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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-17888
SERV-TECH, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-1398757
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5200 CEDAR CREST BOULEVARD
HOUSTON, TEXAS 77087
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 644-9974
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.50 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. [X]
As of March 14, 1997, the registrant had 6,861,999 outstanding shares of
Common Stock, par value $.50 per share, and at such date, the aggregate market
value of the shares of Common Stock held by nonaffiliates of the registrant was
approximately $36.0 million.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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SERV-TECH, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 10
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item 8. Financial Statements and Supplementary Data................. 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 41
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 41
Item 11. Executive Compensation...................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 48
Item 13. Certain Relationships and Related Transactions.............. 49
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 51
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PART I
ITEM 1. BUSINESS
GENERAL
Serv-Tech, Inc. (the "Company") is an integrated provider of specialty
services and products to process industries worldwide. Serv-Tech has three
primary operating segments: (i) Serv-Tech Specialty Services ("Specialty
Services"); (ii) SECO Industries, Inc. ("SECO"); and (iii) Environmental
Services and Performance Chemicals ("Environmental"). Specialty Services
provides total turnaround project management services including heat exchanger
extraction and cleaning, fabrication, specialty welding, refractory and other
specialized services primarily to the refining, petrochemical, paper, and power
industries. SECO provides specialty electrical and instrumentation contracting
services to the processing, petrochemical, power, pulp and paper, and food
processing industries. The Environmental business formulates specialty chemicals
to meet specific customer needs primarily in the hydrocarbon processing, pulp
and paper, and wastewater industries. Also included in Environmental is
specialty decontamination services provided primarily to the hydrocarbon
processing industry through the Company's subsidiary ST Environmental, and
refined-product and heavy oil tank cleaning services provided through Terminal
Technologies, Inc., a subsidiary of the Company.
The Company was organized in Texas in 1978, to provide conventional
hydroblasting and chemical cleaning services to the refining, petrochemical and
paper processing industries in Texas and Louisiana. In 1985, the Company
introduced its new heat exchanger extraction and cleaning technologies and sold
its conventional businesses. In 1987, the Company introduced its tower and
vessel maintenance services to complement its heat exchanger services. In 1988,
the Company introduced its turnaround management services and its proprietary
tank cleaning services. Specialty pipe welding services were added in late-1990.
Electrical and instrumentation services were added in September 1991, with the
acquisition of SECO. The Company began offering engineering and design services
in May 1992, with the acquisition of Talbert & Associates, Inc. ("TAI"). In
1994, the engineering capabilities of TAI were incorporated into the newly
formed Serv-Tech EPC group, to offer its customers turnkey, single-source
responsibilities for engineering, procurement and construction services. In
1994, the Company introduced refractory services through the acquisition of
Hartney Industrial Services Corporation ("Hartney").
In July 1996, the Company announced its intent to discontinue its
engineering, procurement and construction ("EPC") operations. The EPC operations
provided a full range of engineering, procurement and construction services
primarily to the refining, petrochemical and food processing industries. As of
July 1996, the discontinued EPC operations consisted of: (i) several domestic
EPC projects (which have now been completed); (ii) F.C. Schaffer and Associates,
Inc. ("Schaffer") which includes the Finchaa Sugar Factory project, expected to
be completed during the latter part of 1997 (see Discontinued EPC Operations
section below), and a consulting engineering practice; (iii) a construction
company in Orange, Texas (which has been closed and the majority of its
remaining assets sold); and (iv) engineering operations in Lake Charles and New
Orleans, Louisiana (which have been sold). See "Discontinued EPC Operations"
section below for additional information regarding these operations. With the
exception of the Finchaa project, all EPC operations have ceased.
MERGER
On March 5, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") by and among Philip Environmental Inc., an Ontario,
Canada corporation ("Philip"), Taro Aggregates Ltd., an Ontario, Canada
corporation and wholly-owned subsidiary of Philip ("Taro"), ST Acquisition
Corporation, a Texas corporation and wholly-owned subsidiary of Taro ("Sub"),
and the Company. Pursuant to the Merger Agreement, Sub will be merged with and
into the Company, and the Company will become a wholly-owned subsidiary of Taro
and an indirect, wholly-owned subsidiary of Philip.
Under the terms of the Merger Agreement, each share of the Company's Common
Stock, par value $.50 per share ("Company Common Stock") will be exchanged for
0.403 share of Philip common stock, no
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par value ("Philip Common Stock") (except for shares held by persons who perfect
and exercise dissenters' rights under Texas law), provided that Philip will pay
cash in lieu of any fractional shares of Philip Common Stock to which holders of
Company Common Stock would otherwise be entitled. Based upon the closing price
of Philip Common Stock on March 5, 1997, each share of Company Common Stock is
valued at $6.60 per share. In aggregate, the transaction is valued at
approximately $72.0 million, including the assumption of approximately $21.0
million of Company indebtedness. The transaction is subject to regulatory and
shareholder approvals, and is expected to close by June 30, 1997.
Philip is a fully integrated, resource recovery and industrial services
company providing metals processing and mill services, solid and liquid
by-products recovery and industrial and remediation services to all major
industry sectors. Philip Common Stock trades on the New York Stock Exchange.
SPECIALTY SERVICES
Specialty Service's principal market has been the petroleum refining
industry in the United States. Its customers include the majority of the ten
largest integrated oil companies and many of the large independent oil companies
in the United States. To ensure the operability, environmental compliance,
efficiency and safety of their refineries, these companies must periodically
maintain, repair or replace process equipment, operating machinery and piping
systems. Since 1986, increased demand for petroleum products and a stabilization
in refining capacity has led to a substantial increase in refinery utilization,
providing refineries with an incentive to minimize the duration of maintenance
turnarounds. Consequently, refineries have increased their reliance on outside
contractors who can perform specialized turnaround services within strict time
constraints.
Planning and Management Services. As demand for the Company's specialized
heat exchanger, tower and vessel maintenance services increased, the Company
developed the planning capabilities, operational skills and field supervision
necessary to manage all aspects of a turnaround. When managing a turnaround, the
Company is responsible for scheduling and coordinating the entire project. In
addition, certain aspects of a turnaround, such as heat exchanger and tower and
vessel maintenance, refractory installation, piping repair and fabrication,
inspection and repair of furnaces and heaters, and certain specialized types of
welding are typically provided directly by the Company. The Company intends to
continue to enhance its capabilities in turnaround management by improving its
planning and estimating capabilities, adding additional services, and hiring
experienced, qualified project management.
Heat Exchanger Services. Heat exchangers are essential components in
petroleum refining and petrochemical processing. Crude oil and other feedstocks
must be heated before they are processed. Once processed, finished or
semi-finished products must be cooled before storage. Refineries and
petrochemical plants use heat exchangers to allow hot products, which need
cooling, to give up their heat to crude oil or feedstocks which need heating.
This results in conservation of energy and reduced operating cost.
Heat exchangers require periodic maintenance and cleaning, and are usually
cleaned in conjunction with a scheduled turnaround, which may involve the
removal and cleaning of up to 300 heat exchangers during a one- to four-week
period. During the turnaround, the heat exchangers are disassembled and tube
bundles are extracted, cleaned and inspected. The tube bundles are then
reinserted and the heat exchangers are reassembled and pressure tested.
The Company extracts and reinserts heat exchanger bundles using its
patented Fast Draw(R) mobile heat exchanger bundle extractor. The Fast Draw(R)
unit uses a rotating carriage frame, which is aligned with the heat exchanger
centerline and attached to the exchanger shell. A pulling sled, situated on the
carriage frame, is attached to the bundle tubesheet. The pulling sled is then
activated and exerts a pulling force of up to 100 tons to extract the bundle
from the exchanger shell in one continuous, controlled pull. The carriage can be
adjusted to balance the bundle as it is extracted. Once the heat exchanger
bundle is fully extracted, it is lowered to a Company designed and owned trailer
for transportation to an approved cleaning site at the refinery. After cleaning
and inspection, the process is reversed to reinsert the tube bundle. The Company
has received four United States patents regarding its Fast Draw(R) technology.
See "-- Patents, Licenses and Permits."
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In 1985, the Company introduced its Fast Clean(R) system, a mobile,
self-contained, remotely controlled, high-pressure hydroblasting unit. By
cleaning multiple tubes at one time and eliminating hand-held hydroblasting
equipment, the Fast Clean(R) system has demonstrated significant improvements
from traditional methods in cleaning time, personnel safety and manpower
requirements. The Fast Clean(R) unit enhances operator safety by distancing
personnel from high pressure streams and replacing flexible hoses with rigid
piping. The units' mobility allows the Company to perform jobs at widely
separate locations with a minimum of moving costs. The Company has received
three United States patents regarding its Fast Clean(R) technology. See
"-- Patents, Licenses and Permits."
The Company also provides the manpower and tools to disassemble and
reassemble heat exchanger components and shells. The Company has several fully
equipped tool trucks, which are used in conjunction with Fast Draw(R) and Fast
Clean(R) equipment. By combining the disassembly, extraction, cleaning,
reassembly and testing of the heat exchanger, the Company is able to control all
phases of heat exchanger maintenance and provide the customer with shorter
turnaround cycles.
Tower and Vessel Maintenance. In 1987, Specialty Services expanded its
turnaround maintenance capabilities by offering tower and vessel maintenance
services. An integral part of all refining units, towers are used to separate
the components of crude oil or other hydrocarbons through distillation. The
distillation process utilizes a series of disc-shaped perforated horizontal
plates called trays, spaced about every two feet inside the tower. Since these
trays are exposed to high temperature and corrosive conditions during the
distillation process, and because these trays are critical to meeting product
specifications, towers are always inspected and repaired during maintenance
turnarounds. Frequently, tower maintenance is critical to completing the
turnaround and returning the unit to operation. Inspection, repair, modification
and replacement of the tower trays require an experienced work force to complete
the work within the strict time limits imposed by the customer. During the
turnaround, other towers, drums and vessels which are ancillary parts of the
refining process are opened, inspected and repaired if necessary. The Company
has assembled the necessary management, planning skills and labor force to offer
its customers a cost effective tower and vessel maintenance service.
Specialty Pipe Welding. In late-1990, Specialty Services began offering,
through a newly formed subsidiary, ST Piping, Inc., specialized welding services
to refineries and petrochemical plants. The piping, vessels and heat exchangers
in these plants must be designed to withstand extreme high temperature, pressure
and corrosive conditions. Many of the newer process designs utilize high alloy
steels and exotic metals. ST Piping has the equipment and highly skilled
personnel necessary to provide the specialized welds needed for these design
conditions. All of ST Piping's work conforms to the American Society of
Mechanical Engineers Boiler and Pressure Vessel Code, the highest standards in
the industry.
Refractory, Acid Proof and Fireproof Construction. In 1994, Specialty
Services began offering refractory installation and maintenance services through
Hartney, which was acquired in June 1994. Hartney is a leading provider of
refractory services for turnarounds, outages, revamps and expansions of critical
processing units primarily for the petroleum refining, chemical processing and
power industries. Refractory services include the construction of high
temperature, corrosion resistant and fireproof lining systems for virtually
every type of industrial application, in-plant structural and vessel
fireproofing and major refractory installations on Fluid Catalytic Cracking
Units.
SECO
In September 1991, Serv-Tech acquired SECO, a specialty contracting company
engaged primarily in electrical and instrumentation projects. SECO's clients are
primarily petroleum, petrochemical, paper, food processing, mining, marine and
utility companies as well as major engineering firms and general contractors.
SECO was formed in 1961, as an electrical contractor in southern Louisiana.
SECO's initial growth was in the oil field and commercial markets and was
characterized by progressively larger projects and wider geographical scope. At
present, a major portion of SECO's projects involve electrical and
instrumentation systems installation for large offshore petroleum production
facilities. SECO provides its services throughout the world and has worked in 21
countries.
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Offshore production platforms, petroleum refineries and petrochemical
processing plants, mining facilities, and other industrial installations have
complex requirements for electrical, instrumentation, power distribution and
process control systems. Installations of these systems involve large
construction projects often characterized by multiple fabrication sites, wide
diversity of components and processes, and application of advanced technology.
The electrical and instrumentation contractor must excel in every phase of the
project from design assistance to final hook-up.
SECO begins a project by identifying a project management team, which
reviews the project's scope and specifications, and develops a construction
schedule. Project personnel, including engineers, supervisors, foremen and
craftsmen, are assigned to the project. Weekly schedules are developed through
the joint efforts of the project management team and crew foremen, and progress
against the schedules is closely monitored. In addition, inspections of each
task are conducted to assure compliance with customer specifications and
industry codes. SECO's activities are labor intensive, and the ability to
assemble the right number and mix of skilled craftsmen is critical to project
success. Individual projects may require staffing levels of over 150 craftsmen.
During 1994, SECO diversified into the areas of clean-fuels projects (Mobil
Oil Clean Fuels project in Torrance, California), food processing (carrots in
California; rice and salt in Louisiana) and riverboat casinos. In 1995 and 1996,
SECO executed two large oil production projects, the Shell Mars and Ram Powell
deep-water production platforms. SECO is currently involved in the Shell Ursa
deep-water production platform project. The operations of SECO are expected to
continue to include deep-water production platform projects as well as continued
diversification into food processing, petrochemical and other industries.
ENVIRONMENTAL SERVICES AND PERFORMANCE CHEMICALS
In 1988, Serv-Tech introduced petroleum storage tank sludge cleaning
services, which significantly enhance personnel safety and reduce the
environmental risks of cleaning petroleum storage tanks. Sludge is a mixture of
hydrocarbons (paraffins and asphaltines), sediment and corrosive elements which,
together with water, form an emulsion of oil, water and solids. Generally, more
than 90 percent of the sludge constitutes valuable hydrocarbons. Sludge is
generally heavier and more viscous than oil and settles to the bottom of the
tank, thereby reducing the effective capacity of the tank and increasing the
likelihood of corrosion of the tank bottom, which can lead to leakage into the
environment.
The Company's petroleum tank cleaning services utilize the HP2000 system, a
high-pressure rotating, controllable submerged jet that is inserted into a tank
while the tank remains in service. The twin nozzle, high-shear unit is
positioned at the center of the tank and directs single or opposed jets of crude
oil horizontally across the tank bottom. The high-pressure sweeping action
resuspends the hydrocarbon components of the sludge by breaking the bonding
within the emulsion. Once suspended, the sludges and crude oil are filtered
through fine mesh screens on Company owned filter trucks to further homogenize
the crude oil and remove any sediment and rust scale. A refinery can then
process the resuspended hydrocarbon in the normal manner. Inorganic sediments,
scale and water remaining in the tank will have to be removed using traditional
methods. However, because the volume of the sludge has been reduced, the time
between such cleanups is significantly increased.
The primary benefits of the Company's petroleum tank cleaning services are
the recovery of hydrocarbons from the resuspended sludge, the minimizing of
vapor emissions associated with the removal of the residual sludge from the
tank, enhancement of worker safety by reduced exposure to hazardous conditions,
and reduction in the volume of sludge and other waste that requires
reprocessing, disposal in landfills or incineration.
In December 1991, the Company acquired the business operations of TTI, a
provider of tank cleaning services for product storage tanks in petroleum
products distribution terminals. TTI's tank cleaning process uses that company's
patented Hydrocarbon Reclaimer System. The Hydrocarbon Reclaimer System filters
the contaminated tank bottoms, recovering all of the reusable product. The waste
material collected in the filtering process is dried and stored in containers
supplied by TTI. All waste generated in the tank-cleaning process
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leaves the product distribution terminal as a dried solid. An advantage of the
process is that the waste solids are non-hazardous, and can be transported and
disposed by the customer with a minimum of permitting.
During the first quarter of 1991, the Company acquired a 50-percent
interest in Chemisolv and acquired the remaining 50-percent interest in the
fourth quarter of 1994. Chemisolv is an environmental services and specialty
chemical treatment company with operations in the United Kingdom and the United
States. Management of this company has significant experience in providing
waste-stream treatment and chemical treating solutions to a wide range of
industries including food, hydrocarbon processing, textiles, metal finishing,
and pulp and paper.
In 1992, the Company and Chemisolv jointly developed a proprietary chemical
decontamination process for removing benzene and other hydrocarbons from process
equipment in refineries and petrochemical plants. The Life Guard(R) system
utilizes chemical formulations developed by the Company and Chemisolv to
emulsify and extract hydrocarbons remaining in heat exchangers, towers and
vessels after those units have been removed from service in preparation for
turnaround maintenance. The emulsified solution containing the entrapped benzene
and hydrocarbons is then separated to allow disposal of the contaminants through
the plant's waste treatment facilities. The Life Guard(R) chemicals are
non-toxic and biodegradable.
The benefits of the Life Guard(R) system are twofold: it improves worker
safety by removing harmful, carcinogenic benzene and other hydrocarbon compounds
from vessels in which maintenance is performed; and, it reduces the time
necessary to remove oil, sludges and hydrocarbons from process equipment. This
reduces turnaround time by permitting quicker entry to vessels, eliminating the
need for fresh air respiratory equipment, and providing cleaner work areas. On
turnarounds in which the Life Guard(R) system has been used, the Company has
experienced significant savings in time and manpower requirements. Turnaround
times have been reduced by one to three days and manpower has been reduced up to
25 percent.
The Company manufactures pumping systems, which circulate the Life Guard(R)
chemical solutions. The Company has received one United States patent and two
United States patents are pending regarding its Life Guard(R) Decontamination
System. See "-- Patents, Licenses and Permits."
DISCONTINUED EPC OPERATIONS
The Company introduced engineering services in May 1992, with the
acquisition of TAI, an engineering and design firm primarily serving the
petroleum refining and chemical industries. TAI provided a full range of
engineering, design, project management, drafting and estimating services. Since
the physical plants utilized by the Company's customers are large and complex,
they require specialized engineering services in order to undertake
refurbishment, expansion or new construction projects. TAI was able to perform
such jobs, beginning with field inspection activity, through total project
management, which included mechanical, civil, structural, electrical, process
and instrumentation engineering.
In 1994, the engineering capabilities of TAI were incorporated into the
newly-formed Serv-Tech EPC group to offer its customers turnkey, single-source
responsibility for engineering, procurement and construction services. In
November 1994, EPC was awarded an estimated $20.7 million contract to design,
procure and construct a tank farm for Conoco in Westlake, Louisiana. This
project was completed in mid-1996.
During the last part of 1994, the Company acquired all of the outstanding
common stock of Schaffer of Baton Rouge, Louisiana. Schaffer is one of the
leading experts on sugar mill design, engineering and construction management.
