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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 For the Fiscal Year ended March 31, 2002
Commission File Number 1-10955
------------------------------
ENVIRONMENTAL ELEMENTS CORPORATION
(Exact name of registrant as specified in its charter)
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)
(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, The American Stock Exchange, LLC
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. [_]
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of June 3, 2002 was approximately $17.3 million based upon the
closing price of $3.10. The number of shares outstanding of the registrant's
Common Stock as of June 3, 2002 was 7,242,590.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement relating to registrant's Annual
Meeting of Stockholders to be held August 1, 2002 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.
ENVIRONMENTAL ELEMENTS CORPORATION
FORM 10-K
TABLE OF CONTENTS
Item Page
- ---- ----
PART I
1 Business 3
2 Properties 12
3 Legal Proceedings 13
4 Submission of Matters to a Vote of Security Holders 13
PART II
5 Market for Registrant's Common Equity and Related Stockholder Matters 13
6 Selected Financial Data 14
7 Management's Discussion and Analysis of Financial Condition and Results of Operations 15
8 Financial Statements and Supplementary Data 19
9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 38
PART III
10 Directors and Executive Officers of the Registrant 38
11 Executive Compensation 38
12 Security Ownership of Certain Beneficial Owners and Management 38
13 Certain Relationships and Related Transactions 39
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 39
Signatures 42
Exhibit Index 45
2
A NOTE ABOUT FORWARD-LOOKING STATEMENTS
There are forward-looking statements in this filing including, the
sections entitled "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations", that are based on
management's beliefs and assumptions and on information currently available
to management. Forward-looking statements include the information
concerning business strategies, financing, competition, potential growth
opportunities and future operating results. Forward-looking statements
include all statements that are not historical facts and can be identified
by the use of forward-looking terminology such as the words "believes",
"expects", "anticipates", "intends", "plans", "estimates" or similar
expressions.
Forward-looking statements involve risks, uncertainties and
assumptions and actual results may differ materially from those expressed
in these forward-looking statements. The reader of this filing should not
put undue reliance on any forward-looking statements and understand that
many factors could cause results to differ materially from those expressed
in these forward-looking statements. These factors include-
. The loss of bookings
. Increased competition
. Changes in environmental regulations
. Ability of the Company to protect its intellectual property
rights
. Unanticipated increases in project costs
PART I
ITEM 1. BUSINESS
General
Environmental Elements Corporation ("EEC" or "the Company") supplies,
services and maintains proprietary air pollution control systems and products
which enable customers to operate their facilities in compliance with regulatory
standards limiting particulate and gaseous emissions. The Company offers
large-scale, custom-engineered systems and standardized, pre-engineered
products. The Company's business strategy is to sell and service a broad array
of proprietary state-of-the-art technologies to traditionally intensive users of
air pollution control systems, including two primary customer groups -
electricity producers and pulp and paper producers. In the last two years the
Company has focused its efforts on marketing products and on increasing its
service and maintenance operations. At the same time, the Company has also been
more selective in its custom systems business. In 2002, these efforts produced
more consistent operating results throughout the year and a revenue mix that was
more balanced among custom systems, standardized products, and service and
maintenance.
To reflect its new focus, during fiscal 2001, the Company reorganized
itself into three reportable operating segments; the Systems Business Unit, the
Services Business Unit and the AOD
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Business Unit, now called the Engineered Products Business Unit. The Systems
Business Unit contains the Company's systems business; the Services Business
Unit contains the Company service and maintenance (including spare parts)
business; and the Engineered Products Business Unit contains the Company's
product business, which currently consists primarily of its Ammonia-on-Demand
(AOD(R)) products. AOD is a trademark licensed exclusively to the Company from
Hera LLC and Siirtec Nigi, S.p.A.
The Company and its predecessor have been engaged in the air pollution
control business since 1946.
Services Business
Air pollution control systems operate under extreme conditions;
therefore, maintenance and service of these systems is an ongoing requirement.
The Company provides 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 routine or
emergency response basis. These 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 maintenance and repair products and
services from its headquarters and from regional maintenance centers located
near its customers. The Company believes that the services business represents a
significant long-term opportunity. Accordingly, over the last few years, the
Company established seven regional maintenance centers that are located in
Wisconsin, Florida, Virginia, Texas, Pennsylvania, Canada and the United
Kingdom. These centers are helping to leverage the Company's local presence into
a variety of new business relationships with clients that depend on in-market
expertise and rapid response.
Engineered Products Business
In its Engineered Products business, the Company seeks to identify,
and acquire marketing rights for, standardized, pre-engineered technologies
applicable to its existing customer base as well as an expanded market. The
Company offers AOD systems, a patented technology that facilitates the control
of nitrogen oxide (NOx) emissions in coal-fired and natural gas-fired power
generation. The AOD system enables the immediate conversion of non-toxic urea,
which is a chemical commonly used in fertilizer, into ammonia, a necessary
component to facilitate NOx emissions control. The system eliminates significant
storage safety problems and much of the attendant expense associated with the
storage of ammonia. The Company has completed two such projects and seven more
AOD systems are in process at March 31, 2002. This AOD technology is licensed
from Hera, LLC and Siirtec Nigi, S.p.A.
Systems Business
In its Systems Business the Company enters into contracts for original
equipment systems and major rehabilitation and rebuild projects. Customers may
purchase a combination of the Company's systems as an integrated pollution
control solution, but, more typically, they purchase individual systems from the
Company to operate in conjunction with systems or products supplied by others.
In this business, the Company's responsibilities include the design,
fabrication, start-up, testing and (in certain instances) field construction of
its systems. The Company is responsible for its systems' meeting performance
standards for the removal of specified amounts of gaseous or particulate matter
from
4
combustion exhaust gases.
The Company performs design and process engineering for its systems.
This involves determining the size, geometry, mechanical, electrical and
structural characteristics needed to meet the performance standards, creating
the detail design and developing specifications for all structural, electrical,
mechanical, piping and chemical components. The Company generally does not
manufacture or fabricate its systems although it fabricates precipitator
components at its production facility in China for use in its systems in other
markets. The Company purchases from outside vendors most of the various
components in its systems, including standard inventory items and items made to
the Company's specifications. The Company manages all of the technical and
commercial aspects of the performance of its contracts, including the start-up
of its systems. The Company generally hires and supervises subcontractors for
field construction but more recently in some instances has used its own
employees in field construction activities.
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
becomes 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 that 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
collectible particulate. The Company offers its semi-dry scrubbers primarily for
municipal solid waste incineration facilities.
In general, the Company's systems contracts have terms ranging from 12
to 36 months and require the Company to meet specified performance milestones.
Many of these contracts are on a fixed-price basis, under which the Company
bears the risk of cost overruns. From time to time, the Company experiences
losses in connection with these contracts.
Alliance Agreements
A key component of the Company's marketing strategy has been the
development of closer relationships with certain important customers and with
suppliers of complementary pollution control equipment. To that end, the Company
has entered into alliance agreements with several major customers
5
which name the Company as the exclusive provider or the preferred provider of
certain products and services to that customer. The Company has also entered
into alliance agreements with other industry suppliers which provide for
cooperative marketing arrangements.
In early fiscal 2001, the Company and Peerless Mfg. Co. (PMFG) announced
a new cooperative marketing alliance. PMFG is a provider of Selective Catalytic
Reduction (SCR) and ammonia delivery systems with over 140 installations. The
principal purpose of the alliance was to jointly market SCR, AOD, and other more
traditional ammonia storage and delivery systems. In May 2002, the Company
reevaluated the terms of this alliance in light of its continued efforts to
expand the scope of its operations and product offerings and upon mutual
agreement of EEC and PFMG, the alliance was terminated.
During fiscal 2002, the Company signed an agreement with American
Electric Power Co. Inc. (AEP) that establishes the Company as the exclusive
supplier of urea-to-ammonia systems for those of AEP's generating facilities
where AEP decides to proceed with installations of the urea-to-ammonia
technology. AEP employed the AOD technology as part of a program designed to
achieve federally mandated reductions in NOx emissions at AEP's Gen. James M.
