<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
June 30, 2000
ENVIRONMENTAL ELEMENTS CORPORATION
(Exact name of registrant as specified in its charter)
1-10955
(Commission File Number)
<TABLE>
<S> <C>
DELAWARE 52-1303748
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
3700 Koppers St., Baltimore, Maryland 21227
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
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 July 25, 2000.
<PAGE>
Environmental Elements Corporation
Form 10-Q
For the Quarterly Period Ended
June 30, 2000
Part I: Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 2000 and March 31, 1999................. 3
Consolidated Statements of Operations for
the Three Months Ended June 30, 2000 and 1999.... 4
Consolidated Statements of Cash Flows for
the Three Months Ended June 30, 2000 and 1999.... 5
Notes to Consolidated Financial Statements........ 6 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.... 8 - 10
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K.................. 11
Signatures.................................................. 12
---------------------------------------
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 June 30, 2000 and March 31, 2000
<TABLE>
<CAPTION>
June 30, March 31,
-----------------------------------------------------------------------------------------------------------------------------------
2000 2000
-----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................................. $ 1,594,000 $ 736,000
Accounts and retainage receivable, net of allowance for doubtful
accounts of $362,000 and $329,000, respectively........................................ 11,350,000 8,876,000
Unbilled contract costs and fees........................................................... 11,466,000 13,938,000
Inventories................................................................................ 1,201,000 1,214,000
Prepaid expenses and other current assets.................................................. 919,000 1,542,000
------------ ------------
Total Current Assets................................................................... 26,530,000 26,306,000
------------ ------------
Property and equipment:
Capital lease, building and improvements................................................... 7,291,000 7,291,000
Machinery, equipment, furniture and fixtures............................................... 2,939,000 2,935,000
------------ ------------
10,230,000 10,226,000
Less - Accumulated depreciation and amortization........................................... 5,339,000 5,141,000
------------ ------------
Property and equipment,net............................................................. 4,891,000 5,085,000
Other assets................................................................................... 992,000 1,004,000
------------ ------------
Total Assets........................................................................... $ 32,413,000 32,395,000
============ ============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Accounts payable........................................................................... $ 13,634,000 $ 14,996,000
Billings in excess of contract costs and fees.............................................. 412,000 823,000
Accrued payroll and related expenses....................................................... 827,000 980,000
Accrued and other current liabilities...................................................... 3,167,000 3,682,000
------------ ------------
Total Current Liabilities.............................................................. 18,040,000 20,481,000
Long-term capital lease obligation............................................................. 1,687,000 1,687,000
Long-term line of credit....................................................................... 9,500,000 6,500,000
Other non-current liabilities.................................................................. 507,000 500,000
------------ ------------
Total Liabilities...................................................................... 29,734,000 29,168,000
------------ ------------
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.01 per share; 20,000,000 shares authorized;......................
7,118,595 and 7,118,595 shares issued and outstanding, respectively................. 71,000 71,000
Paid-in capital............................................................................ 28,311,000 28,311,000
Cumulative translation adjustment.......................................................... (250,000) (170,000)
Retained deficit ......................................................................... (25,453,000) (24,985,000)
------------ ------------
Total Stockholders' Investment......................................................... 2,679,000 3,227,000
------------ ------------
Total Liabilities and Stockholders' Investment......................................... $ 32,413,000 $ 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 Three Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------------------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales....................................................................... $16,459,000 $ 11,806,000
Cost of sales............................................................... 15,162,000 9,584,000
------------------------------
Gross Profit........................................................ 1,297,000 2,222,000
------------------------------
Selling, general and administrative expenses................................ 1,471,000 1,781,000
------------------------------
Operating Income .................................................. (174,000) 441,000
Interest and other expense, net............................................. (294,000) (220,000)
------------------------------
Income before Income Taxes.......................................... (468,000) 221,000
Provision for income taxes.................................................. - -
------------------------------
Net income.......................................................... $ (468,000) $ 221,000
==============================
Earnings per share:
Basic................................................................... $ (0.07) $ 0.03
==============================
Diluted................................................................. $ (0.07) $ 0.03
==============================
Weighted average common shares outstanding:
Basic................................................................... 7,118,595 7,091,661
Diluted................................................................. 7,118,595 7,126,429
</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 Three Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ......................................................................... $ (468,000) $ 221,000
Non-cash items:
Depreciation and amortization.......................................................... 225,000 207,000
Stock-based compensation............................................................... - 3,000
Effect of changes in operating assets and liabilities:.....................................
