1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________to ________________________
Commission file number 0-25528
------
ENVIROQ CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 59-3290346
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3918 Montclair Road, Suite 206
Birmingham, Alabama 35213
-------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (205)870-0588
-------------
N/A
------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 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
-- --
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
Common Stock, par value $0.01 1,009,377
----------------------------- -----------------
(Class) (Number of Shares)
Traditional Small Business Disclosure Format (Check one):
Yes [x] No [ ]
2
ENVIROQ CORPORATION AND SUBSIDIARIES
FORM 10-QSB SEPTEMBER 28, 1996
ITEM PAGE
---- ----
CONSOLIDATED CONDENSED BALANCE SHEETS -
MARCH 30, 1996 AND SEPTEMBER 28, 1996 3
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS-
SIX MONTHS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30,1995 5
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS -
SIX MONTHS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30,1995 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10
PART II - OTHER INFORMATION 12
SIGNATURES 14
2
3
ENVIROQ CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
================================================================================
Sept. 28, March 30,
1996 1996
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,391,030 $ 3,628,990
Interest receivable - 7,890
Accounts receivable (no allowance considered necessary) 189,465 126,397
License fees receivable 4,960 4,960
Inventories 208,966 118,390
Notes receivable 30,577 -
Prepaid expenses and other assets 42,366 34,078
----------- -----------
Total current assets 2,867,364 3,920,705
----------- -----------
OTHER ASSETS:
Employee notes receivable 17,000 17,000
Other 8,996 17,989
----------- -----------
Total other assets 25,995 34,989
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 310,135 310,135
Building - -
Operating equipment 25,563 25,563
Other equipment and vehicles 59,602 55,048
----------- -----------
395,300 390,746
Less accumulated depreciation (59,856) (56,402)
----------- -----------
Property, plant and equipment, net 335,444 334,344
----------- -----------
TOTAL ASSETS $ 3,228,803 $ 4,290,038
=========== ===========
See accompanying notes to consolidated financial statements.
3
4
ENVIROQ CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
================================================================================
Sept. 28, March 30,
1996 1996
----------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS'EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 116,421 $ 165,753
Salaries, wages and related taxes 7,722 9,814
Income taxes payable 1,040,504
----------- -----------
Total liabilities 124,143 1,216,071
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY
Common stock (par value $.01 per share), authorized
10,000,000 shares, issued
and outstanding effective
April 18, 1995, 1,009,377 shares 10,094 10,094
Additional paid-in capital 6,190,647 6,190,647
Accumulated deficit (3,096,081) (3,126,774)
----------- -----------
Total stockholders' equity 3,104,660 3,073,967
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $ 3,228,803 $ 4,290,038
=========== ===========
See accompanying notes to consolidated financial statements.
4
5
ENVIROQ CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
================================================================================
(All Periods Unaudited)
Three Months Ended Six Months Ended
` --------------------------- --------------------------
Sept. 28, Sept. 30, Sept. 28, Sept. 30,
1996 1995 1996 1995
REVENUES $ 311,113 $ 258,811 $ 635,680 $350,837
COST OF REVENUES 163,556 141,574 345,286 192,823
--------- --------- --------- --------
GROSS PROFIT 147,557 117,237 290,394 158,014
--------- --------- --------- --------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 181,687 240,106 331,051 432,344
--------- --------- --------- --------
LOSS FROM OPERATIONS (34,130) (122,869) (40,657) (274,330)
--------- --------- --------- --------
OTHER INCOME (LOSS) 31,475 (30,345) 71,350 (1,362)
--------- --------- --------- --------
INCOME (LOSS) BEFORE INCOME TAXES (2,655) (153,214) 30,693 (275,692)
--------- --------- --------- --------
INCOME TAX BENEFIT - 50,000 - 85,000
--------- --------- --------- --------
NET INCOME (LOSS) $ (2,655) $(103,214) $ 30,693 $(190,692)
========= ========= ========= =========
NET INCOME (LOSS) PER
SHARE $ (0.00) $ (0.10) $ 0.03 $ (0.19)
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
5
6
ENVIROQ CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (All Periods Unaudited)
================================================================================
Six Months Ended
----------------------------------
Sept. 28, 1996 Sept. 30, 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Not Income (Loss) $ 30,693 $ (190,692)
Adjustments to reconcile net Income (Loss) to net
cash used in operating activities:
Depreciation 3,454 48,665
Amortization 8,995 43,251
Changes in assets and liabilities provided (used) cash: (1,276,548) (240,044)
---------- -----------
Net cash used in operating activities (1,233,406) (338,820)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (4,554) (17,601)
---------- -----------
Net cash used in investing activities (4,554) (17,601)
---------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (1,237,960) (356,421)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 3,628,990 505,169
---------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $2,391,030 $ 148,748
========== ===========
See accompanying notes to consolidated financial statements.