Gavin power plant at Cheshire, Ohio. This plant consists of two 1300-megawatt
coal-fired generating units. The Company is working on seven additional plants
for AEP under the terms of this agreement and another four such projects are
anticipated in the next two years.
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; and continued expansion of pulp
and paper manufacturing capacity. 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.
6
Markets Served
The Company has historically followed a strategy of limiting its business
to systems, products 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 and certain other process industries throughout the United
States, Canada, United Kingdom and selected areas of central Europe, Asia and
the Pacific Rim.
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. 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.
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 40
years, with leading firms in the industry.
In addition to serving the principal markets described above, the Company
sells its systems to customers in the generation of energy from waste, the
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 scrubbers, fabric filters
and electrostatic precipitators. The Company believes that it is competitive in
these other markets.
The Company markets its maintenance and repair services to both existing
and new customers in the utility industry, the pulp and paper companies and to
other industrial companies. These services include ongoing scheduled maintenance
operations as well as repairs, retrofits and rebuilds to existing air pollution
control systems. In addition, the Company sells spare parts to a wide range of
customers in these industries.
In addition, the Company's AOD technology is being aggressively marketed
to the power generation industry as a reliable, safer alternative than other
ammonia delivery systems. The AOD technology is a component of a program to
achieve mandated reductions in NOx discharge. This technology is primarily being
marketed to the utility companies, but the Company is evaluating its capability
to serve other industries affected by air pollution regulations.
7
Bookings and Backlog Information
The information required by this item is contained under the caption
"Bookings and Backlog" in Item 7- Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Research and Development
The Company has an ongoing program for development and commercialization
of new air pollution control technologies and for enhancement of existing
technologies. During fiscal 2001, the Company refocused its spending on research
and concentrated on development programs focused on the improvement of existing
technologies and the identification of commercial technologies that could be
readily added to its product line. An example of the former would be work on the
Company's tubular, wet electrostatic precipitator and its application to the
cleanup of wet flue gas desulfurization acid mist. An example of the latter
would be the ongoing development of the AOD technology. The Company spent
approximately $450,000 on product development in fiscal 2002 compared with
$277,000 and $346,000 during fiscal 2001 and 2000, respectively. Among other
important activities, the Company has developed an advanced technology for the
control of sub-micron sized particulate (the Fine Particulate Agglomerator, or
FPA(TM)) and has acquired both domestic and international patent protection. The
FPA is particularly suited to utility and industrial boilers as these plants are
subject to increasingly stringent fine particulate emission regulations. The FPA
technology has undergone full-scale commercialization and is being marketed
throughout the world. The Company continues to invest in the development of this
technology and in its characterization so it can be applied in a cost-effective
manner to the widest possible range of customers.
Patents
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(R). With the approval of its licensor, EEC has granted an end-user
sublicense for the process to American Electric Power. On October 26, 2001,
American Electric Power filed a declaratory judgment action in the Central
District of Ohio against EC&C Technologies, Inc. and its licensee, Hamon
Research-Cotrell, seeking a ruling that the AOD process does not infringe on
EC&C Technologies' urea to ammonia patented technology. Shortly thereafter, the
Company joined in the lawsuit as a party plaintiff. Both EC&C Technologies and
Hamon Research-Cotrell have filed motions to dismiss on the basis of lack of
personal jurisdiction.
The Company owns or has the rights to a number of other patents, patent
applications, and other proprietary technologies that 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
Agglomerator(TM) technology as potentially providing the Company with a
significant advantage in the marketing of its precipitators. It also views the
patent protection for its AOD technology as potentially providing the Company
with a significant advantage in the marketing of systems for the control of NOx
emissions. 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.
8
Sales and Marketing
The Company's sales and marketing efforts are organized to provide
emphasis and focus by both geographic region and market area. 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. 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 more than 57 % of the Company's
sales in 2002; two customers accounted for more than 31 % of the Company's sales
in 2001; and one customer accounted for more than 10% of the Company's sales in
fiscal 2000. The Company's relationship with American Electric Power through its
alliance agreement resulted in all of the fiscal 2002 revenues in the AOD
business unit. At fiscal year end 2002, approximately 68% of the Company's
accounts and retainages receivable were due from companies within the power
industry and approximately 25% were due from companies within the pulp and paper
industry.
The Company's overseas foreign sales are generated through royalties from
international licensees and direct sales efforts and were 13% of total sales in
fiscal 2002, 21% of sales in fiscal 2001, and less than 17% of sales in fiscal
year 2000. In order to take advantage of certain overseas market opportunities,
the Company has established licensing agreements with companies in the People's
Republic of China, India, South Korea, 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 was a part owner of a joint venture in China that
manufactures certain precipitator components for use by the Company and its
licensee. In April 2002, the Company terminated its participation in the joint
venture and created a wholly owned foreign enterprise in order to gain full
control over its Chinese operations. With its Indian licensee, the Company
trained certain of the licensee's engineers to perform engineering activities
for global applications, 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
9
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
internationally. 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 on the basis of
price, its engineering and technological expertise and the 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 provide high quality services and 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.
Many 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 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.
10
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 NOx emissions by the year 2004, 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 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.
Market Risks
As a global concern, the Company faces exposure to adverse
movements in foreign currency exchange rates. These exposures may change over
time as business practices evolve and could have a material adverse impact on
the Company's financial results. Historically the Company's primary exposures
have been related to nondollar-denominated operating expenses in Canada, Europe
and Asia where the Company sells primarily in U.S. dollars. The Company is
prepared to hedge against fluctuations in these foreign currencies if this
exposure becomes material but does not use derivative financial instruments for
speculative or trading purposes. As of March 31, 2002 the assets and liabilities
of the Company related to non-dollar denominated currencies was not material.
Therefore an increase or decrease of 10 percent in the foreign exchange rate
would not have a material impact on the Company's financial position.
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 terrorist attacks of September 11, 2001 along with the
financial collapse and subsequent default by some major corporations in the
United States have dramatically changed the overall bonding market and have
somewhat hampered the Company's ability to secure bonds. However, the Company
has been able to enter into surety arrangements during fiscal 2002 and expects
that its current surety arrangements are sufficient to support the Company's
expected levels of bonded business. In addition, the Company has a bank
revolving credit and letter of credit agreement that 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, property and errors and omissions coverage.
While a successful claim in an amount in excess of
11
the Company's insurance coverage, or for which there is no coverage could have a
material adverse effect on the Company, the Company believes that it presently
maintains adequate insurance coverage for its business.
Employees
As of March 31, 2002, the Company had 97 full-time employees, of
whom more than 85% were engineers and other professionals and technical
employees. The Company also hires contract and other temporary personnel to meet
the requirements of particular contracts, as well as contract personnel to carry
out maintenance activities and 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.
American Stock Exchange
The Company's stock is listed and traded on the American Stock
Exchange (AMEX). In order to continue to be listed on the AMEX, a company must
be compliant with all of the listing requirements of the Exchange. During fiscal
2002, the Company received notice from AMEX that is was below certain of the
Exchange's listing standards. Specifically, the Company had losses from
continuing operations in two of its three most recent fiscal years and did not
have shareholders' equity of at least $2,000,000. As such, the Company has had
several discussions with Exchange personnel and has submitted a plan to regain
compliance with the continued listing standards of AMEX. The Company expects to
comply with the listing standards by the end of fiscal year 2003 since its
operations in fiscal 2002 resulted in income from continuing operations and the
Company fully expects that fiscal 2003 will show continued profitability. The
Company has not received, and does not expect to receive, a notice from the AMEX
to de-list its stock from the Exchange.
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 30,000 square
feet of this space and subleases substantially all of the remaining space. See
Note 6 of the "Notes to Consolidated Financial Statements", under Item 8 -
Financial Statements and Supplementary Data, 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 inventory and spare parts
operation. The Company expects to further consolidate its facilities and not
renew this lease when it expires in fiscal 2003.
