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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, 2002
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:
7,243,590 shares of common stock, $.01 par value per share, as of August 6,
2002.
ENVIRONMENTAL ELEMENTS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 2002
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 2002 and March 31, 2002 .................. 3
Consolidated Statements of Operations for
the Three Months Ended June 30, 2002 and 2001 ..... 4
Consolidated Statements of Cash Flows for
the Three Months Ended June 30, 2002 and 2001 ..... 5
Notes to Consolidated Financial Statements ........... 6 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..... 10 - 13
PART II: OTHER INFORMATION
Item 1. Legal Proceedings..................................... 13
Item 6. Exhibits and Reports on Form 8-K ..................... 13
Signatures ...................................................... 14
---------------------------------------
A number of the matters and subject areas discussed in this report are not
historical or current facts and deal with potential future circumstances and
developments. The discussion of these matters and subject areas is qualified by
the inherent risks and uncertainties surrounding future expectations generally,
and these discussions may materially differ from our actual future experience
involving any one or more of these matters and subject areas. These forward
looking statements are also subject generally to risks and uncertainties,
including but not limited to, loss of new orders, increased competition, changes
in environmental regulations, operating losses, declines in markets for the
Company's products and services, insufficient capital resources, and other
factors that are described in the Company's filings with the Securities and
Exchange Commission, including the report on Form 10-K for the fiscal year ended
March 31, 2002.
2
Environmental Elements Corporation and Subsidiaries
Consolidated Balance Sheets
As of June 30, 2002 and March 31, 2002
June 30, March 31,
- -----------------------------------------------------------------------------------------------------------------------------
2002 2002
=============================================================================================================================
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 351,000 $ 371,000
Restricted cash 450,000 419,000
Accounts and retainage receivable, net of allowance for doubtful
accounts of $738,000 and $710,000, respectively 9,156,000 10,382,000
Unbilled contract costs and fees 5,957,000 7,353,000
Inventories 1,244,000 1,180,000
Prepaid expenses and other current assets 850,000 801,000
------------ ------------
Total current assets 18,008,000 20,506,000
------------ ------------
Property and equipment:
Capital lease, building and improvements 7,596,000 7,348,000
Machinery, equipment, furniture and fixtures 3,348,000 3,157,000
------------ ------------
10,944,000 10,505,000
Less - Accumulated depreciation and amortization 6,442,000 6,271,000
------------ ------------
Property and equipment, net 4,502,000 4,234,000
------------ ------------
Other assets, net 2,658,000 2,980,000
------------ ------------
Total assets $ 25,168,000 $ 27,720,000
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) INVESTMENT
Current liabilities:
Accounts payable $ 11,963,000 $ 13,699,000
Billings in excess of contract costs and fees 1,013,000 1,444,000
Accrued payroll and related expenses 719,000 1,141,000
Accrued and other current liabilities 3,047,000 2,732,000
------------ ------------
Total current liabilities 16,742,000 19,016,000
Long-term liabilities:
Long-term capital lease obligation 1,546,000 1,546,000
Long-term line of credit 8,036,000 7,968,000
Other non-current liabilities 671,000 696,000
------------ ------------
Total liabilities 26,995,000 29,226,000
------------ ------------
Commitments and contingencies
Stockholders' (deficit) investment:
Common stock, par value $.01 per share; 20,000,000 shares authorized,
7,242,590 and 7,240,748 shares issued and
outstanding, respectively 72,000 72,000
Paid-in capital 28,574,000 28,574,000
Cumulative translation adjustment (310,000) (383,000)
Retained deficit (30,163,000) (29,769,000)
------------ ------------
Total stockholders' (deficit) investment (1,827,000) (1,506,000)
------------ ------------
Total liabilities and stockholders' (deficit) investment $ 25,168,000 $ 27,720,000
============ ============
The accompanying notes are an integral part of these statements.