6
7
ENVIROQ CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - MANAGEMENT'S REPRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. These
unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which Enviroq Corporation considers necessary for a fair
presentation of the financial position and the results of operations for these
periods.
The results of operations for the six months ended September 28, 1996 are not
necessarily indicative of the results to be expected for the full year ending
March 29, 1997. For further information, refer to the financial statements and
footnotes thereto included in the Company's Form 10-KSB for the year ended March
30, 1996, as filed with the Securities and Exchange Commission.
NOTE 2 - GENERAL
A. COMPANY INFORMATION
Enviroq Corporation, a Delaware corporation (the "Company"), was
incorporated on February 9, 1995. At the time of its incorporation, the
Company was a wholly-owned subsidiary of a Delaware corporation formerly
named Enviroq Corporation ("Old Enviroq"). Prior to April 18, 1995, the
Company was named New Enviroq Corporation ("New Enviroq"). On April 18,
1995, Old Enviroq distributed all of the issued and outstanding capital
stock of New Enviroq to the holders of the common stock of Old Enviroq (the
"Distribution"). Following the Distribution, the Company changed its name
from New Enviroq Corporation to Enviroq Corporation. Also following the
Distribution, Old Enviroq merged with a subsidiary of Insituform
Mid-America, Inc. ("IMA") and changed its name to Insituform Southeast,
Inc. ("Insituform Southeast").
The Company's principal executive office is located at 3918 Montclair
Road, Suite 206, Birmingham, Alabama 35213, and its telephone number is
(205) 870-0588. The Company's mailing address is P. O. Box 130062,
Birmingham, Alabama 35213.
The Company is principally engaged in the development, commercialization,
formulation and marketing of spray-applied resinous products, and in the
treatment of municipal wastewater biosolids. The Company's operations are
conducted primarily through Sprayroq(R), Inc., a Florida corporation
("Sprayroq"), and through Synox(R) Corporation, a Delaware corporation and
a wholly-owned subsidiary of the Company ("Synox"). The Company owns 50% of
the outstanding capital stock of Sprayroq. Sprayroq is engaged in the
development, commercialization, manufacture and marketing of spray-applied
resinous materials. Synox is engaged in the research, development and
marketing of a process for the treatment of municipal wastewater biosolids.
To date, most of the revenue and operating income for the Company have
resulted from the operations of Sprayroq.
7
8
B. BASIS OF PRESENTATION
Principles of Consolidation - The consolidated financial statements include
the accounts of Enviroq Corporation, Synox and Sprayroq. These financial
statements included the historical financial statements of Synox and
Sprayroq effective April 18, 1995, as if the operations included herein had
been operating as one entity for the periods presented. They include, at
their historical amounts, the assets, liabilities, revenues and expenses
directly related and those allocated to the businesses which comprise most
of the Company's operations. All significant intercompany transactions are
eliminated. Although the Company owns 50% of the outstanding capital stock
of Sprayroq, all of the operating results of Sprayroq have been included,
without discount or reduction.
C. INCOME (LOSS) PER SHARE
Income per share was computed by dividing net income by the 1,009,377
shares of common stock outstanding as of September 28, 1996, considering
these shares to be outstanding for all periods presented.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
Synox is the exclusive licensee of certain technology and know-how under a
license agreement with a company controlled by certain affiliates of the
Company. The agreement currently covers 15 states in the license territory and
grants an option to acquire additional territory on a payment of a prepaid
royalty. The option rights expire December 31, 1997.
Under the terms of its license agreement, Synox is subject to minimum royalty
provisions and to the maintenance of a $50,000 net worth and the performance of
other material provisions of the license agreement. Minimum annual royalties
(based upon retaining the 15 states currently under the agreement) are due each
January 1, for the ensuing calendar year through the license expiration,
according to the following schedule. On January 1, 1995, a minimum royalty
expense of $45,168 was paid.