In February 1995, Schaffer secured a $83.0 million contract to design, procure
and construct a 4,000 metric-ton-cane-per-day sugar factory and 45,000
liter-per-day ethanol plant in Finchaa, Ethiopia. The project, which is financed
by the African Development Bank, is expected to be completed in the latter part
of 1997, followed by a twelve-month training and warranty period. At December
31, 1996, the Finchaa project was approximately 80 percent complete.
Engineering, procurement and construction projects are typically of longer
duration with more predictable manpower levels than the Company's specialty
services work. Gross profit margins on construction contracts, however, are
lower than specialty services due to the better defined design and scope of work
and less critical nature of completion schedules compared to specialty services
projects.
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In July 1996, the Company announced its intent to discontinue its
engineering, procurement and construction ("EPC") operations. At July 1996, the
discontinued EPC operations consisted of: (i) several domestic EPC projects
(which have now been completed); (ii) Schaffer, which includes the Finchaa Sugar
Factory project as well as a consulting engineering practice; (iii) a
construction company in Orange, Texas (which has been closed and the majority of
its remaining assets sold); and (iv) engineering operations in Lake Charles and
New Orleans, Louisiana (which have been sold). With the exception of the Finchaa
project, which is expected to be completed during late-1997, all EPC operations
have ceased.
BUSINESS SEGMENT FINANCIAL INFORMATION
For certain financial information relating to each of the Company's
operating segments, see Note 15 of Notes to Consolidated Financial Statements.
CUSTOMERS AND MARKETING
The Company derives most of its revenues from continuing operations from
the refining and oil and gas production industries in the United States.
Services have also been provided to companies in the petrochemical, chemical,
gas processing, pipeline and liquid terminal industries. The Company's customers
operate through various subsidiaries and at multiple plant locations principally
throughout the United States. In general, decisions to award work are made at
each operating facility of the customer.
In each of Serv-Tech's service lines, work is typically bid on a job-by-job
basis. Performance of services by the Company at any single plant or project
location does not assure the Company subsequent work at that facility or other
facilities of that customer. Conversely, the loss of a bid for any one project
does not affect the Company's ability to obtain additional work from that
customer. Chevron USA, Inc. accounted for 15 percent of the Company's revenues
from continuing operations in 1996 and 14 percent in 1995, and Mobil Oil
Corporation accounted for 29 percent of the Company's revenues from continuing
operations in 1994. The following table sets forth the Company's ten largest
customers, based upon revenues from continuing operations, for each of 1996,
1995 and 1994:
1996 1995 1994
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Chevron USA, Inc. Chevron USA, Inc. Mobil Oil Corporation
McDermott, Inc. Mobil Oil Corporation Chevron USA, Inc.
Mobil Oil Corporation Atlas Processing Company Texaco, Inc.
Conoco, Inc. E. I. DuPont Conoco, Inc.
Phillips Petroleum Company Unocal, Inc. Exxon USA, Inc.
Fluor Daniel, Inc. Basis Petroleum, Inc. Atlantic-Richfield Company
Basis Petroleum, Inc. Vista Chemical Uno-Ven, Inc.
Shell Oil Products McDermott, Inc. McDermott, Inc.
B. P. Oil Company Coastal Refining B. P. Oil Company
Nooter Construction Texaco, Inc. Coastal Refining
The Company maintains close contact with its customers and reviews
available industry information in order to determine upcoming projects for which
its services may be required. The Company generally is required to bid
competitively for work on a project-by-project basis for each of the services it
provides. Depending on the size and complexity of the work to be awarded, bid
lead times range from two weeks to four months. Much of the work involved in
preparing a bid consists of planning the schedule for the project. As a result,
costs associated with the planning, as well as anticipated costs for management
of the project, are included in the Company's bid. Bids are generally awarded
based on price considerations, although scheduling, efficiency, quality and
safety are also considered by the customer in awarding contracts.
The Company's fee arrangements for its services are primarily based on
either detailed time and material billing schedules or are fixed-price based.
The Company has encouraged its customers to seek firm-bid turnkey proposals for
its Specialty Services contracts. Management believes that firm-bid contracts
permit its customers to realize the benefits of the Company's services and offer
the Company an opportunity to realize
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higher profit margins. Time and material billing arrangements provide for
cost-plus billing schedules for labor and equipment used on the job and offer
the Company an assured level of project profitability. The accumulated man hours
and equipment utilized are billed on a weekly or monthly basis. In 1996,
approximately 78 percent of the Company's revenues were derived from time and
material contracts (versus fixed-price). A new pricing method, "performance
pricing", developed by the Company's Specialty Services group, involves
contractual arrangements with the customer based on performance, considering the
benefits of the Company's expertise, including reducing refinery downtime,
increased efficiency and improved safety.
The Company maintains estimators and planners who review the scope of work
to be performed, analyze labor and material requirements, and prepare bids to be
submitted to potential customers. Final bid prices on major proposals are
coordinated between the estimator/planners, regional managers and senior
management.
The Company markets its turnaround services through five regional offices
and its corporate headquarters in Houston, Texas, with its regional managers
primarily responsible for their sales effort. SECO services are marketed through
offices in Metairie, Louisiana, and five regional offices. The Company markets
its environmental services and performance chemicals from its Houston, Texas,
Atlanta, Georgia, and Manchester, England, offices.
PATENTS, LICENSES AND PERMITS
The Company is the holder of 19 United States patents covering its Fast
Draw(R), Fast Clean(R), Life Guard(R) Decontamination System and tank cleaning
equipment and technology. The Company is actively developing technology related
to its businesses and has filed several patent applications with the United
States Patent Office. Management believes that the development of proprietary
technology has been an important factor in the Company's growth and the Company
intends to seek additional patent protection where appropriate. However, there
can be no assurance that additional patents will be granted, or as to the
validity or value of such patents. In addition, it is conceivable that
competitors could modify the essential technology represented by the Company's
patents in such a way that it would not result in patent infringement. The
Company's patents expire at various dates between November 18, 2003, and May 10,
2015.
The Company is certified by the American Society of Mechanical Engineers
("ASME") Boiler and Pressure Vessel Code to hold "A", "U", "S", and "PP" stamps,
as well as the National Board "R" stamp. These stamps permit the Company to
perform specialized major weld repairs, nozzle replacements and additions in
compliance with ASME requirements.
BACKLOG
Revenue backlog for SECO was $29.1 million, $17.1 million, and $18.0
million as of December 31, 1996, 1995 and 1994, respectively. Revenue backlog at
December 31, 1996, includes $9.4 million related to the Shell URSA project and
$6.0 million related to an additional deep-water drilling platform project, on
which work is scheduled to start in late-1997 and early-1998, respectively.
Backlog for the other operating groups is not meaningful due to the short lead
time and duration of the projects.
While backlog can be an indication of expected future revenues, backlog is
subject to revisions from time-to-time due to cancellations, modifications and
changes in the scope of projects or their design and construction schedules.
There can be no assurance whether or when backlog will be realized as revenue.
COMPETITION
The market for the Company's specialty and environmental services is highly
fragmented and competitive. Many of the Company's competitors have greater
financial and other resources than does the Company. Additionally, the Company
competes with numerous small, independent contractors, which collectively have a
significant share of the market for these services. Competitive factors for
these services include price considerations, performance record, quality and
safety.
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GOVERNMENT REGULATION
The Company's services involve contact with crude oil and refined petroleum
products. These substances have been classified as hazardous waste. Under
various federal laws, hazardous waste is regulated from the point of generation
until disposal. In addition, the United States Environmental Protection Agency
has issued regulations for hazardous-waste generators, transporters and owners
and operators of treatment, storage and disposal facilities.
The Company's services are structured to avoid any involvement in the
disposal of hazardous wastes, and the Company does not consider itself to be a
generator or transporter of hazardous waste. Typically, all hazardous materials
handled by the Company are disposed of by the customer using the customer's
waste-disposal facilities. The cleaning of heat exchangers is usually performed
on cleaning slabs, with the water and debris collected and treated by the
customer's wastewater facilities. The Company has designed and installed for
several of its customers a closed-loop system to circulate and filter water used
in its Fast Clean(R) system. This minimizes water usage and reduces the volume
of wastewater processed by the customer. The Company's petroleum tank cleaning
and sludge control systems resuspend sludge within the petroleum storage tank,
permitting the refinery to reclaim processible hydrocarbons, rather than
removing the sludge for reprocessing or disposal. The Company's tank cleaning
services for petrochemical product storage tanks employ the patented Hydrocarbon
Reclaimer System which recovers all of the reusable product. All waste generated
by this process is in the form of non-hazardous dried solids, which can be
conveniently transported and disposed by the customer.
All of the Company's operations are subject to regulations issued by the
Department of Labor under OSHA. These regulations have strict requirements for
protecting personnel involved with any materials that are classified as
hazardous, which includes certain materials found in heat exchangers, towers,
vessels and petroleum storage tanks. Violations of these rules can result in
fines and suspension of licenses.
INSURANCE
The Company maintains a comprehensive property and casualty risk management
program. This program includes statutory worker's compensation insurance in
accordance with various states requirements and general liability insurance with
an occurrence annual aggregate coverage limit of approximately $100 million. The
Company's general liability insurance, although comprehensive, provides only
limited coverage for pollution-related claims and excludes fines and penalties
levied against the Company as a result of any violations by the Company of the
regulations issued by the Department of Labor under OSHA. To date, the Company
has not incurred significant fines or penalties or any liability for pollution,
environmental damage, toxic torts or personal injury from exposure to hazardous
wastes. However, a successful liability claim for which the Company is only
partially insured or completely uninsured could have a material adverse effect
on the Company. In addition, if the Company experiences a significant amount of
such claims, increases in the Company's insurance premiums could materially and
adversely affect the Company. Any difficulty in obtaining insurance coverage
consistent with industry practice may also impair the Company's ability to
obtain future contracts, which in most cases, are conditioned upon the
availability of specified insurance coverage.
WORKING CAPITAL
The Company's customers typically compensate the Company for services
performed upon completion of a given project or on an agreed upon progress
payment schedule for larger projects. Therefore, the Company must have
sufficient working capital to permit it to undertake its services throughout the
duration of a project. The Company believes that its present working capital
position, combined with forecasted cash flows and borrowing capacity, will be
sufficient to meet the Company's working capital requirements. See Note 5 of
Notes to Consolidated Financial Statements for further discussion of the
Company's working capital facility.
QUARTERLY FLUCTUATIONS
The Company's revenues and operating income have historically been subject
to significant, seasonal fluctuations with respect to its Specialty Services and
Environmental groups. This is due primarily to the
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timing of shutdowns at plant facilities. Accordingly, it is anticipated that the
Company's quarterly results will fluctuate, and the results of one quarter
should not be deemed to be representative of the results of any other quarter or
for the year.
EMPLOYEES
At December 31, 1996, the Company had 969 full-time employees, of which 173
were salaried and 796 were hourly. In addition, the Company employs hourly
workers on an as-required basis to perform labor on a job-by-job basis. Total
employment levels have ranged from 639 to 1,267 per week during 1996, averaging
1,059 employees on a weekly basis. The number of employees fluctuates
significantly due to changing demand during the peak turnaround periods. The
Company has been able to staff its projects through maintenance of a
computerized listing of qualified workers and the personal contacts of its
superintendents and foremen. The Company's two union subsidiaries maintain
collective bargaining agreements with several construction trade unions.
Management believes its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's corporate offices are located at 5200 Cedar Crest Boulevard
in Houston, Texas, at a Company-owned combination office and operations
facility. This location contains 15,000 square feet of office space and 72,500
square feet of shop facilities. SECO occupies 27,500 square feet of leased
property located in Metairie, Louisiana. The Company leases an aggregate of
approximately 200,000 square feet of office, shop and storage space in Lake
Charles, Baton Rouge and Lafayette, Louisiana; Beaumont and Houston, Texas;
Atlanta, Georgia; and Los Angeles, California. The Company does not anticipate
any difficulty in renewing those leases that require renewal within the next
five years. The Company owns land and buildings containing an aggregate of
approximately 50,000 square feet of office and shop space in Houston, Texas; and
Westlake and Belle Chasse, Louisiana. The Company believes that its existing
facilities are adequate to meet the requirements of current operations and that
suitable additional space will be available as required to accommodate any
expansion of operations.
The Company designs, engineers and assembles the Fast Draw(R), Fast
Clean(R), Tank Cleaning, and Chemical Decontamination equipment at its Westlake,
Louisiana facility. The Company assembles this equipment from components that it
purchases from outside suppliers or which it fabricates. The Company has several
sources for these components and does not rely upon any single supplier.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and disputes incidental to its
business. The Company believes that the disposition of all such claims and
disputes, individually or in the aggregate, should not have a material adverse
effect upon the Company's financial position, results of operations or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company Common Stock is traded in the over-the-counter market and is
quoted on the National Association of Securities Dealers' Automated Quotations
System ("NASDAQ") National Market System under the symbol "STEC". The following
table sets forth the quarterly high and low bid quotations of the common stock,
as quoted by NASDAQ, for the calendar quarters indicated.
CALENDAR PERIOD HIGH LOW
--------------- ---- ---
1996:
First Quarter............................................. 7 5 1/4
Second Quarter............................................ 8 5 1/4
Third Quarter............................................. 6 1/4 2 3/4
Fourth Quarter............................................ 3 3/8 2
1995:
First Quarter............................................. 8 3/4 6
Second Quarter............................................ 9 1/4 6 5/8
Third Quarter............................................. 9 6 1/2
Fourth Quarter............................................ 8 1/2 5 1/8
At March 14, 1997, there were approximately 2,160 shareholders of the
Company Common Stock. The average of the high and low bid quotations on such
date was $5.25. The Company has not paid dividends on its common stock, and the
Board of Directors of the Company presently intends to continue a policy of
retaining earnings for use in the Company's operations and to fund the Company's
working capital requirements and growth opportunities.
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
IN THOUSANDS, EXCEPT PER SHARE DATA
OPERATING DATA
Revenues........................ $142,386 $194,831 $167,834 $156,277 $144,051
Depreciation and amortization... 6,005 6,161 5,380 3,914 3,241
Special charge.................. -- -- (12,225)(b) -- --
Operating income (loss) from
continuing operations......... (5,860)(a) 2,342 (9,322)(b) 6,791 8,981
Net income (loss) from
continuing operations......... (2,464)(a) (774) (9,313)(b) 3,073 5,472
Earnings (loss) per share from
continuing operations......... (0.37)(a) (0.11) (1.52)(b) 0.52 0.94
Weighted average number of
shares outstanding............ 6,714 6,720 6,117 5,889 5,789
BALANCE SHEET DATA
Cash and short-term
investments................... $ 4,533 $ 287 $ 1,302 $ 15,650 $ 4,813
Working capital................. 6,669 23,815 22,238 30,053 18,414
Property, plant and equipment,
net........................... 26,275 30,023 29,908 25,287 24,152
Total assets.................... 81,144 107,795 94,118 92,368 86,273
Long-term debt, excluding
current maturities............ 13,835 15,170 15,025 15,140 8,152
Stockholders' equity............ 37,232 52,930 50,564 53,954 51,352
Capital expenditures............ 2,027 5,444 4,830 4,666 5,687
- ---------------
Note:
(a) 1996 results include a $3,480 ($2,297, or $0.35 per share, on an after-tax
basis) charge for the impairment of certain obsolete equipment, the
write-off of an uncollectible receivable, and severance related costs.
Excluding the effect of this charge, the operating loss from continuing
operations was $2,380. Also, included in the 1996 results is the $5,842
($3,856, or $0.57 per share, on an after-tax basis) net proceeds from the
Stewart & Stevenson award, see Note 8 of Notes to Consolidated Financial
Statements. Excluding the effect of these two items, the net loss from
continuing operations was $4,023, or $0.60 per share.
(b) Excluding the effect of the $12,225 ($10,020, or $1.64 per share, on an
after-tax basis) special charge, operating income, net income and earnings
per share from continuing operations for 1994 were $2,903, $707, and $0.12,
respectively. See Note 9 of Notes to Consolidated Financial Statements for
information related to the special charge.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes thereto included elsewhere
in this Report.
CONTINUING OPERATIONS
The year ended December 31, 1996 net loss from continuing operations of
$2.5 million, or $0.37 per share, includes a $2.3 million, or $0.35 per share
charge for the impairment of certain equipment that will no longer be utilized
in the future operations of the Company, the write-off of an uncollectible
receivable and severance related costs. Additionally, included in the 1996 loss
is $5.8 million ($3.9 million, or $0.57 per share, on an after-tax basis), of
net proceeds from the Stewart & Stevenson settlement (see Note 8 of Notes to
Consolidated Financial Statements). Excluding the effects of these two items,
the Company generated a net loss from continuing operations of $4.0 million, or
$0.60 per share, compared to a net loss of $0.8 million, or $0.11 per share in
1995, and a net loss of $9.3 million, or $1.52 per share, in 1994. The 1994 net
loss includes a special charge of $10.0 million, or $1.64 per share. Excluding
the effect of the special charge, the Company generated net earnings from
continuing operations in 1994 of $0.7 million, or $0.12 per share.
Consolidated revenues for 1996 decreased 26.9 percent to $142.4 million
from $194.8 million in 1995, which was 16.1 percent higher than 1994
consolidated revenues of $167.8 million. The 1996 decrease in revenues was
attributable primarily to lower levels of activity in the specialty turnaround
maintenance business, Specialty Services, resulting from delays in scheduled
maintenance at refinery facilities. The increase in 1995 was due to increased
levels of activity in Specialty Services and the Company's Environmental and
Performance Chemicals business, which provides tank cleaning, decontamination
services and specialty chemicals.
Consolidated gross profit margins as a percentage of revenues were 21.0
percent for 1996, increasing from 1995 margins of 18.8 percent. This increase in
gross profit margins was due primarily to improved Specialty Services project
mix, management and performance. The 1995 consolidated gross profit margin
increased from 17.2 percent in 1994. This increase was mainly attributable to
improved Specialty Services and Environmental and Performance Chemical profit
margins over 1994.
Consolidated selling, general and administrative expenses for 1996 of $35.8
million include a pre-tax charge of $3.5 million, discussed above. Excluding
this charge, 1996 overhead expenses decreased $2.0 million, or 6.0 percent to
$32.3 million in 1996 from $34.3 million in 1995. The decrease is lower than the
26.9 percent decrease in revenue for the same period due to the level of fixed
overhead costs inherent in the business which do not decrease with lower revenue
levels. Consolidated selling, general and administrative expenses in 1995 were
$8.3 million, or 32.1 percent, higher than the 1994 level of $26.0 million,
resulting primarily from the expansion of the Specialty Services and the
Environmental and Performance Chemical businesses. The expansion of the
Specialty Services business included the acquisition of Hartney Industrial
Services ("Hartney") in June 1994.
