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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-14992
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
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(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
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(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 737-7900
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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
--- ---
On April 30, 1996, the registrant had 5,901,925 shares of common stock
outstanding.
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QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1996
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
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Item 1: Financial Statements
Consolidated Balance Sheets as of March 31, 1996
(unaudited) and September 30, 1995 3-4
Consolidated Statements of Operations (unaudited)
for the three and six months ended March 31, 1996 and 1995 5
Consolidated Statements of Cash Flows (unaudited)
for the six months ended March 31, 1996 and 1995 6-7
Notes to Consolidated Financial Statements (unaudited) 8
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
PART II. OTHER INFORMATION
Item 5: Other Information 14
Item 6: Exhibits and Reports on Form 8-K 14
Signature 16
Exhibit 11 Computation of per share earnings, for the
three and six months ended March 31, 1996 (unaudited) 17
Exhibit 27 Requirements for the format and input
of financial data schedules (EDGAR version only)
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PART 1 FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, September 30,
1996 1995
----------- ----------
(unaudited)
ASSETS
Current Assets:
Cash $ 625 $ 510
Accounts receivable, less allowance for doubtful
accounts of $1,201 and $1,502 39,275 53,379
Costs and estimated earnings on long-term
contracts in excess of billings 395 2,287
Prepaid expenses and other current assets 2,688 2,676
-------- --------
Total current assets 42,983 58,852
Property and equipment:
Equipment 21,745 21,949
Land and buildings 4,007 4,007
Leasehold improvements 1,071 1,044
-------- --------
Total property and equipment, at cost 26,823 27,000
Less accumulated depreciation and amortization 10,261 10,062
-------- --------
Property and equipment, net 16,562 16,938
Other assets:
Intangible assets, net of accumulated amortization
of $1,294 and $712, respectively 15,756 16,338
Goodwill, net of accumulated amortization of
$523 and $322, respectively 15,144 15,345
Investment in unconsolidated affiliate 2,002 1,502
Other assets 4,136 5,033
-------- --------
TOTAL ASSETS $ 96,583 $114,008
======== ========
See accompanying notes to consolidated financial statements
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands)
March 31, September 30,
1996 1995
----------- -------------
(unaudited)
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and subcontracts payable $ 16,701 $ 24,147
Accrued expenses and other liabilities:
Compensation and related fringes 2,993 4,973
Severence and office closures 774 1,618
Other 6,742 9,343
Billings on long-term contracts in excess of
costs and estimated earnings 1,614 1,251
Current maturities of long-term debt and
short-term borrowings 2,739 2,110
-------- --------
Total current liabilities 31,563 43,442
Long-term debt 23,910 27,403
Other long-term liabilities 4,091 6,017
Convertible Senior Subordinated Note, 10% maturing
in 2004, convertible into 4,169,148 and 3,048,780
common shares, respectively at $3.28 per share 13,675 10,000
Commitments and contingencies:
Redeemable Preferred Stock, $0.01 par value; 78,000
shares authorized; 74,439 and 76,218
shares issued, respectively; 5% cumulative
dividend; $100 redemption value 6,762 6,857
Junior Convertible Preferred Stock; $0.01 par value;
371,500 shares authorized; none issued - -
Preference Stock; $0.01 par value; 1,000,000 shares
authorized; none issued - -
Preferred stock $0.01 par value; 550,500 shares
authorized; none issued - -
Common stockholders' equity:
Common stock; $0.01 par value; 20,000,000 shares
authorized; 5,901,925 and 5,850,015 shares
issued and outstanding, respectively 59 58
Additional paid in capital 17,316 17,149
Retained earnings (793) 3,082
-------- --------
Total common stockholders' equity 16,582 20,289
-------- --------
TOTAL LIABILITIES, REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS EQUITY $ 96,583 $114,008
======== ========
See accompanying notes to consolidated financial statements