<Caption
DUE DATE AMOUNT
- --------------------------------------------------------
January 1, 1997 $ 90,336
- --------------------------------------------------------
January 1, 1998 180,671
- --------------------------------------------------------
January 1, 1999 180,671
- --------------------------------------------------------
January 1, 2000 through 2007 225,839
- -------------------------------------------------------
Pursuant to the merger agreement between Old Enviroq and Synox, the stockholders
of Synox at the time of the merger received Old Enviroq shares valued at
$672,000 in the aggregate plus the right to receive additional shares of Old
Enviroq, dependent on the earnings of Synox, up to a maximum value of
$2,017,000. In addition, the then existing obligations of Synox under promissory
notes to certain shareholders ($767,376 at September 30, 1991 plus additional
interest at 7.66%) shall become payable by Synox in cash only after such time as
(i) all the contingent shares have been issued and (ii) accumulated retained
earnings are available for such payment. Interest shall become payable only to
the extent of available net earnings. As a result of the Distribution of Company
shares referred to in Note 2.A above, the obligation to issue contingent shares
became an obligation of the Company to issue its shares in lieu of Old Enviroq
shares. To the extent additional, contingent shares become issuable in the
future or additional obligations become payable in the future, such
consideration will be recorded at that time at its fair value and accounted for
as additional intangible assets.
The Company and Replico Development Company, Inc. ("Replico") each own 50% of
the outstanding capital stock of Sprayroq, and pursuant to the Stockholder
Agreement dated as of March 25, 1992 between the Company (as successor to Old
Enviroq), Sprayroq and Replico, the parties agreed to vote their respective
8
9
shares to elect three directors designated by the Company and two directors
designated by Replico. Sprayroq has obtained its operating funds primarily from
the Company. To date, the Company has made loans to Sprayroq to fund the
working capital and other needs of Sprayroq in the aggregate amount of
approximately $645,000, plus interest due on principal amounts of approximately
$196,000. On October 15, 1996, the board of directors of Sprayroq voted to
restructure and consolidate this debt with the Company, and a Consolidated Note
evidencing the restructured debt was executed on October 21, 1996 by Sprayroq .
Under the terms of this restructuring and consolidation, the principal amount
of the debt is $840,249. The rate of interest on the debt is 7% per annum. The
debt will be amortized over a 30-year period, with the balance of the principal
due, in the form of a "balloon" payment, on October 1, 2001.
* * * *
9
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Revenue
For the three months ended September 28, 1996, the Company generated
revenues of approximately $311,000, as compared to approximately $259,000
for the three months ended September 30, 1995, representing an increase of
approximately 20%. For the six months ended September 28, 1996, the Company
generated revenues of approximately $636,000, as compared to approximately
$351,000 for the six months ended September 30, 1995, representing an
increase of approximately 81%. The increase in revenues for both the three
month period and the six month period is primarily attributable to
increased sales by the Company's Sprayroq subsidiary.
Cost of Revenues / Gross Profit
Cost of revenues were approximately $164,000 for the three months ended
September 28, 1996, as compared to approximately $142,000 for the three
months ended September 30, 1995, representing an increase of approximately
15%. Cost of revenues were approximately $345,000 for the six months ended
September 28, 1996, as compared to approximately $193,000 for the six
months ended September 30, 1995, representing an increase of approximately
79%. Cost of revenues increased primarily as a result of increased
revenues.
Gross profit margin was approximately 47% for the three months ended
September 28, 1996, as compared to approximately 45% for the three months
ended September 30, 1995. Gross profit margin was 46% for the six months
ended September 28, 1996, as compared to approximately 45% for the six
months ended September 30, 1995. The Company was able to maintain
approximately the same gross profit margin for the three month period as
compared to the corresponding period last year primarily as a result of the
ability of the Company's Sprayroq subsidiary to offset increases in costs
of materials with increased economies of scale.
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses ("S,G&A") for the three months
ended September 28, 1996 were approximately $182,000, as compared to
approximately $240,000 for the three months ended September 30, 1995, a
decrease of 24%. S,G&A for the six months ended September 28, 1996 were
approximately $331,000, as compared to approximately $432,000 for the six
months ended September 30, 1995, a decrease of 23%. The decrease in S,G&A
for the three month period and the six month period is primarily
attributable to reduction in expenses at the Company's Synox subsidiary.
Other Income (Expense) - Net
Other Income (Expense) - Net was approximately $31,000 in income for the
three months ended September 28, 1996, as compared to approximately
($30,000) for the three months ended September 30, 1995. Other Income
(Expense) - Net was approximately $71,000 in income for the six months
ended September 28, 1996, as compared to approximately ($1,000) for the six
months ended September 30, 1995. For the three month period and the six
month period ended September 28, 1996, most of the other income resulted
from interest income and accrued interest receivable by the Company from
its bank cash deposits, money market accounts, and other investments. For
the three month period and the six month
10
11
period ended September 30, 1995, most of the expense resulted from
increases in expenses, which were not offset by corresponding interest
income.