Interest expense increased in 1996 to $2.4 million compared to $1.9 million
in 1995. See Note 5 of Notes to Consolidated Financial Statements for discussion
of the restructuring of the Company's debt and the related increase in interest
costs. In 1995 interest expense increased $0.5 million from $1.4 million in
1994. These increases are due to a higher level of working capital borrowings
under the Company's revolving line of credit necessary to support the Company's
level of business activity.
Interest income increased in 1996 to $0.1 million following a decrease in
1995 from 1994 of $0.5 million. The 1996 increase was primarily due to interest
income generated on the Stewart & Stevenson settlement proceeds. The 1995
decrease resulted primarily from lower available cash balances during the year.
In 1996, other income of $5.9 million includes the net effect of the
Stewart & Stevenson litigation settlement which the Company received during the
year. After payment of attorney's fees and a payment to the Company's founder,
Richard W. Krajicek, the Company received and recorded a $5.8 million net
settlement, or $3.9 million on an after-tax basis (see Note 8 of Notes to
Consolidated Financial Statements).
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Minority interest includes the minority shareholders portion of ST Piping,
Inc. ("ST Piping") earnings. Effective May 18, 1995, the Company acquired an
additional 20 percent of the outstanding common stock of ST Piping, Inc. from
the minority shareholders of that company. Prior to the acquisition, the Company
owned 70 percent (see Note 4 of Notes to Consolidated Financial Statements). The
reduced level of minority ownership in ST Piping coupled with its reduced level
of earnings in 1996 as compared to 1995, due to the lower levels of specialty
turnaround maintenance activity during 1996, have caused the decrease in
minority interest in 1996. Minority interest in 1995 increased over 1994 due to
a higher level of ST Piping earnings in 1995.
SPECIALTY SERVICES
In 1996, Specialty Services revenues decreased $52.9 million, or 40.1
percent from 1995 revenues of $131.9 million. Specialty Services revenues
increased $18.3 million, or 16.1 percent, in 1995 over 1994 revenues of $113.5
million. The 1996 revenue decrease was attributable to lower levels of business
activity throughout the turnaround maintenance business, resulting from delays
in scheduled maintenance at refinery facilities which were experiencing improved
margins. The increase in 1995 was mainly due to the acquisition of Hartney in
June 1994, which generated revenues of $21.6 million in 1995, coupled with
increased refinery spending during the year.
Operating income of $0.1 million in 1996 includes a $1.4 million pre-tax
charge for the impairment of certain obsolete equipment and the write-off of an
uncollectible receivable. Excluding the effect of this charge, operating income
was $1.5 million compared to $4.7 million in the prior year. This decrease is
consistent with the reduced levels of turnaround maintenance revenues as
discussed above. Operating income in 1995 was $1.0 million lower than the 1994
level of $5.7 million, excluding a $10.6 million pre-tax special charge recorded
during 1994. Higher levels of revenues and gross profit in 1995 were offset by
increased selling, general and administrative expenses. The increased level of
overhead expenses was attributable primarily to the acquisition of Hartney in
June, 1994.
SECO
SECO revenues were $50.0 million in 1996, a decrease of $2.2 million from
1995 revenues of $52.2 million. In 1995, revenues increased 5.6 percent from
1994's level of $49.4 million. The 1996 decrease in revenue is attributed to
decreased activity in onshore projects, due to a reduced number of refinery
turnaround projects in 1996, as discussed above, offset partially by an increase
in offshore drilling platform revenue. Revenues from deepwater drilling platform
installations were $10.1 million, $7.1 million and $1.3 million for 1996, 1995
and 1994, respectively. In October 1996, SECO was awarded a contract for work on
the deck module fabrication of the Shell URSA tension leg platform, currently
scheduled for completion in July 1998. Revenues for 1996 included only $0.1
million attributable to the Shell URSA project.
Operating income amounted to $3.5 million in 1996, a decrease of 4.8
percent from the 1995 level of $3.7 million. However, operating income as a
percentage of revenue remained at 7.1 percent for both periods. Operating income
increased by $0.3 million in 1995 from $3.4 million in 1994. This increase is
consistent with the increased level of revenue experienced in 1995.
Revenue backlog was $29.1 million, $17.1 million, and $18.0 million as of
December 31, 1996, 1995 and 1994, respectively. Revenue backlog at December 31,
1996, includes $9.4 million related to the Shell URSA project and $6.0 million
related to an additional deep-water drilling platform project, on which work is
scheduled to start in late-1997 and early-1998, respectively. While backlog can
be an indication of expected future revenues, backlog is subject to revisions
from time-to-time due to cancellations, modifications and changes in the scope
of projects or their design and construction schedules. There can be no
assurance whether or when backlog will be realized as revenue.
ENVIRONMENTAL AND PERFORMANCE CHEMICALS
Environmental and Performance Chemicals 1996 revenues remained constant
with the 1995 level of $16.4 million. In 1995, revenue increased $7.8 million,
or 90.6 percent from $8.6 million in 1994. Chemisolv
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16
Holdings ("Chemisolv"), the Company's performance chemical subsidiary acquired
in November 1994, contributed $5.1 million to the increase in revenues. The
remaining $2.7 million increase was attributable to increased activity in the
Company's tank cleaning services.
The $1.4 million operating loss in 1996, includes a $0.7 million pre-tax
charge for the write-off of certain tank cleaning equipment that will not be
utilized in the future operations of the Company. Excluding the effects of this
charge, the operating loss of $0.7 million was down $1.0 million from 1995
operating income of $0.2 million. This reduction was due to increased research
and development expenditures related to the development of the new
paper-strengthening technology, Mastiff (SM). Operating income in 1995 increased
$0.4 million from a $0.2 million loss in 1994. Higher gross profit margins
recognized on decontamination services and increased activity in the tank
cleaning business contributed to the improved operating results which were
partially offset by Chemisolv operating losses.
CORPORATE AND OTHER
The operating loss of $8.0 million includes a $1.3 million pre-tax charge
primarily for severance related costs and some consulting and professional fees.
Excluding this charge, the 1996 operating loss of $6.7 million increased $0.4
million from 1995. This increase is mainly attributable to costs related to
professional services necessary to study and identify strategic alternatives
available to the Company. These expenses were incurred during the latter part of
1996.
DISCONTINUED OPERATIONS
In July 1996, the Company announced its intent to discontinue its
engineering, procurement and construction ("EPC") operations. The EPC operations
provided a full range of engineering consultation and project management
services primarily to the refining, petrochemical and food processing
industries. The discontinued EPC operations consisted of, (i) several domestic
EPC projects (which have now been completed), (ii) F.C. Schaffer and Associates,
which includes the Finchaa Sugar Factory project as well as a consulting
engineering practice, (iii) a construction company in Orange, Texas (which has
been closed and substantially all remaining assets have been sold) and (iv)
engineering operations in Lake Charles and New Orleans, Louisiana (which have
been sold).
The 1996 net loss from discontinued operations of $10.3 million (net of
income tax benefit of $4.4 million), or $1.54 per share, included a $9.7 million
($6.6 million, or $0.99 per share, on an after-tax basis) charge primarily for
the write-down of the profitability on several domestic EPC projects and the
Finchaa Sugar Factory project. The Finchaa project was written down to a $4.5
million loss ($2.9 million, or $0.43 per share, on an after-tax basis) during
the fourth quarter. Excluding the effects of this charge, the net loss from
discontinued operations was $3.7 million, or $0.55 per share for 1996 compared
to net income of $2.8 million (net of income tax expense of $0.7 million), or
$0.42 per share for 1995 and net income of $0.5 million (net of income tax
expense of $0.1 million), or $0.08 per share for 1994.
Additionally, in conjunction with the decision to discontinue the EPC
operations, the Company recorded a $4.3 million (net of income tax benefit of
$1.0 million), or $0.64 per share, estimated loss on disposal of the EPC
operations for the estimated loss on sale and disposal of certain EPC divisions
and the related write-off of goodwill. The estimated loss on disposal of the EPC
operations includes a $0.3 million, or $0.05 per share, estimated loss during
phase-out period.
Net current assets from discontinued operations at December 31, 1996
consisted primarily of working capital associated with the Finchaa project and
the consulting engineering practice of F.C. Schaffer and Associates. Net
non-current assets from discontinued operations consisted primarily of property
and equipment, net of a note payable of $0.7 million.
Revenues generated by the discontinued EPC operations for 1996, 1995 and
1994 were $70.3 million, $84.7 million and $13.3 million, respectively. 1996 and
1995 revenues included $38.9 million and $32.8 million related to the Finchaa
Sugar Factory Project, respectively.
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FINCHAA SUGAR FACTORY PROJECT
During the first quarter of 1995, F. C. Schaffer & Associates ("Schaffer"),
a subsidiary of the Company, secured an $83 million contract to engineer,
design, procure and construct a 4,000 metric ton cane-per-day sugar factory and
45,000 liter-per-day ethanol plant in Finchaa, Ethiopia. The project, which is
financed by the African Development Bank, is expected to be completed in the
latter part of 1997 followed by a twelve month warranty and training period. In
conjunction with the effectiveness of the contract, the Company received an
advance payment equal to 20.0 percent of the contract value. The Company has
issued letters of credit to support performance and the 20.0 percent advance
payment. At December 31, 1996, letters of credit of $6.3 million were
outstanding to support the unrecovered portion of the advance payment and $8.3
million to support project performance guarantees, see Note 5 of Notes to
Consolidated Financial Statements. Contractual payment amounts to Schaffer are
supported by a revolving letter of credit issued by the Ethiopian government via
the African Development Bank.
As of December 31, 1996, the Finchaa project was approximately 80 percent
complete.
VOLATILITY AND SEASONALITY OF REVENUES
Specialty Services revenues and operating income are subject to significant
quarterly fluctuations, affected primarily by the timing of planned shutdowns at
its customers' facilities. In general, scheduled turnarounds fall predominantly
in two seasonal periods -- February through April, and September through
November. The exact timing and duration of these periods will largely depend on
the demand for the customers' products. In addition, most of the Specialty
Services contracts are short in duration, and large individual contracts may
significantly influence results in any specific quarter.
OTHER
The Company has a combination of contractual and discretionary bonus
programs for key personnel throughout most of its operating groups. Payments
under discretionary plans total, in the aggregate, approximately eight percent
of operating earnings of each unit. For the turnaround maintenance division of
Specialty Services and the Chemisolv division of Environmental and Performance
Chemicals, the Company has established contractual profit sharing programs in
lieu of the discretionary programs noted above. The Specialty Services and
Chemisolv programs generally provide for a profit sharing pool to be established
equal to 20.0 percent of the fully-burdened operating earnings of the respective
group.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation and changing prices have not significantly affected the Company's
operating results or the markets in which the Company performs services.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures for 1996, excluding acquisitions, were $2.0 million,
primarily for the purchase of equipment necessary to support the operations and
expansion of the Company's operating groups. Capital expenditures for 1997,
excluding acquisitions, are expected to be approximately $1.5 million, primarily
for the purchase and manufacture of equipment to support the Company's business
activities.
At December 31, 1996, the Company's working capital totaled approximately
$8.2 million. The Company has been able to finance its working capital
requirements through its cash flows from operations and bank borrowings. The
Company maintains a $26.5 million revolving line of credit with two banks (the
"Revolver"), which expires in December 1997. The $26.5 million credit facility
decreases to $23.5 million at April 30, 1997, and $19.5 million at June 30,
1997. At December 31, 1996, $5.6 million was outstanding under the revolving
line of credit. Additionally, the Company has irrevocable letters of credit
totaling $4.6 million outstanding to guarantee certain of the Company's
insurance programs and bid bonds, leaving $16.3 million available for borrowing
under the Revolver. However, subsequent to December 31, 1996, the Company has
drawn approximately $12.9 million against the revolving line of credit in order
to fund working capital requirements
15
18
consistent with increased first quarter 1997 revenue activity. These amounts are
expected to be repaid during the second quarter of 1997 as receivables are
collected from the seasonably high point of the Company's turnaround maintenance
business. In addition, the Company has $15.0 million in Senior Notes Payable due
June 2003 (See Note 5 of Notes to Consolidated Financial Statements).
As a result of the fourth quarter 1996 net loss, the Company was in
violation of various financial covenants. The Company received waivers from its
lenders with respect to such covenant violations as well as waivers necessary to
enter into the Merger Agreement with Philip Environmental Inc. (See "Subsequent
Event" below).
In 1995, Schaffer secured an $83 million contract to engineer, design,
procure and construct a sugar factory and ethanol plant in Finchaa, Ethiopia. In
conjunction with the effectiveness of the contract, the Company received an
advance payment equal to 20.0 percent of the contract value. The project is
financed by the African Development Bank. Contractual payment amounts to
Schaffer are supported by a revolving letter of credit issued by the Ethiopian
government via the African Development Bank. The Company has issued letters of
credit to support performance and the 20.0 percent advance payment. At December
31, 1996, letters of credit of $6.3 million were outstanding to support the
unrecovered portion of the advance payment and $8.3 million to support project
performance guarantees.
For the year ended December 31, 1996, net cash flows from continuing
operations were $7.9 million resulting primarily from depreciation and
amortization of $6.0 million, the $1.4 million charge, net decrease in accounts
receivable of $9.4 million, offset by a decrease in accounts payable and accrued
liabilities of $6.7 million. The decreases were due primarily to the lower level
of business activity during 1996. Net cash provided by investing activities
amounted to $0.2 million, resulting from $1.7 million in proceeds from sales of
property, plant and equipment and $0.8 million in investing activities related
to the discontinued EPC operations, partially offset by $2.0 million in capital
expenditures. Cash flows used in financing activities totaled $2.1 million
resulting from net principal payments of long-term debt and financing costs
incurred related to the November 1996 debt restructuring (see Note 5 of Notes to
Consolidated Financial Statements), and $0.7 million of debt payments related to
the discontinued EPC operations.
Management believes that existing cash, cash flow from operations, and
existing credit facilities will be sufficient to meet the current ongoing
requirements of the operations of the Company. In addition, the above sources
may be supplemented with other external sources of funds to meet additional cash
requirements, if necessary.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
During 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets
to be Disposed Of". This statement requires that long-lived assets and certain
identifiable intangible assets to be held and used by an entity be reviewed for
impairment whenever events or changes indicate the carrying amount of an asset
may not be recoverable. The adoption of SFAS No. 121 had no effect on the
consolidated financial statements for the year ended December 31, 1996.
SFAS No. 123 "Accounting for Stock Based Compensation" was issued in
October 1995. SFAS No. 123 defines a fair value based method of accounting for
employee stock options. Under this fair value method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period; however, SFAS No. 123 allows an entity to
continue to measure compensation cost in accordance with Accounting Principal
Board Statement No. 25 ("APB 25"). The Company will continue to account for
stock option grants in accordance with APB 25, and recognizes no compensation
expense for stock options granted. Accordingly, the Company has adopted the
disclosure-only provisions of SFAS No. 123, see Note 10 of Notes to Consolidated
Financial Statements.
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SUBSEQUENT EVENT
On March 5, 1997, the Company entered into the Merger Agreement. Pursuant
to the Merger Agreement, Sub will be merged with and into the Company, and the
Company will become a wholly-owned subsidiary of Taro and an indirect,
wholly-owned subsidiary of Philip.
Under the terms of the Merger Agreement, each share of Company Common Stock
will be exchanged for 0.403 share of Philip Common Stock (except for shares held
by persons who perfect and exercise dissenters' rights under Texas law),
provided that Philip will pay cash in lieu of any fractional shares of Philip
Common Stock to which holders of Company Common Stock would otherwise be
entitled. Based upon the closing price of Philip Common Stock on March 5, 1997,
each share of Company Common Stock is valued at $6.60 per share. In aggregate,
the transaction is valued at approximately $72.0 million, including the
assumption of approximately $21.0 million of Company indebtedness. The
transaction is subject to regulatory and shareholder approvals, and is expected
to close by June 30, 1997.
