UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
*******************************************************************************
FORM 10-K/A-1
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1995 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER 0-14992
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
--------------------------------------------
(Formerly Canonie Environmental Services Corp.)
(exact name of registrant as specified in its charter)
DELAWARE 38-2294876
- -------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
13455 NOEL ROAD, SUITE 1500, DALLAS, TEXAS 75240
------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (214) 770-1800
---------------
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 filings 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 the 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 May 12, 1995, the registrant had 5,811,105 outstanding shares of common
stock, $0.01 par value, and on such date, based on the closing sale price of
$5.875, 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 $18.5 million.
FORM 10-K/A-1
Annual Report for the Fiscal Year Ended February 28, 1995
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
--------------------------------------------
(Formerly Canonie Environmental Services Corp.)
TABLE OF CONTENTS
PART I
PAGE
----
Item 1 Business............................................... 3
Item 2. Properties............................................. 11
Item 3. Legal Proceedings...................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.... 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................... 13
Item 6. Selected Financial Data................................ 14
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 15
Item 8. Financial Statements and Supplementary Data............ 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 20
PART III
Item 10. Directors and Executive Officers of the Registrant..... 21
Item 11. Executive Compensation................................. 25
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............................................................ 44
2
PART 1
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, particularly in the Company's fourth quarter,
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.
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 revenue) environmental consulting, engineering, and
remediation services companies.
DESCRIPTION OF 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 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 "Loan Agreement"). BCM reported revenues of
approximately $62 million for the year ended December 31, 1993.
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 purchase price
of approximately $19 million, subject to adjustments, was paid in cash. 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. RES
reported revenues of approximately $76 million for the year ended December 31,
1993.
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. At the time of purchase, RESNA's backlog of remaining
work was approximately $10 million. Although RESNA's size is below that of the
Company's stated acquisition strategy, the business location and market were
attractive considering the purchase price.
3
The Company has 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
governmental clients, particularly the Departments of Defense and Energy and the
Environmental Protection Agency ("EPA").
JOINT BUSINESS VENTURE
The Company owns 100 percent of the issued and outstanding capital stock of
Canonie Technologies, Inc., a Delaware corporation ("CT"). CT, in turn, 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. This technology
has proven to be an efficient treatment of waste materials containing mixtures
of hydrocarbons, water, and soils. In fiscal year 1991, STI completed the first
commercial application of this technology at a Superfund site in New York to
remove polychlorinated biphenyls ("PCBs") from contaminated soils. STI
completed its fourth major project in fiscal year 1995 as a subcontractor to the
Company for a project requiring excavation and treatment of approximately
34,000 tons of contaminated soil.
DESCRIPTION OF SERVICES
The Company's principal business is to provide advice regarding and/or
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 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.
4
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 services: strategic planning; environmental assessment and security;
remedial investigation; feasibility study; design and construction of
remediation facilities, provision of remediation services, and operation of
facilities which purify water sources, treat wastewater streams, prevent
hazardous waste generation at its source, separate, destroy, detoxify, or
isolate hazardous wastes; closure planning and site monitoring; and emergency
response. The following is a brief description of these services:
STRATEGIC PLANNING. On each of its projects, the Company attempts as early
as possible to formulate a complete strategy for directing all efforts
toward solving the contamination problem. The Company's strategic plans,
including alternative contingency plans, are designed to satisfy the
demands of regulatory agencies and the public, sometimes under emergency
conditions. Strategic planning is especially critical when a municipality
or industry is building infrastructure to meet its needs for several
decades. The Company provides consulting services to not only meet the
client's needs but also to ensure these needs are met in a manner that is
environmentally acceptable. The Company's track record of successful
project completions is due in part to its strategic planning capability
made possible by its integrated, interdisciplinary approach and its
experience in addressing regulatory and public concerns.
ENVIRONMENTAL ASSESSMENT AND SECURITY. In conducting an environmental site
assessment, 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 assessment
may also include identification of the presence of endangered flora and
fauna and a risk evaluation to human life and ecological conditions.
Assessments, 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 his
future land use plans. An assessment may also provide the basis for the
selection of a technology to treat water or wastewater streams for a
federal, state or local client.
The Company is especially experienced in responding to conditions which
pose a potential immediate threat to human life and health, often under
emergency conditions. In such cases, site security measures must be
quickly implemented. In providing site security, the Company's services
include assessing the hazardous condition, restricting access to the
affected area, assisting in the preparation of any necessary evacuation
plans, eliminating or reducing potential risks of fire or explosion,
containing or removing hazardous materials which might pose additional
risk, and implementing measures to reduce or halt the spread of hazardous
substances into adjacent areas.
5
REMEDIAL INVESTIGATION. Remedial investigation involves the detailed
assessment of an affected area to determine the nature and extent of
hazardous materials present. In conducting such an investigation, the
Company takes samples and performs numerous physical tests and uses the
resources of analytical laboratories. A remedial investigation also
involves the study of the geographic, geologic, hydrogeologic, and
atmospheric characteristics of the affected area and the surrounding
environment and a determination of the risks posed by the hazardous
materials determined to be located in the affected area. In conducting
such investigations, the Company often reviews the construction of a
facility and past storage and handling practices regarding hazardous
materials. Sophisticated air and groundwater modeling techniques may also
be performed by the Company's scientists and engineers to predict the
unseen extent of the contamination.
FEASIBILITY STUDY. The feasibility study addresses measures which may be
implemented to remove hazardous wastes from a site; treat, stabilize, or
contain such wastes on-site; or otherwise mitigate the effects of hazardous
wastes. Such a study takes into account such factors as available
technology, regulatory considerations and the cost/benefit relationship of
alternative measures. Also, the Company reviews the project and
alternative remedial measures in light of legitimate public concerns.
DESIGN AND CONSTRUCTION OF REMEDIATION FACILITIES, PROVISION OF REMEDIATION
SERVICES AND OPERATION OF REMEDIAL FACILITIES. Based on the results of
assessments, remedial investigation and the feasibility study, the Company
uses its engineering and construction expertise to design and/or construct
an appropriate structure or system for use at a particular site and,
directly, or through subcontractors, performs the necessary construction
and remediation activities. In the case of water and wastewater treatment
facilities, engineering requirements may include major storage and basin
designs, gathering and distribution pipeline systems, and sophisticated
technology scale-up designs.
Remediation services for contaminated sites might include such measures as
construction of a slurry wall 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.
CLOSURE PLANNING AND SITE MONITORING. The Resource Conservation and
Recovery Act of 1976 ("RCRA") requires the planning of closure and post-
closure monitoring for all licensed secure hazardous landfills, treatment
facilities, and on-site hazardous waste storage areas. The Company plans
facility closures and post-closure monitoring programs and furnishes cost
estimates required by RCRA. The Company also performs closures and post-
closure monitoring and provides the engineering certification of completion
required by RCRA. The Company uses in-house computerized data management
systems to manage the post-closure monitoring programs and to generate
reports in tabular and graphic form, which are provided to clients and
regulatory agencies. While certain monitoring requirements are mandated by
RCRA, particularly National Priority List sites, many sites that have at
some time contained hazardous waste may also require frequent monitoring.
The Company provides monitoring and the corresponding data management
services for such sites.
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.
6
To respond to these emergencies, the Company has mobile response units
strategically located in various locations in the western, central and
southern United States. The Company believes it is the only company with
such an extensive system. 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 governmental 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 generates a
substantial portion of revenues under its Emergency Response Cleanup
Services (ERCS) contracts. 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. ERCS Zone 4A and ERCS Region 5 contracts are renewable for one year
periods through February 1996 and September 1997, respectively.
Revenues from ERCS contracts for the three months in fiscal 1995 since RES
was acquired in November 1994, were $6.6 million (or approximately 16
percent of fourth quarter revenues). Annual revenues from ERCS contracts
for RES in the years prior to the Company's acquisition averaged
approximately $35 million. 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. The Company intends to
actively seek the award of future ERCS contracts and the renewal of the
existing contracts.
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.
7
The Company has developed a Low-Temperature Thermal Aeration ("LTTA -
Registered Trademark-") soil remediation system. The LTTA -Registered
Trademark- 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-Registered Trademark- system which can be configured to treat
off-gases by different methods. The Company has not licensed the LTTA -
Registered Trademark- 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 -Registered Trademark- 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 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 also are mandated. When the Company's remedial activities at any
site involve the treatment, storage, or disposal of hazardous waste, it 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"). CERCLA generally addresses cleanup
of inactive sites at which hazardous waste treatment, storage, or disposal
occurred. CERCLA 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, CERCLA authorizes the federal
government either to clean up these sites itself or to order persons responsible
for the situation to do so. CERCLA 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 51 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 October 1990, SARA was
reauthorized for an additional five-year period.
Funding for the Superfund Act expires at the end of the federal
government's 1995 fiscal year. The Company anticipates that Congress will take
some action to continue funding CERCLA beyond the end of the fiscal year. In
connection with any such action, Congress may enact substantive changes. The
Company expects that, if substantive changes are made to the Superfund Act, the
revised act will contain less stringent standards of clean up and will be
designed to force remediation efforts to take place more quickly. While this
could diminish the theoretical size of the remediation market, the net effect
could be to increase both the amount of remediation work performed and the
speed with which it is commenced by lowering barriers to the approval and
implementation of this work.
8
The Company believes that, even without funding authorized by the Superfund
Act or SARA, commercial, industrial and governmental 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.
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. Congress recently 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.
CLEAN AIR ACT ("CAA"). Congress amended the CAA in 1990. As amended,
the CAA charges EPA with promulgating more than 400 regulations and
developing numerous guidelines and procedures. The amendments establish a
national permit program and a stronger enforcement program. In particular,
the amended CAA is designed to address acid rain, urban air pollution and
emissions of hazardous air pollutants. The Company believes that activity
related to CAA compliance may be a source of future work.