The Company has a subsidiary in China that operates in a leased factory in
Bengbu, Anhui Province, China, which fabricates precipitator components.
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.
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ITEM 3. LEGAL PROCEEDINGS
Environmental Elements 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, Environmental Elements
has granted an end-user sublicense for the process to American Electric Power.
On October 26, 2001, American Electric Power filed a declaratory judgment action
in the Central District of Ohio against EC&C Technologies, Inc. and its
licensee, Hamon Research-Cotrell, seeking a ruling that the AOD process does not
infringe on EC&C Technologies' urea to ammonia patented technology. Shortly
thereafter, Environmental Elements joined in the lawsuit as a party plaintiff.
Both EC&C Technologies and Hamon Research-Cotrell have filed motions to dismiss
on the basis of lack of personal jurisdiction.
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
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal year 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Prior to November 1, 1999 the Company's Common Stock was traded on the New
York Stock Exchange under the symbol "EEC." Beginning on, and since November 1,
1999, the Company's Common Stock has traded on the American Stock Exchange under
the symbol "EEC."
As of June 3, 2002, there were approximately 1,779 record holders of the
Company's Common Stock. The closing price of the Common Stock on June 3, 2002
was $3.10. The Company did not pay any dividends for the fiscal years ended
March 31, 2002, 2001 and 2000 and does not expect to pay a dividend in fiscal
2003.
The additional information required by this item is contained under
"Investor Information" on the inside back cover of the Company's Annual Report
to Shareholders and in Note 10 of the "Notes to Consolidated Financial
Statements", under Item 8 - Financial Statements and Supplementary Data. Such
information is incorporated herein by reference.
13
ITEM 6. SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------
For the fiscal years ended March 31, 2002 2001 2000 1999 1998
(In thousands, except for per share amounts)
--------------------------------------------------------
Consolidated statements of operations data
Sales $ 71,936 $ 60,821 $ 55,593 $ 68,029 $ 52,612
Cost of sales 63,579 60,807 51,178 58,960 45,528
-------- -------- -------- -------- --------
Gross profit 8,357 14 4,415 9,069 7,084
-------- -------- -------- -------- --------
Selling, general & administrative expense 6,068 5,009 6,638 7,183 6,373
Restructuring charge - - 1,185 - -
-------- -------- -------- -------- --------
6,068 5,009 7,823 7,183 6,373
-------- -------- -------- -------- --------
Operating income (loss) 2,289 (4,995) (3,408) 1,886 711
Interest and other expense, net (813) (1,265) (1,088) (572) (661)
-------- -------- -------- -------- --------
Income (loss) before provision for income taxes 1,476 (6,260) (4,496) 1,314 50
Provision for income taxes - - - 39 -
-------- -------- -------- -------- --------
Net income (loss) $ 1,476 $ (6,260) $ (4,496) $ 1,275 $ 50
======== ======== ======== ======== ========
Diluted earnings (loss) per share $ 0.20 $ (0.88) $ (0.63) $ 0.18 $ 0.01
Weighted average common shares outstanding
Basic 7,207 7,129 7,099 7,053 6,990
Diluted 7,321 7,129 7,099 7,192 7,098
Consolidated balance sheet data
Working capital $ 1,490 $ 714 $ 5,825 $ 9,562 $ 7,050
Total assets 27,720 29,689 32,395 33,180 34,362
Long-term debt 9,514 8,986 8,187 8,063 7,417
Stockholders' (deficit) investment (1,506) (3,032) 3,227 7,608 6,265
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 recognizes revenues from its long-term contracts under the
percentage-of-completion method. Under this method, the Company estimates total
contract revenues, costs and margin and recognizes a proportionate amount of
revenues and margin in each period based upon the total costs incurred in that
period. If the Company materially revises its estimates during the execution of
the contract, then the cumulative effect of those changes are reflected in the
period in which the change in estimate is made.
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.
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 2002 were
$63.3 million, a slight decrease from the $67.1 million of fiscal 2001 bookings.
The backlog as of March 31, 2002 is $28.6 million compared with $37.2 in backlog
as of March 31, 2001. The Company expects that about 84%, or $24 million of the
$28.6 million, March 31, 2002 backlog will be executed during its next fiscal
year. Due to timing effects of bookings, differences in project gross margins
and varying lengths of time required to perform contracts, annual bookings
activity and backlog levels at period end are not necessarily predictive of
future operating results.
15
Table 1
For the years ended March 31, 2002 2001 2000 2002 2001 2000
- ------------------------------------------------------------------------------------------------------
(in millions) (percentage of net sales)
---------------------- --------------------------
Sales $ 71.9 $ 60.8 $ 55.6 100.0 100.0 100.0
Cost of sales 63.5 60.8 51.2 88.3 100.0 92.1
Gross profit 8.4 - 4.4 11.7 - 7.9
Selling, general and administrative expenses 6.1 5.0 6.6 8.5 8.2 11.9
Restructuring charge - - 1.2 - - 2.1
Operating Income (loss) 2.3 (5.0) (3.4) 3.2 (8.2) (6.1)
Interest and other expense, net (.8) (1.3) (1.1) (1.1) (2.1) (2.0)
Income (loss) before provision for income taxes $ 1.5 $ (6.3) $ (4.5) 2.1 (10.3) (8.1)
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.
Fiscal 2002 Compared to Fiscal 2001
Fiscal 2002 sales increased 18.3% or $11.1 million to $71.9 million from $60.8
million the year before. This increase is the result of significant growth with
the Services and Engineered Products business due to the success of the
Company's continuing strategy to grow these two business units and diversify its
revenues.
Cost of sales increased 4.4% or $2.7 million to $63.5 million from $60.8 million
but decreased significantly as a percentage of sales to 88.3% from 100%. This
decrease in the percentage of sales was due to the successful execution of
various projects within the Systems and Engineered Products business units and
the continued revenue growth in the higher margin Services business unit. In the
second quarter of fiscal 2001, the Company performed a detailed review and
revision of the estimated costs to complete and the probability of collection of
previously billed and unbilled receivables of projects in process. The effect of
these revisions was to increase cost of sales by approximately $4.5 million for
fiscal 2001.
Selling, general and administrative expenses increased 22% or $1.1 million to
$6.1 million. The increase is a result of the Company's planned increase in
sales and marketing expenses as well as higher legal costs incurred in the
development of new alliances and in defense of its patents. The Company's
selling, general and administrative expenses, as a percentage of sales,
increased slightly to 8.5% from 8.2%. Interest and other expense, net, decreased
35.7%, or $452,000, to $813,000. The decrease is primarily the result of reduced
borrowing levels and decreases in the average interest rate on the Company's
line of credit due to decreases in the bank's prime lending rate.
There was no provision for income taxes for fiscal 2002 because the Company has
sufficient net operating loss carryforwards, which are available to offset its
tax liability for the year. Information relating to
16
income taxes is discussed in Note 4 of "Notes to Consolidated Financial
Statements" under Item 8- Financial Statements and Supplementary Data.
For the fiscal year ended March 31, 2002, the Company earned net income of $1.5
million compared with a net loss of $6.3 million for the year ended March 31,
2001.
Fiscal 2001 Compared to Fiscal 2000
Fiscal 2001 sales increased 9.4% or $5.2 million to $60.8 million from $55.6
million the year before. This increase is the result of a significant project
within its Engineered Products business unit and continued growth in products
and services to its maintenance and field service customers.
Cost of sales increased 18.8% or $9.6 million to $60.8 million from $51.2
million and increased as a percentage of sales to 100% from 92.1%. This increase
in the percentage of sales was due to the recognition of costs identified as a
result of a detailed review and revision of the estimated costs to complete and
the probability of collection of previously billed and unbilled receivables of
projects that existed at the beginning of the fiscal year. The effect of these
revisions was to increase cost of sales by approximately $4.5 million for fiscal
2001.
