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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549-1004
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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ENVIROTEST SYSTEMS CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 0-21454 06-0914220
(State or other (Commission (IRS Employer
jurisdiction of incorporation) File Number) Identification Number)
ENVIROTEST TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-57384-01, 33-75406-01 36-2680300
(State or other (Commission (IRS Employer
jurisdiction File Number) Identification Number)
of incorporation)
246 SOBRANTE WAY
SUNNYVALE, CALIFORNIA 94086-4807
(Address of principal executive offices, including zip code, of registrants)
(408) 774-6300
(Registrants' telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANTS (1) HAVE 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
REGISTRANTS WERE REQUIRED TO FILE SUCH REPORTS), AND (2) HAVE BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
---- ------
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
Class of Common Stock Outstanding at June 30, 1997
--------------------- ----------------------------
CLASS A COMMON STOCK, $0.01 PAR 13,204,396 SHARES
VALUE
CLASS B COMMON STOCK, $0.01 PAR 1,389,749 SHARES
VALUE
CLASS C COMMON STOCK, $0.01 PAR 2,026,111 SHARES
VALUE
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ENVIROTEST SYSTEMS CORP.
INDEX
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PAGE NO.
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PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets:
June 30, 1997 and September 30, 1996 3
Condensed Consolidated Statements of Operations:
three and nine months ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows:
nine months ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS 14
ITEM 5. OTHER 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
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PART I. FINANCIAL INFORMATION
Item I. Financial Statements
ENVIROTEST SYSTEMS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
June 30, September 30,
1997 1996
-------------- ----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 93,634 $ 53,104
Short-term investments, net 52,466 7,991
Settlement due from Commonwealth of Pennsylvania - 80,000
Contract receivables, net 8,770 10,969
Prepaid and other current assets 6,476 6,432
--------- ---------
Total current assets 161,346 158,496
Restricted cash 19,676 21,108
Property, plant and equipment, net 183,906 192,400
Assets held under capital lease, net 44,608 46,108
Assets held for sale, net 28,671 32,246
Intangible assets, net 13,030 14,927
Deferred debt acquisition costs, net 12,710 13,159
Deferred charges, net 145 1,189
Other assets 1,345 1,151
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Total assets $ 465,437 $ 480,784
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,004 $3,825
Accrued interest 9,184 1,689
Current portion of long-term debt 4,834 4,740
Current portion of capital lease and long-term debt obligation 4,990 3,880
Accrued expenses and other current liabilities 20,296 27,754
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Total current liabilities 41,308 41,888
Senior long-term debt, net 199,328 199,192
Senior subordinated debt 125,000 125,000
Capital lease and long-term debt obligation, net of current portion 54,405 58,155
Other long-term debt, net of current portion 34,325 38,129
Other long-term liabilities 5,701 5,266
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Total liabilities 460,067 467,630
Stockholders' equity:
Common stock 166 166
Additional paid-in capital 60,172 60,172
Cumulative currency adjustment (115) (96)
Unrealized gains on short-term securities 3 -
Accumulated deficit (49,278) (41,510)
Predecessor carry-over basis (5,578) (5,578)
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Total stockholders' equity 5,370 13,154
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Total liabilities and stockholders' equity $ 465,437 $ 480,784
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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ENVIROTEST SYSTEMS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Nine
Months Ended Months Ended
June 30, June 30,
1997 1996 1997 1996
------------ ------------- -------- --------
(Unaudited) (Unaudited)
Contract revenues $36,909 $32,556 $101,803 $90,764
Costs of services 23,619 25,140 74,048 75,244
---------- -------- -------- --------
Gross profit 13,290 7,416 27,755 15,520
Selling, general and administrative expenses 4,688 5,172 13,967 15,621
Consolidation expense - - - 1,850
Amortization expense 520 872 1,861 2,756
Gain on Pennsylvania settlement (3,950) - (3,950) (15,307)
---------- -------- -------- --------
Income from operations 12,032 1,372 15,877 10,600
Other expense (income):
Interest expense 10,262 10,182 30,104 28,574
Interest income (2,381) (2,477) (6,571) (6,312)
Other 18 4 112 12
---------- -------- -------- --------
