| 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) |
| Page | ||
| PART I: FINANCIAL INFORMATION |
||
| Item 1. Financial Statements |
||
| 3 | ||
| 4 | ||
| 5 | ||
| 6-10 | ||
| 10-14 | ||
| Item 4.
Controls and Procedures |
14 | |
| PART II: OTHER INFORMATION |
||
| Item 1.
Legal Proceedings |
15 | |
| 15 | ||
| Item 6.
Exhibits and Reports on Form 8-K |
15 | |
| 16 |
| September 30, 2002 |
March 31, 2002 |
|||||||
| (Unaudited) |
||||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ |
146,000 |
|
$ |
371,000 |
| ||
| Restricted cash |
|
461,000 |
|
|
419,000 |
| ||
| Accounts and retainage receivable, net of allowance for doubtful accounts of $731,000 and $710,000,
respectively |
|
8,162,000 |
|
|
10,382,000 |
| ||
| Unbilled contract costs and fees |
|
6,395,000 |
|
|
7,353,000 |
| ||
| Inventories |
|
1,226,000 |
|
|
1,180,000 |
| ||
| Prepaid expenses and other current assets |
|
999,000 |
|
|
801,000 |
| ||
| |
|
|
|
|
| |||
| Total current assets |
|
17,389,000 |
|
|
20,506,000 |
| ||
| |
|
|
|
|
| |||
| Property and equipment: |
||||||||
| Capital lease, building and improvements |
|
7,357,000 |
|
|
7,348,000 |
| ||
| Machinery, equipment, furniture and fixtures |
|
3,074,000 |
|
|
3,157,000 |
| ||
| |
|
|
|
|
| |||
| |
10,431,000 |
|
|
10,505,000 |
| |||
| Less—Accumulated depreciation and amortization |
|
5,780,000 |
|
|
6,271,000 |
| ||
| |
|
|
|
|
| |||
| Property and equipment, net |
|
4,651,000 |
|
|
4,234,000 |
| ||
| |
|
|
|
|
| |||
| Other assets, net |
|
2,647,000 |
|
|
2,980,000 |
| ||
| |
|
|
|
|
| |||
| Total assets |
$ |
24,687,000 |
|
$ |
27,720,000 |
| ||
| |
|
|
|
|
| |||
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT) INVESTMENT |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ |
9,490,000 |
|
$ |
13,699,000 |
| ||
| Billings in excess of contract costs and fees |
|
1,177,000 |
|
|
1,444,000 |
| ||
| Accrued payroll and related expenses |
|
612,000 |
|
|
1,141,000 |
| ||
| Accrued and other current liabilities |
|
2,918,000 |
|
|
2,732,000 |
| ||
| |
|
|
|
|
| |||
| Total current liabilities |
|
14,197,000 |
|
|
19,016,000 |
| ||
| Long-term liabilities: |
||||||||
| Long-term capital lease obligation |
|
1,543,000 |
|
|
1,546,000 |
| ||
| Long-term line of credit |
|
9,991,000 |
|
|
7,968,000 |
| ||
| Other non-current liabilities |
|
673,000 |
|
|
696,000 |
| ||
| |
|
|
|
|
| |||
| Total liabilities |
|
26,404,000 |
|
|
29,226,000 |
| ||
| |
|
|
|
|
| |||
| Commitments and contingencies |
||||||||
| Stockholders’ (deficit) investment: |
||||||||
| Common stock, par value $.01 per share; 20,000,000 shares authorized, 7,246,590 and 7,240,748 shares issued and
outstanding, respectively |
|
72,000 |
|
|
72,000 |
| ||
| Paid-in capital |
|
28,580,000 |
|
|
28,574,000 |
| ||
| Cumulative translation adjustment |
|
(253,000 |
) |
|
(383,000 |
) | ||
| Retained deficit |
|
(30,116,000 |
) |
|
(29,769,000 |
) | ||
| |
|
|
|
|
| |||
| Total stockholders’ (deficit) investment |
|
(1,717,000 |
) |
|
(1,506,000 |
) | ||
| |
|
|
|
|
| |||
| Total liabilities and stockholders’ (deficit) investment |
$ |
24,687,000 |
|
$ |
27,720,000 |
| ||
| |
|
|
|
|
| |||
| Three Months Ended September
30, |
Six Months Ended September
30, |
|||||||||||||||
| 2002 |
2001 |
2002 |
2001 |
|||||||||||||
| Sales |
$ |
9,263,000 |
|
$ |
18,655,000 |
|
$ |
23,577,000 |
|
$ |
35,542,000 |
| ||||
| Cost of sales |
|
7,875,000 |
|
|
16,631,000 |
|
|
21,056,000 |
|
|
31,766,000 |
| ||||
| |
|
|
|
|
|
|
|
|
|
|
| |||||
| Gross Profit |
|
1,388,000 |
|
|
2,024,000 |
|
|
2,521,000 |
|
|
3,776,000 |
| ||||
| |
|
|
|
|
|
|
|
|
|
|
| |||||
| Selling, general and administrative expenses |
|
1,277,000 |
|
|
1,441,000 |
|
|
2,660,000 |
|
|
2,626,000 |
| ||||
| |
|
|
|
|
|
|
|
|
|
|
| |||||
| Operating Income (Loss) |
|
111,000 |
|
|
583,000 |
|
|
(139,000 |
) |
|
1,150,000 |
| ||||
| Interest and other expense, net |
|
(64,000 |
) |
|
(242,000 |
) |
|
(208,000 |
) |
|
(504,000 |
) | ||||
| |
|
|
|
|
|
|
|
|
|
|
| |||||
| Income (Loss) before Income Taxes |
|
47,000 |
|
|
341,000 |
|
|
