1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
[ X ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM MARCH 1, 1995 TO SEPTEMBER 30, 1995
COMMISSION FILE NUMBER 0-14992
_____________
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
(exact name of registrant as specified in its charter)
DELAWARE 38-2294876
- -------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3501 JAMBOREE ROAD, SUITE 550, NEWPORT BEACH CA 92660
------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 737-7900
__________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------
Common Stock, $0.01 par value NASDAQ National Market System
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
On December 12, 1995, the registrant had 5,857,640 outstanding shares
of common stock, $0.01 par value, and on such date, based on the closing sale
price of $3.625, as reported in The Wall Street Journal, the aggregate market
value of the shares of common stock held by non-affiliates of the registrant
was approximately $11.5 million.
2
ANNUAL REPORT FOR THE TRANSITION PERIOD ENDED SEPTEMBER 30, 1995
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . 15
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . 17
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . 23
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . 36
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
PART IV
Item 14. Exhibits, Financial Statements Schedule and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 39
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
2
3
PART I
ITEM 1. - BUSINESS
GENERAL
Smith Environmental Technologies Corporation (formerly Canonie
Environmental Services Corp.), a Delaware corporation (the "Company"), was
initially formed as a Michigan corporation under the former name in 1980. It
changed its name to Canonie Engineers, Inc. in 1983 and operated under that
name until a merger, effective July 25, 1986, of Canonie Engineers, Inc. with
and into Canonie Environmental Services Corp., with the Company being the
surviving corporation. The Company changed its name to Smith Environmental
Technologies Corporation on February 28, 1995. The principal business of the
Company is the performance of comprehensive environmental consulting,
engineering, and on-site remediation services throughout the United States for
clients, including federal, state and local government agencies, with regard to
properties contaminated with hazardous materials. Because the performance of
specific projects may be affected by seasonal weather conditions and other
factors that affect the economy generally, quarterly results or other interim
reports should not be considered indicative of results to be expected for any
quarter or full fiscal year. The Company's operations are considered to be
concentrated in one industry segment.
Effective March 1, 1995, the Company changed its fiscal year end from
February 28 to September 30. This report relates to the seven month period
beginning March 1, 1995 and ended September 30, 1995 (the transition period).
BUSINESS DEVELOPMENT
Change in Control. On December 30, 1993, Smith Holding Corporation, a
Delaware corporation, formerly known as Smith Environmental Technologies
Corporation ("Smith Holding") acquired 2,653,720 shares, or 46.6 percent, of
the Company's common stock from W. R. Grace & Co. ("Grace"). The Board of
Directors appointed E. Brian Smith Chief Executive Officer of the Company on
January 1, 1994, and Chairman on January 28, 1994.
Change in Business Strategy. In connection with the 1993 change in
ownership, the Company adopted a new strategic plan which included an
acquisition program to improve the Company's competitive position in its
industry segment. The primary focus of the acquisition program is medium-sized
($30-$80 million annual revenues) environmental consulting, engineering, and
remediation services companies.
The Company is focused on acquiring companies that provide a broader
range of services, better geographic coverage and additional market share. By
merging their operations into its current organizational structure, the Company
believes it is able to reduce overall operating costs by consolidating existing
administrative, financial, information systems and human resources functions.
The Company also believes that through increased market presence and size it
can augment its traditionally strong relationships with its private sector
clients and secure additional environmental consulting and remediation business
with government clients, particularly the Departments of Defense and Energy and
the Environmental Protection Agency ("EPA").
Description of Acquisitions. In September 28, 1994, the Company
purchased all of the outstanding common stock of BCM Engineers Inc. ("BCM"), an
environmental consulting and engineering company, for cash of $5.0 million and
78,000 shares of Redeemable Preferred Stock with an estimated fair value of
$6.9 million on the date of issuance and a redemption value of $7.8 million.
The Redeemable Preferred Stock has a 5 percent cumulative dividend requirement
and is redeemable in equal installments on the fifth, sixth and seventh
anniversaries of its issuance (see Note 12 of Notes to Consolidated Financial
Statements). The Company also repaid $9.5 million of indebtedness of BCM from
the proceeds from borrowings under its Loan and Security Agreement with LaSalle
Business Credit, Inc. (the "LaSalle Loan Agreement").
3
4
On November 21, 1994, the Company purchased all of the capital stock
of Riedel Environmental Services, Inc. ("RES"), an environmental remediation
services firm, from Riedel Environmental Technologies, Inc. The final purchase
price, paid in cash, was approximately $18.2 million. In conjunction with the
acquisition of RES, the Company issued a $10 million Convertible Senior
Subordinated Note (the "Convertible Senior Subordinated Note") and a $2 million
Senior Note (the "Senior Note" and collectively with the Convertible Senior
Subordinated Note, the "Notes"). The Notes were purchased by 399 Venture
Partners, Inc., an affiliate of Citicorp Venture Partners. The proceeds of the
Notes were used to provide funds for the RES acquisition.
On January 13, 1995, the Company acquired from RESNA Industries, Inc.
("RESNA") substantially all of the tangible assets, contracts and certain
intangible assets of RESNA's environmental assessment and remediation business
in exchange for the assumption by the Company of $1.5 million of debt owed to
RESNA's principal lender. Although RESNA's size is below that of the Company's
stated acquisition strategy, the business location and market were considered
attractive relative to the purchase price.
JOINT BUSINESS VENTURE
The Company owns a 50 percent interest in SoilTech ATP Systems, Inc.,
a Delaware corporation ("STI"). STI is a corporate venture that was formed to
use sublicense rights and the related waste material processing equipment for
the remediation of contaminated soils. STI has the exclusive U.S. sublicense
through June 2012 of a pyrolysis technology developed and licensed by UMA Group
Ltd., a Canadian quasi-government agency. This technology has proven to be an
efficient treatment of waste materials containing mixtures of hydrocarbons,
water, and soils (see Note 5 of Notes to Consolidated Financial Statements).
Since 1990, STI has completed four full scale commercial projects with this
technology.
DESCRIPTION OF SERVICES
The Company's principal business is to provide advice regarding and/or
to correct and prevent the effects of pollutants in air, water and soil and in
facilities of all types. The Company achieves this by assessing environmental
regulations, investigating contaminated sites, and designing and engineering
methods to correct or prevent the contamination. The Company will also perform
the remedial actions including the construction and operation of required
facilities, as well as perform emergency response actions involving spills and
accidental releases of hazardous waste. The Company uses a wide variety of
technologies and construction processes and techniques to meet the needs of its
clients in solving the problems created by environmental pollutants. The
Company addresses hazardous and non-hazardous contaminants in municipal and
industrial water supplies, in wastewater and storm water from municipal,
industrial and military installations, in groundwater, soils, and air space
surrounding these types of complexes, and contaminants in the buildings and
facilities themselves, such as asbestos, lead-based paint, and radioactive
contamination.
The Company's objective in rendering its services is to provide
clients with remedial solutions that integrate the various aspects of a project
and that are well documented, practical, cost-effective, and acceptable to
regulatory agencies and the public. To accomplish this objective, the Company
has assembled an experienced staff of engineers, scientists, and construction
professionals. For remediation work, the Company offers an integrated approach
to remediate sites which the Company believes can reduce the time and cost
required to complete a project and may relieve the client of the responsibility
and premium costs associated with coordinating the efforts of independent
consultants, engineers, and contractors. The Company believes it is one of the
few companies capable of providing such a broad range of services for the
remediation of contaminated sites.
The Company's environmental consulting work has included the design of
hundreds of potable water treatment plants for municipalities and a similar
number of sewage and wastewater plants for public and industrial applications.
It performs environmental assessments and impact studies to gauge the effect of
new buildings and facilities on the environment and assesses the resulting
added risk to people and wildlife and
4
5
recommends alternatives which meet its clients' objectives while maintaining
environmental standards. The Company's current environmental consulting
assignments range in value from a few thousand dollars to $15 million with an
average value of approximately $50,000. The Company believes that its
experience with remediation projects makes it a more effective consultant; in
addition, the Company is able to offer a "turn-key" approach to clients.
Consistent with the Company's strategy of providing complete solutions
to clients' environmental problems, the Company provides construction and
remediation services which can implement the solutions designed by its
consulting and engineering group or designed by others. The Company also
provides hazardous waste cleanup, landfill design and construction, water
management systems, wastewater system construction and operation,
decommissioning and demolition of facilities and process systems, storage tank
management, and operation of on-site thermal treatment systems.
The Company's hazardous waste remediation projects have included the
design and construction of on-site facilities to separate, destroy, detoxify,
or isolate hazardous wastes existing in air, soils, and surface and subsurface
water, and the decontamination or demolition of equipment and facilities
related to the production and use of hazardous substances. The Company also
performs assessment, design and construction of landfill facilities for on-site
disposal of hazardous materials and facilities for use as regional disposal
sites. Waste remediation projects undertaken by the Company range in duration
from one month to several years and from $100,000 to approximately $30 million.
Although the Company's projects vary widely in objectives, scope and
duration, each project involves the Company providing one or more of the
following core services: regulatory compliance, environmental investigation,
environmental engineering, water/wastewater and infrastructure, asbestos
management, air pollution control, emergency response, waste management,
in-plant services, and civil remediation projects. The following is a brief
description of these services:
Regulatory Compliance. The Company assists clients in determining
which environmental regulations apply and how to comply with federal, state,
and/or local environmental regulations. The Company provides these consulting
services to both commercial and government clients by maintaining a staff of
regulatory experts and by maintaining libraries of current regulations.
Federal regulations include RCRA, CERCLA, TSCA, CAA, and the CWA in addition to
state and local environmental regulations which may supplement or be more
stringent than federal regulations (See "--Regulation").
Environmental Investigation. In conducting an environmental
investigation, the Company determines the basic characteristics of a site as
well as any specific conditions pertaining to that site, including for example:
the traffic patterns at a site; climatological considerations; and the
proximity and degree of residential development. The investigation may also
include identification of the presence of endangered flora and fauna and a risk
evaluation to human life and ecological conditions. Investigations, performed
in varying degrees of detail, may be used to assess potential risk for a
property buyer, serve as the problem definition phase for an owner who wishes
to clean up a site, or as a baseline against which an owner can measure and
defend the environmental acceptability of their future land use plans. An
investigation may also provide the basis for the selection of a technology to
treat water or wastewater streams for a federal, state or local client.
Environmental Engineering. The Company provides engineering expertise
to evaluate, select, and design remedial actions and/or engineering controls.
Environmental engineering takes into account such factors as available
technology, regulatory considerations, environmental investigation data, and
the cost/benefit relationship of alternative measures. The Company also
reviews engineering and remedial measures in light of legitimate public
concern.
Water/Wastewater and Infrastructure. The Company provides water and
wastewater system design services to public sector clients and some industries.
These services include storage and flocculation basin
5
6
design, distribution pipeline design, pump station design, and biological
treatment system design. Most projects involve the up-grade of aging
municipally owned water and wastewater systems.
Asbestos Management. Asbestos is a carcinogenic fiber found in many
buildings and aging public facilities. The Company provides asbestos surveys
to identify the contaminated areas and abatement plans which specify how to
safely remove, or fixate asbestos containing areas of buildings and structures.
This service is provided by the Company's staff of specially trained and
certified scientists and technicians. The Company also oversees, but does not
perform, asbestos abatement.
Air Pollution Control. The Company maintains expertise with numerous
environmental regulations which were created by the CAA. This expertise
includes regulatory consulting, permitting, stack testing, and pollution
control design which the Company provides to industrial and government clients.
Air transport modeling and risk assessment are provided by the Company in
support of these technical areas to determine exposure to human and ecological
receptors.
Emergency Response. Many of the Company's remediation projects are in
response to hazardous substance emergencies. Examples include oil and chemical
spills on water, highway accidents involving transporters of oil or chemical
substances, fires at chemical or hazardous waste facilities, railroad accidents
involving hazardous materials, transformer fires or explosions involving PCBs,
and other unanticipated instances where hazardous substances pose an immediate
threat to humans or the environment.
To respond to these emergencies, the Company has mobile response units
strategically located in various locations in the western, central and southern
United States. Through this network, the Company believes it is
well-positioned to respond and effectively manage major environmental related
emergencies in the western, central and southern United States. When the
Company receives a request for emergency response services, the Company
immediately mobilizes the available equipment closest to the emergency and
dispatches trained personnel from one of its offices or from field locations to
the site. The Company has a 24-hour telephone "hot-line" for emergency service
calls: 1-800-334-0004.
The Company generally provides its emergency response services under
written contracts and has over 375 master service agreements in place. The
Company has contracts with private organizations and government entities,
including oil and chemical companies, cooperatives, railroads, the EPA, the
Coast Guard and several states including Oregon, California, Washington, Idaho,
Montana, Missouri, Kansas, Illinois, Mississippi, Louisiana and Texas. Certain
of these contracts require the Company to maintain equipment in locations
convenient to the customer and to respond to calls for assistance within
specified response times. Services are provided on the basis of a schedule of
fees for equipment, personnel, materials and travel. In some cases an annual
retainer fee is charged.
With the acquisition of RES in November of 1994, the Company now
generates a substantial portion of revenues under its Emergency Response
Cleanup Services (ERCS) contracts for the EPA. The Company is the prime
contractor for removal of hazardous substances in ERCS Zone 4A, comprising 15
midwestern and southern states, and ERCS Region 5, comprising 6 states
bordering the Great Lakes. The ERCS Zone 4A contract has been renewed through
its final option year covering the period through February 1996. The ERCS
Region 5 contract is renewable for one year periods through September 1997.
The Company intends to actively seek the award of future EPA remedial action
contracts, particularly the replacement contract for the ERCS Zone 4A.
Revenues from ERCS contracts for the seven months ended September 30,
1995 were $29.6 million or approximately 28 percent of revenues. The Company
anticipates that it will receive a similar level of revenues from this source
in fiscal 1996. However, the annual revenues generated from these contracts
depend on the amount of work authorized up to the contractual maximum amount.
6
7
Waste Management. The Company provides expertise in the selection and
design of waste transportation, treatment, and disposal options. On-site and
off-site waste management options are usually compared, taking into account
federal and state land disposal restrictions. Waste treatment, when chosen,
can be provided by the Company utilizing a wide variety of treatment
technologies. Waste transportation and off-site waste disposal generally are
provided by subcontractors.
In-Plant Services. The Company provides a wide variety of
environmental services within a client's plant or facility including
decontamination and decommissioning of equipment and facilities, remedial
system operation and maintenance, environmental training, and security. These
services are provided with the Company's labor by training the client's
existing labor force.
Civil Remediation Projects. The Company believes it is one of the
nation's leading providers of civil remediation projects. Remediation services
for contaminated sites might include such measures as construction of a slurry
wall or cap to contain hazardous wastes, demolition and removal of an entire
structure or facility, construction and operation of a pumping and filtration
system to decontaminate surface or subsurface waters, or construction and
operation of an integrated system to excavate contaminated soil and treat it
on-site to remove hazardous substances. In designing remedial measures, the
Company has used more than 21 different technologies for on-site treatment of
various contaminants.
TECHNOLOGIES EMPLOYED
The Company utilizes a wide range of physical, chemical, biological,
and thermal treatment technologies in performing its remediation activities.
Physical treatment technologies generally involve filtration, aeration, and
soil-washing techniques and are used to separate contaminants from soils,
slurries, or water. Chemical treatment technologies generally involve
flocculation, clarification, precipitation, polymer addition, and
stabilization. The Company also custom designs vapor and liquid-phase carbon
absorption systems to remove contaminants from exhaust air and wastewater
streams. Depending on the contaminants present and the site characteristics,
these technologies are combined into integrated treatment systems which reduce
contaminant concentrations to levels consistent with prescribed regulatory
standards. To optimally design these treatment systems, the Company routinely
performs extensive computer modeling of contaminant transport and aquifer
performance.
The Company has been involved in projects which seek to develop new
technologies into cost-effective alternatives to existing treatment
methodologies. The Company has successfully developed mechanical treatment
technology and soil washing technology for the physical removal of contaminants
from battery casings and soils. The battery separation process, designed to
physically separate and recycle waste from used battery components, received
full approval from the EPA in 1991. In addition, the Company, through its
affiliate, STI, has the exclusive U.S. sublicense of a pyrolysis technology
until June 2012. This four-zoned Anaerobic Thermal Processor is an efficient
treatment of waste materials containing mixtures of hydrocarbon emulsions and
coal tar residues. There are few other technologies available in the United
States that have proven to compete with this technology.
The Company has developed a Low-Temperature Thermal Aeration
("LTTA(R)") soil remediation system. The LTTA(R) system removes, through
vaporization, volatile organic compounds from soils to prevent migration of
these compounds to ground waters. Treated soils are suitable for on-site
backfill and the vaporized contaminants are captured in activated carbon beds.
The Company currently operates one transportable plant utilizing the LTTA(R)
system which can be configured to treat off-gases by different methods. The
Company has not licensed the LTTA(R) technology, which is only one of the
thermal treatment technologies available to the Company. The Company's revenues
are not significantly dependent upon the LTTA(R) System.
In summary, it is the Company's business to assist its clients in
complying with the constantly changing regulatory requirements under which they
must operate. The Company believes it is able to address
7
8
its clients' needs during any phase of the work, from earliest assessment to
long-term monitoring of a closed site.
REGULATION
The business of the Company and its clients is subject to extensive,
stringent, and evolving regulation by the EPA and various other federal, state,
and local environmental authorities. These regulations directly impact the
demand for the services offered by the Company. In addition, the Company is
subject to the federal Occupational Safety & Health Act, which imposes
requirements for employee safety and health. The Company believes it is in
substantial compliance with all federal, state, and local laws governing its
business.
Resource Conservation and Recovery Act ("RCRA"). RCRA is the
principal federal statute governing hazardous waste generation, treatment,
storage, and disposal. RCRA, or EPA-approved state programs at least as
stringent, may govern any waste-handling activities involving wastes classified
as "hazardous."
The EPA issues regulations under RCRA for hazardous waste generators,
transporters, and owners and operators of treatment, storage, and disposal
facilities, such as surface impoundments and landfills; design and operating
requirements are also mandated. When the Company's remedial activities at any
site involve the treatment, storage, or disposal of hazardous waste, the
Company must adhere to the substantive requirements of these regulations.
However, the Company is not required to obtain permits required by RCRA for the
ownership or operation of a hazardous waste treatment, storage or disposal
facility.
Comprehensive Environmental Response, Compensation, and Liability Act
of 1980 ("CERCLA" or the "Superfund Act"). The Superfund Act generally
addresses the cleanup of inactive sites at which hazardous waste treatment,
storage, or disposal has occurred. The Superfund Act imposes joint and several
liability for costs of cleanup and damage to natural resources on any person
who: then currently or at the time of disposal of a hazardous substance, owned
or operated any facility at which hazardous substances were disposed of; by
contract, agreement, or otherwise arranged for disposal or treatment, or
arranged with a transporter for transportation of hazardous substances owned or
possessed by such person for disposal or treatment; or accepted hazardous
substances for transportation to disposal or treatment facilities or sites from
which there is a release or threatened release. Among other things, the
Superfund Act authorizes the federal government either to clean up these sites
itself or to order persons responsible for the situation to do so. The
Superfund Act created a fund to be used by the federal government to pay for
the cleanup efforts. The federal government may seek reimbursement of funds
spent for remedial activities from the potentially responsible parties
("PRPs"). At present, there are 1,238 Superfund sites and another 52 proposed
to be added to the National Priority List requiring extensive monitoring and
remediation work.
Superfund Amendment and Reauthorization Act ("SARA"). In October
1986, SARA was enacted to impose more stringent cleanup standards and
accelerated timetables. SARA authorized additional federal expenditures, and
contains provisions which expand the EPA's enforcement power and are intended
to encourage and facilitate settlements with PRPs. In 1990, Congress extended
funding under the Superfund Act for an additional five-year period. Congress
has extended funding through December, 1995. In connection with any current
federal government budget negotiations, Congress may enact substantive changes
to the Superfund Act. The Company expects that, if substantive changes are made
to the Superfund Act, the revised act will contain less stringent standards of
clean up but will be designed to force remediation efforts to take place more
quickly. Further delays in creating or extending new legislation may result in
lower growth in the engineering, consulting and private remediation market.
The Company believes that, even without additional funding from the
Superfund Act or SARA, commercial, industrial and government entities will
continue to take action to resolve hazardous waste problems because of their
need to comply with other statutory and regulatory requirements and to avoid
liability to private parties.
8
9
The liability imposed by the Superfund Act could, under certain
factual circumstances, apply to a broad range of possible activities by the
Company, including generation or transportation of hazardous substances;
releases of hazardous substances; failure to properly design a cleanup,
removal, or remedial plan; failure to achieve required cleanup standards;
leakage of removed wastes in transit or at the final storage site; and remedial
operations on ground water. Superfund liability can be joint and several where
other parties are involved. The Company believes it has and will continue to
operate its business in such a manner so as not to incur any Superfund
liability. To date, the Company has not been subject to any Superfund
liability.
Federal Facilities Compliance Act. In 1992 Congress clarified that
facilities owned and operated by the federal government, such as defense
installations, must meet the standards imposed by environmental laws. The level
of future activity at these sites is dependent on the portion of the federal
budget allocated to these activities and on possible Congressional action to
amend RCRA and CERCLA. It is uncertain what impact, if any, such Congressional
action would have on the Company's remediation work.