3
Environmental Elements Corporation and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended June 30, 2002 and 2001
(Unaudited)
Three Months Ended
June 30,
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Sales $ 14,314,000 $ 16,887,000
Cost of sales 13,181,000 15,135,000
-----------------------------
Gross Profit 1,133,000 1,752,000
-----------------------------
Selling, general and administrative expenses 1,383,000 1,185,000
-----------------------------
Operating (Loss) Income (250,000) 567,000
Interest and other expense, net (144,000) (262,000)
-----------------------------
(Loss) Income before Income Taxes (394,000) 305,000
Provision for income taxes - -
-----------------------------
Net (Loss) Income $ (394,000) $ 305,000
=============================
Net (Loss) Income per Share:
Basic $ (0.05) $ 0.04
=============================
Diluted $ (0.05) $ 0.04
=============================
Weighted average common shares outstanding:
Basic 7,242,260 7,176,329
Diluted 7,242,260 7,274,008
The accompanying notes are an integral part of these statements.
4
Environmental Elements Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended June 30, 2002 and 2001
(Unaudited)
- --------------------------------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) income $ (394,000) $ 305,000
Non-cash items:
Depreciation and amortization 182,000 234,000
Effect of changes in operating assets and liabilities:
Restricted cash (31,000) --
Accounts and retainages receivable, net 1,451,000 (941,000)
Unbilled contract costs and fees 1,538,000 (913,000)
Inventories 98,000 30,000
Prepaid expenses and other current assets (49,000) 278,000
Accounts payable (1,747,000) (2,160,000)
Billings in excess of contract costs and fees (431,000) 2,814,000
Accrued payroll and related expenses (422,000) 135,000
Accrued and other current liabilities 291,000 (889,000)
Other non-current liabilities (25,000) 10,000
----------- -----------
Net cash flows from operating activities 461,000 (1,097,000)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (392,000) (15,000)
Acquisition of business assets (478,000) --
Effects of changes in other assets 248,000 (287,000)
----------- -----------
Net cash flows from investing activities (622,000) (302,000)
----------- -----------
Cash flows from financing activities:
Net borrowings under line of credit 68,000 1,678,000
Stock options exercised -- 17,000
Change in cumulative translation adjustment 73,000 (59,000)
----------- -----------
Net cash flows from financing activities 141,000 1,636,000
----------- -----------
Net (decrease) increase in cash and cash equivalents (20,000) 237,000
Cash and cash equivalents, beginning of period 371,000 366,000
----------- -----------
Cash and cash equivalents, end of period $ 351,000 $ 603,000
=========== ===========
The accompanying notes are an integral part of these statements.
5
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 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 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. SIGNIFICANT TRANSACTIONS
In April 2002, the Company terminated its participation in its joint venture
in China and created a wholly foreign owned enterprise (WFOE). No additional
assets were required to be invested in the WFOE other than those distributed
in connection with the termination of the joint venture. In connection with
this transaction, the Company repatriated approximately $262,000 of its
joint venture investment which was in excess of the capital needs of the
WFOE. Since its inception, the operations of the WFOE have been included in
the accompanying consolidated financial statements.
In May 2002, the Company acquired the assets of Keepmere Engineering
Limited, a provider of repair and maintenance services for power generation
and industrial equipment in the United Kingdom. Based on a preliminary
allocation of the $478,000 purchase price, the fair value of assets acquired
include $210,000 of tangible assets, $37,000 of customer contracts with an
average life of two years, $110,000 of intellectual property with an average
life of ten years and $121,000 of goodwill. The intangible assets are
included in other assets in the accompanying consolidated balance sheet.
4. LONG TERM LINE OF CREDIT
The Company's principal source of liquidity is its bank credit facility
that has been extended to April 1, 2004. 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
6
accounts receivable reduced by outstanding letters of credit. Under the
provisions of the credit facility, the Company must comply with certain
financial and other covenants. The financial covenant requires that the
Company earn net income before taxes of $500,000 for the first half of the
fiscal year and earn an additional $500,000 for the second half. As a
result of the loss in the first quarter, the Company does not expect to
meet the required net income level for the first half of the fiscal year.
The Company's bank has been notified of the Company's revised expectations
and has informally indicated that it will waive compliance with this
covenant and is working with the Company to revise their requirements to
reflect the modified expectations. The Company expects to come to agreement
with the Bank on new covenants but in the event that an agreement cannot be
reached, the Company may not be able to meet its financial obligations
until a new credit facility is obtained.