(347,000 |
) |
|
646,000 |
| ||||
| Provision for income taxes |
|
— |
|
|
— |
|
|
— |
|
|
— |
| ||||
| |
|
|
|
|
|
|
|
|
|
|
| |||||
| Net Income (Loss) |
$ |
47,000 |
|
$ |
341,000 |
|
$ |
(347,000 |
) |
$ |
646,000 |
| ||||
| |
|
|
|
|
|
|
|
|
|
|
| |||||
| Earnings (loss) per share: |
||||||||||||||||
| Basic |
$ |
0.01 |
|
$ |
0.05 |
|
$ |
(0.05 |
) |
$ |
0.09 |
| ||||
| |
|
|
|
|
|
|
|
|
|
|
| |||||
| Diluted |
$ |
0.01 |
|
$ |
0.05 |
|
$ |
(0.05 |
) |
$ |
0.09 |
| ||||
| |
|
|
|
|
|
|
|
|
|
|
| |||||
| Weighted average common shares outstanding: |
||||||||||||||||
| Basic |
|
7,244,470 |
|
|
7,202,245 |
|
|
7,243,371 |
|
|
7,189,358 |
| ||||
| Diluted |
|
7,254,177 |
|
|
7,306,682 |
|
|
7,243,371 |
|
|
7,284,557 |
| ||||
| 2002 |
2001 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net (loss) income |
$ |
(347,000 |
) |
$ |
646,000 |
| ||
| Non-cash items: |
||||||||
| Depreciation and amortization |
|
355,000 |
|
|
460,000 |
| ||
| Effect of changes in operating assets and liabilities: |
||||||||
| Restricted cash |
|
(42,000 |
) |
|
— |
| ||
| Accounts and retainages receivable, net |
|
2,445,000 |
|
|
(7,288,000 |
) | ||
| Unbilled contract costs and fees |
|
1,100,000 |
|
|
5,160,000 |
| ||
| Inventories |
|
116,000 |
|
|
(50,000 |
) | ||
| Prepaid expenses and other current assets |
|
(198,000 |
) |
|
(90,000 |
) | ||
| Accounts payable |
|
(4,220,000 |
) |
|
218,000 |
| ||
| Billings in excess of contract costs and fees |
|
(267,000 |
) |
|
1,549,000 |
| ||
| Accrued payroll and related expenses |
|
(529,000 |
) |
|
233,000 |
| ||
| Accrued and other current liabilities |
|
162,000 |
|
|
(958,000 |
) | ||
| Other non-current liabilities |
|
(23,000 |
) |
|
21,000 |
| ||
| |
|
|
|
|
| |||
| Net cash flows from operating activities |
|
(1,448,000 |
) |
|
(99,000 |
) | ||
| |
|
|
|
|
| |||
| Cash flows from investing activities: |
||||||||
| Purchases of property and equipment |
|
(692,000 |
) |
|
(92,000 |
) | ||
| Acquisition of business assets |
|
(478,000 |
) |
|
— |
| ||
| Effects of changes in other assets |
|
237,000 |
|
|
(287,000 |
) | ||
| |
|
|
|
|
| |||
| Net cash flows from investing activities |
|
(933,000 |
) |
|
(379,000 |
) | ||
| |
|
|
|
|
| |||
| Cash flows from financing activities: |
||||||||
| Net borrowings under line of credit |
|
2,023,000 |
|
|
700,000 |
| ||
| Reduction of long-term capital lease obligation |
|
(3,000 |
) |
|
(3,000 |
) | ||
| Stock options exercised |
|
6,000 |
|
|
80,000 |
| ||
| Change in cumulative translation adjustment |
|
130,000 |
|
|
(61,000 |
) | ||
| |
|
|
|
|
| |||
| Net cash flows from financing activities |
|
2,156,000 |
|
|
716,000 |
| ||
| |
|
|
|
|
| |||
| Net (decrease) increase in cash and cash equivalents |
|
(225,000 |
) |
|
238,000 |
| ||
| Cash and cash equivalents, beginning of period |
|
371,000 |
|
|
366,000 |
| ||
| |
|
|
|
|
| |||
| Cash and cash equivalents, end of period |
$ |
146,000 |
|
$ |
604,000 |
| ||
| |
|
|
|
|
| |||
The interim consolidated financial statements included herein for Environmental Elements Corporation and Subsidiaries (the Company) have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In management’s opinion, the interim financial data presented herein include all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation. Certain reclassifications have been made to prior year balances in order to conform to the current year presentation. Certain information and footnote disclosures normally included in the consolidated
financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Results for interim periods are not necessarily indicative of results to be expected for
the full year. |
Basic earnings per common share was computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period.
Diluted earnings per common share was computed assuming the terms and conditions for the common stock options were met and converted. The difference between the basic and diluted earnings per share, if any, is the dilutive effect of stock options
outstanding. |
