Articles IV, V, VI, VIII, IX, X and XI of the Registrant's
Restated Certificate of Incorporation, as amended (included in
Exhibit 3.1 and Exhibit 3.2).
4.2- Articles I, II, V and VII of the Registrant's Bylaws (included
in Exhibit 3.3).
10.1- Articles of Lease dated April 15, 1975 between Balkop Properties
Corp., as landlord, and Koppers Company, Inc., and Assignment of
Lease dated June 20, 1989 to Registrant, as assignee, and Beazer
Materials and Services, Inc., as assignor (incorporated by
reference to Form S-1 Registration Statement (File No. 33-35802)
filed with the Commission on May 25, 1990).
10.2- The Registrant's Retirement Plan, as amended (incorporated by
reference to Form 10-K filed with the Commission on June 28,
1995).
10.2(a)- First Amendment, dated December 28, 1995, to the Registrant's
Retirement Plan, as amended (incorporated by reference to Form
10-K filed with the Commission on June 26, 1996).
10.2(b)- Second Amendment, dated December 28, 1995, to the Registrant's
Retirement Plan, as amended (incorporated by reference to Form
10-K filed with the Commission on June 26, 1996).
10.3- Omitted.
10.3(a)- Omitted.
10.3(b)- The Registrant's Replacement 401(k) Retirement Savings Plan,
dated July 1, 1997 (incorporated by reference to the
Registrant's Form 10-K filed with the Commission on June 25,
1998).
10.4- The Registrant's Employee Stock Option Plan, as amended,
(incorporated by reference to Form S-8 Registration Statement
(File No. 33-38400) filed with the Commission on December 21,
1990).
10.5- Environmental Elements Corporation Supplemental Pension
Agreement dated March 1, 1995, between Registrant and Richard E.
Hug (incorporated by reference to Form 10-K filed with the
Commission on June 26, 1996).
<PAGE>
10.5(a) Environmental Elements Corporation Supplemental Pension
Agreement dated July 1, 1996 between Registrant and John C.
Nichols, (incorporated by reference to Form 10-K filed with the
Commission on June 23, 1997).
10.6- Revolving Credit and Letter of Credit Agreement dated November
24, 1993 between the Registrant and Mercantile-Safe Deposit and
Trust Company (incorporated by reference to Form 10-Q filed with
the Commission on February 14, 1994).
10.6(a)- Waiver and Amendment dated May 26, 1994, to the Revolving Credit
and Letter of Credit Agreement dated November 24, 1993 between
the Registrant and Mercantile-Safe Deposit and Trust Company
(incorporated by reference to Form 10-K filed with the
Commission on June 29, 1994).
10.6(b)- Extension Agreement dated November 18, 1994 to the Revolving
Credit and Letter of Credit Agreement dated November 23, 1993
between the Registrant and Mercantile-Safe Deposit and Trust
Company (incorporated by reference to Form 10-K filed with the
Commission on June 28, 1995).
10.6(c)- Second Amendment to Revolving Credit and Letter of Credit
Agreement, First Amendment to Line of Credit Promissory Note and
Security Agreement, dated October 25, 1995 between the
Registrant and Mercantile-Safe Deposit and Trust Co
(incorporated by reference to Form 10-Q filed with the
Commission on February 14, 1996).
10.6(d)- Amendment to Revolving Credit and Letter of Credit Agreement
dated May 10, 1996 between the Registrant and Mercantile-Safe
Deposit and Trust Company (incorporated by referenced to Form
10-K filed with the Commission on June 26, 1996).
10.6(e)- Letter Amendment dated May 5, 1997 to Revolving Credit and
Letter of Credit Agreement between the Registrant and
Mercantile-Safe Deposit and Trust Company dated November 23,
1993, (incorporated by reference to Form 10-K filed with the
Commission on June 23, 1997).
10.6(f)- First Amendment to Security Agreement, Second Amendment to Line
of Credit Promissory Note, and Third Amendment to Revolving
Credit and Letter of Credit Agreement dated June 12, 1998,
between Registrant and Mercantile-Safe Deposit and Trust Company
(incorporated by reference to the Registrant's Form 10-K filed
with the Commission on June 25, 1999).
10.7- Omitted.
10.8- The Registrant's 1998 Stock Option Plan filed herewith.
10.9- Shareholders' Agreement dated February 2, 1990 by and among the
Registrant and certain shareholders of the Registrant
(incorporated by reference to Amendment No. 1 to Form S-1
Registration Statement (File No. 33-35802) filed with the
Commission on July 5, 1990).
10.10- Employment Agreement dated March 29, 1996 between Registrant and
E. H. Verdery (incorporated by reference to Form 10-K filed with
the Commission on June 26, 1996).
10.11- Omitted.
10.12- Omitted.
<PAGE>
11- Statement re: Computation of Earnings per Share, filed herewith.
13- A copy of the 1999 Annual Report to Shareholders is attached
hereto. Such report, except for those portions thereof which are
incorporated by reference in this Form 10-K, is furnished for
the information of the Commission and is not deemed "filed."
21- Subsidiaries of the Registrant (incorporated by reference to
Form 10-K filed with the Commission on June 26, 1996.)
EXHIBIT 11
ENVIRONMENTAL ELEMENTS CORPORATION
STATEMENT REGARDING COMPUTATION OF INCOME PER SHARE
FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997
BASIC: 1999 1998 1997
---- ---- ----
Weighted average number of common shares... 7,053,446 6,989,739 6,923,688
========= ========= =========
DILUTED:
Weighted average number of common shares... 7,053,446 6,989,739 6,923,688
Dilutive effect of common stock equivalents:
Stock options........................... 138,097 108,583 ---
------- ------- ----
Weighted average number of common equivalent
shares outstanding......................... 7,191,543 7,098,322 6,923,688
========= ========= =========
<PAGE>
ENVIRONMENTAL ELEMENTS CORPORATION
1998 STOCK OPTION PLAN
1. Purpose.
--------
This plan, which shall be known as the Environmental Elements
Corporation 1998 Stock Option Plan (the "Plan"), is intended to promote the
interests of Environmental Elements Corporation (the "Company") and its
shareholders by encouraging officers, employees, and outside directors of the
Company and its subsidiaries to acquire equity interests or increase their
equity interests in the Company, thereby giving them an added incentive to work
toward the continued growth and success of the Company. The Board of Directors
also contemplates that through the adoption of the Plan the Company and its
subsidiaries will be better able to compete for the services of personnel needed
for the continued growth and success of the Company.
2. Shares Subject to the Plan.
---------------------------
Subject to adjustment as provided in Section 9 hereof, the aggregate
number of shares of the Common Stock, par value $.01 per share, of the Company
("Shares") reserved for issuance upon exercise of options under the Plan shall
not exceed 300,000 Shares. In the event the number of Shares to be delivered
upon the exercise in full of any option granted under the Plan is reduced for
any reason whatsoever or in the event any option granted under the Plan can no
longer under any circumstances be exercised, the number of Shares no longer
subject to such option shall thereupon be released from such option and shall
thereafter be available to be re-optioned under the Plan.
3. Effective Date.
---------------
The Plan was adopted on June 03, 1998, which, subject to approval by
the stockholders of the Company at the 1998 Annual Meeting of Stockholders, or
any adjournment or postponement thereof, is the effective date ("Effective
Date") of the Plan.
4. Administration.
---------------
(a) Committee. The Plan shall be administered by a committee (the
"Committee") appointed by the Board of Directors of the Company.
(b) Authority. Subject to the provisions of the Plan, the Committee
shall interpret the Plan and the options granted under the Plan, shall make all
other determinations necessary or advisable for the administration of the Plan
and shall correct any defect or supply any omission or reconcile any
inconsistency in the Plan or in any option, in the manner and to the extent the
Committee deems desirable to carry the Plan or option into effect. The
Committee, in its absolute discretion and without shareholder consent, may grant
to holders of outstanding options, in exchange for the surrender and
cancellation of such options, new options having option prices lower (or higher)
than the option price provided in the options so
<PAGE>
surrendered and canceled and containing such other terms and conditions as the
Committee may deem appropriate.
(c) Procedure. All determinations of the Committee shall be made by not
less than a majority of its members present at a meeting at which a quorum is
present. A majority of the entire Committee shall constitute a quorum for the
transaction of business. Any action required or permitted to be taken at a
meeting of the Committee may be taken without a meeting, if a unanimous written
consent which sets forth the action is signed by each member of the Committee
and filed with the minutes of proceedings of the Committee. No member of the
Committee shall be liable, in the absence of bad faith, for any act or omission
with respect to his service on the Committee. Service on the Committee shall
constitute service as a director of the Company so that members of the Committee
shall be entitled to indemnification and reimbursement for their service as
members of the Committee to the same extent as for service as directors of the
Company.
5. Granting of Options.
--------------------
(a) Grant of Options and Selection of Optionees. The Committee shall
have authority, within ten years of the Effective Date of the Plan, to grant to
such officers, employees, and outside directors of the Company and its present
and future subsidiaries as may be selected by it ("Optionees"), options to
purchase authorized but unissued Shares. The Committee shall also have the
authority (i) to determine the number of Shares to be subject to a grant, (ii)
to establish the terms and conditions of each grant (including, but not limited
to, the exercise price of any option, the nature and duration of any restriction
or condition (or provision for lapse thereof) relating to the vesting, exercise,
or forfeiture of an option, and any terms or conditions that may be necessary to
qualify options as incentive stock options as defined in Section 422 of the
Internal Revenue Code of 1986 ("Code")), (iii) to prescribe the form of each
option agreement evidencing a grant, and (iv) to amend, modify, or supplement
the terms of any outstanding option. Appropriate officers of the Company are
hereby authorized to execute and deliver option agreements in the name of the
Company, in the form and as directed from time to time by the Committee.
(b) Time of Granting Option. Nothing contained in the Plan or any
resolutions adopted or to be adopted by the Board of Directors or the
stockholders of the Company shall constitute the granting of any option
hereunder. Options shall be granted hereunder only by action of or pursuant to
the authority of the Committee; provided, however, that no participant shall
have any rights with respect to such grant unless and until he or she shall have
executed and delivered an option agreement in form and substance satisfactory to
the Committee.
(c) Limitation on Grants. No person eligible for a grant under Section
5(a) hereof may be awarded options in any calendar year exercisable for greater
than 100,000 Shares (subject to adjustment as provided in Section 9 hereof).
(d) Limitations on Incentive Stock Options. An Option shall constitute
an Incentive Stock Option only (i) if the Grantee of such Option is an employee
of the Company or
-2-
<PAGE>
any Subsidiary of the Company; (ii) to the extent specifically provided in the
related Award Agreement; and (iii) to the extent that the aggregate Fair Market
Value (determined at the time the Option is granted) of the shares of Stock with
respect to which all Incentive Stock Options held by such Grantee become
exercisable for the first time during any calendar year (under the Plan and all
other plans of the Grantee's employer and its affiliates) does not exceed
$100,000. This limitation shall be applied by taking Options into account in the
order in which they were granted.
6. Option Price.
-------------
(a) Minimum Option Price. The option price per share of the Common
Stock underlying each option shall be fixed by the Committee, but shall not be
less than 100% of the fair market value of such shares on the date the option is
granted. Such fair market value shall be determined by the Committee, which may
use any reasonable method of valuation, including: (i) the mean between the high
and low prices of the Common Stock on the principal exchange on which it is then
trading, if any, on the day previous to the grant date (or, if shares were not
traded on the day previous to such date, then on the next preceding trading day
during which a sale occurred); (ii) if the Common Stock is not traded on an
exchange but is quoted on NASDAQ or a successor quotation system, (1) the mean
between the high and low sales prices (if the Common Stock is then listed as a
National Market Issue under the NASD National Market System) or (2) the mean
between the representative high bid and low asked prices (in all other cases)
for the Common Stock on the day previous to the grant date as reported by NASDAQ
or such successor quotation system (or, if shares were not traded on the day
previous to such date, then on the next preceding trading day during which a
sale occurred); or (iii) if the Common Stock is not publicly traded on an
exchange or is not quoted on NASDAQ or a successor quotation system, the fair
market value determined by taking into account all relevant facts and
circumstances, which may include the advice of an independent appraiser.