5. COMMITMENTS AND CONTINGENCIES
Project dispute-
The Company has completed its original work under a fixed price contract to
provide the design, engineering and materials for the rebuild of an
existing electrostatic precipitator. The construction component of the
project was awarded to a third party. The precipitator is currently
performing at levels that meet the requirements of the State emission
standards, but at levels below those specified in the contract. The Company
believes that it has fulfilled all of its contractual responsibilities and
is working with the customer on a remedy to the problems. The Company has
incurred unexpected costs to identify the source of the problem and to
assure it has met its contractual obligations.
In addition, the Company is involved in a dispute with the construction
contractor over the liability for certain of the contractor's alleged cost
overruns on the project and over certain costs incurred by the contractor
at the Company's request. The contractor has unilaterally invoiced the
Company $1.8 million for these additional costs, which amount the Company
vigorously disputes. The Company has retained legal counsel and has accrued
legal and other costs that it expects to incur to resolve these disputes.
As a result, total estimated costs on the contract now indicate a loss,
which the Company has fully accrued in this quarter. The effect of recording
this loss was to reduce operating income by $802,000 in the quarter. While
the Company has made its best efforts to estimate the final outcome of this
contract, there can be no assurance that the contract will not close out
better or worse than has been estimated.
Patent litigation-
The Company is the exclusive licensee in the United States of certain
patented technology for a urea conversion process known as
"Ammonia-on-Demand" or AOD(TM). With the approval of its licensor, the
Company has granted an end-user sublicense for the process to American
Electric Power Service Corporation and its affiliates. Among the processes
competing with the Company's AOD process is a process sold by Hamon
Research-Cotrell, Inc. under license from EC&C Technologies, Inc.
On October 26, 2001, American Electric Power Service Corporation and certain
of its affiliates filed a declaratory judgment action in the Central
District of Ohio against the Company, EC&C Technologies, Inc. and its
licensee, Hamon Research-Cotrell, Inc., seeking a ruling that the
7
AOD process does not infringe on EC&C Technologies' urea to ammonia patented
technology. The complaint was later amended to realign the Company as a
plaintiff. Both EC&C Technologies and Hamon Research-Cotrell filed motions
to dismiss on the basis of lack of personal jurisdiction.
On November 30, 2001, EC&C Technologies filed a patent infringement action
in the Central District of California against the Company related to the
Company's AOD technology. The Company obtained a stay of that proceeding
pending a ruling on the motions to dismiss the Ohio litigation. On July 26,
2002, the Ohio court granted EC&C Technologies' and Hamon
Research-Cotrell's motions to dismiss, without prejudice.
On August 5, 2002, the Company notified the California court that the Ohio
court had dismissed the Ohio litigation. The docket on which the California
litigation is filed is an expedited docket. The Company anticipates that
trial may begin within 60 days. The Company also anticipates that American
Electric Power will join in this litigation and assist with the defense. If,
however, American Electric Power does not join the Company in this
litigation, the Company may incur additional legal expenses.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Amounts paid in cash for interest during the three months ended June 30,
2002 and 2001 were $123,000 and $190,000, respectively. There were no income
taxes paid during either three month period.
7. SEGMENT INFORMATION
The Company has three reportable operating segments: the Systems Business
Unit, the Services Business Unit, and the Engineered Products 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 Engineered Products Business Unit is dedicated
to finding additional technologies and alliances, and currently includes
Ammonia-on-Demand (AOD(TM)) 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
operating income amounts are evaluated by executive management in deciding
how to allocate resources and assess performance. During the quarter, the
Company refined the criteria that it uses to determine the segment in which
a particular project should be managed and reported. This refinement will be
used going forward and had no effect on the segment information as reported
for the quarter ended June 30, 2001. The effect, if any, of this refinement
will be reflected in the disclosure of prior period information in future
reports. The Company does not allocate assets to the individual operating
segments and there are no intercompany sales transactions between the three
operating segments.