Income (loss) before income taxes 4,133 (6,337) (7,768) (11,674)
Income tax expense - - - 5,490
---------- -------- -------- --------
Net Income (loss) $4,133 ($6,337) ($7,768) ($17,164)
========== ======== ======== ========
Income (Loss) per common and common
equivalent share $0.24 ($0.38) ($0.47) ($1.04)
========== ======== ======== ========
Weighted average common shares and
common equivalent shares 17,241 16,620 16,620 16,530
========== ======== ======== ========
Income (Loss) per common share - assuming
full dilution $0.24 ($0.38) ($0.47) ($1.04)
========== ======== ======== ========
Weighted average common shares and common
equivalent shares 17,347 16,620 16,620 16,530
========== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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ENVIROTEST SYSTEMS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Nine Months Ended
June 30,
1997 1996
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(Unaudited)
Cash flows from operating activities $10,836 $19,066
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Cash flows from investing activities:
Purchases of short-term investments (52,466) -
Maturity and sales of short-term investments 7,991 1,347
Unrealized gains on short-term investments 3
Payment for purchase of Systems Control, Inc.,
net of cash acquired - (1,056)
Proceeds from sale of property, plant and equipment 8,170 1,696
Purchases of property, plant, equipment and assets
under capital lease (8,291) (42,845)
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Net cash used in investing activities (44,593) (40,858)
Cash flows from financing activities:
Proceeds from sale of Pennsylvania receivable 79,405 -
Proceeds from borrowings of long-term debt - 31,345
Decrease in restricted cash 1,432 5,898
Repayment of long-term debt (2,850) (1,637)
Repayment of obligations under capital lease (3,500) (365)
Capitalization of loan fees (208) (855)
Other 3 148
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Net cash provided by financing activities 74,282 34,534
Effect of exchange rate on cash 5 24
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Net increase in cash and cash equivalents 40,530 12,766
Cash and cash equivalents, beginning of period 53,104 17,079
--------- ---------
Cash and cash equivalents, end of period $93,634 $29,845
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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ENVIROTEST SYSTEMS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included.
The accompanying condensed consolidated financial statements should be
read in conjunction with the Company's audited consolidated financial statements
and related footnotes included in the Company's Annual Report on Form 10-K for
the year ended September 30, 1996, filed with the Securities and Exchange
Commission.
Operating results for the interim periods shown in this report are not
necessarily indicative of the results to be expected for the full fiscal year.
2. SHORT TERM INVESTMENTS
Short-term investments primarily consist of corporate commercial paper and
certificates of deposit with original maturities beyond three months and less
than twelve months. These investments are carried at amortized cost that
approximates fair value.
3. DEFERRED CHARGES
The Company incurs significant expenses associated with bringing new
emissions testing programs into operation, including staff recruiting and
training, public information and similar pre-operating costs. These expenses are
deferred and amortized over a twelve month period beginning with the
commencement of the emissions program. At June 30, 1997, the Company had
incurred and deferred approximately $0.1 million, net of accumulated
amortization, of such expenses relating to the Indiana emissions program. The
Company expects that its results of operations during any fiscal period that
includes the commencement of a program will be adversely impacted by this
accelerated amortization.
4. PENNSYLVANIA SETTLEMENT
On December 11, 1996, the Company sold its right to receive the two
remaining installment payments totaling $80 million (the "Receivables Assets")
in principal amount due under a settlement agreement with the Commonwealth of
Pennsylvania (the "Settlement Agreement") for approximately $79,405,000.
The transaction was effected through a sale of the Receivables Assets from
Envirotest Partners ("Partners"), a Pennsylvania general partnership owned by
Envirotest and ETI, to a newly formed wholly owned subsidiary of the Company, ES
Funding Corp. ("Funding"). Funding, in turn, transferred the Receivables Assets
to an affiliate of a Pennsylvania bank.
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Funding and Partners provided certain representations in connection with the
transaction, including representations as to enforceability of the Settlement
Agreement against the Commonwealth, and agreed to repurchase the Receivables
Assets if Partners fails to comply with its obligations under the Settlement
Agreement.