(b) Ten Percent Shareholders. No incentive stock option shall be
granted to any person who, at the time the option is granted, owns (within the
meaning of Section 424(d) of the Code) stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company or of any
parent or subsidiary of the Company, unless the option price is at least 110% of
the fair market value of the Shares subject to the option.
7. Terms and Conditions of Options.
--------------------------------
Options granted under the Plan shall be in such form as the Committee
may from time to time approve, subject to the following terms and conditions,
and may contain such additional terms and conditions (which terms and conditions
need not be the same in each case), not inconsistent with the Plan, as the
Committee shall deem desirable:
(a) Option Period and Conditions and Limitations on Exercise. No option
shall be exercisable with respect to any of the Shares subject to the option
later than ten years from the date of grant. Notwithstanding the foregoing, in
the case of an Optionee owning (within the meaning of Section 424(d) of the
Code), at the time an incentive stock option is
-3-
<PAGE>
granted, more than 10% of the total combined voting power of all classes of
stock of the Company or of any parent or subsidiary of the Company, such
incentive stock option shall not be exercisable with respect to any of the
Shares subject thereto later than five years after the date of grant. The date
on which an option ultimately becomes unexercisable under the previous two
sentences is hereinafter referred to as the Option Expiration Date. To the
extent not prohibited by other provisions of the Plan, each option shall be
exercisable at such time or times and subject to such conditions as are set
forth in the option agreement.
(b) Termination of Employment. If an Optionee's employment or
Directorship is terminated for any reason whatsoever (including his death), the
right to exercise said option shall terminate:
1) At the close of business on the day preceeding the date of
termination of the Optionee's employment or Directorship, if
termination occurs within the one year following the date of grant;
or
2) At the close of business on the day preceeding the date of
termination of the Optionee's employment or Directorship, if
termination occurs for cause, as herinafter defined; or
3) At the expiration of a period of one year after the Optionee's
death, if the Optionee's employment or Directorship is terminated by
reason of death of the Optionee or if the Optionee had a right to
exercise an option on the date of death pursuant to Section 7(b)(1)
or (5); and prior to such date such option may be exercised by the
estate or by the person or persons who acquire the right to exercise
such option by bequest or inheritance with respect to any or all of
the shares remaining subject to such option at the time of the
Optionee's death; or
4) At the expiration of a period of one year after the Optionee ceases
to receive wages through the Company's or a subsidiary's payroll
because of disability, as determined in accordance with applicable
Company personnel policies (the determination of the Committee on any
question involving disability shall be conclusive and binding on all
parties); or
5) At the expiration of three months after the Optionee's employment or
Directorship is terminated, if the Optionee's employment or
Directorship is terminated for any other reason than death,
disability or for cause.
Noncompetition. The right of the Optionee to exercise an option during
the period specified in the option agreement shall be subject to the
condition that during such period the Optionee shall not render
services for any organization engaged directly or indirectly in any
business which, in the opinion of the Committee, competes with or is in
conflict with the interests of the Company or any of its subsidiaries.
-4-
<PAGE>
(c) Cause. For purposes of the Plan, the term "cause" shall mean (i)
any gross or habitual neglect of duty or misconduct of an Optionee in
discharging any of his duties and responsibilities as an employee of the Company
or any of its subsidiaries, (ii) fraud, theft or embezzlement committed against
the Company or any subsidiary or customer of the Company, or (iii) an Optionee's
conviction of a felony or any other crime involving moral turpitude.
(d) General. The Committee, in its sole discretion, may amend any
particular option agreement to provide that the right to exercise such option
shall continue for a period, which shall be specified by the Committee, after
termination of the Optionee's employment and no later than the Option Expiration
Date. An option exercised after cessation of employment by an Optionee for any
reason may, subject to adjustment as provided in Section 9, be exercised only
with respect to the number of Shares which the Optionee could have acquired
under the option immediately prior to the cessation of such employment. In no
event may an option be exercised after its Option Expiration Date. Subject to
the limitations set forth in Section 422 of the Code applicable to incentive
stock options, the Committee may adopt, amend or rescind from time to time such
provisions as it deems appropriate with respect to the effect of leaves of
absence approved by any duly authorized officer of the Company or any subsidiary
with respect to any Optionee.
(e) Acceleration of Exercise. The Committee may, in its discretion, in
the case of any option previously granted under the Plan which is not then
immediately exercisable in full, accelerate the time or times at which such
option may be exercised to any earlier time or times. Any action taken or
determination made by the Committee pursuant to this Section 7(e) shall be
conclusive on all parties.
(f) Transferability. Except as provided in this section, during the
lifetime of an Optionee, only the Optionee (or, in the event of legal incapacity
or incompetency, the Optionee's guardian or legal representative) may exercise
an option. Except as provided in this section, no option shall be assignable or
transferable by the Optionee to whom it is granted, other than by will or the
laws of descent and distribution. If authorized in the applicable option
agreement, an Optionee may transfer all or part of an option that is not an
incentive stock option to (i) any immediate family member, (ii) a trust or
trusts for the exclusive benefit of any immediate family member, or (iii) a
partnership in which immediate family members are the only partners, provided
that (x) there may be no consideration for any such transfer, and (y) subsequent
transfers of transferred options are prohibited except those in accordance with
this section or by will or the laws of descent and distribution. Following
transfer, any such option shall continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer, provided that the
term "Optionee" shall be deemed to refer the transferee where relevant. The
events of termination of employment or other service relationship shall continue
to be applied with respect to the original Optionee, following which the option
shall be exercisable by the transferee only to the extent, and for the periods
specified in the option agreement. Immediate family members" means the spouse,
children and grandchildren of the Optionee.
-5-
<PAGE>
(g) Legal Limitations. Notwithstanding any provision of the Plan or the
terms of any option issued pursuant to the Plan, the Company shall not be
required to issue any Shares hereunder if such issuance would, in the judgment
of the Committee, constitute a violation of any state or federal law, or of the
rules or regulations of any governmental regulatory body, or any securities
exchange.
8. Exercise and Payment.
---------------------
(a) Exercise. In order to exercise an option under the Plan, the person
or persons entitled to exercise it shall deliver to the Company written notice
of the number of full Shares with respect to which such option is to be
exercised accompanied by payment in full for the Shares being purchased plus, in
the case of a nonqualified option, any required withholding tax to the extent
that payment of such withholding tax is not satisfied in the manner prescribed
in Section 8(f) hereof. No fractional Shares will be issued. The payment of the
option exercise price shall either be (i) in cash, (ii) through delivery to the
Company of Shares evidenced by negotiable certificates registered in the sole
name of the Optionee or in the names of the Optionee and spouse, or (iii) by any
combination of cash and Shares. The Committee may provide, by inclusion of
appropriate language in an option agreement, that payment in full of the option
price need not accompany the written notice of exercise provided that the notice
of exercise directs that the certificate or certificates for the Shares for
which the option is exercised be delivered to a licensed broker acceptable to
the Company as the agent for the individual exercising the option and, at the
time such certificate or certificates are delivered, the broker tenders to the
Company cash (or cash equivalents acceptable to the Company) equal to the option
price for the Shares purchased pursuant to the exercise of the option plus the
amount (if any) of federal and/or other taxes which the Company may in its
judgment, be required to withhold with respect to the exercise of the option. To
the extent that the withholding tax is not paid in the manner prescribed in
Section 8(f) hereof, the withholding tax shall be paid in cash or through a
payroll reduction no later than the next payroll cycle.
(b) Payment in Shares; Right of Committee to Refuse Payment in Shares.
The value of Shares delivered for payment of the option price shall be based on
the fair market value of the Shares at the time the option is exercised. Such
fair market value shall be determined by the Committee, which may use any
reasonable method of valuation, including the method prescribed by Section 6(a)
hereof. If certificates representing Shares are used to pay all or part of the
exercise price of an option, separate certificates shall be delivered by the
Company representing the same number of Shares as each certificate so used and
an additional certificate or certificates shall be delivered representing the
additional Shares to which the option holder is entitled as a result of exercise
of the option. Notwithstanding the foregoing provisions of Section 8(a) and (b),
the Committee, in its sole discretion, may refuse to accept Shares in payment of
the option price of the Shares with respect to which such option is to be
exercised. In such event, any certificates representing Shares which were
actually received by the Company with the written notice of exercise shall be
returned to the person exercising such option, together with notice by the
Company of its refusal to accept such Shares, and the Optionee shall be deemed
to have withdrawn the option exercise and shall continue to have the right to
exercise the option in accordance with the terms of the option agreement.
-6-
<PAGE>
(c) Merger, Consolidation or Tender Offer. Notwithstanding any other
provision of the Plan, the Committee is authorized to take such action as it
determines to be necessary or advisable, in its sole discretion, with respect to
options held by Optionees in the event of a merger or consolidation of the
Company with or into another corporation (other than a merger or consolidation
in which the Company is the surviving corporation and no Shares are converted
into or exchanged for securities, cash or any other thing of value), a sale or
transfer of all or substantially all of the assets of the Company to another
corporation or to any other person or entity, or a tender or exchange offer for
voting stock of the Company made by any corporation, person or entity (other
than an offer made by the Company). Such action by the Committee may include
(but shall not be limited to) the following:
(i) accelerating the exercisability of any option to permit its
exercise in full during such period as the Committee, in its
sole discretion, shall prescribe following the public
announcement of such a proposed merger, consolidation, sale or
transfer of assets, or tender or exchange offer;
(ii) permitting any Optionee at any time during such period as the
Committee, in its sole discretion, shall prescribe in
connection with such a merger, consolidation, sale or transfer
of assets, or tender or exchange offer, to surrender any option
(or any portion thereof) to the Company for cancellation in
return for a cash payment to the Optionee as determined by the
Committee in its sole discretion; or
(iii) requiring any Optionee, at any time in connection with such a
merger, consolidation, or sale or transfer of assets to
surrender any option (or any portion thereof) to the Company
(a) in return for a cash payment to the Optionee in accordance
with Subsection (ii) above or (b) in return for a substitute
option which is issued by the corporation surviving such merger
or consolidation or the corporation which acquired such assets
(or by an affiliate of such corporation) and which the
Committee, in its sole discretion, determines to have a value
to the Optionee substantially equivalent to the value to the
Optionee of the option (or portion thereof).
(d) No Rights as Stockholder. The person or persons entitled to
exercise, or who have exercised, an option shall not be entitled to any rights
as a stockholder of the Company with respect to any Shares subject to the option
until such person or persons shall have become the holder of record of such
Shares.
(e) No Right to Continued Employment. An option granted under this Plan
shall not confer upon the Optionee any right to remain in the employment of the
Company or any of its subsidiaries, nor shall it interfere in any way with the
right of the Company or any of its subsidiaries to terminate the Optionee's
employment at any time.
(f) Withholding. The Company shall have the right to withhold from any
payments of cash or issuance of Shares by the Company under this Plan, or to
collect as a condition of such payment or issuance, any taxes required by law to
be withheld. At any time when an Optionee is required to pay to the Company an
amount required to be withheld under applicable income tax laws in connection
with an option exercise, the Optionee may, subject to
-7-
<PAGE>
such rules or procedures as may be adopted by the Committee, satisfy such
requirement in whole or in part by electing (the "Election") either to deliver
to the Company certificates representing Shares having a value equal to the
amount required to be withheld, or to have the Company withhold from the
issuance which would otherwise be made to the Optionee a number of Shares having
a value equal to the amount required to be withheld. Such value shall be
determined by the Committee, which may use any reasonable method of valuation,
including the method prescribed by Section 6(a) hereof. The Committee may
disapprove any Election, suspend or terminate the right of Optionees to make
Elections, or provide with respect to the grant of any option that the right to
make Elections shall not apply to that option. Any Election shall be irrevocable
and shall be deemed to have been made when a completed form of election is hand
delivered to the Secretary of the Company or if mailed, on the day such form is
postmarked.