Selling, general and administrative expenses decreased 24.2% or $1.6 million to
$5.0 million from $6.6 million. The decrease is a result of the Company's
organizational restructuring and cost reduction efforts including a significant
reduction-in-force that was substantially completed during the first quarter of
fiscal 2001. The Company's selling, general and administrative expenses, as a
percentage of sales, decreased to 8.2% from 11.9%.
Interest and other expense, net, increased 16.3%, or $177,000, to $1.3 million.
The increase is primarily the result of increases in the average interest rate
on the Company's line of credit due to increases in the bank's prime lending
rate.
There was no provision for income taxes for fiscal 2001 because the Company
incurred a pre-tax loss for the fiscal year. Information relating to income
taxes is discussed in Note 4 of "Notes to Consolidated Financial Statements"
under Item 8- Financial Statements and Supplementary Data.
For the fiscal year ended March 31, 2001, the Company incurred a net loss of
$6.3 million compared with a net loss of $4.5 million for the year ended March
31, 2000.
Liquidity and Capital Resources
During fiscal 2002, cash, restricted cash and cash equivalents increased by
$424,000 and borrowings under the Company's line of credit increased by
$534,000. 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 $2.6 million and $2.9 million at March 31, 2002 and 2001,
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 fiscal year 2000, the Company's bank agreed to increase its secured open
line of credit up to $15 million, subject to a borrowing base calculation. The
line of credit has been extended until April 2004 and contains certain financial
covenants relating to the Company's operations. Under the terms of the credit
facility, the Company must comply with certain financial and other covenants. At
March 31, 2002, the Company was in compliance with, or had obtained applicable
waivers for such covenants through
17
April 1, 2004. In addition to the covenants discussed above, the Company is
required to earn net income before taxes of $500,000 for the first half of the
fiscal year and earn another $500,000 for the second half of the fiscal year.
Management believes that its borrowing capacity under the line will be
sufficient to meet its operating needs and that it will comply with all of the
terms of the covenants contained within the agreement.
Occasionally a customer will require that the Company obtain a surety bond in
order to bid for a particular project, to ensure that particular performance
standards are met, or to ensure prompt payment to its vendors and subcontractors
on a project. In order to meet these requirements, the Company has arrangements
with several sources to provide these bonds. Management believes that its
bonding sources are adequate to meet its operating needs for the coming year.
Information relating to the Company's credit facility and bonding line is
discussed in Note 3 of "Notes to Consolidated Financial Statements" under Item
8- Financial Statements and Supplementary Data.
The following summarizes certain of the Company's contractual obligations at
March 31, 2002 and the effect such obligations are expected to have on the
Company's liquidity and cash flow in future periods.
Payments due by period
---------------------------------------------------
Less than Greater than
Total 1 year 1 - 3 years 3 years
---------------------------------------------------
Long-term debt $ 7,968,000 $ - $ 7,968,000 $ -
Capital lease, including bargain renewal options 5,355,000 158,000 473,000 4,724,000
Non-cancelable operating leases 822,000 227,000 250,000 345,000
---------------------------------------------------
Total $14,145,000 $ 385,000 $ 8,691,000 $ 5,069,000
===================================================
The Company believes that there has been evidence of long term improvement over
the past several years in the market for its products, technologies and
services. In the short term, the market is exceptionally difficult to predict
accurately due to regulatory and other domestic and international factors. 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 operate its business due to the fact that historically
the Company has required little investment in operating working capital and its
banking arrangements are adequate to fund its operations at its anticipated
level of activity.
Dividends
The Board of Directors did not declare a dividend during fiscal 2002. 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.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Consolidated Balance Sheets as of
March 31, 2002 and March 31, 2001 ................................... 20
Consolidated Statements of Operations for
the years ended March 31, 2002, 2001 and 2000 ....................... 21
Consolidated Statements of Cash Flows for
the years ended March 31, 2002, 2001, and 2000 ...................... 22
Consolidated Statements of Stockholders' (Deficit) Investment for
the years ended March 31, 2002, 2001, and 2000 ...................... 23
Notes to Consolidated Financial Statements ............................. 24
Management's Responsibility for Financial Statements ................... 36
Report of Independent Public Accountants ............................... 37
All other schedules are omitted because they are not applicable or not required
or because the required information is included in the Consolidated Financial
Statements or the Notes thereto.
19
Consolidated Balance Sheets
- ---------------------------------------------------------------------------------------------------------------------------
As of March 31, 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 371,000 $ 366,000
Restricted cash 419,000 -
Accounts and retainages receivable, net of allowance for doubtful
accounts of $710,000 and $1,159,000 in 2002 and 2001, respectively 10,382,000 8,013,000
Unbilled contract costs and fees 7,353,000 13,658,000
Inventories 1,180,000 1,076,000
Prepaid expenses and other current assets 801,000 672,000
------------ ------------
Total current assets 20,506,000 23,785,000
------------ ------------
Property and equipment:
Capital lease, building and improvements 7,348,000 7,303,000
Machinery, equipment, furniture and fixtures 3,157,000 2,978,000
------------ ------------
Total property and equipment at cost 10,505,000 10,281,000
Less - Accumulated depreciation and amortization 6,271,000 5,786,000
------------ ------------
Property and equipment, net 4,234,000 4,495,000
------------ ------------
Other assets, net 2,980,000 1,409,000
------------ ------------
Total assets $ 27,720,000 $ 29,689,000
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) INVESTMENT
Current liabilities:
Accounts payable $ 13,699,000 $ 17,522,000
Billings in excess of contract costs and fees 1,444,000 1,203,000
Accrued payroll and related expenses 1,141,000 638,000
Accrued and other current liabilities 2,732,000 3,708,000
------------ ------------
Total current liabilities 19,016,000 23,071,000
Long-term liabilities:
Long-term capital lease obligation 1,546,000 1,552,000
Long-term line of credit 7,968,000 7,434,000
Other non-current liabilities 696,000 664,000
------------ ------------
Total liabilities 29,226,000 32,721,000
------------ ------------
Commitments and contingencies
Stockholders' (deficit) investment:
Common stock, par value $.01 per share; 20,000,000 shares authorized,
7,240,748 and 7,171,142 shares issued and outstanding in 2002 and 2001, respectively 72,000 72,000
Paid-in capital 28,574,000 28,392,000
Cumulative translation adjustment (383,000) (251,000)
Retained deficit (29,769,000) (31,245,000)
------------ ------------
Total stockholders' (deficit) investment (1,506,000) (3,032,000)
------------ ------------
Total liabilities and stockholders' (deficit) investment $ 27,720,000 $ 29,689,000
============ ============
The accompanying notes are an integral part of these statements
20
Consolidated Statements of Operations
- --------------------------------------------------------------------------------------------
For the years ended March 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------
Sales $ 71,936,000 $ 60,821,000 $ 55,593,000
Cost of sales 63,579,000 60,807,000 51,178,000
------------ ------------ ------------
Gross Profit 8,357,000 14,000 4,415,000
------------ ------------ ------------
Selling, general and administrative expenses 6,068,000 5,009,000 6,638,000
Restructuring charge - - 1,185,000
------------ ------------ ------------
6,068,000 5,009,000 7,823,000
------------ ------------ ------------
Operating Income (Loss) 2,289,000 (4,995,000) (3,408,000)
Interest and other expense, net (813,000) (1,265,000) (1,088,000)
------------ ------------ ------------
Income (Loss) before provision
for Income Taxes 1,476,000 (6,260,000) (4,496,000)
Provision for income taxes - - -
------------ ------------ ------------
Net Income (Loss) $ 1,476,000 $ (6,260,000) $ (4,496,000)
============ ============ ============
Net Income (Loss) per Share:
Basic $ 0.20 $ (0.88) $ (0.63)
------------ ------------ ------------
Diluted $ 0.20 $ (0.88) $ (0.63)
============ ============ ============
Weighted average common shares outstanding:
Basic 7,207,000 7,129,000 7,099,000
------------ ------------ ------------
Diluted 7,321,000 7,129,000 7,099,000
------------ ------------ ------------
The accompanying notes are an integral part of these statements.
