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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 June 30, 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
(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
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 July 31, 1996, the registrant had 5,932,664 shares of common stock
outstanding.
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QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 30, 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 June 30,1996
(unaudited) and September 30, 1995 3-4
Consolidated Statements of Operations (unaudited)
for the three and nine months ended June 30, 1996 and 1995 5
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended June 30, 1996 and 1995 6-7
Notes to Consolidated Financial Statements (unaudited) 8-9
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-17
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 18-19
Item 3: Defaults on Senior Securities 21
Item 5: Other Information 21
Item 6: Exhibits and Reports on Form 8-K 22
Signature 23
Exhibit 10:26 First Amendment to the Forbearance Agreement
Exhibit 10:27 Second Amendment to the Forbearance Agreement
Exhibit 10:28 Second Amended and Restated Note Purchase Agreement
Exhibit 11 Computation of earnings per share, for the
three and nine months ended June 30, 1996 (unaudited) 24
Exhibit 27 Requirements for the format and input
of financial data schedules (EDGAR version only)
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PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, September 30,
1996 1995
----------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash $ 625 $ 510
Accounts receivable, less allowance for doubtful
accounts of $956 and $1,502 (Note 2) 39,639 53,379
Costs and estimated earnings on long-term
contracts in excess of billings 901 2,287
Prepaid expenses and other current assets 1,963 2,676
------- --------
Total current assets 43,128 58,852
Property and equipment:
Equipment 21,456 21,949
Land and buildings 3,962 4,007
Leasehold improvements 1,107 1,044
------- --------
Total property and equipment, at cost 26,525 27,000
Less accumulated depreciation and amortization 10,918 10,062
------- --------
Property and equipment, net (Note 2) 15,607 16,938
Other assets:
Intangible assets, net of accumulated amortization
of $1,586 and $712, respectively 15,464 16,338
Goodwill, net of accumulated amortization of $621
and $322, respectively 15,046 15,345
Investment in unconsolidated affiliate 2,002 1,502
Other assets 3,958 5,033
------- --------
TOTAL ASSETS $95,205 $114,008
======= ========
See accompanying notes to consolidated financial statements
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands)
June 30, September 30,
1996 1995
----------- ------------
(Unaudited)
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and subcontracts payable $17,432 $ 24,147
Accrued expenses and other liabilities:
Compensation and related fringes 4,320 4,973
Severance and office closures 539 1,618
Other 6,923 9,343
Billings on long-term contracts in excess of
costs and estimated earnings 207 1,251
Current maturities of long-term debt and
short-term borrowings 2,744 2,110
------- --------
Total current liabilities 32,165 43,442
Long-term debt 23,812 27,403
Other long-term liabilities 3,810 6,017
Convertible Senior Subordinated Note, 10% maturing
in 2004, convertible into 4,267,778 and 3,048,780
common shares, respectively at $3.28 per share 13,998 10,000
Commitments and contingencies (Note 2)
Redeemable Preferred Stock, $0.01 par value; 78,000
shares authorized; 74,438 and 76,218
shares issued, respectively; 5% cumulative
dividend; $100 redemption value 6,804 6,857
Junior Convertible Preferred Stock; $0.01 par value;
470,000 shares authorized; none issued 0 0
Preference Stock; $0.01 par value; 1,000,000 shares
authorized; none issued 0 0
Preferred stock $0.01 par value; 550,500 shares
authorized; none issued 0 0
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
(Accumulated deficit) retained earnings (2,759) 3,082
------- --------
Total common stockholders' equity 14,616 20,289
------- --------
TOTAL LIABILITIES, REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS EQUITY $95,205 $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 Nine months ended
June 30, June 30,
------------------ --------------------
1996 1995 1996 1995
------- ------- -------- --------
Revenues $38,011 $43,906 $119,905 $117,861
Cost of revenues 34,457 38,014 107,867 102,397
------- ------- -------- --------
Gross profit 3,554 5,892 12,038 15,464
Selling, general and administrative expenses 3,715 3,844 11,106 10,448