9. Adjustment of Shares.
- ---------------------
In the event that any time after the Effective Date, the outstanding
Shares are changed into or exchanged for a different number or kind of shares of
the Company or other securities of the Company by reason of merger,
consolidation, recapitalization, reclassification, stock split, stock dividend,
or combination of shares, the Committee shall make an appropriate and equitable
adjustment in the number and kind of Shares subject to outstanding options, or
portions thereof then unexercised, and the number of Shares subject to the Plan
to the end that after such event the Shares subject to the Plan and the
Optionee's right to a proportionate interest in the Company shall be maintained
as before the occurrence of such event. Such adjustment in an outstanding option
shall be made without change in the total price applicable to the option or the
unexercised portion of the option (except for any change in the aggregate price
resulting from rounding-off share quantities or prices) and with any necessary
corresponding adjustment in option price per Share. Any such adjustment made by
the Committee shall be final and binding upon all Optionees, the Company, and
all other interested persons.
10. Amendments and Termination.
----------------------------
The Board of Directors of the Company may at any time terminate,
suspend or amend the Plan in such respects as it shall deem advisable, except
that any amendment or alteration to the Plan shall be subject to the approval of
the Company's stockholders not later than the annual meeting next following such
Board of Directors action if such stockholder approval is required by any
federal or state law or regulation (including, without limitation, Code Section
162(m)) or the rules of any stock exchange or automated quotation system on
which the Shares may then be listed or quoted, and the Board of Directors may
otherwise, in its discretion, determine to submit other such changes to the Plan
to stockholders for approval. No termination, suspension or amendment of the
Plan may, without the consent of the employee to whom any option shall
theretofore have been granted, adversely affect the rights of such employee
under any such option then outstanding.
11. Unfunded Plan.
--------------
-8-
<PAGE>
The Plan shall be unfunded. The Company shall not be required to
segregate any cash or any Shares which may at any time be represented by options
granted hereunder. Neither the Company, its Board of Directors nor the Committee
shall be deemed to be a trustee of any amounts to be paid under the Plan. Any
liability of the Company to any Optionee with respect to an option granted
hereunder shall be based solely upon contractual obligations created by this
Plan and the option agreement, and the rights of any Optionee shall be limited
to those of a general creditor of the Company.
12. Governing Law.
---------------
The Plan shall be governed by the laws of the State of Delaware,
without regard to principles of conflicts of law.
-9-
1999 Annual Report
EEC
technology
competence
experience
commitment
(GRAPHIC APPEARS HERE)
A breath of fresh air(sm)
ENVIRONMENTAL ELEMENTS CORPORATION o THE LEADER IN AIR POLLUTION CONTROL
TECHNOLOGY
<PAGE>
Financial Highlights for the years ended March 31, 1999 1998
(in thousands, except per share and employee data)
Continuing operations
Bookings $75,400 $88,600
Backlog 77,200 69,800
Sales 68,029 52,612
Operating income 1,886 711
Net income pre-tax $ 1,314 $50
Diluted earnings per share
Net income $ 0.18 $0.01
Cash and cash equivalents $ 1,619 $958
Working capital 9,562 7,050
Stockholders' investment 7,608 6,265
Current ratio 1.56x 1.35x
Weighted average shares outstanding:
Basic 7,053 6,990
Diluted 7,192 7,098
Ending shares outstanding 7,091 7,035
Number of full-time employees 142 131
Environmental Elements Corporation is a leading supplier of air pollution
control systems with more than fifty years of experience. The Company designs
and installs large-scale, custom-engineered equipment and systems that enable
our customers to comply with governmental regulations limiting particulate and
gaseous emissions.
From 1946 to 1983, as part of the Koppers Company, we built a solid
reputation as the premier supplier of air pollution control systems to the pulp
and paper industry, and we developed a significant share of other industrial,
municipal and power generation markets. Following a leveraged buyout by senior
management in 1983, the Company was taken public in 1990 and listed on the New
York Stock Exchange (symbol: EEC) in 1991.
From the start, the Company has maintained a leadership position at the cutting
edge of particulate control technology, and we lead the industry with many
innovations in the design of electrostatic precipitators, fabric filters and
scrubbing systems. Through active and aggressive R&D, the Company continues to
develop and refine its technologies and services in response to changing
customer needs, optimizing the quality, cost and performance of our systems.
Environmental Elements Corporation is the leader in particulate removal in North
America, and we continue to develop a growing presence in the international
markets. The Company is well positioned to benefit from a domestic regulatory
climate that continues to evolve in our favor, and from regulatory and economic
trends in global power and industrial markets that augur well for our future.
Environmental Elements Corporation
3700 Koppers Street o Baltimore MD 21227
410-368-7000 o 800-333-4331
Contents
2 To Our Shareholders
4 New Challenges
6 New Vigor
8 Innovative Solutions
10 Management's Discussion and Analysis
12 Consolidated Financial Statements
16 Notes to Consolidated Financial Statements
22 Management's Responsibility for
Financial Statements
23 Report of Independent Public Accountants
24 Selected Consolidated Financial Data
25 Board of Directors and Senior Management
25 General Information
(GRAPHIC APPEARS HERE)
<PAGE>
Wisconsin Electric initiated a four-year, $300 million contract to bring its NOx
emissions into compliance with new Environmental Protection Agency standards.
Partnering with DB Riley in this joint venture, EEC's contract revenue by
completion is expected to exceed $100 million.
Neil R. Davis named Senior Vice President, Operations. Davis coordinates and
manages the Company's growing program of providing ongoing support not only for
EEC installations, but for those of our competitors as well.
Ahlstrom Recovery has awarded EEC, a leader in the pulp and paper pollution
control market, a contract to provide an electrostatic precipitator installation
for a paper manufacturer in Syktyvkar, Russia.
EEC's new regional maintenance centers put our expertise where it's needed, when
it's needed. From the oversight of new construction through continuing
maintenance, support and upgrading of existing installations, the Company's new
regional centers keep us in the lead.
Commercial-scale tests of EEC's Fine Particulate Agglomerator(TM) at Wisconsin
Electric's Presque Isle power plant have demonstrated a significant increase in
the amount of fine particulate removed from the exhaust stream compared to
conventional precipitator systems.
EEC's new Mid-South Regional Maintenance Center has been awarded a $3 million
contract to coordinate the rebuilding of three cement kiln electrostatic
precipitator units for North Texas Cement.
A contract in excess of $1 million has been awarded to EEC to design and
fabricate an electrostatic precipitator for American Soda's new soda ash
facility, now under construction in Colorado. The installation will be used to
collect sodium carbonate and sodium bicarbonate.
Kimberly-Clark awarded EEC its first contract to upgrade a recovery boiler
electrostatic precipitator at its Pictou, Nova Scotia, pulp mill. The newly
upgraded installation will be larger and will assure that this plant meets local
standards while helping to recover costly chemicals used in the pulp-making
process.
The US Patent Office has issued a patent to EEC for the development of an
Electrostatic Precipitator Sandwich Electrode, a system designed to capture
sub-micron pollutant particles which often pass unimpeded through competitive
precipitator systems.
The US Department of Energy has contracted with EEC to develop an enhancement to
the particulate scrubbers installed on coal-fired power plants as part of a
program to assist in the commercial development of pressurized fluid-bed
combustion technology.
EEC has received a $2 million contract to erect an electrostatic precipitator at
a large copper smelter in northern Canada. The new installation at Hudson Bay
Mining and Smelting's operation in Flin Flan, Manitoba, will significantly
improve air quality in the town by removing particulates from the effluent of
copper converters.
The US Patent Office has issued a patent to EEC for a Corona Discharge Reactor,
a novel device designed to remove highly toxic mercury vapor from combustion
exhaust gases of coal-fired power plants. This new technology now moves into
commercial production.
Environmental Elements Corporation 1
<PAGE>
To Our Shareholders
I am very pleased to report that your Company enjoys solid financial
health. We have met all of the goals we set when we began our journey
to renewed financial viability, and we now have nine consecutive
quarters of positive operating profit behind us. We are lean and trim.
Our continued investment in R&D is paying off. Our orders are up
significantly and our earnings are getting stronger. New markets are
opening to us, and we are moving aggressively to capitalize on these
opportunities.
E. H. Verdery Chairman of the
Board and Chief Executive Officer
(GRAPHIC APPEARS HERE)
"We have moved onto solid financial footing, and our orders book is stronger
than ever. Best of all, we own much of the most effective technology in our
field. To say the future looks bright is an understatement. As more and more
people grow concerned about future air quality our market will expand, both at
home and abroad. No one is better positioned to serve this expanding need than
EEC."
A very satisfying year
Sales for the fiscal year grew by better than 29 percent over last
year. Our backlog is up 11 percent, from $70 million to $77 million.
And our earnings for this year are a very respectable $1.3 million.
These numbers are the gratifying result of a team effort that began in
the boardroom and reached out to every member of the Company. No less
important, we are putting in place some new ideas that will lead to an
even stronger position in our markets in the years ahead.
A challenging environment
The power generation market--the arena in which EEC is the emerging
leader, with a market share in excess of 30 percent--is being subjected
to new regulatory and economic pressures. Utilities are
facing sharpened competition in many areas, and the need to keep costs
down is powering a search for an ever-wider range of less costly fuels
to burn. This fuel flexibility puts an added burden on the pollution
control systems in use to meet gaseous and particulate air quality
standards. In addition, the EPA is moving forward with a new set of
standards for permissible levels of nitrogen-oxide (NOx) emissions. We
are well positioned to capitalize on these market trends.
New standards, new opportunities
Newly emerging NOx standards will initiate a vast new market for air
pollution controls. Changing fuels will not reduce the emissions; they
must be extracted. Due to our strengthening presence in the power
generation market, we will have many opportunities to design and
fabricate systems of our own. But our reputation as systems integrators
will offer some other major advantages over our competitors. We are
currently participating in a project with Wisconsin Electric, a
Wisconsin Energy company, in which EEC is integrating and optimizing
the system with a partner who is equally committed. This
approach--where more than one company is contributing to selecting the
best solutions for the customer--promises to be a very profitable
segment of this immense new market, and no one is better positioned
than we are to take advantage of this approach.
2 Environmental Elements Corporation
<PAGE>
Deepening our commitment
Our new concept of developing Regional Maintenance Centers to provide a
full range of after-market services promises to add a very strong and
growing profit source for the Company. Our leading market share in air
pollution systems for power generation and pulp and paper positions us
as a prime player in the development of an exciting new market segment,
and we have established three centers in the South and Mid-Atlantic
regions to serve our existing customers. Pollution control systems
demand continual maintenance, and our regional centers will permit us
to meet our customers' needs efficiently. In addition, our field
service engineers are fully capable of working on competitive
installations and handling major upgrades and rebuilds. We see a very
bright future for this support structure. Our next step is to add three
more regional centers over the next year.
A shrinking world
Despite the economic slowdowns, which have been dominating the
international scene during the past year, we still see major
opportunities abroad, and we are continuing to pursue openings in these
foreign markets. We have a presence in China, South Korea, India,
Brazil, Finland and Russia. The years ahead will bring a renewal of
emphasis on tightened air standards, and these markets promise great
potential for EEC. We will continue to seek opportunities to expand our
international presence.
Proprietary technology
Our investment in R&D--increasingly rare in our industry--continues to
reward us and bring us an excellent return. Over the past year, EEC was
awarded three more patents for new pollution control technologies. Our
ongoing R&D projects and technology developments will prove to be
particularly important in the NOx market as it accelerates in the next
few years. The available means of removing NOx emissions are often very
costly, and there is a need for new processes to keep our customers'
costs under control. We have several promising irons in this fire, and
we are now reviewing new approaches that can quickly establish EEC as a
NOx leader.
(BAR GRAPHIC APPEARS HERE)
developments will prove to be particularly important in the NOx market
as it accelerates in the next few years. The available means of
removing NOx emissions are often very costly, and there is a need for
new processes to keep our customers' costs under control. We have
several promising irons in the fire, and we are now reviewing new
approaches that can quickly establish EEC as a NOx leader.