Other laws that the Company's operations are subject to, which protect
the environment, include the Clean Air Act, Clean Water Act, Safe Drinking
Water Act, and the Toxic Substances Control Act. Many states have also enacted
statutes regulating the handling of hazardous substances, some of which are
broader and more stringent than the federal laws and regulations, and the
Company could be subject to liability under these statutes if it is responsible
for the mishandling or release of hazardous substances.
COMPETITION
As a result of the acquisitions of BCM and RES, the Company competes
on a national basis with a large number of environmental service firms. These
range in size from small local companies to large national firms, many of which
have considerably greater resources than the Company. While the service
capabilities of these competitors overlap with several of the service areas
provided by the Company, few compete in all areas of the Company's markets.
Factors influencing the Company's competitiveness are price, reputation for
quality, the availability and skills of engineering, remediation and
construction personnel, financial strength, knowledge of markets, site
conditions and estimating abilities. Although the environmental business is
highly competitive, particularly for competitively bid projects, the Company
believes its experience and skill make it well positioned to compete
effectively.
CONTRACT PROVISIONS AND SUBCONTRACTING
The Company has a mix of contracts ranging from reimbursement of labor
and materials on a cost plus basis to "fixed price" or "fixed unit price"
contracts under which the Company provides materials or services required by a
project at a fixed price or a fixed unit price (for example, dollars per ton of
material treated or cubic yards of earth excavated). While the fixed unit price
contract generally shifts the risk of estimating the quantity of units required
for a particular project to the customer, the cost of performing each such unit
is the Company's responsibility and risk. The Company's contracts are obtained
primarily through competitive bidding in response to proposal requests by
private parties and federal, state and local government agencies.
All federal government contracts and many of the Company's private
contracts provide for termination of the contract for the convenience of the
party contracting with the Company. In addition, some of the Company's
contracts are subject to certain completion schedule requirements with
liquidated damages in the event schedules are not met.
The Company acts as prime contractor on most of the projects it
undertakes. The Company accomplishes the majority of its projects with its own
resources and subcontracts specialized activities such as transportation and
disposal, drilling, electrical and mechanical work. As prime contractor, the
Company is responsible for the performance of the entire contract, including
subcontract work. While the Company can be
9
10
subject to increased costs associated with the failure of one or more
subcontractors to perform as anticipated, it does not expect that any such
failure, based on its experience to date, will have a material adverse effect
on the operations of the Company.
INSURANCE AND BONDING
The Company maintains commercial general liability, automobile
liability, workers' compensation, employer's liability, and excess liability
insurance policies. The Company also maintains protection and indemnity
coverage and hull insurance to protect against risks arising from the Company's
marine activities, and a combined consultant's environmental and professional
liability policy to protect against claims arising out of actual, alleged, or
threatened discharge, dispersal, or release of pollutants, asbestos-related
claims, and alleged errors or omissions in performance of the Company's
professional services which claims are excluded from the aforementioned
liability policies. The Company also maintains contractor's pollution
liability insurance policies that cover certain specific jobsite pollution
exposures of the Company. There can be no assurance that any liability that may
be incurred by the Company will be covered by its insurance or that the dollar
amount of any such liability will not exceed the Company's policy limits.
Difficulty in obtaining insurance may also impair the Company's ability to
obtain future contracts, which are in many cases conditioned on the
availability of adequate insurance coverage. To date, the Company has not
experienced significant difficulty in obtaining insurance.
In connection with its business, the Company often is required to
provide various types of surety bonds guaranteeing its performance under
certain public and private sector contracts. The Company's ability to obtain
surety bonds depends upon its capitalization, working capital, past
performance, management expertise and other factors. Surety companies consider
such factors in light of the amount of surety bonds then outstanding for the
Company and their current underwriting standards, which may change from time to
time. The Company currently has bonding programs in place which it believes are
sufficient for its needs. Although the Company has no assurance that future
bonding will be available, it believes it will continue to meet its bonding
requirements through a U.S. Treasury listed surety.
CLIENTS AND MARKETING
The Company's marketing efforts have focused upon providing private
industry clients with practical and effective solutions to their site
contamination problems. The Company has recently broadened its marketing
efforts to include selected public-sector projects, particularly for the
Departments of Defense and Energy and the EPA. The Company has performed work
at numerous major project sites nationwide, including 174 Superfund sites and
numerous RCRA facilities. The Company has worked for a significant number of
the Fortune 500 companies. The Company's clients include PRP groups, petroleum
and chemical companies, electronics manufacturing firms, railroads, waste
disposal firms, utilities, other industrial companies, and government agencies.
The Company has a National Accounts Program to develop and establish
comprehensive and long-term relationships between the management of clients and
the Company. The Company's marketing strategy features and reinforces the
Company's ability to deliver comprehensive and specialized technological
services to meet the environmental needs of clients at every level. The Company
markets its services from offices nationwide and augments its marketing staff
with management and technical specialists.
The Company generates its revenues from an existing account base as
well as new clients developed during the year. While the Company receives a
significant portion of its revenues from a relatively small number of clients,
these customers are not necessarily the same each year. During the seven
months ended September 30, 1995, no single client accounted for more than 10
percent of the Company's revenues for the period, other than the Company's
Emergency and Spill Response work under ERCS contracts with the EPA.
10
11
BACKLOG
As of September 30, 1995, the Company had a contract backlog of orders
of approximately $125 million, of which the Company anticipates performing
approximately $110 million in fiscal 1996. As of September 30, 1995, the value
of unfunded or indefinite delivery order contracts ("IDO") was approximately
$141 million and when combined with contract backlog totaled approximately $266
million. The ultimate value of the backlog is subject to change as the scope of
work on projects changes. Customers often retain the right to change the scope
of work with an appropriate increase or decrease in the contract price. At
September 30, 1994, the Company had a contract backlog of orders of
approximately $63 million. Additionally, there was approximately $5 million
unfunded backlog at September 30, 1994 which was acquired with BCM.
EMPLOYEES
As of September 30, 1995, the Company had approximately 1,250
full-time employees. Approximately 120 employees are represented by the
International Organization of Masters, Mates and Pilots (IOMMP) and are employed
under a collective bargaining agreement which extends through March 1, 1996.
The Company considers its relations with its employees to be good and has never
had a work stoppage. The Company's ability to continue to retain and expand its
staff of qualified engineers, scientists, and construction professionals will
be an important factor in determining the Company's future success.
11
12
ITEM 2. PROPERTIES
The Company leases and, in some cases, owns office and warehouse space
in various locations throughout the United States. Generally, space has been
improved, as required, to fit the needs of the engineering, construction
management and remediation services areas. With the acquisitions of BCM and RES
in the third quarter of fiscal 1995 (as described in Note 2 of Notes to
Consolidated Financial Statements), the Company has closed and/or combined
certain offices to reduce its facilities costs. The Company will continue to
combine or consolidate its facilities to achieve the best possible utilization.
The following is a summary of the major office and warehouse facilities:
Plymouth Meeting, Pennsylvania (1) . . . . . . . . . . . . . . . . 91,000 sq. ft. Leased
Mobile, Alabama (2) . . . . . . . . . . . . . . . . . . . . . . . . 57,000 sq. ft. Leased
Porter, Indiana . . . . . . . . . . . . . . . . . . . . . . . . . . 33,000 sq. ft. Owned
New Orleans, Louisiana . . . . . . . . . . . . . . . . . . . . . . 33,000 sq. ft. Leased
Denver, Colorado (3) . . . . . . . . . . . . . . . . . . . . . . . 33,000 sq. ft. Leased
Alameda, California (4) . . . . . . . . . . . . . . . . . . . . . . 36,000 sq. ft. Leased
Torrance, California . . . . . . . . . . . . . . . . . . . . . . . 31,000 sq. ft. Owned
___________
(1) 19,000 square feet are vacant and the Company intends to sublet the
space.
(2) Four locations: approximately 5,000 square feet are vacant and the
Company intends to sublet the space.
(3) Two locations: the Company intends to consolidate into one location
and reduce total square footage.
(4) Two primary locations: a Regional office and operations facilities.
The Company also has offices in Panama City, Florida; Albuquerque, New
Mexico; Pocono Summit and Pittsburgh, Pennsylvania; Merriam, Kansas; St. Louis,
Missouri; Dallas and Houston, Texas; Jackson, Mississippi; Chicago, Illinois;
Detroit, Michigan; Portland, Oregon; Bakersfield, Newport Beach, Pleasanton and
Mountain View, California; Burlington, New Jersey; and Washington, D.C. The
Company believes its office and warehouse space and the availability of space
is adequate for its present needs.
The Company's senior lender has been granted a security interest in
substantially all assets of the Company and its consolidated subsidiaries.
12
13
ITEM 3. LEGAL PROCEEDINGS
CANONIE ENVIRONMENTAL SERVICES CORP. VS.
NL INDUSTRIES, INC., ET AL. (THE "PRPS")
The Company filed an action for breach of contract and rescission
against seven PRPs in the Circuit Court, Multnomah County, Oregon in February
1995. The Company is pursuing recovery for amounts due as a result of the
performance of services, including $1.3 million of accounts receivable and
retainage, $2.5 million of unrecovered equipment investment, and other damages
resulting in a total claim exceeding $8.5 million. Prior to the Company's
claim, activity at the site had been suspended pending approval by the EPA of
changes in the remedial activities proposed by the PRPs and supported by
independent engineering reports which acknowledge significant differences in
the waste at the site from those conditions specified in the EPA Record of
Decision and in the initial Remedial Investigation performed by others at the
site. The court action has been abated pending the arbitration before the
American Arbitration Association demanded by the PRPs who are seeking
reimbursement from the Company of approximately $18 million paid for work
performed under the contract. The Company will vigorously defend its position
and intends to aggressively pursue all amounts recoverable related to the
performance at this site.
CINDRA BROWN, ET AL VS. RIEDEL ENVIRONMENTAL SERVICES, INC., ET AL.
In November 1993, second amended complaints and initial complaints
were filed in the Circuit Court, County of Jackson, Mississippi, which included
RES along with a number of other defendants in claims pending in 27 separate
civil actions. These civil actions involve approximately 219 plaintiffs and
include two wrongful death claims. Plaintiffs allege that RES was negligent in
transferring and clean-up activities of the chemical diethylamine, released
from an overturned tanker. Settlements by other defendants are pending. In
the event proposed settlements are completed, eighty-seven plaintiffs' claims
will be dismissed leaving one hundred thirty-two plaintiffs with claims
remaining against RES, including the two wrongful death claims. The special
damages of remaining plaintiffs are approximately $400,000, not including
unstated general damages. RES will be entitled to a credit for payments made
by settling defendants allocated against any remaining plaintiffs. The Company
is vigorously defending the described litigation.
U-MAX ENGINEERING AND CONSTRUCTION CORP. VS.
STROUD TOWNSHIP BOARD OF SUPERVISORS, ET AL.
The plaintiff construction company filed a claim for damages exceeding
$3,000,000 against Stroud Township Board of Supervisors (the "Township") in the
U.S. Federal District Court, Middle District of Pennsylvania based on improper
specifications, delay damages and improper soil testing. The Township filed
third party complaints against the soil testing laboratory and BCM. Upon
completion of the trial in October 1995, the Court entered a judgment of
$2,028,000 in favor of the plaintiff attributable in one-half equal shares
against the Township and BCM. The plaintiff's action for recovery did not
include any claim against BCM. BCM's counsel has filed motions for relief with
the District Court based on error in the application of law and the rendering
of a judgment which counsel feels subjects the decision to reversal on appeal.
The Company intends to timely file an appeal to the Third Circuit Court of
Appeals pending decision on motions for post trial relief filed with the trial
court. The Company's uninsured exposure to this judgment is less than
$300,000.
TRANSCONTINENTAL REALTY INVESTORS, INC. VS. MT. LAUREL ASSOCIATES, ET AL.
A mortgage lender commenced this action against the Mt. Laurel
Associates (the "Developer"), its legal counsel, architect and BCM in October
1990 in the Superior Court of New Jersey, Burlington County, New Jersey. The
claims against BCM are for damages based on negligent misrepresentations in
certifications allegedly made by BCM at the closing of an $8.5 million loan of
compliance of the property with laws, ordinances and government requirements.
The U.S. Corps of Engineers issued a letter requiring the Developer to cease
and desist from certain activities on the property due to placement of fill
material placed in regulated wetlands in violation of the Federal
13
14
Clean Water Act. The Developer's legal counsel and architect have been
dismissed through an agreed settlement. BCM's scope of services excluded the
obligation to assess and delineate the Developer's property with respect to
federally regulated wetlands. BCM is vigorously defending this matter which is
expected to be set for trial in the spring of 1996.
OTHER MATTERS
The Company is also currently a party to other claims and litigation
incidental to its business. Although no assurances can be given, management
believes, based on its experience and after considering appropriate reserves
that have been established, that the outcome of the litigation described above
and other litigation will not have a material adverse effect on the future
financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the
last three months of the transition period.
At the Company's 1995 Annual Meeting of Stockholders held on November
17, 1995, the stockholders ratified the issuance of the Convertible Senior
Subordinated Note and the Senior Note to 399 Venture Partners, Inc. (see Note 8
of Notes to Consolidated Financial Statements).
14
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of September 30, 1995, the Company had more than 1,750 holders of
record and beneficial holders of its Common Stock. The Company has not paid
cash dividends on its Common Stock and is limited from doing so under the terms
of its credit facilities. The Company anticipates that for the foreseeable
future any earnings will be retained for use in its business, and no cash
dividends will be paid on the Common Stock. Declaration of Common Stock
dividends will remain within the discretion of the Company's Board of Directors
and will depend upon the Company's growth, profitability, financial condition,
lender covenants and other relevant factors.
The Company's Common Stock is listed with the NASDAQ National Market
System under the symbol "SMTH." The table below reflects the high and low bid
and asked quotations for each of the Company's two fiscal quarters during the
seven month period from March 1 to September 30, 1995 and the latest two fiscal
years. The prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission and do not necessarily represent actual transactions.
YEARS ENDED FEBRUARY 28
SEVEN MONTHS ENDED ---------------------------------------------
SEPTEMBER 30, 1995 (1) 1995 1994
----------------------- ------------------ ------------------
High Low High Low High Low
---- --- ---- --- ---- ---
1st Quarter 6 5/8 5 4 5/8 2 3/4 5 1/4 3 3/4
2nd Quarter 6 1/4 4 3/8 5 1/2 2 7/8 4 1/2 2 3/4
3rd Quarter 7 5/8 5 4 1/4 2 7/8
4th Quarter 7 1/4 5 5 2 3/4
September 30, 1995 5 1/4 4 3/8
(1) Quarterly periods are consistent with fiscal years 1994 and 1995. A
one-month period ended September 30, 1995 was added for the purposes of
this report.
15
16
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data shown below has been derived from the
audited consolidated financial statements of the Company except for the
unaudited results for the seven months ended September 30, 1994, which is shown
for comparative purposes only. The balance sheet data is presented as of the
end of the fiscal years shown. The information set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and related notes included elsewhere herein.
STATEMENT OF OPERATIONS DATA
(Thousands, except per share data)
SEVEN MONTHS ENDED
SEPTEMBER 30 YEARS ENDED FEBRUARY 28,
----------------- ---------------------------------------------------------
1995 1994 1995 1994 1993 1992 1991
(unaudited)
-------- ----------- -------- -------- -------- -------- ---------
Revenues . . . . . . . . . . . . . . $105,290 $ 43,771 $104,738 $59,461 $71,376 $65,807 $69,888
Income (loss) from operations . . . . 2,831 1,573 4,021 (6,576) (11,466) 2,546 2,565
Net income (loss) . . . . . . . . . . 346 1,460 2,773 (9,999) (9,923) 807 1,118
Earnings (loss) per common and common
equivalent share . . . . . . . . . -- .25 .44 (1.75) (1.74) .14 .20
Weighted average number of common and
common equivalent shares
outstanding . . . . . . . . . . . 5,964 5,782 5,866 5,701 5,701 5,701 5,701
BALANCE SHEET DATA
Working capital . . . . . . . . . . . $ 15,410 $ 11,462 $ 11,092 $ 3,283 $ 10,681 $ 19,837 $ 19,698
Total assets . . . . . . . . . . . . 114,008 70,295 100,554 33,524 43,331 47,197 46,317
Long-term obligations and redeemable
preferred stock . . . . . . . . . 50,277 28,709 42,588 -- -- -- --
Common stockholders' equity . . . . . 20,289 18,715 20,098 17,183 27,151 37,048 36,197
See Note 2 of Notes to Consolidated Financial Statements regarding the
acquisition of BCM which was recorded in the Company's Balance Sheet as of
September 30, 1994. No operating results were included prior to this period.
See Note 15 of Notes to Consolidated Financial Statements for a
discussion of special items including contract cost overruns and claims,
special charges, and write-offs of investments in fiscal 1993 and 1994.
No cash dividends were paid on common shares for any period.
16
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages which certain items from the consolidated statements of operations
bear to the revenues of the Company. This table and Management's Discussion and
Analysis of Financial Condition and Results of Operations should be read in
conjunction with the selected financial data, the consolidated financial
statements and the notes to the consolidated financial statements of the
Company included elsewhere herein.
SEVEN MONTHS ENDED
SEPTEMBER 30, YEARS ENDED FEBRUARY 28,
--------------------- -------------------------------------
1995 1994 1995 1994 1993
(unaudited)
------ ----------- ------ ------ ------
Revenues . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues . . . . . . . . . . . . 87.3 86.8 85.9 94.2 100.7
------ ------ ------ ------ ------
Gross profit . . . . . . . . . . . . . . 12.7 13.2 14.1 5.8 (0.7)
Selling, general, and administrative
expenses . . . . . . . . . . . . . . . 8.6 9.6 9.8 9.7 9.2
Amortization of intangible assets, goodwill
and deferred financing fees . . . . . . 1.0 -- .5 -- --
Special items . . . . . . . . . . . . . . .4 -- -- 7.2 6.1
------ ------ ------ ------ ------
Income (loss) from operations . . . . . . 2.7 3.6 3.8 (11.1) (16.0)
Interest expense . . . . . . . . . . . . 2.1 0.1 1.2 0.7 0.2
------ ------ ------ ------ ------
Income (loss) before income tax expense
(benefit) . . . . . . . . . . . . . . 0.6 3.5 2.6 (11.8) (16.2)
Income tax expense (benefit) . . . . . . 0.1 0.8 .5 0.2 (3.6)
------ ------ ------ ------ ------
Income (loss) before earnings (losses) of
unconsolidated affiliates . . . . . . . . 0.5 2.7 2.1 (12.0) (12.6)
Share in earnings (losses) of unconsolidated
affiliates . . . . . . . . . . . . . . (0.2) 0.6 0.5 (4.8) (1.3)
------ ------ ------ ------ ------
Net income (loss) . . . . . . . . . . . . 0.3% 3.3% 2.6% (16.8)% (13.9)%
====== ====== ====== ====== ======
GENERAL
The Company provides a broad range of comprehensive environmental
consulting, engineering, remediation and construction services to clients
throughout the United States, including various federal, state and local
government agencies, with sites contaminated with hazardous materials. The
timing of the Company's revenues is dependent on its backlog, contract awards
and the performance requirements of each contract. The Company's revenues are
also affected by the timing of its clients' activities. Due to these changes in
demand, the Company's quarterly and annual revenues fluctuate. Accordingly,
quarterly or other interim results should not be considered indicative of
results to be expected for any quarter or full fiscal year.
The Company's consolidated financial statements at September 30, 1995
include the results of operations for BCM and Riedel since their acquisition by
the Company in September and November 1994, respectively. RESNA, from which
certain assets and selected contracts for services were acquired by the
Company, is also included beginning January 1, 1995. The Company uses the
equity method of accounting for incorporated joint ventures and affiliated
companies where ownership ranges from 20 to 50 percent.
The seven month period from March 1, 1995 to September 30, 1995 is a
transitional period in connection with the Company's adoption of a new fiscal
year end. All references to fiscal 1995, 1994 and 1993 refer to the twelve
month periods ended February 28, 1995, 1994 and 1993, respectively. Certain
amounts in prior years have been reclassified to conform with the current
period presentation.
17
18
SEVEN MONTHS ENDED SEPTEMBER 30, 1995 COMPARED WITH SEVEN MONTHS ENDED
SEPTEMBER 30, 1994.
Revenues for the seven months ended September 30, 1995 were $105.3
million, compared with $43.8 million for the same period in 1994, an increase
of $61.5 million or 140 percent. This increase in revenues was primarily
attributable to the acquisition of BCM, RES and RESNA in fiscal 1995. Revenues
included in the consolidated financial statements for the seven months ended
September 30, 1995, as a result of these acquisitions, were $79.9 million.
Revenues for the seven months ended September 30, 1995 exclusive of revenues
from acquisitions were $25.4 million, compared with $43.8 million for the
corresponding period in 1994. This decrease of $18.4 million, or 42 percent,
was primarily attributable to the completion of two major long-term remediation
construction contracts before March 1, 1995.