In April 2002, the Company terminated its participation in its joint venture in China and created a wholly foreign owned enterprise (WFOE). No additional assets
were required to be invested in the WFOE other than those distributed in connection with the termination of the joint venture. In connection with this transaction, the Company repatriated approximately $262,000 of its joint venture investment which
was in excess of the capital needs of the WFOE. Since its inception, the operations of the WFOE have been included in the accompanying consolidated financial statements. |
In May 2002, the Company acquired the assets of Keepmere Engineering Limited, a provider of repair and maintenance services for power generation and industrial
equipment in the United Kingdom. Based on a preliminary allocation of the $478,000 purchase price, the fair value of assets acquired include $210,000 of tangible assets, $37,000 of customer contracts with an average life of two years, $110,000 of
intellectual property with an average life of ten years and $121,000 of goodwill. The intangible assets are included in other assets in the accompanying consolidated balance sheet. |
The Company’s principal source of liquidity is its bank credit facility which expires on April 1, 2004. That facility provides for secured borrowings of up
to $15,000,000 based upon the Company’s borrowing base, consisting of unbilled contract costs and fees and certain accounts |
receivable reduced by outstanding letters of credit. As of September 30, 2002, due to lowered business activity, the Company’s outstanding debt exceeded
its borrowing base by approximately $1.8 million. The Company’s bank has approved this excess borrowing and has indicated that it will not place any further restrictions on the Company at this time. If the bank changes its position in the
future and enforces stricter limits on the Company’s borrowing levels, the Company could face a significant liquidity problem. |
Under the provisions of the credit facility, the Company must comply with certain financial and other covenants. The financial covenant requires that the
Company earn net income before taxes of $500,000 for the first half of the fiscal year and earn an additional $500,000 for the second half. The bank has waived compliance with this covenant for the first half of the year but the covenant for the
second half of the fiscal year remains in place. Based on current market conditions, the Company may not achieve compliance with the covenant for the second half of the fiscal year and there are no assurances that the bank will waive this compliance
in the future. Although the bank has indicated a willingness to consider future compliance waivers, there is no assurance that any such waivers will be granted. The Company’s independent auditors have informed management that if the Company
becomes non-compliant with its debt covenants and is unable to obtain a waiver from the bank at the end of its fiscal year, the auditors expect to issue a going concern modification within the auditor’s report on the March 31, 2003 financial
statements. |
Project dispute- |
During the first quarter, the Company completed its original work under a fixed price contract to provide the design, engineering and materials for the rebuild
of an existing electrostatic precipitator. The construction component of the project was awarded to a third party. The precipitator is currently performing at levels that meet the requirements of the State emission standards, but at levels below
those specified in the contract. The Company believes that it has fulfilled all of its contractual responsibilities and is working with the customer on a remedy. |
In addition, the Company is involved in a dispute with the construction contractor over liability for certain of the contractor’s alleged cost overruns on
the project and over certain costs incurred by the contractor at the Company’s request. The contractor has unilaterally invoiced the Company $1.8 million for these additional costs, which amount the Company vigorously disputes. The Company has