A winning team
The Company's performance over the past two years is the result of the
skills and the dedication of EEC's employees. From the boardroom to
customers' facilities, we are rewarded with a team of professionals
that I feel is unparalleled in our industry. The Company's success is
their success, and I cannot overstate the depth of pride I feel working
with them.
Sincerely,
E. H. Verdery
Chairman of the Board and
Chief Executive Officer
June 1999
Environmental Elements Corporation 3
<PAGE>
new
challenges
The new air-quality standards being promulgated by the EPA will open a
new and expanding market for EEC and our competitors in the air
pollution control industry. This new arena will be so vast that no
single company will be able to dominate it, but EEC is better
positioned to capitalize on these emerging requirements than most other
companies. Our leading position in the particulate control segment of
the power generation market is a key advantage.
Though nearly half of all NOx emissions are from motor vehicle exhaust,
power plants account for more than a quarter of the total. Over the
past three decades, while most air pollutants have been reduced
significantly, NOx emissions have increased by more than ten percent.
NOx is invisible, but quickly reacts in the air to form a number of
serious pollutants, such as the acid aerosols which form acid rains,
ground-level ozone and other respiratory irritants, while nitrate
particles have been linked to algae blooms and the destruction of
rivers and lakes. The new standards are designed to reduce these
emissions, starting in those areas where the problem is most severe.
The initial NOx requirements are focused on 22 Midwestern and Eastern
states and the District of Columbia, and are targeted primarily on
utility power generation. EEC already has a very heavy presence in most
of these affected states, and our established
position as the recognized leader in this market puts us out front.
(GRAPHIC APPEARS HERE)
"The market for NOx control represents an outstanding opportunity. The new
requirements can't be met by switching fuels, as was done with SOx. Fossil fuel
combustion produces nitrogen oxides, and they can only be removed by active
measures. This is a substantial, new market, and EEC is well positioned to
capture a significant share."
S. Michael Dunseith
Executive Vice President and
Chief Operating Officer
Costly solutions
NOx is costly to remove, and unlike the sulfur oxides which were the
primary target of the Clean Air Act of 1990, simply changing to
"cleaner" fuels will not reduce these nitrogen oxide emissions. NOx
emissions are the byproduct of any combustion that uses ordinary air as
the oxidant--the oxides emitted are not from the fuel itself, but from
the nitrogen in our atmosphere. At present, the commercial process that
is most effective is the Selective Catalytic Reduction (SCR) process,
which involves the use of ammonia and a catalyst to remove NOx gases.
It is expensive to install; costly to operate; and the catalyst, which
is itself very expensive, has a finite life and must periodically be
renewed. With utility deregulation and the resultant increased
competition, utilities want to avoid these very expensive SCR
installations, if at all possible.
Proprietary technologies
We are examining a number of alternative NOx treatment technologies
that are somewhat less efficient than the SCR process, but their far
lower costs of installation and operation make them an attractive
alternative, particularly when they can be combined to attain the
desired degree
4 Environmental Elements Corporation
<PAGE>
(GRAPHIC APPEARS HERE)
Wisconsin Electric's Presque Isle plant is part of the company's portfolio
being analyzed for a major NOx reduction installation in which EEC is the
systems integrator.
of NOx reduction. EEC is currently evaluating a number of these
technologies with a view to commercial development as proprietary
processes. We foresee many potentially profitable applications where
these systems offer utilities a flexible and economical alternative to
SCR technology. As the NOx market expands, the company with the widest
range of options will be in the best position to serve the most
customers by offering the most flexibility. EEC intends to be in that
position.
Systems integration
Our flexible approach to this new NOx market illustrates some of EEC's
basic strengths: our knowledge and experience, gained through more than
fifty years in the overall air pollution marketplace, and our
willingness to reach out and select the process best suited to the task
at hand. We possess a vast array of proprietary processes--both
home-grown and licensed--but it is not our technology that is
generating our growing reputation, it is our proven ability to put
together efficient
solutions to our customers' problems that increasingly sets us apart
from our competitors.
Our contract with Wisconsin Electric is an illustration
of how we can provide our customers with more value for the dollars
they invest in new air pollution control technology. EEC evaluates the
customer's problem, optimizes the solution, and then integrates all of
the various components into a workable system--all the while keeping
costs in line. We are not wedded to our own technology, and we have the
freedom to pick and choose the technologies that best suit our
customer's needs regardless of the source. This systems integration
approach will be a growing part of our future services, both in the NOx
markets and in our other areas of interest.
Environmental Elements Corporation 5
<PAGE>
new
vigor
Environmental Elements Corporation is the leader in supplying air
pollution control installations for the power generation and pulp and
paper industries, for waste-to-energy plants, and the Company's
products enjoy a significant presence in the rock products, metals and
petrochemical industries. Each installation represents an investment of
many millions of dollars by the customer, both initially and over the
expected life of the system--typically about twenty or more years.
A market is born
Once the welds on a new air pollution control installation had cooled
and the paint had dried, the builder of the equipment typically turned
the operational and maintenance responsibilities over to the customer
and turned its attention to the next major project. This maintenance
vacuum was filled by small, local independents, some even mom-and-pop
operations, many of which grew into mid-sized companies by offering a
limited array of specialized, mechanical support services--but all too
often on a patchwork basis. Major upgrades of equipment frequently
involved costly fabrications and custom adaptations, and periodic
rebuilds of the installations proved usually to be beyond their
capabilities.
As a prime supplier of full-scale air pollution control installations,
EEC enjoys the benefits of design experience and fabrication
capabilities that none of these small operations can approach. Their
only advantage is location. We are moving aggressively to change that.
During the past year, EEC has opened three new Regional Maintenance
Centers in Pensacola, Florida, Richmond, Virginia, and Karnack, Texas.
These three sites were chosen to inaugurate our new services because
they are situated within convenient reach of nearly seventy percent of
our existing installations. We are, therefore, known entities among
these customers. Our products and capabilities need no further
introductions. They are an ideal test bed for the fundamental concept,
and they are proving to be even more successful than anticipated in our
planning. For very little initial investment, the Company is gaining
excellent returns. Inaugural staffing and equipment needs are modest,
and we enjoy great flexibility in the ways we can respond to our
customers' requirements. Best of all, perhaps, is the continued
closeness of EEC personnel and the customer, a relationship that
ensures that we really understand their needs and simultaneously
underscores the full range of the Company's technical capabilities to
meet them. Our current plans call for the opening of two more regional
maintenance centers this year, and we are planning three more next
year--in the Midwest, the Northwest and the Southwest.
(GRAPHIC APPEARS HERE)
"Air pollution control equipment is very costly, highly complex, and in use
around the clock, day after day after day. Effective maintenance is an
imperative that no plant can afford to ignore. No one is better equipped to
provide competent maintenance and support services than EEC."
Neil R. Davis Senior Vice President, Operations
6 Environmental Elements Corporation
<PAGE>
(GRAPHIC APPEARS HERE)
EEC's new Regional Maintenance Centers mean that our expertise is readily on
hand to meet customers' needs--even when the equipment is not ours.
The camel's nose
Having a recognized, primary air pollution control equipment
manufacturer in the neighborhood is proving to be a major benefit to
all companies with air pollution control systems, even companies with
systems installed by our competitors. These systems are not
off-the-shelf appliances; each installation is unique, and each is
tailored closely to the plant it is designed to support. Simply stated,
our systems are adaptable to many applications, not just to our own
proprietary installations. The key characteristics that set us apart in
the maintenance field are our reputation for quality systems design and
fabrication, and our capability for full systems integration. We can
carry out work on any air pollution control system--from periodic
maintenance requirements through a complete rebuild--and improve it in
the process.
One notable illustration occurred last year. A contract was awarded to
EEC by North Texas Cement; we were awarded this $3 million contract
because of our known proficiency in the marketplace, and because we
possess the local capability to deliver our services on site, on
demand. The new Mid-South Regional Maintenance Center will coordinate
the rebuild of three precipitator units that serve North Texas' cement
kilns. A project of this type puts EEC in a far stronger position to
bid on future new construction projects for customers we support with
maintenance contracts.
A growing force in our future
The benefits of this regional maintenance concept to the Company are
manifold and significant. The investment is small and the returns are
great. Major installations occur on a time frame that is easily
considered to be "occasional"--with a probable life expectancy of about
25 years. Yet the need to maintain such an installation is continual,
and the revenue stream on this maintenance, and on the consumable parts
required, is a steady source of recurring revenue. And, finally, and
probably most important of all, the relationship of EEC personnel with
the customer is of immeasurable advantage when major upgrades or
rebuilds become necessary. In coming years, we anticipate that these
service revenues will grow significantly. And it is even more important
to note that, in times of economic downturn and recession, when new
installation orders may shrink to minimums, our customers will need to
make every effort to maintain existing facilities and keep them in
operation. We intend to be ready to respond to those needs at every
level of demand.
Environmental Elements Corporation 7
<PAGE>
innovative
solutions
If there is any one facet of EEC's corporate operations that makes us
truly unique among the rest of our industry, it is our continuing
investment in research and development. Very few companies seem willing
to make the substantial investment demanded by an active R&D effort,
but we have found it to be a major advantage in expanding our share of
our existing markets and in penetrating new ones.
Dreams to bricks and mortar
At EEC, research and development are ambidextrous right and left hands.
Neither is more important than the other, and both serve the Company
exceptionally well. Though we start out from an air pollution control
perspective, the sparks often lead us into other only distantly related
fields. Our fundamental investigations into corona-discharge
technology, for example, have blossomed into research and development
contracts for biological and chemical decontamination for the Defense
Department, and into a cooperative research effort with a major
university to explore the future of using this technology to control
other biological contaminations in food processing and other
applications where sterile surfaces are mandatory. In our own narrower
field of interest, this research also led to a patent--the third patent
issued to EEC during this past year--on a whole new means of
eliminating mercury vapor from gaseous industrial effluent.
The new process employs a catalytic reactor to absorb the mercury, and
a corona-discharge plasma unit oxidizes the element and makes it easily
susceptible to collection in a conventional flue-gas scrubber.
Previously, a far more costly method using carbon powder injection was
the only reliable technology available to remove this highly toxic
element from stack gases of power plants. Success with this application
is leading us into new explorations of how corona-discharge technology
can be used to eliminate other dangerous pollutants from exhaust
emissions.
The shrinking particle
Other major research efforts that have resulted in new patents by EEC
are the new series of electrostatic precipitator panels that we have
developed. Electrostatic precipitation is, by far, the most common
means of removing particulate pollutants from stack-gas emissions, but
it is a technology that is often far from perfect in its application.
There are very real limits to the size of particles most conventional
systems can capture, and turbulent airflow and other internal
conditions have a drastic impact on their performance. Turbulence often
results in re-entrainment of particles that escape the collectors,
requiring additional collectors to capture them. And, in all too many
systems, truly tiny particles flow through unimpeded.
EEC invented and commercially developed and patented the Fine
Particulate AgglomeratorTM (FPA) which is a
(GRAPHIC APPEARS HERE)
"One of the most important things we do at EEC is pursue major R&D projects,
both in terms of basic research and of commercial product development. Staying
at the cutting edge of our technology is what will keep us at the leading edge
of our industry.
Robert W. Tisone Senior Vice President, Technology and Product Management
8 Environmental Elements Corporation
<PAGE>
(GRAPHIC APPEARS HERE)
We are the only company in our field with the R&D capability to fully model
elaborate new equipment designs and installations before beginning construction.
hybrid of conventional and laminar flow technology. The FPA will
enhance an existing electrostatic precipitator's performance and help
to remove ultra-small particles--less than a micron--which are more
difficult to collect in a conventional electrostatic collection system.
In addition, the Company patented the heart of our FPA system, the new
Sandwich Electrode.(TM) This new electrode consists of a flat-plate
design, which minimizes the flow turbulence that can ruin the enhanced
agglomeration effect in the FPA field.
A new standard
Another EEC R&D effort from which we expect an excellent return is the
new Modulok II(R) dust plate, for which another new patent was issued
to the Company during the past year. This new design is highly
efficient, yet it is so simple, with components so standardized, that
it is readily adaptable to a vast range of precipitator applications.