The Settlement Agreement requires the Company to use its best efforts to
dispose of the assets it acquired to perform vehicle emissions testing services
in Pennsylvania. If the net proceeds received by the Company from the sale of
the assets is less than $55 million, Pennsylvania is obligated to pay the
Company fifty percent of the difference up to $11 million no later than July 31,
1998. The amount of this contingent payment was reduced from $15 million in an
amendment to the Settlement Agreement that permitted the Company to complete the
sale of the receivable assets. Should the net proceeds from the sale of the real
estate and other program related assets exceed $55 million, the Company is
obligated to pay the Commonwealth 75% of the amount by which the net proceeds
exceed $55 million. Based upon the experience with recent sales of these assets
and the sufficiency of reserves, the Company is of the opinion that upon final
disposition of properties no loss will be recognized.
Gain on the Pennsylvania settlement of $3.9 million during the third
fiscal quarter 1997 represents adjustments to provisions made earlier for claims
resulting as a consequence of the Pennsylvania contract cancellation that have
been settled, resolved or are unlikely to present future liability. A gain on
the Pennsylvania settlement of $15.3 million was included in the nine months
ended June 30, 1996.
5. BUSINESS ACQUISITION
In January 1996, the Company purchased from Systems Control, Inc. ("SCI")
the stock of SCI-WA, a Washington company and operator of the State of
Washington centralized emissions testing program, all intellectual property of
SCI and an option to purchase SCI's Indiana subsidiary for $3.2 million. The
Company exercised the option in June, 1996 and purchased the assets of the
Indiana subsidiary. The results of operations of SCI-WA have been included in
consolidated results from the date of acquisition.
6. INCOME TAXES
The deferred tax asset is fully reserved as of June 30, 1997. The amount
of the deferred tax asset considered realizable may change in the near term if
estimates of future taxable income are revised based on financial performance of
the Company and other economic events.
7. LEGAL PROCEEDINGS
The State of Connecticut has made certain claims stating that the Company
owes the State $2.4 million plus accruing amounts for certain cost savings in
the start up of the enhanced testing program in Connecticut. The Company cannot
predict the outcome of this complaint. However, the Company believes that it has
valid defense against these claims.
The Company is a defendant in Grendell, et al. V. Ohio EPA et al., a
taxpayers' class action suit originally filed on October 3, 1996 in Geauga
County Court of Common Pleas, State of Ohio. The case has been remanded to the
Common Pleas Court in Franklin County, Ohio. Plaintiffs seek to enjoin the Ohio
motor vehicle emission inspection program and the Company's Ohio contracts as
invalid and void based on certain Ohio constitutional provisions.
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The Company believes that it has valid defenses to the claims contained in the
complaint and intends to defend the matter vigorously.
On May 12, 1997, the Company was served with a complaint asserting that
Timothy Dore purports to represent a class of all "front range drivers who have
paid to have their vehicle emissions systems tested by the Company" in the state
of Colorado. The complaint, filed in Denver District Court, states two claims
for relief, breach of contract and negligence, and seeks damages, equal to the
difference in price between the new emissions test and the old tail pipe tests,
for all tests for members of the class undertaken on the front range since
implementation of the Company's testing program. The complaint also seeks
cancellation of the contract for the State of Colorado. The Company believes
that it has valid defenses to the claims contained in the complaint and intends
to defend the matter vigorously. On June 30, 1997 the Company filed a motion to
dismiss the action. And on July 18, 1997 the Plaintiffs filed a motion for
Partial Summary Judgment on the issue of their standing to sue as third party
beneficiaries of the Company's contract for the State of Colorado.
The Company is a party to various other legal proceedings and claims in
the ordinary course of business. The Company does not believe that the outcome
of any pending matters will have a material adverse affect on its consolidated
financial position or results of operations.
See Part II., Item 1 - Legal Proceedings for further discussion.
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ENVIROTEST SYSTEMS CORP.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company conducts its current operations directly and through its
principal wholly owned subsidiaries, Envirotest Technologies, Inc. ("ETI"),
Envirotest Illinois, Inc.("EII"), Envirotest Wisconsin, Inc. and Systems
Control, Inc., a Washington corporation. The Company's British Columbia, Canada
operations are conducted through a British Columbia partnership, Envirotest
Canada which is wholly owned by the Company (through its subsidiaries).
