<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended
September 30, 2000
ENVIRONMENTAL ELEMENTS CORPORATION
(Exact name of registrant as specified in its charter)
1-10955
(Commission File Number)
DELAWARE 52-1303748
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3700 Koppers St., Baltimore, Maryland 21227
(Address of Principal Executive Offices) (Zip Code)
410 - 368 - 7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
7,118,595 shares of common stock, $.01 par value per share, as of November 16,
2000.
<PAGE>
Environmental Elements Corporation
Form 10-Q
For the Quarterly Period Ended
September 30, 2000
Part I: Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2000 and March 31, 2000...................... 3
Consolidated Statements of Operations for
the Periods Ended September 30, 2000 and 1999.............. 4
Consolidated Statements of Cash Flows for
the Six Months Ended September 30, 2000 and 1999........... 5
Notes to Consolidated Financial Statements.................... 6 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 9 - 14
Part II: Other Information
Item 4. Submission of Matters to a Vote of Security Holders........... 15
Item 6. Exhibits and Reports on Form 8-K.............................. 15
Signatures............................................................ 16
_______________________________________
Certain of the statements included in this Form 10-Q are forward-looking
statements. These statements involve risks and uncertainties that could cause
the actual results to differ from those expressed or implied by such statements.
These factors include loss of new orders, increased competition, changes in
environmental regulations, and other factors, including but not limited to,
operating losses, declines in markets for the Company's products and services,
and insufficient capital resources. Information on factors that could affect the
Company's financial results are set forth in the Company's filings with the
Securities and Exchange Commission including the report on Form 10-K for the
Company's fiscal year ended March 31, 2000
2
<PAGE>
Environmental Elements Corporation and Subsidiaries
Consolidated Balance Sheets
As of September 30, 2000 and March 31, 2000
<TABLE>
<CAPTION>
September 30, March 31,
---------------------------------------------------------------------------------------------------------------------------
2000 2000
---------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 791,000 $ 736,000
Accounts and retainage receivable, net of allowance for doubtful
accounts of $1,110,000 and $329,000, respectively............................. 6,852,000 8,876,000
Unbilled contract costs and fees................................................ 11,849,000 13,938,000
Inventories..................................................................... 1,218,000 1,214,000
Prepaid expenses and other current assets....................................... 1,224,000 1,542,000
------------- -------------
Total Current Assets.......................................................... 21,934,000 26,306,000
------------- -------------
Property and equipment:
Capital lease, building and improvements........................................ 7,291,000 7,291,000
Machinery, equipment, furniture and fixtures.................................... 2,943,000 2,935,000
------------- -------------
10,234,000 10,226,000
Less - Accumulated depreciation and amortization................................ 5,505,000 5,141,000
------------- -------------
Property and equipment,net.................................................... 4,729,000 5,085,000
Other assets....................................................................... 1,248,000 1,004,000
------------- -------------
Total Assets................................................................. $ 27,911,000 $ 32,395,000
============= =============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) INVESTMENT
Current liabilities:
Accounts payable................................................................ $ 13,443,000 $ 14,996,000
Billings in excess of contract costs and fees................................... 630,000 823,000
Accrued payroll and related expenses............................................ 547,000 980,000
Accrued and other current liabilities........................................... 4,875,000 3,682,000
------------- -------------
Total Current Liabilities.................................................... 19,495,000 20,481,000
Long-term capital lease obligation................................................. 1,683,000 1,687,000
Long-term line of credit........................................................... 9,500,000 6,500,000
Other non-current liabilities...................................................... 513,000 500,000
------------- -------------
Total Liabilities............................................................ 31,191,000 29,168,000
------------- -------------
Commitments and contingencies
Stockholders' (deficit) investment:
Common stock, par value $.01 per share; 20,000,000 shares authorized;...........