Other laws that the Company's operations are subject to, which protect the
environment, include the 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 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.
9
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 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 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 environmental and
professional policy limits of liability are $5 million for each loss and an
aggregate of $5 million for all losses. 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 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 172 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 governmental
agencies. The Company has initiated 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 and professional 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 revenue from a relatively small number of clients, these
customers are not necessarily the same each year. In addition, there were only
two customers in fiscal 1995 who accounted for 10 percent or more or the
Company's annual revenues.
10
BACKLOG
As of February 28, 1995, the Company had a contract backlog of orders of
approximately $105 million, of which the Company anticipates performing $90
million in fiscal 1996. As of February 28, 1995, the value of unfunded or
indefinite delivery order contracts ("IDO") was approximately $170 million and
when combined with contract backlog totals $275 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 February 28, 1994, the Company
had a backlog of orders of approximately $60 million. There was no unfunded
backlog at February 28, 1994.
EMPLOYEES
As of May 12, 1994, the Company had 1,260 full-time employees of whom
approximately 1,100 were in operations and 160 were in sales, marketing and
administrative positions. Of these employees, 122 are represented by the
International Organization of Masters, Mates and Pilots (IOMMP) and are employed
under a collective bargaining agreement which has been extended for one year and
is pending renegotiation. 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.
ITEM 2. PROPERTIES
The Company leases and, in some cases, owns office and warehouse space in
various locations throughout the United States. The facility 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
Riedel 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.
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
Dallas, Texas 13,000 sq. ft. Leased
Porter, Indiana 33,000 sq. ft. Owned
St. Louis, Missouri 12,000 sq. ft. Owned
St. Louis, Missouri 10,000 sq. ft. Leased
New Orleans, Louisiana 33,000 sq. ft. Leased
Houston, Texas 16,000 sq. ft. Leased
Jackson, Mississippi (3) 17,000 sq. ft. Leased
Denver, Colorado (3) 35,000 sq. ft. Leased
Chicago, Illinois (3) 25,000 sq. ft. Leased
Detroit, Michigan (3) 20,000 sq. ft. Leased
San Francisco, California (4) 36,000 sq. ft. Leased
Los Angeles, California 31,000 sq. ft. Owned
Bakersfield, California 15,000 sq. ft. Leased
Portland, Oregon (4) 20,000 sq. ft. Leased
Burlington, New Jersey 10,000 sq. ft. Leased
Pittsburgh, Pennsylvania 10,000 sq. ft. Owned
Washington, D.C. 10,000 sq. ft. Leased
(1) 19,000 square feet are vacant and the Company intends to sublet the space.
(2) Four locations. 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.
11
The Company also has offices in Panama City, Florida; Stockton, California;
Albuquerque, New Mexico; Pocono Summit, Pennsylvania; and Bozeman, Montana
totaling approximately 13,000 square feet. The Company believes office and
warehouse space, as listed, 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 subsidiaries.
ITEM 3. LEGAL PROCEEDINGS
CANONIE ENVIRONMENTAL SERVICES CORP. (THE "COMPANY") 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 $6.5 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 its performance at this site.
CINDRA BROWN, ET AL. VS. RIEDEL ENVIRONMENTAL SERVICES, INC. ("RES"), ET AL.
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. The Company rejects every
allegation in its defense. The matter is in the discovery phase. The Company
is vigorously defending the described litigation.
OTHER MATTERS
The Company is also currently a party to other litigation incidental to its
business. While such litigation, including the matters specifically described
above, could result in judgments against the Company, management believes 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the fourth
quarter of fiscal year 1995.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of May 12, 1995, the Company had more than 250 holders of record 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 facility with the
Company's senior Lenders. 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
and other relevant factors.
The Company's Common Stock is listed with the NASDAQ National Market System
under NASDAQ symbol "SMTH." The table below reflects the high and low bid and
ask quotations for each of the Company's fiscal quarters for 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.
1995 1994
---- ----
HIGH LOW HIGH LOW
---- --- ---- ---
1st Quarter 4 5/8 2 3/4 5 1/4 3 3/4
2nd Quarter 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
13
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data shown below have been derived from the audited
consolidated financial statements of the Company. 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
1995 1994 1993 1992 1991
(in thousands, except per share data) ---- ---- ---- ---- ----
Revenues $104,738 $59,461 $71,376 $65,807 $69,888
Income (loss) from operations $4,021 $(6,576) $(11,466) $2,546 $2,565
Net income (loss) $2,773 $(9,999) $(9,923) $807 $1,118
Earnings (loss) per common
and common equivalent share $.44 $(1.75) $(1.74) $.14 $.20
Weighted average number of
common and common
equivalent shares outstanding 5,866 5,701 5,701 5,701 5,701
BALANCE SHEET DATA
Working capital $11,092 $3,283 $10,681 $19,837 $19,698
Total assets $100,554 $33,524 $43,331 $47,197 $46,317
Long-term obligations and
redeemable preferred stock $42,588 $ -- $ -- $ -- $ --
Common stockholders' equity $20,098 $17,183 $27,151 $37,048 $36,197
See Note 15 of Notes to Consolidated Financial Statements for a discussion
of 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.
14
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 the Management's Discussion and Analysis
of Results of Operations and Financial Condition 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.
1995 1994 1993
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Cost of revenues 85.9 94.2 100.7
------ ------ ------
Gross profit 14.1 5.8 (.7)
Selling, general and administrative expenses 10.3 9.7 9.2
Special charges -- 7.2 6.1
------ ------ ------
Income (loss) from operations 3.8 (11.1) (16.0)
Interest expense 1.2 .7 .2
------ ------ ------
Income (loss) before income tax expense (benefit) 2.6 (11.8) (16.2)
Income tax expense (benefit) .5 .2 (3.6)
------ ------ ------
Income (loss) before earnings (losses) of
unconsolidated affiliates 2.1 (12.0) (12.6)
Share in earnings (losses) of unconsolidated affiliates .5 (4.8) (1.3)
------ ------ ------
Net income (loss) 2.6% (16.8)% (13.9)%
------ ------- -------
------ ------- -------
GENERAL
The Company provides a broad range of comprehensive environmental
consulting, engineering, remediation and construction services to clients with
sites contaminated with hazardous materials, primarily throughout the United
States including various federal, state and local government agencies.
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. Generally, in
the Company's fourth quarter, a lower level of work is performed due to weather
related factors. 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 February 28, 1995
include the results of operations for BCM and Riedel since their acquisitions by
the Company in September 1994 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 percent to 50 percent.
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 fiscal 1994 and 1993 have been reclassified to conform with the fiscal 1995
presentation. Certain costs related to regional operations for prior periods
have been reclassified from selling, general and administrative (SG&A) expenses
to cost of revenues. The costs reclassified for fiscal 1994 and fiscal 1993 were
$6.5 million and $7.9 million, respectively.
15
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% 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% of revenues, compared with $3.4 million in fiscal 1994, or
5.8% of revenues. Fiscal 1994 gross profits were reduced by a charge of $2.3
million, or 3.9% 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% of revenues. The increase in gross profit as a percentage
of revenues during 1995, as compared to 1994, of 3.1% 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 $10.8
million, a $5.0 million or 87.6 percent increase, compared with $5.8 million
for fiscal 1994. SG&A expenses as a percentage of revenue were 10.3 percent
in fiscal 1995 compared with 9.7 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, goodwill and loan transaction fee amortization, and increased
administrative management costs.
In fiscal 1994, the Company recorded special charges aggregating $4.3
million, primarily associated with management's focus on resolving ongoing
operational issues. Included in the special charges 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
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. 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.
16
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% 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.
Results of fiscal 1995 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.
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
revenue 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.
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 revenue 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 revenue 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 charges
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 of 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 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.
17
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 existing credit
facility. Cash totaled $2.3 million at February 28, 1995 compared with $2.3
million at February 28, 1994. The Company's working capital increased to $11.1
million at February 28, 1995 from $3.3 million at February 28, 1994. The
increase in working capital is primarily a result of increases in accounts
receivable and unbilled costs resulting from the acquisition of BCM, RES and
certain assets of RESNA during 1995, partially offset by increases in accrued
compensation and related fringes and other accrued liabilities, primarily
project and acquisition related costs.
At February 28, 1995, the Company had a $30.0 million credit facility
consisting of a $4.5 million term loan facility and a $25.5 million revolving
credit facility, subject to limitations pursuant to the calculation of a defined
borrowing base. At February 28, 1995, $22.1 million of borrowing capacity was
available to the Company against which the Company had outstanding borrowings
of $19.1 million. The calculation of the borrowing base is based, in large
part, on eligible accounts receivable, as defined in the credit agreement with
the lender. As a result, changes in the borrowing base can occur due to the
magnitude and timing of the Company's billings for services performed, 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 May 5, 1995, the Company and its lender amended the credit agreement to
increase the eligible borrowing base by an amount up to $4 million with the
creation of an "Unbilled Account Subline" whereby unbilled receivables,
previously excluded from the borrowing base calculation, are now included,
subject to limitations, in the calculation of the borrowing base. Availability
under the Unbilled Account Subline is automatically and permanently reduced in
monthly increments of $500,000 commencing on August 1, 1995 and reduces to zero
upon the Company's receipt of at least $10 million through the sale and issuance
of its equity securities. The interest rate charged under the amended revolving
credit facility has been increased by three-quarters of a percent (3/4%) until
all amounts advanced under the Unbilled Account Subline, and interest accrued
thereon, have been paid and the occurrence of an increase in equity described
herein. In order to facilitate the additional borrowings, E. Brian Smith,
Chairman, President and Chief Executive Officer of the Company agreed to pledge
800,000 shares of Company common stock contemporaneously with the transaction.