Certain sections of this Form 10-Q, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contain forward
looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, with respect to the Company's expectations or belief concerning
future events. The Company cautions that these statements are further qualified
by important factors that could cause actual results to differ materially from
those in the forward looking statements. Such factors include, but are not
limited to general economic conditions, pending legislation and the cyclical
nature of the vehicle emission testing industry. The forward looking statements
include, without limitation, the amounts of reserves recognized, the number of
annual tests, the commencement of operations for a particular program, the
amount of revenues that will be generated under a contract, the total capital
expenditure requirement of a program and ultimate outcome of pending litigation.
RECENT DEVELOPMENTS
During the third fiscal quarter, the Company signed an agreement with the
State of Illinois to upgrade the State's existing centralized auto emissions
testing program to an enhanced program. The agreement also extends the program
term to 2006. Capital expenditures required to implement the new program are
expected to total approximately $75 million. Enhanced testing will commence in
early 1999. The Company will earn a portion of its contracted revenue during the
implementation period for performance of the basic test and other services
provided during this period. Revenues for the nine-year term are expected to
total approximately $385 million. The expected total program revenues of
approximately $385 million includes an amount of $48 million which will be paid
to Envirotest by the State during the course of the implementation of the
program upgrade. These payments will be applied toward the expenditures required
to implement the program.
Also during fiscal year 1997, the Company signed an agreement with the
State of Florida extending the current contract at the same test fee for two
additional years to expire March 31, 2000. The extension is expected to generate
aggregate revenues of up to $32 million.
The Company was also awarded a contract to provide a vehicle safety and
inspection program in Connecticut which commenced January, 1, 1997. Under the
terms of the contract, which expires in June 2002, Envirotest will provide
safety inspections on an estimated 160,000
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vehicles per year with anticipated annual revenues of approximately $2.1 million
to the Company.
As of March 31, 1997, the State of California elected to terminate the
Company's contract to provide remote sensing services. The contract was expected
to extend through June 30, 1998 and provide $2.3 million of revenue to the
Company. The termination was related to the State's decision to reassess its
future vehicle emissions testing program.
RESULTS OF OPERATIONS
Contract revenues increased to $36.9 million in fiscal third quarter 1997
from $32.6 million in fiscal third quarter 1996, an increase of $4.3 million or
13.4%. For the nine months ended June 30, 1997, contract revenues were $101.8
million, an increase of $11.0 million, or 12.2%, over contract revenues of $90.8
million for the corresponding period in fiscal 1996. The increase in contract
revenues in fiscal third quarter 1997 as compared to fiscal third quarter 1996
was primarily due to additional revenues of approximately $2.3 million generated
from new or extended emissions programs in Indiana and Illinois; $1.7 million of
additional revenues in the British Columbia program primarily attributable to
the employee strike which impacted operations during fiscal third quarter 1996
and $0.4 million from the new Connecticut safety and inspection program. Other
increases in revenue of $0.5 million from additional test volume were offset by
a $0.5 million decrease in revenue as a result of the expiration of the
California Quality Assurance contract on September 30, 1996.
The increase in contract revenues of $11.0 million for the nine months
ended June 30, 1997 resulted primarily from additional revenues of approximately
$9.1 million from new, acquired or extended emissions contracts in Indiana,
Ohio, Washington and Illinois; $4.1 million from the British Columbia program
resulting from a one time adjustment in scheduling and the absence of testing
due to an employee strike during fiscal 1996; and $1.0 million from a new safety
and inspection program in Connecticut. These increases in revenues were partly
offset by a decrease of $1.5 million from the expiration of the California
Quality Assurance program and $1.5 million in the Connecticut program as more
vehicles were scheduled for testing in the corresponding period in fiscal 1996.