Amortization of intangible assets, goodwill and
deferred financing fees 490 371 1,467 1,007
Special items - - 593 -
------- ------- -------- --------
(Loss) income from operations (651) 1,677 (1,128) 4,009
Interest expense (1,103) (918) (3,286) (2,210)
-------- ------- -------- --------
(Loss) income before share in earnings of
unconsolidated affiliate, income taxes and
extraordinary charge (1,754) 759 (4,414) 1,799
Share in (loss) earnings of unconsolidated affiliate - (111) 500 165
------- ------- -------- --------
(Loss) income before income taxes and
extraordinary charge (1,754) 648 (3,914) 1,964
Income tax expense (30) (182) (80) (405)
------- ------- -------- --------
(Loss) income before extraordinary charge (1,784) 466 (3,994) 1,559
Extraordinary charge on debt refinancing - - (1,395) -
------- ------- -------- --------
Net (loss) income (1,784) 466 (5,389) 1,559
Dividends and accretion on Redeemable Preferred Stock (182) (128) (452) (389)
------- ------- -------- --------
Net (loss) income applicable to common stock $(1,966) $ 338 $ (5,841) $ 1,170
======= ======= ======== ========
Weighted average number of common and common
equivalent shares outstanding 5,911 5,991 5,890 5,975
======= ======= ======== ========
Income (loss) per common and common equivalent share:
(Loss) income before extraordinary charge $ (0.30) $ 0.08 $ (0.68) $ 0.26
Extraordinary charge - - (0.23) -
------- ------- -------- --------
Net (loss) income $ (0.30) $ 0.08 $ (0.91) $ 0.26
======= ======= ======== ========
Net (loss) income applicable to common stock $ (0.33) $ 0.06 $ (0.99) $ 0.20
======= ======= ======== ========
See accompanying notes to consolidated financial statements
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
unaudited
Nine months ended
June 30,
--------------------
1996 1995
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OPERATING ACTIVITIES
- --------------------
(Loss) income before extraordinary charge $(3,994) $ 1,559
Adjustments to reconcile net (loss) income to cash provided
by (used in) operating activities:
Depreciation and amortization 3,443 3,299
(Gain) loss on disposal of equipment (260) 168
Share in earnings of affiliate (500) (165)
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable 13,740 (4,357)
Costs and estimated earnings on long-term
contracts in excess of billings 1,386 2,283
Prepaid expenses and other current assets 635 3,102
Other assets 821 (762)
Accounts and subcontracts payable (6,715) 22
Accrued expenses and other liabilities (4,111) (9,034)
Billings on long-term contracts in excess of costs
and estimated earnings (1,044) (1,909)
Other long-term liabilities (2,207) (74)
------- -------
Net cash provided by (used in) operating activities $ 1,194 $(5,868)
======= =======
See accompanying notes to consolidated financial statements
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
unaudited
Nine months ended
June 30,
--------------------
1996 1995
-------- --------
INVESTING ACTIVITIES
Capital expenditures $ (1,109) $ (722)
Advances from affiliates - 1,415
Proceeds from sale of fixed assets 725 -
Purchase of RESNA - (1,500)
Purchase of Riedel Environmental Services (net of cash
acquired) - (18,336)
-------- --------
Net cash used in investing activities (384) (19,143)
-------- --------
FINANCING ACTIVITIES
Proceeds from revolving line of credit 20,649 5,053
Retirement of revolving line of credit (21,537) -
(Repayments) borrowings on revolving line of credit, net (1,171) 6,881
Proceeds from term loan 6,500 2,000
Retirement of term loan (3,400) -
Repayments on term loan (1,578) (605)
Proceeds from issuance of Convertible Senior Subordinated Note - 10,000
Proceeds from issuance of Senior Note - 2,000
Borrowings from conversion of Senior Note 1,998 -
Payment of financing fees (1,096) -
Payment of early debt extinguishment penalty (287) -
Repayments of debt (420) (1,651)
Proceeds from exercise of stock options 14 -
Repurchase of Redeemable Preferred Stock (179) (156)
Dividends paid on Redeemable Preferred Stock (188) (191)
-------- --------
Net cash (used in) provided by financing activities (695) 23,331
-------- --------
Net increase (decrease) in cash 115 (1,680)
Cash at beginning of period 510 2,793
-------- --------
Cash at end of period $ 625 $ 1,113
======== ========
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 nine months
ended June 30, 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 a 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 discussed in the Company's Transition
Report on Form 10-K for the seven month transition period ended September 30,
1995.
