SEC Filing | CECO Environmental

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended MARCH 31, 1999 Commission file number 0-7099 -------------- ------------- CECO ENVIRONMENTAL CORP. - -------------------------------------------------------------------------------- NEW YORK 13-2566064 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 505 UNIVERSITY AVENUE, SUITE 1400, TORONTO, ONTARIO, CANADA M5G 1X3 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 416-593-6543 ---------------- - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. 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 and (2) has been subject to such filing requirements for the past 90 days. X Yes No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the close of the period covered by this report. Class: COMMON, PAR VALUE $.01 PER SHARE -------------------------------- OUTSTANDING at March 31, 1999 8,388,816

CECO ENVIRONMENTAL CORP. ------------------------ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 MARCH 31, 1999 - -------------------------------------------------------------------------------- INDEX ----- Part I - Financial Information: Condensed consolidated balance sheet as of March 31, 1999 and December 31, 1998 2 Condensed consolidated statement of operations for the three-month periods ended March 31, 1999 and 1998 3 Condensed consolidated statement of cash flows for the three-month periods ended March 31, 1999 and 1998 4 & 5 Notes to condensed consolidated financial statements 6 to 8 Management's discussion and analysis of the financial condition and results of operations 9 to 11 Signature 12 - -1-

CECO ENVIRONMENTAL CORP. ------------------------ CONDENSED CONSOLIDATED BALANCE SHEET (unaudited) - -------------------------------------------------------------------------------- MARCH 31, DECEMBER 31, 1999 1998 ----------- ----------- ASSETS Current assets: Cash $ 361,795 $ 364,648 Marketable securities - trading 894,155 695,944 Accounts receivable 2,941,859 4,068,640 Inventories 628,814 541,315 Costs and estimated earnings in excess of billings on uncompleted contracts 958,797 226,504 Due from former owners of Busch 244,146 147,939 Investment in sales-type lease 95,400 95,400 Prepaid expenses and other current assets 482,021 344,961 Deferred income taxes 84,500 84,500 ----------- ----------- Total current assets 6,691,487 6,569,851 Property and equipment, net 2,043,943 2,062,452 Goodwill, net 4,989,262 5,169,353 Other intangible assets, at cost, net 1,223,588 1,270,780 Investment in sales-type lease 310,050 333,900 Other assets 402,426 -- Deferred income taxes 68,500 68,500 ----------- ----------- $15,729,256 $15,474,836 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term obligations $ 2,000,000 $ 1,200,000 Current portion of long-term debt 345,074 385,149 Accounts payable and accrued expenses 3,153,217 3,107,227 Billings in excess of costs and estimated earnings on uncompleted contracts 1,114,136 1,174,427 Unearned income 73,650 78,000 Income taxes payable 20,555 253,100 ----------- ----------- Total current liabilities 6,706,632 6,197,903 Long-term debt, less current portion 1,306,153 1,569,713 ----------- ----------- Total liabilities 8,012,785 7,767,616 ----------- ----------- Minority interest 130,836 149,941 ----------- ----------- Shareholders' equity: Preferred stock, $.01 par value; 10,000,000 shares authorized and none issued -- -- Common stock, $.01 par value; 100,000,000 shares authorized and 8,388,816 shares issued 83,888 83,888 Capital in excess of par value 10,139,013 10,139,013 Accumulated deficit ( 2,288,597) ( 2,316,953) ----------- ----------- 7,934,304 7,905,948 Less treasury stock, at cost ( 348,669) ( 348,669) ----------- ----------- Net shareholders' equity 7,585,635 7,557,279 ----------- ----------- $15,729,256 $15,474,836 =========== =========== See accompanying notes to condensed consolidated financial statements. - -2-