retained legal counsel and has accrued legal and other costs that it expects to incur to resolve these disputes. |
Patent litigation- |
The Company is the exclusive licensee in the United States of certain patented technology for a urea conversion process known as “Ammonia-on-Demand”
or AOD™. With the approval of its licensor, the Company has granted an end-user sublicense for the
process to American Electric Power Service Corporation and its affiliates. Among the processes competing with the Company’s AOD process is a process patented by EC&C Technologies, Inc. |
On November 30, 2001, EC&C Technologies filed a patent infringement action in the Central District of California against the Company. This action was stayed
pending resolution of related actions initiated by American Electric Power Service Corporation in Ohio. The Ohio |
action was resolved on August 1, 2002, and the California action resumed. |
On October 28, 2002, the Company filed a motion in the California action requesting that the action be dismissed because a necessary party, the user of the
equipment alleged to infringe on EC&C’s patent, is not named in the suit. This motion is pending. |
The Company believes that the AOD technology does not infringe on EC&C’s patents and has obtained what it believes are competent legal opinions to that
effect. The outcome of this matter is not presently determinable. A trial is currently scheduled for March, 2004. |
Amounts paid in cash for interest during the six months ended September 30, 2002 and 2001 were $337,000 and $449,000, respectively. Income taxes paid during the
six month period ended September 30, 2002 totaled $6,000 while no income taxes were paid in the six months ended September 30, 2001. |
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 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 installed APC equipment of the Company’s design and APC and other industrial equipment designed by others. The Engineered Products Business Unit is dedicated to finding additional
technologies and alliances, and currently includes Ammonia-on-Demand (AODTM) technology and international
ventures. |
The segments reported below are the segments of the Company for which separate financial information is available and for which sales and operating income
amounts are evaluated by executive management in deciding how to allocate resources and assess performance. During the prior quarter, the Company refined the criteria that it uses to determine the segment in which a particular project should be
managed and reported. The effect of this refinement has been reflected in the disclosure of prior period information in this report. The Company does not allocate assets to the individual operating segments and there are no intercompany sales
transactions between the three operating segments. |
| 3 months ended 9/30/02 |
3 months ended 9/30/01 |
|||||||||||||
| Business Unit |
Sales |
Operating Income (Loss) |
Sales |
Operating Income (Loss) |
||||||||||
| Systems |
$ |
2,969,000 |
$ |
455,000 |
|
$ |
11,536,000 |
$ |
27,000 |
| ||||
| Services |
|
5,184,000 |
|
(225,000 |
) |
|
6,038,000 |
|
894,000 |
| ||||
| Engineered Products |
|
1,110,000 |
|
(119,000 |
) |
|
1,081,000 |
|
(338,000 |
) | ||||
| |
|
|
|
|
|
|
|
|
| |||||
| Total |
$ |
9,263,000 |
$ |
111,000 |
|
$ |
18,655,000 |
$ |
583,000 |
| ||||
| |
|
|
|
|
|
|
|
|
| |||||
| 6 months ended 9/30/02 |
6 months ended 9/30/01 |
|||||||||||||
| Business Unit |
Sales |
Operating Income (Loss) |
Sales |
Operating Income (Loss) |
||||||||||
| Systems |
$ |
8,845,000 |
$ |
(310,000 |
) |
$ |
19,533,000 |
$ |
47,000 |
| ||||
| Services |
|
10,600,000 |
|
172,000 |
|
|
11,837,000 |
|
1,385,000 |
| ||||
| Engineered Products |
|
4,132,000 |
|
(1,000 |
) |
|
4,172,000 |
|
(282,000 |
) | ||||
| |
|
|
|
|
|
|
|
|
| |||||
| Total |
$ |
23,577,000 |
$ |
(139,000 |
) |
$ |
35,542,000 |
$ |
1,150,000 |
| ||||
| |
|
|
|
|
|
|
|
|
| |||||
| Three months ended September 30, | ||||||
| Geographic Area |
2002 |
2001 | ||||
| United States |
$ |
7,821,000 |