Accounts and retainages receivable, net................................................ (2,474,000) 785,000
Unbilled contract costs and fees....................................................... 2,472,000 (905,000)
Inventories............................................................................ 13,000 80,000
Prepaid expenses....................................................................... 623,000 504,000
Accounts payable....................................................................... (1,362,000) (1,767,000)
Billings in excess of contract costs and fees.......................................... (411,000) (253,000)
Accrued payroll and related expenses................................................... (153,000) (161,000)
Accrued and other current liabilities.................................................. (515,000) (258,000)
Other non-current liabilities.......................................................... 7,000 (3,000)
----------- -----------
Net Cash Flows from Operating Activities............................................. (2,043,000) (1,547,000)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment........................................................ (4,000) (20,000)
Effects of changes in other assets......................................................... (15,000) (239,000)
----------- -----------
Net Cash Flows from Investing Activities............................................. (19,000) (259,000)
----------- -----------
Cash flows from financing activities:
Net borrowings under line of credit........................................................ 3,000,000 2,100,000
Change in cumulative translation adjustment................................................ (80,000) 19,000
----------- -----------
Net Cash Flows from Financing Activities ............................................ 2,920,000 2,119,000
----------- -----------
Net Increase in Cash and Cash Equivalents............................................ 858,000 313,000
Cash and Cash Equivalents, beginning of period................................................. 736,000 1,619,000
----------- -----------
Cash and Cash Equivalents, end of period....................................................... $ 1,594,000 $ 1,932,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Environmental Elements Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Financial Information:
The interim consolidated financial statements included herein for
Environmental Elements Corporation and Subsidiaries (the Company) have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In management's
opinion, the interim financial data presented herein include all adjustments
(which include only normal recurring adjustments) necessary for a fair
presentation. Certain information and footnote disclosures normally included
in the consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Results for interim periods are not
necessarily indicative of results to be expected for the full year.
2. Per Share Data:
During the fiscal year ended March 31, 1998, the Company adopted SFAS No.
128, "Earnings Per Share." Basic earnings per common share is computed by
dividing net earnings by the weighted average number of shares of common
stock outstanding during the period. Diluted earnings per common share is
computed assuming the terms and conditions for the common stock options were
met and converted. The difference between the basic and diluted earnings per
share is the dilutive effect of stock options outstanding.
3. Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist principally of purchased parts held for use in contracts
and as spare parts.
4. Supplemental Cash Flow Information:
Amounts paid in cash for interest during the three months ended June 30,
2000 and 1999 were $213,400 and $150,000, respectively. There were no income
taxes paid during the three months ended June 30, 2000 and $40,000 was paid
in cash for income taxes during the three months ended June 30, 1999.
6
<PAGE>
5. SEGMENT INFORMATION:
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," during fiscal year 1999. The Company
does not allocate resources and assess performance based on separate
operating segments. Therefore, the Company has determined that it currently
does not have reportable segments. Rather, the Company's resources are
allocated based on specific project needs. Sales by geographic area for the
three months ended June 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
(in thousands) 2000 1999
---- ----
<S> <C> <C>
Geographic Area:
United States $9,805 $10,031
------------------------------------------------------
Canada 2,617 1,400
------------------------------------------------------
Other International 4,037 375
------------------------------------------------------
Total $16,459 $11,806
------------------------------------------------------
</TABLE>
6. COMPREHENSIVE (LOSS) INCOME:
Comprehensive (loss) income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner sources. The Company's comprehensive (loss)
income for the periods presented is listed below:
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
-----------------------------------
2000 1999
---- ----
<S> <C> <C>
Net (Loss) Income as Reported $(468,000) $221,000
Effect of Foreign Currency Translation Loss (80,000) 19,000
--------- --------
Comprehensive Net (Loss) Income $(548,000) $240,000
========= ========
</TABLE>
7
<PAGE>
Item 2 Management's Discussion and Analysis
The following information should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in this
Quarterly Report and the audited Financial Statements and Management's
Discussion and Analysis contained in the Company's Form 10-K for the fiscal
year ended March 31, 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 June 30,
2000 1999
----- -----
<S> <C> <C>
Sales.................................................... 100.0% 100.0%
Cost of Sales............................................ 92.1 81.2
----- -----
Gross Profit............................................. 7.9 18.8
Selling, general and administrative expenses............. 8.9 15.1
----- -----
Operating (Loss) Income ................................. (1.0%) 3.7%
===== =====
</TABLE>
Three Months Ended June 30, 2000 Compared to
Three Months Ended June 30, 1999
Sales increased 39.4% or $4,653,000 to $16,459,000 from $11,806,000. The
increase in sales for the three-month period is primarily related to increased
sales to the Company's systems and services customers.
Cost of sales increased 58.2% or $5,578,000 to $15,162,000 from $9,584,000.
The increase in dollars resulted from the increase in sales volume for the
current year quarter. As a percentage of sales, cost of sales increased to
92.1% in the current period from the prior year's 81.2%.
8
<PAGE>
Gross Profit decreased 41.6%, or $925,000, to $1,297,000 from $2,222,000.
During the prior year's quarter, margins were positively impacted by one
project containing a greater portion of engineering work, and a correspondingly
lower portion of construction work, that generated $536,000, or 24.1% of gross
profit during the quarter. The remaining $389,000 decrease in gross profit was
due to run off from competitively bid large systems projects with lower gross
margins. As a percentage of sales, gross profit decreased to 7.9% from 18.8%.