Gross profit for the seven months ended September 30, 1995 was $13.4
million compared with $5.8 million for the comparable seven months ended
September 30, 1994, a 131 percent increase. Gross profit was 12.7 percent of
revenues for the seven months ended September 30, 1995 compared with 13.2
percent of revenues for the seven months ended September 30, 1994. The decrease
in gross profit as a percentage of revenues was primarily attributable to a
lower level of work performed on remediation construction contracts during the
seven month period ended September 30,1995 as compared to the corresponding
period in 1994. Gross profit, exclusive of gross profit from acquisitions, was
$2.3 million, compared with $5.8 million for the corresponding period in 1994.
The decrease of $3.5 million relates primarily to the lower level of work
performed during the seven months ended September 30, 1995. Gross profit as a
percentage of revenues was 9.1 percent, exclusive of the operating results of
the acquired companies, compared with 13.2 percent for the same period of 1994.
The operating results of BCM, which generates a higher gross profit as a
percentage of revenues on engineering services, are included in the seven
months ended September 30, 1995 and offset the lower operating results from
remediation construction contracts during that period. Included in revenues
and cost of revenues for the seven months ended September 30, 1994 was $6.8
million of subcontracted work to STI, the Company's 50 percent owned
subsidiary. Gross profit as a percentage of revenues for the seven months
ended September 30, 1994 would have been 15.6 percent, exclusive of the
subcontracted work to STI.
Selling, general and administrative expenses (SG&A) were $9.1 million
compared with $4.2 million for the same period in 1994, an increase of $4.9
million. The increase in SG&A is principally a result of additional
administrative costs associated with acquisitions and increased marketing and
legal expenses. SG&A as a percentage of revenues for the period was 8.6 percent
compared with 9.6 percent for the same period in 1994 and reflects the benefits
of consolidating administrative functions in connection with the acquisitions
of BCM, RES and RESNA.
Amortization of goodwill, intangible assets and deferred financing
fees for the seven months ended September 30, 1995 were $1 million as a result
of the acquisitions of BCM, RES and RESNA.
Special items were $393,000 for the seven months ended September 30,
1995 and include severance and relocation costs in connection with office
closings and consolidations.
Net interest expense for the seven months ended September 30, 1995 was
$2.2 million compared with $41,000 for the same period in 1994. The increase
in interest expense is primarily due to increased bank borrowings and related
debt in connection with acquisitions of BCM, RES and RESNA.
The Company's share of losses in its unconsolidated affiliate, STI,
for the seven months ended September 30, 1995 was $173,000, compared with
earnings of $263,000 for the same period in 1994. STI performed two
significant contracts during the seven months ended September 30, 1994 at a
profit, but was not engaged in significant contract work for 1995 and incurred
a loss. STI has identified several bidding opportunities and expects to be
successful in securing contract work for fiscal 1996.
18
19
In the seven months ended September 30, 1995, the Company provided
$87,000 for state income taxes. No federal taxes were provided for the period.
The effective tax rate of approximately 14 percent differs from the federal
statutory rate of 35 percent as a result of state income taxes and utilization
of net operating loss carryforwards. A valuation allowance has been recorded
in both periods to reduce the deferred tax assets related to these
carryforwards and other deferred tax assets to zero since the realization of
such is not assured.
Results of the transition period may not be indicative of future years
as the Company's and its clients' businesses are subject to evolving
regulations by the EPA and other federal, state and local environmental
authorities. Changes in applicable regulatory standards or current regulatory
policies, resulting in delays in project approvals or modified treatment
standards, may impact environmental compliance and cleanup spending levels,
especially with respect to discretionary cleanups by industrial companies.
Accordingly, the Company's revenues from remediation projects may vary from
year to year. The Company believes that, despite possible changes in regulatory
policies and spending levels for both the public and private sectors, the
Company will continue to gain market share as a result of the expanded service
capabilities resulting from recent acquisitions.
1995 COMPARED WITH 1994
Revenues for fiscal 1995 were $104.7 million which was $45.2 million
or 76 percent, greater than fiscal 1994 revenues of $59.5 million. The increase
in revenues was primarily attributable to the acquisition of BCM and RES in
September and November 1994, respectively. Revenues of BCM and RES included in
fiscal 1995 were approximately $24 million and $15 million, respectively.
Revenues for fiscal 1995, exclusive of revenues attributable to the
acquisitions referred to above, were $67.1 million, or 12.7 percent greater
than fiscal 1994 revenues of $59.5 million. This increase in revenues was
principally due to a higher volume of large remediation contracts performed
during fiscal 1995.
Gross profit for fiscal 1995 was $14.8 million, an $11.4 million
increase from the $3.4 million reported in fiscal 1994. Gross profit as a
percentage of revenues was 14.1 percent in fiscal 1995 compared with 5.8
percent in fiscal 1994. Included in fiscal 1995 and 1994 revenues and cost of
revenues were $8.0 million and $4.6 million related to work subcontracted to
STI, a 50 percent owned affiliate, in fiscal 1995 and 1994, respectively.
Fiscal 1994 cost of revenues included approximately $2.3 million of additional
costs attributable to changes in profit estimates related to construction
projects substantially completed prior to fiscal 1994. Gross profit as a
percentage of revenues for fiscal 1995 and fiscal 1994, exclusive of the
subcontracted work to STI and additional costs, was 15.3 percent and 10.6
percent, respectively. The increase in gross profit in fiscal 1995 was
primarily due to the inclusion of five months of the operating results of BCM,
which as an engineering division generates higher gross profit margins, and a
reduction in regional operations expenses. Gross profit, exclusive of operating
results attributable to acquisitions, was $8.6 million in fiscal 1995, or 12.8
percent of revenues, compared with $3.4 million in fiscal 1994, or 5.8 percent
of revenues. Fiscal 1994 gross profits were reduced by a charge of $2.3
million, or 3.9 percent of revenues, which was attributable to changes to
profit estimates on remediation projects substantially completed prior to
fiscal 1994. Without this charge, fiscal 1994 gross profits would have been
$5.7 million, or 9.7 percent of revenues. The increase in gross profit as a
percentage of revenues during 1995, as compared to 1994, of 3.1 percent
resulted primarily from a reduction in indirect expenses due to the Company
operating with three fewer regional offices.
Selling, general and administrative expenses for fiscal 1995 were
$10.3 million, a $4.5 million or 77.6 percent increase, compared with $5.8
million for fiscal 1994. SG&A expenses as a percentage of revenues were 9.8
percent in fiscal 1995 compared with 9.6 percent in fiscal 1994. The increase
resulted primarily from the inclusion of five months of BCM and three months of
RES and the related SG&A expenses, increases in incentive compensation expenses
and increased administrative management costs. Amortization of goodwill,
intangible assets and deferred financing fees were $510,000 in 1995 as a result
of the acquisitions of BCM, RES and RESNA.
19
20
In fiscal 1994, the Company recorded special items aggregating $4.3
million, primarily associated with management's focus on resolving ongoing
operational issues. Included in the special items were $2.4 million of
restructuring charges associated with office closures and severance costs
aggregating $1.8 million and the write-off of an investment in a non-core
business no longer fitting the strategic direction of the Company of
approximately $600,000. The effect of the office closures and restructuring
charges was to eliminate the costs of operating certain offices in fiscal 1995
and thereafter. These costs, primarily indirect costs classified in cost of
revenues, aggregated $2.3 million in fiscal 1994. Since the offices were closed
and staff reductions occurred in March and April of 1994, the first two months
of the fiscal year, savings were realized immediately and for virtually all of
fiscal 1995. Additionally in 1994, there were other special items which
included an asset write-off resulting from the implementation of a new
information system of approximately $440,000, a writedown of process equipment
determined to have impaired value of approximately $490,000, and an accrual of
costs associated with litigation of $1 million. Identifiable savings beyond
1995 can not be determined because of the change in size and complexity of the
Company resulting from the recent acquisitions of BCM and RES. During 1995, the
office closure and severance accrual was reduced by payments totaling $1.4
million. The remainder of the accrual will be paid as follows: 1996, $200,000;
1997, $100,000; and 1998 and 1999, $50,000 respectively.
Net interest expense for fiscal 1995 was $1.2 million compared with
$412,000 in fiscal 1994. An increase in bank borrowings in connection with
acquisitions of BCM and Riedel resulted in an $817,000 increase in net interest
expense from fiscal 1994.
In fiscal 1995, the Company provided for income taxes of $558,000 at
an effective tax rate of 20 percent. The effective tax rate differs from the
federal statutory rate of 35 percent as a result of state income taxes and the
utilization of net operating loss carryforwards. In fiscal 1994, the Company
provided $135,000 for state income taxes while federal income taxes were
reduced by the utilization of available net operating loss carryforwards. A
valuation allowance has been recorded to reduce the deferred tax asset related
to these carryforwards and other deferred tax assets to zero since the
realization of such is not assured.
The Company had net operating loss and net capital loss carryforwards
for federal income tax purposes of approximately $4.5 million and $3.3 million,
respectively, at February 28, 1995. If unused, the net operating loss will
expire beginning in fiscal 2008. The capital loss carryforward, if unused, will
expire beginning in fiscal 1999. Future tax benefits from the carryforwards
will reduce income tax expense when realized. Due to a greater than 50 percent
change in ownership of the Company within the past three fiscal years, use of
the carryforwards to reduce future taxable income will be limited to
approximately $900,000 annually. However, future recognition of these net
operating loss and net capital loss carryforwards will occur only if the
operations of the Company generate sufficient earnings before their respective
expiration.
The Company's share of earnings of its unconsolidated affiliate, STI,
in fiscal 1995 was $539,000 compared with a loss of $221,000 in fiscal 1994.
STI performed on two significant contracts for the Company in fiscal 1995 at a
profit. STI was not engaged in significant contract work prior to the fourth
quarter of fiscal 1994 and incurred a loss. Also, in fiscal 1994, the Company
wrote off $2.7 million representing its investment in a joint venture involving
an incineration project which was impaired by more stringent regulations and
greater costs to complete than was anticipated and a decline in the demand for
incineration.
1994 COMPARED WITH 1993
Revenues for fiscal 1994 were $59.5 million which was $11.9 million,
or 17 percent, less than reported fiscal 1993 revenues of $71.4 million. Fiscal
1993 revenues were reported net of a $7.7 million write-off of claims
recognized as revenues prior to fiscal 1993. Giving effect to this write-off,
revenues actually declined $19.6 million in fiscal 1994 from fiscal 1993. The
decrease in revenues was a result of lower private sector market demand, the
absence of large dollar value excavation and transportation projects and
increased selectivity in the bidding process during fiscal 1994.
20
21
Gross profit for fiscal 1994 was $3.4 million, a $3.9 million
improvement from the $498,000 gross loss in fiscal 1993. The gross loss in
fiscal 1993 was caused primarily by the $7.7 million write-off of claims from
prior periods mentioned above. Fiscal 1994 cost of revenues included
approximately $2.3 million attributable to additional costs related to
construction projects substantially completed prior to fiscal 1994. Also,
included in fiscal 1994 revenues and cost of revenues were $4.6 million related
to work subcontracted to STI. Gross profit as a percentage of revenues for
fiscal 1994 and fiscal 1993, exclusive of the additional costs, subcontracted
costs to STI and the write-off of claims relating to prior periods, was 10.6
percent and 9.2 percent, respectively.
Selling, general and administrative expenses for fiscal 1994 were $5.8
million, a $800,000 or 12.8 percent decrease, compared with $6.6 million for
fiscal 1993. The decrease resulted primarily from staff reductions,
consolidation of and reduction in the size of offices and other reorganization
actions as the Company attempted to "right size" its administrative operations.
SG&A expenses as a percentage of revenues was 9.7 percent in fiscal 1994
compared with 9.2 percent in fiscal 1993. The percentage increase was primarily
the result of the diminished revenue levels in fiscal 1994.
In fiscal 1994, the Company, as mentioned above, recorded special
items of $4.3 million associated with management's focus on resolving
operational issues, such as new information systems, staff reductions and the
closure of certain offices. In fiscal 1993, the Company also recorded special
charges of $4.4 million consisting of a $2.6 million reduction in the carrying
value of a trade note receivable, $1.6 million for severance, office
consolidation and other costs associated with reorganization of administrative
operations and $200,000 for the loss on the sale of a subsidiary.
Net interest expense for fiscal 1994 was $412,000 primarily from
borrowings under the Company's bank credit agreement and fees related to an
interest rate swap which was canceled. An increase in bank borrowings caused
the $269,000 increase in net interest expense from fiscal 1993.
In fiscal 1994, the Company paid $135,000 in state income taxes.
Federal income taxes were offset by the utilization of available net operating
loss carryforwards. In fiscal 1993, the Company recorded income tax benefits of
$2.6 million from a carryback of its net operating loss.
The Company's share of operating losses of unconsolidated affiliates
in fiscal 1994 was $221,000, a $680,000 decrease from fiscal 1993. The decrease
in losses resulted from higher margin work and lower general and administrative
expenses. Also, in fiscal 1994, the Company, as mentioned above, wrote off $2.7
million representing its investment in a joint venture involved in an
incineration project.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are cash, cash flows generated
from operations and available borrowings under the Company's credit facilities.
Cash totaled $510,000 at September 30, 1995 compared with $2.3 million at
February 28, 1995 and $2.8 million at September 30, 1994. The Company's
working capital increased to $15.4 million at September 30, 1995 from $11
million at February 28, 1995 and $11.5 million at September 30, 1994. The
increase in working capital is primarily a result of increases in billed and
unbilled accounts receivable during the seven months ended September 30, 1995,
partially offset by increases in accounts payable.
At September 30, 1995, the Company had a $30 million credit facility
under the LaSalle Loan Agreement, consisting of a $4.5 million term loan and a
$25.5 million revolving line of credit, subject to limitations pursuant to the
calculation of a defined borrowing base. The calculation of the borrowing base
is, in large part, based on eligible accounts receivable, as defined in the
LaSalle Loan Agreement, including a $4 million declining unbilled
account subline, which was personally guaranteed by E. Brian Smith, Chairman,
President and Chief Executive Officer of the Company. At September 30, 1995,
$27 million of borrowing
21
22
capacity was available to the Company against which the Company had outstanding
borrowings of $25.4 million.
On October 18, 1995 the Company executed a new $35 million senior credit
facility with Chemical Bank and Bank of Tokyo. The new facility (the "Chemical
Facility"), which replaced the LaSalle Loan Agreement, consists of a $6.5
million term loan and a $28.5 million revolving line of credit. The Chemical
Facility provides for a $5 million unbilled account subline whereby unbilled
receivables, subject to limitations, are included in the calculation of the
expanded borrowing base. The personal guarantee by Mr. Smith, which was
provided for the unbilled account subline in the LaSalle Loan Agreement, was
terminated upon the execution of the Chemical Facility. Similar to the
LaSalle Loan Agreement, the calculation of the borrowing base for the Chemical
Facility is based on eligible accounts receivable, as defined in the credit
agreement. As a result, changes in the borrowing base can occur due to the
magnitude and timing of the Company's billings for services, which in turn are
impacted by, among other things, contractual terms and seasonal considerations,
the timing of collection of billed receivables, and other factors. On October
18, 1995, available borrowing capacity, under the Chemical Facility, was
approximately $30 million as compared with the LaSalle Loan Agreement, under
which $23 million of borrowing capacity was available.
In connection with the LaSalle Loan Agreement, the Company was required
to maintain a minimum average availability for the thirty day period preceding
the payment of any dividends. The Company has made all quarterly dividend
payments to the holders of its Redeemable Preferred Stock. During the thirty
day period preceding the September 30, 1995 Redeemable Preferred Stock dividend
payment, the Company did not meet the minimum average availability requirement.
The Company advised its lender that it had not met this requirement and
requested a waiver. A similar situation occurred prior to the June 30, 1995
Redeemable Preferred Stock dividend payment and the Company was granted a
waiver. However, in view of the Company's refinancing under the Chemical
Facility, the issue rendered itself moot.
The Company's funding requirements arise primarily from its operating
expenses and the debt service and acquisition related expenses incurred in
fiscal 1995. Prior to fiscal 1995, the Company had met such requirements
primarily with cash flows generated by operations and debt financing. During
fiscal 1995, the Company substantially increased its size through the
acquisition of BCM, RES, and certain assets of RESNA, and in the process,
incurred long-term debt of approximately $31 million and issued $7.8 million of
Redeemable Preferred Stock. At September 30, 1995, the Company's long term
debt, including current maturities of $2.1 million, was $39.5 million, the
components of which were outstanding borrowings under the LaSalle Loan
Agreement of approximately $25.4 million, the $10 million Convertible Senior
Subordinated Note, the $2 million Senior Note and $2.1 million of capital
leases and other notes. As of December 12, 1995, the Company's indebtedness
under the Chemical Facility was $6.3 million of term loans and $26.7 million of
borrowings under the line of credit. The unused borrowing capacity, as of
December 12 1995, under the Chemical Facility line of credit was $1.3 million.
During the seven months ended September 30, 1995, management of the
Company continued its focus on consolidating the acquired companies by
resolving operational issues, taking actions to increase the efficiency of the
Company's operations and improving the management of its working capital by
implementing programs to accelerate the collection of its accounts receivables.
Additionally, the Chemical Facility provides the Company additional borrowing
capacity. Management of the Company believes that the above actions and the
expanded credit facility enhances the Company's ability to fund its obligations
in future periods. However, in the event the Company fails to improve the
management of its working capital on a timely basis, its liquidity and
financial position could be materially adversely impacted.
22
23
OTHER ITEMS AFFECTING OPERATING RESULTS
With the acquisition of RES in November, 1994, the Company also
generates a substantial portion of revenues under its Emergency Response
Cleanup Services (ERCS) contracts for the EPA. The Company is the prime
contractor for removal of hazardous substances in ERCS Zone 4A, comprising 15
midwestern and southern states, and ERCS Region 5, comprising 6 states
bordering the Great Lakes. The ERCS Zone 4A contract has been renewed through
its final option year covering the period through February 1996. The ERCS
Region 5 contract is renewable for one year periods through September 1997.
On July 19, 1995, the Company was notified by Region 5 of the EPA of
its intention to exercise a third option period of an Indefinite Delivery Order
Contract to provide Emergency Response Services. The option period will run
from September 29, 1995 through September 28, 1996. The maximum contract
amount available for this region is approximately $19 million.
Revenues from EPA contracts for the seven months ended September 30,
1995 were approximately $30 million. Annual revenues from EPA contracts for
RES in the years prior to the Company's acquisition averaged approximately $35
million. The Company anticipates that it will continue to receive similar
levels of revenues in fiscal 1996. The Company intends to actively seek the
award of future EPA remedial action contracts, particularly the replacement
contract for the ERCS Zone 4A.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data are
indexed in Item 14 hereof and incorporated in this item by reference thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
23
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The Company's Board of Directors is divided into three distinct
classes. The directors in Class A, Class B and Class C named below have terms
which expire in 1996, 1997 and 1998, respectively. The following table
contains certain information regarding the directors.
DIRECTORS OF THE REGISTRANT YEAR
FIRST
ELECTED
NAME, AGE, OCCUPATION AND BUSINESS EXPERIENCE DIRECTOR
--------------------------------------------- --------
DIRECTORS TO SERVE UNTIL ANNUAL MEETING IN 1996 (CLASS A)
ARTHUR A. RIEDEL, 65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1994
Chairman of the Board and President of Riedel Resources, Inc. since 1979; Chairman of the Board of
Columbia Western, Inc. 1986 to 1995; Chairman and Chief Executive Officer of Celtic Development,
Inc.; Director of ESCO Corporation, Acordia/Northwest Co.
BYRON LEE, JR., 66, (7), (9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1986
Retired as President and Chief Executive Officer of the Nuclear Management and Resources Council
(NUMARAC), a nuclear power industry organization, in July 1992. Prior to May 1, 1987, served as
Executive Vice President of Commonwealth Edison Company, an electric utility, for seven years.
Director of Unicom Corporation (formerly known as Commonwealth Edison Company.)
RICHARD M. CASHIN, JR., 42, (6), (10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1994
Managing Director Citicorp Venture Capital, Ltd., a company that provides debt and equity financing
to businesses in the U.S., from 1980 to present; Director, Levitz Furniture Co.; Tital Wheel
International; Hoover Group; Autostyle Plastics; Coper-Vulcan; Delco Remy America; Freedom Forge;
JAC Products.
DIRECTORS SERVING UNTIL ANNUAL MEETING IN 1997 (CLASS B)
MELVIN H. CHIOGIOJI, PH.D., REAR ADMIRAL, U.S. NAVAL RESERVE (RET.), 56, (2), (6), (8) . . . . 1994
President of Intemco, Ltd., an independent power producing company, since June 1992, President of
Mele Associates, Inc., a consulting services company and President of EFC, Inc. an automobile body
repair business, since June 1980. Construction Manager and Deputy Director, Office of New
Production Reactors, U.S. Department of Energy from June 1989 to January 1993. Commander, Second
Naval Construction Brigade, Civil Engineer Corps., U.S. Naval Reserve from 1987 to 1993.
ROBERT L. GUYETT, 58, (3), (6), (7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1994
Consultant to since May 1995, and formerly Senior Vice President and Chief Financial Officer of
Engelhard Corporation, a specialty chemicals and precious metals management company, from
September 1991. Senior Vice President, Chief Financial Officer and Director of Fluor Corporation,
an international engineering and construction company, from 1987 to 1991. Director of Newport
Corporation, a manufacturer of precision laboratory equipment, fiber optic and microscopy systems.