On June 27, 1996, a Construction Industry Arbitration Tribunal formed
under the rules of the American Arbitration Association issued, with one
dissenting opinion, a binding award of $4.5 million in favor of NL Industries,
et al (the "PRP Group") against the Company. The award and an earlier decision
of the Circuit Court of the State of Oregon compelling arbitration are being
contested by the Company. The Company has also filed notice of a claim
relating to this award with its professional liability, general liability, and
property insurance carriers. The Company's liability coverage includes a
$500,000 self-insured retention requirement which has been met by the Company
through the cost of investigation and defense related to this matter.
The claims arise from the operation of a battery component recycling and
processing plant designed and operated by the Company from May 1992 to April
1994 at the Gould Superfund Site located near Portland, Oregon. The plant and
equipment, currently at the project site, was awarded to the Company in the
arbitration. The market value of the plant and equipment is unknown at this
time. The Company has approximately $2.5 million of cost for plant and
equipment and $1.5 million of accounts receivable relating to the project
recorded in the Company's financial statements.
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Company is unable to predict the outcome of any legal action or
appeal of the arbitration award or the results of its claims against its
insurance carriers. The Company believes that it has substantial
possibilities to either overturn the arbitration award and post any required
appeal bond, realize coverage by its insurance carriers for the recovery of any
lost amounts, or reach a satisfactory resolution to the dispute with the PRP
Group. No liability or asset reserve has been established in the third quarter
financial statements as the Company does not believe the loss is probable
and/or reasonably estimable at this time. The Company is currently unable to
pay the arbitration award, and the failure to overturn the award, realize
recovery from its insurance carriers of any lost amount, or achieve an
acceptable settlement with the PRP Group will have a material adverse impact on
the financial condition of the Company.
An agreement in principle has been reached by the plaintiff and the
professional liability carrier of one of the Company's subsidiaries to resolve
all claims in Transcontinental Realty Investors, Inc. vs. Mt. Laurel
Associates, BCM Engineers Inc., et al. The $8.0 million claim by
Transcontinental Realty Investors, Inc. was settled for $1.5 million. The
insurance carrier will pay the agreed settlement directly to the plaintiff, and
the Company will be required to reimburse the insurance carrier the unexpended
portion of a self-insured retention of approximately $210,000. Final
settlement documents and agreement between BCM and its carrier on the schedule
of reimbursement of the Company's portion of settlement proceeds are currently
being negotiated.
The Company is a party to litigation described in its Transition Report
on Form 10-K for the seven month transition period ended September 30, 1995,
and other claims and litigation related to its business. The Company believes
that appropriate reserves have been established with respect to such litigation
and that other litigation will not have a material adverse effect on the
current 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 $1.9 million and $5.8
million for the three and nine months ended June 30, 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 Nine months ended
June 30, June 30,
------------------ -----------------
1996 1995 1996 1995
----- ----- ----- -----
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues 90.6 86.6 89.9 86.9
----- ----- ----- -----
Gross profit (loss) 9.4 13.4 10.1 13.1
Selling, general and administrative expenses 9.8 8.8 9.3 8.9
Amortization of intangible assets, goodwill and
deferred financing fees 1.3 0.8 1.2 0.8
Special items - - 0.5 -
----- ----- ----- -----
(Loss) income from operations (1.7) 3.8 (0.9) 3.4
Interest expense (2.9) (2.1) (2.7) (1.9)
----- ----- ----- -----
(Loss) income before share in earnings of
unconsolidated affiliate, income taxes and
extraordinary charge (4.6) 1.7 (3.6) 1.5
Share in (losses) earnings of unconsolidated affiliate - (0.3) 0.4 0.1
----- ----- ----- -----
(Loss) income before income taxes and
extraordinary charge (4.6) 1.4 (3.2) 1.6
Income tax expense (0.1) (0.4) (0.1) (0.3)
----- ----- ----- -----
(Loss) income before extraordinary charge (4.7) 1.0 (3.3) 1.3
Extraordinary charge on debt refinancing - - (1.2) -
----- ----- ----- -----
Net (loss) income (4.7)% 1.0 % (4.5)% 1.3%
===== ===== ===== =====
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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 June 30, 1996 and for
the three and nine months then ended include the results of operations for BCM
Engineers Inc. ("BCM"), Riedel Environmental Services, Inc. ("RES") and RESNA
Industries, Inc. ("RESNA"). The consolidated financial statements for the same
period in 1995 only 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 JUNE 30, 1996 AND 1995
Revenues for the quarter ended June 30, 1996 were $38.0 million compared
with $43.9 million for the same quarter in 1995, a decrease of $5.9 million or
13.4 percent. Revenues from construction services contracts were negatively
impacted by adjustments of approximately $1.0 million due to the cancellation
of a major construction contract during the quarter and an adjustment resulting
from a contract settlement. Remediation and engineering services revenues
decreased due to lower commercial revenues, partially offset by higher
government revenues.