Philip is a fully integrated, resource recovery and industrial services
company providing metals processing and mill services, solid and liquid
by-products recovery and industrial and remediation services to all major
industry sectors. Philip Common Stock trades on the New York Stock Exchange.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Consolidated Balance Sheets................................. 19
Consolidated Statements of Operations....................... 20
Consolidated Statements of Changes in Stockholders'
Equity.................................................... 21
Consolidated Statements of Cash Flows....................... 22
Notes to Consolidated Financial Statements.................. 23
Independent Auditors' Report................................ 40
18
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SERV-TECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
---------------------------
1996 1995
----------- ------------
Current Assets:
Cash and cash equivalents................................. $ 4,532,622 $ 287,356
Accounts receivable, net.................................. 23,402,942 31,941,127
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 1,479,518 2,111,396
Prepaid expenses.......................................... 839,969 768,161
Inventory................................................. 2,026,359 2,102,245
Deferred income taxes..................................... 3,246,448 4,532,761
Net current assets from discontinued operations........... 378,326 16,276,603
----------- ------------
Total current assets.............................. 35,906,184 58,019,649
Property, plant and equipment, net.......................... 26,275,026 30,022,511
Intangible assets, net...................................... 14,189,083 14,748,088
Other assets................................................ 2,230,681 1,884,763
Net non-current assets, discontinued operations............. 1,714,503 3,120,272
----------- ------------
Total assets...................................... $80,315,477 $107,795,283
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 7,497,878 $ 13,295,347
Accrued liabilities....................................... 12,672,252 13,545,808
Revolving line of credit.................................. 5,559,169 6,500,000
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 390,897 359,415
Income taxes payable...................................... -- 295,865
Current maturities of long-term debt...................... 1,587,269 207,732
----------- ------------
Total current liabilities......................... 27,707,465 34,204,167
Long-term debt, less current maturities..................... 13,835,000 15,169,998
Deferred income taxes....................................... 954,317 5,006,320
Minority interest and other................................. 586,905 484,952
Commitments and Contingencies (Note 11)
Stockholders' Equity:
Preferred stock, $1 par value, 2,000,000 shares
authorized; no shares issued or outstanding............ -- --
Common stock, par value $.50, authorized 20,000,000
shares; issued shares of 6,873,709 and 6,752,671,
respectively........................................... 3,436,855 3,376,336
Additional paid-in capital................................ 43,346,804 43,489,763
Retained (deficit) earnings............................... (9,457,021) 7,675,586
Cumulative translation adjustments........................ (44,505) (64,982)
Treasury stock, at cost, 13,774 and 193,358 shares,
respectively........................................... (50,343) (1,546,857)
----------- ------------
Total stockholders' equity........................ 37,231,790 52,929,846
----------- ------------
Total liabilities and stockholders' equity........ $80,315,477 $107,795,283
=========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
19
22
SERV-TECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
Revenues......................................... $142,385,571 $194,830,759 $167,833,853
Costs of services................................ 112,462,899 158,139,025 138,925,050
------------ ------------ ------------
Gross profit........................... 29,922,672 36,691,734 28,908,803
Selling, general and administrative expenses..... 35,782,864 34,349,971 26,005,980
Special charge................................... -- -- 12,225,182
------------ ------------ ------------
Operating income (loss)........................ (5,860,192) 2,341,763 (9,322,359)
------------ ------------ ------------
Other income (expense):
Interest expense............................... (2,357,795) (1,945,683) (1,438,213)
Interest income................................ 148,869 34,832 511,357
Other, net..................................... 5,944,218 126,929 4,016
------------ ------------ ------------
Total other income (expense)........... 3,735,292 (1,783,922) (922,840)
------------ ------------ ------------
Minority interest and other...................... (101,953) (415,425) (260,305)
Equity in losses of affiliates................... -- (24,331) (226,700)
------------ ------------ ------------
Pre-tax income (loss) from continuing
operations..................................... (2,226,853) 118,085 (10,732,204)
Income tax expense (benefit)..................... 237,000 892,000 (1,419,000)
------------ ------------ ------------
Net loss from continuing operations.............. $ (2,463,853) $ (773,915) $ (9,313,204)
Income (loss) from discontinued operations, net
of income taxes................................ (10,342,208) 2,835,034 517,868
Estimated loss on disposal of discontinued
operations, net of tax benefit................. (4,326,546) -- --
------------ ------------ ------------
Net income (loss)...................... $(17,132,607) $ 2,061,119 $ (8,795,336)
============ ============ ============
Loss per share from continuing operations........ $ (0.37) $ (0.11) $ (1.52)
Earnings (loss) per share from discontinued
operations..................................... (2.18) 0.42 0.08
------------ ------------ ------------
Net income (loss) per share............ $ (2.55) $ 0.31 $ (1.44)
============ ============ ============
Weighted average common shares outstanding....... 6,714,335 6,720,134 6,117,434
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
20
23
SERV-TECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL RETAINED CUMULATIVE TREASURY STOCK
---------------------- PAID-IN EARNINGS TRANSLATION ----------------------
SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENTS SHARES AMOUNT
--------- ---------- ----------- ------------ ----------- -------- -----------
Balance, December 31, 1993........ 5,810,978 $2,905,490 $36,881,683 $ 14,409,803 $(243,456) -- $ --
Exercise of stock options....... 43,800 21,900 184,526 -- -- -- --
Issuance of common stock........ 650,000 325,000 4,762,500 -- -- -- --
Translation adjustments......... -- -- -- -- 111,531 -- --
Net loss........................ -- -- -- (8,795,336) -- -- --
--------- ---------- ----------- ------------ --------- -------- -----------
Balance, December 31, 1994........ 6,504,778 3,252,390 41,828,709 5,614,467 (131,925) -- --
Exercise of stock options....... 40,000 20,000 121,250 -- -- -- --
Issuance of common stock........ 207,893 103,946 1,539,804 -- -- -- --
Purchase of treasury stock...... -- -- -- -- -- (203,873) (1,630,984)
Transfer of treasury stock to
401(k) plan................... -- -- -- -- -- 10,515 84,127
Translation adjustments......... -- -- -- -- 66,943 -- --
Net income...................... -- -- -- 2,061,119 -- -- --
--------- ---------- ----------- ------------ --------- -------- -----------
Balance, December 31, 1995........ 6,752,671 3,376,336 43,489,763 7,675,586 (64,982) (193,358) (1,546,857)
Issuance of common stock........ 73,778 36,889 270,421 -- -- (10,322) (22,767)
Restricted stock awards
issued........................ 64,800 32,400 388,800 -- -- -- --
Restricted stock awards
forfeited..................... (17,540) (8,770) (106,696) -- -- -- --
Transfer of treasury stock to
401(k) plan................... -- -- (695,484) -- -- 189,906 1,519,281
Translation adjustments......... -- -- -- -- 20,477 -- --
Net loss........................ -- -- -- (17,132,607) -- -- --
--------- ---------- ----------- ------------ --------- -------- -----------
Balance, December 31, 1996........ 6,873,709 $3,436,855 $43,346,804 $ (9,457,021) $ (44,505) (13,774) $ (50,343)
========= ========== =========== ============ ========= ======== ===========
TOTAL
------------
Balance, December 31, 1993........ $ 53,953,520
Exercise of stock options....... 206,426
Issuance of common stock........ 5,087,500
Translation adjustments......... 111,531
Net loss........................ (8,795,336)
------------
Balance, December 31, 1994........ 50,563,641
Exercise of stock options....... 141,250
Issuance of common stock........ 1,643,750
Purchase of treasury stock...... (1,630,984)
Transfer of treasury stock to
401(k) plan................... 84,127
Translation adjustments......... 66,943
Net income...................... 2,061,119
------------
Balance, December 31, 1995........ 52,929,846
Issuance of common stock........ 284,543
Restricted stock awards
issued........................ 421,200
Restricted stock awards
forfeited..................... (115,466)
Transfer of treasury stock to
401(k) plan................... 823,797
Translation adjustments......... 20,477
Net loss........................ (17,132,607)
------------
Balance, December 31, 1996........ $ 37,231,790
============
The accompanying notes are an integral part of the consolidated financial
statements.
21
24
SERV-TECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss)...................................... $(17,132,607) $ 2,061,119 $ (8,795,336)
Adjustments to reconcile net income (loss) to net cash
provided by continuing operations:
(Income) loss from discontinued operations........... 10,342,208 (2,835,034) (517,868)
Loss on disposal of discontinued operations.......... 4,326,546 -- --
Depreciation and amortization........................ 6,004,942 6,160,642 5,380,282
Non-cash charges..................................... 1,387,207 -- 12,225,182
Minority interest and other.......................... 101,953 415,425 260,305
Equity in losses of affiliates....................... -- 24,331 226,700
Provision for losses on accounts and notes
receivable........................................ (850,932) 1,218,579 (1,529,454)
Deferred income taxes................................ 540,000 (883,000) (1,084,647)
Other................................................ (39,399) 64,635 109,805
------------ ------------ ------------
4,679,918 6,226,697 6,274,969
Changes in assets and liabilities, net of effect from
acquisitions of businesses:
Accounts receivable.................................. 9,389,116 554,376 (747,233)
Net change in billings, costs and estimated earnings
on uncompleted contracts.......................... 663,360 315,250 1,259,598
Inventory............................................ 75,886 (374,509) (38,938)
Prepaid expenses..................................... (71,808) 450,807 10,565
Other assets......................................... 179,511 (584,384) (40,703)
Accounts payable..................................... (5,797,469) 4,116,650 (3,447,231)
Accrued liabilities.................................. (873,556) (332,335) (974,535)
Income taxes payable................................. (295,865) 295,865 206,181
------------ ------------ ------------
Net cash provided by operating activities of
continuing operations...................... 7,949,093 10,668,417 2,502,673
Net cash used by discontinued operations............. (1,770,443) (8,426,500) (2,488,568)
------------ ------------ ------------
Net cash provided by operating activities.... 6,178,650 2,241,917 14,105
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures................................. (2,027,194) (5,443,934) (4,829,855)
Investing activities related to discontinued
operations........................................ 776,265 (1,046,257) (911,432)
Investments in and advances to affiliates............ -- (34,450) (671,387)
Acquisitions of businesses, net of cash acquired..... -- (625,514) (2,316,050)
Intangible assets.................................... (229,274) (243,303) (161,769)
Proceeds from sale of property, plant and
equipment......................................... 1,683,809 148,625 77,864
------------ ------------ ------------
Net cash provided by (used in) investing
activities................................. 203,606 (7,244,833) (8,812,629)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of debt....................... 13,784,423 31,000,000 8,000,000
Principal payments of debt........................... (14,690,162) (24,994,490) (12,554,198)
Financing costs...................................... (525,429) -- (300,000)
Proceeds from issuance of common stock............... -- 141,250 146,426
Purchase of treasury stock........................... -- (1,630,984) --
Payments of dividends on preferred stock of a
subsidiary........................................ -- -- (42,411)
Purchase of preferred stock of a subsidiary.......... -- -- (800,000)
Financing activities of discontinued operations...... (705,822) (527,243) --
------------ ------------ ------------
Net cash provided by (used in) financing
activities................................. (2,136,990) 3,988,533 (5,550,183)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents... 4,245,266 (1,014,383) (14,348,707)
Cash and cash equivalents at beginning of year......... 287,356 1,301,739 15,650,446
------------ ------------ ------------
Cash and cash equivalents at end of year............... $ 4,532,622 $ 287,356 $ 1,301,739
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
22
25
SERV-TECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Serv-Tech,
Inc., and its majority-owned subsidiaries. The Company's investments in
affiliated companies (50% and less owned) are accounted for in accordance with
the equity method. All significant intercompany balances and transactions are
eliminated.
Revenues and Costs Recognition
The Company engages in fixed price and modified fixed price contracts and
contracts based on costs incurred plus applicable profit percentages (time and
material contracts).
Revenues from fixed price and modified fixed price contracts are recognized
on the percentage-of-completion method, measured primarily by the percentage of
costs incurred to date to estimated total costs for each contract (cost-to-cost
method). Management believes this method is the most appropriate measure of
progress on contracts. Revenues from time and material contracts are recognized
currently as costs are incurred in performing the work.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools and repairs. Selling, general, and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions and estimated profitability may result in
revisions to costs and income which are recognized in the period in which the
revisions are determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts", represents billings in excess of revenues recognized.
Research and Development Costs
The Company expenses all research and development costs as they are named.
These costs, primarily related to Chemisolv's new paper-strengthening technology
Mastiff (SM), amounted to 0, $0.2 million and $0.9 million for 1994, 1995 and
1996, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include cash, tax free municipal bond funds and
other highly liquid investments with maturities of three months or less at the
date of acquisition. Cash equivalents are stated at cost which approximates
market value.
Inventory
Inventory consists primarily of materials and supplies and is stated at the
lower of cost or market. Cost is determined principally by the average cost
method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Major renewals and
betterments which extend the lives of equipment are capitalized while all other
repairs and maintenance are charged to operations as incurred.
Disposals are removed at cost less accumulated depreciation with any
resulting gain or loss reflected in results of operations.
23
26
SERV-TECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For financial reporting purposes, depreciation for all property, plant and
equipment is provided using the straight-line method over the estimated useful
lives of the depreciable assets, ranging from three to 20 years.
Accelerated methods are generally used for income tax purposes.
Intangible Assets
Intangible assets are carried at cost and amortized using the straight line
method over their legal or estimated useful lives. These lives range from 20 to
40 years for excess of costs over net assets of businesses acquired, 17 years
for patents and three to five years for covenants not to compete. The Company's
management assesses, at least quarterly, recorded balances of excess of costs
over net assets of businesses acquired net of accumulated amortization for
impairment in light of historic and projected operating trends and
profitability, new product development and strategic direction of the Company.
Restricted Cash
At December 31, 1996 and 1995, cash and cash equivalents include restricted
balances of $0.3 million and $0.6 million, respectively. The balances are
restricted for the guarantee of indebtedness of a subsidiary and for the payment
of claims, expenses and premiums under certain insurance policies. Any unused
balances are refundable to the Company.
Foreign Currency Translation
The assets and liabilities of the Company's foreign affiliates are
translated at year-end exchange rates, while income and expenses are translated
at average rates during the year. Translation adjustments are recorded as a
separate component of stockholders' equity.
Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
carrying amounts and tax basis of assets and liabilities using enacted tax rates
in effect in the years in which the differences are expected to reverse. The
Company does not provide deferred income taxes on undistributed earnings of
equity affiliates because such earnings are considered to be permanently
reinvested. The amount of deferred income taxes not provided is immaterial.
Earnings (Loss) per Common Share of Stock
Primary and fully diluted earnings (loss) per common share are based on the
weighted average number of shares outstanding during the year after
consideration of the dilutive effect of stock options reflected under the
treasury stock method. Fully diluted earnings per share are not presented
because such amounts would be similar to amounts computed for primary earnings
per share.
Preferred Stock
The Company can issue up to 2,000,000 shares of preferred stock with a par
value of $1.00 per share, none of which are issued or outstanding. The Company's
Board of Directors is authorized to divide the preferred stock into series and
to fix and determine the relative rights and preferences of each series.
24
27
SERV-TECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk
The Company provides specialized turnaround maintenance, electrical and
instrumentation, and environmental services, primarily to the hydrocarbon
(petroleum and natural gas related products) processing and production
industries principally in the United States. The Company performs ongoing credit
evaluations of its customers' financial condition. Although generally no
collateral is required from its customers, the Company may place liens against
the property constructed or serviced if payment default occurs. The Company
maintains reserves for potential losses and such losses have been within
management's expectations. See Note 3 regarding the Finchaa project. Excess cash
is invested principally in tax-free municipal bond funds consisting of
securities of municipalities with strong credit ratings. These investments
generally mature within three months and, therefore, bear minimal risk. The
Company has not experienced any losses on these type of short-term investments.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Impact of Recently Issued Accounting Standards
During 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets
to be Disposed Of". This statement requires that long-lived assets and certain
identifiable intangible assets to be held and used by an entity be reviewed for
impairment whenever events or changes indicate the carrying amount of an asset
may not be recoverable. The adoption of SFAS No. 121 had no effect on the
consolidated financial statement for the year ended December 31, 1996.
SFAS No. 123 "Accounting for Stock Based Compensation" was issued in
October 1995. SFAS No. 123 defines a fair value based method of accounting for
employee stock options. Under this fair value method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period; however, SFAS No. 123 allows an entity to
continue to measure compensation cost in accordance with Accounting Principal
Board Statement No. 25 ("APB 25"). The Company will continue to account for
stock option grants in accordance with APB 25, and recognizes no compensation
expense for stock options granted. Accordingly, the Company has adopted the
disclosure-only provisions of SFAS No. 123, see Note 10.
Reclassifications
Certain reclassifications have been made in order to conform to current
year presentation with no effect on net income (loss).
25
28
SERV-TECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts at December
31, 1996 and 1995 is presented below:
1996 1995
----------- -----------
Accounts receivable:
Contracts............................................... $23,565,801 $32,741,509
Income taxes............................................ 220,879 --
Other................................................... 520,560 954,848
----------- -----------
24,307,240 33,696,357
Less allowance for doubtful accounts.................... (904,298) (1,755,230)
----------- -----------
$23,402,942 $31,941,127
=========== ===========
Bad debt expense was approximately $0.2 million, $1.1 million and $0.9
million for the years ended December 31, 1996, 1995, and 1994, respectively.
1996 1995
----------- -----------
Property, plant and equipment, at cost:
Land and improvements................................... $ 1,303,646 $ 1,303,646
Buildings and improvements.............................. 5,219,509 5,065,445
Operating machinery and equipment....................... 33,632,149 35,631,879
Furniture and office equipment.......................... 6,363,635 5,026,875
----------- -----------
46,518,939 47,027,845
Less accumulated depreciation........................... (20,387,080) (17,579,372)
----------- -----------
26,131,859 29,448,473
Construction-in-progress................................ 143,167 574,038
----------- -----------
$26,275,026 $30,022,511
=========== ===========
Depreciation expense was approximately $5.0 million, $5.2 million and $4.4
million for the years ended December 31, 1996, 1995, and 1994, respectively.
1996 1995
----------- -----------
Intangible assets:
Patents (net of accumulated amortization of $586,686 and
$468,977 at December 31, 1996 and 1995,
respectively)........................................ $ 1,268,314 $ 1,118,430
Covenants not to compete (net of accumulated
amortization of $2,125,000 and $1,712,510 at December
31, 1996 and 1995, respectively)..................... 535,893 948,383
Excess of costs over net assets of businesses acquired
(net of accumulated amortization of $1,444,498 and
$977,001 at December 31, 1996 and 1995,
respectively)........................................ 12,384,876 12,681,275
----------- -----------
$14,189,083 $14,748,088
=========== ===========
Amortization expense was approximately $1.0 million, for each of the years
ended December 31, 1996, 1995 and 1994.
26
29
SERV-TECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 1995
----------- -----------
Accrued liabilities:
Wages and payroll taxes................................. $ 2,482,899 $ 2,493,105
Insurance............................................... 5,443,798 7,433,850
Other................................................... 4,745,555 3,618,853
----------- -----------
$12,672,252 $13,545,808
=========== ===========
3. DISCONTINUED OPERATIONS
In July 1996, the Company announced its intent to discontinue its
engineering, procurement and construction ("EPC") operations. The EPC operations
provided a full range of engineering consultation and project management
services primarily to the refining, petrochemical and food processing
industries. The discontinued EPC operations consisted of, (i) several domestic
EPC projects (which have now been completed), (ii) F.C. Schaffer and Associates
which includes the Finchaa Sugar Factory project as well as a consulting
engineering practice, (iii) a construction company in Orange, Texas (which has
been closed and substantially all remaining assets have been sold) and (iv)
engineering operations in Lake Charles and New Orleans, Louisiana (which have
been sold).
The 1996 net loss from discontinued operations of $10.3 million (net of
income tax benefit of $4.4 million), or $1.54 per share, included a $9.7 million
($6.6 million, or $0.99 per share, on an after-tax basis) charge primarily for
the write-down of the profitability on several domestic EPC projects and the
Finchaa Sugar Factory project. The Finchaa project was written down to a $4.5
million loss ($2.9 million, or $0.43 per share, on an after-tax basis) during
the fourth quarter of 1996. Excluding the effects of this charge, the net loss
from discontinued operations was $3.7 million, or $0.55 per share for 1996
compared to net income of $2.8 million (net of income tax expense of $0.7
million), or $0.42 per share for 1995 and net income of $0.5 million (net of
income tax expense of $0.1 million), or $0.08 per share for 1994.
Additionally, in conjunction with the decision to discontinue the EPC
operations, the Company recorded a $4.3 million (net of income tax benefit of
$1.0 million), or $0.64 per share, estimated loss on disposal of the EPC
operations for the estimated loss on sale and disposal of certain EPC divisions
and the related write-off of goodwill. The estimated loss on disposal of the EPC
operations includes $0.3 million, or $0.05 per share, estimated losses during
phase-out period.