Gross profit increased to $13.3 million in fiscal third quarter 1997 from
$7.4 million in fiscal third quarter 1996, an increase of $5.9 million, or
79.2%. As a percentage of contract revenues, gross profit increased to 36.0% in
fiscal third quarter 1997 from 22.8% in fiscal third quarter 1996, an absolute
increase of 13.2%. The increase was attributable to several factors including
contributions of $1.2 million from new or extended contracts in Indiana,
Illinois and the Connecticut safety and inspection program; $0.9 million in the
British Columbia program which benefited from an additional volume increase and
settlement of an employee strike; $3.5 million from improvements in operational
efficiencies in most other programs; and $0.6 million from the reduction in the
deferred charge amortization. These increases were partly offset by a $0.2
million loss resulting from the expiration of the California Quality Assurance
contract.
For the nine months ended June 30, 1997, gross profit increased to $27.8
million from $15.5 million for the corresponding period in fiscal 1996, a
increase of $12.3 million or 78.8%. As a percentage of contract revenues, gross
profit increased to 27.3 % from 17.1% in the corresponding period in fiscal
1996, an absolute increase of 10.2%. This increase was
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attributable to contributions of $5.7 million from new or extended contracts
with the states of Indiana, Ohio, Washington, Wisconsin, Illinois and
Connecticut (safety and inspection), resulting from higher revenues and cost
efficiencies as compared to the prior fiscal period which included higher
operating expenditures associated with the startup of some new enhanced
programs; $2.8 million additional contribution from the British Columbia program
which benefited from an additional volume increase and settlement of an employee
strike as discussed above. Also, there was an additional contribution of $2.8
million primarily from further operating efficiencies in most other programs
together with a $1.6 million decrease in the amortization of deferred charges
relating to new programs. These increases were partly offset by a $0.7 million
decrease in contribution from the California Quality Assurance contract that
expired in September 30, 1996.
Selling, general and administrative ("SG&A") expenses decreased to $4.7
million in fiscal third quarter 1997 from $5.2 million in fiscal third quarter
1996, a decrease of $0.5 million or 9.4%. As a percentage of contract revenues,
SG&A expenses decreased to 12.7% in fiscal third quarter 1997 from 15.9% in
fiscal third quarter 1996, an absolute decrease of 3.2%. The decrease in SG&A
expenses was primarily due to lower engineering support cost as new programs
mature.
For the nine months ended June 30, 1997, SG&A decreased to $14.0 million
from $15.6 million for the corresponding period in fiscal 1996, a decrease of
$1.6 million or 10.6%. As a percentage of contract revenues, SG&A expenses
decreased to 13.7% for the nine months ended June 30, 1997 from 17.2% for the
corresponding period in 1996, an absolute decrease of 3.5%. The decrease in SG&A
expenses is primarily due to relocation costs of $1.5 million resulting from the
consolidation of the corporate headquarters to Sunnyvale, California during
fiscal second quarter 1996. Also, during the nine months ended June 30, 1996,
the Company recorded a consolidation expense of $1.9 million representing the
costs associated with the closure of the Phoenix corporate headquarters and
other restructuring costs.
Amortization expense decreased to $0.5 million in fiscal third quarter
1997 from $0.9 million in fiscal third quarter 1996, a decrease of $0.4 million.
For the nine months ended June 30, 1997, amortization expense decreased to $1.9
million from $2.8 million for the corresponding period in fiscal 1996. The
decrease was attributable to the expiration of the California Quality Assurance
contract as of September 30, 1996 and certain other acquired intangible assets.
Gain on the Pennsylvania settlement of $3.9 million during the third
fiscal quarter 1997 represents adjustments to provisions made earlier for claims
resulting as a consequence of the Pennsylvania contract cancellation that have
been settled, resolved or are unlikely to present future liability. A gain on
the Pennsylvania settlement of $15.3 million was included in the nine months
ended June 30, 1996.
Interest expense increased to $10.3 million in fiscal third quarter 1997
from $10.2 million in fiscal third quarter 1996, an increase of $0.1 million.
For the nine months ended June 30, 1997, interest expense increased to $30.1
million from $28.6 million in the corresponding period of the prior year, an
increase of $1.5 million. These increases were primarily attributable to
additional debt associated with the Wisconsin, Washington and Indiana programs.