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
unaudited
Three months ended Six months ended
March 31, March 31,
------------------ ------------------
1996 1995 1996 1995
------- ------- ------- -------
Revenues $35,136 $38,736 $81,894 $73,955
Cost of revenues 32,534 33,950 73,410 64,383
------- ------- ------- -------
Gross profit 2,602 4,786 8,484 9,572
Selling, general and administrative expenses 3,542 3,191 7,391 6,604
Amortization of intangible assets, goodwill and
deferred financing fees 489 491 977 636
Special items 200 - 593 -
------- ------- ------- -------
(Loss) income from operations (1,629) 1,104 (477) 2,332
Interest expense (1,029) (738) (2,183) (1,292)
------- ------- ------- -------
(Loss) income before share in earnings of
unconsolidated affiliate, income taxes and
extraordinary charge (2,658) 366 (2,660) 1,040
Share in earnings of unconsolidated affiliate - (68) 500 276
------- ------- ------- -------
(Loss) income before income taxes and
extraordinary charge (2,658) 298 (2,160) 1,316
Income tax benefit (expense) 63 (117) (50) (223)
------- ------- ------- -------
(Loss) income before extraordinary charge (2,595) 181 (2,210) 1,093
Extraordinary charge on debt refinancing (113) - (1,395) -
------- ------- ------- -------
Net (loss) income (2,708) 181 (3,605) 1,093
Dividends and accretion on Redeemable Preferred Stock (133) (130) (270) (261)
------- ------- ------- -------
Net (loss) income applicable to common stock $(2,841) $ 51 $(3,875) $ 832
======= ======= ======= =======
Weighted average number of common and common
equivalent shares outstanding 5,877 5,982 5,880 5,966
======= ======= ======= =======
Income (loss) per common and common equivalent share:
Income before extraordinary charge $ (0.44) $ 0.03 $ (0.38) $ 0.18
Extraordinary charge (0.02) - (0.24) -
------- ------- ------- -------
Net (loss) income $ (0.46) $ 0.03 $ (0.61) $ 0.18
======= ======= ======= =======
Net (loss) income applicable to common stock $ (0.48) $ 0.01 $ (0.66) $ 0.14
======= ======= ======= =======
See accompanying notes to consolidated financial statements
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
unaudited
Six months ended
March 31,
------------------
1996 1995
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OPERATING ACTIVITIES
Income before extraordinary charge ($2,210) $ 1,093
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 2,207 2,216
(Loss) gain on disposal of equipment (347) 24
Share in earnings of affiliate (500) (276)
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable 14,104 4,708
Costs and estimated earnings on long-term
contracts in excess of billings 1,892 1,375
Prepaid expenses and other current assets (12) 3,509
Other assets 805 (547)
Accounts and subcontracts payable (7,446) 770
Accrued expenses and other liabilities (5,479) (7,406)
Billings on long-term contracts in excess of costs
and estimated earnings 363 (1,287)
Other long-term liabilities (1,926) (406)
------- -------
Net cash provided by operating activities $ 1,451 $ 3,773
======= =======
See accompanying notes to consolidated financial statements
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
(In thousands)
unaudited
Six months ended
March 31,
-------------------
1996 1995
------ ------
INVESTING ACTIVITIES
Capital expenditures $(1,081) $ (982)
Advances from affiliates - 1,215
Proceeds from sale of fixed assets 577 -
Purchase of RESNA - (1,500)
Purchase of Riedel Environmental Services (net of cash
acquired) - (18,336)
------- -------
Net cash used in investing activities (504) (19,603)
------- -------
FINANCING ACTIVITIES
Proceeds from revolving line of credit 20,649 5,053
Retirement of revolving line of credit (21,537) -
Borrowings (repayments) on revolving line of credit, net (1,641) (1,847)
Proceeds from term loan 6,500 2,000
Retirement of term loan (3,400) -
Repayments on term loan (1,161) (380)
Proceeds from issuance of Convertible Senior Subordinated Note - 10,000
Proceeds from issuance of Senior Note - 2,000
Borrowings from conversion of Senior Note 1,675 -
Payment of financing fees (1,096) -
Payment of early debt extinguishment penalty (287) -
Repayments of debt (274) (1,729)
Proceeds from exercise of stock options 14
Repurchase of Redeemable Preferred Stock (179) (116)
Dividends paid on Redeemable Preferred Stock (95) -
------- -------
Net cash provided by (used in) financing activities (832) 14,981
------- -------
Net increase (decrease) in cash 115 (849)
Cash at beginning of period 510 2,793
------- -------