This Modulok II dust plate was designed for international electrostatic
precipitator projects, and it can be quickly manufactured, shipped and
assembled on site virtually anywhere in the world--a distinct advantage
in terms of our growing international markets.
Open minds and open markets
Unlike many designers and manufacturers with active R&D efforts,
however, EEC is not infected with the "not-invented-here" mentality.
Our search for new approaches to meeting our business goals is not
confined to our internal resources alone.
The cost associated with commercial development of new technologies has
never been higher, and there are many good ideas floating around
without the kind of solid financial sponsorship needed to bring them on
line. We are open to acquiring new processes that meet our customers'
needs, and we actively search for new ways of increasing effectiveness
or lowering costs--or both. We invent new processes and equipment when
we can, but we are willing to buy or license promising new techniques
when our evaluation proves them to be worth our investment. At present,
EEC is evaluating new methods for removing NOx that are far less costly
than the SCR system.
Blazers in the lab
In order to assure that our capabilities and our customers' needs are
in mesh, our project managers work directly with our R&D personnel.
There is no mid-level interpreter standing between the people designing
and building a new installation on site and the men and women back in
the lab who are monitoring and evaluating the project. We model new
systems fully, not only in computer software, but as working
miniatures, operating in a real-world environment.
We lead our industry, and our R&D will keep us out front in the years
ahead.
Environmental Elements Corporation 9
<PAGE>
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
General
The Company designs and supplies systems and equipment and provides
aftermarket products and services that enable its customers to comply with
regulations limiting particulate and gaseous emissions. The Company
generally is contractually responsible for all phases of design,
fabrication and, if included in the scope of the Company's contract, field
construction of its equipment and systems. The Company faces substantial
competition in each of its principal markets. Substantially all contracts
for the Company's systems are awarded through competitive bidding and are
undertaken on a fixed-price basis. Like others in its industry, the
Company relies on outside suppliers, manufacturers and fabricators to
supply parts and components in accordance with the Company's designs and
specifications. When the Company's scope of work includes installation of
equipment, the Company selects and supervises subcontractors for this
work. The Company's successful completion of its contractual obligations
is usually determined by performance testing of its systems.
Bookings and Backlog
Bookings represent work for which the Company has entered into a signed
agreement or has received a notice to proceed. Bookings during fiscal 1999
were $75.4 million, a 15% decrease from fiscal 1998 bookings. The decrease
in bookings during fiscal 1999 was due primarily to decreases in orders
from the Company's customers in the power generation and repair and
rebuild areas, offset by increases in orders from customers in the
industrial, maintenance and spare parts areas.The backlog as of March 31,
1999 is $77.2 million.
Due to timing effects of bookings, differences in project gross margins
and varying lengths of time required to perform contracts (typically 12-36
months), annual bookings activity and backlog levels at period end are not
necessarily predictive of future operating results.
Sales and Income
Table 1 sets forth the amounts and percentage relationships to sales of
selected items in the Company's consolidated statements of operations for
the periods indicated. Table 1 excludes a restructuring charge of $2.2
million from fiscal year 1997.
Fiscal 1999 Compared to Fiscal 1998
Fiscal 1999 sales increased 29.3% or $15.4 million to $68.0 million from
$52.6 million the year before. This change reflects increases in sales to
the Company's power, maintenance and spare parts customers, which is
offset in part by decreases in sales to its industrial, repair and rebuild
and international customers.
Cost of sales increased 29.5% or $13.4 million to $58.9 million from $45.5
million. Cost of sales increased slightly as a percentage of sales to
86.7% from 86.5%, reflecting essentially level project execution
performance.
Selling, general and administrative expenses increased 12.7% or $0.8
million to $7.2 million from $6.4 million. The increase was caused
primarily by increased sales volume, offset in part by efficiencies in the
Company's administrative costs. Because the increased sales volume was
significantly higher than the increase in expenses in dollar terms, the
Company's selling, general and administrative expenses, as a percentage of
sales, decreased to 10.6% from 12.2%.
For the reasons set forth above, operating income was $1.9 million, or
2.7% of sales, for fiscal 1999 compared to operating income of $711,000,
or 1.3% of sales, in the prior year.
Interest and other expense, net, decreased 13.5%, or $89,000, to $572,000.
The decrease is primarily a result of a decrease in interest expense due
to decreased borrowings on the Company's line of credit during most of the
fiscal year.
Because of the above mentioned sales volume increases and decreased
expenses, pre-tax income from continuing operations was $1.3 million, or
1.9% of sales, for fiscal 1999 compared to $50,000, or 0.1% of sales, in
the prior year.
Provision for income taxes was $39,000 for fiscal 1999. The provision was
for state taxes not offset by net operating loss carryforwards. There was
no provision for income taxes in fiscal 1998 because the Company had net
operating loss carryforwards that offset pre-tax income from continuing
operations. Information relating to income taxes is discussed in Note 4 of
"Notes to Consolidated Financial Statements."
For the reasons set forth above, net income was $1.28 million, or 1.9% of
sales, for fiscal 1999, compared to net income of $50,000, or 0.1% of
sales, for fiscal 1998.
Fiscal 1998 Compared to Fiscal 1997
Fiscal 1998 sales increased 10% or $4.9 million to $52.6 million from
$47.7 million the year before. The increase in sales reflected increases
in sales to the Company's power, international, field service, and spare
parts customers offset in part by decreases in sales to its industrial and
repair and rebuild customers.
Cost of sales increased 11% or $4.5 million to $45.5 million from $41.0
million. Cost of sales increased slightly as a percentage of sales to
86.5% from 86.1%, reflecting essentially level project execution
performance.
Selling, general and administrative expenses decreased 18% or $1.4 million
to $6.4 million from $7.8 million. Cost reductions from restructuring
actions taken during prior fiscal years, and the resultant increased
efficiencies during fiscal 1998, were the primary factors in the decrease.
Because of the increased sales volumes and the decreased expenses in
dollar terms, the Company's selling, general and administrative expenses,
as a percentage of sales, decreased to 12.2% from 16.4%.
For the reasons set forth above, operating income was $711,000, or 1.3% of
sales, for fiscal 1998 compared to an operating loss of $1.2 million,
excluding a restructuring charge of $2.2 million, in fiscal year 1997.
<TABLE>
<CAPTION>
TABLE 1 For the years ended March 31, 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(in millions) (percentage of net sales)
Sales $68.0 $52.6 $47.7 100.0 100.0 100.0
Cost of sales 58.9 45.5 41.0 86.7 86.5 86.1
Gross profit 9.1 7.1 6.6 13.3 13.5 13.9
Selling, general and administrative expenses 7.2 6.4 7.8 10.6 12.2 16.4
Operating income (loss) 1.9 0.7 (1.2) 2.7 1.3 (2.5)
Interest and other expense, net (0.6) (0.6) (0.6) (0.8) (1.1) (1.3)
Income (loss) before provision for income taxes $1.3 $0.1 $(1.8) 1.9 0.1 (3.8)
</TABLE>
10 Environmental Elements Corporation
<PAGE>
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Interest and other expense, net, increased 5.9%, or $37,000, to $661,000.
The increase was primarily a result of an increase in interest expense due
to increased borrowings on the Company's line of credit.
Because of the above mentioned sales volume increases and decreased
expenses, pre-tax income from continuing operations was $50,000, or 0.1%
of sales, for fiscal 1998 compared to a loss from continuing operations
before restructuring charges of $1.8 million in fiscal 1997.
Liquidity and Capital Resources
During fiscal 1999, cash and cash equivalents increased by $0.7 million
and borrowings under the Company's line of credit increased by $0.9
million. This was caused principally by the increase in cash flow
generated from net income of $1.3 million and depreciation and
amortization expenses of $0.8 million, offset by the decrease in cash flow
generated from a $2.4 million increase in the Company's net working
capital investment in contracts.
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 $8.1 million and $5.7
million at March 31, 1999 and 1998, respectively.) The Company seeks to
manage project cash flows through its payment terms with customers and
suppliers and in adherence to project budgets and schedules.
During the fiscal year, the Company and its bank agreed to increase the
Company's secured open line of credit to $12 million, for a two-year term.
Subsequent to year-end, the Company increased its bonding capacity by
establishing an unsecured bonding line of $80 million through its
corporate insurance providers.
The Company's order backlog increased 11% to $77 million during the fiscal
year. Bookings received during the fiscal year decreased 15% from the
prior year, to $75.4 million from $88.6 million.
On March 4, 1999, the Company entered an agreement with one of its
customers, Wisconsin Electric, 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. Environmental Elements and DB Riley, both recognized leaders in
the supply of air pollution control equipment, through a joint venture,
will manage, design, engineer, procure, fabricate, supply and install
boiler technology, particulate technology and emission control equipment.
The Company received an initial minimum order for $25 million at the time
the agreement was signed. Additional 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 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.
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.
Dividends
The Board of Directors did not declare a dividend during fiscal 1999. Any
future determination as to the payment of dividends on common stock will
depend on future profitability and capital requirements of the Company
and/or on such other factors as the Board of Directors may consider. The
Company intends to retain most of its future earnings to finance growth
and development of its business.