MAJOR GENERAL HUGH G. ROBINSON (RET.), 63, (4), (6), (7) . . . . . . . . . . . . . . . . . . . 1994
Chairman and Chief Executive Officer of the Tetra Group, Inc., a construction management
consulting company, since April 1989, and Senior Vice President of Grigsby Brandford & Co., Inc.,
an investment banking firm, since October 1988. Director of A.H. Belo Corporation, Columbus Realty
Trust, Texas Utilities Electric Company, Lomas Financial Corporation and Guaranty Federal Savings
Bank. Director of Federal Reserve Bank of Dallas from 1985 to 1991 (Chairman 1991).
24
25
DIRECTORS SERVING UNTIL ANNUAL MEETING IN 1998 (CLASS C)
E. BRIAN SMITH, 57, (5), (8), (9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1994
Chairman and Chief Executive Officer of the Company since January 1994 and President of
the Company since February 1995. Chairman, President and Chief Executive Officer of Smith
Holding Corporation, a company formed by Mr. Smith to seek investments in environmental
consulting and remediation firms, since August 1993. Consultant to International Technology
Corporation ("IT"), a company engaged in environmental remediation and consulting, from
July 1992 to August 1993. President and Chief Operating Officer of IT from 1988 to July
1992.
REAR ADMIRAL JOHN PAUL JONES, JR. (RET.), 63, (1), (7), (8) . . . . . . . . . . . . . . . . . . 1994
Independent Consultant since 1988. Retired as Chief of Navy Civil Engineers and
Commander, Naval Facilities Engineering Command in September 1987.
___________
(1) Mr. Jones was elected to the Board of Directors effective January 28,
1994 to fill the unexpired term of Charles E. Johnson, II, who resigned
effective as of January 28, 1994.
(2) Mr. Chiogioji was elected to the Board of Directors effective as of
January 16, 1994 to fill the unexpired term of J. Peter Grace, who
resigned effective as of January 16, 1994.
(3) Mr. Guyett was elected to the Board of Directors effective as of January
16, 1994 to fill the unexpired term of Richard A. Zartler, who resigned
effective as of January 16, 1994.
(4) Mr. Robinson was elected to the Board of Directors effective as of
January 16, 1994 to fill the unexpired term of D. Walter Robbins, Jr.,
who resigned effective as of January 16, 1994.
(5) Mr. Smith was elected to the Board of Directors effective as of January
16, 1994 to fill the unexpired term of Joseph R. Wright, Jr., who
resigned effective as of January 16, 1994.
(6) Member of the Audit and Finance Committee.
(7) Member of the Compensation Committee.
(8) Member of the Nominating and Insurance Committee.
(9) Mr. Byron Lee, Jr. resigned his position as a Class C director effective
as of the 1995 Annual Meeting of Stockholders held on November 17, 1995.
Mr. E. Brian Smith was elected as a Class C director to fill the vacancy
created by the resignation of Mr. Lee. Upon his election to the Class C
director's position, Mr. Smith resigned his Class A directorship, and the
Board of Directors appointed Mr. Lee to complete the remaining one-year
term of the Class A directorship vacated by Mr. Smith.
(10) Mr. Cashin resigned as a Class A director effective November 16, 1995.
25
26
EXECUTIVE OFFICERS
The following table contains certain information regarding the
Company's executive officers. Each of the executive officers of the Company
serves at the pleasure of the Board.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION WITH COMPANY
- ---- --- ---------------------
E. Brian Smith . . . . 57 Chairman, President and Chief Executive Officer
William T. Campbell . . 46 Vice President - Finance
C. Robert Conner . . . 40 Vice President - Engineering and Consulting Services
Anthony J. Dury . . . . 57 Vice President - Chief Administrative Officer
Frank J. Loscavio* . . 45 Vice President - Construction and Remediation Services
Wilfrid D. Nelson . . . 54 Vice President - General Counsel and Secretary
John W. Poling . . . . 50 Vice President - Treasurer and Assistant Secretary
Daniel M. Rice* . . . . 41 Vice President - Controller
Richard A. Zartler* . . 54 Vice President - Construction and Remediation Services
- -----------
* Mr. Loscavio was selected to replace Mr. Zartler, who retired, as Vice
President - Construction and Remediation Services, effective June 19, 1995.
Mr. Rice resigned as Vice President-Controller effective December 12, 1995.
E. Brian Smith has served as Chief Executive Officer since January 1,
1994, Chairman of the Board since January 28, 1994, and President of the
Company since February 1995, when the Company changed its name. In August 1993,
Mr. Smith formed Smith Holding Corporation, a company formed to seek
investments in environmental consulting and remediation firms. Mr. Smith serves
as Chairman, President and Chief Executive Officer of Smith Holding
Corporation. From July 1992 to August 1993, Mr. Smith was employed as a
consultant to International Technology Corporation. Mr. Smith was President and
Chief Operating Officer of International Technology Corporation from 1988 to
July 1992. Mr. Smith holds a B.S. in Electrical Engineering from Purdue
University and an M.S. in Financial Management from George Washington
University.
William T. Campbell, C.P.A., has served as Vice President - Finance
since February 1995. He joined the Company as Vice President - Controller in
March 1994. From 1984 to 1994, Mr. Campbell served various positions at
International Technology Corporation, including Vice President - Government
Contract Compliance from April 1992 to March 1994, Vice President - Controller
from April 1990 to April 1992, and Operations Controller from March 1989 to
April 1990. Mr. Campbell received a B.S. in Accounting from Pennsylvania State
University.
C. Robert Conner serves as Vice President - Engineering and Consulting
Services. Prior to joining the Company in January 1995, Mr. Conner was founder
and President of CRC Environmental, Inc., an engineering and business
development firm from 1992 to 1994. Mr. Conner was employed by International
Technology Corporation from 1989 to 1992, most recently as Regional Director in
Cincinnati, Ohio, and Westinghouse Electric Corporation from 1979 to 1989 in
several environmental management positions involving site assessment and
remediation. Mr. Conner has a B.S. in Physics and Mathematics from Memphis
State University and an M.S. in Nuclear Engineering from Carnegie Mellon
Institute.
Anthony J. Dury, Ph.D. has served as Vice President - Chief
Administrative Officer since February 1995. He joined the Company as Vice
President of Administration and Human Resources in January 1994. Prior to
joining the Company, Dr. Dury was at International Technology Corporation from
1984, most recently serving as Vice President - Human Resources. Dr. Dury
received a Ph.D. from the University of
26
27
Pittsburgh in Higher Education in 1979, a M.Ed. from Towson University and B.S.
from Pennsylvania State University.
Frank J. Loscavio is Vice President - Construction and Remediation
Services. He joined the Company in June 1995. From 1992 until May 1995, Mr.
Loscavio served as Vice President of Kenetech Corporation, CNF Constructors.
Mr. Loscavio served as President of Brinderson Corporation, a national general
construction firm, from 1987 through 1991. Mr. Loscavio has a degree in
Mechanical Engineering from the State University of New York.
Wilfrid D. Nelson is Vice President - General Counsel and Secretary.
He joined the Company in October 1993 as General Counsel and Secretary. Prior
to joining the Company, he served as Vice President and General Counsel/Risk
Manager of American NuKem Corporation and its subsidiary ENSR Corporation from
April 1988 to October 1993 and as an Assistant General Counsel of Brown & Root,
Inc. from 1976 to 1988. Mr. Nelson, a member of the Texas and Washington Bar
Associations, holds an undergraduate degree in Commerce/Accounting from Kansas
State University and is a graduate of the University of Texas School of Law.
John W. Poling has served as Vice President - Treasurer and Assistant
Secretary since February 1995. He joined the Company in November 1994 as
Controller. Mr. Poling has held financial positions with environmental
companies, including Vice President Finance and Chief Financial Officer of
Envirogen, Inc. from September 1993 to October 1994, President of Tier, Inc.,
an environmental remediation services company, from August 1992 to September
1993, and Vice President and Chief Financial Officer of Roy F. Weston, Inc.
from 1989 to 1992. Mr. Poling received a B.S. in Accounting from Rutgers
University.
Daniel M. Rice, C.P.A., joined the Company in February 1995, and
serves as Vice President - Controller. From 1988 to 1995, Mr. Rice was an
independent financial consultant servicing clients in several industries. Most
recently he was a consultant to BCM Engineers Inc. from March 1994 until
joining the Company. Mr. Rice holds a B.S. in Accounting from LaSalle
University in Philadelphia and is a member of the Pennsylvania Institute of
Certified Public Accountants. Mr. Rice resigned effective December 12, 1995.
Richard A. Zartler served as Vice President - Construction and
Remediation Services from February 1995 to June 1995. Mr. Zartler joined the
Company in January 1993 as President and Chief Executive Officer and served as
President until February 1995. Mr. Zartler had been President and Chief
Executive Officer of Grace Drilling Company, a subsidiary of Grace Energy
Corporation, a position he held since 1988. Mr. Zartler received his B.A.
degree in Engineering Science from Dartmouth College and his M.B.A. from
Harvard Business School. Mr. Zartler retired as of June 9, 1995.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires certain persons, including the Company's directors and executive
officers, to file reports with the Securities and Exchange Commission regarding
beneficial ownership of certain equity securities of the Company. All required
reports were timely filed.
27
28
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to the
compensation of the Company's Chief Executive Officer and the four other most
highly compensated executive officers during the seven months ended September
30, 1995 and the three preceding fiscal years. (1)
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------- -------------------------------
RESTRICTED SECURITIES ALL OTHER
STOCK UNDERLYING COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS/SARS SATION
--------------------------------- -------- --------- --------- ---------- ------------ --------
E. Brian Smith . . . . . . . . 1995T(2) $184,782 $ 38,000(5) -- 150,000 $ 38,500(4)
Chairman, Chief Executive Officer 1995 250,704 115,000 -- -- --
and President 1994 23,077(3) -- -- -- --
1993 -- -- -- -- --
C. Robert Conner . . . . . . . 1995T(2) $ 96,923 -- -- -- --
Vice President - Engineering 1995 32,000(6) -- -- 120,000 --
Services Division 1994 -- -- -- -- --
1993 -- -- -- -- --
Anthony J. Dury . . . . . . . . 1995T(2) $ 89,295 $16,200(5) $300,000(8) 5,000 --
Vice President - Chief 1995 136,873 -- -- -- --
Administrative 1994 12,981(7) -- -- 30,000 --
Officer 1993 -- -- -- -- --
William T. Campbell . . . . . . 1995T(2) $ 85,720 $14,000(5) $150,000(10) 5,000 --
Vice President - Finance and 1995 118,127(9) -- -- 25,000 --
Assistant Secretary 1994 -- -- -- -- --
1993 -- -- -- -- --
Richard A. Zartler . . . . . . 1995T(2) $ 84,458 $20,000(5) -- 17,500 --
Vice President - Construction and 1995 202,016 -- -- -- --
Remediation Division (11) 1994 200,000 -- -- -- --
1993 9,231(12) 65,000(13) -- 75,000 --
(1) The column showing Other Annual Compensation has been omitted because,
during the periods covered, no named executive officer received any
other annual compensation. The column showing Long Term Incentive Plan
Payouts has been omitted because, as of September 30, 1995, the Company
had no long term incentive plans (as defined in item 402 of Regulation
S-K) under which compensation can be earned.
(2) Reflects the seven month transition period commencing March 1, 1995 to
September 30, 1995.
(3) Reflects Mr. Smith's salary for the period from January 1, 1994 through
February 28, 1994.
(4) The Company reimburses the premium cost of a term life insurance policy on
the life of E. Brian Smith.
(5) Reflects incentive bonus paid for services rendered in fiscal 1995.
(6) Reflects Mr. Conner's salary for the period December 26, 1994 through
February 28, 1995.
(7) Reflects Mr. Dury's salary for the period from January 24, 1994 through
February 28, 1994.
(8) Reflects the market value of 60,000 shares of restricted stock granted on
August 10, 1995. The restricted stock vests equally over a period of seven
years.
(9) Reflects Mr. Campbell's salary for the period from March 7, 1994 through
February 28, 1995.
(10) Reflects the market value of 30,000 shares of restricted stock
granted on August 10, 1995. The restricted stock vests equally over a
period of seven years.
(11) Mr. Zartler served as President and Chief Executive Officer of the
Company from January 29, 1993 through December 31, 1993 and as
President from January 29, 1993 until his retirement on June 9, 1995.
(12) Reflects Mr. Zartler's salary for the period from January 29, 1993
through February 28, 1993.
(13) Represents a signing bonus paid to Mr. Zartler as an incentive to join
the Company.
28
29
TABLE OF OPTION GRANTS DURING TRANSITION PERIOD FROM MARCH 1 THROUGH
SEPTEMBER 30, 1995
The following table sets forth, as to the Chief Executive Officer and
the four most highly compensated other executive officers of the Company,
information with respect to stock option grants during the seven months ended
September 30, 1995 and the hypothetical values of such options. The Company has
not granted any stock appreciation rights.
OPTION/SAR GRANTS IN THE TRANSITION PERIOD
INDIVIDUAL GRANTS
--------------------------------------------------------------- ----------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS GRANT
UNDERLYING GRANTED TO EXERCISE OR DATE
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
NAME GRANTED (1) PERIOD ($/SH) DATE VALUE (2)
---- ------------ ------------ ----------- ---------- ---------
E. Brian Smith . . . 150,000(3) 42.6% $ 5.750 April 10, 2005 $600,000
C. Robert Conner . . . -- -- -- -- --
Anthony J. Dury . . . . 5,000 1.4 6.375 March 1, 2005 26,650
William T. Campbell . . 5,000 1.4 6.375 March 1, 2005 23,650
Richard A. Zartler . . 17,500 5.0 6.375 March 1, 2005 82,775
(1) These grants were made pursuant to the 1994 Stock Incentive Plan.
(2) This calculation is based on the Black - Scholes Option Pricing Model
adapted for use in valuing stock options. The actual value, if any,
an executive officer may realize ultimately depends on the market
value of the Common Stock at a future date. There is no assurance
that the value realized by an executive will be at or near the value
estimated by the Black - Scholes Model. The Black-Scholes Option
Pricing Model calculates the present value of option grants as
measured at the date of each grant. All options were granted at fair
market value. The estimated values under that model are based on
the assumptions described below.
GRANT DATE APRIL 10, 1995 MARCH 1, 1995
- -------------------------- -------------- -------------
Stock Price on Grant Date $ 5.750 $ 6.375
Exercise Price $ 5.750 $ 6.375
Expected Option Term 10 years 10 years
Risk-Free Interest Rate 7.24% 7.07%
Stock Price Volatility(a) 56.0% 56.0%
Dividend Yield 0.0% 0.0%
(a) The stock price volatility has been calculated using an average of
quarterly and monthly stock price data over a 5 year period, from March
31, 1990 through March 31, 1995.
(3) Granted under the Company's 1994 Stock Incentive Plan, these
options vest in three equal increments of 50,000 shares each upon the
Company's common stock achieving and maintaining for 59 consecutive
trading days an average closing price of $7.75 per share, $9.75 per
share and $11.75 per share, respectively. Any options not otherwise
vested shall vest on the sixth anniversary of the grant or upon a
change in control as defined in the 1994 Employee Stock Incentive
Plan.
29
30
TABLE OF OPTION EXERCISES IN TRANSITION PERIOD AND OPTION VALUES AT END OF
TRANSITION PERIOD
The following table sets forth, as to the Chief Executive Officer and
the four most highly compensated other executive officers of the Company,
information concerning exercised and unexercised options held as of September
30, 1995. The Company has not granted any stock appreciation rights.
AGGREGATED OPTION/SAR EXERCISES IN TRANSITION PERIOD AND
OPTION/SAR VALUES AT END OF TRANSITION PERIOD
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/
SHARES OPTIONS/SARS AT SEPTEMBER 30, 1995 SARS AT SEPTEMBER 30, 1995(1)
ACQUIRED VALUE ---------------------------------- -----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ ----------- -------- ----------- ------------- ----------- -------------
E. Brian Smith -- -- -- 150,000 -- --
C. Robert Conner -- -- -- 120,000 -- --
Anthony J. Dury -- -- 10,000 25,000 $ 16,625 $ 31,250
William T. Campbell -- -- 6,250 23,750 2,734 8,203
Richard A. Zartler 32,244(2) $ 129,375 -- -- -- --
(1) The value of unexercised in-the-money options at September 30, 1995 is
calculated by subtracting the total exercise price from the market
value of the underlying securities as of September 30, 1995 (closing
bid price of $4.9375).
(2) Mr. Zartler exercised options for 75,000 shares on June 1, 1995 by
transferring to the Company 7,000 shares of common stock previously
held and a certain number of option shares in consideration for the
issuance of 32,244 shares of common stock.
DIRECTOR COMPENSATION
The Company, on January 28, 1994, terminated the cash compensation
plan for members of the Board of Directors and provided for options to be
granted under the Company's 1994 Non-employee Directors Stock Option Plan in
lieu of accepting cash pursuant to the cash compensation plan. The directors
are also reimbursed for expenses incurred in attending all board meetings.
Prior to January 28, 1994, in addition to payments under a cash
compensation plan, each member of the Board of Directors who was not an
employee of the Company or an individual designated to serve on the Board of
Directors by W.R. Grace & Co. was entitled under the Company's 1992
Non-employee Director Stock Option Plan to receive an option for 6,000 shares
of common stock upon his initial election to the Board of Directors. Each of
Messrs. Lee, Chiogioji, Guyett, Jones, and Robinson received such grants upon
their election to the Board of Directors. The options issued to Messrs. Lee,
Chiogioji, Guyett, Jones and Robinson are exercisable at a rate not exceeding
2,000 shares for each year, commencing one year after the date of grant of the
option at an exercise price equal to 100% of the fair market value of the
underlying common stock on the date of the grant. Options granted under the
1992 Non-employee Director Stock Option Plan expire five years after the grant.
The 1992 plan remains in effect only to the extent of any unexercised options
granted under that plan.
In replacement of the former cash compensation plan and the 1992
Non-employee Director Stock Option Plan, the new 1994 Non-employee Director
Stock Option Plan provides that each non-employee director will receive an
initial option for 12,000 shares of common stock and an additional annual
option for 5,000 shares of common stock on each anniversary of his election to
the Board of Directors so long as he remains a non-employee director. The
exercise price of the options is equal to 100% of the fair market value of the
underlying common stock on date of the grant. The term of the stock options is
ten years. The initial options will vest in equal annual increments over
30
31
three years and each annual option will vest after one year. The non-employee
directors (Messrs. Chiogioji, Guyett, Jones, Lee, Robinson, Cashin and Riedel)
were granted their initial 12,000 share options. Options to non- employee
directors have been granted during fiscal year 1995 pursuant to the terms of
the plan.
On November 17, 1995, the Board of Directors approved a change in the
non-employee Director Compensation Program to provide a fee of $750 for
attendance at regularly scheduled meetings. The fees will be paid semiannually
in stock or stock options in accordance with each director's annual election.
Payment in the form of vested stock options will be valued on a Black-Scholes
valuation as of the grant date. Payments in the form of stock will be valued
based on the closing price of the stock on the grant date.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Prior to his retirement on June 9, 1995, Mr. Richard A. Zartler was
employed by the Company pursuant to an Employment Agreement dated effective
January 1, 1994. The Employment Agreement was for a term of one year and
continuing thereafter subject to termination by the employee or employer. The
agreement provided for a minimum base annual salary of $200,000, and for
severance benefits, equal to twelve months base salary, in the event of
termination for a reason other than for "Cause," as that term was defined in
the Employment Agreement, or in the event Mr. Zartler was asked to relocate or
assume lesser duties. The Employment Agreement contained provisions for a
limited period of non-solicitation and non-disclosure of confidential
information following termination of employment. As a result of Mr. Zartler's
retirement, the Employment Agreement was terminated as of June 9, 1995.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is currently
composed of four non-employee directors who are not former employees of the
Company. The Committee reviews management compensation levels, administers the
Company's short and long-term incentive plans, evaluates management
performance, and considers management succession and related matters. The
Committee retained an outside advisor to conduct an independent review of the
Company's compensation programs and to advise the Committee on executive
compensation matters.
This report describes the Company's compensation philosophy and
programs and the compensation actions for the seven months ended September 30,
1995 with respect to officers.
COMPENSATION PROGRAM PHILOSOPHY AND OBJECTIVES
As a result of the independent review of the compensation programs,
the Compensation Committee adopted a compensation philosophy with related
policies, plans, and programs which are designed to attract, retain, and
motivate key management and to align the financial interests of the Company's
management with those of stockholders. The management compensation programs
are designed to provide:
- competitive levels of base salary that are competitive with
environmental service companies and general industry;
- competitive total annual cash compensation which is comprised
of base salary and annual incentive compensation that relates
directly to the financial performance of the Company; and
- longer-term incentive compensation that directs management's
efforts to building stockholder value through attainment of
longer-term financial and strategic goals.
It is the intent of the Company to qualify compensation paid to the
named executive officers under the incentive compensation plans according to
the provisions of Section 162m of the Internal Revenue Code of 1986, as amended
(the "Code") (the $1 million limitation), where appropriate.
31
32
Base salaries generally have been set at competitive levels and
reflect individual contributions to Company performance. However, greater
reliance has been placed on annual and long-term incentives which are highly
variable and closely tied to Company, business unit and individual performance.