7,118,595 shares issued and outstanding...................................... 71,000 71,000
Paid-in capital................................................................. 28,311,000 28,311,000
Cumulative translation adjustment............................................... (239,000) (170,000)
Retained deficit................................................................ (31,423,000) (24,985,000)
------------- -------------
Total Stockholders' (Deficit) Investment..................................... (3,280,000) 3,227,000
------------- -------------
Total Liabilities and Stockholders' (Deficit) Investment..................... $ 27,911,000 $ 32,395,000
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
Environmental Elements Corporation and Subsidiaries
Consolidated Statements of Operations
For the Periods Ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
----------------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales............................................. $ 12,218,000 $ 13,557,000 $ 28,677,000 $ 25,363,000
Cost of sales..................................... 16,240,000 12,635,000 31,402,000 22,219,000
------------------------------- -------------------------------
Gross Profit (Loss)....................... (4,022,000) 922,000 (2,725,000) 3,144,000
------------------------------- -------------------------------
Selling, general and administrative expenses..... 1,593,000 1,958,000 3,064,000 3,739,000
------------------------------- -------------------------------
Operating (Loss).......................... (5,615,000) (1,036,000) (5,789,000) (595,000)
Interest and other expense, net................... (355,000) (258,000) (649,000) (479,000)
------------------------------- -------------------------------
(Loss) before Income Taxes................ (5,970,000) (1,294,000) (6,438,000) (1,074,000)
Provision for income taxes........................ -- -- -- --
------------------------------- -------------------------------
Net (Loss)................................ $ (5,970,000) $ (1,294,000) $ (6,438,000) $ (1,074,000)
=============================== ===============================
Earnings per share:
Basic......................................... $ (0.84) $ (0.18) $ (0.90) $ (0.15)
=============================== ===============================
Diluted....................................... $ (0.84) $ (0.18) $ (0.90) $ (0.15)
=============================== ===============================
Weighted average common shares outstanding:
Basic......................................... 7,118,595 7,093,705 7,118,595 7,092,820
Diluted....................................... 7,118,595 7,093,705 7,118,595 7,092,820
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
Environmental Elements Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................................... $(6,438,000) $(1,074,000)
Non-cash items:
Depreciation and amortization............................. 457,000 443,000
Stock-based compensation.................................. - 6,000
Effect of changes in operating assets and liabilities:........
Accounts and retainages receivable, net................... 2,024,000 (756,000)
Unbilled contract costs and fees.......................... 2,089,000 (133,000)
Inventories............................................... (4,000) 116,000
Prepaid expenses.......................................... 318,000 223,000
Accounts payable.......................................... (1,553,000) (1,375,000)
Billings in excess of contract costs and fees............. (193,000) (382,000)
Accrued payroll and related expenses...................... (433,000) (114,000)
Accrued and other current liabilities..................... 1,193,000 557,000
Other non-current liabilities............................. 13,000 13,000
----------- -----------
Net Cash Flows from Operating Activities................ (2,527,000) (2,476,000)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment........................... (8,000) (160,000)
Effects of changes in other assets............................ (337,000) (239,000)
----------- -----------
Net Cash Flows from Investing Activities................ (345,000) (399,000)
----------- -----------
Cash flows from financing activities:
Net borrowings under line of credit........................... 3,000,000 2,000,000
Reduction of long-term capital lease obligation............... (4,000) (135,000)
Change in cumulative translation adjustment................... (69,000) 33,000
----------- -----------
Net Cash Flows from Financing Activities................ 2,927,000 1,898,000
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents.... 55,000 (977,000)
Cash and Cash Equivalents, beginning of period.................... 736,000 1,619,000
----------- -----------
Cash and Cash Equivalents, end of period.......................... $ 791,000 $ 642,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Environmental Elements Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Financial Information:
The interim consolidated financial statements included herein for
Environmental Elements Corporation and Subsidiaries (the Company) have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In management's
opinion, the interim financial data presented herein include all adjustments
(which include only normal recurring adjustments) necessary for a fair
presentation. Certain information and footnote disclosures normally included
in the consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Results for interim periods are not
necessarily indicative of results to be expected for the full year.
2. Per Share Data:
Basic earnings per common share was computed by dividing net earnings by the
weighted average number of shares of common stock outstanding during the
period. Diluted earnings per common share was computed assuming the terms
and conditions for the common stock options were met and converted. The
difference between the basic and diluted earnings per share is the dilutive
effect of stock options outstanding.
3. Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist principally of purchased parts held for use in contracts
and as spare parts.
6
<PAGE>
4. Supplemental Cash Flow Information:
Amounts paid in cash for interest during the six months ended September 30,
2000 and 1999 were $591,000 and $470,000, respectively. Amounts paid for
income taxes during the six months ended September 30, 2000 and 1999 were
$4,300 and $70,300, respectively.