Gross profit for the quarter ended June 30, 1996 was $3.6 million or 9.4
percent of revenues compared with $5.9 million or 13.4 percent of revenues for
the quarter ended June 30, 1995, a decrease of approximately $2.3 million. The
decrease in gross profit is due primarily to the aforementioned contract
settlement and contract cancellation and to a lesser extent, lower engineering
services margins. Margins on engineering services revenues decreased compared
to the prior period due to a higher portion of engineering revenues during the
period from government contracts. Revenues generated from government contracts
traditionally result in lower gross profit margins.
Selling, general and administrative expenses (SG&A) for the quarter ended
June 30, 1996 were $3.7 million and were slightly lower when compared with $3.8
million for the same quarter last year. As a percentage of revenues for the
quarter ended June 30, 1996, however, SG&A was 9.8 percent compared with 8.8
percent for the same quarter in 1995. The increase in percentage is primarily
attributable to lower revenues and increased marketing and sales costs which
were partially offset by reductions in administrative costs derived from
consolidating the acquired companies.
Amortization of intangible assets, goodwill and deferred financing fees
for the quarter ended June 30, 1996 was $490,000 compared with $371,000 for the
same period in 1995. The increase is primarily a result of the finalization in
September 1995 of the allocation of the purchase prices for the acquired
subsidiaries.
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Interest expense for the quarter ended June 30, 1996 was $1.1 million
compared with $918,000 for the same quarter in 1995. The increase in interest
expense is primarily due to increased bank borrowings and higher interest
rates.
The Company's share of losses from an unconsolidated affiliate in the
quarter ended June 30, 1995 was $111,000, and was the result of overhead costs
associated with the affiliate's operations which were eliminated in the current
fiscal year.
In the quarter ended June 30, 1996, the Company provided for income taxes
of $30,000 which represents a provision for state income taxes. The Company
has not provided for federal taxes 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. 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 benefit is not assured. Due to a greater than 50 percent change in
ownership of the Company in December 1993, use of carryforwards to reduce
future taxable income will be limited to approximately $900,000 annually.
COMPARISON OF NINE MONTHS ENDED JUNE 30, 1996 AND 1995
Revenues for the nine months ended June 30, 1996 were $119.9 million
compared with $117.9 million for the same period in 1995, an increase of $2.0
million or 1.7 percent. The increase in revenues was primarily attributable to
the acquisition of RES in November 1994. Revenues for the nine months ended
June 30, 1996, exclusive of revenues attributable to RES, were approximately
$69.6 million compared with $77.8 for the same period in 1995, a 10.5 percent
decrease. Lower revenues, exclusive of RES, were due to various factors
including construction services contract adjustment, lower commercial revenues
in engineering services and severe winter weather conditions primarily in the
Company's second quarter which impeded contract work.
Gross profit for the nine months ended June 30, 1996 was $12.0 million or
10.1 percent of revenues compared with $15.5 million or 13.1 percent of
revenues for the nine months ended June 30, 1995, a decrease of approximately
$3.5 million. Remediation services gross profit decrease of approximately
$1.0 million resulted from a combination of lower revenues and profits due
primarily to the suspension of funding for the EPA's Emergency Response
Contract Services, ("ERCS") during the Federal Government's shutdown and the
fixed cost of government compliance associated with ERCS contained within the
cost of revenues. Gross profit, exclusive of operating results attributable to
RES, was approximately $10.3 million during the nine months ended June 30,
1996, compared with $12.6 million for the same period in 1995, a decrease of
approximately $2.3 million. Engineering services revenues have decreased from
the prior period primarily due to lower commercial revenues offset slightly
with higher government revenues. Revenues generated from government contracts
traditionally result in lower gross profit margins.