Environmental Elements Corporation 11
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
For the years ended March 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Sales $68,029,000 $52,612,000 $47,654,000
- ------------------------------------------------------------------------------------------------------------------------
Cost of sales 58,960,000 45,528,000 41,023,000
- ------------------------------------------------------------------------------------------------------------------------
Gross profit 9,069,000 7,084,000 6,631,000
- ------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 7,183,000 6,373,000 7,807,000
- ------------------------------------------------------------------------------------------------------------------------
Restructuring charge -- -- 2,215,000
- ------------------------------------------------------------------------------------------------------------------------
7,183,000 6,373,000 10,022,000
-----------------------------------------------------------
Operating income (loss) 1,886,000 711,000 (3,391,000)
- ------------------------------------------------------------------------------------------------------------------------
Interest and other expense, net (572,000) (661,000) (624,000)
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for
income taxes 1,314,000 50,000 (4,015,000)
- ------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 39,000 -- --
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) $1,275,000 $50,000 $(4,015,000)
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share:
Basic $ 0.18 $ 0.01 $(0.58)
- ------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.18 $ 0.01 $(0.58)
- ------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding:
Basic 7,053,000 6,990,000 6,924,000
- ------------------------------------------------------------------------------------------------------------------------
Diluted 7,192,000 7,098,000 6,924,000
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
12 Environmental Elements Corporation
<PAGE>
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
As of March 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $1,619,000 $958,000
- ------------------------------------------------------------------------------------------------------------------------
Accounts and retainage receivable, net of allowance for doubtful
accounts of $221,000 and $218,000 in 1999 and 1998, respectively 9,441,000 9,709,000
- -----------------------------------------------------------------------------------------------------------------------
Unbilled contract costs and fees 12,315,000 13,877,000
- -----------------------------------------------------------------------------------------------------------------------
Inventories 1,407,000 760,000
- -----------------------------------------------------------------------------------------------------------------------
Prepaid expenses and other current assets 1,814,000 1,970,000
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 26,596,000 27,274,000
- ------------------------------------------------------------------------------------------------------------------------
Property and equipment:
Capital lease, building and improvements 7,293,000 7,200,000
- ------------------------------------------------------------------------------------------------------------------------
Machinery, equipment, furniture and fixtures 3,120,000 3,032,000
- -----------------------------------------------------------------------------------------------------------------------
Total property and equipment at cost 10,413,000 10,232,000
- ------------------------------------------------------------------------------------------------------------------------
Less - Accumulated depreciation and amortization 4,827,000 4,084,000
- ------------------------------------------------------------------------------------------------------------------------
Property and equipment, net 5,586,000 6,148,000
- ------------------------------------------------------------------------------------------------------------------------
Non-current retainage receivable 277,000 --
- ------------------------------------------------------------------------------------------------------------------------
Other assets, net 721,000 940,000
- -----------------------------------------------------------------------------------------------------------------------
Total assets $33,180,000 $34,362,000
- ------------------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' investment
Current liabilities:
Accounts payable $13,110,000 $16,378,000
- ------------------------------------------------------------------------------------------------------------------------
Billings in excess of contract costs and fees 824,000 1,462,000
- -----------------------------------------------------------------------------------------------------------------------
Accrued payroll and related expenses 1,044,000 509,000
- -----------------------------------------------------------------------------------------------------------------------
Accrued and other current liabilities 2,056,000 1,875,000
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 17,034,000 20,224,000
- ------------------------------------------------------------------------------------------------------------------------
Long-term liabilities:
Long-term capital lease obligation 1,963,000 2,217,000
- ------------------------------------------------------------------------------------------------------------------------
Long-term line of credit 6,100,000 5,200,000
- -----------------------------------------------------------------------------------------------------------------------
Other non-current liabilities 475,000 456,000
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities $25,572,000 $28,097,000
- ------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.01 per share; 20,000,000 shares authorized; 7,090,705
and 7,034,759 shares issued and outstanding at March 31,
1999 and 1998, respectively 71,000 71,000
- -----------------------------------------------------------------------------------------------------------------------
Paid-in capital 28,222,000 28,047,000
- -----------------------------------------------------------------------------------------------------------------------
Cumulative translation adjustment (196,000) (89,000)
- ------------------------------------------------------------------------------------------------------------------------
Retained deficit (20,489,000) (21,764,000)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' investment 7,608,000 6,265,000
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' investment $33,180,000 $34,362,000
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
Environmental Elements Corporation 13
<PAGE>
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the years ended March 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $1,275,000 $50,000 $(4,015,000)
- ------------------------------------------------------------------------------------------------------------------------
Non-cash items:
Depreciation and amortization 826,000 848,000 786,000
- ------------------------------------------------------------------------------------------------------------------------
Stock contributions to savings plan 98,000 88,000 46,000
- -----------------------------------------------------------------------------------------------------------------------
Stock-based compensation 77,000 96,000 102,000
- -----------------------------------------------------------------------------------------------------------------------
Changes in operating assets and liabilities:
(Increase) decrease in accounts and retainages receivable, net (9,000) (3,392,000) 3,710,000
- ------------------------------------------------------------------------------------------------------------------------
Decrease (increase) in unbilled contract costs and fees 1,562,000 (7,629,000) (1,423,000)
- ------------------------------------------------------------------------------------------------------------------------
(Increase) decrease in inventories (647,000) 207,000 484,000
- -----------------------------------------------------------------------------------------------------------------------
Decrease (increase) in prepaid expenses and other current assets 156,000 20,000 (843,000)
- ------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in accounts payable (3,268,000) 6,654,000 (2,462,000)
- ------------------------------------------------------------------------------------------------------------------------
Decrease in billings in excess of contract costs and fees (638,000) (198,000) (731,000)
- ------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in accrued payroll and related expenses 535,000 (109,000) (57,000)
- ------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in accrued and other current liabilities 181,000 (49,000) (81,000)
- ------------------------------------------------------------------------------------------------------------------------
Increase in other non-current liabilities 19,000 47,000 64,000
- -----------------------------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) operating activities 167,000 (3,367,000) (4,420,000)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (181,000) (463,000) (99,000)
- ------------------------------------------------------------------------------------------------------------------------
Disposals of property and equipment, net -- -- 1,596,000
- -------------------------------------------------------------------------------------------------------------------------
Proceeds from disposal of assets held for sale -- 864,000 --
- -------------------------------------------------------------------------------------------------------------------------
Decrease (increase) in other assets 136,000 (136,000) 57,000
- -----------------------------------------------------------------------------------------------------------------------
Net cash flows (used in) provided by investing activities (45,000) 265,000 1,554,000
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings under line of credit 900,000 2,615,000 2,585,000
- ------------------------------------------------------------------------------------------------------------------------
Payments under capital lease obligation (254,000) (232,000) (213,000)
- ------------------------------------------------------------------------------------------------------------------------
Change in cumulative translation adjustment (107,000) (7,000) 54,000
- -----------------------------------------------------------------------------------------------------------------------
Net cash flows provided by financing activities 539,000 2,376,000 2,426,000
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 661,000 (726,000) (440,000)
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year 958,000 1,684,000 2,124,000
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $1,619,000 $958,000 $1,684,000
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
14 Environmental Elements Corporation
<PAGE>
Consolidated Statements of Stockholders' Investment
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative Retained
Common Treasury Paid-in Translation Earnings
Stock Stock Capital Adjustment (Deficit) Total
- ------------------------------------------------------------------------------------------------------------------------
Changes in Amounts
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1996 $69,000 $(107,000) $27,763,000 $(136,000) $(17,738,000) $9,851,000
- ------------------------------------------------------------------------------------------------------------------------
Net loss -- -- -- -- (4,015,000) (4,015,000)
- ------------------------------------------------------------------------------------------------------------------------
Translation adjustment -- -- -- 54,000 -- 54,000
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive loss -- -- -- -- -- (3,961,000)
- ------------------------------------------------------------------------------------------------------------------------
Issuance of common stock from treasury
under employee savings plan -- 107,000 -- -- (61,000) 46,000
- ------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 1,000 -- 101,000 -- -- 102,000
- ------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 70,000 -- 27,864,000 (82,000) (21,814,000) 6,038,000
- ------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- -- 50,000 50,000
- -----------------------------------------------------------------------------------------------------------------------
Translation adjustment -- -- -- (7,000) -- (7,000)
- ------------------------------------------------------------------------------------------------------------------------
Comprehensive income -- -- -- -- -- 43,000
- ------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 1,000 -- 183,000 -- -- 184,000
- ------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 71,000 -- 28,047,000 (89,000) (21,764,000) 6,265,000
- ------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- -- 1,275,000 1,275,000
- -----------------------------------------------------------------------------------------------------------------------
Translation adjustment -- -- -- (107,000) -- (107,000)
- ------------------------------------------------------------------------------------------------------------------------
Comprehensive income -- -- -- -- -- 1,168,000
- ------------------------------------------------------------------------------------------------------------------------
Issuance of common stock -- -- 175,000 -- -- 175,000
- ------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 $71,000 $-- $28,222,000 $(196,000) $(20,489,000) $7,608,000
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Changes in Common Shares
Balance, March 31, 1996 6,902,322
- --------------------------------------------------------------------------------
Issuance of common stock from treasury under employee savings plan 17,902
- ----------------------------------------------------------------------------
Issuance of common stock 43,122
- --------------------------------------------------------------------------------
Balance, March 31, 1997 6,963,346
- --------------------------------------------------------------------------------
Issuance of common stock under employee savings plan 34,082
- ----------------------------------------------------------------------------
Issuance of common stock 37,331
- --------------------------------------------------------------------------------
Balance, March 31, 1998 7,034,759
- --------------------------------------------------------------------------------
Issuance of common stock under employee savings plan 27,671
- ----------------------------------------------------------------------------
Issuance of common stock 28,275
- --------------------------------------------------------------------------------
Balance, March 31, 1999 7,090,705
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
Environmental Elements Corporation 15
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(GRAPHIC APPEARS HERE)
Note 1 Summary of Significant
Accounting Policies
Organization and Business
The Company (incorporated in Delaware on March 15, 1983) designs and
supplies proprietary, large-scale, custom-engineered air pollution
control systems that enable customers to operate their facilities in
compliance with regulatory standards limiting particulate and gaseous
emissions.
The Company's operations depend, among other things, upon the Company's
ability to generate sufficient revenues and gross margins in a
competitive market from a limited number of clients in specific
industries. Future operations may be affected by the level of orders
available in the market and obtained by the Company and its ability to
generate sufficient gross margins.
Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
Cash equivalents consist primarily of investments in short-term, highly
liquid securities having an original maturity of three months or less
at the time of acquisition. Cash and cash equivalents are stated at
cost plus accrued interest, which approximates market value. As of
March 31, 1999 and 1998, $938,000 and $958,000, respectively, of
repurchase agreements were included in this caption.
Accounts and Retainages Receivable
As of March 31, 1999 and 1998, accounts and retainages receivable, net
of allowance for doubtful accounts, include current accounts receivable
of $7,713,000 and $8,664,000, respectively, and current retainages of
$1,728,000 and $1,045,000, respectively. All non-current retainages as
of March 31, 1999 become due after fiscal 2000, based on applicable
contract terms.
Long-Term Contracts
The Company records sales from long-term contracts using the
percentage-of-completion method. Under this method, the Company
recognizes as sales that portion of the total contract price which the
cost of work completed bears to the estimated total cost of the work
covered by the contract. Because contracts may extend over more than
one fiscal period, revisions of cost and profit estimates are made
periodically and are reflected in the accounting period in which they
are determined. If the estimate of total costs on a contract indicates
a loss, the total anticipated loss is recognized immediately.
Unbilled contract costs and fees represent sales recognized in excess
of amounts billed. All unbilled contract costs and fees are expected to
be collected within the next fiscal year. Billings in excess of
contract costs and fees represent billings in excess of sales
recognized.
The Company provides for warranty expenses on contracts based on
estimates which take into account historical experience. Warranty
expenses and related accruals are included in cost of sales and in
accrued and other current liabilities, respectively, in the
accompanying consolidated financial statements.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories consist principally of purchased and fabricated
parts held for use in contracts and as spare parts.
Other Assets
In December 1995, the Company made a strategic investment in an
international joint venture. Certain costs incurred to establish
licenses and acquire plant designs, equipment and other assets have
been recorded as other assets and are being amortized over the life of
the related equipment and agreements of five to 12 years. As of March
31, 1999 and 1998, the unamortized costs related to the joint venture
included in other assets totaled approximately $577,000 and $767,000,
respectively.
Property and Equipment
Major improvements are capitalized at cost, while replacements and
maintenance and repairs which do not improve or extend the life of the
affected assets are charged to expense as incurred. Depreciation and
amortization of property and equipment is computed on the straight-line
method over estimated useful lives, or with respect to leasehold
improvements, over the term of the lease if shorter. Useful lives range
from three to 40 years by major asset class.
16 Environmental Elements Corporation
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Income Taxes
The Company provides for income taxes using the liability method
pursuant to Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes." Deferred income taxes are provided for
temporary differences arising between the tax basis of assets and
liabilities and their respective book basis as reported in the
financial statements. Because the Company operated at a loss in prior
years, and has significant net operating loss carryforwards, current
year income taxes are not material.
Fair Value of Financial Instruments
The Company determines fair value of their financial instruments held
based on quoted market values, where applicable, or discounted cash
flow analysis. As of March 31, 1999 and 1998, the carrying value of its
financial instruments approximates fair value.
New Accounting Standards
During fiscal year 1999, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," (SFAS
No. 130). This Statement establishes standards for reporting and
display of comprehensive income and its components. Comprehensive
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 presents its comprehensive income
in the Statement of Stockholders' Investment.
Also during fiscal year 1999, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information," (SFAS No. 131). The Statement
establishes standards for the way that public companies report
information about operating segments in their financial statements, and
also establishes standards for related disclosures about products and
services, geographic areas and major customers. 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, regardless of product,
service or geographic area. Sales by geographic area for the current
and two prior fiscal years were as follows:
(in thousands) 1999 1998 1997
--------------------------------------------------
Geographic Area:
United States $61,125 $47,320 $38,206
-------------------------------------------------
Canada 4,011 2,686 7,906
-------------------------------------------------
Other international 2,893 2,606 1,542
-------------------------------------------------
Total $68,029 $52,612 $47,654
=================================================
As of March 31, 1999, approximately 56% of the Company's accounts and
retainages receivable were due from companies in the power industry and
23% were due from companies in the pulp and paper industry. Three
customers accounted for 56% of the Company's sales in fiscal 1999; no
customer accounted for more than 10% of the Company's sales in fiscal
1998; and three customers accounted for 33% of the Company's sales in
fiscal 1997.