CECO ENVIRONMENTAL CORP. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited) - -------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, 1999 1998 ---------- ---------- Revenues: Net sales - products $2,529,846 $2,414,989 Contract revenues 2,242,811 3,331,743 ---------- ---------- 4,772,657 5,746,732 ---------- ---------- Costs and expenses: Cost of revenues - products 1,284,646 1,285,010 Cost of revenues - contracts 1,496,715 2,209,429 Selling and administrative 1,493,780 1,710,800 Depreciation and amortization 143,024 133,224 ---------- ---------- 4,418,165 5,338,463 ---------- ---------- Income from continuing operations before investment income and interest expense 354,492 408,269 Investment income 38,179 16,932 Interest expense ( 75,498) ( 46,698) ---------- ---------- Income from continuing operations before provision for income taxes 317,173 378,503 Provision for income taxes 143,560 165,000 ---------- ---------- Income from continuing operations before minority interest 173,613 213,503 Minority interest ( 8,330) ( 30,091) ---------- ---------- Income from continuing operations 165,283 183,412 Discontinued operations: Loss from operations of discontinued division, net of income tax benefit and minority interest ( 124,445) ( 47,576) Loss from disposal of discontinued division ( 12,482) -- ---------- ---------- ( 136,927) ( 47,576) ---------- ---------- Net income $ 28,356 $ 135,836 ========== ========== Net income per share, basic and diluted: Income from continuing operations $ .02 $ .02 Loss from discontinued operations ( .02) -- ---------- ---------- Net income per share, basic and diluted $ -- $ .02 ========== ========== Weighted average number of common shares outstanding: Basic 8,250,896 8,156,973 ========== ========== Diluted 9,039,987 8,547,598 ========== ========== See accompanying notes to condensed consolidated financial statements. - -3-

CECO ENVIRONMENTAL CORP. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) - -------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, 1999 1998 ------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash flows from operating activities: Net income $ 28,356 $ 135,836 Adjustments to reconcile net income to net cash (used in) operating activities: Loss from discontinued operations 136,927 47,576 Depreciation and amortization 113,860 105,264 Unearned income ( 4,350) - Goodwill amortization - CECO Filters, Inc. 29,164 27,960 Minority interest 8,330 30,091 Gain on sale of marketable securities, trading ( 43,868) - (Increase) decrease in operating assets: Accounts receivable 591,099 184,357 Inventories ( 87,499) 139,166 Costs and estimated earnings in excess of billings on uncompleted contracts (765,681) ( 255,742) Due from former owners of Busch Co. ( 96,207) - Investment in sales-type lease 23,850 - Prepaid expenses and other current assets (136,230) ( 95,029) Prepaid and refundable income taxes - 94,200 Other assets (232,433) - Purchases of marketable securities (353,630) ( 876,155) Proceeds from sales of marketable securities 199,287 859,806 Increase (decrease) in operating liabilities: Accounts payable and accrued expenses 133,312 1,017,592 Billings in excess of costs and estimated earnings on uncompleted contracts 85,072 (1,506,923) Accrued income taxes (232,545) - ------- --------- Net cash (used in) continuing operations (603,186) ( 92,001) Net cash provided by (used in) discontinued operations 195,774 ( 409,546) ------- --------- Net cash (used in) operating activities (407,412) ( 501,547) ------- --------- Cash flows from investing activities: Additions to property and equipment and intangible assets ( 45,836) ( 43,809) Capital expenditures of discontinued operations ( 2,356) ( 21,355) Acquisition of additional shares of CECO Filters, Inc. ( 42,015) ( 10,363) Acquisition of IFM, net of cash acquired, comprised of the following: Excess of current liabilities over current assets, net of cash acquired - 169,756 Equipment - ( 125,132) Goodwill - ( 144,493) ------- --------- Net cash (used in) investing activities ( 90,207) ( 175,396) ------- --------- CONTINUED ON NEXT PAGE See accompanying notes to condensed consolidated financial statements. - -4-

CECO ENVIRONMENTAL CORP. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED (unaudited) - -------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, 1999 1998 ---------- ---------- Cash flows from financing activities: Proceeds from short-term obligations $2,286,014 $ - Net borrowings (repayments) of short-term obligations ( 1,486,014) 798,524 Proceeds from long-term debt 1,412,155 - Repayments of long-term debt and capital lease obligation ( 1,717,389) ( 85,909) Due to former owners of Busch Co. - ( 495,516) ---------- ---------- Net cash provided by financing activities 494,766 217,099 ---------- ---------- Net increase (decrease) in cash ( 2,853) ( 459,844) Cash at beginning of period 364,648 847,827 ---------- ---------- Cash at end of period $ 361,795 $ 387,983 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 75,498 $ 46,698 ---------- ---------- Income taxes $ 349,960 $ 34,800 ---------- ---------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES On March 31, 1999, the Company sold the contracts and customer list of a division in exchange for a non-interest bearing promissory note with a present value of $174,493. - -5-