8
Information about reported segment sales and operating income (loss) for the
three months ended June 30, 2002 and 2001 is as follows:
2002 2001
------------------------------------------ ------------------------------------------
Operating Income Operating Income
Business Unit Sales (Loss) Sales (Loss)
----------------------------- --------------------- -------------------- -------------------- ---------------------
Systems $ 5,876,000 $ (765,000) $ 8,523,000 $ 73,000
Services 5,416,000 397,000 5,273,000 438,000
Engineered Products 3,022,000 118,000 3,091,000 56,000
--------------------- -------------------- -------------------- ---------------------
Total $ 14,314,000 $ (250,000) $ 16,887,000 $ 567,000
===================== ==================== ==================== =====================
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 three months ended June 30, 2002 and 2001 are as
follows:
Geographic Area 2002 2001
--------------------------- --------------------- ---------------------
United States $ 13,448,000 $ 12,410,000
United Kingdom 505,000 3,476,000
Canada 159,000 891,000
Other International 202,000 110,000
--------------------- ---------------------
Total $ 14,314,000 $ 16,887,000
===================== =====================
8. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) 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
(loss) for the three months ended June 30, 2002 and 2001 is as follows:
2002 2001
------------ -----------
Net Income (Loss) as Reported $ (394,000) $ 305,000
Effect of Foreign Currency Translation Gain (Loss) 73,000 (59,000)
------------ -----------
Comprehensive Income (Loss) $ (321,000) $ 246,000
============ ===========
9
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, 2002.
GENERAL
The Company designs, supplies and services systems and equipment and
provides aftermarket products 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. Many contracts for the Company's large-scale
systems design and construction projects 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. The
Company's services and maintenance work is done primarily on a time and
material basis and also relies on outside subcontractors and suppliers. This
type of work generally is of a shorter duration (1 to 3 months) and does not
include performance testing of the service or repairs.
CRITICAL ACCOUNTING POLICIES
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. Revenues for spare parts are
recognized when those parts are shipped to the customer.
Unbilled contract costs and fees represent revenues 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 revenues recognized.
The Company provides for warranty expenses on contracts based on estimates
that 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.
10
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.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationships to sales of
selected items in the Company's consolidated statements of operations
(unaudited) for the three months ended June 30, 2002 and 2001:
2002 2001
-------- --------
Sales 100.0% 100.0%
Cost of sales 92.1 89.6
-------- --------
Gross profit 7.9 10.4
Selling, general and administrative expenses 9.6 7.0
-------- --------
Operating income (loss) (1.7)% 3.4%
======== ========
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO
THREE MONTHS ENDED JUNE 30, 2001
Sales for the three months ended June 30, 2002 decreased 15.2%, or
$2,537,000, to $14,314,000 from $16,887,000. The Services business unit's
sales increased 2.7% while the sales in Systems and Engineered Products
decreased 31.1% and 2.2%, respectively. The large decrease in revenues in
the Systems business unit reflects delays in the awarding of several large
projects that were originally anticipated to be released in March, 2002 and
are now expected to be released in September, 2002. The Company has
negotiated the contract terms with the customers and remains the sole
contractor that is working with the customer on these projects and thus
expects these contracts to be released in the revised timeframe.
As a percentage of sales, cost of sales increased to 92.1% in the current
period as compared to 89.6% in the same period of the prior year and the
Company's gross profit percentage decreased to 7.9% from 10.4%. The decline
in gross profit is attributable to losses associated with a specific
contract that arose in the first quarter as previously described in Note 5
to the accompanying financial statements (entitled "Commitments and
Contingencies"). The impact of recording the total estimated loss on that
contract was approximately $802,000 for the three months ended June 30,
2002.
Selling, general and administrative expenses increased 16.7%, or $198,000 to
$1,383,000 from $1,185,000, and as a percentage of sales to 9.6% from 7.0%.
These increases were due to the Company's increased investment in its sales
and marketing and business development efforts in order to continue the
growth in its Services and Engineered Products business units.
For the reasons set forth above, the Company incurred an operating loss of
$250,000, or 1.7% of sales for the quarter ended June 30, 2002, compared to
operating income of $567,000, or
11
3.4% of sales, for the prior year period.
Interest and other expense, net of interest and other income, decreased
45.0%, or $118,000, to $144,000 from $262,000. The decrease was primarily
due to lower interest costs on the Company's revolving credit line.