Pending the pledge of such stock, Mr. Smith has personally guaranteed repayment
of amounts advanced to the Company under the agreement, as amended, up to
$4 million. The personal guarantee will terminate upon the pledge of 800,000
shares of Company common stock and the passage of a period of 91 days following
such pledge; the repayment of all amounts advanced under the Unbilled Account
Subline and the termination of that subline; or a $10 million increase in
equity. At May 26, 1995, $22.4 million of borrowing capacity was available to
the Company pursuant to the credit facility, as amended, against which the
Company had outstanding borrowings of $21.4 million.
The Company's funding requirements arise primarily from its operating
expenses and the debt service and acquisition related expenses incurred in
fiscal 1995. Historically, the Company has met such requirements primarily with
cash flows generated by operations and limited 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 February 28, 1995, the components of debt were outstanding
borrowings under the Company's credit facility of approximately $19 million, a
$10 million convertible senior note, and a $2 million senior note. Subsequent
to the BCM, Riedel and RESNA acquisitions, cash has been used to reduce the
vendor financing previously used by the acquired businesses.
During fiscal 1994 and continuing in fiscal 1995, management of the
Company has focused on resolving ongoing operational issues, taking actions
to increase the efficiency of the Company's operations and improving the
management of its working capital. Management of the Company believes these
actions will enhance the Company's ability to fund its obligations in fiscal
1996.
18
The Company is currently in discussions with additional sources of capital
to meet its working capital requirements as well as to fund future expansion.
Management believes, based on its discussions with sources of potential
financing, that it will be able to raise capital through additional debt and/or
equity. However, in the event the Company fails to improve the management of
its working capital and is unable to raise additional capital on a timely basis,
its liquidity and financial position could be materially adversely impacted.
BACKLOG
As of February 28, 1995, the Company had a contract backlog of orders of
approximately $105 million, of which the Company anticipates performing
approximately $90 million in fiscal 1996. As of February 28, 1995, the value of
unfunded or indefinite delivery order contracts ("IDO") was approximately $170
million and when combined with contract backlog totals $275 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 February 28,
1994, the Company had a backlog of orders of approximately $60 million. There
was no unfunded backlog at February 28, 1994.
OTHER ITEMS AFFECTING OPERATING RESULTS
The Company has significant customers who, on an annual basis, individually
account for more than ten percent of annual revenues. In each of fiscal 1995
and fiscal 1994, the Company had two significant customers from which revenues
received aggregated $24.3 and $16.5 million, or 23.2 percent and 27.7 percent,
respectively, of revenues in those years. In fiscal 1993, the Company did not
have a significant customer who generated more than 10% of annual revenues.
With the acquisition of RES in November of 1994 (See Note 2 of Notes To
Consolidated Financial Statements), the Company now generates a significant
portion of revenues under its contracts with the EPA. Under its current
Emergency Response Cleanup Services ("ERCS") contracts, 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. ERCS Zone 4A and ERCS Region 5 contracts are
renewable for one year periods through February 1996 and September 1997,
respectively.
Revenues from EPA contracts for the three months in fiscal 1995 since RES
was acquired in November 1994, were $6.6 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 receive a
similar level of revenues in fiscal 1996. The Company intends to actively seek
the award of future EPA contracts as the requests for proposals are issued.
In April and May 1994, the EPA Office of Inspector General for Audits
("OIG") performed a review of the financial condition of RES in order to
render an opinion on its financial capability to perform on EPA and other
federal government agency contracts. The review included an evaluation of
RES' existing and future financial capabilities to continue its operations
and financial restructuring process and its relationship with its bank. The
OIG submitted its report in May 1994. The report recommended that the EPA
require RES to submit periodic reports relating to its financial condition,
as well as to provide updates on the RES financial restructuring process.
Management believes that RES has submitted reports as required and that, as a
result of the acquisition of RES by the Company in November 1994, there will
not be any material changes in RES' federal government contract relationships.
The market for environmental services is primarily driven by legislation.
Environmental engineering, consulting and remediation services are purchased
because of legal or regulatory requirements to clean up problems. The delays in
extending or creating new legislation, primarily Superfund, has resulted in much
slower growth expectations in the engineering, consulting and private
remediation markets and may continue pending new legislation. This reduced
activity has resulted in increased competition and lower profitability leading
to considerable downsizing in small to midsize environmental service companies
and, in a number of cases, has led to consolidation.
19
The key laws affecting the environmental market are the Response
Conservation and Recovery Act, as amended in 1984 and 1986; the Comprehensive
Environmental Response, Compensation and Liability Act, also known as the
Superfund law; the Clean Air Act, the Federal Water Pollution Control Act,
also known as the Clean Water Act, the Toxic Substances Control Act, and
the Federal Facilities Compliance Act of 1992.
The Company's operations have not been, nor are they expected in the near
term, to be materially affected by inflation.
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
(a) Previous independent auditors
(i) On January 31, 1994, the Company dismissed BDO Seidman as
its independent auditors.
(ii) The reports of BDO Seidman on the consolidated financial
statements for the past three fiscal years contained no
adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or
accounting principle.
(iii) The Registrant's Board of Directors participated in and
approved the decision to change independent auditors.
(iv) In connection with its audits for the three most recent
fiscal years and through January 31, 1994, there have been
no disagreements with BDO Seidman on any matter of
accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which would
have caused BDO Seidman to make reference thereto in their
report on the financial statements for such years.
(v) During the two most recent fiscal years and through
January 31, 1994, there have been no reportable events (as
defined in Regulation S-K Item 304(a)(1)(v)).
(vi) The Registrant requested and BDO Seidman furnished a
letter addressed to the SEC stating that it agrees with
the above statements. A copy of such letter was filed as
Exhibit 1 to Form 8-K dated January 31, 1994.
(b) New independent auditors
(i) The Registrant engaged Ernst & Young LLP as its new
independent auditors as of January 31, 1994. During the
three most recent fiscal years and through January 31,
1994, the Registrant has not consulted with Ernst & Young
LLP on items which (1) were or should have been subject to
SAS 50 or (2) concerned the subject matter of a
disagreement or reportable event with the former auditor
(as described in Regulation S-K Item 304(a)(2)).
20
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 C, Class A and Class B named below have terms which
expire in 1995, 1996 and 1997, respectively. The following table contains
certain information regarding the directors.
DIRECTORS OF THE REGISTRANT
YEAR
FIRST
NAME, AGE, OCCUPATION AND ELECTED
BUSINESS EXPERIENCE DIRECTOR
- ------------------------- --------
DIRECTORS TO SERVE UNTIL ANNUAL MEETING IN 1995 (CLASS C)
REAR ADMIRAL JOHN PAUL JONES, JR.
(RET.), 62, (1), (8), (9) 1994
Independent Consultant since
1988. Retired as Chief of Navy
Civil Engineers and Commander,
Naval Facilities Engineering
Command in September 1987.
BYRON LEE, JR., 65, (8), (10) 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.)
DIRECTORS SERVING UNTIL ANNUAL MEETING IN 1997 (CLASS B)
MELVIN H. CHIOGIOJI, PH.D.,
REAR ADMIRAL, U.S. NAVAL RESERVE
(RET.), 54, (2), (7), (9) 1994
President of Intemco, Ltd.,
an independent power producing
company, since June 1992, 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.
21
YEAR
FIRST
NAME, AGE, OCCUPATION AND ELECTED
BUSINESS EXPERIENCE DIRECTOR
- ------------------------- --------
ROBERT L. GUYETT, 58, (3), (7), (8) 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
Engelhard Corporation and
Newport Corporation.
MAJOR GENERAL HUGH G. ROBINSON
(RET.), 62, (4), (7), (8) 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).
DIRECTORS SERVING UNTIL ANNUAL MEETING IN 1996 (CLASS A)
E. BRIAN SMITH, 57, (5), (9), (10) 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.
ARTHUR A. RIEDEL, 64 1994
Chairman of the Board and
President of Riedel Resources,
Inc. since 1979; Chairman of the
Board of Columbia Western, Inc. since
1986; Director of ESCO Corporation,
Acordia/Pettit-Morry Co.
22
YEAR
FIRST
NAME, AGE, OCCUPATION AND ELECTED
BUSINESS EXPERIENCE DIRECTOR
- ------------------------- --------
RICHARD M. CASHIN, JR., 42, (6), (7) 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.; Titan
Wheel International; Hoover
Group; Autostyle Plastics;
Copes-Vulcan; Delco Remy America;
Freedom Forge; JAC Products.
<FN>
_________________________
(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) Mr. Cashin was elected to the Board of Directors effective as of November
21, 1994 by a vote of a majority of the board to fill an existing vacancy
in the Class A directors.
(7) Member of the Audit and Finance Committee.
(8) Member of the Compensation Committee.
(9) Member of the Nominating and Insurance Committee.
(10) Mr. Byron Lee, Jr. has determined, for personal reasons, not to stand for
re-election for a full three year term and to resign his position as a
Class C director effective as of the 1995 Annual Meeting of Stockholders.
Mr. E. Brian Smith has been nominated for election as a Class C director
to fill the vacancy which will be created by the resignation of Mr. Lee.
If elected as a Class C director, Mr. Smith intends to resign his Class A
directorship, and the Board of Directors has indicated its intention to
appoint Mr. Lee to complete the remaining one year term of the Class A
directorship to be vacated by Mr. Smith. Mr. Lee has indicated his
willingness to accept this appointment.