Cash at end of period $ 625 $ 1,944
======= =======
Supplemental Cash Flow Information:
Issuance of Stock for Bonus Compensation $ 47 $ -
Issuance of Stock for Defined Contribution Plan $ 107 $ -
See accompanying notes to consolidated financial statements
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by Smith Environmental Technologies Corporation (the Company), pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The Company
believes the disclosures made herein are adequate to make the information
presented not misleading. The financial statements reflect all material
adjustments which are all of a normal, recurring nature and, in the opinion of
management, necessary for a fair presentation. These financial statements
should be read in conjunction with the Company's Transition Report on Form 10-K
for the seven month transition period ended September 30, 1995. The results of
operations for the three and six months ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 1996.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
The Company is currently party to various legal actions arising in the
normal course of its business, some of which involve claims and substantial
sums. Such legal actions were previously described in the Company's Transition
Report on Form 10-K for the seven month transition period ended September 30,
1995. Additional legal actions and claims have been filed against the Company
in the period ended March 31, 1996. While such legal actions could result in
judgments against the Company, management believes, based on its experience and
after considering appropriate reserves that have been established at March 31,
1996, that the outcome of such litigation will not have a material adverse
effect on the future financial condition or results of operations of the
Company.
NOTE 3 - INDUSTRY SEGMENT
The Company operates within a single industry segment. Revenues generated
outside the United States were approximately $2.7 million and $3.9 million for
the three and six months ended March 31, 1996 respectively.
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ITEM 2. 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 the Management's Discussion and
Analysis of Financial Condition and Results of Operations should be read in
conjunction with the consolidated financial statements and the notes to the
consolidated financial statements of the Company included herein and the
Company's Transition Report on Form 10-K for the seven month transition period
ended September 30, 1995.
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- ------------------------
1996 1995 1996 1995
-------- ------ ------ ------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 92.6 87.6 89.6 87.1
----- ----- ----- -----
Gross profit (loss) 7.4 12.4 10.4 12.9
Selling, general and administrative expenses 10.1 8.2 9.0 8.9
Amortization of intangible assets, goodwill and
deferred financing fees 1.4 1.3 1.2 0.9
Special items 0.6 - 0.7 -
----- ----- ----- -----
(Loss) income from operations (4.7) 2.9 (0.5) 3.1
Interest expense (2.9) (1.9) (2.7) (1.7)
----- ----- ----- -----
(Loss) income before share in earnings of
unconsolidated affiliate, income taxes and
extraordinary charge (7.6) 1.0 (3.2) 1.4
Share in (losses) earnings of unconsolidated affiliate - (0.2) 0.6 0.4
----- ----- ----- -----
(Loss) income before income taxes and
extraordinary charge (7.6) 0.8 (2.6) 1.8
Income tax benefit (expense) 0.2 (0.3) (0.1) (0.3)
----- ----- ----- -----
(Loss) income before extraordinary charge (7.4) 0.5 (2.7) 1.5
Extraordinary charge on debt refinancing (0.3) - (1.7) -
----- ----- ----- -----
Net (loss) income (7.7)% 0.5% (4.4)% 1.5%
===== ===== ===== =====
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GENERAL
The Company provides a broad range of comprehensive environmental
consulting, engineering, remediation and construction services principally 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 primarily 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 other quarter or full fiscal year.
The Company's consolidated financial statements at March 31, 1996 and for
the three and six months then ended include the results of operations for Riedel
Environmental Technologies, Inc. ("RES") and RESNA Industries, Inc. ("RESNA").
The consolidated financial statements for the same period in 1995 include the
results of RES from November 21, 1994 and RESNA from January 1, 1995.
Certain amounts from prior periods have been reclassified to conform to
current period presentation.