The Company incurred a net loss before income taxes of $394,000, or 2.8% of
sales, in the current year quarter, compared to income before income taxes
of $305,000, or 1.8% 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
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 $2.1 million at June 30, 2002 and $2.6 million at
March 31, 2002. The Company also requires capital to the extent that its net
cash flows from operating activities are negative.
Cash and cash equivalents decreased by $20,000 and borrowings under the
Company's line of credit increased by $68,000 during the three months ended
June 30, 2002. Significant investments which required an investment of cash
during the three months ended June 30, 2002 included the acquisition the
assets of Keepmere Engineering Limited for $478,000, and investments in
leasehold improvements and equipment totaling $392,000. The conversion of
the Company's investment in its joint venture in China to a wholly foreign
owned enterprise provided an infusion of cash of $262,000.
The Company's principal source of liquidity is its bank credit facility that
has been extended to April 1, 2004. 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. Under the provisions of
the credit facility, the Company must comply with certain financial and
other covenants. The financial covenant requires that the Company
earn net income before taxes of $500,000 for the first half of the fiscal
year and earn an additional $500,000 for the second half. As a result of the
loss in the first quarter, the Company does not expect to meet the required
net income level for the first half of the fiscal year. The Company's bank
has been notified of the Company's revised expectations and has informally
indicated that it will waive compliance with this covenant and is working
with the Company to revise their requirements to reflect the modified
expectations. The Company expects to come to agreement with the Bank on new
covenants but in the event that an agreement cannot be reached, the Company
may not be able to meet its financial obligations until a new credit
facility is obtained.
12
At June 30, 2002, the amount outstanding under the bank credit facility was
$8.0 million.
The Company's backlog of unfilled orders at June 30, 2002 decreased 13% to
$27.7 million from $31.7 million at June 30, 2001. However, new orders
received during the three months ended June 30, 2002 increased 19% from the
same period last year, to $13.4 million from $11.3 million.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is the exclusive licensee in the United States of certain
patented technology for a urea conversion process known as
"Ammonia-on-Demand" or AOD(TM). With the approval of its licensor, the
Company has granted an end-user sublicense for the process to American
Electric Power Service Corporation and its affiliates. Among the processes
competing with the Company's AOD process is a process sold by Hamon
Research-Cotrell, Inc. under license from EC&C Technologies, Inc.
On October 26, 2001, American Electric Power Service Corporation and
certain of its affiliates filed a declaratory judgment action in the
Central District of Ohio against the Company, EC&C Technologies, Inc. and
its licensee, Hamon Research-Cotrell, Inc., seeking a ruling that the AOD
process does not infringe on EC&C Technologies' urea to ammonia patented
technology. The complaint was later amended to realign the Company as a
plaintiff. Both EC&C Technologies and Hamon Research-Cotrell filed motions
to dismiss on the basis of lack of personal jurisdiction.
On November 30, 2001, EC&C Technologies filed a patent infringement action
in the Central District of California against the Company related to the
Company's AOD technology. The Company obtained a stay of that proceeding
pending a ruling on the motions to dismiss the Ohio litigation. On July 26,
2002, the Ohio court granted EC&C Technologies' and Hamon Research-Cotrell's
motions to dismiss, without prejudice.
On August 5, 2002, the Company notified the California court that the Ohio
court had dismissed the Ohio litigation. The docket on which the California
litigation is filed is an expedited docket. The Company anticipates that
trial may begin within 60 days. The Company also anticipates that American
Electric Power will join in this litigation and assist with the defense. If,
however, American Electric Power does not join the Company in this
litigation, the Company may incur additional legal expenses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
No exhibits are included in this form 10-Q
(b) Reports on Form 8-K:
Form 8-K, dated June 14, 2002, reported that the Board of Directors had
dismissed Arthur Andersen LLP as the Company's independent auditors and
appointed Ernst & Young LLP to serve as Environmental Elements
Corporation's independent auditors for the current fiscal year, which
ends on March 31, 2003.
13
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/ Lawrence Rychlak
--------------------------------------------
Lawrence Rychlak
Senior Vice President and Chief Financial Officer
Date: August 14, 2002
14