$ |
14,079,000 | ||
| United Kingdom |
|
1,052,000 |
|
3,894,000 | ||
| Canada |
|
194,000 |
|
131,000 | ||
| Other International |
|
196,000 |
|
551,000 | ||
| |
|
|
| |||
| Total |
$ |
9,263,000 |
$ |
18,655,000 | ||
| |
|
|
| |||
| Six months ended September 30, | ||||||
| Geographic Area |
2002 |
2001 | ||||
| United States |
$ |
21,272,000 |
$ |
26,489,000 | ||
| United Kingdom |
|
1,557,000 |
|
7,370,000 | ||
| Canada |
|
352,000 |
|
1,022,000 | ||
| Other International |
|
396,000 |
|
661,000 | ||
| |
|
|
| |||
| Total |
$ |
23,577,000 |
$ |
35,542,000 | ||
| |
|
|
| |||
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances
from non-owner sources. The Company’s comprehensive income (loss) for the six months ended September 30, 2002 and 2001 is as follows: |
| 2002 |
2001 |
|||||||
| Net Income (Loss) as Reported |
$ |
(347,000 |
) |
$ |
646,000 |
| ||
| Effect of Foreign Currency Translation |
|
130,000 |
|
|
(61,000 |
) | ||
| |
|
|
|
|
| |||
| Comprehensive Net Income (Loss) |
$ |
(217,000 |
) |
$ |
585,000 |
| ||
| |
|
|
|
|
| |||
The following information should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in this
Quarterly Report and the audited Financial Statements and Management’s Discussion and Analysis contained in the Company’s Form 10-K for the fiscal year ended March 31, 2002. |
GENERAL |
The Company designs, supplies and services systems and equipment and provides aftermarket products that enable its customers to comply with regulations limiting
particulate and gaseous emissions. The Company generally is contractually responsible for all phases of design, fabrication and, if included in the scope of the Company’s contract, field construction of its equipment and systems. The Company
faces substantial competition in each of its principal markets. Many contracts for the Company’s large-scale systems design and construction projects are awarded through competitive bidding and are undertaken on a fixed-price basis. Like others
in its industry, the Company relies on outside suppliers, manufacturers and fabricators to supply parts and components in accordance with the Company’s designs and specifications. When the Company’s scope of work includes installation of
equipment, the Company selects and supervises subcontractors for this work. The Company’s successful completion of its contractual obligations is usually determined by performance testing of its systems. The Company’s services and
maintenance work is done primarily on a time and material basis and also relies on outside subcontractors and suppliers. This type of work generally is of a shorter duration (1 to 3 months) and does not include performance testing of the service or
repairs. |
CRITICAL ACCOUNTING POLICIES |
Long-Term Contracts |
The Company records sales from long-term contracts using the percentage-of-completion method. Under this method, the Company recognizes as sales that portion of
the total contract price which the cost of work completed bears to the estimated total cost of the work covered by |
the contract. Because contracts may extend over more than one fiscal period, revisions of cost and profit estimates are made periodically and are reflected in
the accounting period in which they are determined. If the estimate of total costs on a contract indicates a loss, the total anticipated loss is recognized immediately. Revenues for spare parts are recognized when those parts are shipped to the
customer. |
Unbilled contract costs and fees represent revenues recognized in excess of amounts billed. All unbilled contract costs and fees are expected to be collected
within the next fiscal year. Billings in excess of contract costs and fees represent billings in excess of revenues recognized. The Company provides for warranty expenses on contracts based on estimates that take into account historical experience.
Warranty expenses and related accruals are included in cost of sales and in accrued and other current liabilities, respectively, in the accompanying consolidated financial statements. |