In February 1998, the Financial Accounting Standards Board issued SFAS
No. 132, "Employer's Disclosures about Pensions and Other
Postretirement Benefits." This statement revises the disclosures that
employers are required to make regarding pension and postretirement
benefit plans. This statement is effective for fiscal years beginning
after December 15, 1997. Management has restated benefit disclosures to
be in compliance with the requirements of this statement.
(GRAPHIC APPEARS HERE)
Note 2 Earnings Per Share
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," effective December 15, 1997. As a result,
the Company is required to provide additional disclosure of basic
earnings per share. Despite certain new calculation criteria, diluted
earnings per share, as defined and reported under the new SFAS, was
equivalent to the historically reported fully-diluted earnings per
share.
The following illustrates the calculation of weighted average number of
common equivalent shares outstanding for the years ended March 31,
1999, 1998 and 1997:
1999 1998 1997
---------------------------------------------------
Weighted-average
number of
common shares 7,053,000 6,990,000 6,924,000
---------------------------------------------------
Dilutive effect
of outstanding
stock options 139,000 108,000 --
-------------------------------------------------
Weighted-average
number of common
equivalent shares
outstanding 7,192,000 7,098,000 6,924,000
---------------------------------------------------
The dilutive effects of stock options were not provided for 1997, as
these options would have an anti-dilutive effect due to the losses of
the Company.
Environmental Elements Corporation 17
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(GRAPHIC APPEARS HERE)
Note 3 Credit Facility and Bonding Line
The Company has a bank credit facility, amended during fiscal 1999,
providing for revolving line of credit borrowings and letters of credit
issuances of up to $12,000,000. Under the credit facility, interest
accrues at the bank's prime rate plus 1/2%. As of March 31, 1999 and
1998, the rate in effect was 8.25% and 9.0%, respectively. At March 31,
1999 and 1998 borrowings of $6,100,000 and $5,200,000 were outstanding,
respectively. Additionally, $3,546,000 and $2,464,000 of letters of
credit were also outstanding at March 31, 1999 and 1998, respectively.
The credit facility expires on July 1, 2000 and is secured by certain
assets of the Company.
During fiscal years 1999, 1998 and 1997, the maximum borrowings under
lines of credit totaled $6,100,000, $5,200,000 and $5,500,000,
respectively. Average borrowings during such years were $3,010,000,
$3,808,000 and $3,615,000, and the weighted average interest rates on
such borrowings were 8.82%, 9.0% and 8.75%, in fiscal years 1999, 1998
and 1997, respectively. Interest expense for the fiscal years 1999,
1998 and 1997 was $265,000, $339,000 and $315,000, respectively. Under
the provisions of the credit facility, the Company must comply with
certain financial and other covenants including tangible net worth and
current ratio calculations among other restrictions. At March 31, 1999,
the Company was in compliance with these covenants.
On May 14, 1999, the Company entered into a contract with its corporate
insurance providers to provide performance and payment bonds to the
Company under which the providers extended an $80 million
uncollateralized bonding line.
(GRAPHIC APPEARS HERE)
Note 4 Income Taxes
As of March 31, 1999, the Company had available, for federal tax
purposes, an estimated federal income tax net operating loss
carryforward of approximately $20,310,000 to offset future taxable
income. The carryforwards will expire between 2008 and 2012. As of
March 31, 1999, the Company also had an alternative minimum tax credit
carryforward of approximately $532,000 which has no expiration date. As
of March 31, 1999 and 1998, the Company had alternative minimum tax net
operating loss carryforwards of approximately $20,526,000 and
$21,674,000, respectively.
The reconciliation of the provision for income taxes computed at
statutory rates to the provision for income taxes provided on income
(loss) from continuing operations is not material. The provision for
fiscal 1999 related to state taxes not offset by net operating loss
carryforwards. Federal taxes at the statutory rate were offset by equal
reductions/increases to the valuation reserve. The Company has
maintained a valuation reserve for the tax loss carryforwards since
their recovery is dependent on profitable future operations.
The significant components of the deferred tax asset
(liability), stated by source of the difference between financial
accounting and tax basis as of March 31, 1999 and 1998 are as follows:
1999 1998
---------------------------------------------------
Operating loss
carryforward
and tax credits $8,406,000 $9,009,000
---------------------------------------------------
Reserves, accrued
liabilities and other 304,000 487,000
-------------------------------------------------
Valuation allowance (8,625,000) (9,450,000)
Property, plant,
equipment and other (285,000) (246,000)
Net deferred income
tax liability $(200,000) $(200,000)
---------------------------------------------------
(GRAPHIC APPEARS HERE)
Note 5 Employee Benefit Plans
Pension Plan
The Company maintains a defined benefit pension plan covering the
majority of employees. Contributions to the Plan are based on the
actuarially determined costs thereof, and the Company's funding policy
has been to contribute an amount at least sufficient to meet the
funding standards under the Employee Retirement Income Security Act of
1974. Contributions are intended to provide not only for benefits
attributed to service to date, but also for those expected to be earned
in the future.
Pension expense for the years ended March 31, 1999, 1998 and 1997
consisted of:
1999 1998 1997
---------------------------------------------------
Service $369,000 $330,000 $360,000
---------------------------------------------------
Net amortization
and deferral 793,000 490,000 122,000
-------------------------------------------------
Interest cost 738,000 688,000 644,000
-------------------------------------------------
Actual return
on assets (1,454,000) (1,119,000) (733,000)
--------------------------------------------------
Net pension
expense $446,000 $389,000 $393,000
---------------------------------------------------
18 Environmental Elements Corporation
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The funded status of the Plan as of the most recent actuarial
valuations was:
12/31/98 12/31/97
- --------------------------------------------------------------------------------
Actuarial present value
of benefit obligations:
Accumulated benefit
obligation, including
vested benefits of
$11,081,000 and
$9,025,000 in 1999 and
1998, respectively $11,514,000 $9,254,000
- --------------------------------------------------------------------------------
Projected benefit
obligation for services
rendered to date $12,534,000 $9,558,000
- --------------------------------------------------------------------------------
Plan assets, consisting
primarily of fixed income
investments, at fair value 11,299,000 9,714,000
- --------------------------------------------------------------------------------
Plan assets in excess of
(or less than) projected
benefit obligation (1,235,000) 156,000
- --------------------------------------------------------------------------------
Unrecognized net loss
from past experience
different from that
assumed and changes
in assumptions 2,319,000 695,000
- --------------------------------------------------------------------------------
Prior service cost
not yet recognized in
net periodic cost 214,000 262,000
Prepaid pension cost $1,298,000 $1,113,000
- --------------------------------------------------------------------------------
For purposes of determining the actuarial present value of the
projected benefit obligation, weighted average discount rates of 6.5%
and 7.75% were used in 1999 and 1998, respectively. Rates of increase
in future compensation levels between 3.5% and 6.5%, and an 8% expected
long-term rate of return on plan assets were assumed.
Post-Employment Benefits
The Company provides limited health care and life insurance benefits
for certain employees upon retirement. In addition, employees
terminated in connection with the elimination of manufacturing
operations in prior years were eligible to receive certain health care
and life insurance benefits upon termination. These benefit plans are
not funded.
The accrual is determined by application of the terms of
the current benefit plans, effects of Medicare for eligible employees,
relevant actuarial assumptions and health-care cost trend rates
projected at an annual rate of 5%. A 1% increase in the annual trend
rate would increase the accumulated post-retirement benefit obligation
by approximately $6,000; the annual costs would not be materially
affected. There is no effect on cash flow as a result of current
recognition of future post-retirement benefits.
The obligation for post-employment benefits as of March 31, 1999 was:
Obligation as of March 31, 1998 $325,000
- --------------------------------------------------------------------------------
Service cost 74,000
- --------------------------------------------------------------------------------
Paid during current year (70,000)
- --------------------------------------------------------------------------------
Interest cost (16,000)
- --------------------------------------------------------------------------------
Obligation as of March 31, 1999 $313,000
- --------------------------------------------------------------------------------
Savings Plan
The Company's Retirement Savings Plan (the "Savings Plan") is qualified
under sections 401(a) and 401(k) of the Internal Revenue Code. All
employees of the Company are eligible to participate in the Savings
Plan upon completion of six months of employment. Under the Savings
Plan's salary deferral provisions, participating employees may elect to
defer specified portions of their compensation. Elective contributions
made by employees are fully vested at all times. The Company makes
matching contributions in the form of shares of common stock at the
rate of 50% of the first 3% of each participant's compensation which is
deferred for each calendar year. Employees fully vest in Company
contributions after the completion of five years of service.
Contributions by the Company were $98,000, $90,000 and $83,000, in
1999, 1998 and 1997, respectively.
Stock Option Plan
During fiscal year 1999, the Company adopted a new stock option plan,
"1998 Stock Option Plan," which authorizes the granting of options to
purchase up to an aggregate of 300,000 shares of common stock at prices
not less than fair market value at the date of grant. The previous
stock option plan, "Employee Stock Option Plan," had an aggregate of
650,000 shares. Options issued prior to 1995 could not be exercised
during the first year after grant, and generally thereafter 20% of the
options granted become exercisable on each of the first through fifth
anniversaries of grant. For options granted after 1995, 20% are
exercisable immediately along with 20% on each of the four
anniversaries. Options granted expire between five and ten years from
the date of grant. As of March 31, 1999, the weighted average exercise
price for outstanding options was $3.24 per share and expiration dates
ranged from December 21, 1999 to March 18, 2009. The options price
range per share is $2.13 to $5.38.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plan. Accordingly, no compensation expense has been
recognized for its stock option plan. Had compensation cost for the
Company's stock-based compensation plans been determined based on the
fair value at the grant dates for awards under that
Environmental Elements Corporation 19
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
plan consistent with the method of FASB Statement 123,
the Company's net income (loss) and earnings per share would have been
reduced to the pro forma amounts indicated below:
- --------------------------------------------------------------------------------
Years ended March 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Net income
(loss):
- --------------------------------------------------------------------------------
As reported $1,275,000 $50,000 $(4,015,000)
- --------------------------------------------------------------------------------
Pro forma $1,126,000 $(41,000) $(4,106,000)
- --------------------------------------------------------------------------------
Basic earnings
per share:
As reported $0.18 $0.01 $(0.58)
- --------------------------------------------------------------------------------
Pro forma $0.16 $(0.01) $(0.59)
- --------------------------------------------------------------------------------
Diluted earnings
per share:
As reported $0.18 $0.01 $(0.58)
- --------------------------------------------------------------------------------
Pro forma $0.16 $(0.01) $(0.59)
- --------------------------------------------------------------------------------
Options were assumed to be exercised upon vesting for the purposes of
this valuation. Adjustments are made for options forfeited prior to
vesting.
Changes in outstanding stock options during the year were as follows:
Years ended March 31,1999 1998 1997
- --------------------------------------------------------------------------------
Outstanding,
beginning of year 571,000 431,000 515,000
- --------------------------------------------------------------------------------
Granted 271,000 140,000 181,000
- --------------------------------------------------------------------------------
Exercised (1,000) -- (11,000)
- --------------------------------------------------------------------------------
Canceled (47,000) -- (254,000)
- --------------------------------------------------------------------------------
Outstanding,
end of year 794,000 571,000 431,000
- --------------------------------------------------------------------------------
There were options for a total of 425,000 shares exercisable as of
March 31, 1999 at a weighted average price of $3.49 per share.
The weighted average fair value of each stock option is
estimated on the date of grant using the Black-Scholes option-pricing
model. The following key assumptions were used in the Black-Scholes
option pricing model:
Years ended March 31,1999 1998 1997
- --------------------------------------------------------------------------------
Risk-free
interest rate 4.5% 6.5% 6.0%
- --------------------------------------------------------------------------------
Expected life 5 years 5 years 5 years
- --------------------------------------------------------------------------------
Volatility 41% 58% 61%
- --------------------------------------------------------------------------------
(GRAPHIC APPEARS HERE)
Note 6 Commitments and Contingencies
Commitments
The principal office facilities of the Company and its subsidiaries are
occupied under a lease expiring in January 2002, with bargain renewal
periods extending to January 2037. The lease has been capitalized using
an 8.9% interest rate. Principal and interest on this lease commitment
are being amortized using the effective-interest method.