5. Credit Facility:
Under the provisions of the Company's credit facility, the Company must
comply with certain financial and other covenants, including net worth and
current ratio calculations. Currently, the Company is not in compliance with
certain of these covenants, but the bank has waived the non-compliance
through April 1, 2001. In addition, the bank has eliminated a covenant
restricting the amount of the Company's cumulative net loss to $1,000,000
and replaced it with a covenant requiring that the Company not experience a
net loss for the last six months of the current fiscal year.
6. Segment Information :
During fiscal year 2001, the Company was restructured and now has three
reportable operating segments: the Systems Business Unit; the Services
Business Unit; and the New Ventures Business Unit. The Systems Business Unit
provides custom-engineered, original equipment systems to traditionally
intensive users of air pollution control (APC) systems. The Services
Business Unit provides maintenance, repair, and spare parts products and
services to customers with particulate abatement installed APC equipment.
The New Ventures Business Unit is dedicated to finding additional
technologies and alliances, and currently includes Ammonia-on-Demand (AODTM)
technology and international ventures.
The segments reported below are the segments of the Company for which
separate financial information is available and for which sales and gross
profit amounts are evaluated by executive management in deciding how to
allocate resources and accessing performance. Due to the fact that no
segments existed prior to the restructuring, comparative information is not
reported because it can not be practicably determined. The Company does not
allocate assets or operating expenses to the individual operating segments.
There are no intercompany sales transactions between the three operating
segments.
7
<PAGE>
Information about reported segment sales and gross profit for the six months
ended September 30, 2000 is as follows:
Business Unit Sales Gross Profit (Loss)
------------- ----------- -------------------
Systems $19,575,000 $(3,020,000)
Services 8,449,000 1,020,000
New Ventures 653,000 (725,000)
----------- -----------
Total $28,677,000 $(2,725,000)
=========== ===========
The Company attributes revenues to individual geographic areas based upon the
country where services are provided or products are delivered. Sales by
geographic area for the six months ended September 30, 2000 and 1999 were as
follows:
Geographic Area 2000 1999
--------------- ----------- -----------
United States $17,361,000 $18,501,000
Canada 4,503,000 3,630,000
Other International 6,813,000 3,232,000
----------- -----------
Total $28,677,000 $25,363,000
=========== ===========
7. Comprehensive Income:
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner sources. The Company's comprehensive income for
the periods presented is listed below:
For the Six Months Ended September 30,
--------------------------------------
2000 1999
---- ----
Net Loss as Reported $(6,438,000) $(1,074,000)
Effect of Foreign Currency Translation (Loss) Gain (69,000) 33,000
-------------------------
Comprehensive Net Loss $(6,507,000) $(1,041,000)
=========================
8
<PAGE>
Item 2 Management's Discussion and Analysis
The following information should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in this
Quarterly Report and the audited Financial Statements and Management's
Discussion and Analysis contained in the Company's Form 10-K for the fiscal year
ended March 31, 2000.
Results of Operations
The following table sets forth the percentage relationships to sales of selected
items in the Company's consolidated statements of income (unaudited) for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales.................................................. 100.0% 100.0% 100.0% 100.0%
Cost of Sales.......................................... 132.9 93.2 109.5 87.6
----- ----- ----- -----
Gross Profit (Loss).................................... (32.9) 6.8 (9.5) 12.4
Selling, general and administrative expenses 13.1 14.4 10.7 14.7
----- ----- ----- -----
Operating (Loss)....................................... (46.0%) (7.6)% (20.2%) (2.3)%
===== ===== ===== =====
</TABLE>
9
<PAGE>
Three Months Ended September 30, 2000 Compared to
Three Months Ended September 30, 1999
Sales decreased 9.9% or $1,339,000 to $12,218,000 from $13,557,000. Modest
increases in sales related to maintenance, repair, field service, and spare
parts sales were more than offset by a decrease in sales from the Company's
industrial customers.
Cost of sales increased 28.5% or $3,605,000 to $16,240,000 from $12,635,000.
Cost of sales increased approximately $3,300,000 as the result of revisions to
estimates of cost of completion and warranty experience on certain contracts.