Inventories |
Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist principally of purchased and fabricated parts held for use in
contracts and as spare parts. |
RESULTS OF OPERATIONS |
The following table sets forth the percentage relationships to sales of selected items in the Company’s consolidated statements of operations (unaudited)
for the three and six months ended September 30, 2002 and 2001: |
| Three months ended September 30, |
Six months ended September 30, |
|||||||||||
| 2002 |
2001 |
2002 |
2001 |
|||||||||
| Sales |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% | ||||
| Cost of sales |
85.0 |
|
89.2 |
|
89.3 |
|
89.4 |
| ||||
| |
|
|
|
|
|
|
| |||||
| Gross profit |
15.0 |
|
10.8 |
|
10.7 |
|
10.6 |
| ||||
| Selling, general and administrative expenses |
13.8 |
|
7.7 |
|
11.3 |
|
7.4 |
| ||||
| |
|
|
|
|
|
|
| |||||
| Operating income (loss) |
1.2 |
% |
3.1 |
% |
(0.6 |
)% |
3.2 |
% | ||||
| |
|
|
|
|
|
|
| |||||
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED
TO |
THREE MONTHS ENDED SEPTEMBER 30, 2001 |
Sales for the three months ended September 30, 2002 decreased 50.3% from the same period last year, from $18,655,000 to $9,263,000, with the Systems business
unit accounting for most of the decrease. Its revenues decreased 74.3% from those of the same period last year. The well publicized slowdown and liquidity issues facing the utility industry during the past nine months have caused the deferral of
several large utility air pollution control projects, while generally soft product demand in the pulp and paper industry has caused further deferral of projects normally available to the Company. This spending slowdown has also been evident to a
lesser degree in the Services business unit where revenues decreased 14.1% as compared with the same period last year. The Engineered Products business unit reported a 2.7% increase in revenues. |
As a percentage of sales, cost of sales decreased significantly to 85.0% in the current period from the prior year’s 89.2%. As a result, the Company’s
gross profit percentage increased to 15.0% from 10.8% in the prior period. The reduced cost of sales percentage and the corresponding increase in gross profit is attributable to the closeout of several projects whose final profit margins were
greater than previously estimated. These adjustments totaled approximately $866,000 for the three months ended September 30, 2002. |
Selling, general and administrative expenses increased as a percentage of sales to 13.8% from 7.7% as a result of the lowered revenues for the quarter. However,
total dollars spent on this expense category decreased from $1,441,000 in 2001 to $1,277,000. |
In response to its lower revenues, the Company initiated a reduction in force in October 2002. This action will reduce the Company’s annual salary expense
by approximately $1.2 million and will be evident in the fourth quarter, as severance costs will offset the reductions in salary expense in the third quarter. |
For the reasons set forth above, the Company earned operating income of $111,000 for the three months ended September 30, 2002, compared to $583,000 for the
prior year. |
Interest and other expense, net of interest and other income, decreased 73.6%, or $178,000, to $64,000 from $242,000 due to the recognition of a gain on the
sale of patent, a royalty payment from a foreign licensee and reduced interest expense due to lower interest rates. |
The Company earned income before income taxes of $47,000 in the current period, compared to $341,000 for the prior period. |
There was no provision for income taxes in either quarter reported because the effects of the Company’s net operating loss carryforwards from prior years
substantially eliminated taxes on current year income. |
SIX MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
|
SIX MONTHS ENDED SEPTEMBER 30, 2001 |
Sales for the six months ended September 30, 2002 decreased 33.7% from the same period last year from $35,542,000 to $23,577,000, with the Systems business unit