CECO ENVIRONMENTAL CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - -------------------------------------------------------------------------------- 1. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position as of March 31, 1999 and the results of operations and cash flows for the three-month periods ended March 31, 1999 and 1998. The results of operations for the three-month period ended March 31, 1999 are not necessarily indicative of the results to be expected for the full year. 2. Discontinued Operations On March 31, 1999, the Company's subsidiary, CECO Filters, Inc. ("CECO"), sold the contracts and customer list of U.S. Facilities Management Arizona division for $250,000. The sales price was paid through a non-interest bearing promissory note from the purchaser. Monthly principal payments of $1,500 commence October 1, 1999 with a balloon payment for the balance due on April 1, 2007. The following is a summary of operating activity for this discontinued division: THREE MONTHS ENDED MARCH 31, 1999 1998 -------- -------- Revenues $387,656 $908,103 Cost of revenues ( 493,439) ( 819,526) Selling and administrative ( 117,554) ( 170,230) Depreciation and amortization ( 7,998) ( 8,485) -------- -------- Operating loss ( 231,335) ( 90,138) Income tax benefit 97,500 36,000 Minority interest 9,390 6,562 -------- -------- Loss from operations of discontinued division ($124,445) ($ 47,576) ======= ======== The following is a summary of the loss recorded from the disposal of this division: Net present value note receivable $174,493 Impairment of goodwill ( 166,932) Disposition costs ( 20,043) -------- Loss from disposal of discontinued division ($ 12,482) ======== The following is a summary of the balance sheet for this discontinued division: MARCH 31, DECEMBER 31, 1999 1998 -------- -------- Current assets $375,056 $1,332,463 Property and equipment, net 207,797 233,740 Other assets 169,993 166,932 Current liabilities ( 504,238) ( 992,384) ------- ---------- Net assets of discontinued operations $248,608 $ 740,751 ======= ========== - -6-

CECO ENVIRONMENTAL CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (unaudited) - -------------------------------------------------------------------------------- 3. Inventories consisted of the following: MARCH 31, DECEMBER 31, 1999 1998 Raw materials $464,050 $380,477 Finished goods 54,606 46,742 Parts for resale 110,158 114,096 ------- ------- $628,814 $541,315 ======= ======= 4. Investment in CECO Filters, Inc. The Company acquired 51,000 shares of CECO's common stock on the open market for the amount of $42,014 during January, 1999. As of March 31, 1999, the Company owned 93.6% of CECO's common stock. Summarized financial information of CECO as of and for its three months ended March 31, 1999, is as follows: Financial position: Working capital (deficiency) ($ 839,539) ============ Total assets $ 10,904,816 ============ Net shareholders' equity $ 2,438,531 =========== Results of operations: Continuing: Total revenues $ 4,772,657 ============ Income before income taxes $ 222,999 ============ Income from continuing operations $ 129,799 ============ Discontinued: Loss from discontinued operations ($ 146,317) ============ Net loss ($ 16,518) ============ 5. Debt On March 16, 1999, CECO entered into a formal financing arrangement with PNC Bank which provides for a $5,000,000 line of credit, a $625,000 term loan, a $787,155 mortgage note payable and a $2,000,000 acquisition line of credit. A portion of the proceeds was used to repay the previous line of credit, term loan and mortgage note payable. The $5,000,000 line of credit expires March 16, 2000. The term loan is payable in monthly installments of $20,833 plus interest through September 1, 2001. The mortgage note payable is due in monthly installments of $8,032 including interest with a balloon payment on March 1, 2006. Interest is charged at prime less .25% or LIBOR plus 2.25%. The bank financing is secured by CECO's receivables, intangibles, property and equipment. The bank debt is also subject to certain financial covenants. - -7-