It is intended that a substantial portion of an executive officer's
compensation is "at risk" under the annual and long-term incentive plans.
The Company's reference to the Compensation Comparison Group includes
the companies listed in the Peer Group Index, as set forth below in "Comparison
of Total Shareholder Return," as well as more than 50 other environmental
services companies, and general industry companies, data with respect to which
was derived from various compensation survey sources.
The Company attempts to achieve an appropriate balance among the
various elements of compensation, relative to the performance of the Company.
Each element is discussed in greater detail below.
BASE SALARY
The Company has established a base salary program that is consistent
with competitive practice. Base salary levels for management are set at
approximately the median of the Compensation Comparison Group and are intended
to reflect individual performance and the Company's overall financial
performance.
No salary increases were granted to officers of the Company during the
transition period other than to Mr. Conner. His salary was increased to
$200,000, effective August 21, 1995, to reflect increased responsibilities and
competitive pay practices.
ANNUAL INCENTIVE COMPENSATION
The Annual Incentive Compensation Plan, as approved by the Committee,
is designed to reward management and all other employees on an annual or other
basis contingent on achievement of Company and business unit objectives, and
individual performance. A special incentive plan was adopted for the period
ended September 30, 1995 that encompasses all employees. Each eligible
employee's incentive award is expressed as a percentage of the individual's
base salary at the beginning of each fiscal year or a fixed dollar amount.
Incentive award targets vary for each employee level and generally reflect
competitive practices at similar size companies. The incentive award targets
equate to the Company's annual objectives. The target incentive is leveraged
and, predicated on Company, business unit and individual performance, actual
incentive awards can range from 0% to approximately 200% of the target
incentive. Those employees with greater influence on stockholder value have
greater amounts of compensation "at risk."
Company objectives are measured by the following performance criteria:
pre-tax and net income, operating margins, revenue growth and cash flow. The
Committee believes that these performance measures correlate with share price
over a period of time. Company objectives are expressed in specific financial
targets that are established as part of the annual budgeting process which
takes into account the Company's prior year performance and the performance of
the Compensation Comparison Group (excluding the general industry companies).
An incentive compensation fund is generated as a percentage of
pre-tax, pre-bonus profit. The distribution of incentive awards from the
incentive fund is determined by the Committee's assessment of Company, business
unit, and individual performance in relation to preestablished objectives.
As a result of the Company's financial performance for the seven
months ended September 30, 1995, no incentive bonus payments were paid to the
named executives or other officers of the Company under the special incentive
plan implemented during the transition period. Incentive payments were made to
certain non-management employees of the Company under the gainsharing element
of the incentive plan. Special incentive awards totaling $31,100 were paid to
four non-executive officers of the Company to reflect their extraordinary
contributions to the Company.
32
33
TOTAL ANNUAL CASH COMPENSATION (BASE SALARY PLUS BONUS)
When the Company's annual objectives and targets are achieved, total
annual cash compensation is set at the 50th percentile of competitive
compensation at the Compensation Comparison Group. To provide further
motivation to management to excel, the total amount of cash compensation can
reach the top quartile of competitive pay levels if business results
significantly exceed Company objectives.
LONG-TERM COMPENSATION PROGRAM
The Company's long-term incentive program is comprised of employee
stock option plans. The 1986 Employee Stock Plan, which governs options
granted and remaining outstanding under that plan, terminated June 21, 1994.
On June 21, 1994, the stockholders approved the 1994 Stock Incentive Plan,
which was adopted by the Company's Board of Directors on April 28, 1994. The
long-term incentive program is intended to:
- directly link management to building stockholder value;
- focus management on long-term corporate objectives;
- attract, retain, and motivate key employees;
- encourage employee stock ownership; and
- balance long-term and short-term decision making.
The 1994 Stock Incentive Plan authorizes the Compensation Committee to
grant various stock- and cash-based incentive awards to officers and all other
employees of the Company. Awards are not restricted to any specified form or
structure and may include, without limitation, stock options, stock awards or
payments, reload stock options, stock appreciation rights, other rights to
acquire stock, performance units, or performance shares. The Committee has
determined that Non-qualified Stock Options and Incentive Stock Options will be
the primary awards to be issued under this plan. It is the Committee's policy
that each year it will consider the grant of stock-based awards to officers and
other employees under the 1994 Stock Incentive Plan. The Committee considers
the performance of the Company and the individual in determining if a grant
will be made and the magnitude of the award. The Committee has adopted award
guidelines by employee level, derived from competitive practices, for
determining the range of stock-based awards. In determining individual awards,
the Committee considers the performance, potential, and value of the employee
as well as the performance of the Company.
During the seven months ended September 30, 1995, the Committee issued
stock option and restricted stock awards to selected key employees of the
Company in consideration of their individual performance and to encourage a
long term employment commitment with the Company.
COMPENSATION ACTIONS FOR THE CHIEF EXECUTIVE OFFICER
Effective January 1, 1994, the Company elected E. Brian Smith Chairman
and Chief Executive Officer and Mr. Zartler, formerly the Chief Executive
Officer and President, President. In February, 1995, the Company elected Mr.
Smith President.
Mr. Smith's base salary was set at $280,000 for the fiscal year ended
February 28, 1995 which approximates the 50th percentile of salaries for Chief
Executive Officers at similar environmental services and general industry
companies. On February 23, 1995, Mr. Smith's base salary was increased to
$300,000 per annum effective March 1, 1995. The salary increase reflected the
Company's growth and improved financial results for the fiscal year ended
February 28. 1995 and competitive base salary levels at the 50th percentile for
Chief Executive Officers of the Compensation Comparison Group.
33
34
The Chief Executive Officer participates in the Company's Annual
Incentive Compensation Plan. During fiscal year 1995, the Compensation
Committee approved selected financial (earnings based) and nonfinancial
performance goals for the Chief Executive Officer focusing on growth through
acquisition and improvement in shareholder value. An incentive cash bonus and
stock option award were established contingent upon achievement of the
performance goals. A cash incentive bonus of $115,000 was earned by Mr. Smith
in connection with the successful completion of two major acquisitions and an
additional cash incentive bonus of $38,000 was earned on the basis of
achievement of certain preestablished financial and nonfinancial goals for the
fiscal year ended February 28, 1995. Mr. Smith was granted an option for
150,000 shares of stock under the Company's 1994 Employee Stock Incentive Plan.
These options vest in three equal increments of 50,000 shares each upon the
Company's common stock achieving and maintaining for 59 consecutive trading
days an average closing price of $7.75 per share, 9.75 per share and $11.75 per
share, respectively. Any options otherwise vested shall vest on the sixth
anniversary of the grant or upon a change in control as defined in the 1994
Stock Incentive Plan.
For the seven months ended September 30, 1995 the Compensation
Committee approved selected financial (earnings based) and nonfinancial
performance goals for the Chief Executive Officer focusing on growth internally
and externally through acquisitions. An incentive bonus award of up to 60
percent and 67 percent of base salary respectively, could be earned by the
Chief Executive Officer for achievement of specific financial and nonfinancial
goals and growth through acquisition goals. No incentive awards were earned by
the Chief Executive Officer for the transition period.
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Hugh G. Robinson, Chairman
Robert L. Guyett
John Paul Jones, Jr.
Byron Lee, Jr.
34
35
COMPARISON OF TOTAL STOCKHOLDER RETURN
The following performance graph compares the market performance of the
Company's common stock over a five year period, beginning February 28, 1990 and
ended September 30, 1995, to the NASDAQ Stock Market Value Index and the
Company's Peer Group Index. The graph assumes that the value of the investment
in the Company's common stock and each index was $100 at September 30, 1990 and
that all dividends were reinvested.
A) VALUE OF $100 INVESTED 2/28/90 2/28/91 2/28/92 2/26/93 2/28/94 2/28/95 9/30/95
------- ------- ------- ------- ------- ------- -------
Nasdaq Stock Market Index $100 $110.15 $157.20 $167.25 $196.79 $200.05 $269.46
(US Companies) . . . . .
Smith Environmental NA (25.93)% (12.49)% (45.71)% (2.36)% 45.52 % (26.86)%
Technologies . . . . . .
Self-Determined Peer Group $100 $137.70 $119.80 $104.50 $94.42 $75.44 $72.00
Smith Environmental $100 $74.07 $64.82 $35.19 $34.36 $50.00 $36.57
Technologies . . . . . .
B) ANNUALIZED RETURN 2/28/90 2/28/91 2/28/92 2/26/93 2/28/94 2/28/95 9/30/95
------- ------- ------- ------- ------- ------- -------
Nasdaq Stock Market Index NA 10.15 % 42.71 % 6.39 % 17.66 % 1.66 % 34.70%
(US Companies) . . . . .
Self-Determined Peer Group NA 37.70 % (12.99)% (12.77)% (9.64)% (20.10)% (4.56)%
Smith Environmental NA (25.93)% (12.49)% (45.71)% (2.36)% 45.52 % (26.86)%
Technologies . . . . . .
The Peer Group Index (market capitalization weighted) is comprised of
13 companies. The criteria used in selecting the Peer Group companies included
lines of business, types and numbers of employees, and size characteristics
such as revenues and market capitalization. The companies include: Geraghty &
Miller, Inc., Groundwater Technology, Inc., Harding Associates, Inc., ICF
International, Inc., International Technology Corporation, OHM Corporation,
Riedel Environmental Technologies, Inc., Sevenson Environmental Services, Inc.,
Tetra Tech, Inc., TRC Companies, Inc., URS Corporation, Versar, Inc., and Roy
F. Weston, Inc.
During 1994, two of the companies were deleted from the index.
Geraghty & Miller, Inc. merged with Heidemij N.V., and is no longer a
publicly-traded company. The major assets of Riedel Environmental
Technologies, Inc. were acquired by the Company as of December 1, 1994. Riedel
Environmental Technologies, Inc. is no longer a publicly-traded company.
Accordingly, the 1995 Index excludes these two companies.
35
36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following tables set forth information as of December 12, 1995
with respect to each person who is known to the Company to be the beneficial
owner of more than five percent of the Company's common stock. Except as
otherwise indicated, such persons have sole voting and investment power with
respect to the shares indicated below.
NAME AND ADDRESS OF BENEFICIAL HOLDER NUMBER OF SHARES PERCENT OF
------------------------------------- ---------------- ----------
OWNED BENEFICIALLY CLASS
------------------ ----------
Smith Holding Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 2,653,720(1) 45.30%
51 Montecito Drive
Corona Del Mar, CA 92625
Dimensional Fund Advisors Inc. . . . . . . . . . . . . . . . . . . . . . . . 389,300(2) 6.65%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
J.J. Cramer & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 520,100(3) 8.88%
56 Beaver Street, Suite 701
New York, NY 10004
399 Venture Partners, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 3,714,430(4) 38.80%
399 Park Avenue
New York, NY 10043
E. Brian Smith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,653,720(5) 45.30%
51 Montecito Drive
Corona Del Mar, CA 92625
-----------
(1) Based upon information contained in a Form 3, dated January 5, 1994.
(2) Based upon information obtained from Dimensional Fund Advisors, Inc.,
as of September 30, 1995.
(3) Based upon information contained in amendment number 4 to Schedule
13D, dated February 6, 1995.
(4) This number reflects shares represented by the conversion rights of
the Convertible Senior Subordinated Note and the Senior Note,
including 371,443 shares represented by portions of the senior notes
distributed to individual investors in 399 Venture Partners, Inc., one
of whom was a director of the Company. Percent of class is calculated
assuming the notes were converted to common shares.
(5) These shares are owned of record and included in the shares reported
by Smith Holding Corporation, which has sole power over voting and
disposition thereof. E. Brian Smith is the Chairman, President and
Chief Executive Officer and holds majority ownership of Smith Holding
Corporation.
36
37
SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS
The following table sets forth information as of December 12, 1995
with respect to the ownership of the Company's common stock by (i) each
director, (ii) the Company's Chief Executive Officer and the four other most
highly compensated executive officers, and (iii) all executive officers and
directors as a group. Except as otherwise indicated, such persons have sole
voting and investment power with respect to the shares indicated below.
NUMBER OF SHARES PERCENT OF
OWNED OUTSTANDING
NAME BENEFICIALLY SHARES
---- --------------- -----------
John Paul Jones, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000(4) *
E. Brian Smith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,653,720(2) 45.30%
Melvin H. Chiogioji . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000(4) *
Robert L. Guyett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,000(4) *
Hugh G. Robinson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000(4) *
Byron Lee, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,200(1) *
Arthur A. Riedel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000(5) *
Richard M. Cashin, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,880(3) 2.22%
C. Robert Conner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- *
Anthony J. Dury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000(6) *
William T. Campbell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,250(6) *
Richard A. Zartler . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244(7) *
All executive officers and directors as a group . . . . . . . . . . . . . . . 2,911,304(8) 49.70%
-----------------
* Less than one percent.
(1) Includes 6,000 shares for which Mr. Lee holds an option granted under
the 1992 Non-employee Directors Stock Option Plan and options for
9,000 shares granted under the 1994 Non-employee Directors Stock
Option Plan exercisable within 60 days.
(2) These shares are owned of record by Smith Holding Corporation, which
has sole power over voting and disposition thereof. E. Brian Smith is
the Chairman, President and Chief Executive Officer and holds majority
ownership of Smith Holding Corporation.
(3) Includes shares subject to issuance based upon the conversion rights
of the Convertible Senior Subordinated Note and the Convertible Senior
Note issued by the Company to 399 Venture Partners, Inc. in November
1994. Mr. Cashin resigned his position as a director of the Company
on November 16, 1995.
(4) Includes options for 4,000 shares granted under the 1992 Non-Employee
Directors Stock Option Plan and options for 9,000 shares granted under
the 1994 Non-Employee Directors Stock Option Plan exercisable within
60 days.
(5) Includes options for 4,000 shares granted under the 1994 Non-Employee
Directors Stock Option Plan.
(6) Includes options for shares subject to acquisition within 60 days held
by Messrs. Dury and Campbell for 20,000 and 6,250 shares,
respectively.
(7) Mr. Zartler retired on June 9, 1995.
(8) Includes 109,750 options to acquire shares vested, or which will vest,
within 60 days and 129,880 shares represented by conversion rights
granted to 399 Venture Partners, Inc., which are attributable to a
director of the Company, and included in the shares reported by 399
Venture Partners, Inc.
37
38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LOANS TO EXECUTIVE OFFICERS
The Company loaned E. Brian Smith the principal amount of $95,000, as
of June 20, 1994, to pay certain expenses incurred by Smith Holding Corporation
in the development of an acquisition strategy and information for the benefit
of the Company. The loan is documented by a promissory note bearing interest at
a fluctuating rate based on the Federal short-term rate consistent with the
applicable Internal Revenue Service Regulations governing imputed interest and
provides that all principal and accrued interest shall be payable upon demand
and not later than March 31, 1996. The interest rate at the date of issuance
was 5.56 percent and is 6.37 percent as of the date hereof. The principal and
accrued interest remain outstanding.
LEASE OF OFFICE BUILDINGS FROM AFFILIATE
The Company's wholly owned subsidiary Riedel Environmental Services,
Inc. is the month to month tenant of a warehouse and marine yard facility owned
by Wilamette-Western Corporation, whose principal shareholder and Chairman is
Arthur A. Riedel. The Wilamette-Western Corporation has filed for protection
from creditors under Chapter 11 of the U.S. Bankruptcy Code. The aggregate
annualized rental payment for these facilities is $90,000. The Company
believes the terms of the rental arrangements are at least as favorable as
could be obtained from unrelated third parties.
ACQUISITION OF ASSETS FROM EXECUTIVE OFFICER
The Company acquired the assets, technology, trade secrets and
customer lists of a company owned by C. Robert Conner, and obtained
restrictions on competition from Mr. Conner upon his appointment as the
Company's Vice President-Engineering and Consulting Services Division and as
President of the Company's wholly owned subsidiary BCM Engineers Inc. The
agreement with Mr. Conner provides for the payment to him of $360,000 over a
period of three years beginning in 1995, subject to reductions related to
increases in base compensation, with a portion of the consideration conditioned
upon the continued employment of Mr. Conner by the Company during that time.
38
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits
(1) Consolidated Financial Statements:
The following financial statements are incorporated herein by
this reference.
Reports of Independent Auditors ............................................. F-1
Consolidated Balance Sheets at September 30, 1995, February 28, 1995 and
1994...................................................................... F-4
Consolidated Statements of Operations for the seven months ended September
30, 1995 and for each of the three years ended February 28, 1995, 1994 and
1993...................................................................... F-6
Consolidated Statements of Common Stockholders' Equity for the seven months
ended September 30, 1995 and for each of the three years ended
February 28, 1995, 1994 and 1993.......................................... F-7
Consolidated Statements of Cash Flows for the seven months ended September
30, 1995 and for each of the three years ended February 28, 1995, 1994 and
1993...................................................................... F-8
Notes to Consolidated Financial Statements................................... F-10
(2) Financial Statement Schedule for the seven months ended
September 30, 1995 and each of the three years ended February
28, 1995, 1994 and 1993.
II - Valuation and Qualifying Accounts............................................. F-26
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is
included in the consolidated financial statements or notes thereto.
39
40
EXHIBIT INDEX
(3) Exhibits:
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBIT PAGE NUMBER*
------ ---------------------- ------------
3.1 Certificate of Incorporation of the Registrant. Incorporated by reference to Exhibit 3.1 to **
the Registrant's Registration Statement on Form S-1, File No. 33-7596.
3.1.1 Amendment to the Certificate of Incorporation of the Registrant. Incorporated by reference to **
Exhibit 3.1.1 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1, File
No. 33-7596.
3.1.2 Certificate of Designations of the $100 Redeemable Preferred Stock of the Registrant dated as **
of September 28, 1994. Incorporated by reference to the Registrant's Form 10-Q dated
October 11, 1994.
3.1.3 Certificate of Designations of the Junior Convertible Preferred Stock of the Registrant. **
Incorporated by reference to Registrant's Form 8-K dated November 21, 1994.
3.2 Bylaws of the Registrant, as amended. Incorporated by reference to Exhibit 3.2 to the **
Registrant's Registration Statement on Form S-1, File No. 33-7596.
4.1 Convertible Senior Subordinated Note in the principal amount of $10,000,000 dated November 21, **
1994. Incorporated by reference to the Registrant's Form 8-K dated September 7, 1994.
10.1 1986 Employee Stock Option Plan, as amended. Incorporated by reference to the Registrant's **
Annual Report on Form 10-K for the year ended February 28, 1989.
10.2 Non-employee Directors Stock Option Plan, as amended. Incorporated by reference to Exhibit A **
to the Registrant's Proxy Statement dated May 26, 1992.
10.3 Retirement Savings Plan and Trust Agreement. Incorporated by reference to Exhibit 10.5 to the **
Registrant's Annual Report on Form 10-K for the year ended February 19, 1988.
10.4 Standstill Agreement dated September 1, 1988, between W.R. Grace & Co. and Registrant. **
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended
February 28, 1989.
10.5 Standstill Agreement dated December 30, 1993, between Smith Environmental Technologies **
Corporation and Registrant. Incorporated by reference to Registrant's Form 8-K dated
December 30, 1993.
10.6 Registration Rights Agreement dated as of December 30, 1993, between Smith Environmental **
Technologies Corporation and Registrant. Incorporated by reference to Registrant's Form 8-K
dated December 30, 1993.
10.7 1994 Stock Incentive Plan. Incorporated by reference to the Registrant's Proxy Statement dated **
May 27, 1994.
10.8 1994 Non-Employee Directors Stock Option Plan. Incorporated by reference to the Registrant's **
Proxy Statement dated May 27, 1994.
10.9 Amended and Restated Note Purchase Agreement between the Registrant and 399 Venture Partners, **
Inc. dated November 15, 1994. Incorporated by reference to Registrant's Form 8-K dated
September 7, 1994.
10.10 Agreement and Plan of Merger dated as of August 17, 1994, by and among the Registrant, BCM **
Merger Corp., BCM Engineers Inc. and the Trustees of the BCM Engineers Inc. Second Restatement
of Employee Stock Ownership Plan. Incorporated by reference to Registrant's Form 10-Q dated
October 11, 1994.
10.11 Amendment Agreement dated as of August 29, 1994 and Second Amendment Agreement dated as of **
September 23, 1994, by and among the Registrant, BCM Merger Corp., BCM Engineers Inc. and the
Trustees of the BCM Engineers Inc. Second Restatement of the Employee Stock Ownership Plan.
Incorporated by reference to the Registrant's Form 10-Q dated October 11, 1994.
40
41
10.12 Loan and Security Agreement dated as of September 28, 1994 by and among the Registrant, BCM **
Engineers Inc. (a Pennsylvania corporation), BCM Engineers Inc. (an Alabama corporation) and
LaSalle Business Credit, Inc., as agent for these Lenders. Incorporated by reference to
Registrant's Form 10-Q dated October 11, 1994.
10.13 Stock Purchase Agreement, as amended, dated August 1, 1994 by among Riedel Environmental **
Services, Inc., Riedel Environmental Technologies, Inc. and the Registrant. Incorporated by
reference to the Registrant's Form 8-K dated November 21, 1994.