23
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 45 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 53 Vice President - General Counsel and Secretary
John W. Poling 49 Vice President - Treasurer and Assistant Secretary
Daniel M. Rice 40 Vice President - Controller
Richard A. Zartler 54 Vice President - Construction and Remediation Services
<FN>
________________
* Mr. Loscavio has been selected to replace Mr. Zartler, who retired, as
Vice President - Construction and Remediation Services, effective June 19, 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 in a variety of 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.
24
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 Pittsburgh in Higher Education in 1979, a M.Ed. from
Towson University and B.S. from Pennsylvania State University.
Frank J. Loscavio joined the Company effective June 19, 1995 as Vice
President - Construction and Remediation Services. 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 Bar, 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.
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.
During fiscal year 1995, Mr. Byron Lee, Jr., a director of the Company,
failed to file one Form 4 report relating to the grant of stock options,
which transaction was reported late on Form 5.
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 fiscal year ended February 28,
1995 and the two preceding fiscal years. (1)
25
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
---------------------- ------------
SECURITIES
NAME & PRINCIPAL POSITION FISCAL UNDERLYING
- ------------------------- YEAR SALARY BONUS OPTIONS/SARS
------ ------ ------- ------------
E. BRIAN SMITH 1995 $250,704 115,000 0
Chairman, 1994 $23,077 (2) 0 0
Chief Executive Officer and 1993 0 0 0
President
RICHARD A. ZARTLER 1995 $202,016 0 0
Vice President - Construction 1994 $200,000 0 0
and Remediation Division (3) 1993 $ 9,231 (4) $65,000 (5) 75,000
ANTHONY J. DURY 1995 $136,873 0
Vice President - 1994 12,981 (6) 0 30,000
Chief Administrative 1993 0 0 0
Officer
WILFRID D. NELSON 1995 $126,602 0 0
Vice President, 1994 48,077 (7) 0 20,000
General Counsel and Secretary 1993 0 0 0
WILLIAM T. CAMPBELL 1995 $118,127 (8) 0 25,000
Vice President - 1994 0 0 0
Finance and Assistant 1993 0 0 0
Secretary
<FN>
_____________________
(1) The column showing Other Annual Compensation has been omitted because,
during the periods covered, no named executive officer received any "other
annual compensation" other than certain perquisites and other personal
benefits the dollar value of which was less than the established reporting
thresholds. The column showing Restricted Stock Awards has been omitted
because there have been no Restricted Stock Awards during the periods
covered and there are no outstanding shares of Restricted Stock held by the
named executive officers. The column showing Long Term Incentive Plan
Payouts has been omitted because as of February 28, 1995, the Company had
no Long Term Incentive Plans under which compensation can be earned. The
column showing All Other Compensation has been omitted because, during the
periods covered, no named executive officer received any "other
compensation."
(2) Reflects Mr. Smith's salary for the period from January 1, 1994 through
February 28, 1994.
(3) 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 through February 23, 1995.
(4) Reflects Mr. Zartler's salary for the period from January 29, 1993 through
February 28, 1993.
(5) Represents a signing bonus paid to Mr. Zartler as an incentive to join the
Company.
26
(6) Reflects Mr. Dury's salary for the period from January 24, 1994 through
February 28, 1994.
(7) Reflects Mr. Nelson's salary for the period from October 11, 1993 through
February 28, 1994.
(8) Reflects Mr. Campbell's salary for the period from March 7, 1994 through
February 28, 1995.
TABLE OF OPTION GRANTS IN FISCAL YEAR 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 in fiscal year 1995 and the
hypothetical values of such options. The Company has not granted any stock
appreciation rights.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Grant Date
Individual Grants Value(1)
- ---------------------------------------------------------------------------------------------------- ----------
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base Expiration Grant Date
Name Granted (2) Fiscal Year Price($/Sh) Date Present Value
- -------------------- ------------ ------------ ---------------- ---------- -------------
E. Brian Smith 0 0 - - -
Richard A. Zartler 0 0 - - -
Anthony J. Dury 0 0 - - -
William T. Campbell 25,000 6% $4,625 3/7/04 79,500
Wilfrid D. Nelson 0 0 - - -
27
<FN>
____________________
(1) Grant Date Present Values were calculated using the Black-Scholes option
pricing model. Use of this model should not be viewed in any way as a
forecast of the future performance of the Company's stock. The estimated
Grant Date Present Value of the stock option is $3.18 based on the
following inputs:
Stock Price (Fair Market Value) at Grant $4.625
Exercise Price $4.625
Expected Option Term 10 years
Risk-Free Interest Rate 7.11%
Stock Price Volatility 0.47
Dividend Yield 0.0%
The model assumes: (a) an Option Term of ten years which reflects the
actual ten-year life of the option and is not discounted for factors such
as the expected time until exercise and the risk of forfeiture; (b) a Risk-
Free Interest Rate that represents the interest rate on a U.S. Treasury
Note with a maturity date corresponding to that of the Expected Option
Term; (c) Stock Price Volatility is calculated using monthly stock prices
over a three-year period from March 1, 1991 to February 28, 1994; and (d)
zero Dividend Yield. Notwithstanding the fact that these options are non-
transferable, no discount for lack of marketability was applied.
(2) Granted under the Company's 1994 Employee Stock Incentive Plan. Under the
terms of the 1994 Employee Stock Incentive Plan, the options will become
exercisable in four equal annual increments commencing one year after the
date of grant.
TABLE OF OPTION EXERCISES IN FISCAL YEAR 1995 AND YEAR-END OPTION VALUES
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 February 28,
1995. The Company has not granted any stock appreciation rights.
28
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY OPTIONS/
SHARES AT FEBRUARY 28, 1995 SARS AT FEBRUARY 28, 1995(1)
ACQUIRED VALUE -------------------------------- --------------------------------
NAME ON EXERCISE REALIZED EXERCISABLE(2) UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE
- -------------------- ----------- -------- -------------- ------------- -------------- -------------
E. Brian Smith 0 0 0 0 0
Richard A. Zartler 0 75,000 0 $223,125 0
Anthony J. Dury 0 10,000 20,000 $30,000 $60,000
Wilfrid D. Nelson 5,000 $21,691 15,000 0 $52,500 0
William T. Campbell 0 0 25,000 0 $43,750
<FN>
_______________
(1) The value of unexercised in-the-money options at February 28, 1995 is
calculated by subtracting the total exercise price from the market value of
the underlying securities as of February 28, 1995 (closing bid price of
$6.375).
(2) All unexercisable options held by the named executive officers prior to
January 16, 1994 became vested effective December 30, 1993 under the terms
of the 1986 Employee Stock Option Plan due to a change in control (as
defined in the plan).
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 per 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 Non-employee Director
Stock Option Plan was terminated in 1994 and replaced by the 1994 Non-employee
Director Stock Option Plan. 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 the date of the grant. The terms of the options are for ten years.
The initial options will vest in equal annual increments over three years and
each annual option for 5,000 shares 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 during fiscal year 1995 pursuant
to the terms of the plan.
29
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 minimum 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 has been 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. 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 has 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 fiscal year 1995 with respect to executive
officers.
COMPENSATION PROGRAM PHILOSOPHY AND OBJECTIVES
As a result of the independent review of the compensation programs, the
Compensation Committee adopted a new 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:
- 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
- long-term incentive compensation that directs management's efforts to
building stockholder value through attainment of longer-term financial
and strategic goals.
30
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.
Base salaries generally have been set at competitive levels and reflect
individual contributions to Company performance to enhance the pay for
performance feature of the program. 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 new 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 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 the practices of the Compensation Comparison Group. Base salary levels
for management are intended to reflect individual performance, the Company's
overall financial performance, and competitive practice.
In recognition of the Company's improved financial performance during
fiscal year 1995, the Committee approved salary increases for certain officers
effective March 1, 1995.
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 basis,
contingent on achievement of Company and business unit objectives, and
individual performance. A special Turnaround Incentive Plan was adopted for
fiscal year 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 reflect competitive practices
at the Compensation Comparison Group companies. The incentive award targets
equate to the Company's annual objectives. The target incentive is leveraged
and, predicated on Company performance, actual incentive awards can range
from 0% to 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, 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.
31
As a result of the Company's improved financial performance for fiscal year
1995, incentive bonuses were paid to nonofficer employees under the 1995
improved Bonus Plan. The incentive bonus pool for eligible management positions
was reduced in order to increase the incentive gain sharing pool for non-
management employees.
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 companies. 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 INCENTIVE 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 fiscal year 1995, the Committee issued stock option awards to
selected key employees of the Company in consideration of their individual
performance and to encourage them to remain 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.
32
Mr. Smith's base salary was set at $280,000 for fiscal year 1995 which
approximates the 50th percentile of salaries for Chief Executive Officers at
similar environmental services and general industry companies. Mr. Smith
waived a total of $13,995 of his base salary through February 28, 1994. The
variance between Mr. Smith's annual salary of $280,000 and the $250,704 paid
during fiscal year 1995 has been deferred and not waived. 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 and competitive base salary levels at the 50th
percentile for Chief Executive Officers of the Compensation Comparison Group.
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 under the plan. The Committee also approved two
additional 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.
Although a significant increase in shareholder value was realized during fiscal
year 1995, the shareholder value goals were not achieved. Therefore, no stock
option award was granted.
During fiscal year 1995, the Committee approved an unsecured, full-recourse
loan to the Chief Executive Officer in connection with certain acquisition
expenses.
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Hugh G. Robinson, Chairman
Robert L. Guyett
John Paul Jones, Jr.
Byron Lee, Jr.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
John Paul Jones, Jr., a director and member of the Compensation Committee
received an aggregate of $4,000 compensation for consulting services provided to
the Company during fiscal year 1995.