Net current assets from discontinued operations at December 31, 1996
consisted primarily of working capital associated with the Finchaa project and
the consulting engineering practice of F.C. Schaffer and Associates. Net
non-current assets from discontinued operations consisted primarily of property
and equipment, net of a note payable of $0.7 million.
Revenues generated by the discontinued EPC operations for 1996, 1995 and
1994 were $70.3 million, $84.7 million and $13.3 million, respectively. 1996 and
1995 revenues included $38.9 million and $32.8 million related to the Finchaa
Sugar Factory Project, respectively.
Finchaa Sugar Factory Project
During the first quarter of 1995, F. C. Schaffer & Associates ("Schaffer"),
a subsidiary of the Company, secured an $83 million contract to engineer,
design, procure and construct a 4,000 metric ton cane-per-day sugar factory and
45,000 liter-per-day ethanol plant in Finchaa, Ethiopia. The project, which is
financed by the African Development Bank, is expected to be completed in the
latter part of 1997 followed by a twelve month warranty and training period. In
conjunction with the effectiveness of the contract, the Company received an
advance payment equal to 20% of the contract value. The Company has issued
letters of credit to support performance and the 20% advance payment. At
December 31, 1996, letters of credit of $6.3 million were outstanding to support
the unrecovered portion of the advance payment and $8.3 million to support
project
27
30
SERV-TECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
performance guarantees, see Note 5. Contractual payment amounts to Schaffer are
supported by a revolving letter of credit to be issued by the Ethiopian
government via the African Development Bank.
As of December 31, 1996, the Finchaa project was approximately 80%
complete.
4. ACQUISITIONS
ST Piping
Effective May 18, 1995, the Company acquired an additional 20% of the
outstanding common stock of its specialty welding subsidiary, ST Piping, Inc.,
from the minority shareholders of that company. Consideration for the purchase
consisted of $0.6 million cash and 180,000 shares of Company common stock with a
fair market value of approximately $1.4 million (total consideration of $2.0
million). ST Piping, Inc. was formed in January, 1991, between the Company (70%
owner) and the Management Group of that company. This transaction now brings the
Company ownership to 90%. The purchase price and expenses associated with the
acquisition exceeded the fair value of net assets by approximately $1.2 million
and is included in intangible assets. The Company's consolidated financial
statements have included the results of operations of ST Piping, Inc. since
January 1, 1991. Pro forma results were not material to the Company's financial
position or results of operations.
Hartney
Effective June 14, 1994, the Company acquired all of the outstanding common
stock of Hartney Industrial Services Corporation ("Hartney"), a Houston, Texas,
company, in exchange for 450,000 shares of Company common stock with a fair
market value of $3.7 million. In addition, the Company paid $0.5 million in cash
for non-competition and confidentiality agreements entered into with the selling
shareholders. Pursuant to the terms of an earnout agreement, the Company may be
required to pay additional amounts based on Hartney's pre-tax earnings through
December 31, 1998. Amounts earned under the terms of the agreement will be
recorded as excess of costs over net assets of businesses acquired. The purchase
price and expenses associated with the acquisition exceeded the fair value of
net assets by approximately $3.0 million.
Hartney is a specialty contractor which provides refractory, acid-proofing
and other corrosion prevention services to the petroleum refining,
petrochemical, cement, power generation and waste incineration industries.
Chemisolv
Effective November 8, 1994, the Company acquired the remaining 50% interest
in its affiliate Chemisolv Holdings, Inc. ("Chemisolv"), a specialty chemical
treatment company with operations in the United Kingdom and the United States.
The purchase price consisted primarily of 200,000 shares of Company common stock
with a fair market value of $1.4 million. In addition, the Company paid $0.5
million for non-competition and confidentiality agreements entered into with the
selling shareholders, consisting of $0.2 million cash and a $0.3 million note
payable due January, 1995. The purchase price and expenses associated with the
acquisition exceeded the fair value of net assets of the business acquired by
approximately $1.8 million.
Unaudited pro forma combined results, assuming the Hartney and Chemisolv
acquisitions had occurred at January 1, 1994, are as follows:
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
----------------------
Revenues.................................................... $186,600
Net income (loss)........................................... (8,869)
Earnings (loss) per share................................... $ (1.37)
28
31
SERV-TECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited pro forma summary is not necessarily indicative either of
results of operations that would have occurred had the acquisitions been made at
the beginning of the periods presented, or of future results of operations of
the combined companies.
SECO
During 1994, the Company paid $800,000 to purchase all of the outstanding
redeemable preferred stock of SECO held by a former shareholder of that company.
Prior to July, 1994, annual cumulative dividends of $10 per share were paid
monthly and included in minority interest in the statement of operations.
All acquisitions have been accounted for using the purchase method;
accordingly, the assets and liabilities have been recorded at their estimated
fair values at the date of acquisition. The excess purchase price and related
expenses over the fair value of net assets acquired is included in "excess of
costs over net assets of businesses acquired". Under the purchase method of
accounting, the results of operations are included in the consolidated financial
statements from their acquisition dates.
5. LONG-TERM DEBT
In November 1996, the Company reached agreement with its lenders regarding
the restructuring of its debt facilities including the: (i) $15.0 million notes
held by four insurance companies (the "Notes"), (ii) revolving line of credit
with two banks (the "Revolver"), and (iii) the letters of credit supporting
performance and advance payment amounts related to the Finchaa Sugar Factory
project totaling $14.6 million at December 31, 1996.
Effective November 12, 1996, under the new agreements, the Notes accrue
interest at a rate of 10.50% with 0.25% incremental increases each quarter
beginning January 1, 1998, through December 31, 1998 (rate caps at 11.50%
through maturity). The Notes are collateralized by substantially all assets of
the Company. Monthly principal payments of $208,333 are payable beginning July
1997, through the June 2003 maturity date.
The Revolver permits borrowings up to $26.5 million until April 30, 1997,
when it decreases to $23.5 million, and further reduces to $19.5 million at June
30, 1997, until its scheduled December 31, 1997 maturity. Interest is payable
monthly at a rate equivalent to either eurodollar plus 4.09% (at December 31,
1996 the adjusted rate was 9.59%) or prime plus 1.0% (9.25% at December 31,
1996). Borrowings under the Revolver are collateralized by substantially all
assets of the Company. The Company pays a commitment fee of 0.25 percent on the
unused portion. At December 31, 1996, working capital borrowings of $5.6 million
were outstanding under the Revolver. Additionally, the Company has irrevocable
letters of credit totaling $4.6 million outstanding, to guarantee certain of the
Company's insurance programs and bid bonds, leaving total availability under the
Revolver, at $16.3 million. Borrowings under the Revolver are also subject to a
borrowing base computation, which is limited primarily to 75% of eligible
accounts receivable, as defined.
The Notes, Revolver and Finchaa LOC agreements contain covenants, which
require, among others, that the Company maintain: (i) minimum consolidated net
worth, (ii) minimum cash flow (defined as earnings before interest, taxes,
depreciation and amortization), and (iii) minimum fixed charge coverage.
Additionally, the Company is limited in its debt-to-capitalization ratio as well
as capital expenditures. Draws, if any, under the Finchaa LOC would represent
loans, which would be secured by substantially all assets of the Company.
As a result of the fourth quarter 1996 net loss, the Company was in
violation of various financial covenants. The Company received waivers from its
lenders with respect to such covenant violations as well as waivers necessary to
enter into the definitive merger agreement with Philip Environmental Inc. (See
Note 17).
29
32
SERV-TECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996 and 1995, long-term debt consisted of the following:
1996 1995
----------- -----------
The Notes................................................. $15,000,000 $15,000,000
Other various notes payable............................... 422,269 377,730
----------- -----------
15,422,269 15,377,730
Less current maturities................................... (1,587,269) (207,732)
----------- -----------
$13,835,000 $15,169,998
=========== ===========
The aggregate maturities of long-term debt during the five years subsequent
to December 31, 1996, are approximately $1.6 million, $2.6 million, $2.5
million, $2.5 million, and $2.5 million, respectively.
6. INCOME TAXES
The components of the income tax provision (benefit) from continuing
operations for the three years ended December 31, 1996, were as follows:
1996 1995 1994
--------- ---------- -----------
Federal:
Current..................................... $(303,000) $1,430,000 $ (212,000)
Deferred.................................... 468,919 (753,240) (1,396,548)
State:
Current..................................... -- 345,000 350,000
Deferred.................................... 71,081 (129,760) (205,452)
Foreign-current............................... -- -- 45,000
--------- ---------- -----------
$ 237,000 $ 892,000 $(1,419,000)
========= ========== ===========
The difference between the effective rate reflected in the income tax
provision (benefit) and the statutory federal tax rate for the three years ended
December 31, 1996, is analyzed as follows:
1996 1995 1994
----------------- ---------------- -------------------
Amount computed using the
statutory rate................ $(757,130) (34.0)% $ 40,149 34.0% $(3,648,949) (34.0)%
Losses of tax entities for which
no tax benefit is
recognized.................... 617,572 27.7 177,000 150.0 181,217 1.7
Minority interest............... 34,664 1.6 141,245 119.6 88,504 0.8
State taxes, net of federal tax
benefit....................... 71,081 3.2 227,452 192.6 10,418 0.1
Write down of certain equity
investments and other
intangibles................... -- -- -- -- 880,435 8.2
Nondeductible expenses.......... 344,370 15.5 242,583 205.4 697,538 6.5
Other........................... (73,557) (3.3) 63,571 53.8 371,837 3.5
--------- ----- -------- ----- ----------- -----
$ 237,000 10.6% $892,000 755.4% $(1,419,000) (13.2)%
========= ===== ======== ===== =========== =====
30
33
SERV-TECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred income tax asset (liability) from
continuing operations at December 31, 1996 and 1995, consisted of the following:
1996 1995
----------- -----------
Current deferred tax assets:
Difference in recognition of insurance claims........... $ 363,190 $ 2,630,595
Difference in recognition of financial statement
accruals............................................. 2,465,453 1,168,794
Difference in recognition of allowance for doubtful
accounts............................................. 417,805 733,372
----------- -----------
Total net current deferred tax asset.................... 3,246,448 4,532,761
----------- -----------
Noncurrent deferred tax liabilities:
Property, plant and equipment basis and depreciation
differences.......................................... (2,971,502) (4,287,000)
Differences in recognition of certain intangible
assets............................................... 453,211 (719,320)
Net operating loss carryforward......................... 2,924,408 --
Alternative minimum tax credit carryforward............. 169,566 --
----------- -----------
Total noncurrent deferred tax assets (liabilities)...... 575,683 (5,006,320)
Less: Valuation allowance............................... (1,530,000) --
----------- -----------
Net noncurrent deferred tax liabilities................. (954,317) (5,006,320)
----------- -----------
Net deferred tax asset (liability)........................ $ 2,292,131 $ (473,559)
=========== ===========
The Company recorded a valuation allowance for deferred tax assets in 1996
of $1,530,000. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. In order
to fully realize all deferred tax assets, the Company will need to generate
future taxable income of approximately $8,600,000 prior to the expiration of the
net operating loss carryforwards in 2011. Based upon the level of historical
taxable income and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it is more likely
than not the Company will realize the benefits of these deductible differences,
net of the existing valuation allowances at December 31, 1996. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
7. RELATED PARTY TRANSACTION/TREASURY STOCK
In August, 1995, Richard W. Krajicek retired as Chairman of the Company.
Mr. Krajicek was subsequently retained by the Company under a five year
consulting agreement. Mr. Krajicek, along with certain family members, owned
815,491 common shares of Company common stock. The Company has agreed to pay Mr.
Krajicek an amount equal to the shortfall, if any, between the average sales
price and $8.00 per share for up to 203,873 shares sold per year commencing on
November 9, 1995, and ending on November 9, 1999 (the "Krajicek Agreement"). The
average sales price, related to stock sold, shall be computed in arrears at the
end of each twelve month period and shall be based on the highest priced 203,873
shares (or portion thereof) sold during such period.
On October 1, 1995, the Company purchased 203,873 shares of Serv-Tech stock
from Mr. Krajicek at the then fair market price of $8.00 per share, or a total
of $1.6 million, leaving 611,618 shares subject to the Krajicek Agreement.
The Company recently reached an agreement with Mr. Krajicek to defer, to no
earlier than September 30, 1997 unless agreed by the Company, the cash
obligation that may be due, if any, during the period
31
34
SERV-TECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
beginning November 9, 1996. Additionally, the cash obligation that may be due,
if any, during the period beginning November 9, 1997 has been deferred to no
earlier than February 1, 1998. Based upon the current level of the Serv-Tech
stock price ($5.375 per share as of March 14, 1997), Mr. Krajicek would be due
approximately $0.5 million (associated with the period beginning November 9,
1996), if the stock were sold pursuant to the terms of the Krajicek Agreement.
See Note 8 for additional related party information regarding Mr. Krajicek.
8. STEWART & STEVENSON SETTLEMENT
On July 25, 1996, the Company received a $30.0 million verdict by a
Houston, Texas jury on a retrial against Stewart & Stevenson Services, Inc.
("Stewart & Stevenson") for breach of an agreement that contained confidential
information and trade secrets. Before the trial, the parties entered into a
settlement agreement by which Stewart & Stevenson waived its right of appeal of
the trial-court judgment in the case and guaranteed a minimum recovery of
$250,000 in exchange for a $20.0 million cap on any recovery by the Company. In
September 1996, after payment of attorney's fees and a payment to the Company's
founder, Richard W. Krajicek, the Company received and recorded a $5.8 million
net settlement ($3.9 million on an after-tax basis, or $0.57 per share).
9. SPECIAL CHARGE
During the third quarter of 1994, management performed a comprehensive
review of the Company's operating investment activities and structure. This
review was performed in light of management's new strategy for growth, which
focuses on operations that management believed would generate acceptable returns
on investments and elimination of activities that did not meet this criteria. As
a result of this review, the Company recorded a special charge of $12.2 million,
which consisted of non-cash write-offs including goodwill and other intangibles
($3.5 million), equipment ($1.6 million), and investment in affiliates ($1.2
million). Additionally, the special charge included certain project-related
reserves ($2.2 million) and accruals for employee-related and other costs ($3.7
million). The non-cash write-offs for goodwill and investments in affiliates
were primarily a result of management's decision to de-emphasize certain
domestic and foreign operations.
10. LONG-TERM INCENTIVE COMPENSATION, STOCK OPTIONS AND STOCK AWARD PLANS
On May 18, 1995, the shareholders approved the 1995 Long-Term Incentive
Plan ("Plan") administered solely by the Long-Term Incentive Plan Committee of
the Board of Directors ("Committee"). The Plan permits the issuance of stock
options, stock appreciation rights ("SARs"), restricted stock awards,
performance grants and any other awards deemed consistent with the plan to key
employees of the Company and certain other key individuals, who perform services
for the Company. The Plan reserves 300,000 shares of Company common stock for
distribution. Under the terms of the Plan, options granted may be either
nonqualified or incentive stock options and the exercise price, determined by
the Committee, may not be less than 50 percent of the fair market value of the
underlying common shares at the time the option is granted; however, in the case
of incentive stock options issued to employees of the Company, the option price
may not be less than the fair market value of a share on the date of grant.
The Committee may grant SARs either alone, or in conjunction with stock
options, performance grants or other awards. Upon exercise of such rights, the
optionee surrenders the exercisable portion of the option in exchange for
payment of the difference between the aggregate option price and the aggregate
fair market value on the date of surrender. Payment may be in the form of cash
and/or common stock valued at its fair market value on the date of surrender.
SARs utilize the same shares reserved for issuance of options, and the exercise
of a SAR or option automatically cancels the related option or SAR. SARs become
exercisable and expire on the same dates as the related options. There were no
SARs issued during 1996.
32
35
SERV-TECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Restricted stock awards are issuances of a given number of shares of
Company common stock that are restricted as to the sale and transfer of the
shares; participants are entitled to all rights of a shareholder. Restricted
stock awards vest 20 percent on the date of grant with the remaining shares
vesting within four years. The cost of the awards are charged to expense over
the vesting period. During 1996, 64,800 restricted stock awards were granted
under the Plan. Compensation expense associated with the vesting of stock awards
was $0.1 million in 1996.
Performance grants entitle a participant to receive specified awards, as
determined by the Committee, if certain performance objectives are achieved
during a specified period. There were no performance grants awarded under the
plan during 1996.
Prior to the Plan, the Company had two Incentive Stock Option Plans ("ISO
Plans") that provided up to 920,000 shares of common stock to selected officers
and key employees of the Company. Subject to various conditions, the outstanding
options are exercisable for up to ten years at an option price not less than
market price on the date the option is granted. In connection with the
establishment of the Plan, the ISO Plans were amended to prohibit the grant of
additional common stock options, thereby canceling the remaining shares of
Company stock available for future awards, except for any options which become
available by way of forfeiture of any presently outstanding options.
The Company maintains a Director Stock Option Plan that provides up to
50,000 shares of common stock for issuance to certain non-employee directors of
the Company. The stock options are exercisable for up to ten years, at an option
price not less than the market price on the date the option is granted. The
Company has nonqualified stock options, not granted pursuant to a shareholder
approved plan, with certain key officers, directors, employees and consultants
of the Company. The Agreements provide for the issuance of 378,000 shares of
Company common stock at exercise prices ranging from $3.00 -- $7.75 and are
exercisable, subject to various conditions, for various terms of up to ten
years.
The following table sets forth pertinent information regarding stock option
transactions for each of the three years in the period ended December 31, 1996:
NUMBER OPTION PRICE
OF SHARES PER SHARE
--------- --------------
Outstanding December 31, 1993............................. 772,750 2.500 - 12.375
Granted................................................. 486,500 6.250 - 9.125
Exercised............................................... (43,800) 2.500 - 6.625
Cancelled............................................... (102,700) 6.625 - 12.375
---------
Outstanding December 31, 1994........................... 1,112,750 2.500 - 12.375
Granted................................................. 256,400 5.625 - 8.750
Exercised............................................... (40,000) 7.250 - 8.625
Cancelled............................................... (263,000) 6.250 - 9.125
---------
Outstanding December 31, 1995............................. 1,066,150 2.500 - 9.125
Granted................................................. 1,026,900 3.000 - 6.813
Cancelled............................................... (985,650) 3.000 - 12.375
---------
Outstanding December 31, 1996........................... 1,107,400 3.000 - 9.125
=========
Exercisable as of December 31, 1996....................... 372,500 3.000 - 9.125
=========
Included in the 1996 stock option cancellations and grants are 736,900
options which were exchanged, in October 1996, for options with a three-year
vesting schedule and an option price of $3.00 per share (the then current market
price of Serv-Tech stock). Of the 1,107,400 stock options outstanding at
December 31, 1996,
33
36
SERV-TECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
731,900 have an option price of $3.00 per share. The remaining 375,500 stock
options outstanding have option prices ranging from $5.625 to $9.125 per share.