Interest income decreased to $2.4 million in fiscal third quarter 1997
from $2.5 million in fiscal third quarter of 1996, a decrease of $0.1 million.
For the nine months ended June 30,
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1997, interest income increased to $6.6 million compared to $6.3 million in the
corresponding period of the prior year. This increase over the prior year was
primarily attributable to the interest earned on amounts under the Pennsylvania
settlement.
There was no income tax provision on the pretax income in the fiscal third
quarter 1997 and the corresponding period of the prior year. There was no income
tax provision on the pretax loss for the nine months ended June 30, 1997
compared to income tax expense of $5.5 million for the nine months ended June
30, 1996. The absence of the tax credit at the combined federal and state
effective tax rate of approximately 39% for the nine months ended June 30, 1997,
is a result of recording a valuation allowance to fully reserve the net deferred
tax asset.
Net income was $4.1 million in fiscal third quarter 1997 compared to a
$6.3 million loss in fiscal third quarter 1996, an increase of $10.4 million.
For the nine months ended June 30, 1997, net loss was $7.8 million compared to
$17.2 million for the corresponding period in fiscal 1996.
LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS
Cash and cash equivalents, short-term investments and restricted cash
increased to $165.8 million at June 30, 1997 from $82.2 million at September
30, 1996. The increase of $83.6 million was primarily a result of the proceeds
of $79.4 million received as a result of the Company selling its rights to
receive the two remaining installment payments totaling $80 million from the
Commonwealth of Pennsylvania and $10.8 million of cash generated from
operations. These increases in cash were partially offset by $6.4 million of
debt and capital lease payments.
The Company's primary uses of cash are the funding of the Company's
capital expenditure requirements, debt repayments, payments on capital and
operating leases, interest payments and other working capital needs. The
Company's capital and operating leases currently require minimum lease payments
of approximately $15.7 million in fiscal year 1997, decreasing to approximately
$14.3 million through 1999 and decreasing thereafter as certain leases are
scheduled to expire.
The Company's capital expenditures include expenditures for maintenance of
existing facilities, and development and construction expenditures for new
emissions facilities. The Company's development and construction capital
expenditures are dependent on the number of contracts it is awarded, and are
only incurred after the contract has been signed. After signing a contract, the
Company may incur significant development and construction expenditures, which
the Company expects to finance with existing cash resources, internally
generated funds, additional borrowings and alternative financing sources,
including leasing alternatives. It generally takes one to two years after a
contract has been signed for a program to begin operations and generate
revenues, depending on the size of the program. The Company expects the total
capital expenditure requirements for the purchase, development and construction
of the Illinois program will be approximately $75.0 million. The Illinois
enhanced emission testing facilities are expected to be complete and fully
operational during second fiscal quarter 1999.
The Company's principal commitment at June 30, 1997 is approximately $2.1
million for the Indiana program. Also in fiscal year 1997, the Company intends
to spend approximately $1.9 million on maintenance capital expenditures. The
Company believes that its existing cash resources, cash generated from
operations and alternative financing sources, including leasing alternatives,
will be sufficient to complete implementation of the Indiana and Illinois
programs and to meet its liquidity requirements for the foreseeable future.
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RECENT ACCOUNTING PRONOUNCEMENTS
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" (SFAS No. 128) which establishes
standards for computing and presenting earnings per share (EPS) more comparable
to international standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. The Company is studying the impact of the adoption of
SFAS No. 128, which is effective for the financial statements issued for periods
ending after December 15, 1997, will have on its EPS calculation.