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
ending February 28, 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 February 28, 1990 and
that all dividends were reinvested.
33
[Graph]
------------------------------------------------------------------------------------
a) Value of $100 Invested 2/28/90 2/28/91 2/28/92 2/26/93 2/28/94 2/28/95
------------------------------------------------------------------------------------
Nasdaq Stock Market Index (US Companies) $100 $110.15 $157.20 $167.25 $196.79 $200.05
------------------------------------------------------------------------------------
Smith Environmental Technology NA (25.93%) (12.50%) (45.71%) (2.63%) 45.95%
------------------------------------------------------------------------------------
Self-Determined Peer Group $100 $137.70 $119.80 $104.50 $94.42 $75.44
------------------------------------------------------------------------------------
Smith Environmental Technology $100 $74.07 $64.82 $35.19 $34.36 $50.00
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
b) Annualized Return 2/28/90 2/28/91 2/28/92 2/26/93 2/28/94 2/28/95
------------------------------------------------------------------------------------
Nasdaq Stock Market Index (US Companies) NA 10.15% 42.71% 6.39% 17.66% 1.66%
------------------------------------------------------------------------------------
Self-Determined Peer Group NA 37.70% (12.99%) (12.77%) (9.64%) (20.10%)
------------------------------------------------------------------------------------
Smith Environmental Technology NA (25.93%) (12.50%) (45.71%) (2.63%) 45.95%
------------------------------------------------------------------------------------
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
34
Environmental Technologies, Inc. were acquired by the Company as of December 1,
1994. Riedel Environmental Technologies, Inc. is no longer a publicly-traded
company.
The following performance graph compares the market performance of the
Company's common stock for the period beginning December 30, 1993 - the date of
the change in the Company's management - and ending February 28, 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 December 30, 1993 and that all dividends were reinvested.
[Graph]
------------------------------------
a) Value of $100 Invested 12/30/93 2/28/94 2/28/95
------------------------------------
Nasdaq Stock Market Index (US Companies) $100 $102.88 $104.59
------------------------------------
Self-Determined Peer Group $100 $110.31 $88.14
------------------------------------
Smith Environmental Technology $100 $154.17 $225.00
------------------------------------
------------------------------------
b) Annualized Return 12/30/93 2/28/94 2/28/95
------------------------------------
Nasdaq Stock Market Index (US Companies) NA 2.88% 1.66%
------------------------------------
Self-Determined Peer Group NA 10.31% (20.10%)
------------------------------------
Smith Environmental Technology NA 54.17% 45.95%
------------------------------------
35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following tables set forth information as of May 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.
NUMBER OF
SHARES OWNED PERCENT OF
NAME AND ADDRESS OF BENEFICIAL HOLDER BENEFICIALLY CLASS
- --------------------------------------------------------------------------------
Smith Holding Corporation 2,653,720 (1) 45.67%
51 Montecito Drive
Corona Del Mar, CA 92625
Dimensional Fund Advisors Inc. 404,900 (2) 6.97%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
J.J. Cramer & Co. 520,100 (3) 8.95%
56 Beaver Street, Suite 701
New York, NY 10004
399 Venture Partners, Inc. 3,714,430 (4) 38.99%
399 Park Avenue
New York, NY 10043
E. Brian Smith 2,653,720 (5) 45.67%
51 Montecito Drive
Corona Del Mar, CA 92625
36
<FN>
_____________________________
(1) Based upon information contained in a Form 3, dated January 5, 1994.
(2) Based upon information obtained from Dimensional Fund Advisors, Inc.
Schedule 13G dated January 30, 1995. Dimensional Fund Advisors, Inc., a
registered investment advisor, is deemed to have beneficial ownership of
404,900 shares of the Company's common stock as of January 30, 1995, all of
which shares are held in portfolios of DFA Investment Dimensions Group,
Inc., a registered open-end investment company, or in series of The DFA
Investment Trust Company, a Delaware business trust, or the DFA Group Trust
and the DFA Participating Group Trust, investment vehicles for qualified
employee benefit plans. Dimensional Fund Advisors, Inc. serves as
investment manager for all of the Dimension and DFA entities, and
Dimensional Fund Advisors, Inc. disclaims beneficial ownership of all such
shares.
(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 Convertible Senior Note,
including 371,443 shares represented by portions of the Notes distributed
to individual investors in 399 Venture Partners, Inc., one of whom is a
director of the Company.
(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.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information as of May 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 PERCENT OF
SHARES OWNED OUTSTANDING
NAME BENEFICIALLY SHARES
- ---- ------------ ------------
John Paul Jones, Jr. 6,000 (4) *
E. Brian Smith 2,653,720 (2) 45.67%
Melvin H. Chiogioji 6,000 (4) *
Robert L. Guyett 13,500 (4) *
Hugh G. Robinson 6,000 (4) *
Byron Lee, Jr. 11,200 (1) *
Arthur A. Riedel 0 *
Richard M. Cashin, Jr. 129,880 (3) 2.19%
Richard A. Zartler 82,000 (5) 1.39%
Anthony J. Dury 10,000 (5) *
Wilfrid D. Nelson 15,000 (5) *
William T. Campbell 6,250 (5) *
All executive officers and directors
as a group 2,941,060 (6) 48.36%
<FN>
_________________________
* 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 4,000 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.
(4) Includes options for 2,000 shares granted under the 1992 Non-Employee
Directors Stock Option Plan and options for 4,000 shares granted under the
1994 Non-Employee Directors Stock Option Plan exercisable within 60 days.
(5) Includes options for shares subject to acquisition within 60 days held by
Messrs. Zartler, Dury, Nelson, and Campbell for 75,000, 10,000, 15,000 and
6,250 shares, respectively.
(6) Includes 140,667 options to acquire shares 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
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% and is 6.37% 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 an office facility from Columbia Western, Inc.,
whose principal stockholder is Arthur A. Riedel who serves as a director of the
Company. The annualized lease payment for the office facility, which will be
vacated by the Company on or before June 30, 1995, is $220,049. The subsidiary
is also a tenant of a warehouse and marine yard facility owned by Wilamette-
Western Corporation, whose principal shareholder and Chairman is Arthur A.
Riedel. The aggregate annualized lease payment on these facilities is $90,000.
The subsidiary also leases office and yard space from Celtic Investment Co., an
assumed business name for Arthur A. Riedel. The aggregate annualized lease
payment for these facilities is $62,184 and the lease expires October 31, 1995.
The Company believes the terms of the lease arrangements described above are
at least as favorable as could be obtained from unrelated third parties.
ACQUISITION OF ASSETS FROM EXECUTIVE OFFICER
The Company has agreed to acquire the assets, technology, trade secrets
and customer lists of a company owned by C. Robert Conner, and to obtain
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, with a portion of the consideration conditioned upon
the continued employment of Mr. Conner by the Company during that time.
Although this transaction has not yet been consummated, its terms were
negotiated with Mr. Conner prior to his employment by the Company and,
therefore, are as favorable as terms which could have been obtained from
an unrelated third party.
38
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 February 28,
1995 and 1994..........................................F-3
Consolidated Statements of Operations for each of the
Three Years Ended February 28, 1995....................F-5
Consolidated Statements of Common Stockholders' Equity
for each of the Three Years Ended February 28, 1995....F-6
Consolidated Statements of Cash Flows for each of the
Three Years Ended February 28, 1995....................F-7
Notes to Consolidated Financial Statements.............F-8
(2) Financial Statement Schedule for the Three Years
Ended February 28, 1995
II - Valuation and Qualifying Accounts.................F-22
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
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.
<FN>
____________
*This information appears only in the manually signed original of the Form
10-K.
**Incorporated by reference.
***Previously filed.
40
Exhibit Sequential
Number Description of Exhibit Page Number*
- ------- ---------------------- ------------
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.
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.
<FN>
____________
*This information appears only in the manually signed original of the Form
10-K.
**Incorporated by reference.
***Previously filed.
41
Exhibit Sequential
Number Description of Exhibit Page Number*
- ------- ---------------------- ------------
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.
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 ***
<FN>
____________
*This information appears only in the manually signed original of the Form
10-K.
**Incorporated by reference.
***Previously filed.
42
Exhibit Sequential
Number Description of Exhibit Page Number*
- ------- ---------------------- ------------
24 Powers of Attorney and Certified Copy of Resolution: ***
(a) Power of Attorney dated February 22, 1995,
granted by Robert L. Guyett to Anthony J. Dury,
William T. Campbell and Wilfrid D. Nelson.
(b) Power of Attorney dated February 22, 1995,
granted by Hugh G. Robinson to Anthony J. Dury,
William T. Campbell and Wilfrid D. Nelson.
(c) Power of Attorney dated February 22, 1995,
granted by Byron Lee, Jr. to Anthony J. Dury,
William T. Campbell and Wilfrid D. Nelson.
(d) Power of Attorney dated February 22, 1995,
granted by Melvin H. Chiogioji to Anthony J. Dury,
William T. Campbell and Wilfrid D. Nelson.
(e) Power of Attorney dated February 22, 1995,
granted by John Paul Jones, Jr. to Anthony J. Dury,
William T. Campbell and Wilfrid D. Nelson.
(f) Power of Attorney dated February 22, 1995,
granted by E. Brian Smith to Anthony J. Dury,
William T. Campbell and Wilfrid D. Nelson.
(g) Power of Attorney dated February 22, 1995,
granted by Richard M. Cashin, Jr. to Anthony J. Dury,
William T. Campbell and Wilfrid D. Nelson.
(h) Power of Attorney dated February 22, 1995,
granted by Arthur A. Riedel to Anthony J. Dury,
William T. Campbell and Wilfrid D. Nelson.