Selling, general and administrative expenses (SG&A) for the nine months
ended June 30, 1996 were $11.1 million compared with $10.4 million for the same
period last year, an increase of approximately $700,000. SG&A as a percentage
of revenues for the nine months ended June 30, 1996 was 9.3 percent compared
with 8.9 percent for the same period in 1995. The increase in percentage is
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primarily attributable to lower revenues and increased marketing and sales
costs partly offset by reductions in administrative costs derived from
consolidating the acquired companies.
Amortization of intangible assets, goodwill and deferred financing fees
for the nine months ended June 30, 1996 was $1.5 million compared with $1.0
million in the same period in 1995. The increase is primarily a result of the
finalization in September 1995 of the allocation of the purchase prices for
the acquired subsidiaries.
Special items were $593,000 for the nine months ended June 30, 1996 and
included severance and relocation costs in connection with additional office
closings and consolidations.
Interest expense for the nine months ended June 30, 1996 was $3.3 million
compared with $2.2 million for the same period in 1995. The increase in
interest expense is primarily due to increased bank borrowings and higher
interest rates.
The Company's share of earnings from an unconsolidated affiliate for the
nine months ended June 30, 1996 was $500,000 compared with $165,000 for the
same period in 1995 and was a result of the favorable resolution of a contract
dispute.
In the nine months ended June 30, 1996, the Company provided for income
taxes of $80,000 which represents a provision for state income taxes. The
Company has not provided for federal taxes 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. 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 benefit is not assured. Due to a greater than 50 percent change in
ownership or the Company in December, 1993, 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 nine months ended June 30, 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.
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LIQUIDITY AND CAPITAL RESOURCES
The Company is engaged in a business which at times requires substantial
working capital for remediation and engineering services contracts that require
investments of personnel and equipment by the Company before the Company is
permitted to invoice the client. In addition, many of the Company's contracts
provide for progress or monthly invoices as certain benchmarks of performance
are reached or costs have been incurred. The Company's working capital and
cash have been significantly impacted by the amount of debt incurred in
connection with the acquisition of BCM, RES and the assets of RESNA and by
costs associated with consolidating the acquired companies' operations into
those of the Company. As a result of these factors and current market
conditions for the environmental industry which reflects lower government
spending and lessened regulatory enforcement, the Company is experiencing
liquidity problems.
On October 18, 1995, the Company executed a three year $35 million credit
facility with Chemical Bank and BTM Capital Corporation (the "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"). 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 includes
a $5 million unbilled account subline providing that unbilled receivables,
subject to limitations, are included in the calculation of the borrowing base.
Changes in the borrowing base occur as a result of the magnitude and timing of
the Company's billings for services.
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 nine months
ended June 30, 1996, operating activities provided net cash of approximately
$1.2 million, primarily due to accelerated client billings and increased
collections of accounts receivable. Investing activities used approximately
$384,000 in net cash principally for capital expenditures. Net cash of
$695,000 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 is used to repay the Revolver and results in
an increase of available borrowings under the Revolver. The Company was able
to reduce cash used in financing activities by the conversion of certain
interest payments to long term debt and increased borrowings (see discussion of
Amended Agreements below).
As of June 30, 1996, long term debt, including current maturities
of $2.7 million, was approximately $40.5 million, the components of which were
borrowings of $20.0 million under the Revolver and $5.0 million of the term
loan under the Chemical Facility, $14.0 million of Convertible Subordinated
Notes and $1.5 million of other notes and capital leases. The available
borrowing capacity as of July 31, 1996 under the Chemical Facility was
approximately $240,000.
The Company and its Senior Lenders executed the Third Amendment, Waiver
and Consent (the "Third Amendment") effective as of May 15, 1996 to the
existing Loan and Security Agreement dated October 18, 1995 between the Company
and its Senior Lenders (referred to as the "Loan Agreement"). The Third
Amendment waived and consented to certain conditions and actions related to (1)
the BCM Engineers Employee Stock Ownership plan and (2) financial covenant
violations under the Loan Agreement. The effective period of the amendment was
from March 31, 1996 through June 29, 1996. However, the waivers, consents and
amendments provided in this Third Amendment were contingent upon certain
conditions precedent which the Company has not met. Subsequently, the Company
and its Senior Lenders executed a Forbearance Agreement for the period of June
7, 1996 through June 28, 1996 in connection with an overdraft condition which
resulted from the establishment by the Senior
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Lenders of a reserve against the Company's borrowing base. The requirement for
the reserve, which reduced the Company's available borrowing base and caused
the overdraft condition, resulted from the cancellation by a client of the
Company of a major contract and the Senior Lenders' concerns regarding the
collectibility of the accounts receivable related to that contract. The
Lenders permitted the overdraft condition to continue with scheduled reductions
through the forbearance period. The issues relating to the contract and the
associated accounts receivable have subsequently been resolved and the reserve
requirement has been terminated.