CECO ENVIRONMENTAL CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (unaudited) - -------------------------------------------------------------------------------- 6. Segment and Related Information The Company has two reportable segments: Air Quality Improvement and Ventilation and Environmental Products. The Company provides standard and engineered systems and filter media for air quality improvement through its Air Quality Improvement segment. The Ventilation and Environmental Products segment assembles and manufactures ventilation, environmental and process-related products. The Interfacility Maintenance segment, which provided interfacility repair, preventative maintenance and inter-facility construction, was discontinued on March 31, 1999. VENTILATION ELIMINATION AIR AND OF INTER- QUALITY ENVIRONMENTAL SEGMENT TOTAL IMPROVEMENT PRODUCTS OTHER ACTIVITY CONSOLIDATED ----------- -------- ----- -------- ------------ Three Months ended March 31, 1999 --------------------------------- Revenues $2,179,720 $2,781,413 $13,570 ($202,046) $4,772,657 Operating income 182,850 145,323 26,319 354,492 Three Months ended March 31, 1998 --------------------------------- Revenues $2,001,359 $3,827,775 $ 8,798 ($91,200) $5,746,732 Operating income (loss) 318,913 231,284 ( 141,928) 408,269 - -8-

CECO ENVIRONMENTAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS (unaudited) - -------------------------------------------------------------------------------- Financial Condition, Liquidity and Capital Resources - The Company - ------------------------------------------------------------------ The Company's consolidated cash and marketable securities position increased from $1,060,592 at December 31, 1998 to $1,255,950 at March 31, 1999. This increase of $195,358 is attributable to net cash provided by financing activities of $494,766, offset by cash used in operating activities of $209,201 (excluding activities relating to marketable securities), additions to property and equipment and intangible assets of $48,192, and the acquisition of additional shares of CECO of $42,015. The investment in marketable securities is primarily in high yield bonds of major U.S. corporations. CECO Filters, Inc. ("CECO") maintains a $5,000,000 line of credit with a commercial bank of which $2,000,000 was outstanding as of March 31, 1999. Management believes that the expected revenues from operations of CECO, supplemented by the available line of credit, will be sufficient to provide adequate cash to fund anticipated working capital and other cash needs during the remainder of the year. Since January 1, 1994, the Company and CECO have been parties to a management and consulting agreement pursuant to which the Company has provided management and financial consulting services to CECO for a monthly fee of $20,000 through July 1998 and $35,000 per month thereafter. This agreement was originally due to expire in December 31, 1998, but was extended by the parties and will automatically renew for one-year terms unless cancelled by the Company. The Company believes its consulting agreement with CECO and interest income from its investments in marketable securities, should provide sufficient revenue to meet its general and administrative expenses. Results of Operations - The Company - ----------------------------------- The Company's consolidated statement of operations for the three-month periods ended March 31, 1999 and 1998 reflects the operations of the Company consolidated with the operations of CECO. At March 31, 1999, the Company owned 93.6% of CECO. Minority interest in the consolidated statement of operations has been presented as a reduction in net income. The Company received $105,000 and $60,000 during the three month periods ended March 31, 1999 and 1998, respectively, for management and financial consulting services provided to CECO. This amount is not reflected in the consolidated results of operations since it is eliminated in consolidation. The Company has no income, revenues or expenses other than as a result of its investment in CECO, its consulting agreement with CECO, and its investment in marketable securities. The Company does not engage in operations other than through its operating subsidiary, CECO. CECO is comprised of CECO Filters, Inc., Air Purator Corporation ("APC"), U.S. Facilities Management Company, Inc. ("USFM-Indiana") and New Busch Co., Inc. (collectively referred to as the CECO Group) which provide innovative solutions to air quality problems through particle and chemical control technologies and services. - -9-