Certain reserves related to these revisions are reflected on the Company's
balance sheet as accrued and other current liabilities. Additionally,
approximately $720,000 of the increase in cost of sales is the result of an
increase in the allowance for doubtful accounts based upon the current
realizability of accounts receivable on two contracts and approximately $450,000
of the increase is the result of the unfavorable resolution of a contract
dispute.
Selling, general and administrative expenses decreased 18.6% or $365,000 to
$1,593,000 from $1,958,000. The decrease in dollars is directly attributable to
the Company's cost reduction efforts, including a significant reduction-in-force
which was substantially completed during the first quarter of fiscal 2001.
Selling, general and administrative expenses decreased to 13.1% from 14.4%, as a
percentage of sales. The decreases resulting from the cost cutting efforts were
partially offset by the need to establish an additional reserve to cover the
cost of medical benefits for certain retired employees due to changes in
coverage availability from health maintenance organizations.
For the reasons set forth above, the operating loss was $5,615,000, or 46.0% of
sales, for the quarter, versus an operating loss of $1,036,000, or 7.6% of
sales, in the prior year quarter.
Interest and other expense, net of interest and other income, increased 37.6%,
or $97,000, to $355,000 from $258,000. The increase is due to the recognition of
$30,000 of interest expense related to the discounting of prepaid royalty
expenses, as well as increased borrowing during the quarter.
The loss before income taxes was $5,970,000, or 48.9 % of sales, in the current
year quarter, compared to a loss before income taxes of $1,294,000, or 9.5% of
sales, for the prior year period.
There was no provision for income taxes in either quarter reported because the
Company incurred pre-tax losses and recorded a valuation reserve offsetting the
deferred tax benefit.
10
<PAGE>
Six Months Ended September 30, 2000 Compared to
Six Months Ended September 30, 1999
Sales increased 13.1% or $3,314,000 to $28,677,000 from $25,363,000. The
increase in sales for the six-month period is generally due to increases in
sales related to maintenance, repair, field service, and spare parts sales.
Cost of sales increased 41.3% or $9,183,000 to $31,402,000 from $22,219,000. The
increase in dollars resulted from the increase in sales volume for the current
year period as well as the following. Cost of sales increased approximately
$3,300,000 as the result of revisions to estimates of cost of completion and
warranty experience on certain contracts. Certain reserves related to these
revisions are reflected on the Company's balance sheet as accrued and other
current liabilities. Additionally, approximately $720,000 of the increase in
cost of sales is the result of an increase in the allowance for doubtful
accounts based upon the current collectibility of accounts receivable on two
contracts and approximately $450,000 of the increase is the result of the
unfavorable resolution of a contract dispute.
As a percentage of sales, cost of sales increased to 109.5% of sales from 87.6%
in the prior year period. During the prior year's period, cost of sales were
positively impacted by one project containing a greater portion of engineering
work, and a correspondingly lower portion of construction work that generated
$536,000, or 24.1% gross profit.
Selling, general and administrative expenses decreased 18.1% or $675,000 to
$3,064,000 from $3,739,000. The decrease in dollars is directly attributable to
the Company's cost reduction efforts, including a significant reduction-in-force
which was substantially completed during the first quarter of fiscal 2001.
Selling, general and administrative expenses decreased to 10.7% from 14.7%, as a
percentage of sales. The decreases resulting from the cost cutting efforts were
partially offset by the need to establish an additional reserve to cover the
cost of medical benefits for certain retired employees due to changes in
coverage availability from health maintenance organizations.
For the reasons set forth above, there was an operating loss of $5,789,000, or
20.2% of sales, for the six month period, versus an operating loss of $595,000,
or 2.3% of sales, in the prior year period.
11
<PAGE>
Interest and other expense, net of interest and other income, increased 35.5%,
or $170,000, to $649,000 from $479,000. The increase is due to the recognition
of $30,000 of interest expense related to the discounting of prepaid royalty
expenses, as well as increased borrowing during the period.
Loss before income taxes was $6,438,000, or 22.5% of sales, in the current year
period, compared to a loss of $1,074,000, or 4.2% of sales, for the prior year
period.
There was no provision for income taxes in either period reported because the
Company incurred pre-tax losses and recorded a valuation reserve offsetting the
deferred tax benefit.