The Company executed an amendment to the Forbearance Agreement as of June
28, 1996 extending the forbearance period through August 14, 1996 permitting
the Company to continue an overdraft condition of $500,000, reducing to
$250,000 on August 9th and to zero on August 14, 1996. On August 13, 1996, the
Senior Lenders and the Company executed a Second Amendment extending the
forbearance period without an overdraft condition, through September 6, 1996.
The Company and its Senior Lenders are currently negotiating additional
amendments to the Loan Agreement which would bring the Company in compliance
with renegotiated financial covenants.
The Company also executed an Amended and Restated Note Purchase Agreement
(the "Amended Agreement") effective as of May 15, 1996 with the holders of
notes payable to 399 Venture Partners Inc., an affiliate of Citicorp Venture
Capital, Ltd. and to various individual distributees of promissory notes
formerly held by 399 Venture Partners, Inc. (the "Holders"), in the aggregate
principal amount of $2.0 million in Convertible Subordinated Notes and $10.0
million in Senior Subordinated Notes (collectively referred to as the
"Notes"). The Holders previously agreed to defer the payment of interest due
May 21, 1995 and November 21, 1996, and have also agreed to defer the payment
of interest due May 21, 1996 and the interest which will accrue and become due
on November 21, 1996 and May 21, 1997. The Amended Agreement provides for the
issuance of additional notes (maturing on November 21, 2004) in lieu of all
such deferred interest payments. The effect as of June 30, 1996 of this
deferral was to reclassify approximately $1.8 million of accrued interest
expenses to long-term debt under the Notes, which is reflected in the Company's
financial statements. All of the interest converted to principal will be
subject to conversion rights on the same terms and conditions as the original
principal amount of the Notes.
During the nine months ended June 30, 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. During the
fiscal year, the Company was able to reduce its accounts receivable by
approximately $13.7 million, and accounts payable and other liabilities by
approximately $10.8 million. Nevertheless, the Company continues to experience
a liquidity problem.
The arbitration award in favor of the PRP Group discussed in Note 2,
Commitments and Contingencies and in Part II, Item I, Legal Proceedings,
represents a significant matter potentially affecting the liquidity of the
Company. In the event the Company fails to reach a satisfactory resolution to
the arbitration award and improve its operating results and generate or obtain
additional working capital, which it continues to seek, its liquidity and
financial position will be materially adversely affected.
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BACKLOG
As of June 30, 1996, the Company had a contract backlog of orders of
approximately $104 million compared with approximately $125 million and $111
million at September 30, 1995 and June 30, 1995, respectively. The value of
unfunded or indefinite delivery order contracts ("IDO") was approximately $141
million as of June 30, 1996 compared with approximately $141 million and $159
million at September 30, 1995 and June 30, 1995, respectively. The combined
contract backlog as of June 30, 1996 was approximately $245 million compared
with approximately $266 million and $270 million at September 30, 1995 and June
30, 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 from the Environmental Protection Agency ("EPA"). The Company is the
prime contractor for removal of hazardous substances in ERCS Zone 4A,
comprising Regions 6, 7 and 8, and ERCS Region 5. The ERCS Zone 4A contract
was extended in February 1996 for a period of nine months and was recently
extended through February 1997. The ERCS Region 5 contract has been renewed
for a one year period through September 1997.
On July 12, 1996, the Company received notice that its proposal did not
qualify for the competitive range for proposals as a clean-up contractor in the
EPA ERRS-West contract comprising regions 6, 8 and 9. The Company has
submitted a letter of protest to the U.S. General Accounting Office and has
requested that the EPA withhold making any contract award pending the
resolution of the Company's protest. The protest requests the re-evaluation of
the Company's proposal, the inclusion of the Company's proposal in the
competitive range and the allowance of the Company to submit a best and final
offer. The Company is unable to predict the outcome of this protest and will
continue to vigorously pursue this contract.