The Company had 461,800, 503,050, and 280,250, shares of Common Stock
available for grant under existing stock option plans at December 31, 1996,
1995, and 1994, respectively.
As discussed in Note 1, the Company has elected to continue to measure
compensation cost related stock options in accordance with APB 25. However, if
compensation costs were measured using the fair value of the stock options on
the date of grant, during 1995 and 1996, in accordance with SFAS No. 123, the
Company's net earnings (loss) would be as follows:
1996 1995
---------------------------- -------------------------
AS REPORTED PROFORMA AS REPORTED PROFORMA
------------ ------------ ----------- ----------
Net earnings (loss)................... $(17,132,607) $(17,296,362) $2,061,119 $1,986,346
Earnings (loss) per share............. $ (2.55) $ (2.58) $ 0.31 $ 0.30
The weighted average fair value of options granted in 1995 and 1996 were
$3.74 and $2.11, respectively. The fair value of each option was determined
using the Black-Scholes option valuation model with the following assumptions
(i) risk free interest rate of 6.46 percent, (ii) expected volatility of 49.27
percent, and (iii) expected option life of 6 years and (iv) no annualized
dividend yield.
11. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and disputes incidental to its
business. The Company believes that the disposition of all such claims and
disputes, individually or in the aggregate, should not have a material adverse
effect upon the Company's financial position, results of operations or cash
flows.
At December 31, 1996, the Company had irrevocable letters of credit
outstanding of approximately $19.8 million. The letters of credit were issued
primarily to (i) guarantee certain of the Company's insurance programs amounting
to $4.6 million, (ii) support Finchaa Sugar Factory Project procurement
amounting to $0.6 million, (iii) $6.3 million to support the unrecovered portion
of the Finchaa project advance payment and (iv) to support job performance
guarantees on the Finchaa project amounting to $8.3 million.
Operating Lease Commitments
The Company has entered into operating leases for various types of
equipment and for its building facilities. Most leases contain purchase and
renewal options at fair market and rental values. Rental expense was
approximately $2.5 million, $2.3 million, and $2.2 million for the years ended
December 31, 1996, 1995, and 1994, respectively.
The following is a schedule of minimum rental commitments under
noncancelable operating leases. Minimum lease payments have not been reduced by
minimum sublease rentals of $2,258,000 due in the future.
YEARS ENDING DECEMBER 31,
- -------------------------
1997.................................................. $2,678,000
1998.................................................. 1,858,000
1999.................................................. 1,382,000
2000.................................................. 980,000
2001.................................................. 842,000
Thereafter............................................ 3,615,000
34
37
SERV-TECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INSURANCE
The Company maintains a comprehensive property and casualty risk management
program including worker's compensation insurance for its employees and other
coverages for normal business risks. In many cases, the Company is responsible
for the payment of incurred claims up to specified individual and aggregate
limits, over which a third party insurer is contractually liable for any
additional payment of such claims. Accordingly, the Company bears certain
economic risks related to these coverages. The Company records an accrual equal
to the estimated costs expected to result from incurred claims plus an estimate
of claims incurred but not reported based on the best available information.
However, the nature of these claims is such that actual development of the
claims may vary significantly from the estimated accruals. All changes in the
accrual estimates are accounted for on a prospective basis and could have a
significant impact on the Company's financial position or results of operations.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable and
payable, accrued liabilities and the Revolving Note are considered to
approximate fair value due to the short-term nature of these instruments. The
carrying value of long-term debt is estimated to approximate fair value based on
the Company's current incremental borrowing rates for similar types of borrowing
arrangements.
In the normal course of business, the Company issues letters of credits and
other guarantees which are not reflected in the consolidated balance sheet. In
the past no significant claims have been made against these financial
instruments and management expects no material losses to occur.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the three years ended December 31, 1996, for interest and
income taxes was as follows:
1996 1995 1994
---------- ---------- ----------
Interest....................................... $2,337,433 $1,960,000 $1,432,000
Income taxes................................... 980,348 1,681,000 2,738,000
The following non-cash transactions have been excluded from the
consolidated statement of cash flows for the three years ended December 31,
1996:
1996 1995 1994
-------- ---------- ----------
Translation adjustments of equity investments... $ 20,477 $ 66,943 $ 111,531
Common stock issued in connection with certain
acquisitions.................................. 280,000 1,643,750 5,087,500
Treasury stock transferred to the Company 401(k)
plan.......................................... 823,797 84,127 --
Acquisition of property, plant, and equipment in
settlement of certain receivables............. -- -- 536,000
Additional compensation earned under the terms
of an earn-out agreement...................... -- 410,000 --
35
38
SERV-TECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Components of cash used for acquisitions as reflected in the Consolidated
Statement of Cash Flows for the three years in the period ended December 31,
1996, are summarized as follows:
1995 1994
----------- ------------
Fair value of current assets, net of cash acquired....... $ 623,917 $ 11,049,660
Fair value of noncurrent assets, excluding intangibles... 1,135,797 5,511,264
Intangible assets*....................................... 338,314 2,047,207
Liabilities assumed or incurred.......................... (1,472,514) (16,292,081)
----------- ------------
$ 625,514 $ 2,316,050
=========== ============
- ---------------
* Net of approximately $1.5 million in 1995 and $5.1 million in 1994 non-cash
consideration.
14. DEFINED CONTRIBUTION PLANS
The Company maintains a defined contribution 401(k) plan for its permanent
employees. Under the plan, eligible employees may contribute amounts through
payroll deductions for investment in various funds established by the plan. The
Company matches 50% of a participant's voluntary contribution up to a maximum of
6% of a participant's compensation in Company common stock. The costs of the
plan were $0.7 million, $0.7 million, and $0.6 million in 1996, 1995, and 1994,
respectively. The Company recently amended its 401(k) plan, effective, April 1,
1997, to replace the Company matching contribution with a discretionary profit
sharing contribution determined by the Company's Board of Directors on an annual
basis (in arrears).
15. BUSINESS SEGMENT AND MAJOR CUSTOMERS
The Company's operations include three primary business segments: (i)
Specialty Services, (ii) SECO Industries ("SECO") and (iii) Environmental and
Performance Chemicals ("Environmental"). Specialty Services provides specialized
turnaround maintenance, welding, boiler repair and refractory services primarily
to the refining, petrochemical, power, paper and cement industries. SECO
installs electrical and instrumentation systems for offshore production
platforms, refineries, petrochemical processing plants and food processing
plants. Environmental includes tank cleaning, decontamination services and the
Company's specialty chemical company, Chemisolv. The operations and assets of
Chemisolv have been included from the date of acquisition, November 1994 (See
Note 4).
Operating profit (loss) is defined as total revenue less direct and
operating expenses. Identifiable assets are those assets directly identifiable
with operations in each segment. Corporate and Other consist primarily of cash
and cash equivalents, certain receivables and the corporate facilities.
36
39
SERV-TECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information by business segment for each of the three
years ended December 31, 1996, is set forth below.
ENVIRONMENTAL
SPECIALTY & PERFORMANCE CORPORATE
SERVICES SECO CHEMICALS & OTHER CONSOLIDATED
--------- ------- ------------- --------- ------------
1996
Revenues for customers........ $ 78,858 $47,232 $16,296 $ -- $142,386
Intersegment revenues......... 109 2,746 -- (2,855)(1) --
-------- ------- ------- ------- --------
Total revenues................ 78,967 49,978 16,296 (2,855) 142,386
-------- ------- ------- ------- --------
Operating profit (loss)....... 47(2) 3,524 (1,442)(3) (7,989)(4) (5,860)
Identifiable assets........... 36,418 13,557 13,343 12,428 75,746
Depreciation and
amortization............... 2,733 798 1,642 832 6,005
Capital expenditures.......... 998 56 884 89 2,027
1995
Revenues for customers........ $130,103 $49,573 $15,155 $ -- $194,831
Intersegment revenues......... 1,755 2,620 1,284 (5,659)(1) --
-------- ------- ------- ------- --------
Total revenues................ 131,858 52,193 16,439 (5,659) 194,831
-------- ------- ------- ------- --------
Operating profit (loss)....... 4,658 3,699 230 (6,245) 2,342
Identifiable assets........... 42,131 24,180 11,039 11,048 88,398
Depreciation and
amortization............... 3,238 935 1,528 460 6,161
Capital expenditures.......... 1,716 246 1,588 1,894 5,444
1994
Revenues for customers........ $113,541 $45,547 $ 8,624 $ 122 $167,834
Intersegment revenues......... -- 3,895 -- (3,895)(1) --
-------- ------- ------- ------- --------
Total revenues................ 113,541 49,442 8,624 (3,773) 167,834
-------- ------- ------- ------- --------
Special Charge(5)............. 10,599 -- -- 1,626 12,225
Operating profit (loss)....... (4,935) 3,380 (219) (7,548) (9,322)
Identifiable assets........... 47,786 19,970 5,964 13,314 87,034
Depreciation and
amortization............... 3,060 920 680 720 5,380
Capital expenditures.......... 3,311 643 648 228 4,830
- ---------------
(1) Elimination of intersegment revenue.
(2) Includes a $1.4 million pre-tax charge for the impairment of certain
obsolete equipment and the write-off of an uncollectible receivable.
(3) Includes a $0.7 million pre-tax second quarter charge for the write-off of
certain tank cleaning equipment that will not be used in the future
operations of the Company.
(4) Includes a second quarter pre-tax charge of $1.3 million primarily related
to severance costs, consulting and professional fees.
(5) Includes a $12.2 million pre-tax special charge. See Note 9 for additional
information.
Significant sales to individual customers shown as a percentage of total
revenues were 15% in 1996, 14% in 1995, and 29% in 1994.
37
40
SERV-TECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
QUARTER
------------------------------------------
FIRST SECOND THIRD FOURTH
------- -------- ------- -------
IN THOUSANDS, EXCEPT PER SHARE DATA
1996
Revenues........................................ $33,314 $ 38,471 $34,375 $36,226
Gross profit.................................... 7,500 7,719 7,196 7,508
Net income (loss) from continuing operations.... 199 (3,327)(a) 3,174(b) (2,510)
Income (loss) from discontinued operations, net
of income taxes(c)........................... (1,229) (10,505) -- (2,935)(d)
Net income (loss)............................... (1,030) (13,832) 3,174 (5,445)
Earnings (loss) per share from continuing
operations................................... 0.03 (0.50) 0.47 (0.37)
Earnings (loss) per share from discontinued
operations................................... (0.18) (1.57) -- (0.43)
Net income (loss) per share..................... (0.15) (2.07) 0.47 (0.80)
QUARTER
------------------------------------------
FIRST SECOND THIRD FOURTH
------- -------- ------- -------
1995
Revenues........................................ $60,324 $ 45,877 $30,017 $58,613
Gross profit.................................... 10,817 8,307 6,048 11,520
Net income (loss) from continuing operations.... 836 (252) (1,648) 290
Income (loss) from discontinued operations, net
of income taxes.............................. 682 919 333 901
Net income (loss)............................... 1,517 666 (1,314) 1,192
Earnings (loss) per share from continuing
operations................................... 0.12 (0.04) (0.24) 0.04
Earnings (loss) per share from discontinued
operations................................... 0.10 0.14 0.05 0.13
Net income (loss) per share..................... 0.23 0.10 (0.19) 0.18
- ---------------
(a) Includes a $3.5 million pre-tax (or $2.3 million after-tax) charge for the
impairment of certain equipment, an uncollectible receivable, and severance
related costs.
(b) Includes a $5.8 million pre-tax (or $3.9 million after-tax) Stewart &
Stevenson settlement. See Note 8 for additional information.
(c) See Note 3 for a discussion of the discontinued EPC operations.
(d) Increase in loss from discontinued operations related to an additional
Finchaa project write-down, see Note 3.
17. SUBSEQUENT EVENT
On March 5, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") by and among Philip Environmental Inc. an Ontario,
Canada corporation, ("Philip"), Taro Aggregates, Ltd., an Ontario, Canada
corporation and wholly-owned subsidiary of Philip ("Taro"), ST Acquisition
Corporation, a Texas corporation and wholly-owned subsidiary of Taro ("Sub"),
and the Company. Pursuant to the Merger Agreement, Sub will be merged with and
into the Company, and the Company will become a wholly-owned subsidiary of Taro
and an indirect, wholly-owned subsidiary of Philip.
Under the terms of the Merger Agreement, each share of the Company's Common
Stock, par value $.50 per share ("Company Common Stock") will be exchanged for
0.403 share of Philip common stock, no par
38
41
SERV-TECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value ("Philip Common Stock") (except for shares held by persons who perfect and
exercise dissenters' rights under Texas law), provided that Philip will pay cash
in lieu of any fractional shares of Philip Common Stock to which holders of
Company Common Stock would otherwise be entitled. Based upon the closing price
of Philip Common Stock on March 5, 1997, each share of Company Common Stock is
valued at $6.60 per share. In aggregate, the transaction is valued at
approximately $72.0 million, including the assumption of approximately $21.0
million of Company indebtedness. The transaction is subject to regulatory and
shareholder approvals, and is expected to close by June 30, 1997.
Philip is a fully integrated, resource recovery and industrial services
company providing metals processing and mill services, solid and liquid
by-products recovery and industrial and remediation services to all major
industry sectors. Philip Common Stock trades on the New York Stock Exchange.
39
42
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Serv-Tech, Inc.:
We have audited the accompanying consolidated balance sheets of Serv-Tech,
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The
accompanying consolidated statements of operations, changes in stockholders'
equity and cash flows of Serv-Tech, Inc. and Subsidiaries, for the year ended
December 31, 1994, were audited by other auditors whose report thereon dated
February 17, 1995, expressed an unqualified opinion on those statements.
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 1996 and 1995 consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Serv-Tech, Inc. and Subsidiaries at December 31, 1996 and 1995, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
February 26, 1997
40
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information as of March 14, 1997, with respect
to each of the members of the Board of Directors and Executive Officers,
including the business experience of each during at least the past 5 years and
the age of each on March 14, 1997.
Robert J. Cresci, 53, has been a Director of the Company since November,
1984, Chairman of the Board since August, 1995, and President and Chief
Executive Officer since May, 1996. Mr. Cresci has been a Managing Director of
Pecks Management Partners Ltd., an investment management firm, since September,
1990. Mr. Cresci currently serves on the boards of Bridgeport Machines, Inc.,
EIS International, Inc., Sepracor, Inc., Vestro Natural Foods, Inc., Olympic
Financial, Ltd., GeoWaste, Inc., Hitox, Inc., Natures Elements, Inc., Garnet
Resources Corporation, HarCor Energy, Inc., Meris Laboratories, Inc., Film
Roman, Inc., Educational Medical, Inc. and several private companies.
D.D. (Del) Hock, 62, was appointed a Director of the Company by the Board
of Directors in January, 1996. Mr. Hock is the retired Chairman and Chief
Executive Officer of Public Service Company of Colorado, an investor-owned
electric, natural gas, and thermal energy utility. He began his career with
Public Service Company in 1962 and held numerous positions in the Company,
including Vice President of accounting, Senior Vice President of utility
services, President, Chief Operating Officer, and Chief Executive Officer. Mr.
Hock serves on the board of numerous charitable and power industry
organizations, including Edison Electric Institute, Electric Power Research
Institute, The Western Energy Supply and Transmission (WEST) Associates, and the
Association of Edison Illuminating Companies. He is also a director of Hathaway
Corporation and American Century Investments.
Mike M. Mustafoglu, 46, has been a Director of the Company since May, 1995.
Since 1991, he has served as President of TransGlobal Financial Corporation, a
merchant banking and financial advisory firm. Between 1984 and June, 1996, he
served in executive capacities with the Oxbow Group of companies as President of
Oxbow Energy, Oxbow Hydrocarbons and Oxbow Petroleum, and, between 1992 and
1995, has served as a Director and co-founder of ECO(2), Inc., a NASDAQ listed
recycling company. From 1977 to 1984, Mr. Mustafoglu was Vice President Finance
of Getty Oil Canada, owned by Getty Oil Company, an integrated natural resources
company, and from 1974 to 1977, he was an Exploration Geophysicist for Shell Oil
Company, an integrated petroleum company. In addition, he is a former member of
the Board of Directors of National Petroleum Refiners Association; Independent
Petroleum Association of America and the Economic Council of Palm Beach County.
John B. O'Brien, 54, was elected a Director of the Company in May, 1993. He
has served as President of Baker & O'Brien, Inc., a Dallas, Texas based
engineering consulting firm serving the oil, gas and related industries, since
January, 1993. From 1987 through 1992, Mr. O'Brien was Vice President and a
director of Muse, Stancil & Co., an energy consulting firm. He has been involved
in the domestic and international petroleum refining industry for more than 30
years, first as a chemical engineer with Caltex Petroleum Corporation and later
as a consultant.
James M. Piette, 72, was appointed a Director of the Company by the Board
of Directors in January, 1995. Mr. Piette is the retired Vice Chairman, of Union
Camp Corp., a paper, chemical, and wood products company, where he served from
1951 to 1991 as a director, Senior Executive Vice President and Vice Chairman.
Mr. Piette also serves on the Boards of Union Mission and Savannah Electric and
Power Company, and is a Fellow and member of the Technical Association of the
Pulp and Paper Industry (TAPPI). In addition, Mr. Piette is a member of several
vocational, community and charitable organizations.
41
44
Frank A. Perrone, 51, has been a Director of the Company since May, 1996,
and has served as Vice President, General Counsel and Corporate Secretary since
November, 1994. Mr. Perrone was the Senior Corporate Counsel, Southern District
of Jacobs Engineering Group Inc. from August, 1994 to November, 1994. He was
Vice President, General Counsel and Corporate Secretary of CRSS Inc. from 1983
to July, 1994. He served as General Attorney for Dresser Industries, Inc. from
1977 to 1982 and as an Assistant District Attorney for Harris County, Texas from
1973 to 1977.
David P. Tusa, 36, has been Senior Vice President, Finance and
Administration since August, 1994. Mr. Tusa previously held positions of Vice
President, Controller of National Convenience Stores and Corporate Controller of
CRSS Inc. since April, 1990. Prior to this Mr. Tusa was with the public
accounting and consulting firm of KPMG Peat Marwick since January 1983, and most
recently as a Senior Manager. He holds a B.B.A. in Accounting from the
University of Houston and is a Certified Public Accountant.
Dale W. Wilhelm, 34, has been Corporate Controller since September, 1994.