21
Consolidated Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------
For the years ended March 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 1,476,000 $(6,260,000) $(4,496,000)
Non-cash items:
Depreciation and amortization 1,021,000 830,000 867,000
Stock-based compensation 84,000 82,000 89,000
Effect of changes in operating assets and liabilities:
Restricted cash (419,000) - -
Accounts and retainage receivable, net (2,369,000) 863,000 842,000
Unbilled contract costs and fees 6,305,000 280,000 (1,623,000)
Inventories (104,000) 138,000 193,000
Prepaid expenses and other assets (1,883,000) 465,000 272,000
Accounts payable (3,823,000) 2,526,000 1,886,000
Billings in excess of contract costs and fees 241,000 380,000 (1,000)
Accrued payroll and related expenses 503,000 (342,000) (64,000)
Accrued and other current liabilities (976,000) 26,000 1,626,000
Other non-current liabilities 32,000 164,000 25,000
----------- ----------- -----------
Net cash flows from operating activities 88,000 (848,000) (384,000)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (290,000) (55,000) (245,000)
Investment in other assets, net (287,000) (185,000) (404,000)
----------- ----------- -----------
Net cash flows from investing activities (577,000) (240,000) (649,000)
----------- ----------- -----------
Cash flows from financing activities:
Net borrowings under line of credit 534,000 934,000 400,000
Payments under capital lease obligation (6,000) (135,000) (276,000)
Stock options exercised 98,000 - -
Change in cumulative translation adjustment (132,000) (81,000) 26,000
----------- ----------- -----------
Net cash flows from financing activities 494,000 718,000 150,000
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 5,000 (370,000) (883,000)
Cash and cash equivalents, beginning of year 366,000 736,000 1,619,000
----------- ----------- -----------
Cash and cash equivalents, end of year $ 371,000 $ 366,000 $ 736,000
=========== =========== ===========
The accompanying notes are an integral part of these statements.
22
Consolidated Statements of Stockholders' (Deficit) Investment
For the years ended March 31, 2002, 2001, and 2000
- -------------------------------------------------------------------------------
Cumulative
Common Paid-in Translation Retained
Changes in Amounts Stock Capital Adjustment Deficit Total
- ----------------------------------------------------------------------------------------------------
Balance, March 31, 1999 $ 71,000 $ 28,222,000 $ (196,000) $(20,489,000) $ 7,608,000
Net loss - - - (4,496,000) (4,496,000)
Translation adjustment - - 26,000 - 26,000
Comprehensive loss - - - - (4,470,000)
Issuance of common stock - 89,000 - - 89,000
- ----------------------------------------------------------------------------------------------------
Balance, March 31, 2000 71,000 28,311,000 (170,000) (24,985,000) 3,227,000
Net loss - - - (6,260,000) (6,260,000)
Translation adjustment - - (81,000) - (81,000)
Comprehensive loss - - - - (6,341,000)
Issuance of common stock 1,000 81,000 - - 82,000
- ----------------------------------------------------------------------------------------------------
Balance, March 31, 2001 72,000 28,392,000 (251,000) (31,245,000) (3,032,000)
Net income - - - 1,476,000 1,476,000
Translation adjustment - - (132,000) - (132,000)
Comprehensive income - - - - 1,344,000
Issuance of common stock - 182,000 - - 182,000
- ----------------------------------------------------------------------------------------------------
Balance, March 31, 2002 $ 72,000 $ 28,574,000 $ (383,000) $(29,769,000) $ (1,506,000)
============ ============ ============ ============ =============
- ------------------------------------------
Changes in Common shares
- ------------------------------------------
Balance, March 31, 1999 7,090,705
Issuance of common stock 27,890
---------
Balance, March 31, 2000 7,118,595
Issuance of common stock 52,547
---------
Balance, March 31, 2001 7,171,142
Issuance of common stock 69,606
---------
Balance, March 31, 2002 7,240,748
---------
The accompanying notes are an integral part of these statements.
23
Notes to Consolidated Financial Statements
Note 1
------
Organization and 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. In addition,
the Company provides maintenance, service and replacement parts for the air
pollution control systems.
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 accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses as well as
the disclosures of contingent assets and liabilities at the date of the
financial statements. 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, 2001, $58,000
of repurchase agreements were included in this caption and there were none as of
March 31, 2002.
Restricted Cash
During fiscal year 2002, the Company was required to escrow funds to
support a performance bond that was issued to a customer in the U.K. These
escrowed funds totaled $419,000 as of March 31, 2002 and are shown as restricted
cash in the accompanying balance sheets.
24
Accounts and Retainages Receivable
As of March 31, 2002 and 2001, accounts and retainages receivable, net
of allowance for doubtful accounts, include accounts receivable of $9,615,000
and $6,836,000, respectively, and current retainages of $767,000 and $1,177,000,
respectively. All retainage amounts as of March 31, 2002 become due during
fiscal 2003, based on applicable contract terms and are thus classified as
current.
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.
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. In April 2001, the Company made an additional net
investment of $277,000 in the joint venture increasing its ownership in the
joint venture to 25% of the total. The Company therefore accounted for the
investment under the equity method of accounting in fiscal year 2002. Earnings
of the joint venture during fiscal 2002 were not significant and the net
investment included within other assets in the accompanying consolidated balance
sheets was $594,000 and $424,000 as of March 31, 2002 and 2001, respectively.
Subsequent to March 31, 2002, the Company terminated its participation in the
joint venture and created a wholly owned foreign enterprise that will be
consolidated in future years. The impact of terminating the joint venture was
not significant.
In 1999, the Company acquired a license to market Ammonia-on-Demand
(AOD(R)) technology in North America. The costs to acquire the licensed
technology were recorded as other assets in the accompanying consolidated
balance sheets, and were amortized as additional costs of contracts utilizing
the technology. As of March 31, 2002 the costs related to the AOD technology
were fully amortized. As of March 31, 2001 the unamortized costs related to this
technology totaled approximately $243,000.
25
Property and Equipment
Major improvements are capitalized at cost, while replacements and
maintenance and repairs that 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 3 to 40 years by major asset class.
Income Taxes
The Company provides for income taxes using the liability method
pursuant to Statement of Financial Accounting Standards (SFAS) 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 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, 2002 and 2001, the carrying value of its financial
instruments approximates fair value.
Reclassifications
Certain reclassifications have been made to prior year balances in
order to conform with current year presentation.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities". This statement, as subsequently amended, establishes accounting and
reporting standards for derivative investments to be recorded in the balance
sheet at their fair value. The Company implemented SFAS No. 133 effective April
1, 2002. The adoption of this pronouncement did not have a material effect on
operations.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment of Long-lived assets" (SFAS
No. 144), which supercedes SFAS No. 121. Though it retains the basic
requirements of SFAS No. 121 regarding when and how to measure an impairment
loss, SFAS No. 144 applies to long-lived assets to be held and used or to be
disposed of, including assets under capital leases of lessees, assets subject to
operating leases of lessors, and prepaid assets. SFAS No. 144 also expands the
scope of a discontinued operation to include a component of an entity, and
eliminates the current exemption to consolidation when control over a subsidiary
is likely to be temporary. This statement is effective for fiscal years
beginning after December 15, 2001. The Company does not believe that
implementation of this SFAS will have a material impact on its financial
statements.
26
Note 2
------
Earnings Per Share
------------------
The following illustrates the calculation of weighted average number
of common equivalent shares outstanding for the years ended March 31, 2002,
2001, and 2000:
2002 2001 2000
---- ---- ----
Weighted-average number of common shares 7,207,000 7,129,000 7,099,000
Dilutive effect of outstanding stock options 114,000 - -
--------- --------- ---------
Weighted-average number of common
Equivalent shares outstanding 7,321,000 7,129,000 7,099,000
========= ========= =========
The dilutive effects of stock options were not provided for 2001 and 2000, as
these options would have an anti-dilutive effect due to the losses of the
Company.