The Company intends to actively seek the award of future EPA remediation
contracts as they arise.
Revenues from EPA contracts for the three and nine months ended June
30, 1996 were approximately $11.5 million and $31.5 million, respectively. The
federal Government's shutdown in the Company's second quarter severely affected
the operating results for that period.
FORWARD LOOKING STATEMENTS AND INFORMATION
This report and other reports and statements filed by the Company from
time to time with the Securities and Exchange Commission (collectively, "SEC
Filings") contain or may contain certain forward-looking statements and
information that are based on information available to the Company's management
and various estimates, assumptions and predictions made by the Company's
management.
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When used in SEC Filings, the words "anticipate," "contemplate," "estimate,"
"expect," "future," "intend," "plan," "predict" and similar expressions are
intended to identify forward-looking statements. Such statements are subject
to inherent uncertainties, including, in addition to any uncertainties
specifically identified in the text surrounding such statements, uncertainties
with respect to changes or developments in social, economic, business,
industry, market, legal and regulatory circumstances and conditions and actions
taken or omitted to be taken by third parties, including the Company's
stockholders, customers, suppliers, business partners and competitors, and
legislative, regulatory, judicial and other governmental authorities and
officials. Consequently, actual events, circumstances, consequences, effects
and results may vary significantly from those described in or contemplated by
such forward-looking statements or information.
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
CANONIE ENVIRONMENTAL SERVICES CORP. VS. NL INDUSTRIES, INC., ET AL.
The Company (previously known as Canonie Environmental Services Corp.)
filed suit in the Circuit Court, Mulnomah County, Oregon in February 1995
against NL Industries, Inc., Gould, Inc., Johnson Controls, Inc., Exide, Inc.,
AT&T Technologies, Inc., Rhone-Poulenc AG Co., and Burlington Northern Railroad
Co. (the "PRPs") for breach of contract dated May 28, 1992 for the remediation
of soil on property located near Portland, Oregon (the "Contract").
In the suit, the Company sought recovery for amounts due as a result of
services performed under the Contract, including $1.5 million in accounts
receivable, $2.5 million of plant and equipment at the site, and other damages
resulting in a total claim of $8.5 million. Prior to the Company filing suit,
activity at the site had been suspended pending EPA approval of changes in the
remedial activities proposed by the PRPs and supported by independent
engineering reports which indicated significant differences in the waste
materials at the site from the materials specified in the EPA Record of
Decision and in the initial remedial investigation performed by others at the
site. The PRPs alleged the Contract required the dispute be arbitrated. The
Company objected to the arbitration denying it was required under the terms of
the Contract and alleging that the time for asserting such claims had expired.
The Company's objections were overruled by the court and the court action was
abated pending arbitration before the American Arbitration Association. In the
arbitration, the PRPs sought reimbursement from the Company for amounts ranging
from $3.4 million to $17.0 million, under various damage theories relating to
work performed by the Company under the Contract alleging negligent performance
and breach of contract. The Company filed a counterclaim in the arbitration to
recover the damages claimed in the court action.
On June 27, 1996 a Construction Industry Arbitration Tribunal of the
American Arbitration Association issued, with one dissenting opinion, a
binding award in favor of the PRPs in the amount of $4.5 million against the
Company. The counterclaim of the Company was denied; however, the Company's
plant and equipment at the site was awarded to the Company.
The arbitration award and the earlier decision of the court compelling
the arbitration is being contested by the Company. At the same time, the
Company has filed notice of a claim relating to the award with its professional
liability, general liability, and property insurance carriers. The Company's
liability coverage includes a $500,000 self-insured retention requirement which
has been met by the Company through the costs of investigation and defense
related to this matter. The Company believes that it has significant
possibilities to either overturn the arbitration award and post any required
appeal bond, realize coverage by its insurance carriers for the recovery of any
lost amounts, or reach a satisfactory resolution to the dispute with the PRP
Group. No liability or asset reserve has been established in the third quarter
financial statement as the Company does not believe the loss is probable
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and/or reasonably estimable at this time. The Company has approximately $4
million of accounts receivable and plant equipment relating to the project
recorded in its financial statements.