COMPARISON OF QUARTER ENDED MARCH 31, 1996 AND 1995
Revenues for the quarter ended March 31, 1996 were $35.1 million compared
with $38.7 million for the same quarter in 1995, a decrease of $3.6 million or
9.3 percent. The decrease in revenues was due primarily to the suspension of
funding for Emergency Response Contract Services ("ERCS") during the Federal
Government's shutdown, which affected remediation services, and to a lesser
extent, lower consulting and engineering services revenues. Severe winter
weather conditions also contributed to decreased revenues.
Gross profit for the quarter ended March 31, 1996 was $2.6 million or 7.4
percent of revenues compared with $4.8 million or 12.4 percent of revenues for
the quarter ended March 31, 1995, a decrease of approximately $2.2 million. The
decrease in gross profit is attributable to lower margins on remediation
services resulting from lower revenues and fixed costs of government compliance
contained within cost of revenues and lower margins on consulting and
engineering services partially offset by improved construction margins.
Selling, general and administrative expenses (SG&A) for the quarter ended
March 31, 1996 were $3.5 million compared with $3.2 million for the same quarter
last year, an increase of approximately $300,000 due primarily to increased
marketing and sales costs in connection with business development activities.
SG&A as a percentage of revenues for the quarter ended March 31, 1996 was 10.1
percent compared with 8.2 percent for the same quarter in 1995. The increase in
percentage is primarily attributable to lower revenues and increased marketing
and sales costs partially offset by reductions in administration costs derived
from consolidating the acquired companies.
Special items were $200,000 for the quarter ended March 31, 1996 and
included severance and relocation costs in connection with additional office
closings and consolidations.
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Interest expense for the quarter ended March 31, 1996 was $1.0 million
compared with $738,000 for the same quarter in 1995. The increase in interest
expense is primarily due to increased bank borrowings and related debt in
connection with the acquisitions of RES and RESNA and their respective
operations.
In the quarter ended March 31, 1996, the Company reduced its federal tax
provision to zero as a result of the current quarter and year to date operating
loss. The Company has significant net operating loss carryforwards to offset
future federal tax liabilities. Due to a greater than 50 percent change in
ownership, use of carryforwards to reduce future taxable income will be limited
to approximately $900,000 annually.
The Company recorded an extraordinary charge of $113,000 as a result of
reversing the first quarter tax benefit in connection with the debt refinancing.
COMPARISON OF SIX MONTHS ENDED MARCH 31, 1996 AND 1995
Revenues for the six months ended March 31, 1996 were $81.9 million
compared with $74.0 million for the same period in 1995, an increase of $7.9
million or 10.7 percent. The increase in revenues was primarily attributable to
the acquisition of RES in November, 1994. Revenues for the six months ended
March 31, 1996, exclusive of revenues attributable to RES, were approximately
$48.8 million, 7.6 percent lower than the same period in 1995. The decrease in
revenues exclusive of RES is primarily attributable to lower construction
revenues in the first quarter and lower consulting and engineering revenues in
the second quarter. Severe winter weather conditions also contributed to
decreased revenues.
Gross profit for the six months ended March 31, 1996 was $8.5 million or
10.4 percent of revenues compared with $9.6 million or 12.9 percent of revenues
for the six months ended March 31, 1995, a decrease of approximately $1.1
million. The decrease in gross profit as a percentage of revenue resulted from
lower margins on consulting and engineering services in the second quarter,
partially offset by improved construction services margins primarily in the
second quarter. Gross profit, exclusive of operating results attributable to
RES was approximately $7.3 million during the six months ended March 31, 1996,
compared with $8.5 million for the same period in 1995.
Selling, general and administrative expenses (SG&A) for the six months
ended March 31, 1996 were $7.4 million compared with $6.6 million for the same
period last year, an increase of approximately $800,000. SG&A as a percentage
of revenues for the six months ended March 31, 1996 was 9.0 percent compared
with 8.9 percent for the same period in 1995. The increase in percentage is
primarily attributable to lower revenues and increased marketing and sales costs
partially offset by reductions in administrative costs derived from
consolidating the acquired companies.
Amortization of goodwill, intangible assets and deferred financing fees
for the six months ended March 31, 1996 was $977,000 compared with $636,000 in
the same period in 1995. The increase is primarily a result of the finalization
in September 1995 of the allocation of the acquired companies' purchase prices.