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ENVIROTEST SYSTEMS CORP.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's new contract with the State of Connecticut began January 1,
1995. Enhanced testing was scheduled to begin on April 3, 1995. Just prior to
the startup of enhanced testing, the State unilaterally decided to continue the
old testing procedure and phase in the enhanced testing. Additionally, the
Company was unable to build two facilities, one due to the State's inability to
provide the land the contract required and the other due to the Company's
inability to obtain zoning. The State claimed that it was entitled to be paid
for the cost savings to the Company for not having performed the enhanced test
and not having built the facilities. The Company claimed additional costs
incurred when the State unilaterally changed the test. After unsuccessful
settlement negotiations, the Commissioner of Department of Motor Vehicles
decided on February 9, 1996 that the Company owed the State $2.4 million plus
other non-qualified amounts for 1995 and additional accruing amounts until the
enhanced test was performed and the facilities built. In accordance with the
contract and to protect its rights, the Company appealed the Commissioner's
decision to binding arbitration under rules of the American Arbitration
Association. On May 1, 1996, prior to the appointment of the arbitrators, the
State filed a complaint in the Superior Court in Hartford, Connecticut to enjoin
the arbitration claiming that the American Arbitration Association had no power
to administer hearings in this matter. The State has taken no further action on
this matter and no hearing date with regard to the State's complaint has been
scheduled.
The Company is a defendant in Grendell, et al. V. Ohio EPA. et al, a
taxpayers' class action suit originally filed on October 3, 1996 in Geauga
County Court of Common Pleas, State of Ohio. The case has been remanded to the
Common Pleas Court in Franklin County, Ohio. Plaintiffs seek to enjoin the
program and the Company's Ohio contracts as invalid and void based on certain
Ohio constitutional provisions. The Company believes that it has valid defenses
to the claims contained in the complaint and intends to defend the matter
vigorously.
On May 12, 1997, the Company was served with a complaint asserting that
Timothy Dore purports to represent a class of all "front range drivers who have
paid to have their vehicle emissions systems tested by the Company" in the state
of Colorado. The complaint, filed in Denver District Court, states two claims
for relief, breach of contract and negligence, and seeks damages, equal to the
difference in price between the new emissions test and the old tail pipe tests,
for all tests, for members of the class undertaken on the front range since
implementation of the Company's testing program. The complaint also seeks
cancellation of the contract for the State of Colorado. The Company believes
that it has valid defenses to the claims contained in the complaint and intends
to defend the matter vigorously. On June 30, 1997 the Company filed a motion to
dismiss the action. And on July 18, 1997 the Plaintiffs filed a motion for
Partial Summary Judgment on the issue of their standing to sue as third party
beneficiaries of the Company's contract for the State of Colorado.
The Company is a party to various other legal proceedings and claims in
the ordinary course of business. The Company does not believe that the outcome
of any pending matters will have a material adverse affect on its consolidated
financial position or results of operations.
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ITEM 5. OTHER EVENTS
On May 27, 1997, Allen Telecom Inc. announced (PR Newswire) that its
subsidiary, Marta Technologies, Inc. ("Marta"), and the Company have jointly
decided to terminate the agreement of sale between Marta and the Company,
providing for the transfer of Marta's centralized emissions testing programs for
Florida, Maryland and the Cincinnati region of Ohio to Envirotest.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
State of Illinois EPA Service Agreement Contract with Envirotest
Illinois, Inc. dated May 19,1997......................................10.118
Statement of Computation of Income (Loss) Per Share....................11
Financial Data Schedule................................................27
(b) Reports on Form 8-K
The registrants filed the following reports on form 8-K during the
third quarter of fiscal 1997. The Company filed a report on form 8-K on
June 30, 1997, that included information under item 5 ("Other Events").
The report was filed for the purpose of announcing that the Company
signed an agreement with the State of Illinois to upgrade the State's
existing centralized auto emissions testing program to an enhanced
program.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused their report to be signed on their behalf by the
undersigned thereunto duly authorized.
ENVIROTEST SYSTEMS CORP.
(Registrant)
ENVIROTEST TECHNOLOGIES, INC.
(Registrant)
Date: July 31, 1997 /s/F. Robert Miller
--------------------------------------
F. Robert Miller
President and Chief Executive Officer
Date: July 31, 1997 /s/Raj Modi
---------------------------------------
Raj Modi
Vice President, Chief Financial
Officer,
Treasurer and Assistant Secretary
(Principal Financial Officer)
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ENVIROTEST SYSTEMS CORP.
EXHIBIT INDEX
EXHIBIT
NUMBER:
10.118 State of Illinois EPA Service Agreement Contract with
Envirotest Illinois Inc. dated May 19, 1997.
11 Statement of Computation of Income (Loss) Per
Share
27.1 Financial Data Schedule