Note 3
------
Credit Facility
---------------
The Company has a bank credit facility providing for revolving line of
credit borrowings and letters of credit issuances of up to $15,000,000, subject
to a borrowing base calculation, and is secured by substantially all of assets
of the Company. Under the credit facility, interest accrues at the bank's prime
rate plus 1/2%. As of March 31, 2002 and 2001, the rate in effect was 5.25% and
8.5% and borrowings of $7,968,000 and $7,434,000 were outstanding, respectively.
Additionally, $1,168,000 and $1,158,000 of letters of credit were outstanding at
March 31, 2002 and 2001, respectively.
During fiscal years 2002, 2001, and 2000, the maximum borrowings under
the line of credit facility totaled $10,500,000, $9,500,000, and $11,100,000,
respectively. Average borrowings during such years were $7,580,000, $8,710,000,
and $9,021,000, and the weighted average interest rates on such borrowings were
6.62%, 9.70%, and 8.51%, in fiscal years 2002, 2001, and 2000, respectively.
Interest expense for fiscal years 2002, 2001, and 2000, was $501,000, $845,000,
and $768,000, respectively.
The line of credit has been extended until April 1, 2004 and contains
certain financial and other covenants relating to the Company's operations. In
addition to these covenants, the Company is required to earn net income before
income taxes of $500,000 for the first half of the fiscal year and an additional
$500,000 for the second half of the year. At March 31, 2002, the Company was in
compliance with, or had obtained applicable waivers for such covenants through
April 1, 2004. Management believes that its borrowing capacity under the line
will be sufficient to meet its operating needs and that it will comply with all
of the terms of the covenants contained within the agreement.
Bonding
-------
27
The Company has arrangements with several sources to provide surety
bonds, including bid bonds and performance bonds, when a customer requires them.
Management believes that its bonding sources are adequate to meet its operating
needs for the coming year.
Note 4
------
Income Taxes
------------
As of March 31, 2002, the Company had available, for federal tax
purposes, an estimated federal income tax net operating loss carryforward of
approximately $27,457,000 to offset future taxable income. These carryforwards
will expire between 2008 and 2021. As of March 31, 2002, the Company also had an
alternative minimum tax credit carryforward of approximately $516,000 that has
no expiration date. As of March 31, 2002, the Company had an alternative minimum
tax net operating loss carryforward of approximately $27,897,000.
The reconciliation of the provision for income taxes computed at
statutory rates to the provision for income taxes provided on pretax (loss)
income is not material. 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 liability stated by
source of the difference between financial accounting and tax basis as of March
31, 2002 and 2001 are as follows:
2002 2001
---- ----
Operating loss carryforward and tax credits $ 11,010,000 $ 11,148,000
Reserves, accrued liabilities and other 1,085,000 1,398,000
Property, plant, equipment and other 9,000 118,000
Valuation allowance (12,304,000) (12,864,000)
------------ ------------
Net deferred income tax liability $ (200,000) $ (200,000)
============ ============
The deferred income tax liability is included in other current
liabilities and other noncurrent liabilities in the accompanying consolidated
financial statements.
Note 5
------
Employee Benefit Plans
----------------------
Pension Plan
------------
The Company maintains a defined benefit pension plan covering the
majority of its 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
28
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, 2002, 2001 and 2000 consisted
of the following:
2002 2001 2000
-----------------------------------------
Service cost $ 305,000 $ 419,000 $ 463,000
Net amortization and deferral 48,000 48,000 602,000
Interest cost 923,000 869,000 797,000
Expected return on assets (956,000) (959,000) (1,313,000)
-----------------------------------------
Net pension expense $ 320,000 $ 377,000 $ 549,000
=========================================
The funded status of the Plan as of the most recent actuarial valuations was:
December 31,
----------------------------
2001 2000
------------ ------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $12,730,000 and $11,788,000 in 2002
and 2001, respectively $ 12,831,000 $ 11,889,000
Projected benefit obligation for services rendered to date 13,540,000 12,682,000
Plan assets, at fair value 12,770,000 12,321,000
Plan assets in excess of (or less than) the projected
benefit obligation $ (770,000) $ (361,000)
Unrecognized net loss from past experience different
from that assumed and changes in assumptions 3,368,000 967,000
Prior service cost not yet recognized in net periodic cost 71,000 119,000
------------ ------------
Prepaid pension cost $ 2,669,000 $ 725,000
============ ============
For purposes of determining the actuarial present value of the
projected benefit obligation, weighted average discount rates of 7.25% and 7.50%
were used in 2002 and 2001, 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
29
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 3%.
The rollforward of the obligation for Post-Employment benefits is
as follows for the years ended March 31:
2002 2001 2000
----------------------------------------
Obligation, beginning of year $ 560,000 $333,000 $313,000
Service Cost 129,000 270,000 97,000
Paid during current year (123,000) (72,000) (53,000)
Interest Cost 49,000 29,000 (24,000)
----------------------------------------
Obligation, end of year $ 615,000 $560,000 $333,000
========================================
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 matches employee cash contributions by purchasing company
stock on the open market at the rate of 50% of the first 3% of each
participant's compensation. Employees fully vest in Company contributions after
the completion of five years of service. Contributions by the Company were
$76,000, $76,000, and $115,000, in 2002, 2001, and 2000, respectively.
Stock Option Plan
- -----------------
The Company maintains a stock option plan that authorizes the
granting of options to purchase shares of common stock at prices not less than
fair market value at the date of grant. The current plan, the 1998 Stock Option
Plan (the Plan), was approved by a majority of the Company's shareholders and
authorizes the granting of options to purchase up to 650,000 shares of common
stock. Under the terms of this Plan, 20% of the options granted are exercisable
immediately along with 20% on each of the next four anniversaries and expire
five years from the date of grant. As of March 31, 2002, the weighted average
exercise price for outstanding options was $2.82 per share and expiration dates
ranged from September 2002 to November 2006. The options price range per share
is $1.50 to $4.31.
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 plan consistent with the method of SFAS No.
123 "Stock Based Compensation", the Company's net income (loss) and earnings per
share would have been reduced to the
30
pro forma amounts indicated below:
Years ended March 31, 2002 2001 2000
---- ---- ----
Net Income (loss):
As reported $1,476,000 $(6,260,000) $(4,496,000)
Pro forma $1,342,000 $(6,319,000) $(4,710,000)
Basic earnings per share:
As reported $ 0.20 $ (0.88) $ (0.63)
Pro forma $ 0.19 $ (0.89) $ (0.66)
Diluted earnings per share:
As reported $ 0.20 $ (0.88) $ (0.63)
Pro forma $ 0.18 $ (0.89) $ (0.66)
Options were assumed to be exercised upon vesting for the purposes of this
valuation. Adjustments are made for options forfeited prior to vesting.
31
Changes in outstanding stock options during the year were as follows:
Years ended March 31, 2002 2001 2000
----------------------------------------
Outstanding, beginning of year 368,000 827,000 794,000
Granted 149,000 143,000 75,000
Exercised (45,000) (2,000) (8,000)
Forfeited (24,000) (600,000) (34,000)
----------------------------------------
Outstanding, end of year 448,000 368,000 827,000
----------------------------------------
There were options for a total of 215,000 shares exercisable as of March 31,
2002 at a weighted average price of $2.83 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:
Year Ended March 31,
2002 2001 2000
---- ---- ----
Risk-Free Interest Rate 2.1% 5.8% 5.6%
Expected Life 5 years 5 years 5 years
Volatility 69% 73% 46%
Dividends --- --- ---
Note 6
------
Commitments and Contingencies
-----------------------------
Commitments
The principal office facilities of the Company and its
subsidiaries are occupied under a lease expiring in January 2007, 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, including all
bargain renewal options, are $157,500 per year through 2036, $78,750 in 2037,
and total $5,355,000. Of this amount, $3,803,000 represents imputed interest and
the balance of $1,552,000 as of March 31, 2002 is included in the consolidated
financial statements as a current liability ($6,000) and a long-term capital
lease obligation ($1,546,000).