(i) 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 fourth quarter of the fiscal year ended February 28, 1995:
(1) Form 8-K/A dated December 6, 1994, amending Form 8-K
dated November 21, 1994, to include audited consolidated
financial statements of Riedel Environmental Services, Inc.
(2) Form 8-K dated January 13, 1995, relating to the acquisition
of certain assets of RESNA Industries, Inc., a Delaware
corporation.
(3) Form 8-K/A dated January 27, 1995, amending Form 8-K dated
January 13, 1995, to include audited consolidated financial
statements of RESNA Industries, Inc.
(4) Form 8-K/A dated January 27, 1995, to amend Form 8-K dated
January 13, 1995 to reflect the term "unaudited" as applied to
footnote number 9.
27 Requirements for the format and input of financial data schedules ***
(not deemed filed with the Commission).
<FN>
____________
*This information appears only in the manually signed original of the Form
10-K.
**Incorporated by reference.
***Previously filed.
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 CORP.
(Registrant)
By: /s/ William T. Campbell
----------------------------
William T. Campbell
Vice President - Finance
June 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 June 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
------------------------- (Principal Financial Officer)
William T. Campbell
/s/ Daniel M. Rice Vice President - Controller
------------------------- (Principal Accounting Officer)
Daniel M. Rice
/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
/s/ Richard M. Cashin* Director
-------------------------
Richard M. Cashin
* By /s/ Wilfrid D. Nelson
Wilfrid D. Nelson, pursuant to Powers of Attorney previously filed.
44
REPORTS 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 (formerly Canonie Environmental Services
Corp.) as of February 28, 1995 and 1994 and the related consolidated statements
of operations, common stockholders' equity, and cash flows for the years then
ended. Our audit also included the financial statement schedule listed in the
Index at Item 14(a) for the 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 audit. The financial statements of SoilTech ATP
Systems, Inc. (a corporation in which the Company has a 50% interest) 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 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 consolidated financial position of
Smith Environmental Technologies Corporation as of February 28, 1995 and 1994,
and the consolidated results of its operations and its cash flows for the years
then ended, 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.
Dallas, Texas ERNST & YOUNG LLP
May 10, 1995
F-1
REPORTS 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). 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 to 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.
Kalamazoo, Michigan BDO Seidman
April 16, 1993 Certified Public Accountants
To the Stockholders of
SoilTech ATP Systems, Inc.
King of Prussia, Pennsylvania
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.
Kalamazoo, Michigan BDO Seidman
January 24, 1995 Certified Public Accountants
F-2
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
(FORMERLY CANONIE ENVIRONMENTAL SERVICES CORP.)
CONSOLIDATED BALANCE SHEETS
(In thousands)
FEBRUARY 28, FEBRUARY 28,
1995 1994
------------- -------------
ASSETS
Current Assets:
Cash $ 2,345 $ 2,290
Accounts receivable, less allowance for doubtful
accounts of $1,312 and $485 (Note 3) 41,726 13,739
Costs and estimated earnings on long-term
contracts in excess of billings (Note 4) 1,803 3,365
Prepaid expenses and other current assets 3,086 230
------------- -------------
Total current assets 48,960 19,624
Property and Equipment:
Equipment 18,712 14,730
Land and buildings 4,431 2,638
Leasehold improvements 1,448 101
------------- -------------
Total property and equipment, at cost 24,591 17,469
Less accumulated depreciation and amortization 8,681 7,848
------------- -------------
Property and equipment, net 15,910 9,621
Other Assets:
Cost in excess of net assets of businesses acquired,
net of accumulated amortization of $310 (Note 2) 28,495 -
Other assets (Notes 5 and 6) 7,189 4,279
------------- -------------
TOTAL ASSETS $ 100,554 $ 33,524
------------- -------------
------------- -------------
F-3
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
(FORMERLY CANONIE ENVIRONMENTAL SERVICES CORP.)
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
FEBRUARY 28, FEBRUARY 28,
1995 1994
------------- -------------
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts and subcontracts payable $ 16,793 $ 4,827
Payables to affiliates (Note 5) 1,092 2,437
Accrued expenses and other liabilities:
Compensation and related fringes 4,763 957
Severance and office closures 3,590 1,606
Other 8,684 3,582
Billings on long-term contracts in excess
of costs and estimated earnings (Note 4) 636 1,132
Current maturies of long-term debt
and short-term borrowings (Note 7) 2,310 1,800
------------- -------------
Total current liabilities 37,868 16,341
Long-term debt (Note 7) 21,078 -
Other long-term liabilities 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 -
Commitments and contingencies (Notes 9 and 14)
Redeemable Preferred Stock, $0.01 par value; 78,000
shares authorized; 78,000 shares issued; 5%
cumulative dividend; $100 redemption value,
aggregate redemption value $7,800,000 (Note 12) 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; 5,807,472 and 5,700,783 shares
issued, respectively 58 57
Addditional paid-in capital 16,970 16,611
Retained earnings 3,070 515
------------- -------------
Total common stockholders' equity 20,098 17,183
------------- -------------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY $ 100,554 $ 33,524
------------- -------------
------------- -------------
See accompanying notes to consolidated financial statements.
F-4
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
(FORMERLY CANONIE ENVIRONMENTAL SERVICES CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
Years Ended February 28,
------------------------------------------
1995 1994 1993
------------ ------------- -------------
Revenues (Notes 3 and 15) $ 104,738 $ 59,461 $ 71,376
Cost of revenues 89,922 56,020 71,874
------------ ------------- -------------
Gross profit (loss) 14,816 3,441 (498)
Selling, general, and administrative
expenses 10,795 5,754 6,597
Special charges (Note 15) - 4,263 4,371
------------ ------------- -------------
Income (loss) from operations 4,021 (6,576) (11,466)
Interest expense 1,229 412 143
------------ ------------- -------------
Income (loss) before income tax expense (benefit) 2,792 (6,988) (11,609)
Income tax expense (benefit) (Note 10) 558 135 (2,587)
------------ ------------- -------------
Income (loss) before earnings (losses)
of unconsolidated affiliates 2,234 (7,123) (9,022)
Share in earnings (losses) of
unconsolidated affiliates: (Note 5)
Operating 539 (221) (901)
Investment write-off - (2,655) -
------------ ------------- -------------
Net income (loss) 2,773 (9,999) (9,923)
Dividends and accretion on
Redeemable Preferred Stock (Note 12) 218 - -
------------ ------------- -------------
Income (loss) applicable to common stock $ 2,555 $ (9,999) $ (9,923)
------------ ------------- -------------
------------ ------------- -------------
Weighted average number of common
and common equivalent shares
outstanding 5,865,782 5,700,783 5,700,783
Earnings (loss) per common and common
equivalent share $ 0.44 $ (1.75) $ (1.74)
See accompanying notes to consolidated financial statements.
F-5
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
(FORMERLY CANONIE ENVIRONMENTAL SERVICES CORP.)
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(In thousands, except common share data)
SHARES OF ADDITIONAL
COMMON COMMON PAID-IN RETAINED
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
Shares issued upon conversion
of stock options 106,689 1 359 360
Net income - - - 2,773 2,773
Dividends and accretion on -
Redeemable Preferred Stock - - - (218) (218)
------------ ---------- -------------- --------------- -------------
Balance, February 28, 1995 5,807,472 $ 58 $ 16,970 $ 3,070 $ 20,098
------------ ---------- -------------- --------------- -------------
------------ ---------- -------------- --------------- -------------
See accompanying notes to consolidated financial statements.
F-6
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
(FORMERLY CANONIE ENVIRONMENTAL SERVICES CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED FEBRUARY 28,
------------------------------------------
1995 1994 1993
OPERATING ACTIVITIES:
Net income (loss) $ 2,773 $ (9,999) $ (9,923)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for special items - 4,263 4,371
Depreciation and amortization 3,360 1,546 2,182
Loss on disposal of equipment 168
Share in (earnings) losses of affiliates (539) 2,876 901
Income tax refund - 2,208 (2,208)
Changes in operating assets and liabilities, net
of effects from acquisitions:
Accounts receivable 4,529 2,749 4,339
Costs and estimated earnings on long-term
contracts in excess of billings 1,562 2,720 118
Prepaid expenses and other current assets (602) 724 (421)
Other assets (1,959) - -
Accounts and subcontracts payable 1,130 1,386 (2,931)
Accrued expenses and other liabilities (4,983) (859) 1,022
Billings on long-term contracts in excess of
costs and estimated earnings (496) 178 567
Other long-term liabilities (845) - -
Other, net (218) 675 (766)
------------ ------------- -------------
Net cash provided by (used in) operating activities 3,880 8,467 (2,749)
------------ ------------- -------------
INVESTING ACTIVITIES:
Capital expenditures (689) (3,333) (2,766)
Advances (to) from affiliates 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 (43) 22 (1)
------------ ------------- -------------
Net cash used in investing activities (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 (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 (1,967) - -
Proceeds from excercise of stock options 360 - -
------------ ------------- -------------
Net cash provided (used) by financing activities 19,026 (3,200) 5,000
------------ ------------- -------------
Net increase (decrease) in cash 55 1,164 (536)
Cash at beginning of year 2,290 1,126 1,966
Cash of sold subsidiary - - (304)
------------ ------------- -------------
Cash at end of year $ 2,345 $ 2,290 $ 1,126
------------ ------------- -------------
------------ ------------- -------------
See accompanying notes to consolidated financial statements.
F-7
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
(FORMERLY CANONIE ENVIRONMENTAL SERVICES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Smith Environmental Technologies Corporation (formerly Canonie
Environmental Services Corp.), 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.