Selling, general and administrative expenses decreased 17.4% or $310,000 to
$1,471,000 from $1,781,000. As a percentage of sales, selling, general and
administrative expenses decreased to 8.9% from 15.1%. The decreases in dollars
and percentage were primarily due to the impact of cost reductions related to
restructuring efforts begun in the quarter ended March 31, 2000.
For the reasons set forth above, the company incurred an operating loss of
$174,000, or 1.0% of sales, compared to operating income of $441,000, or 3.7%
of sales, for the prior year.
Interest and other expense, net of interest and other income, increased 33.6%,
or $74,000, to $294,000 from $220,000. The increase was primarily due to
increased borrowing under the Company's revolving credit line.
The Company incurred a loss before income taxes of $468,000, or 2.8% of sales,
in the current year quarter, compared to income before income taxes of
$221,000, or 1.9% of sales, for the prior year period.
There was no provision for income taxes in either quarter reported because the
effects of the Company's net operating loss carryforwards from prior years
substantially eliminated taxes on current year income.
Liquidity and Capital Resources
Cash and cash equivalents increased by $858,000 and borrowings under the
Company's line of credit increased by $3.0 million during the three months
ended June 30, 2000. This was caused principally by approximately $2.0 million
in cash used in operating activity during the three months ended June 30, 2000.
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 $8.8 million and $7.0 million at June
9
<PAGE>
30, 2000 and March 31, 2000, respectively.) The Company seeks to manage project
cash flows in its payment terms negotiations with customers and suppliers, and
in adherence to project budgets and schedules.
During last fiscal year, the Company and its bank agreed to increase the
Company's secured open line of credit to $15 million, for a two-year term.
Under the provisions of the credit facility, the Company must comply with
certain financial and other covenants, including net worth and current ratio
calculations. At June 30, 2000, the Company was in compliance with, or had
obtained applicable waivers for such covenants through April 1, 2001. In
addition to the covenants discussed above, there is an additional covenant,
which restricts the Company from incurring a cumulative loss before income
taxes in excess of $1,000,000 during fiscal year 2001. Management believes
that the reorganization and related actions taken will be sufficient to
maintain compliance with its covenants during fiscal year 2001.
New orders received during the three months ended June 30, 2000 decreased 82.8%
from the same period last year, to $2.9 million. The Company's backlog of
unfilled orders at June 30, 2000 decreased 71.0% to $16.7 million from $57.6
million at June 30, 1999. (Backlog totals for both periods are excluding a
$24.7 million order from one customer, booked in fiscal 1999, that remains on
hold, and has been removed from backlog.)
The Company believes that there has been evidence of long term improvement over
the past three 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 anticipated during the coming fiscal year.
However, there can be no assurance that such business levels will occur, that
the Company's actions will be successful, or that future losses would not
adversely affect the Company's liquidity and capital resource position. The
Company believes it has liquidity and capital resources sufficient to maintain
its business at its current level of activity due to the following: no
significant capital expenditures are expected; historically the Company has
required little investment in operating working capital; and its banking
arrangements, i.e. those currently available and those which could be obtained,
would be adequate to maintain its ongoing business at its current level of
activity during the next year.
10
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 - Fourth Amendment to Line of Credit Promissory Note dated
May 18, 2000 between the Registrant and Mercantile Safe Deposit
and Trust Company filed herewith.
10.2 - Fifth Amendment to Revolving Credit and Letter of Credit
Agreement dated May 18, 2000 between the Registrant and Mercantile
Safe Deposit and Trust Company filed herewith.
10.3 - Patent security Agreement dated June 30, 2000 between the
Registrant and Mercantile Safe Deposit and Trust Company filed
herewith.
10.4 - Trademark Security Agreement dated June 30, 2000 between
the Registrant and Mercantile Safe Deposit and Trust Company filed
herewith.
27.1 - Financial Data Schedule
(b) A Form 8-K report that disclosed the restructuring efforts began
by the Company and the resignation of S. M. Dunseith, chief operating officer,
was filed with the Commission on April 5, 2000.
11
<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/ ____________________________
Susan L. Rosebery
Chief Financial Officer
Date: August 14, 2000
12
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
10.1 Fourth Amendment to Line of Credit Promissory Note
dated May 18, 2000 between the Registrant and
Mercantile Safe Deposit and Trust Company
10.2 Fifth Amendment to Revolving Credit and Letter of
Credit Agreement dated May 18, 2000 between the
Registrant and Mercantile Safe Deposit and Trust
Company
10.3 Patent Security Agreement dated June 30,2000 between
the Registrant and Mercantile Safe Deposit and Trust
Company
10.4 Trademark Security Agreement dated June 30, 2000
between the Registrant and Mercantile Safe Deposit
and Trust Company
27.1 Financial Data Schedule
13