10.14 First Amendment to the Loan and Security Agreement, dated November 15, 1994 by among the **
Registrant, BCM Engineers Inc. (a Pennsylvania corporation), BCM Engineers Inc. (an Alabama
corporation) and LaSalle Business Credit, Inc., as agent for these Lenders. Incorporated by
reference to Registrant's Form 8-K dated November 21, 1994.
10.15 Registration Rights Agreement dated as of November 15, 1994, by and among 399 Venture **
Partners, Inc., Smith Holding Corporation and the Registrant. Incorporated by reference to
Registrant's Form 8-K dated November 21, 1994.
10.16 Stockholders Agreement dated as of November 15, 1994, by and among Registrant, Smith Holding **
Corporation, E. Brian Smith and 399 Venture Partners Inc. Incorporated by reference to
Registrant's Form 8-K dated November 21, 1994.
10.17 Asset Purchase Agreement dated as of December 30, 1994 by and between RESNA Industries, Inc. **
and the Registrant. Incorporated by reference to Registrant's Form 8-K dated January 13, 1995.
10.18 Second Amendment to Loan and Security Agreement dated as of January 13, 1995, by and among the **
Registrant, BCM Engineers Inc. (a Pennsylvania corporation), BCM Engineers Inc. (an Alabama
corporation), Riedel Environmental Services, Inc., and LaSalle Business Credit, Inc., as agent
for the Lenders. Incorporated by reference to Registrant's Form 8-K dated January 13, 1995.
10.19 Third Amendment to the Loan and Security Agreement dated as of January 27, 1995, by and among ***
the Registrant, BCM Engineers Inc. (a Pennsylvania corporation), BCM Engineers Inc. (an
Alabama corporation), Riedel Environmental Services, Inc., and LaSalle Business Credit, Inc.,
as agent for the Lenders, filed herewith.
10.20 Fourth Amendment to the Loan and Security Agreement dated as of May 5, 1995, by and among the **
Registrant, BCM Engineers Inc. (a Pennsylvania corporation), BCM Engineers Inc. (an Alabama
corporation), Riedel Environmental Services, Inc., and LaSalle Business Credit, Inc., as Agent
for the Lenders. Incorporated by reference to the Registrant's Form 8-K dated May 5, 1995.
10.21 The Loan and Security Agreement dated October 18, 1995, by and among the Registrant, BCM ***
Engineers Inc. and Riedel Environmental Services, Inc. and Chemical Bank and Bank of Tokyo.
Incorporated by reference to the Registrant's Form 8-K dated November 6, 1995.
11 Statement regarding computation of per share earnings.
21 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP
23.2 Consent of BDO Seidman
24 Powers of Attorney and Certified Copy of Resolution:
(a) Power of Attorney dated November 16, 1995, granted by Robert
L. Guyett to Anthony J. Dury, William T. Campbell and
Wilfrid D. Nelson.
(b) Power of Attorney dated November 16, 1995, granted by Hugh G.
Robinson to Anthony J. Dury, William T. Campbell and
Wilfrid D. Nelson.
(c) Power of Attorney dated November 16, 1995, granted by Byron
Lee, Jr. to Anthony J. Dury, William T. Campbell and
Wilfrid D. Nelson.
(d) Power of Attorney dated November 16, 1995, granted by Melvin
H. Chiogioji to Anthony J. Dury, William T. Campbell and
Wilfrid D. Nelson.
(e) Power of Attorney dated November 16, 1995, granted by John
Paul Jones, Jr. to Anthony J. Dury, William T. Campbell
and Wilfrid D. Nelson.
(f) Power of Attorney dated November 16, 1995, granted by E.
Brian Smith to Anthony J.
41
42
Dury, William T. Campbell and Wilfrid D. Nelson.
(g) Power of Attorney dated November 16, 1995, granted by Arthur
A. Riedel to Anthony J. Dury, William T. Campbell and
Wilfrid D. Nelson.
(h) Certified Copy of the Resolution of Registrant's Board of
Directors authorizing signatures pursuant to power of
attorney.
(b) Reports on Form 8-K: The following reports on Form 8-K were filed
during the last three months of the transition period.
A report on Form 8-K, dated August 10, 1995, was filed by the
Registrant for the purpose of reporting the change of its fiscal
year end from February 28 to September 30. **
27 Requirements for the format and input of financial data schedules
(not deemed filed with the Commission).
___________
* This information appears only in the manually signed original of the
Form 10-K.
** Incorporated by reference.
*** Previously filed.
42
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SMITH ENVIRONMENTAL TECHNOLOGIES
CORPORATION
(Registrant)
By: /s/ WILLIAM T. CAMPBELL
----------------------------
William T. Campbell
Vice President - Finance
December 28, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 28th day of December 1995.
SIGNATURE TITLE
--------- -----
/s/ E. BRIAN SMITH* Chief Executive Officer, President and
---------------------- Director (Principal Executive Officer)
E. Brian Smith
/s/ WILLIAM T. CAMPBELL Vice President - Finance
--------------------------
William T. Campbell (Principal Financial Officer)
/s/ MELVIN CHIOGIOJI* Director
------------------------
Melvin Chiogioji
/s/ ROBERT L. GUYETT* Director
------------------------
Robert L. Guyett
/s/ JOHN PAUL JONES, JR.* Director
- ----------------------------
John Paul Jones, Jr.
/s/ BYRON LEE, JR.* Director
----------------------
Byron Lee, Jr.
/s/ HUGH G. ROBINSON* Director
------------------------
Hugh G. Robinson
/s/ ARTHUR A. RIEDEL* Director
------------------------
Arthur A. Riedel
*By /s/ WILFRID D. NELSON
------------------------
Wilfrid D. Nelson
Pursuant to Powers of
Attorney filed herewith.
43
44
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Smith Environmental Technologies Corporation
We have audited the accompanying consolidated balance sheets of Smith
Environmental Technologies Corporation as of September 30, 1995, February 28,
1995 and February 28, 1994 and the related consolidated statements of
operations, common stockholders' equity, and cash flows for the seven month
period ended September 30, 1995 and years ended February 28, 1995 and 1994.
Our audits also included the financial statement schedule listed in the Index
at Item 14(a) for the seven month period ended September 30, 1995 and years
ended February 28, 1995 and 1994. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
financial statements of SoilTech ATP Systems, Inc. (a corporation in which the
Company has a 50 percent interest) for the years ended December 31, 1994 and
1993 have been audited by other auditors whose report has been furnished to us;
insofar as our opinion on the consolidated financial statements relates to data
included for SoilTech ATP Systems, Inc., it is based solely on their report.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Smith Environmental Technologies Corporation as of September 30,
1995, February 28, 1995 and February 28, 1994, and the consolidated results of
its operations and its cash flows for the seven month period ended September
30, 1995 and years ended February 28, 1995 and 1994, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
Philadelphia, Pennsylvania ERNST & YOUNG LLP
December 22, 1995
F-1
45
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Smith Environmental Technologies Corporation
We have audited the accompanying consolidated statements of
operations, common stockholders' equity, and cash flows of Smith Environmental
Technologies Corporation (formerly Canonie Environmental Services Corp.) for
the year ended February 28, 1993. Our audit also included the financial
statement schedule listed in the Index at Item 14(a) for the year ended
February 28, 1993. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the results of operations and
cash flows of Smith Environmental Technologies Corporation for the year ended
February 28, 1993, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein for the year ended
February 28, 1993.
BDO Seidman, LLP
Certified Public Accountants
Kalamazoo, Michigan
April 16, 1993
F-2
46
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of
SoilTech ATP Systems, Inc.
Porter, Indiana
We have audited the balance sheets of SoilTech ATP Systems, Inc. as of
December 31, 1994 and 1993, and the related statements of operations and
deficit and cash flows for the years then ended (not included herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of SoilTech ATP
Systems, Inc. at December 31, 1994 and 1993, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
BDO Seidman, LLP
Certified Public Accountants
Kalamazoo, Michigan
January 24, 1995
F-3
47
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
February 28,
September 30, --------------------------
1995 1995 1994
--------- ---------- ----------
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 510 $ 2,345 $ 2,290
Accounts receivable, less allowance for doubtful accounts
of $1,502, $1,312 and $485, respectively (Note 3) . . . . 53,379 41,726 13,739
Costs and estimated earnings on long-term contracts
in excess of billings (Note 4) . . . . . . . . . . . . . 2,287 1,803 3,365
Prepaid expenses and other current assets . . . . . . . . . 2,676 3,086 230
--------- ---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . 58,852 48,960 19,624
--------- ---------- ----------
Property and Equipment:
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . 21,949 18,712 14,730
Land and buildings . . . . . . . . . . . . . . . . . . . . . 4,007 4,431 2,638
Leasehold improvements . . . . . . . . . . . . . . . . . . . 1,044 1,448 101
--------- ---------- ----------
Total property and equipment, at cost . . . . . . . . . . 27,000 24,591 17,469
Less accumulated depreciation and amortization . . . . . . . 10,062 8,681 7,848
--------- ---------- ----------
Property and equipment, net . . . . . . . . . . . . . . . 16,938 15,910 9,621
Intangible assets, net of accumulated amortization of $712
and $183, respectively (Note 2) . . . . . . . . . . . . . . 16,338 16,867 ---
Goodwill, net of accumulated amortization of $322 and
$127, respectively (Note 2) . . . . . . . . . . . . . . . . 15,345 11,628 ---
Investment in unconsolidated affiliate (Note 5) . . . . . . . . 1,502 1,800 2,464
Other assets (Note 6) . . . . . . . . . . . . . . . . . . . . . 5,033 5,389 1,815
--------- ---------- ----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . $ 114,008 $ 100,554 $ 33,524
========= ========== ==========
F-4
See accompanying notes to consolidated financial statements.
48
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
February 28,
September 30, --------------------------
1995 1995 1994
---------- ---------- --------
Current Liabilities:
Accounts and subcontracts payable . . . . . . . . . . . . . . . . $ 24,147 $ 16,793 $ 4,827
Payable to affiliates (Note 5) . . . . . . . . . . . . . . . . . . -- 1,092 2,437
Accrued expenses and other liabilities:
Compensation and related fringes . . . . . . . . . . . . . . . . . 4,973 4,763 957
Severance and office closures . . . . . . . . . . . . . . . . . . 1,618 3,590 1,606
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,343 8,684 3,582
Billings on long-term contracts in excess of costs and
estimated earnings (Note 4) . . . . . . . . . . . . . . . . . . 1,251 636 1,132
Current maturities of long-term debt and short-term
borrowings (Note 7) . . . . . . . . . . . . . . . . . . . . . . 2,110 2,310 1,800
---------- ---------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . 43,442 37,868 16,341
Long-term debt (Note 7) . . . . . . . . . . . . . . . . . . . . . . . 27,403 21,078 ---
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . 6,017 4,587 ---
Convertible Senior Subordinated Note; 10%; maturing in
2004, convertible into 3,048,780 common shares at
$3.28 per share (Note 8) . . . . . . . . . . . . . . . . . . . . . 10,000 10,000 ---
Commitments and contingencies (Notes 9 and 14):
Redeemable Preferred Stock, $0.01 par value; 78,000 shares . . . . .
authorized; 76,218 and 78,000 shares issued, respectively;
5% cumulative dividend; $100 redemption value (Note 12) . . . . . 6,857 6,923 ---
Junior Convertible Preferred Stock, $0.01 par value; . . . . . . . .
371,500 shares authorized; none issued (Note 8) . . . . . . . . . . . --- --- ---
Preference Stock, $0.01 par value; 1,000,000 shares . . . . . . . .
authorized; none issued . . . . . . . . . . . . . . . . . . . . . . . --- --- ---
Common Stockholders' Equity:
Common stock, $0.01 par value; 20,000,000 shares authorized,
5,850,015, 5,807,472 and 5,700,783 shares issued and
outstanding, respectively . . . . . . . . . . . . . . . . . . . 58 58 57
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 17,149 16,970 16,611
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 3,082 3,070 515
---------- ---------- --------
Total common stockholders' equity . . . . . . . . . . . . . . . 20,289 20,098 17,183
---------- ---------- --------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . $ 114,008 $ 100,554 $ 33,524
========== ========== ========
See accompanying notes to consolidated financial statements.
F-5
49
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Seven months
ended Years ended February 28,
September 30, ----------------------------------------
1995 1995 1994 1993
---------- ---------- ---------- ----------
Revenues (Notes 3 and 15) $ 105,290 $ 104,738 $ 59,461 $ 71,376
Cost of revenues . . . . . . . . . . . . . . . . . . . . . 91,932 89,922 56,020 71,874
---------- ---------- ---------- ----------
Gross profit (loss) . . . . . . . . . . . . . . . . . 13,358 14,816 3,441 (498)
Selling, general, and administrative expenses . . . . . . . 9,109 10,285 5,754 6,597
Amortization of intangible assets, goodwill
and deferred financing fees . . . . . . . . . . . . . . 1,025 510 --- ---
Special items (Note 15) . . . . . . . . . . . . . . . . . . 393 --- 4,263 4,371
---------- ---------- ---------- ----------
Income (loss) from operations . . . . . . . . . . . . . . . 2,831 4,021 (6,576) (11,466)
Interest expense . . . . . . . . . . . . . . . . . . . . . 2,225 1,229 412 143
---------- ---------- ---------- ----------
Income (loss) before income tax expense
(benefit) . . . . . . . . . . . . . . . . . . . . . . . 606 2,792 (6,988) (11,609)
Income tax expense (benefit) (Note 10) . . . . . . . . . . 87 558 135 (2,587)
---------- ---------- ---------- ----------
Income (loss) before earnings (losses)
of unconsolidated affiliates . . . . . . . . . . . . . . 519 2,234 (7,123) (9,022)
Share in earnings (losses) of unconsolidated . . . . . . .
affiliates (Note 5):
Operating . . . . . . . . . . . . . . . . . . . . . . (173) 539 (221) (901)
Investment write-off . . . . . . . . . . . . . . . . --- --- (2,655) ---
---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . 346 2,773 (9,999) (9,923)
Dividends and accretion on Redeemable . . . . . . . . . .
Preferred Stock (Notes 1 and 12) . . . . . . . . . . . . . 334 218 --- ---
---------- ---------- ---------- ----------
Income (loss) applicable to common stock . . . . . . . . . $ 12 $ 2,555 $ (9,999) $ (9,923)
========== ========== ========== ==========
Weighted average number of common and
common equivalent shares outstanding . . . . . . . . . . 5,964,250 5,865,782 5,700,783 5,700,783
========== ========== ========== ==========
Earnings (loss) per common and common
equivalent share . . . . . . . . . . . . . . . . . . . . . $ .00 $ .44 $ (1.75) $ (1.74)
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-6
50
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT COMMON SHARE DATA)
Additional
Shares of Common Paid-in Retained
Common Stock Stock Capital Earnings Total
------------ ------ ---------- -------- -------
Balance, February 29, 1992 . . . . . . . . . 5,700,783 $ 57 $ 16,584 $20,407 $37,048
Net loss . . . . . . . . . . . . . . . . . . --- --- --- (9,923) (9,923)
Other . . . . . . . . . . . . . . . . . . . . --- --- (4) 30 26
--------- ---- -------- ------- -------
Balance, February 28, 1993 . . . . . . . . . 5,700,783 57 16,580 10,514 27,151
Net loss . . . . . . . . . . . . . . . . . . --- --- --- (9,999) (9,999)
Other . . . . . . . . . . . . . . . . . . . . --- --- 31 --- 31
--------- ---- -------- ------- -------
Balance, February 28, 1994 . . . . . . . . . 5,700,783 57 16,611 515 17,183
Net income . . . . . . . . . . . . . . . . . --- --- --- 2,773 2,773
Shares issued upon conversion of stock options 106,689 1 359 --- 360
Dividends and accretion on Redeemable Preferred
Stock . . . . . . . . . . . . . . . . . . . --- --- --- (218) (218)
--------- ---- -------- ------- -------
Balance, February 28, 1995 . . . . . . . . . 5,807,472 58 16,970 3,070 20,098
Net income . . . . . . . . . . . . . . . . . --- --- --- 346 346
Shares issued upon conversion of stock options 42,543 --- 179 --- 179
Dividends and accretion on Redeemable Preferred
Stock . . . . . . . . . . . . . . . . . . . --- --- --- (334) (334)
--------- ---- -------- ------- -------
Balance, September 30, 1995 . . . . . . . . . 5,850,015 $ 58 $ 17,149 $ 3,082 $20,289
========= ==== ======== ======= =======
See accompanying notes to consolidated financial statements.
F-7
51
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Seven months
ended Years ended February 28,
September 30, -----------------------------------
1995 1995 1994 1993
------------- ---- ---- ----
Operating Activities:
Net income (loss) $ 346 $ 2,773 $(9,999) $ (9,923)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities: . . . . . . . .
Provisions for special items . . . . . . . . . . . --- --- 4,263 4,371
Depreciation and amortization . . . . . . . . . . . 2,868 3,360 1,546 2,182
Loss on disposal of equipment . . . . . . . . . . . 94 168 --- ---
Share in (earnings) losses of affiliates . . . . . 173 (539) 2,876 901
Income tax refund . . . . . . . . . . . . . . . . . --- --- 2,208 (2,208)
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable . . . . . . . . . . . . . . . . (10,991) 4,529 2,749 4,339
Costs and estimated earnings on long-term
contracts in excess of billings . . . . . . . . . (484) 1,562 2,720 118
Prepaid expenses and other current assets . . . . . 410 (602) 724 (421)
Other assets . . . . . . . . . . . . . . . . . . . 53 (1,959) --- ---
Accounts and subcontracts payable . . . . . . . . . 6,262 1,130 1,386 (2,931)
Accrued expenses and other liabilities . . . . . . (2,374) (4,983) (859) 1,022
Billings on long-term contracts in excess of
costs and estimated earnings . . . . . . . . . . 615 (496) 178 567
Other long-term liabilities . . . . . . . . . . . . (3,005) (845) --- ---
Other, net . . . . . . . . . . . . . . . . . . . . 53 (218) 675 (766)
------- ------- ------- ---------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . . . $(5,980) $ 3,880 $ 8,467 $ (2,749)
------- ------- ------- ---------
F-8
See accompanying notes to consolidated financial statements.
52
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
Seven months
ended Years ended February 28,
September 30, --------------------------------------
1995 1995 1994 1993
------------- ------- -------- -------
Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . $ (2,172) $ (689) $ (3,333) $ (2,766)
Advances (to) from affiliates . . . . . . . . . . . . . 125 1,000 (1,496) (1,020)
Proceeds from sale of subsidiary . . . . . . . . . . . --- --- 704 1,000
Purchase of BCM Engineers (net of cash
acquired) . . . . . . . . . . . . . . . . . . . . . --- (4,783) --- ---
Purchase of Riedel Environmental Services (net
of cash acquired) . . . . . . . . . . . . . . . . . --- (18,336) --- ---
Other . . . . . . . . . . . . . . . . . . . . . . . . . 388 (43) 22 (1)
-------- --------- -------- -------
Net cash used in investing activities . . . . . . . . . . . (1,659) (22,851) (4,103) (2,787)
-------- -------- -------- -------
Financing Activities:
Proceeds from revolving line of credit used to
fund acquisitions . . . . . . . . . . . . . . . . . --- 19,580 --- ---
(Repayments) borrowings on revolving line of
credit, net . . . . . . . . . . . . . . . . . . . . 7,219 (4,800) (3,200) 5,000
Retirement of acquired companies debt . . . . . . . . . --- (10,647) --- ---
Proceeds from term loans used to fund acquisitions . . --- 4,500 --- ---
Proceeds from Senior Note . . . . . . . . . . . . . . . --- 2,000 --- ---
Proceeds from Convertible Senior
Subordinated Note . . . . . . . . . . . . . . . . . --- 10,000 --- ---
Repayment of debt . . . . . . . . . . . . . . . . . . . (1,857) (1,967) --- ---
Proceeds from exercise of stock options . . . . . . . . 50 360 --- ---
Repurchase of Redeemable Preferred Stock . . . . . . . (178) --- --- ---
Dividends paid on Redeemable Preferred Stock . . . . . (191) --- --- ---
Capital leases and other notes . . . . . . . . . . . . 761 --- --- ---
------- ------- ------- -------
Net cash provided (used) by financing activities . . . . . 5,804 19,026 (3,200) 5,000
------- ------- ------- -------
Net increase (decrease) in cash . . . . . . . . . . . . . . (1,835) 55 1,164 (536)
Cash at beginning of period . . . . . . . . . . . . . . . . 2,345 2,290 1,126 1,966
Cash of sold subsidiary . . . . . . . . . . . . . . . . . . --- --- --- (304)
-------- ------- ------- -------
Cash at end of period . . . . . . . . . . . . . . . . . . . $ 510 $ 2,345 $ 2,290 $ 1,126
======== ========= ======== ========
See accompanying notes to consolidated financial statements.
F-9
53
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Smith Environmental Technologies Corporation, a Delaware corporation
(the Company), provides a broad range of comprehensive environmental
consulting, engineering, and on-site remediation services for clients,
including federal, state and municipal government agencies, with properties
contaminated with hazardous materials throughout the United States. During the
year ended February 28, 1995, the Company completed three acquisitions which
significantly increased its services, core competencies and geographic
coverage. See Note 2 for description of acquisitions.
The Company's operations are considered to be concentrated in one
industry segment.