accounting for most of the decrease. Its revenues decreased 54.7% from those of the same period last year due to the cancellation and deferral of the large projects of many of the Company’s utility and pulp and paper customers. Weakened demand
coupled with an overall soft national economy has led several of the Company’s customers to defer spending that had been planned for 2002. This spending slowdown was also evident to a lesser degree in the Services and Engineered Products
business units where revenues decreased 10.5% and 1.0%, respectively, for the six months ended September 30, 2002. |
As a percentage of sales, cost of sales decreased slightly to 89.3% in the current period from the prior year’s 89.4%. The impact of the positive
adjustment to cost of sales in the second quarter as discussed in the previous section was offset by the effect of an $802,000 negative adjustment in the first quarter to effect for the estimated loss on a specific project. As a result, the
Company’s gross profit percentage remained essentially unchanged at 10.7% for 2002 as compared to 10.6% in the prior period. |
Selling, general and administrative expenses increased as a percentage of sales to 11.3% from 7.4% but were comparable in terms of absolute dollars.
|
For the reasons set forth above, the Company recorded an operating loss of $139,000 for the six months ended September 30, 2002, compared to an operating profit
of $1,150,000 for the prior period. |
Interest and other expense, net of interest and other income, decreased 58.7%, from $504,000 in 2001, to $208,000 for the six months ended September 30, 2002.
The decrease was due to the recognition of a gain on the sale of patent, a royalty payment from a foreign licensee and reduced interest expense due to lower interest rates. |
The Company recorded a net loss before income taxes of $347,000 for the six months ended September 30, 2002, compared to income before income taxes of $646,000
in the prior period. |
There was no provision for income taxes in either period reported because the effects of the Company’s net operating loss carryforwards from prior years
substantially eliminated taxes on current year income. |
Liquidity and Capital Resources |
The Company seeks to arrange its contracts so as to minimize its investment in net working capital, but the amount of this investment varies with the payment
terms and stage of completion of its contracts. (“Net working capital invested in contracts” consists of accounts and retainages receivable and unbilled contract costs and fees, less accounts payable and less billings in excess of contract
costs and fees.) Net working capital invested in contracts was $3.9 million at September 30, 2002 and $2.6 million at March 31, 2002. The Company also requires capital to the extent that its net cash flows from operating or investment activities are
negative. |
Cash and cash equivalents decreased by $225,000 and borrowings under the Company’s line of credit increased by $2.0 million during the six months ended
September 30, 2002. Significant investments which required an investment of cash during the six months ended September 30, 2002 included the acquisition of the assets of Keepmere Engineering Limited for $478,000, and investments in leasehold
improvements and equipment totaling $692,000. The conversion of the Company’s investment in its joint venture in China to a wholly foreign owned enterprise provided an infusion of cash of $262,000. |
The Company’s principal source of liquidity is its bank credit facility which expires on April 1, 2004. That facility provides for secured borrowings of up
to $15,000,000 based upon the Company’s borrowing base, consisting of unbilled contract costs and fees and certain accounts receivable reduced by outstanding letters of credit. As of September 30, 2002, due to lowered business activity, the
Company’s outstanding debt exceeded its borrowing base by approximately $1.8 million. The Company’s bank has approved this excess borrowing and has indicated that it will not place any further restrictions on the Company at this time. If