Future payments under the office building lease are $445,000 per year
through 2001, and total, with bargain renewal options, $6,403,000. Of
this amount, $4,186,000 represents imputed interest and the balance of
$2,217,000 as of March 31, 1999 is included in the consolidated
financial statements as a current liability ($254,000) and a long-term
capital lease obligation ($1,963,000).
The Company subleases a portion of building office space to tenants.
The rental income and related costs are included in operating income
(loss) in the accompanying Consolidated Financial Statements. For the
years ended March 31, 1999, 1998 and 1997 rental income totaled
$585,000, $401,000 and $375,000, respectively, and building and related
costs totaled $747,000, $803,000 and $1,006,000, respectively. The
future rentals on the subleases are $616,000, $522,000, $404,000 and
$195,000 for fiscal 2000, 2001, 2002 and 2003, respectively.
The Company and certain subsidiaries use office facilities and
equipment under operating leases. Rent expense for the years ended
March 31,1999, 1998 and 1997 totaled $231,000, $187,000 and $191,000,
respectively.
Litigation
The Company is, from time to time, a party to various legal actions
arising in the ordinary course of its business, some of which may
involve claims for substantial sums. In management's opinion, the
resolution of these matters will not have a material adverse effect on
the Company's financial position.
(GRAPHIC APPEARS HERE)
Note 7 Restructuring Charges
During fiscal year 1997, the Company identified additional costs of
$2.2 million in excess of the amount recorded as a restructuring charge
in fiscal year 1996, related to a series of actions the Company began
in fiscal year 1996, which included the relocation of its aftermarket
operations to Baltimore, the de-emphasis of direct hire fabrication and
construction activities and a corresponding emphasis on its aftermarket
parts, services and materials business and the closing of its office in
the United Kingdom. Accordingly, the
20 Environmental Elements Corporation
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Company recorded a restructuring charge of $2.2 million during fiscal
year 1997 which represents the excess of expected final costs (related
primarily to loss on disposition of property and cessation of
operations) over costs estimated in fiscal year 1996. The sale and
final disposition of facilities and equipment was completed during
fiscal year 1998.
(GRAPHIC APPEARS HERE)
Note 8 Supplemental Cash Flow Information
In non-cash financing transactions, the Company issued 27,671, and
34,082 shares in fiscal 1999 and 1998, respectively, as matching
contributions under its Savings Plan. In addition, the Company issued
27,275 and 37,331 shares in fiscal 1999 and 1998, respectively, as
compensation to its outside directors.
Amounts paid for interest during the years ended March 31, 1999, 1998
and 1997, were $623,000, $460,000 and $615,000, respectively. Amounts
paid for income taxes in fiscal year 1999, 1998 and 1997 were $16,000,
$10,000 and $14,000, respectively.
(GRAPHIC APPEARS HERE)
Note 9 Quarterly and Selected Financial
Data [Unaudited]
See table below.
<TABLE>
<CAPTION>
Quarterly and Selected Financial Data [Unaudited]
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal year 1999 quarters ended 3/31/99 12/31/98 9/30/98 6/30/98
- ----------------------------------------------------------------------------------------------------------------------
Sales $13,731,000 $16,998,000 $20,757,000 $16,543,000
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 2,423,000 2,275,000 2,293,000 2,078,000
- ----------------------------------------------------------------------------------------------------------------------
Net income $371,000 $351,000 $346,000 $207,000
- ----------------------------------------------------------------------------------------------------------------------
Diluted net income per share(1) $ .05 $ .05 $ .05 $ .03
- ----------------------------------------------------------------------------------------------------------------------
Stock price
High $4.438 $4.375 $3.875 $5.688
- ----------------------------------------------------------------------------------------------------------------------
Low $2.938 $2.438 $2.563 $3.313
- ----------------------------------------------------------------------------------------------------------------------
Fiscal year 1998 quarters ended 3/31/98 12/31/97 9/30/97 6/30/97
- ----------------------------------------------------------------------------------------------------------------------
Sales $14,846,000 $12,386,000 $11,456,000 $13,924,000
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 1,788,000 1,806,000 1,733,000 1,757,000
Net income (loss) $153,000 $(145,000) $28,000 $14,000
Diluted net income (loss) per share(1) $ 0.02 $ (0.02) -- --
- ----------------------------------------------------------------------------------------------------------------------
Stock price
High $6.688 $3.938 $2.750 $2.938
- ----------------------------------------------------------------------------------------------------------------------
Low $3.438 $2.188 $2.125 $2.000
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Due to rounding, the accumulation of the quarterly results may not equal
year-end totals.
Environmental Elements Corporation 21
<PAGE>
Management's Responsibility for Financial Statements
- --------------------------------------------------------------------------------
The consolidated financial statements of Environmental Elements
Corporation and subsidiaries have been prepared by the Company in
accordance with generally accepted accounting principles. The financial
information presented is the responsibility of management and
accordingly includes amounts upon which judgment has been applied, or
estimates made, based on the best information available.
The financial statements have been audited by Arthur Andersen LLP,
independent public accountants, for each of the three years in the
period ended March 31, 1999.
The consolidated financial statements, in the opinion of management,
present fairly the financial position, results of operations and cash
flows of the Company as of the stated dates and for the stated periods
in conformity with generally accepted accounting principles. The
Company believes that its accounting systems and related internal
controls used to record and report financial information provide
reasonable assurance that financial records are reliable and that
transactions are recorded in accordance with established policies and
procedures.
/s/ E. H. Verdery /s/ J.B. Sinclair
----------------- -----------------
E. H. Verdery J. B. Sinclair
Chairman of the Board and Chief Financial Officer
Chief Executive Officer
22 Environmental Elements Corporation
<PAGE>
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Environmental Elements
Corporation:
We have audited the accompanying consolidated balance sheets of
Environmental Elements Corporation (a Delaware corporation) and
subsidiaries as of March 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' investment and
cash flows for the years in the period ended March 31, 1999, 1998 and
1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
Environmental Elements Corporation and subsidiaries as of March 31,
1999 and 1998, and the results of their operations and their cash flows
for the years ended March 31, 1999, 1998 and 1997 in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
-----------------------
Baltimore, Maryland
May 14, 1999
Environmental Elements Corporation 23
<PAGE>
<TABLE>
<CAPTION>
Selected Consolidated Financial Data
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the years ended March 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
Consolidated statements of operations data
Sales $68,029,000 $52,612,000 $47,654,000 $61,214,000 $77,923,000
Cost of sales 58,960,000 45,528,000 41,023,000 54,593,000 69,100,000
- ------------------------------------------------------------------------------------------------------------------------
Gross profit 9,069,000 7,084,000 6,631,000 6,621,000 8,823,000
- ------------------------------------------------------------------------------------------------------------------------
Selling, general and administration expenses 7,183,000 6,373,000 7,807,000 9,024,000 10,679,000
Restructuring charge -- -- 2,215,000 951,000 --
- ------------------------------------------------------------------------------------------------------------------------
7,183,000 6,373,000 10,022,000 9,975,000 10,679,000
- ------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 1,886,000 711,000 (3,391,000) (3,354,000) (1,856,000)
- ------------------------------------------------------------------------------------------------------------------------
Interest and other expense, net (572,000) (661,000) (624,000) (501,000) (179,000)
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes 1,314,000 50,000 (4,015,000) (3,855,000) (2,035,000)
- ------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 39,000 -- -- -- 33,000
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 1,275,000 50,000 (4,015,000) (3,855,000) (2,068,000)
- ------------------------------------------------------------------------------------------------------------------------
Net effect of discontinued operations -- -- -- 351,000 2,105,000
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) $1,275,000 $50,000 $(4,015,000) $(3,504,000) $37,000
- ------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
From continuing operations $ 0.18 $ 0.01 $(0.58) $(0.56) $(0.30)
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.18 $ 0.01 $(0.58) $(0.51) $ 0.01
- -------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding:
Basic 7,053,000 6,990,000 6,924,000 6,880,000 6,869,000
- -------------------------------------------------------------------------------------------------------------------------
Diluted 7,192,000 7,098,000 6,924,000 6,880,000 6,869,000
- ------------------------------------------------------------------------------------------------------------------------
Balance sheet data
Working capital $9,562,000 $7,050,000 $1,559,000 $3,267,000 $7,670,000
- ------------------------------------------------------------------------------------------------------------------------
Total assets 33,180,000 34,362,000 25,407,000 30,179,000 45,234,000
- ------------------------------------------------------------------------------------------------------------------------
Short-term debt -- -- 2,798,000 195,000 1,044,000
- ------------------------------------------------------------------------------------------------------------------------
Long-term debt 8,063,000 7,417,000 2,449,000 2,662,000 2,858,000
- ------------------------------------------------------------------------------------------------------------------------
Stockholders' investment $7,608,000 $6,265,000 $6,038,000 $9,851,000 $13,333,000
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
24 Environmental Elements Corporation
<PAGE>
Board of Directors
E. H. Verdery Barry Koh
Chairman and President
Chief Executive Officer B. Koh & Associates, Inc.
Environmental Elements
Richard E. Hug James S. Potts
Chairman Emeritus Vice President
Environmental Elements Potomac Electric Power Company
F. Bradford Smith Samuel T. Woodside
Former Chairman and President and
Chief Executive Officer Chief Executive Officer
Environmental Elements Energy Controls International
John C. Nichols
Corporate Secretary
Environmental Elements
General Information
Information and Customer Service
Power, Industrial, Repair and Rebuild Projects
Environmental Elements Corporation
3700 Koppers Street
Baltimore, Maryland 21227
Phone 410-368-7000
800-333-4331
Spare and Replacement Parts (all OEMs)
Phone 800-PART-EEC
Technical Field Services and Telephone Help Line
Phone 800-928-HELP
Investor Information
Corporate Address Secretary
3700 Koppers Street John C. Nichols
Baltimore, Maryland 21227 3700 Koppers Street
410-368-7000 Baltimore, Maryland 21227
410-368-7384
Transfer Agent and Registrar
Chase Mellon Shareholder Services, L.L.C.
Securityholder Relations Department
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
800-526-0801
For inquiries concerning shareholders' records or certificates, please contact
the transfer agent. Shareholders whose certificates are missing or destroyed
should immediately notify the transfer agent. In the event of any change in
address, please notify the transfer agent in writing. If possible, please
enclose a recent mailing label and indicate you are a shareholder of
Environmental Elements Corporation.
Senior Management
E. H. Verdery
Chairman and
Chief Executive Officer
S. Michael Dunseith
Executive Vice President and
Chief Operating Officer
James B. Sinclair
Senior Vice President
and Chief Financial Officer
Neil R. Davis
Senior Vice President
Operations
Robert W. Tisone
Senior Vice President
Technology and Product Management
Common Stock
The Common Stock of the Company trades on the New York Stock Exchange under the
symbol "EEC." A substantial number of the Company's shares are held in nominee
accounts at banks and brokerage firms. These accounts, which include most mutual
funds and other institutional investments, are cumulatively represented by one
"of record" depository account. There were 231 shareholders of record as of
March 31, 1999.
Investor Relations
To obtain, without cost, a copy of the annual report filed with the Securities &
Exchange Commission on Form 10-K or other information on the Company, copies of
earnings press releases and 10-Q filings, or for investment analyst inquiries,
please contact Lisa A. Morris, Investor Relations Administrator, at
410-368-7092.
Certain of the statements included in this annual report
are forward-looking statements. These statements involve risks and uncertainties
that could cause the actual results to differ from those expressed in or implied
by such statements. These factors include the loss of bookings, increased
competition, changes in environmental regulations and other factors. Information
on factors that could affect the Company's financial results is set forth in the
Company's filings with the Securities and Exchange Commission including the
recently filed report on Form 10-K for the Company's fiscal year ended March 31,
1999.
Environmental Elements Corporation 25
<PAGE>
(GRAPHIC APPEARS HERE)
Environmental
Elements
Corporation
3700 Koppers Street o Baltimore, Maryland 21227
410-368-7000 o www.eec1.com
PRINTED ON RECYCLED PAPER
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