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 prior years have been reclassified to conform with the
fiscal 1995 presentation. Certain costs related to regional operations have
been reclassified from selling, general and administrative expenses to cost of
revenues. The costs reclassified for fiscal 1994 and fiscal 1993 were $6.5
million and $7.9 million, respectively.
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 construction
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
associated with contract work in progress at February 28, 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
Leasehold improvements 3-10 years
Office, process and field equipment 3-7 years
- --------------------------------------------------------------------------------
F-8
INCOME TAXES
The Company utilizes a 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 bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
ACCRETION ON REDEEMABLE PREFERRED STOCK
The Company's Redeemable Preferred Stock was recorded at its estimated fair
value at the date of issuance. The $932,000 excess redemption value of the
Redeemable Preferred Stock over its carrying value is being accreted using the
interest method so that the carrying value will equal the redemption value on
the scheduled redemption dates. The accretion to redemption value on the
Redeemable Preferred Stock aggregated $55,000 for fiscal 1995.
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 in the amount of
$218,000 for fiscal 1995.
EARNINGS PER SHARE
Earnings per share are computed on the basis of the weighted average number
of common and common equivalent shares outstanding (5,865,782 in fiscal 1995 and
5,700,783 in fiscal 1994 and 1993). The dilutive effect of the Company's stock
options was calculated using the treasury stock method in 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 February 28, 1995 consist of the
Company's Convertible Senior Subordinated Note (see Note 8). Conversion of the
Convertible Senior Subordinated Note for fiscal 1995 was not considered since
assumed conversion did not result in significant dilution.
AMORTIZATION OF COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED
The excess of cost over fair value of net assets of businesses acquired
(goodwill) is amortized on a straight-line basis over a period not exceeding
thirty years. The Company periodically reviews goodwill to assess
recoverability. The Company continually evaluates the existence of goodwill
impairment on the basis of whether goodwill is fully recoverable from
projected undiscounted cash flows of the acquired business operations.
Impairments will be recognized in operating results if a permanent diminution
in value were to occur. Amortization recorded for fiscal 1995 was $310,000.
STATEMENT OF CASH FLOWS
Supplemental cash flow information for fiscal years 1995, 1994 and 1993, is
summarized as follows (in thousands):
1995 1994 1993
----------------------------------------
Interest paid $ (830) $ (532) $ (287)
Interest received 40 100 263
Income taxes paid (391) -- --
Income tax refunds 620 1, 981 4
F-9
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 indebtedness of BCM from the proceeds
under its Loan Agreement.
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 $19 million, subject to
certain adjustments as determined by a final audit of the acquired assets. 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 a definitive 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 the operations of RESNA. RESNA, based in
California, operates 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 for fiscal
1995 since their respective acquisitions dates. The cost in excess of the
estimated fair value of the net assets acquired was recorded as goodwill in the
amount of $28.8 million ($14.7 million relating to BCM, $12.6 million relating
to RES, and $1.5 million relating to RESNA) and is being amortized on a
straight-line basis over a period of 30 years.
The following pro forma combined revenues, net loss and loss per share data
which summarize the results of operations for the year ended February 28, 1995
and 1994 as if BCM, RES and RESNA had been acquired as of the beginning of
fiscal 1994.
1995 1994
---------------------------------
(in thousands, except share data)
Revenues $195,296 $221,211
Net loss $(1,098) $(20,441)
Loss per share $(0.28) $(3.68)
The unaudited pro forma combined financial information is based on
historical information and does not necessarily reflect the results of
operations which would have occurred had such transactions been consummated at
the beginning of fiscal 1994 or the Company's results of operations for any
future period. Further, no effect has been given in the pro forma information
for consolidation cost savings and other synergistic benefits expected to be
realized subsequent to the consummation of the acquisitions.
The above pro forma data include adjustments to eliminate inter-company
revenues and cost of revenues, adjust interest expense in connection with
additional borrowings, eliminate ESOP expenses related to BCM, eliminate
revenues and operating results in connection with the BCM laboratory which is
held for sale, adjust depreciation, recognize preferred stock dividend
requirements, and record the amortization of cost in excess of net assets
acquired.
F-10
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable at February 28, 1995 and 1994 are comprised of the
following (in thousands):
February 28,
------------------------
Commercial and non-U.S. government customers: 1995 1994
-------- --------
Amounts billed $ 21,746 $ 11,086
Unbilled recoverable costs and estimated earnings 5,661 --
Due from affiliates -- 454
Retention 4,020 2,610
-------- --------
31,427 14,150
-------- --------
United States Government and agencies:
Amounts billed 5,565 74
Unbilled recoverable costs and estimated earnings 5,910 --
Retention 136
--------
11,611 74
-------- --------
All customers 43,038 14,224
Allowance for doubtful accounts (1,312) (485)
-------- --------
$ 41,726 $ 13,739
-------- --------
-------- --------
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 $4.2 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% of its revenues for the year.
During fiscal 1995, the Company had two customers with revenues of $12.2 million
and $12.1 million. For fiscal 1994, the Company had two customers, who were
different from the customers in fiscal 1995, with revenues of $9.9 million and
$6.6 million.
The Company, as a result of the acquisition of RES, had revenues for fiscal
1995 derived from the United States Environmental Protection Agency (EPA) for
Emergency Response Cleanup Services (ERCS). Under the ERCS contracts, the
Company is the prime contractor for scheduled and emergency removal of hazardous
substances. The Company derived approximately $6.6 million of revenue from the
EPA during the quarter ended February 28, 1995.
Prior to the acquisition of RES by the Company, the EPA Office of Inspector
General for Audits (OIG) performed a review of the financial condition of RES in
order to render an opinion on its financial capability to perform on EPA and
other federal government contracts. The review included an evaluation of RES'
existing and future financial capabilities to continue its operations and
financial restructuring process and its relationship with its bank. The OIG
submitted its reports in May 1994. The report recommended that the EPA require
RES to submit periodic reports relating to its financial condition as well as to
provide updates on the RES' financial restructuring process. Management
believes that, as a result of the acquisition by the Company, there will not be
any material changes in RES' contractual relationship with the federal
government.
F-11
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,
------------------
1995 1994
-------- --------
Accumulated expenditures on
uncompleted contracts $107,277 $103,318
Estimated earnings thereon 14,593 13,291
-------- --------
121,870 116,609
Less applicable progress billings 120,703 114,376
-------- --------
Total $ 1,167 $ 2,233
-------- --------
-------- --------
The long-term construction contracts are shown in the accompanying balance
sheets as follows (in thousands):
February 28,
------------------
1995 1994
-------- --------
Costs and estimated earnings on long-term
contracts in excess of billings $ 1,803 $ 3,365
Billings on long-term contracts in excess of
costs and estimated earnings (636) (1,132)
-------- --------
Total $ 1,167 $ 2,233
-------- --------
-------- --------
NOTE 5 - CONSOLIDATED SUBSIDIARY AND UNCONSOLIDATED AFFILIATE COMPANIES
The Company owns a 100% interest in Canonie Technologies, Inc. (CT). CT
owns a 50% interest in SoilTech ATP Systems, Inc. (STI).
STI is a corporate joint venture that was formed to use sublicense rights
and the related waste material processing equipment for remediation of
contaminated sites. STI has the sole U.S. license until June 2012 of a
pyrolysis technology developed by a Canadian quasi governmental agency. Under
the equity method of accounting for this unconsolidated affiliate, the Company's
investment in STI has been adjusted by the Company's proportionate share of the
earnings and losses incurred by STI over the years. STI's accumulated
stockholders' deficit at December 31, 1994 is $3.3 million. The Company's
investment and advances to STI, which is classified in other assets on the
accompanying balance sheets, on February 28, 1995 was $1.8 million compared
with $2.5 million at February 28, 1994. The Company's management continues to
believe its investment of $1.8 million at February 28, 1995, will be realized
through STI's future undiscounted cash flows. The Company's balance sheet
includes $1.1 million in subcontracts payable with respect to STI at February
28, 1995.
In addition, the Company owns a 20% 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.
F-12
A summary of the unconsolidated affiliates' combined financial position and
results of operations (STI and LRC fiscal 1993 and STI in fiscal 1994 and 1995)
is as follows (in thousands):
1995 1994 1993
--------------------------------------
Revenues $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 derived revenues from engineering services performed for
various affiliated companies, primarily STI in fiscal 1995 and 1994 and a former
significant shareholder in 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):
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
NOTE 6 - OTHER ASSETS
Other assets at February 28, 1995 and 1994 include a trade note receivable
with a $1.5 million carrying value which accrues interest at 1 percent below the
prime rate, is secured by real estate, and is due May 2002. Repayment terms are
accelerated upon a transfer or a modified utilization of the real estate or
abandonment of efforts to obtain waste permits. The real estate, located in
Santa Barbara County, California, includes a former toxic waste site. Based on
an independent appraisal, management adjusted the carrying value of the note in
fiscal 1993 from $4.1 million to $1.5 million to reflect the fair market value
of the real estate securing the note.
Included in other assets at February 28, 1995 are $1.4 million of loan
closing fees, which are net of $201,000 of accumulated amortization, related to
the loans obtained in connections with the acquisition of BCM and RES. The
original amount of loan fees of $1.6 million are being amortized over 36 months,
the term of the loan agreements.