12
<PAGE>
Liquidity and Capital Resources
The Company seeks to arrange its contracts so as to minimize its investment in
net working capital, but the amount of this investment varies with the payment
terms and stage of completion of its contracts. ("Net working capital invested
in contracts" consists of accounts and retainages receivable and unbilled
contract costs and fees, less accounts payable and less billings in excess of
contract costs and fees.) Net working capital invested in contracts was $4.6
million at September 30, 2000 and $7.0 million at March 31, 2000. The Company
also requires capital to the extent that its net cash flows from operating
activities are negative.
Cash and cash equivalents increased by $55,000 and borrowings under the
Company's line of credit increased by $3.0 million during the six months ended
September 30, 2000. This was caused principally by the $2.5 million in cash used
by operating activities during the six months ended September 30, 2000.
The Company's principal source of capital is its bank credit facility. That
facility provides for secured borrowings of up to $15,000,000 based upon the
Company's borrowing base, consisting of unbilled contract costs and fees and
certain accounts receivable reduced by outstanding letters of credit. The term
of the credit facility has been extended from July 1, 2001 to December 31, 2001.
Under the provisions of the credit facility, the Company must comply with
certain financial and other covenants, including net worth and current ratio
calculations. Currently, the Company is not in compliance with certain of these
covenants, but the bank has waived the non-compliance through April 1, 2001. In
addition, the bank has eliminated a covenant restricting the amount of the
Company's cumulative net loss to $1,000,000 and replaced it with a covenant
requiring that the Company not experience a net loss for the last six months of
the current fiscal year.
At September 30, 2000, the amount outstanding under the bank credit facility was
$9.5 million. The Company's business plan requires cash in excess of the
projected availability based upon its projected borrowing base. The required
cash is within the $15,000,000 maximum borrowing under the facility. The Company
anticipates working with its bank to modify certain covenants and to increase
its borrowing base. In addition, the Company is exploring several alternatives
which could result in additional capital for the Company, but there is no
assurance that any such alternative will be successful.
13
<PAGE>
The Company has been advised by its independent public accountants that should
the above uncertainties remain unresolved prior to the completion of their audit
of the Company's Financial Statements for the year ending March 31, 2001, their
report on those financial statements may be modified to reflect these
uncertainties.
The Company's backlog of unfilled orders at September 30, 2000 decreased 62.5%
to $25.3 million from $67.5 million at September 30, 1999. New orders received
during the six months ended September 30, 2000 increased 14.5% from the same
period last year, to $23.7 million from $20.7 million.
14
<PAGE>
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of securities holders at
the Annual Meeting of Stockholders held on July 28, 2000:
(a) The stockholders ratified the selection of Arthur Andersen LLP to
serve as independent public accountants of the Company for the
fiscal year ending March 31, 2001. The matter was approved by a vote
of 5,907,683 for, 40,336 against, 12,926 abstaining. 1,157,650
shares were not voted.
(b) The stockholders elected Barry Koh (5,904,618 for and 56,327
withheld), and John C. Nichols (5,904,948 for and 55,997 withheld)
as Class I directors for a three-year term expiring at the 2003
Annual Meeting or until their successors are duly elected and
qualified. 1,157,650 shares were not voted in each case. The names
of all other directors whose terms of office as directors continued
after the meeting are as follows: Samuel T. Woodside, Richard E.
Hug, F. Bradford Smith, and James S. Potts.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 - Notice of modification to the Fourth Amendment to Security
Agreement dated August 31, 1999 between the Registrant and
Mercantile Safe Deposit and Trust Company filed herewith.
10.2 - Notice of modification to the Fifth Amendment to Security
Agreement dated May 18, 2000 between the Registrant and Mercantile
Safe Deposit and Trust Company filed herewith.
(b) No reports on Form 8-K were filed during the quarter ended September
30, 2000.
15
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENVIRONMENTAL ELEMENTS CORPORATION
(Registrant)
/s/ John L. Sams
------------------------
John L. Sams
President
/s/ John C. Nichols
------------------------
John C. Nichols
Chief Accounting Officer and Corporate Secretary
Date: November 20, 2000
16
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
10.1 Notice of modification to the Fourth Amendment to
Security Agreement dated August 31, 1999 between the
Registrant and Mercantile Safe Deposit and Trust
Company
10.2 Notice of modification to the Fifth Amendment to
Security Agreement dated May 18, 2000 between the
Registrant and Mercantile Safe Deposit and Trust
Company filed herewith.
27.1 Financial Data Schedule
17