The Company is currently unable to pay the arbitration award, and the
failure to overturn the arbitration award, recover lost amounts from its
insurance carriers, or achieve a satisfactory resolution to the dispute with
the PRPs will have a material adverse impact on the financial condition of the
Company.
TRANSCONTINENTAL REALTY INVESTORS, INC. VS. MT. LAUREL ASSOCIATES, ET AL.
An agreement in principle has been reached by the plaintiff and the
professional liability carrier of the Company's subsidiary, BCM Engineers Inc.
("BCM") to resolve all claims, in Transcontinental Realty Investors, Inc. vs.
Mt. Laurel Associates, BCM Engineers Inc., et al. The $8.0 million claim by
Transcontinental Realty Investors, Inc., was settled for $1.5 million. The
insurance carrier will pay the agreed settlement directly to the plaintiff and
BCM will be required to reimburse the insurance carrier the balance of the
unexpended portion of a self-insured retention of approximately $210,000.
Final settlement documents and agreement between BCM and its carrier on the
schedule of reimbursement of the Company's portion of settlement proceeds are
currently being negotiated.
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ITEM 3. DEFAULTS ON SENIOR SECURITIES
The BCM Stock Repurchase Agreement provides that certain shares of the
Company's redeemable preferred stock, put back to the Company, be repurchased
within 30 days of receiving the stock. To date, there have been 3,245.32 shares
of redeemable preferred stock with a value of $324,532.04, which have been
received but not repurchased by the Company. The agreement provides that the
repurchase be made in cash and notes. The cash payment required to repurchase
the redeemable preferred stock is approximately $190,000. The Stock Repurchase
Agreement also requires the Company to be in compliance with its Senior Lenders
prior to the payment of any dividend or the redemption of any securities of the
Company. The Company was not in compliance with certain financial covenants of
the Chemical Facility in the second quarter and therefore was prohibited from
repurchasing shares of redeemable preferred stock which had been put back to
the Company.
The payment of quarterly dividends is also prohibited by the Chemical Facility
while an event of default exists with its Senior Lenders. The Company has not
made the second quarter 1996 5 percent payment of the second quarter 1996 five
percent preferred stock dividend of approximately $95,000 due on June 30,
1996. The terms of the preferred stock provide that a non-payment condition
increases the dividend rate 7.5 percent.
The Company anticipates that it will resolve these issures prior to September
30, 1996.
ITEM 5. OTHER INFORMATION
The Company executed a Forbearance Agreement with its Senior Lenders for
the period of June 7, 1996 through June 28, 1996 in connection with an
overdraft condition which resulted from the establishment by the Senior Lenders
of a reserve against the Company's borrowing base.
The Company executed the First Amendment to the Forbearance Agreement as
of June 28, 1996 extending the forbearance period through August 14, 1996
permitting the Company to continue an overdraft condition of $500,000, reducing
to $250,000 on August 9, 1996 and zero on August 14, 1996.
The Company executed the Second Amendment to the Forbearance Agreement on
August 13, 1996 extending the forbearance period to September 6, 1996 without
an overdraft condition.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.26 First Amendment to the Forbearance Agreement
10.27 Second Amendment to the Forbearance Agreement
10.28 The Second Amended and Restated Note Purchase Agreement effective as of
May 15, 1996 with the holders of notes payable to 399 Venture Partners, Inc.,
an affiliate of Citicorp Venture, Ltd.
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
Form 8-K dated May 15, 1996 filed on July 24, 1996 in connection
with (i) the execution of the Third Amendment, Waiver and Consent
effective as of May 15, 1996 to the existing Loan & 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; (ii) the execution of
an Amended and Restated Note Purchase Agreement effective as of
May 15, 1996 with the Holders of note payable to 399 Venture
Partners, Inc., and affiliate of Citicorp Venture, Ltd.
and to various individual distributees of promissory notes
formerly held by 399 Venture Partners, Inc. , in the aggregate
principal amount of $2.0 million in convertible subordinated notes
and $10.0 million in Senior Subordinated Notes; and (iii) the
notification on June 27, 1996 of the award by an arbitration panel
acting pursuant to the rules of the American Arbitration
Association of $4.5 million against the Company.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Smith Environmental Technologies Corporation
(Registrant)
By: /s/ William T. Campbell
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William T. Campbell
Vice President - Finance
Date: August 14, 1996
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