Mr. Wilhelm previously held the position of Assistant Corporate Controller of
CRSS Inc. since May, 1990. Prior to this Mr. Wilhelm was with the public
accounting and consulting firm of KPMG Peat Marwick since September 1995, and
most recently as an Audit Manager. He holds a B.B.A. in Accounting from the
University of Texas at Austin and is a Certified Public Accountant.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities ("Reporting Persons") to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and NASDAQ. Reporting Persons are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely upon a review of such forms and any amendments thereto
furnished to the Company during the period January 1, 1996, to December 31,
1996, and on written representations of certain Reporting Persons that no Forms
5 were required for those persons, the Company believes there were no known
failures to file or unreported transactions by Reporting Persons.
42
45
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth all compensation
paid by the Company in 1996 to the Chief Executive Officer and to each of the
four most highly compensated executive officers of the Company whose
compensation exceeded $100,000 ("Named Executives").
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
----------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ----------------------- -------
------------------------------------ RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS(2) OPTIONS(3) PAYOUTS COMPENSATION(4)
- --------------------------- ---- -------- ------- --------------- ---------- ---------- ------- ---------------
Robert J. Cresci(5),....... 1996 0 0 $103,650 0 86,900(6) 0 --
Chairman of the Board, 1995 0 0 $ 37,500 0 10,900(6) 0 --
President and Chief 1994 0 0 $ 5,000 0 0 0 --
Executive Officer
Richard L. Daerr(5),....... 1996 $ 99,836(7) 0 $ 7,900(7) 0 20,000 0 $465,837(12)
Former President and 1995 $200,000 0 $ 11,856 0 0 0 $ 2,058
Chief Executive Officer 1994 $ 63,030 $40,000 $ 13,000 0 180,000 0 --
Larry A. Talbert(5),....... 1996 $ 54,754(8) 0 $ 3,216(8) $19,500 0 0 $404,738(13)
Former President, 1995 $138,145 $40,000 $ 15,772 0 0 0 $ 20,749
Serv-Tech EPC, Inc. 1994 $125,525 $25,000 $ 1,044 0 75,000 0 $ 3,238
David P. Tusa(5),.......... 1996 $140,000 $50,000 $ 10,248 $12,188 75,000(9) 0 $ 5,111
Senior Vice President, 1995 $132,000 $25,000 $ 11,736 0 10,000(9) 0 $ 1,193
Finance & Administration 1994 $ 40,392 $25,000 $ 3,274 0 50,000(9) 0 $ 132
Frank A. Perrone(5),....... 1996 $122,000 $20,000 $ 8,616 $12,188 50,000(10) 0 $ 4,410
Vice President, General 1995 $115,000 $15,000 $ 10,056 0 0 0 $ 320
Counsel and Corporate 1994 $ 16,668 $ 7,500 $ 1,119 0 35,000(10) 0 $ 29
Secretary
Dale W. Wilhelm(5)......... 1996 $ 83,000 $32,500 $ 8,616 $ 3,047 15,000(11) 0 $ 204
Corporate Controller 1995 $ 79,000 $ 7,500 $ 10,056 0 0 0 $ 226
1994 $ 24,148 $ 7,500 $ 3,364 0 15,000(11) 0 $ 50
- ---------------
(1) "Other Annual Compensation" includes amounts paid as auto allowances and
company paid insurance of $10,248 for Mr. Tusa, and $8,616 for Mr. Perrone
and Mr. Wilhelm. Also includes $90,000 in Retainer Fees and $13,650 in
Board and Committee Meeting Fees for Mr. Cresci.
(2) Includes the number and value of restricted (unvested) shares held by the
Named Executives as of December 31, 1996, as follows: Mr. Talbert 6,000
shares and $14,625, Mr. Tusa 3,000 shares and $7,313, Mr. Perrone 3,000
shares and $7,313, and Mr. Wilhelm 750 shares and $1,828, respectively.
Under the Securities and Exchange Commission rules on executive
compensation disclosure, all restricted stock was valued using the average
of the high and low prices of the Company's unrestricted Common Stock on
the National Association of Securities Dealers Automated Quotation System
("NASDAQ") as of December 31, 1996, which was $2.4375.
(3) On October 1, 1996, the Compensation Committee approved an exchange of
outstanding options held by current directors and active employees for
options with an exercise price of $3.00 per share and a 3 year vesting
schedule (see Serv-Tech, Inc. Compensation Committee Report On Executive
Compensation -- Compensation Program Components).
(4) "All Other Compensation" includes Company matching contributions to the
Company's 401(k) Plan and the premiums paid on life insurance policies in
excess of $50,000 under the Group Life Insurance Plan. Under the Company's
401(k) Plan, each eligible employee may elect to contribute up to 20% of
his or her salary and to have such deferred amounts invested in the plan.
The Company contributes $.50 (in Company common stock) for every $1.00
contributed by a participant, limited to 6% of the salary of such
participating employee.
(5) Mr. Cresci has been a Director of the Company since November, 1984, and
Chairman of the Board since August, 1995, and President and Chief Executive
Officer since May, 1996. Mr. Daerr joined the
43
46
Company in August, 1994 and served as President and Chief Executive Officer
from October, 1994 to May 23, 1996. Mr. Talbert served as Executive Vice
President, Operations from August 9, 1995, until January 29, 1996. Mr. Tusa
joined the Company in August, 1994 and became an executive officer of the
Company in October, 1994. Mr. Perrone joined and became an executive
officer of the Company in November, 1994. Mr. Wilhelm joined and became an
executive officer of the Company in September, 1994.
(6) Includes 30,900 share options previously granted and outstanding, including
the 10,900 share options originally granted in 1995, which were
subsequently exchanged for a like number of new share options granted on
October 1, 1996, at an exercise price of $3.00 per share. See footnotes (1)
and (2) of the table entitled "Option Grants In Last Fiscal Year".
(7) "Salary" includes $99,836 from January, 1996 to May 23, 1996. "Other Annual
Compensation" includes $2,400 auto allowance and $5,500 company paid
insurance.
(8) "Salary" includes $18,251 for January, 1996. "Other Annual Compensation"
includes $3,216 company paid insurance.
(9) Includes 60,000 share options originally granted in 1994 and 1995 that were
subsequently exchanged for a like number of new share options granted on
October 1, 1996, at an exercise price of $3.00 per share vesting over 3
years. See footnotes (1) and (3) of the table entitled "Option Grants In
Last Fiscal Year".
(10) Includes 35,000 share options originally granted in 1994 that were
subsequently exchanged for a like number of new share options granted on
October 1, 1996, at an exercise price of $3.00 per share vesting over 3
years. See footnotes (1) and (4) of the table entitled "Option Grants In
Last Fiscal Year".
(11) Includes 15,000 share options originally granted in 1994 that were
subsequently exchanged for a like number of new share options granted on
October 1, 1996, at an exercise price of $3.00 per share vesting over 3
years. See footnotes (1) and (5) of the table entitled "Options Grants In
Last Fiscal Year".
(12) "All Other Compensation" includes a $440,000 separation payment and $21,600
auto allowance (2 years allowance) pursuant to Mr. Daerr's Employment
Agreement in conjunction with the termination of his employment on May 23,
1996.
(13) "All Other Compensation" includes a $440,503 separation payment pursuant to
Mr. Talbert's Employment Agreement in conjunction with the termination of
his employment on January 29, 1996.
Employment Agreements. On August 29, 1994, and November 10, 1994, the
Company entered into employment agreements with Messrs. David P. Tusa, Senior
Vice President, Finance & Administration and Frank A. Perrone, Vice President,
General Counsel and Corporate Secretary, respectively. These agreements are for
3 year rolling terms and provide that in the event of termination of employment,
the executive will receive as a lump sum his annual base salary plus employee
benefits up to 1 year after such termination, except that in the event of a
termination within 3 years of a Change in Control of the Company, as defined in
the agreement, Messrs. Tusa and Perrone would receive 18 months base salary and
benefits. The agreements further require that the executive not engage as an
officer, employee or otherwise in providing turnaround services for a competitor
of the Company for 1 year after termination by the executive of his employment
with the Company.
The Company has agreed to provide certain supplemental benefits to Dale W.
Wilhelm, Corporate Controller. Specifically, if Mr. Wilhelm's employment is
terminated either by the Company, without cause or by resignation of Mr. Wilhelm
prior to reaching the age of 64 1/2, the Company will pay Mr. Wilhelm a lump sum
severance payment equal to 12 months of his salary (plus car allowance) at the
time of such termination or resignation. In addition, Mr. Wilhelm will be
entitled to retain certain benefits (group health, dental and car allowance) on
the then current terms and cost for the 12 months subsequent to such termination
or resignation, unless Mr. Wilhelm becomes eligible for such benefits from a
subsequent employer.
Directors' Fees and Options. The Company paid non-Chairman directors who
are not employees of the Company at an annual rate of $12,000. The Company paid
the Chairman of the Board at an annual rate of $75,000 until May 23, 1996, at
which time the annual rate was increased to $100,000 when the Chairman also
44
47
assumed the position of Company President and Chief Executive Officer. The
Company also paid $1,000 for each Board meeting attended and $800 for each
Committee meeting attended by non-employee directors and reimburses their
expenses incurred in attending Board and Committee meetings. Additionally, each
newly elected Board member receives a non-qualified stock option for 5,000
shares vesting over 5 years, and each re-elected Board member receives a
non-qualified stock option for 1,000 fully vested shares.
Option Grants. The following table sets forth the individual grants of
stock options made by the Company during 1996 to the Named Executives:
OPTION GRANTS IN LAST FISCAL YEAR(1)
INDIVIDUAL GRANTS
----------------------------------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED
OPTIONS TO EMPLOYEES IN EXERCISE OR EXPIRATION GRANT DATE
NAME GRANTED 1996 FISCAL YEAR BASE PRICE DATE PRESENT VALUE
---- ---------- ---------------- ----------- ---------- -------------
Robert J. Cresci.............. 86,900(2) 8.46% $3.00 10-1-06 $174,193(6)
Richard L. Daerr.............. 20,000 1.95% $6.25 5-24-97 --
Larry A. Talbert.............. -- -- -- -- --
David P. Tusa................. 75,000(3) 7.30% $3.00 10-1-06 $147,750(6)
Frank A. Perrone.............. 50,000(4) 4.87% $3.00 10-1-06 $ 98,500(6)
Dale W. Wilhelm............... 15,000(5) 1.46% $3.00 10-1-06 $ 29,550(6)
- ---------------
(1) On October 1, 1996, the Compensation Committee approved an exchange of
outstanding options held by current directors and active employees for new
options with an exercise price of $3.00 per share and a 3 year vesting
schedule (see Serv-Tech, Inc. Compensation Committee Report On Executive
Compensation -- Compensation Program Components).
(2) Includes 30,900 share options previously granted and outstanding, which were
exchanged for a like number of new share options granted on October 1, 1996,
at an exercise price of $3.00 per share. Of the 86,900 share options
granted, 25,000 share options vested on the date of grant (October 1, 1996).
The remaining 61,900 share options vest on various dates over a 3 year
period ending October 1, 1999 (see footnote (1) above).
(3) Includes 60,000 share options previously granted and outstanding, which were
exchanged for a like number of new share options granted on October 1, 1996,
at an exercise price of $3.00 per share. The 75,000 share options vest over
a 3 year period ending October 1, 1999 (see footnote (1) above).
(4) Includes 35,000 share options previously granted and outstanding, which were
exchanged for a like number of new share options granted on October 1, 1996,
at an exercise price of $3.00 per share. The 50,000 share options vest over
a 3 year period ending October 1, 1999 (see footnote (1) above).
(5) Includes 15,000 share options previously granted and outstanding, which were
exchanged for a like number of new share options granted on October 1, 1996,
at an exercise price of $3.00 per share. The 15,000 share options vest over
a 3 year period ending October 1, 1999 (see footnote (1) above).
(6) Grant date present value is based upon the Black-Scholes option pricing
model. The Black-Scholes option value was based upon the following
assumptions: (i) no annualized dividend yield, (ii) an annualized stock
price volatility factor of .4927, (iii) a risk free interest rate of 6.46%,
(iv) options exercised 10 years from the date of grant, and (v) a discount
rate of 3% per year during the 3 year vesting period to reflect the risk of
forfeiture of unvested stock options. These assumptions were based upon 6
years of historical monthly trading data.
Option Exercises and Year-End Option Values. The following table sets forth
the year-end values of unexercised options held by the Named Executives at
December 31, 1996, where the value of the underlying stock exceeds the exercise
price. The Company has not granted any stock appreciation rights.
45
48
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
DECEMBER 31, 1996 OPTION VALUES
None of the Named Executives exercised any stock options in the 1996 fiscal
year.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1996 AT DECEMBER 31, 1996(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Robert J. Cresci........................... 25,000 61,900 0 0
Richard L. Daerr........................... 200,000 0 0 0
Larry A. Talbert........................... 69,000 36,000 0 0
David P. Tusa.............................. 0 75,000 0 0
Frank A. Perrone........................... 0 50,000 0 0
Dale W. Wilhelm............................ 0 15,000 0 0
- ---------------
(1) The value of options was calculated using the average of the high and low
prices of the Company's Common Stock on the NASDAQ as of December 31, 1996,
which was $2.4375.
During October, 1996, 736,900 then outstanding stock options were exchanged
for stock options with a 3 year vesting schedule and an option price of $3.00
per share, the then current market price of Company Stock (the "Exchange").
Participation in the Exchange by Named Executives is as follows:
EXCHANGE OF OPTIONS TABLE
MARKET
PRICE EXERCISE LENGTH OF ORIGINAL
NUMBER OF OF STOCK PRICE NEW OPTION TERM
OPTIONS AT TIME OF AT TIME OF EXERCISE REMAINING AT DATE
NAME DATE EXCHANGED EXCHANGE EXCHANGE PRICE OF EXCHANGE
---- --------- --------- ---------- ---------- -------- ------------------
Robert J. Cresci...... 10/1/96 10,000 $ 3.00 $12.375 $ 3.00 4 years, one month
10/1/96 5,000 $ 3.00 $ 8.25 $ 3.00 6 years, seven months
10/1/96 6,000 $ 3.00 $ 7.75 $ 3.00 7 years, one month
10/1/96 1,000 $ 3.00 $ 6.75 $ 3.00 8 years, four months
10/1/96 8,900 $ 3.00 $ 5.625 $ 3.00 8 years, ten months
---------
30,900
David P. Tusa......... 10/1/96 50,000 $ 3.00 $ 6.25 $ 3.00 8 years, one month
10/1/96 10,000 $ 3.00 $ 6.75 $ 3.00 8 years, four months
---------
60,000
Frank A. Perrone...... 10/1/96 35,000 $ 3.00 $ 6.25 $ 3.00 8 years, one month
Dale W. Wilhelm....... 10/1/96 15,000 $ 3.00 $ 6.25 $ 3.00 8 years, one month
SERV-TECH, INC. COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
In fiscal year 1996, the Compensation Committee (the "Committee") was
comprised of 3 non-salaried directors, Messrs. O'Brien (Chairman) Hock and
Piette, who also comprise the Administrative Committee of the Company's Long
Term Incentive Plan. For the remainder of this report, the Administrative
Committee is considered a part of the Compensation Committee except as otherwise
indicated.
The Compensation Committee makes recommendations to the Board regarding
executive officer salaries and bonuses, and the Administrative Committee of the
Long Term Incentive Plan makes decisions regarding stock option grants and stock
awards. All recommendations of the Compensation Committee are reviewed and
approved by the entire Board of Directors (except that directors who are also
executive officers or serve as Chairman of the Board abstain from voting with
respect to their own compensation) except as otherwise indicated.
46
49
COMPENSATION POLICY
The compensation policy of the Company, which is endorsed by the Committee,
is that a substantial portion of the annual compensation for each executive
officer should relate to and be dependent upon the performance of the Company as
well as the individual contribution of each officer. Consequently, the
compensation program is designed to motivate senior management and to align the
interests of executive officers with the long-term interest of shareholders.
COMPENSATION PROGRAM COMPONENTS
The executive compensation program is comprised of salary, annual cash
bonus awards and long-term incentive opportunities primarily in the form of
stock options.
Base Salary -- At senior executive levels, base salaries are modest by
industry standards. Actual salaries are based on individual performance,
comparative levels of responsibility and competitive marketplace relationships.
Annual Bonus Awards -- Except for bonus amounts awarded on the basis of
exceptional and meritorious achievement, the Company awards annual bonuses based
on the attainment of certain operating objectives. Executive officer bonuses are
derived from a specific quantitative formula approved by the Compensation
Committee based on ultimate financial performance of the Company and its
operating subsidiaries as measured against Board approved financial goals.
Stock Option Plans -- The Committee strongly believes that it is in the
best interest of the shareholders for the Company compensation to be tied
directly to shareholder return by the participation of key executives in
long-term incentive stock awards. Therefore, key executives and management are
eligible to receive, from time to time, stock options which give them the right
to purchase stock in the future at a specified price. The number of stock
options granted to executive officers is based on individual performance,
performance of the Company's subsidiaries and competitive practices. In view of
the decline in price of the Company's stock price in 1996 and the need to
maintain an incentive for Company management, the Committee approved the
exchange of all outstanding stock options held by current directors and active
employees for new stock options with a $3.00 per share exercise price and a new
3 year vesting period. Except with respect to non-employee directors and except
with respect to 25,000 share options to the Chairman, Mr. Cresci, all stock
options issued pursuant to the October 1, 1996, exchange have a new 3 year
vesting schedule regardless of the majority-vested status of the stock options
so exchanged.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
As Chairman of the Board, Mr. Cresci's retainer is determined by the
members of the Compensation Committee based on the performance of the Company
and the efforts of Mr. Cresci. The Board raised Mr. Cresci's annual retainer
from $75,000 to $100,000 effective May 23, 1996, to reflect Mr. Cresci's
additional duties as President and Chief Executive Officer of the Company
commencing as of that date.
COMPENSATION COMMITTEE
John B. O'Brien, Chairman
D. D. Hock
James M. Piette
47
50
PERFORMANCE GRAPH
The following graph compares the performance of the Company's Common Stock
to the NASDAQ Total Return Index and to an index of peer companies selected by
the Company since December 31, 1991.