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Special items were $593,000 for the six months ended March 31, 1996 and
included severance and relocation costs in connection with additional office
closings and consolidations.
Interest expense for the six months ended March 31, 1996 was $2.2 million
compared with $1.3 million for the same period in 1995. The increase in
interest expense is primarily due to increased bank borrowings and related debt
in connection with acquisitions of RES and RESNA and their respective
operations.
The Company's share of earnings from an unconsolidated affiliate for the
six months ended March 31, 1996 was $500,000 compared with $276,000 for the
same period in 1995 and were a result of the resolution of a contract dispute.
In the six months ended March 31, 1996, the Company reduced its federal
tax provision to zero as a result of the year to date operating loss. The
year to date income tax expense of $50,000 represents the provision for state
income taxes. The Company has significant net operating loss carryforwards to
offset future federal tax liabilities. Due to a greater than 50 percent change
in ownership, use of carryforwards to reduce future taxable income will be
limited to approximately $900,000 annually.
The Company recorded an extraordinary charge of approximately $1.4 million
during the six months ended March 31, 1996 as a result of refinancing its senior
credit facility. The charge includes unamortized financing fees and a
prepayment penalty in connection with the refinancing.
LIQUIDITY AND CAPITAL RESOURCES
On October 18, 1995 the Company executed a $35 million credit facility
with Chemical Bank and BTM Capital Corporation ("Senior Lenders"). The
facility (the "Chemical Facility"), which replaced the LaSalle Loan Agreement
(the "LaSalle Loan Agreement") consists of a $6.5 million term loan and a $28.5
million revolving line of credit (the "Revolver"). 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. The
Chemical Facility provides for a $5 million unbilled account subline whereby
unbilled receivables, subject to limitations, are included in the calculation of
the borrowing base. 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 and the
timing of collection of billed receivables. On October 18, 1995, available
borrowing capacity under the Chemical Facility was approximately $30 million
compared with $23 million under the LaSalle Loan Agreement.
The principal sources of liquidity for the Company's business and
operating needs are internally generated funds from operations and available
revolving credit borrowings under the Chemical Facility. For the six months
ended March 31, 1996, operating activities provided net
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cash of approximately $1.5 million, primarily due to accelerated client billings
and increased collections of accounts receivable, offset by reductions to
accounts payable and accrued expenses. Investing activities used approximately
$504,000 in net cash principally due to capital expenditures. Net cash of
$832,000 used in financing activities resulted primarily from repayments on the
Chemical Facility and financing and prepayment fees. Cash generated from the
collection of accounts receivable, which has directly affected the borrowing
base on the Revolver by reducing available borrowings, resulted in repayments
to the Revolver. Principal offsets to net cash used in financing activities,
include increased borrowings from the refinancing and the conversion of certain
interest payments on the senior notes, less other financing uses.
The Company incurred substantially all of its long term debt in connection
with its acquisitions of BCM, RES and RESNA. As of March 31, 1996, long term
debt, including current maturities of $2.7 million, was approximately $40.3
million, the components of which were borrowings of $19.5 million under the
revolving credit facility and $5.4 million of the term loan under the Chemical
Facility, $13.7 million of Convertible Subordinated Notes and $1.7 million of
other notes and capital leases. The unused borrowing capacity as of April 30,
1996, under the Chemical Facility was approximately $330,000.
During the six months ended March 31, 1996, 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 receivable. As a result
of these programs, the Company was able to reduce its accounts receivable by
approximately $14.1 million, which in addition to increased borrowing capacity
under the Chemical Facility, resulted in an approximately $12.5 million
reduction in accounts payable and other liabilities.
The Company reported on Form 8-K dated April 22, 1996 that it had notified
its Senior Lenders that it was not in compliance with certain financial
covenants in the Chemical Facility due to the operating results for the second
quarter. The Company has also notified 399 Venture Partners, Inc., an
affiliate of Citicorp Venture Capital, Ltd. (the "Holders"), the Holders of its
Convertible Subordinated Notes (the "Notes") that due to the non-compliance
under the Chemical Facility, the Company will be unable to make the scheduled
interest payment due May 21, 1996 on the Notes. The Holders of the Notes have
amended the Amended and Restated Note Purchase Agreement dated November 15,
1994; (i) to add the initial two interest payments previously deferred to the
principal thereof and (ii) to allow the issuance, at the Company's election, of
additional notes (maturing on November 21, 2004) in lieu of the semi-annual
interest payments payable on May 21, 1996, November 21, 1996 and May 21, 1997.