F-13
NOTE 7 - DEBT
Long-term debt consists of the following (in thousands):
February 28,
----------------------------
1995 1994
---- ----
Bank borrowings:
Revolving credit loans $14,780 $
Term loans 4,267 --
Notes payable -- 1,800
Senior Note (Note 8) 2,000 --
Capitalized lease obligations at interest
rates of 6% to 10% 1,139 --
ESOP notes payable to individuals at
interest rates of 7.5% to 10.5% 613 --
Other 589 --
------- -------
Total debt 23,388 1,800
Less current maturities 2,310 1,800
------- -------
Total long-term debt $21,078 $ --
------- -------
At February 28, 1995, the Company's Loan and Security Agreement (the
Agreement) with LaSalle Business Credit, Inc. (Lender), consists of a $25.5
million revolving credit facility and a $4.5 million term loan facility. The
Company may issue up to $3.0 million for letters of credit under the Agreement
which reduces availability under the revolving credit facility. The Company can
choose an interest rate equal to 1.50 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 February 28, 1995, $10.0 million of the revolving
credit facility and $3.5 million of the term loan facility was bearing interest
based on LIBOR at 9.438 percent and 9.688 percent, respectively. Interest rates
on the remaining amounts due under the revolving and term loan facilities were
10.50 percent and 10.75 percent, respectively, and were based on the prime rate.
Outstanding letters of credit issued pursuant to the Agreement aggregated
$450,000 at February 28, 1995. The Agreement provides for various covenants
including requirements as to the Company's net income, tangible net worth,
interest coverage, current ratio, and debt service coverage ratio.
Additionally, the Agreement provides for limitations on business combinations,
capital expenditures and dividends on common stock. LaSalle Business Credit,
Inc. acts as agent for other Lenders participating in the amended credit
facility. The initial term of the credit facility is three years and expires on
September 28, 1997, unless extended by the Company and the Lender. If the
Company elects to terminate the Agreement during the initial term, it will be
subject to prepayment fees of the entire credit facility of 2.50 percent during
the first year of the Agreement; 1.25 percent during the second year of the
agreement; and 0.50 percent during the third year of the Agreement. No
prepayment fees will be imposed if the Agreement is terminated during any
renewal term.
Borrowings pursuant to the Agreement are secured by substantially all of
the assets of the Company and its subsidiaries. Under the revolving credit
facility, the Company may borrow up to 80% of eligible billed accounts
receivable, as defined by the Agreement. The amount of availability fluctuates
based on the timing of customer invoicing and eligible accounts receivable. The
unused credit facility at February 28, 1995 was $3.0 million. The term loans
are based on eligible property and equipment at the time of the loans and are
being amortized and paid over 60 months, but are due on September 27, 1997 if
the revolving credit facility is not renewed by the Company and the Lender.
F-14
Maturities of long-term debt for years ending February 28, are as follows
(in thousands):
1996 $ 2,310
1997 1,471
1998 17,607
1999 --
2000 --
Thereafter 2,000
-------
$23,388
-------
-------
On May 5, 1995, the Company and Lender amended its Agreement to
increase the eligible borrowing base by an amount up to $4 million with the
creation of an "Unbilled Account Subline" whereby unbilled receivables,
previously excluded from the borrowing base calculation, are now included,
subject to limitations, in the calculation of the borrowing base. Advances
relating to the Unbilled Account Subline may not exceed 50 percent of eligible
unbilled accounts receivable. Availability under the Unbilled Account Subline
is automatically and permanently reduced in monthly increments of $500,000
commencing on August 1, 1995 and reduces to zero upon the Company's receipt of
at least $10 million through the sale and issuance of its equity securities.
The interest rate charged under the amended revolving credit facility has been
increased by three-quarters of a percent (3/4%) until all amounts under the
Unbilled Account Subline, and interest accrued thereon, have been paid and/or
the occurrence of an increase of equity described above. If the Company does
not obtain $10 million of equity by November 1, 1995, the Company will be
required to pay a monthly fee of $20,000 until such equity is obtained. In
order to facilitate the additional borrowings, E. Brian Smith, Chairman,
President and Chief Executive Officer of the Company agreed to pledge
800,000 shares of Company Common Stock contemporaneously with the transaction.
Pending the pledge of such stock, Mr. Smith has personally guaranteed
repayment of amounts advanced to the Company under the Agreement, as amended,
up to $4 million. The personal guarantee will terminate upon the pledge of
800,000 shares of Company Common Stock and the passage of a period of 91 days
following such pledge; the repayment of all amounts advanced under the Unbilled
Account Subline and the termination of the subline; or a $10.0 million increase
in equity.
NOTE 8 - CONVERTIBLE 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), and 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. If not paid by October 21, 1995, the Senior Note, including accrued and
unpaid interest, is 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.
F-15
The holder of the Convertible Senior Subordinated Note and the Senior Note
is not entitled to voting rights as stockholders of the Company. Upon
conversion of the Notes to Junior Convertible Preferred Stock, the holder is
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 rights of the Company's Lenders pursuant to the Loan
and Security Agreement 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. The Company was required by the
National Association of Securities Dealers, Inc. to obtain the written
indication of support from the holders of a majority of its Common Stock for
the issuance of the Notes containing the terms of conversion and to submit the
matter to the stockholders for approval at the next annual meeting.
NOTE 9 - LEASES
The Company leases office space and various equipment under non-cancelable
leases expiring through 2000.
Total lease expense charged to operations was approximately $7.1 million in
fiscal 1995, $3.6 million in fiscal 1994 and $4.9 million in fiscal 1993 and
includes rentals under short-term cancelable leases.
As of February 28, 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 $ 4,316
1997 3,329
1998 2,789
1999 2,177
2000 860
Thereafter 1,468
-------
TOTAL $14,939
-------
F-16
NOTE 10 - INCOME TAXES
Provisions (benefits) for federal and state income taxes are comprised of
the following components (in thousands):
1995 1994 1993
-------------------------------
Current:
Federal $405 $ -- $(1,916)
State 153 135 (13)
----- ----- ---------
558 135 (1,929)
----- ----- ---------
Deferred:
Federal -- -- (658)
State -- -- --
----- ----- ---------
-- -- (658)
----- ----- ---------
TOTAL $558 $135 $(2,587)
----- ----- ---------
----- ----- ---------
Significant components of the Company's deferred tax assets and liabilities
as of February 28, 1995 and 1994 are as follows (in thousands):
February 28,
------------------------
1995 1994
---- ----
Deferred tax assets:
Bad debt allowance $ 484 $ 1,234
Restructuring and related items 310 862
Capital loss carryforward 1,331 1,278
Net operating loss carryforwards 1,791 1,429
AMT and other credits 1,306 --
Unconsolidated affiliates 301 376
Accrued liabilities 3,546 912
Liabilities related to
acquisitions 1,036 --
Other 233 398
Valuation allowance (5,183) (5,009)
-------- ---------
Total deferred tax assets 5,155 1,480
-------- ---------
Deferred tax liabilities:
Property and equipment (1,099) (1,353)
Contracts (2,728) (99)
Other (14) (28)
Goodwill (1,314) --
Total deferred tax liabilities (5,155) (1,480)
-------- ---------
Net deferred taxes $ -- $ --
-------- ---------
-------- ---------
F-17
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. 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 in fiscal 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 asset of the companies acquired in fiscal 1995 will reduce goodwill
when realized. Due to a greater than 50% 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.
A reconciliation of income taxes (benefit) to amounts computed using
federal statutory rates are shown below (in thousands):
1995 1994 1993
---- ---- ----
Income taxes (benefit) computed
at the federal statutory rate $977 $(2,446) (3,947)
Loss carryforward for which no
benefit was provided -- 2,446 1,281
Utilization of previously
unbenefited losses (826) -- --
Elimination of deferred taxes -- -- 142
State taxes 100 135 (13)
Non-deductible goodwill amortization 69 -- --
Other 238 -- (50)
----- ---- -------
Income taxes (benefit) $ 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 fiscal 1995, the Company accrued matching
contributions of $161,000. There were no Company contributions for fiscal 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 7.50 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 7.50 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 5.0 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
F-18
Preferred Stock, in whole or in 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% 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% 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 $750,000, 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 Option 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 February 28, 1995, there were
no shares outstanding pursuant to other stock-based awards under the plan.
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.
F-19
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 cancelled (175,750) $ 3.40 - $15.73
---------
February 28, 1993 774,250 $ 3.40 - $15.73
Granted 369,000 $ 2.88 - $ 5.00
Lapsed or cancelled (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 cancelled (307,862) $ 2.88 - $15.73
---------
February 28, 1995 877,155 $ 2.88 - $15.73
---------
At February 28, 1995, 911,906 shares of the Company's Common Stock
were reserved for future grant under the plans. At February 28, 1995, 1994
and 1993, options for 358,617, 700,250 and 254,393 shares were exercisable
respectively.
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 $6.5 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 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 $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. The Company rejects every
allegation in its defense. The matter is in the discovery phase. The Company
is vigorously defending the described litigation.
The Company is also currently a party to other litigation to its
business. While such litigation, including the matters described above, could
result in judgments against the Company, management believes that the outcome of
the administrative complaint and other litigation described above and incidental
litigation will not have material adverse effect on the future financial
condition or results of operations of the Company and that adequate reserves
have been established at February 28, 1995.
F-20
NOTE 15 - SPECIAL CHARGES
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.
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 (Note 2), and is included
in losses of unconsolidated affiliates. The remaining $4.3 million in charges
is included in special charges. Included in the special charges 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 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. 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.
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.
F-21
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
(FORMERLY CANONIE ENVIRONMENTAL SERVICES CORP.)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Net (write-offs)
Balance at recoveries Balance at
beginning Other Charged to charged against end of
of period Reserves Expense reserve period
---------- -------- ---------- ---------------- -----------
Allowance for Doubtful Accounts:
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
<FN>
Note:
- ----
(a) Additional reserves recognized with the acquisitions of BCM Engineers ($777) and
Riedel Environmental Services ($411)
F-22