CHANGE IN YEAR END
Effective March 1, 1995, the Company changed its fiscal year end from
February 28 to September 30. The accompanying consolidated financial
statements include audited financial statements for the seven month transition
period ended September 30, 1995 (transition period; 1995T).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All material intercompany accounts and
transactions are eliminated. The Company uses the equity method of accounting
for incorporated joint ventures and affiliated companies where ownership ranges
from 20 percent to 50 percent. Certain amounts in the prior years have been
reclassified to conform to the current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE AND COST RECOGNITION
Revenues from engineering and remediation service contracts are
generally recognized as the services are provided, principally under
cost-plus-fee and time and materials contracts. The Company recognizes revenues
on fixed price, long-term contracts on the percentage-of-completion method,
primarily based on contract costs incurred to date compared with total
estimated contract costs. Where appropriate, contracts are divided between
engineering and remedial efforts and accordingly, gross margin related to each
activity is recognized as those separate services are rendered. Contract costs
include all direct material, labor, and subcontract costs and other direct
costs related to contract performance. Indirect costs, classified as cost of
revenues, and selling, general, and administrative costs are charged to expense
as incurred. Changes to total estimated contract costs and losses, if any, are
recognized in the period they are determined. Revenues recognized in excess of
amounts billed are classified under current assets as costs and estimated
earnings on long-term contracts in excess of billings. It is anticipated that
the incurred costs
F-10
54
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE AND COST RECOGNITION (CONTINUED)
associated with contract work in progress at September 30, 1995 will be billed
and collected in fiscal 1996. Amounts received from clients in excess of
revenues recognized to date are classified under current liabilities as
billings on long-term contracts in excess of costs and estimated earnings. An
amount equal to contract costs attributable to claims, if any, is included in
revenues when realization is probable and the amount can be reasonably
estimated.
PROPERTY, EQUIPMENT, AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is provided
primarily on the straight-line method except for process equipment which is
depreciated based on units of production and cost recovery methods.
Depreciation is based on the following estimated useful lives:
Building and improvements. . . . . . . . . . 33-35 years
Office, process and field equipment. . . . . 3-7 years
Leasehold improvements are amortized over the shorter of their respective
useful lives or lease terms.
INCOME TAXES
The Company utilizes the liability approach to financial accounting
and reporting for income taxes. This method requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
DIVIDENDS AND ACCRETION ON REDEEMABLE PREFERRED STOCK
The Company's Redeemable Preferred Stock was recorded at its estimated
fair value at the date of issuance. The original $932,000 excess redemption
value over the carrying value is being accreted using the interest method so
that the carrying value will equal the redemption value on the scheduled
redemption dates. Dividends and accretion on redeemable preferred stock for the
seven months ended September 30, 1995 and for the year ended February 28, 1995
are as follows:
1995T 1995
----- ----
Dividends $222 $163
Accretion 112 55
---- ----
$334 $218
==== ====
F-11
55
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME (LOSS) APPLICABLE TO COMMON STOCK
Income (loss) applicable to common stock represents the portion of the
Company's earnings applicable to its common stockholders. Such amount is
calculated by adjusting net income (loss) for the accretion and dividend
requirements on the Company's Redeemable Preferred Stock.
EARNINGS PER SHARE
Earnings per share are computed on the basis of the weighted average
number of common and common equivalent shares outstanding. The dilutive effect
of the Company's stock options was calculated using the treasury stock method
in 1995T and fiscal 1995. The effect of the Company's stock options was
excluded from the calculation of earnings per share in fiscal 1994 and 1993 due
to their anti-dilutive impact. Other potentially dilutive securities at
September 30, 1995 consist of the Company's Convertible Senior Subordinated
Note and Senior Note (see Note 8). Conversion of Convertible Senior
Subordinated Note and Senior Note for 1995T and fiscal 1995 was not considered
since assumed conversion did not result in significant dilution.
INTANGIBLE ASSETS AND GOODWILL
Intangible assets are amortized over an estimated useful life of
fifteen years. Goodwill is amortized over forty years. The Company
continually evaluates intangible assets and goodwill to insure that the
intangible assets and goodwill are fully recoverable from projected
undiscounted cash flows of the acquired business operations. Impairments are
recognized in operating results in the period in which a permanent diminution
in value occurs.
STATEMENT OF CASH FLOWS
Supplemental cash flow information is summarized as follows (in
thousands):
YEARS ENDED FEBRUARY 28
--------------------------------
1995T 1995 1994 1993
------ ----- ------ ----
Interest paid . . . . . . . . . . . . . . . $(1,405) $(830) $ (532) $(287)
Interest received . . . . . . . . . . . . . 115 40 100 263
Income taxes paid . . . . . . . . . . . . . (22) (391) -- --
Income tax refund . . . . . . . . . . . . . -- 620 1,981 4
NOTE 2 - ACQUISITIONS
On September 28, 1994, the Company purchased all of the outstanding
common stock of BCM Engineers Inc. (BCM), an environmental consulting and
engineering company, for cash of $5.0 million and 78,000 shares of Redeemable
Preferred Stock with an estimated fair value of $6.9 million on the date of
issuance and a redemption value of $7.8 million. The Redeemable Preferred Stock
has a 5 percent cumulative dividend requirement and is redeemable in equal
installments on the fifth, sixth and seventh anniversaries of its issuance (see
Note 12). The Company also repaid $9.5 million of BCM's indebtedness from the
proceeds under its LaSalle Loan Agreement.
F-12
56
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - ACQUISITIONS (CONTINUED)
On November 21, 1994, the Company purchased all of the capital stock
of Riedel Environmental Services, Inc. (RES), an Oregon corporation, from
Riedel Environmental Technologies, Inc. RES is an environmental remediation
firm. The purchase price, paid in cash, was approximately $18.2 million. The
RES acquisition was funded by the Company's issuance of a $10 million
Convertible Senior Subordinated Note and a $2 million Senior Note (see Note 8)
and borrowings under the Company's revolving and term credit facilities.
On December 30, 1994, the Company entered into an agreement with RESNA
Industries, Inc. (RESNA) to acquire substantially all of RESNA's assets in
exchange for the assumption by the Company of RESNA's debt to its principal
bank lender of $1.5 million, of which $1.1 million was paid at closing with
proceeds from the Company's revolving credit facility. The Company also assumed
certain other liabilities in connection with RESNA's operations. RESNA, based
in California, operated a full service environmental remediation business which
focuses primarily on the soil and groundwater contamination market and cleanups
related to underground storage tanks.
The transactions were accounted for as purchases. Accordingly, the
purchase prices have been allocated to assets and liabilities based on
estimated fair values as of the acquisition dates and the results of operations
of the acquired companies have been included in the Company's statement of
operations since their respective acquisition dates. The cost in excess of
estimated fair value of the net tangible assets acquired was recorded as
goodwill in the amount of $28.8 million as of February 28, 1995 which, upon
finalization of the purchase price allocation, increased to $32.7 million. The
increase to goodwill was principally the result of revised estimates related to
pre-acquisition loss contingencies. At September 30, 1995, $17.0 million has
been allocated to intangible assets consisting of approximately $9.2 million
for assembled workforce and $7.8 million for customer lists and contract
backlog. The remaining $15.7 million has been apportioned to goodwill as of
September 30, 1995.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following (in thousands):
FEBRUARY 28,
SEPTEMBER 30, -----------------------
1995 1995 1994
------------- ------- -------
Commercial and non-US government customers:
Amounts billed . . . . . . . . . . . . . . . . . . . . . . . . . $26,318 $21,746 $11,086
Unbilled recoverable costs and estimated earnings . . . . . . . 6,847 5,661 ---
Due from affiliates . . . . . . . . . . . . . . . . . . . . . . --- --- 454
Retention . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,829 4,020 2,610
------- ------- -------
35,994 31,427 14,150
------- ------- -------
United States Government and agencies:
Amounts billed . . . . . . . . . . . . . . . . . . . . . . . . . 9,092 5,565 74
Unbilled recoverable costs and estimated earnings . . . . . . . 9,353 5,910 ---
Retention . . . . . . . . . . . . . . . . . . . . . . . . . . . 442 136 ---
------- ------- -------
18,887 11,611 74
------- ------- -------
All customers 54,881 43,038 14,224
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . (1,502) (1,312) (485)
------- ------- -------
$53,379 $41,726 $13,739
======= ======= =======
F-13
57
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACCOUNTS RECEIVABLE (CONTINUED)
Unbilled recoverable costs and estimated earnings represents revenue
earned and recognized on contracts which are not yet billable according to
contract terms, which usually consider the passage of time, achievement of
certain milestones, or the completion of the project. Retention of
approximately $3.3 million is expected to be substantially collected during
fiscal 1996.
Due to the nature of the services provided by the Company, it may
derive revenue from a single customer which exceeds 10 percent of its revenues
for the year. For the seven months ended September 30, 1995, the Company
derived revenues from the United States Environmental Protection Agency (EPA)
of approximately $29.6 million or 28.1 percent of revenues for Emergency
Response Cleanup Services (ERCS). There were no significant commercial
customers with revenues in excess of 10 percent during the seven month period
ended September 30, 1995. For the year ended February 28, 1995, the Company
had two commercial customers with revenues of $12.2 million and $12.1 million.
For the year ended February 28, 1994, the Company had two different commercial
customers with revenues of $9.9 million and $6.6 million.
NOTE 4 - LONG-TERM CONTRACTS AND RECEIVABLES
Long-term contracts in process accounted for using the
percentage-of-completion method are as follows (in thousands):
FEBRUARY 28,
SEPTEMBER 30, ---------------------------
1995 1995 1994
------------- ---------- ----------
Accumulated expenditures on uncompleted
contracts . . . . . . . . . . . . . . . . . . . . . . . . . $ 82,778 $ 107,277 $ 103,318
Estimated earnings thereon . . . . . . . . . . . . . . . . . 9,787 14,593 13,291
--------- --------- ---------
92,565 121,870 116,609
Less applicable progress billings . . . . . . . . . . . . . . 91,529 120,703 114,376
--------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,036 $ 1,167 $ 2,233
========= ========= =========
The long-term construction contracts are shown in the accompanying
balance sheets as follows (in thousands):
FEBRUARY 28,
SEPTEMBER 30, -------------------------
1995 1995 1994
------------- -------- ---------
Costs and estimated earnings on long-term
contracts in excess of billings . . . . . . . . . . . . . . $ 2,287 $ 1,803 $ 3,365
Billings on long term contracts in excess of costs
and estimated earnings . . . . . . . . . . . . . . . . . . (1,251) (636) (1,132)
--------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,036 $ 1,167 $ 2,233
========= ========= =========
F-14
58
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - INVESTMENT IN UNCONSOLIDATED AFFILIATE
The Company owns a 50 percent interest in SoilTech ATP Systems, Inc.
(STI). STI is a corporate joint venture that was formed to use its sublicense
rights and its related waste material processing equipment for remediation of
contaminated sites. STI has the sole U.S. license until 2012 of pyrolysis
technology, developed by a Canadian quasi- governmental agency. Under the
equity method of accounting, the investment has been adjusted to reflect the
Company's proportionate share of earnings and losses. The Company's management
believes its investment at September 30, 1995 will be realized through STI's
future undiscounted cash flows.
In addition, the Company owned a 20 percent interest in LaPosta Recycling
Center, Inc. (LRC). LRC was formed to develop a full service hazardous waste
treatment facility and recycling center. The Company wrote off its investment
in and advances to LRC in fiscal 1994 and has no further financial commitment
to LRC.
For the seven months ended September 30, 1995, STI was not a significant
unconsolidated affiliate. A summary of the unconsolidated affiliates' combined
financial position and results of operations for the years ended February
28,1995, 1994 and 1993, respectively, is as follows (in thousands):
FOR YEAR ENDED FEBRUARY 28,
--------------------------------------
1995 1994 1993
------ ------- -------
Revenue . . . . . . . . . . . . . . . . . . $8,252 $ 5,166 $ 2,204
------ ------- -------
Net income (loss) . . . . . . . . . . . . . 561 (874) (2,177)
------ ------- -------
Current assets . . . . . . . . . . . . . . 1,597 3,117 760
Non-current assets . . . . . . . . . . . . 2,882 4,001 12,799
------ ------- -------
TOTAL ASSETS . . . . . . . . . . . . . . . 4,479 7,118 13,559
------ ------- -------
Current liabilities . . . . . . . . . . . . 922 2,722 3,870
Notes payable to stockholders . . . . . . . 6,872 8,432 12,821
------ ------- -------
TOTAL LIABILITIES . . . . . . . . . . . . . $7,794 $11,154 $16,691
====== ======= =======
The Company had no material operating transactions with STI or other
affiliates in the seven months ended September 30, 1995. The Company derived
revenues from services performed for various affiliated companies, primarily
STI for the years ended February 28, 1995 and 1994, and a former significant
stockholder for the year ended February 28, 1993. In addition, the Company's
cost of revenues include costs associated with services provided by affiliated
companies, primarily STI, as subcontractors on its remediation contracts. These
transactions with affiliates are summarized as follows (in thousands):
FOR THE YEAR ENDED FEBRUARY 28,
------------------------------------
1995 1994 1993
------- ------ ------
Services provided to affiliates, included in revenues . . . . . $ 604 $ 917 $5,109
Subcontract costs, included in cost of revenues . . . . . . . . $ 8,015 $4,614 $2,961
F-15
59
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - OTHER ASSETS
Other assets include the following (in thousands):
SEPTEMBER 30, FEBRUARY 28,
-----------------------
1995 1995 1994
------------ ------ ------
Trade note receivable . . . . . . . . . . . . . $ 1,500 $1,500 $1,500
Deferred financing fees . . . . . . . . . . . . 1,173 1,423 --
Other . . . . . . . . . . . . . . . . . . . . . 2,360 2,466 315
--------- ------- ------
$ 5,033 $5,389 $1,815
========= ======= ======
The trade note receivable is secured by real estate located in Santa
Barbara County, California which contains a toxic waste site. The note bears
interest at 1 percent below the prime rate and is due May, 2002. Repayment
terms are accelerated upon a transfer or a modified utilization of the real
estate, or an abandonment of efforts to obtain waste permits. Deferred
financing fees are carried net of accumulated amortization and include loan
closing costs incurred in connection with the acquisitions of BCM and RES.
Amortization expense was $352,000 for the seven months ended September 30, 1995
and $200,000 for the year ended February 28, 1995. On October 18, 1995, the
Company entered a new senior credit facility (see Note 7) and repaid its
obligation to LaSalle Business Credit, Inc. Deferred financing fees, in
connection with the LaSalle Loan Agreement, of $1.2 million as of September
30, 1995, plus a prepayment penalty of $287,500 will be written off in October
1995 (FY 1996).
NOTE 7 - DEBT
Long-term debt consists of the following (in thousands):
SEPTEMBER 30, FEBRUARY 28,
--------------------
1995 1995 1994
------------ ---- ----
Bank borrowings:
Revolving credit loans . . . . . . . . . . . . . . . . . $ 21,999 $ 14,780 $ ---
Term loans . . . . . . . . . . . . . . . . . . . . . . . 3,476 4,267 ---
Notes payable . . . . . . . . . . . . . . . . . . . . . -- -- 1,800
Senior Note (Note 8). . . . . . . . . . . . . . . . . . . . . 2,000 2,000 ---
Capitalized lease obligations at interest rates of
6% to 12% . . . . . . . . . . . . . . . . . . . . . . . . 1,091 1,139 ---
ESOP notes payable to individuals at interest rates of
7.5% to 10.5% . . . . . . . . . . . . . . . . . . . . . . 604 613 ---
Other 343 589 ---
-------- -------- --------
Total debt . . . . . . . . . . . . . . . . . . . . . . . 29,513 23,388 1,800
Less: current maturities . . . . . . . . . . . . . . . . . . (2,110) (2,310) (1,800)
-------- -------- --------
Total long-term debt . . . . . . . . . . . . . . . . . . . . $ 27,403 $ 21,078 $ ---
======== ======== ========
F-16
60
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - DEBT (CONTINUED)
At September 30, 1995, the Company had a Loan and Security Agreement
with LaSalle Business Credit, Inc. (LaSalle Loan Agreement), which consisted
of a $25.5 million revolving credit facility, including a $3 million "unbilled
account subline," and a $4.5 million term loan. The Company could issue up to
$3.0 million for letters of credit under the LaSalle Loan Agreement which would
reduce availability under the revolving credit facility. The Company could
choose an interest rate equal to 1.5 percent over the prime rate or 3.25
percent over the London Interbank Offered Rate (LIBOR) on revolving credit
borrowings and 1.75 percent over the prime rate or 3.5 percent over LIBOR on
term loan borrowings. At September 30, 1995, the interest rate on the amount
due under the revolving line of credit was 11 percent including a 0.75 percent
adjustment in connection with the unbilled subline. The interest rate for the
term loan borrowings was 10.5 percent based on the prime rate. At September
30, 1995 there were no outstanding LIBOR loans. Outstanding letters of credit
issued pursuant to the LaSalle Loan Agreement aggregated $450,000 at September
30, 1995. The credit facility had an initial term of three years commencing on
September 28, 1994, with a prepayment penalty equal to 1.25 percent during the
second year and 0.50 percent during the third year.
On October 18, 1995, the Company entered into a new senior credit
facility with Chemical Bank and Bank of Tokyo (Chemical Facility). The new $35
million senior credit facility includes a $6.5 million term loan, payable over
four years, and a three year $28.5 million revolving line of credit. The loans
are fully secured by the Company's billed and unbilled accounts receivable and
its fixed assets. The terms of the Chemical Facility have been expanded to
provide for additional borrowing, including eligible unbilled receivables up to
$5 million and certain billed receivables over 90 days. The Company incurred
deferred financing fees of $1.1 million in connection with the new facility
which will be amortized over the three year term of the agreement.
The Chemical Facility requires the Company to meet financial targets,
maintain certain key ratios and comply with numerous financial covenants.
Additionally the facility places restrictions and other conditions on the
payment of dividend on common and preferred stock.
Maturities of long-term debt outstanding at September 30, 1995, as
determined under the provisions of the Chemical Facility, are as follows (in
thousands):
1996 . . . . . . . . . . . . . . . . . . . . . . $ 2,110
1997 . . . . . . . . . . . . . . . . . . . . . . 1,456
1998 . . . . . . . . . . . . . . . . . . . . . . 1,948
1999 . . . . . . . . . . . . . . . . . . . . . . 21,999
2000 . . . . . . . . . . . . . . . . . . . . . . --
Thereafter . . . . . . . . . . . . . . . . . . . 2,000
--------
$ 29,513
========
F-17
61
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - CONVERTIBLE SENIOR SUBORDINATED NOTE
On November 15, 1994, the Company entered into an Amended and Restated
Note Purchase Agreement with 399 Venture Partners, Inc. (the Investor), an
affiliate of Citicorp Venture Capital, Ltd., in connection with the purchase of
RES, pursuant to which the Company issued, and the Investor purchased, $10
million aggregate principal amount of a Convertible Senior Subordinated Note
(the Convertible Senior Subordinated Note) and $2 million aggregate principal
amount of a Senior Note (the Senior Note and collectively with the Convertible
Senior Subordinated Note, the Notes). The Notes mature on November 21, 2004.
Interest on the Convertible Senior Subordinated Note is payable semi-annually
at 10 percent per annum. Interest on the Senior Note accrues at a rate per
annum equal to the higher of 10 percent or the prime interest rate plus 1.75
percent. In the event that the Senior Note is not repaid in full with interest
on or before October 21, 1995, interest will accrue thereunder and the Company
thereafter will pay, on a semi-annual basis, interest in cash in respect of a
restated principal amount equal to the then outstanding principal amount plus
the amount of accrued but unpaid interest under the Senior Note through October
21, 1995. The Convertible Senior Subordinated Note is convertible by the holder
at any time prior to maturity into approximately 305,000 shares of Junior
Convertible Preferred Stock, par value $.01 per share. The Junior Convertible
Preferred Stock is in turn convertible to Common Stock, par value $.01 per
share, of the Company. Subject to certain adjustments for future below market
stock issuances and similar events, the Convertible Senior Subordinated Note,
if fully converted for Common Stock, would be convertible into approximately
3.05 million shares of Common Stock. As of October 21, 1995, the Senior Note,
including accrued and unpaid interest remained unpaid and therefore became
convertible by the holder at any time subsequent to October 21, 1995, on the
same basis as the Convertible Senior Subordinated Note. Subject to certain
adjustments for future below market issuances, stock splits and similar events,
the Senior Note, if fully converted, including accrued and unpaid interest,
would be convertible into approximately 665,000 shares of Common Stock. The
Company has reserved 3,715,000 shares of Common Stock for issuance in the event
of conversion of the Junior Convertible Preferred Stock.
The holders of the Convertible Senior Subordinated Note and the Senior
Note are not entitled to voting rights as stockholders of the Company. Upon
conversion of the Notes to Junior Convertible Preferred Stock, the holders are
entitled to participate with Common Stock, on an as-if converted basis, with
respect to dividends, certain voting rights and, upon liquidation, dissolution
and winding up of the Company; provided, however, that, except as required by
law and as to matters which the Junior Convertible Preferred Stock is entitled
to vote separately as a class, the total voting power of the Junior Convertible
Preferred Stock will not represent more than 19.9 percent of the total voting
power of the then outstanding Common Stock and Junior Convertible Preferred
Stock, taken together.