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) SERV-TECH S&P 500 PEER GROUP
1991 100.00 100.00 100.00
1992 93.30 107.70 75.10
1993 82.20 118.20 64.40
1994 57.80 119.80 58.40
1995 52.20 164.80 49.90
1996 21.70 203.20 58.10
The lines in the graph assume that the value of an investment in the
Company's Common Stock on each index was $100 on December 31, 1991 and that any
dividends were reinvested. The companies in the peer group are Allwaste, Inc.,
Chempower, Inc., Gundle SLT Environmental, Inc., GZA Geoenvironmental
Technology, Inc., C. H. Heist Corp. and Matrix Service Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Holders of Securities. The following table sets forth certain
information as of March 14, 1997, with respect to: (i) each person known by the
Company to own beneficially more than 5% of the Company's shares of outstanding
Common Stock; and (ii) all directors and executive officers as a group.
NAME OF BENEFICIAL AMOUNT AND NATURE OF PERCENT
OWNER AND ADDRESS BENEFICIAL OWNERSHIP OF CLASS
------------------ -------------------- --------
Heartland Advisors, Inc....................... 1,013,100(1) 14.9%
790 North Milwaukee Street
Milwaukee, WI 53202
Richard W. Krajicek........................... 559,618(2) 8.16%
1111 Hermann Drive
Houston, TX 77004
Dimensional Fund Advisors Inc................. 354,655(3) 5.21%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
All directors and executive officers.......... 247,590(4) 3.61%
as a group (8 persons)
- ---------------
(1) The shares of common stock are held in investment advisory accounts of
Heartland Advisors, Inc. As a result, various persons have the right to
receive or the power to direct the receipt of dividends from, or the
proceeds from the sale of, the securities. The interests of one such
account, Heartland Group, Inc., a
48
51
registered investment company, relates to more than 5% of the class. The
number of Company shares owned was as of December 31, 1996, as Heartland
Advisors, Inc. has not provided more current data.
(2) Includes 25,313 shares owned by Mr. Krajicek's spouse and 102,850 shares
held by Merit Systems, Inc., a Louisiana corporation, of which Mr. Krajicek
is a principal shareholder, an officer and a director, and also includes
shares that represent options currently exercisable or exercisable within 60
days to purchase 8,000 shares of Common Stock.
(3) Officers of Dimensional Fund Advisors Inc. also serve as officers of DFA
Investment Dimensions Group Inc. (the "Fund") and The DFA Investment Trust
Company (the "Trust"), both of which are registered open-end management
investment companies. In their positions as officers of the Fund and the
Trust, those persons vote an aggregate of 56,900 additional shares owned by
the Fund and 50,355 shares owned by the Trust. The number of Company shares
shown owned was as of December 31, 1996, as Dimensional Fund Advisors Inc.
has not provided more current data.
(4) Includes shares that represent options currently exercisable or exercisable
within 60 days to purchase 85,000 shares of Common Stock granted to all
directors and executive officers as a group.
Security Ownership of Management. The following table sets forth certain
information as of March 14, 1997, with respect to: (i) each Named Executive;
(ii) each director; and (iii) all directors and executive officers as a group.
NAME OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OF CLASS
---------------- ------------------------ --------
Robert J. Cresci............................ 170,000(2) 2.48%
Richard L. Daerr............................ 200,000(2) 2.91%
Larry A. Talbert............................ 82,800(2) 1.21%
David P. Tusa............................... 6,440(2) 0.09%
Frank A. Perrone............................ 4,440(2) 0.06%
Dale W. Wilhelm............................. 1,210(2) 0.02%
D. D. Hock.................................. 13,000(2) 0.19%
Mike M. Mustafoglu.......................... 12,000(2) 0.17%
John B. O'Brien............................. 16,000(2) 0.23%
James M. Piette............................. 24,500(2) 0.36%
All directors and executive officers........ 247,590(2) 3.61%
as a group (8 persons)
- ---------------
(1) Except as otherwise indicated below, all shares are owned directly and the
owner has sole voting and dispositive authority with respect to such shares.
(2) Includes shares that represent options currently exercisable or exercisable
within 60 days to purchase 354,000 shares of Common Stock. The foregoing
includes the following specific individuals: Mr. Daerr 200,000 shares; Mr.
Talbert 69,000 shares; Mr. Cresci 31,000 shares; Mr. Hock 12,000 shares; Mr.
Mustafoglu 12,000 shares; Mr. O'Brien 16,000 shares; and Mr. Piette 14,000
shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As disclosed in Note 17 of Notes to the Consolidated Financial Statements
in Item 8 above, the Company recently entered into an Agreement and Plan of
Merger with Philip Environmental, Inc. (the "Merger"). Upon consummation of the
Merger, the Company will pay to Mr. Robert J. Cresci, Chairman, President and
Chief Executive Officer an amount equal to $150,000. In addition, upon
consummation of the Merger, the Company will pay transaction bonuses to David P.
Tusa, Senior Vice President, Finance and Administration, Frank A. Perrone, Vice
President, General Counsel and Corporate Secretary, and Dale W. Wilhelm,
Corporate Controller, in the amounts of $140,000, $50,000, and $45,000,
respectively.
The Employment Agreement of Mr. Tusa dated as of August 29, 1994, as
amended, and the Employment Agreement of Mr. Perrone dated as of November 10,
1994, as amended, (collectively, the "Employment Agreements"), each provide for
the payment of certain benefits to Mr. Tusa and Mr. Perrone
49
52
(each being referred to as the "Executive") upon termination of their employment
within three years after a Change in Control (as defined in the Agreements). The
Merger will constitute a "Change in Control" under the Agreements. Accordingly,
if within three years after the consummation of the Merger, either (i) the
Company terminates the Executive's employment for any reason (other than the
Executive's retirement, disability or death) or (ii) the Executive resigns from
his employment with the Company for any reason, then the Executive will be
entitled to receive the following benefits from the Company:
(i) a cash payment equal to (a) the Executive's base salary (plus car
allowance) for either the 18 month period ending immediately before
consummation of the Merger or the 18 month period ending immediately before
the termination of the Executive's employment, whichever is greater, minus
(b) the minimum amount required to avoid certain adverse excise tax and
federal income tax consequences to the Executive and the Company,
respectively, resulting from "excess parachute payments";
(ii) medical and life insurance coverage, paid by the Company, as in
effect immediately before the Merger for a period of 18 months after the
Executive's termination, unless the Executive becomes eligible for such
coverage from a subsequent employer; and
(iii) 18 months of additional service credit for all purposes,
including vesting, retirement, eligibility, and benefit accrual, under all
employee benefit plans sponsored by the Company in which the Executive
participated immediately before the Merger.
The Company has agreed to provide certain supplemental benefits to Mr.
Wilhelm. Specifically, if Mr. Wilhelm's employment is terminated either by the
Company, without cause or by resignation of Mr. Wilhelm prior to reaching the
age of 64 1/2, the Company will pay Mr. Wilhelm a lump sum severance payment
equal to 12 months of his salary (plus car allowance) at the time of such
termination or resignation. In addition, Mr. Wilhelm will be entitled to retain
certain benefits (group health, dental and car allowance) on the then current
terms and cost for the 12 months subsequent to such termination or resignation,
unless Mr. Wilhelm becomes eligible for such benefits from a subsequent
employer.
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53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules:
(1) Consolidated Financial Statements:
See Index to Financial Statements in Item 8, which information is herein
incorporated by reference.
(2) Consolidated Financial Statement Schedules:
PAGE
----
II. Valuation and Qualifying Accounts....................... 53
Independent Auditors' Report............................. 54
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index are filed as part of
this report.
(b) Reports on Form 8-K:
The Company filed on March 6, 1997, a Current Report on Form 8-K dated
March 5, 1997, with the Securities and Exchange Commission in connection with
entering an Agreement and Plan of Merger with Philip Environmental Inc., an
Ontario, Canada corporation.
The Company filed on October 9, 1996, a Current Report on Form 8-K dated
September 30, 1996, with the Securities and Exchange Commission in connection
with termination of merger negotiations with HydroChem Holdings, Inc.
51
54
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.
SERV-TECH, INC.
By /s/ ROBERT J. CRESCI
-----------------------------------
Robert J. Cresci,
Chairman, President, CEO
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 and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT J. CRESCI Chairman, President, CEO, Director March 28, 1997
- -----------------------------------------------------
(Robert J. Cresci)
/s/ DAVID P. TUSA Senior Vice President, Finance and March 28, 1997
- ----------------------------------------------------- Administration
(David P. Tusa)
/s/ MIKE M. MUSTAFOGLU Director March 28, 1997
- -----------------------------------------------------
(Mike M. Mustafoglu)
/s/ JOHN B. O'BRIEN Director March 28, 1997
- -----------------------------------------------------
(John B. O'Brien)
/s/ D. D. (DEL) HOCK Director March 28, 1997
- -----------------------------------------------------
(D. D. (Del) Hock)
/s/ JAMES M. PIETTE Director March 28, 1997
- -----------------------------------------------------
(James M. Piette)
/s/ FRANK A. PERRONE Director, Vice President, General March 28, 1997
- ----------------------------------------------------- Counsel, Secretary
(Frank A. Perrone)
/s/ DALE W. WILHELM Corporate Controller March 28, 1997
- -----------------------------------------------------
(Dale W. Wilhelm)
52
55
SCHEDULE II
SERV-TECH, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
COL. A. COL. B COL. C -- ADDITIONS COL. D COL. F
------- ---------- ---------------------------- ----------- ------------
(1) (2)
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER ACCOUNTS- DEDUCTIONS- AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
----------- ---------- ---------- --------------- ----------- ------------
December 31, 1996:
Allowance for doubtful
accounts................. 1,755,230 177,476 -- 1,028,408(A) 904,298
December 31, 1995:
Allowance for doubtful
accounts................. 1,677,334 1,123,775 74,043(B) 1,119,922(A) 1,755,230
December 31, 1994:
Allowance for doubtful
accounts................. 225,388 903,809 835,285(B) 287,148(A) 1,677,334
- ---------------
(A) Represents recoveries and uncollectible accounts written off.
(B) Represents allowance for doubtful accounts of companies acquired at date of
acquisition.
53
56
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Serv-Tech, Inc.:
Under date of February 26, 1997, we reported on the consolidated balance
sheets of Serv-Tech, Inc. and Subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the years in the two year period ended
December 31, 1996, as contained in the annual report on Form 10-K for the year
1996. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule as listed in the accompanying Index to Financial Statements. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Houston, Texas
February 26, 1997
54
57
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1(5) -- Agreement and Plan of Merger dated June 14, 1994, among
Serv-Tech, Inc., Hartney Acquisition Corporation and
Hartney Industrial Services Corporation.
3.1(1) -- Restated Articles of Incorporation of Serv-Tech, Inc.
3.2(1) -- Bylaws, as amended, of Serv-Tech, Inc.
4.1(1) -- Specimen stock certificate evidencing Common Stock of
Serv-Tech, Inc.
10.1(1) -- United States Patent Number 4,817,653 (Tank Cleaning,
Water Washing Robot), dated April 4, 1989.
10.2(1) -- United States Patent Number 4,805,653 (Mobile
Articulatable Tube Bundle Cleaner), dated February 21,
1989.
10.3(1) -- United States Patent Number 4,666,365 (Tube Bundle
Pulling Apparatus), dated May 19, 1987.
10.4(1) -- United States Patent Number 4,575,305 (Truck-Mounted Tube
Bundle Pulling Apparatus), dated March 11, 1986.
10.5(2) -- United States Patent No. 4,856,545 (Multi-Lance Tube
Bundle Cleaner), dated August 15, 1989.
10.6(2) -- United States Patent No. 4,869,638 (Aerial Bundle
Puller), dated September 26, 1989.
10.7(3) -- United States Patent No. 4,954,267 (Hydrocarbon Reclaimer
System), dated September 4, 1990.
10.8(3) -- United States Patent No. 4,945,933 (Liquid Circulator
Useful for Dispersing Sediment Contained in a Storage
Tank), dated August 7, 1990.
10.9(3) -- United States Patent No. 5,032,054 (Aerial Bundle
Puller), dated July 16, 1991.
10.10(3) -- United States Patent No. 5,091,016 (Method for Dispersing
Sediment Contained in a Storage Tank), dated February 25,
1992.
10.11(6) -- United States Patent No. 5,356,482 (Process for Vessel
Decontamination), dated October 18, 1994.
10.12(6) -- United States Patent No. 5,261,600 (Vertical Tube Bundle
Cleaner), dated November 16, 1993.
10.13(6) -- United States Patent No. 5,173,007 (Method and Apparatus
for In-Line Blending of Aqueous Emulsions), dated
December 22, 1992.
10.14(6) -- United States Patent No. 5,389,156 (Decontamination of
Hydrocarbon Process Equipment), dated February 14, 1995.
10.15(3)(10) -- Amended and Restated 1986 Incentive Stock Option Plan of
Serv-Tech, Inc.
10.16(3)(10) -- Amended and Restated 1989 Incentive Stock Option Plan of
Serv-Tech, Inc.
10.17(3)(10) -- Amended and Restated 1989 Director Stock Option Plan of
Serv-Tech, Inc.
10.18(4) -- Note Purchase Agreement dated June 1, 1993, by and
between Serv-Tech, Inc. and Berkshire Life Insurance
Company; Serv-Tech, Inc. and The Security Mutual Life
Insurance Company; Serv-Tech, Inc. and TMG Life Insurance
Company; Serv-Tech, Inc. and Principal Mutual Life
Insurance Company.
10.19(4)(10) -- Employment Agreement, dated May 11, 1992, between the
Company and Larry A. Talbert.
10.20(4) -- Registration Rights Agreement, dated May 11, 1992,
between Serv-Tech, Inc. and Larry A. Talbert.
58
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.21(4) -- Earnout Agreement, dated May 11, 1992, between Serv-Tech,
Inc. and Larry A. Talbert.
10.22(6)(10) -- Employment Agreement, dated August 9, 1994, between
Serv-Tech, Inc., and Richard L. Daerr.
10.23(6)(10) -- Employment Agreement, dated August 29, 1994, between
Serv-Tech, Inc., and David P. Tusa.
10.24(6)(10) -- Employment Agreement, dated November 10, 1994, between
Serv-Tech, Inc., and Frank A. Perrone.
10.25(9)(10) -- Serv-Tech, Inc. 1995 Long Term Incentive Plan.
10.26(7) -- United States Patent No. 5,403,145 (Street Legal, Mobil,
Truck Mounted Tube Bundle Pulling Apparatus), dated April
4, 1995.
10.27(7) -- United States Patent No. 5,425,814 (Method for Quick
Turnaround of Hydrocarbon Processing Units), dated June
20, 1995.
10.28(7) -- United States Patent No. 5,460,331 (Apparatus for
Dispersion of Sludge in a Crude Oil Storage Tank), dated
October 24, 1995.
10.29(7) -- United States Patent No. 5,485,966 (Remotely Controlled
Chopping Machine for Tank Cleaning), dated January 23,
1996.
10.30(7) -- Contract No. FP-03 for Design, Supply, Construction and
Commissioning of Finchaa Sugar Factory and Ethanol Plant
between Finchaa Sugar Factory of the Transitional
Government of Ethiopia and F. C. Schaffer & Associates,
Inc.
10.31(7)(10) -- Agreement for Serv-Tech Turnaround Services Management
Group.
10.32(7)(10) -- Agreement Relating to Employment Performance Bonuses by
and between Chemisolv, Limited and Chemisolv Holdings,
Inc. and Serv-Tech, Inc. and the Chemisolv Management
Group.
10.33(7)(10) -- Option Assignment Agreement by and between Chemisolv
Holdings, Inc. and Chemisolv, Limited and Serv-Tech, Inc.
and the Chemisolv Option Holders and Laserdisk, Limited.
10.34(7) -- Guaranteed Unsecured Loan Notes by and between Chemisolv
Holdings, Inc. and Serv-Tech, Inc. and the Chemisolv
Management Group.
10.35(8) -- Agreement and Plan of Merger, dated March 5, 1997, by and
among Philip Environmental Inc., an Ontario, Canada
corporation ("Philip"), Taro Aggregate Ltd, an Ontario,
Canada corporation and wholly-owned subsidiary of Philip
("Taro"), ST Acquisition Corporation, a newly-formed
Texas Corporation and wholly-owned subsidiary of Taro and
Serv-Tech, Inc.
10.36 -- First Amended and Restated Credit Agreement among
Serv-Tech, Inc. and Texas Commerce Bank National
Association, and Bank One, Texas, N.A., dated November
12, 1996.
10.37 -- Note Restructuring Amendment, dated November 12, 1996, to
Note Purchase Agreement by and between Serv-Tech, Inc.
and Principal Mutual Life Insurance Company, TMG Life
Insurance Company, The Security Mutual Life Insurance
Company, and Berkshire Life Insurance Company.
10.38 -- Amended and Restated Continuing Reimbursement Agreement,
dated November 12, 1996, by and between F.C. Schaffer &
Associates, Inc. and ABN AMRO Bank, N.V.
59
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.39 -- Intercreditor Agreement, dated November 12, 1996, by and
among Principal Mutual Life Insurance Company, TMG Life
Insurance Company, Berkshire Life Insurance Company, and
The Security Mutual Life Insurance Company; Texas
Commerce Bank National Association and Bank One, Texas,
N.A.; and ABN AMRO Bank, N.V.
10.40(10) -- Amendment to Employment Agreement, dated March 5, 1997,
by and between David P. Tusa and Serv-Tech, Inc.
10.41(10) -- Amendment to Employment Agreement, dated March 5, 1997,
by and between Frank A. Perrone and Serv-Tech, Inc.
10.42(10) -- Employment Agreement, dated March 5, 1997 by and between
Dale W. Wilhelm and Serv-Tech, Inc.
10.43 -- First Amendment to the First Amended and Restated Credit
Agreement, dated March 17, 1997, among Serv-Tech, Inc.
and Texas Commerce Bank National Association, and Bank
One, Texas, N.A.
21.1 -- Subsidiaries of Serv-Tech, Inc.
23.1 -- Consent of KPMG Peat Marwick LLP.
27.1 -- Financial Data Schedule
99.1 -- Opinion of Coopers & Lybrand for the consolidated
statements of operations, changes in stockholders' equity
and cash flow for the period ended December 31, 1994.
- ---------------
(1) Incorporated by reference from the registrant's Registration Statement No.
33-29594 on Form S-1.
(2) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1990.
(3) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
(4) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993.
(5) Incorporated by reference from the registrant's Report on Form 8-K, dated
June 14, 1994.
(6) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the fiscal year December 31, 1994.
(7) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the fiscal year December 31, 1995.
(8) Incorporated by reference from the registrant's Current Report on Form 8-K
dated March 5, 1997.
(9) Incorporated by reference from the registrant's Form S-8 (Registration No.
33-62139) filed with the Securities and Exchange Commission on August 25,
1995.
(10) Management contract or compensatory plan or agreement.