32
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 financial statements. For the years ended March 31, 2002, 2001,
and 2000, rental income totaled $480,000, $525,000, and $635,000, respectively,
and building related costs totaled $686,000, $662,000, and $772,000,
respectively. The future rentals on the subleases are $696,000, $712,000,
$661,000, $532,000, $485,000 and $31,000 for fiscal 2003, 2004, 2005, 2006, 2007
and 2008, respectively.
The Company and certain subsidiaries use office facilities and
equipment under operating leases. Rent expense for the years ended March 31,
2002, 2001 and 2000 totaled $325,000, $359,000 and $287,000, respectively.
Future minimum rental payments for all operating leases having initial
or remaining non-cancelable lease terms in excess of one year are as follows for
the fiscal years ending March 31:
2003 $227,000
2004 118,000
2005 72,000
2006 60,000
2007 55,000
2008 and thereafter 290,000
-----------
Total $822,000
===========
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 or
results of its operations.
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(R). With the approval of its licensor, Environmental Elements has
granted an end-user sublicense for the process to American Electric Power. On
October 26, 2001, American Electric Power filed a declaratory judgment action in
the Central District of Ohio against EC&C Technologies, Inc. and its licensee,
Hamon Research-Cotrell, seeking a ruling that the AOD process does not infringe
on EC&C Technologies' urea to ammonia patented technology. Shortly thereafter,
Environmental Elements joined in the lawsuit as a party plaintiff. Both EC&C
Technologies and Hamon Research-Cotrell have filed motions to dismiss on the
basis of lack of personal jurisdiction
Note 7
------
Restructuring Charges
---------------------
During the fourth quarter of fiscal year 2000, the Company took action
to shift the focus of its operations to a services and technology-driven
business model. The actions included a business reorganization and a reduction
in workforce, resulting in a restructuring charge of $1,185,000, primarily
representing severance and related costs of these terminations, all of which had
been expended in fiscal 2001.
33
Note 8
------
Supplemental Cash Flow Information
----------------------------------
The Company issued 22,106, 50,547, and 19,890 shares of its common
stock in fiscal 2002, 2001 and 2000, respectively, as compensation to its
outside directors.
Amounts paid for interest during the years ended March 31, 2002, 2001,
and 2000, were $729,000, $1,122,000, and $1,033,000, respectively. Amounts paid
for income taxes in fiscal year 2002, 2001, and 2000, were $3,000, $5,000, and
$78,000, respectively.
Note 9
------
Segment Reporting
-----------------
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 AOD Business Unit, now called 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 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 for assessing performance. Due to the fact that no segments
existed prior to the restructuring, fiscal 2000 information is not reported
because it can not be practicably determined. The Company does not allocate
assets to the individual operating segments and there are no intercompany sales
transactions among the three operating segments.
Information about reported segment sales and operating income (loss)
is as follows:
March 31, 2002 March 31, 2001
-----------------------------------------------------------------------------------------------
Business Unit Sales Operating Sales Operating Income
Income (Loss)
-------------------------------------------------------------------------------------------------------------------
Systems $32,974,000 $ 20,000 $34,564,000 $(5,259,000)
Services 23,112,000 1,883,000 19,647,000 991,000
Engineered Products 15,850,000 386,000 6,610,000 (727,000)
-----------------------------------------------------------------------------------------------
Total $71,936,000 $2,289,000 $60,821,000 $(4,995,000)
-----------------------------------------------------------------------------------------------
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 years ended March 31, 2002, 2001 and 2000 were as
follows:
34
Geographic Area 2002 2001 2000
--------------------------------------------------------------
United States $61,442,000 $42,878,000 $37,374,000
United Kingdom 8,642,000 2,893,000 5,652,000
Canada 1,072,000 5,107,000 8,617,000
Other International 780,000 9,943,000 3,950,000
--------------------------------------------------------------
Total $71,936,000 $60,821,000 $55,593,000
--------------------------------------------------------------
As of March 31, 2002, approximately 68% of the Company's accounts and
retainages receivable were due from companies in the power industry and 25% were
due from companies in the pulp and paper industry. Due to the nature of the
Company's business, in any given fiscal year a significant portion of Company
revenues may be derived from a single customer or contract. Three customers
accounted for more than 57% of the Company's sales in 2002; two customers
accounted for more than 31% of the Company's sales in 2001; and one customer
accounted for more than 10% of the Company's sales in fiscal 2000. The Company's
relationship with American Electric Power through its alliance agreement
resulted in all of the fiscal 2002 revenues in the Engineered Products Business
Unit. While EEC expects to add new customers within that business unit in fiscal
2003, the termination of the relationship with American Electric Power could
have a material adverse effect on the Company's operations.
Note 10
-------
Quarterly and Selected Financial Data [Unaudited]
Fiscal year 2002 quarters ended 3/31/2002 12/31/2001 9/30/2001 6/30/2001
------------ ----------- ----------- -----------
Sales $ 16,241,000 $20,153,000 $18,655,000 $16,887,000
Gross profit 1,971,000 2,610,000 2,024,000 1,752,000
Net income 127,000 703,000 341,000 305,000
Diluted net income per share (1) $ 0.02 $ 0.10 $ 0.05 $ 0.04
Stock price
High $ 5.450 $ 4.150 $ 4.150 $ 4.700
Low $ 3.650 $ 3.050 $ 2.400 $ 1.950
Fiscal year 2001 quarters ended 3/31/2001 12/31/2000 9/30/2000 6/30/2000
------------ ----------- ----------- -----------
Sales $ 17,345,000 $14,799,000 $12,218,000 $16,459,000
Gross profit (loss) 1,668,000 1,430,000 (4,243,000) 1,159,000
Net income (loss) 161,000 17,000 (5,970,000) (468,000)
Diluted net income (loss) per share (1) $ 0.02 $ 0.00 ($0.84) ($0.07)
Stock price
High $ 2.310 $ 2.375 $ 2.375 $ 2.375
Low $ 1.250 $ 1.125 $ 1.125 $ 1.125
(1) Due to rounding, the accumulation of the quarterly results may not equal
year end totals.
35
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 accounting
principles generally accepted in the United States. 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,
2002.
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
accounting principles generally accepted in the United States. 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/ J. L. Sams /s/ Lawrence Rychlak
- ---------------------- -------------------------
J.L. Sams Lawrence Rychlak
President and Chief Executive Officer Senior Vice President and
Chief Financial Officer
36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders 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,
2002 and 2001, and the related consolidated statements of operations,
stockholders' investment (deficit) and cash flows for the years in the period
ended March 31, 2002, 2001, and 2000. 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 auditing standards generally accepted
in the United States. 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, 2002 and 2001, and the results of
their operations and their cash flows for each of the years in the period ended
March 31, 2002, 2001, and 2000 in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
Baltimore, Maryland
May 15, 2002
37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 2002 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 2002 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, 2002, 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 2002 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
Equity Compensation Plan Information
------------------------------------
--------------------------------------------------------------------------------------------------------------
Number of securities
to be issued upon Weighted average Number of securities
exercise of exercise price of remaining available for
Plan category outstanding options, outstanding options, future issuance
warrants and rights warrants and rights
--------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by 448,000 $2.82 per share 229,000
security holders
--------------------------------------------------------------------------------------------------------------
Equity compensation plans not approved None None None
by security holders
--------------------------------------------------------------------------------------------------------------
Total 448,000 $2.82 per share 229,000
--------------------------------------------------------------------------------------------------------------
The other information required by this item is incorporated herein by
reference to the Registrant's 2002 Proxy Statement to be filed with the
Securities and Exchange Commission, under the heading "Security Ownership."
38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the Registrant's 2002 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."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements - see Index to Financial Statements and Financial
Statement Schedules on page 19 of this Form 10K.
Page Number
in 10-K
2. Financial Statement Schedules:
Report of Independent Public Accountants on Schedules 43
Valuation and Qualifying Accounts for the years ended
March 31, 2002, 2001, and 2000 (Schedule II) 44
3. Exhibits - The following Exhibits are filed herewith unless otherwise
indicated:
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).
39
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).