The Company has the right to prepay the Convertible Senior
Subordinated Note, subject to certain provisions in the Company's credit
facilities discussed in Note 7, and prepay the Senior Note. However, with
respect to the Convertible Senior Subordinated Note, if prepayment occurs prior
to November 21, 1999, and prior to the later of a two year period ending
November 21, 1996 or the "Positive Development Trading Date", which date occurs
after the Common Stock of the Company has traded above $7.00 per share for
ninety consecutive days, and, with respect to the Senior Note, after October
21, 1995, the holder is entitled to a prepayment premium of up to 5 percent
which reduces over time. Additionally, the holder of the Note retains an
exercise right, in the event prepayment occurs prior to the later of November
21, 1996 and the "Positive Development Trading Date", to purchase shares of
Junior Convertible Preferred Stock, at the same terms as were provided in the
Notes, within a one year exercise period.
F-18
62
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - LEASES
The Company leases office space and various equipment under
non-cancelable leases expiring through 2000.
For the transition period ended September 30, 1995, and the years
ended February 28, 1995, 1994 and 1993, total lease expense charged to
operations was approximately $4.1 million, $7.1 million, $3.6 million and $4.9
million, respectively and includes rentals under short-term cancelable leases.
As of September 30, 1995, future minimum rental payments required
under operating leases that have initial or remaining non-cancelable terms in
excess of one year are as follows (in thousands):
1996 . . . . . . . . . . . . . . . . . . . . . . . . $ 6,123
1997 . . . . . . . . . . . . . . . . . . . . . . . . 5,141
1998 . . . . . . . . . . . . . . . . . . . . . . . . 4,684
1999 . . . . . . . . . . . . . . . . . . . . . . . . 4,176
2000 . . . . . . . . . . . . . . . . . . . . . . . . 2,955
Thereafter . . . . . . . . . . . . . . . . . . . . . 1,655
-------
$24,734
=======
NOTE 10 - INCOME TAXES
Provision (benefit) for federal and state income taxes are comprised
of the following components (in thousands):
YEAR ENDED FEBRUARY 28,
-----------------------------------
1995 1995 1994 1993
----- ----- ----- -------
Current
Federal . . . . . . . . . . . . . $ -- $ 405 $ -- $(1,916)
----- ----- ----- -------
State . . . . . . . . . . . . . . 87 153 135 (13)
----- ----- ----- -------
87 558 135 (1,929)
Deferred:
Federal . . . . . . . . . . . . . -- -- -- (658)
State . . . . . . . . . . . . . . -- -- -- --
----- ----- ----- -------
-- -- -- (658)
----- ----- ----- -------
TOTAL . . . . . . . . . . . . . . . . $ 87 $ 558 $ 135 $(2,587)
===== ===== ===== =======
F-19
63
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
SEPTEMBER 30, FEBRUARY 28,
--------------------------
1995 1995 1994
------------ ----------- ---------
Deferred tax assets:
Bad debt allowance . . . . . . . . . . . . . . . . . . . . . . $ 277 $ 484 $ 1,234
Restructuring and related items . . . . . . . . . . . . . . . 359 310 862
Capital loss carryforward . . . . . . . . . . . . . . . . . . 1,331 1,331 1,278
Net operating loss carryforward . . . . . . . . . . . . . . . 3,005 1,791 1,429
AMT and other credits . . . . . . . . . . . . . . . . . . . . 999 1,306 ---
Unconsolidated affiliates . . . . . . . . . . . . . . . . . . 370 301 376
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . 1,370 3,546 912
Liabilities related to acquisitions . . . . . . . . . . . . . 1,617 1,036 ---
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,087 233 398
Valuation allowance . . . . . . . . . . . . . . . . . . . . . (5,434) (5,183) (5,009)
-------- ------- -------
Total deferred tax assets . . . . . . . . . . . . . . . . . 4,981 5,155 1,480
-------- ------- -------
Deferred tax liabilities:
Property and equipment . . . . . . . . . . . . . . . . . . . . (1,475) (1,099) (1,353)
Cash to accrual . . . . . . . . . . . . . . . . . . . . . . . (1,819) (2,728) ---
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . (113) (14) (127)
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,574) (1,314) ---
-------- ------ ------
Total deferred tax liabilities . . . . . . . . . . . . . . (4,981) (5,155) (1,480)
-------- ------ ------
Net deferred taxes . . . . . . . . . . . . . . . . . . . . $ --- $ --- $ ---
========= ======== ========
The Company had net operating loss and net capital loss carryforwards for
federal income tax purposes of approximately $7.5 million and $3.3 million,
respectively, at September 30, 1995. If unused, the net operating loss will
expire beginning in fiscal 2008. The capital loss carryforward, if unused, will
expire beginning in fiscal 1999. For financial reporting purposes, a valuation
allowance has been recorded to reduce the deferred tax asset related to these
carryforwards and other deferred tax assets, including approximately $1.3
million of deferred tax assets related to companies acquired during the year
ended February 28, 1995, net of deferred tax liabilities, to zero since the
realization of such amounts is not assured. Future tax benefits from the
carryforwards will reduce income tax expense when realized. Future tax benefits
associated with the unrecognized net deferred tax assets of the companies
acquired in fiscal 1995 will reduce goodwill when realized. Due to a greater
than 50 percent change in ownership of the Company within the past three fiscal
years, use of the carryforwards to reduce future taxable income will be limited
to approximately $900,000 annually.
F-20
64
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - INCOME TAXES (CONTINUED)
A reconciliation of income tax expense (benefit) to amounts computed using
federal statutory rates are shown below (in thousands):
YEAR ENDED FEBRUARY 28,
---------------------------------
1995 1995 1994 1993
------ ------- ------- --------
Income tax expense (benefit) computed
at the federal statutory rate . . . . . . . . . . . . . . . . $ 35 $ 977 $(2,446) $ (3,947)
Loss carryforward for which no benefit was
provided . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 2,446 1,281
Utilization of previously unbenefited losses . . . . . . . . . . (372) (826) -- --
Elimination of deferred taxes . . . . . . . . . . . . . . . . . . -- -- -- 142
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 100 135 (13)
Non-deductible goodwill amortization . . . . . . . . . . . . . . 142 69 -- --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 238 -- (50)
------ ------- ------- --------
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . $ 87 $ 558 $ 135 $ (2,587)
====== ======= ======= ========
NOTE 11 - EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan covering substantially all
employees. Under the plan, employees may make tax deferred voluntary
contributions which, at the discretion of the Company's Board of Directors, are
matched within certain limits by the Company. In addition, the Company may make
additional discretionary contributions to the plan as profit sharing
contributions. All contributions to the plan are limited by applicable Internal
Revenue Code regulations. For the seven months ended September 30, 1995 and
the year ended February 28, 1995 the Company accrued matching contributions of
$147,000 and $161,000, respectively. There were no Company contributions for
years ended February 28, 1994 and 1993.
NOTE 12 - REDEEMABLE PREFERRED STOCK
In connection with the acquisition of BCM, the Company authorized and issued
78,000 shares of Redeemable Preferred Stock (the Redeemable Preferred Stock).
Each share has a $100 redemption value, is senior to the Company's common stock
and has a liquidation preference of $100 per share plus accrued and unpaid
dividends. The Redeemable Preferred Stock was recorded at its initial fair
value of $6,868,000 on the date of issuance. The excess of the redemption value
over the carrying value is being accreted to redemption value by periodic
charges to retained earnings using the interest method and an effective annual
rate of return of 7.5 percent. The Redeemable Preferred Stock has a 5.0 percent
per annum cumulative dividend payable quarterly. If the Company fails for any
reason to make a scheduled quarterly dividend payment on the Redeemable
Preferred Stock, the rate of the dividends shall increase from 5 percent per
annum to 7.5 percent per annum per share, and if failure to pay a quarterly
dividend occurs a second consecutive time, the rate of dividends shall increase
to 10 percent per annum per share. When all accrued but unpaid dividends have
been paid in full at the adjusted rate, the dividend rate for future dividends
will return to the initial rate of 5 percent per annum. The Redeemable
Preferred Stock shall not have any right or power to vote on any question or in
any proceeding or to be represented at any meeting of the Company's
stockholders. The Company at its option may redeem shares of Redeemable
Preferred Stock, in whole or in
F-21
65
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - REDEEMABLE PREFERRED STOCK (CONTINUED)
part, at any time. The Company is required to redeem at a redemption price of
$100 per share plus accrued but unpaid dividends, and to the extent such
redemption payments are permitted in accordance with the covenant set forth
therein, no later than each of the fifth, sixth and seventh anniversaries of
the date of issuance of the shares of Redeemable Preferred Stock, not less than
one-third of the total shares originally authorized and issued. In the event
the Company fails to make a scheduled redemption payment, the redemption date
for all remaining shares of Redeemable Preferred Stock is accelerated and the
rate of dividends increases to 15 percent per annum.
The Redeemable Preferred Stock issued in connection with the acquisition of
BCM is held by the BCM Employee Stock Ownership Trust (the ESOP) for the future
benefit of vested participants. Effective September 28, 1994, the ESOP was
amended to fully vest all participants who were employed by BCM on September
28, 1994 and to provide that no further contributions are to be made to the
ESOP. The Company has entered into a Trust and Security Agreement which created
a trust (the Trust) to secure payment of certain current and future obligations
of the Company arising in connection with the acquisition of BCM, principally
the payment of dividends on and the redemption of the Redeemable Preferred
Stock. Participants become eligible for distribution of the Redeemable
Preferred Stock held for their account in the ESOP upon retirement, death,
disability or in the sixth year following termination of employment. The
participants can put the Redeemable Preferred Stock back to the Company at the
$100 redemption value in exchange for cash or cash and a subordinated note
payable. Payments to a participant by the Company are limited to the greater of
20 percent of the redemption value of the shares of Redeemable Preferred Stock
or $10,000 per year. Certain insurance policies on the lives of former and
present employees of BCM, with aggregate death benefits of approximately $41
million and an aggregate cash surrender value (net of policy loans) of
approximately $800,000, are held by the Trust for the benefit of the
beneficiaries. The Company is obligated to contribute $100,000 each fiscal
quarter to fund premium payments on the insurance policies. The Trust will
terminate after all secured indebtedness has been satisfied, and any remaining
assets will be returned to the Company.
NOTE 13 - STOCK OPTION PLANS
The Company has various plans which provide for the grant of incentive
awards to employees, advisors and non-employee directors. During fiscal 1994,
the 1986 Employee Stock Option Plan and the 1992 Non-employee Directors Stock
Option Plans were terminated except as to options then outstanding. The
terminated plans were replaced by the 1994 Stock Incentive Plan and the 1994
Non-employee Directors Stock Option Plan (1994 Directors' Plan). A maximum of
1,200,000 and 250,000 shares of the Company's common stock are issuable in
connection with awards granted under the 1994 Stock Incentive Plan and
1994 Directors' Plan, respectively.
The 1994 Stock Incentive Plan provides for the granting of incentive stock
options and other stock-based awards to key employees and advisors. The
exercise price of options granted under the plan is 100 percent of the fair
market value of common stock on the date the option is granted. Options become
exercisable as determined at the date of grant by a committee of the Board of
Directors and expire ten years after the date of grant unless an earlier
expiration date is set at the time of grant. At September 30, 1995, there were
no shares outstanding pursuant to other stock-based awards under the plan.
F-22
66
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13 - STOCK OPTION PLANS (CONTINUED)
The 1994 Directors' Plan provides for the granting of options to
acquire the Company's common stock to non-employee directors. The exercise price
of options granted under the plan is 100 percent of the fair market value of
common stock on the date the option is granted. Options become exercisable one
to three years after the grant date and expire ten years after the date of grant
unless an earlier expiration date is set at the time of grant.
The following table summarizes activity under the Company's stock
plans:
Option Price
Shares Per Share
--------- ----------------
February 29, 1992 . . . . . . . . . . . . . . . . . . . . 841,500 $6.75 - $15.73
Granted . . . . . . . . . . . . . . . . . . . . . . . 255,000 $3.40 - $ 7.75
Re-issued . . . . . . . . . . . . . . . . . . . . . . (146,500) $15.73
Lapsed or canceled . . . . . . . . . . . . . . . . . . (175,750) $3.40 -- $15.73
---------
February 28, 1993 . . . . . . . . . . . . . . . . . . . . 774,250 $3.40 -- $15.73
Granted . . . . . . . . . . . . . . . . . . . . . . . 369,000 $2.88 -- $ 5.00
Lapsed or canceled . . . . . . . . . . . . . . . . . . (343,000) $2.88 -- $15.73
---------
February 28, 1994 800,250 $2.88 -- $15.73
Granted . . . . . . . . . . . . . . . . . . . . . . . 491,456 $3.25 -- $ 7.00
Exercised . . . . . . . . . . . . . . . . . . . . . . (106,689) $2.88 -- $ 5.00
Lapsed or canceled . . . . . . . . . . . . . . . . . . (307,862) $2.88 -- $15.73
---------
February 28, 1995 . . . . . . . . . . . . . . . . . . . . 877,155 $2.88 -- $15.73
Granted . . . . . . . . . . . . . . . . . . . . . . . 327,400 $5.38 -- $ 6.50
Exercised . . . . . . . . . . . . . . . . . . . . . . (92,799) $2.88 -- $ 4.38
Lapsed or canceled . . . . . . . . . . . . . . . . . . (101,652) $2.88 -- $11.00
---------
September 30, 1995 . . . . . . . . . . . . . . . . . . . 1,010,104 $2.88 -- $15.73
---------
At September 30, 1995, 657,658 shares of the Company's Common Stock
were reserved for future grant under the plans. At September 30, 1995, and
February 28, 1995, 1994 and 1993, options for 191,247, 358,617, 700,250 and
254,393 shares, respectively, were exercisable.
NOTE 14 - COMMITMENT AND CONTINGENCIES
The Company filed an action for breach of contract and rescission
against seven potentially responsible parties (the PRP's) in the Circuit Court,
Multnomah County, Oregon in February 1995. The Company is pursuing recovery for
amounts due as a result of its performance of services, including $1.3 million
of accounts receivable and retainage, $2.5 million of unrecovered equipment
investment and other damages resulting in a total claim exceeding $8.5 million.
Prior to the Company's claim, activity at the site had been suspended pending
approval by EPA of changes in the remedial activities proposed by the PRP's and
supported by independent engineering reports which acknowledge significant
differences in the waste at the site from those conditions specified in the EPA
Record of Decision and in the initial Remedial
F-23
67
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - COMMITMENT AND CONTINGENCIES (CONTINUED)
Investigation performed by others at the site. The court action has been abated
pending the arbitration before the American Arbitration Association of issues
initiated by the PRP's seeking reimbursement by the Company of approximately
$18.0 million paid for work performed under the contract. The Company will
vigorously defend its position and intends to aggressively pursue all amounts
recoverable related to the performance at this site.
In November 1993, second amended complaints and initial complaints
were filed in the Circuit Court of the State of Mississippi, County of Jackson,
which included RES along with a number of other defendants in claims pending in
27 separate civil actions. These civil actions involve approximately 219
plaintiffs and include two wrongful death claims. Plaintiffs allege that RES
was negligent in transferring and clean-up activities of the chemical
diethylamine, released from an overturned tanker. Settlements by other
defendants are pending. In the event proposed settlements are completed,
eighty-seven plaintiffs' claims will be dismissed leaving one hundred
thirty-two plaintiffs with claims remaining against RES, including the two
wrongful death claims. The special damages of remaining plaintiffs are
approximately $400,000 not including unstated general damages. RES will be
entitled to a credit for payments made by settling defendants against any
remaining plaintiffs. The Company, in its defense, rejects every allegation.
The matter is in the discovery phase. The Company is vigorously defending the
described litigation.
In October 1990, a mortgage lender commenced an action against Mt.
Laurel Associates (the "Developer"), its legal counsel, architect and BCM
Engineers Inc. ("BCM", an affiliated subsidiary of the Company), in the
District Court of Burlington County, New Jersey. The claims against BCM are
for damages based on negligent misrepresentations in certifications allegedly
made by BCM at the closing of an $8.5 million loan of compliance of the
property with laws, ordinances and governmental requirements. The U.S. Corps
of Engineers issued a letter requiring the Developer to cease and desist from
certain activities on the property due to placement of fill material placed in
regulated wetlands in violation of the Federal Clean Water Act. The
Developer's legal counsel and architect have been dismissed through an agreed
settlement. BCM's scope of services excluded the obligation to assess and
delineate the Developer's property with respect to federally regulated
wetlands. BCM is vigorously defending this matter which is expected to be set
for trial in the spring of 1996.
The Company is also currently a party to other claims and litigation
related to its business. Although no assurances can be given, management
believes, based on its experience, and after considering appropriate reserves
that have been established, the outcome of the litigation described above and
other litigation will not have material adverse effect on the future financial
condition or results of operations of the Company.
NOTE 15 - SPECIAL ITEMS
In September 1995, the Company incurred $393,000 in severance and
relocation costs in connection with the Company's continuing effort to reduce
operating costs.
In the second and fourth quarters of fiscal 1994, the Company recorded
special items aggregating $9.3 million associated with management's focus on
resolving ongoing operational issues, such as project specific claims issues,
investments in non-core business activities, and new information systems, staff
reductions and office closings.
F-24
68
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - SPECIAL ITEMS (CONTINUED)
Of the $9.3 million of aggregate special items, $2.3 million was
attributable to additional costs and changes in profit estimates related to
construction contracts and is included in cost of revenues and $2.7 million
related primarily to the write-off of the Company's equity method investment in
LRC, a joint venture formed to develop an incinerator, and is included in losses
of unconsolidated affiliates. The remaining $4.3 million in charges is
included in special items and includes $2.4 million of restructuring charges
associated with office closures and severance costs aggregating $1.8 million
and the write-off of an investment in a non-core business no longer fitting the
strategic direction of the Company of approximately $600,000. The effect of the
office closures and restructuring charges was to eliminate the costs of
operating certain offices in fiscal 1995 and thereafter. These costs, primarily
indirect costs classified in cost of revenues, aggregated $2.3 million in
fiscal 1994. Since the offices were closed and staff reductions occurred in
March and April of 1994, the first two months of the fiscal year, savings were
realized immediately and for virtually all of fiscal 1995. Additionally in
1994, there were other special charges which included an asset write-off
resulting from the implementation of a new information system of approximately
$440,000, a writedown of process equipment determined to have impaired value of
approximately $490,000, and an accrual of costs associated with litigation of
$1 million. Identifiable savings beyond 1995 can not be determined because of
the change in size and complexity of the Company resulting from the recent
acquisitions of BCM and RES.
In the second quarter of fiscal 1993, the Company implemented a plan
to "right size" administrative operations resulting in a special charge of
$500,000, primarily for severance. In the fourth quarter of fiscal 1993, the
Company recorded special items of $10.6 million. The fourth quarter special
items occurred primarily from the Company's change in the pursuit of its
outstanding claims on contracts and the reduction in the carrying value of a
trade note receivable (see Note 6). Of the $12.1 million in aggregate
adjustments, approximately $7.7 million was attributable to the write-off of
claims previously recognized as revenues. The remaining $4.4 million is
included in special charges and includes a $2.6 million charge to reduce the
carrying value of a trade note receivable, a $1.6 million charge for severance,
office consolidation and other reorganizational moves, and $200,000 for the
loss on the sale of a subsidiary.
NOTE 16 - UNAUDITED CONSOLIDATED STATEMENT OF OPERATION FOR THE SEVEN MONTHS
ENDED SEPTEMBER 30, 1994
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,771
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 38,006
------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . 5,765
Selling, general, and administrative expenses . . . . . . . . . . . . 4,192
------------
Income from operations . . . . . . . . . . . . . . . . . . . . . . . 1,573
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . 41
------------
Income before income tax expense . . . . . . . . . . . . . . . . . . 1,532
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . 335
------------
Income before earnings of unconsolidated affiliates . . . . . . . . . 1,197
Share in operating earnings of unconsolidated affiliates . . . . . . 263
------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,460
============
Weighted average number of common and common
equivalent shares outstanding . . . . . . . . . . . . . . . . . . 5,782,100
============
Earnings per common and common equivalent share . . . . . . . . . . . $ .25
============
F-25
69
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
NET (WRITE-
OFFS)
RECOVERIES BALANCE
BALANCE AT CHARGED AT
BEGINNING OTHER CHARGED TO AGAINST END OF
OF PERIOD RESERVES EXPENSE RESERVE PERIOD
---------- -------- ---------- ---------- --------
Allowance for Doubtful Accounts:
Seven months ended
September 30, 1995 . . . . . . . . . . . . . . . $1,312 $ 442(b) $ 124 $ (376) $ 1,502
Year ended February 28, 1995 . . . . . . . . . . . 485 1,188(a) 165 (526) 1,312
Year ended February 28, 1994 . . . . . . . . . . . 1,300 -- (122) (693) 485
Year ended February 28, 1993 . . . . . . . . . . . 500 -- 2,645 (1,845) 1,300
___________
(a) Additional reserves recognized with the acquisitions of BCM Engineers
($777) and Riedel Environmental Services ($411)
(b) Additional reserves recognized as a result of the finalization of the
purchase price allocation relating to the 1995 acquisitions..
F-26