the bank changes its position in the future and enforces stricter limits on the Company’s borrowing levels, the Company could face a significant liquidity problem. |
Under the provisions of the credit facility, the Company must comply with certain financial and other covenants. The financial covenant requires that the
Company earn net income before income taxes of $500,000 for the first half of the fiscal year and earn an additional $500,000 for the second half. The bank has waived compliance with this covenant for the first half of the fiscal year but the
covenant for the second half remains in place. Based on current market conditions, the Company may not achieve compliance with the covenant for the second half of the fiscal year and there are no assurances that the bank will waive this compliance
in the future. Although the bank has indicated a willingness to consider future compliance waivers, there is no assurance that any such waivers will be granted. The Company’s independent auditors have informed management that if the Company
becomes non-compliant with its debt covenants and is unable to obtain a waiver from the bank at the end of its fiscal year, the auditors expect to issue a going concern modification within the auditor’s report on the March 31, 2003 financial
statements. |
At September 30, 2002, the amount outstanding under the bank credit facility was $10.0 million. |
Due to declines in the equity markets, the fair value of the Company’s pension fund assets has decreased since December 31, 2001, the date of the most
recent actuarial review of the pension plan. In the absence of a significant stock market recovery prior to December 31, 2002, in accordance with SFAS No. 87, “Employers’ Accounting for Pensions”, the Company would record a minimum
pension liability adjustment at March 31, 2003. This would result in a direct charge to stockholders’ equity and would not impact net income, but would be included in other comprehensive income. The charge to stockholders’ equity is not
presently determinable, but based upon current market valuations would be in the range of $3-$5 million. |
The Company’s backlog of unfilled orders at September 30, 2002 decreased 33% to $19.1 million from $28.6 million at March 31, 2002. For the six months
ended September 30, 2002, the Company booked approximately $15.6 million of new orders, but several projects that were booked in prior periods had their project scopes reduced by a total of $1.6 million. Thus, the net bookings for the six months
ended September 30, 2002 decreased 69% from last year, to $14 million from $45.1 million. |
Within 90 days prior to the date of this report, the Company carried out, under the supervision and with the participation of the Company’s management,
including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the
Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information which is required to be included in the periodic
reports that the Company must file with the Securities and Exchange Commission. |
There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation. |
(a) |
The stockholders ratified the selection of Ernst & Young LLP to serve as independent public accountants of the Company for the fiscal year ending March 31,
2003. The matter was approved by a vote of 6,781,425 for, 5,375 against, and 4,500 abstaining. 451,290 shares were not voted. |
(b) |
The stockholders elected Samuel T. Woodside (6,774,651 for and 16,649 withheld), and F. Bradford Smith (6,730,244 for and 61,056 withheld) as Class II directors
for a three-year term expiring at the 2005 Annual Meeting or until their successors are duly elected and qualified. 451,290 shares were not voted for both Mr. Woodside and Mr. Smith. The names of all other directors whose terms of office as
directors continued after the meeting are as follows: Richard E. Hug, John L. Sams, Barry Koh, John C. Nichols, and Joseph J. Duffy. |
| /s/ Lawrence Rychlak | ||
| Lawrence Rychlak Senior Vice
President and Chief Financial Officer | ||