The effect as of March 31, 1996, of this deferral was to reclassify
approximately $1.5 million of accrued expenses to long term debt under the
Notes and is reflected in the accompanying financial statements. All of the
deferred interest will be subject to conversion rights on the same terms and
conditions as the original principal amount of the Notes.
Contemporaneously, the Senior Lenders have provided the Company an
amendment and waiver in connection with the non-compliance with certain
financial covenants until June 29, 1996. The waiver includes, among other
things, an increase in the interest rates of 0.5 percent, and an increase in
the frequency of the Company's reporting
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requirements. The Company is currently negotiating additional modifications to
the Chemical Facility including revisions to the financial covenants to restore
compliance beyond June 29, 1996.
Cash provided by operations and borrowings under the Revolver will
continue to be the primary sources of funds for the Company. Management of the
Company believes that increased revenue and operating profit, which are expected
in the second half of the Company's fiscal year, should generate additional cash
and borrowing availability under the Revolver to meet working capital
requirements. The Company is also seeking additional sources of financing. In
the event the Company fails to improve its operating results and is unable to
generate or obtain additional working capital, its liquidity and financial
position could be materially adversely impacted.
BACKLOG
As of March 31, 1996, the Company had a contract backlog of orders of
approximately $114 million compared with approximately $125 million and $107
million at September 30, 1995 and March 31, 1995, respectively. The value of
unfunded or indefinite delivery order contracts ("IDO") was approximately $147
million as of March 31, 1996 compared with approximately $141 million and $167
million at September 30, 1995 and March 31, 1995, respectively. The combined
contract backlog as of March 31, 1996 was approximately $261 million compared
with approximately $266 million and $274 million at September 30, 1995 and March
31, 1995, respectively. The ultimate value of the backlog is subject to change
as the scope of work on projects change. Customers often retain the right to
change the scope of work with an appropriate increase or decrease in contract
price.
OTHER ITEMS AFFECTING OPERATING RESULTS
The Company generates a substantial portion of revenues under its ERCS
contracts for the Environmental Protection Agency ("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 was extended in February
1996 for a period of six months with an additional three month option, with a
contract value of approximately $17.2 million. The ERCS Region 5 contract is
renewable for one year periods through September 1997.
Revenues from EPA contracts for the three and six months ended March
31, 1996 were approximately $7.0 million and $20.0 million, respectively. The
federal Government's shutdown in the second quarter severely affected the
Company's operating results. Management expects, that by the fourth quarter,
revenues generated from the EPA should be fairly consistent with the revenue
level in the first quarter. The Company intends to actively seek the award of
future EPA remedial action contracts, particularly the replacement contract for
the ERCS Zone 4A.
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
PART II
ITEM 5: OTHER INFORMATION
On May 15, 1996, the Company executed the Third Amendment,
Waiver and Consent to the Chemical Loan and Security Agreement
dated October 18, 1995 which among other items, provided for a
waiver in connection with the Company's non-compliances with
certain financial covenants. (See Management Discussion and
Analysis-Liquidity and Capital Resources)
On May 15, 1996, the Company executed the Second Amendment to the
Amended and Restated Note Purchase Agreement dated November 15,
1994. The amendment provides for the deferral of certain
interest payments in exchange for future conversion rights on
such interest payments. (See Management Discussion and
Analysis-Liquidity and Capital Resources)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement regarding computation of earnings per share.
27 Requirements for the format and input of financial data
schedules (EDGAR version only)
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the three month
period ending December 31, 1995 and was omitted from the Company's
10-Q for this period filed on February 14, 1996. There were no
reports on Form 8-K during the three month period ending
March 31, 1996.
Form 8-K dated November 6, 1995 filed in connection
with 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 BTM Capital Corporation.
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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
Date: May 15, 1996
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