CECO ENVIRONMENTAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED (unaudited) - -------------------------------------------------------------------------------- CECO manufactures and markets filters known as fiber bed mist eliminators, designed to trap, collect and remove solid soluble and liquid particulate matter suspended in an air or other gas stream whether generated from a point source emission or otherwise. CECO offers innovative patented technologies, Catenary Grid(R) and Narrow Gap Venturi(TM) designed for use with heat and mass transfer operations and particulate control. APC designs and manufactures high performance filter media and bags for use in high temperature pulse-jet baghouses, the most effective type of baghouse for capturing submicron particulate from gas streams. USFM-Indiana provides facilities management, as well as outsourced plant-wide maintenance management to help customers achieve their performance goals. Busch is engaged in designing, manufacturing and supplying equipment used to control the environment in and around industrial plants with a variety of proprietary and patented technologies. On March 31, 1999, CECO sold the contracts and customer list of U.S. Facilities Management's Arizona division for $250,000. The sales price was paid through a non-interest bearing promissory note from the purchaser. Monthly principal payments of $1,500 commence October 1, 1999 with a balloon payment for the balance due on April 1, 2007. Results of Operations - CECO (Company's Subsidiary) - --------------------------------------------------- Comparison of Three Months Ended March 31, 1999 to Three Months Ended March 31, 1998 - ------------------------------------------------------------------------------- Revenues from continuing operations were approximately $4.8 million and $5.7 million for the three months ended March 31, 1999 and 1998, respectively, a decrease of 17%. The decrease in revenues from 1998 to 1999 resulted primarily from a decrease in sales orders, particularly new orders. While sales in CECO's Air Quality Improvement segment were approximately 9% higher ($2.18 million for the three months ended March 31, 1999 compared to $2.0 million for the three months ended March 31, 1998), revenues in CECO's Ventilation and Environmental Product segment were approximately 27% lower ($2.8 million for the three months ended March 31, 1999 compared to $3.8 million for the three months ended March 31, 1998). CECO's backlog of orders at March 31, 1999 was approximately $7.2 million as compared to approximately $10.6 million at March 31, 1998, a decrease of $3.4 million or 32%. There can be no assurance that order backlog will be replicated, or increased, or translate into higher revenues in the future. The success of CECO's business depends on a multitude of factors that are out of CECO's control. CECO's operating results can be significantly impacted by the introduction of new products, new manufacturing technologies, rapid change in the demand for its product, decrease in the average selling price over the life of a product as competition increases, and CECO's dependence on the efforts of middle men to sell a significant portion of its product. - -10-

CECO ENVIRONMENTAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED (unaudited) - -------------------------------------------------------------------------------- CECO's overall cost of revenues from continuing operations decreased as a percentage of sales for the three months ended March 31, 1999 (58.3%) compared to the three months ended March 31, 1998 (60.8%). The decrease is attributed to lower material costs, as well as lower costs incurred to service CECO products. CECO continues to use the latest technology available in an effort to reduce both cost of revenues (and the maintenance of optimal inventory levels) and operating expenses, and ultimately increase overall company profits. CECO's selling and administrative expenses from continuing operations amounted to $1,461,439 for the three-month period ended March 31, 1999 compared to $1,614,587 for the three-month period ended March 31, 1998, representing a decrease of $153,148 or 9.5%. CECO incurred management fees to the Company of $105,000 and $60,000 during the three-month periods ended March 31, 1999 and 1998, respectively. Interest expense increased by $28,800 or 48.7% during the three-month period ended March 31, 1999 when compared to the same period in 1998. The increase in interest expense can be attributed to an increased utilization of the bank line of credit from a new credit facility with an increased line of credit, during the three months ended March 31, 1999, compared to the previous year. CECO earned income from continuing operations, after taxes, of $129,799 for the three-month period ended March 31, 1999 as compared to $248,244 for the three-month period ended March 31, 1998. This change is attributed principally to the decrease in revenues for the three-month period ended March 30, 1999 over the comparable period in 1998. The provision for federal and state income taxes for the three-month period ended March 31, 1999 amounted to $93,200 compared to $165,000 for the three-month period ended March 31, 1998 and reflects an effective income tax rate of approximately 42% and 40% for each respective period. Other Matters - ------------- The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this document and other materials filed or to be filed with the Securities and Exchange Commission, as well as information included in oral or other written statements made or to be made by the Company, contains statements that are forward- looking. Such statements may relate to plans for future expansion, business development activities, other capital spending, financing, or other effects of regulation and competition. Such information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward- looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to product and service development activities, dependence on existing management, global economic and market conditions, and changes in federal or state laws. - -11-

CECO ENVIRONMENTAL CORP. SIGNATURE - -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CECO ENVIRONMENTAL CORP. ------------------------- Phillip DeZwirek Chief Financial Officer Chief Executive Officer Date: May 8, 1998 - -12-

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.

3-MOS MAR-31-1999 MAR-31-1999 361,795 894,155 2,941,859 0 628,814 6,691,487 4,075,195 2,031,252 15,729,256 6,706,632 1,651,227 0 0 83,888 7,501,747 15,729,256 2,529,846 4,772,657 1,284,646 4,418,165 75,498 0 75,498 317,173 143,560 173,613 (136,927) 0 0 28,356 0 0