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, 1998).
10.6(g) - Second Amendment to Security Agreement,Third Amendment to
Line of Credit Promissory Note, Fourth Amendment to Revolving
Credit and Letter of Credit Agreement dated August 31, 1999
between Registrant and Mercantile Safe Deposit and Trust
Company (incorporated by reference to the Registrant's Form
10-Q filed with the Commission on November 12, 1999.)
10.6(h) - Fourth Amendment to Line of Credit Promissory Note and Fifth
Amendment to Revolving
40
Credit and Letter of Credit Agreement dated May 18, 2000 and
Patent Security Agreement and Trademark Security Agreement
dated June 30, 2000 between the Registrant and Mercantile Safe
Deposit and Trust Company (incorporated by reference to the
Registrant's Form 10-Q filed with the Commission on August 14,
2000).
10.6(i) - Notices of modification to the Fourth Amendment to the
Revolving Credit and Letter of Credit Agreement dated August
31, 1999 and the Fifth Amendment to the Revolving Credit and
Letter of Credit Agreement dated May 18, 2000 between the
Registrant and Mercantile Safe Deposit and Trust Company
(incorporated by reference to the Registrant's Form 10-Q
filed with the Commission on November 20, 2000).
10.6(j) - Letter Amendment dated May 31, 2001 to Revolving Credit and
Letter of Credit Agreement between the Registrant and
Mercantile Safe Deposit and Trust Company dated November 24,
1993 (incorporated by reference to Form 10-K filed with the
Commission on June 25, 2001).
10.6(k) - Letter Amendment dated March 11, 2002 to Revolving Credit and
Letter of Credit Agreement between the Registrant and
Mercantile Safe Deposit and Trust Company dated November 24,
1993.
10.8 - The Registrant's 1998 Stock Option Plan (incorporated by
reference to Form 10-K filed with the Commission on June 25,
1999).
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 - Employment Agreement dated February 25, 2000 between Registrant
and J. L. Sams, filed herewith (incorporated by reference to
Form 10-K filed with the Commission on June 25, 2001).
10.12 - Separation and Non-Competition Agreement dated February 25,
2000 between Registrant and E. H. Verdery, (incorporated by
reference to Form 10-K filed with the Commission on June 28,
2000.)
10.13 - Separation, Release, and Non-Competition Agreement dated April
17, 2000 between Registrant and S. M. Dunseith, (incorporated
by reference to Form 10-K filed with the Commission on June 28,
2000.)
11 - Statement Regarding Computation of Income per Share, filed
herewith.
21 - Subsidiaries of the Registrant (incorporated by reference to
Form 10-K filed with the Commission on June 26, 1996.)
23.1 - Consent of Arthur Andersen LLP
99.9 - Letter to the SEC regarding representations made by Arthur
Andersen LLP
b) Reports on Form 8-K - No Reports on Form 8-K were filed for the quarter ended
March 31, 2002.
All other schedules have been omitted, since the required information is
included in the consolidated financial statements, including the notes hereto,
or the circumstances requiring inclusion of such schedules are not present.
41
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/ Lawrence Rychlak
- -------------------------------------------------
Lawrence Rychlak
Senior Vice President and Chief 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/ John L. Sams June 14, 2002
- ------------------------------------------------- -------------
John L. Sams Date
President and Chief Executive Officer
/s/ Joseph Duffy June 14, 2002
- ------------------------------------------------- -------------
Joseph Duffy Date
Director
/s/ Richard E. Hug June 14, 2002
- ------------------------------------------------- -------------
Richard E. Hug Date
Director
/s/ Barry Koh June 14, 2002
- ------------------------------------------------- -------------
Barry Koh Date
Director
/s/ John C. Nichols June 14, 2002
- ------------------------------------------------- -------------
John C. Nichols Date
Director and Secretary
/s/ F. Bradford Smith June 14, 2002
- ------------------------------------------------- -------------
F. Bradford Smith Date
Director
/s/ Samuel T. Woodside June 14, 2002
- ------------------------------------------------- -------------
Samuel T. Woodside Date
Director
42
Schedule I
Report of Independent Public Accountants on Schedules
To the Board of Directors and Stockholders of Environmental Elements
Corporation:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Environmental Elements
Corporation and subsidiaries in this Form 10-K, and have issued our report
thereon dated May 15, 2002. Our audits were made for the purpose of forming an
opinion on the consolidated financial statements taken as a whole. Schedule II-
Valuation and Qualifying Accounts 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.
/s/ Arthur Andersen LLP
Baltimore, Maryland,
May 15, 2002
43
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 2002, 2001 AND 2000
Allowance for Reserve for
Doubtful Accounts Restructuring
------------------- --------------------
Balance, March 31, 1999 $ 221,000
Charged (credited) to profit and loss 112,000 $ 1,185,000
(Deductions) additions (4,000) -
------------------- --------------------
Balance, March 31, 2000 329,000 1,185,000
Charged (credited) to profit and loss 847,000 -
(Deductions) additions (17,000) (1,185,000)
------------------- --------------------
Balance, March 31, 2001 1,159,000 -
Charged (credited) to profit and loss 145,000 -
(Deductions) additions (594,000) -
------------------- --------------------
Balance, March 31, 2002 $ 710,000 $ -
=================== ====================
44
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(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).
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
45
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, 1998).
10.6(g) - Second Amendment to Security Agreement,Third Amendment to
Line of Credit Promissory Note, Fourth Amendment to Revolving
Credit and Letter of Credit Agreement dated August 31, 1999
between Registrant and Mercantile Safe Deposit and Trust
Company (incorporated by reference to the Registrant's Form
10-Q filed with the Commission on November 12, 1999.)
10.6(h) - Fourth Amendment to Line of Credit Promissory Note and Fifth
Amendment to Revolving Credit and Letter of Credit Agreement
dated May 18, 2000 and Patent Security Agreement and Trademark
Security Agreement dated June 30, 2000 between the Registrant
and Mercantile Safe Deposit and Trust Company (incorporated by
reference to the Registrant's Form 10-Q filed with the
Commission on August 14, 2000).
10.6(i) - Notices of modification to the Fourth Amendment to the
Revolving Credit and Letter of Credit Agreement dated August
31, 1999 and the Fifth Amendment to the Revolving Credit and
Letter of Credit Agreement dated May 18, 2000 between the
Registrant and Mercantile Safe Deposit and Trust Company
(incorporated by reference to the Registrant's Form 1-Q filed
with the Commission on November 20, 2000).
10.6(j) - Letter Amendment dated May 31, 2001 to Revolving Credit and
Letter of Credit Agreement between the Registrant and
Mercantile Safe Deposit and Trust Company dated November 24,
1993 (incorporated by reference to Form 10-K filed with the
Commission
46
on June 25, 2001).
10.6(k) - Letter Amendment dated March 11, 2002 to Revolving Credit and
Letter of Credit Agreement between the Registrant and
Mercantile Safe Deposit and Trust Company dated November 24,
1993.
10.8 - The Registrant's 1998 Stock Option Plan (incorporated by
reference to Form 10-K filed with the Commission on June 25,
1999.)
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 - Employment Agreement dated February 25, 2000 between Registrant
and J. L. Sams, filed herewith (incorporated by reference to
Form 10-K filed with the Commission on June 25, 2001).
10.12 - Separation and Non-Competition Agreement dated February 25,
2000 between Registrant and E. H. Verdery, (incorporated by
reference to Form 10-K filed with the Commission on June 28,
2000.)
10.13 - Separation, Release, and Non-Competition Agreement dated April
17, 2000 between Registrant and S. M. Dunseith, (incorporated
by reference to Form 10-K filed with the Commission on June
28, 2000.)
11 - Statement Regarding Computation of Income per Share, filed
herewith.
21 - Subsidiaries of the Registrant (incorporated by reference to
Form 10-K filed with the Commission on June 26, 1996.)
23.1 - Consent of Arthur Andersen LLP
99.9 - Letter to the SEC regarding representations made by Arthur
Andersen LLP
47