Net Income (Loss)
For the three months ended September 28, 1996, the net loss was
approximately $3,000, as compared to net loss of approximately $103,000 as
of September 30, 1995. For the six months ended September 28, 1996, net
income was approximately $31,000, as compared to a net loss of
approximately $191,000 as of September 30, 1995. The net loss for the three
months ended September 28, 1996 was primarily attributable to increases in
audit, legal and insurance expenses, while the net loss for the three
months ended September 30, 1995, was primarily attributable to losses at
the Company's Synox and Sprayroq subsidiaries. Net income for the six month
period ended September 28, 1996 was primarily attributable to increases in
revenue and gross profit. The net loss for the six month period ended
September 30, 1995 was primarily attributable to losses at the Company's
Synox and Sprayroq subsidiaries.
Financial Condition
For the three months ended September 28, 1996, stockholders' equity
decreased as compared to the preceding quarter ended June 29, 1996,
primarily as a result of the associated net loss. For the six months ended
September 28, 1996, stockholders' equity increased as compared to the
fiscal year ended March 30, 1996, primarily as a result of the associated
net income. For the three months and six months ended September 28, 1996,
total assets, total liabilities and working capital decreased, primarily as
a result of the payment of income taxes.
At September 28, 1996, the Company had approximately $2,743,000 in working
capital and a current ratio of 23.1-to-1, as compared to working capital of
approximately $2,705,000 and a current ratio of 3.2-to-1 at March 30, 1996.
At September 28, 1996, the Company's cash and cash equivalents totaled
approximately $2,391,000. In addition, accounts receivable totaled
approximately $189,000. The Company used cash of approximately $1,238,000
for the six months ended September 28, 1996, primarily as a result of the
payment of income taxes during the quarter ended June 29, 1996 and, to a
lesser extent, as a result of increased inventories, accounts receivable
and prepaid expenses.
Depreciation and amortization expense was approximately $12,000 for the six
months ended September 28, 1996. Net fixed assets increased approximately
$1,000 between March 30, 1996 and September 28, 1996. This increase is
attributable to the purchase of equipment offsetting the accumulated
depreciation.
The Company does not believe that there is any appreciable seasonal impact
on the business of the Company, although extreme cold weather may impair
installation of spray-applied materials which may result in decreased resin
sales by Sprayroq.
The Company's undeveloped property in Jacksonville, Florida (approximately
10.6 acres) is currently being offered for sale, which may result in an
increase in the Company's cash.
Operating cash flow combined with available cash and cash equivalents are
currently expected to be sufficient in amount to provide resources to the
Company's working capital needs during fiscal year 1997. To the extent that
the Company is not able to meet its financial goals, however, the Company's
revenues may not be sufficient to satisfy the Company's working capital
needs. Consequently, there can be no assurance that the Company's revenues
will be sufficient to adequately fund the Company's future working capital
needs.
11
12
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
None.
ITEM 2 - Changes in Securities
None.
ITEM 3 - Defaults upon Senior Securities
None.
ITEM 4 - Submission of Matters to a Vote of Security Holders
The annual meeting of the Shareholders of the Company was held on September 12,
1996. At the annual meeting, the Shareholders elected seven (7) directors to
serve for the ensuing year, and ratified management's appointment of Deloitte
and Touche, LLP as the Company's independent public accountants. With respect to
the election of directors, the following table provides the results of the vote:
VOTES VOTES ABSTENSIONS/
DIRECTOR FOR AGAINST NON-VOTES
-------------------------------------------------------------------------------------------------------
Charles A. Long, Jr 931,656 6,591 0
William J. Long 931,936 6,311 0
Antonio M. Marinelli 932,016 6,231 0
Michael X. Marinelli 931,656 6,591 0
Orlando M. Marinelli 931,656 6,591 0
W. T. Goodloe Rutland 931,966 6,281 0
Alexander P. Zechella 931,966 6,281 0
With respect to the appointment of Deloitte and Touche, there were 937,159 votes
cast for the appointment, 668 votes cast against, and 420 abstentions and
non-votes.
ITEM 5 - Other Information
In a letter to the shareholders contained in the annual report of Company for
the year ended March 30, 1996, the president and chief executive officer of the
Company made the following statement:
"The strong financial position of the Company, along with its status as
a public company, may offer opportunities for growth. The management of
your Company is therefore searching for opportunities to leverage the
Company's advantages to bring additional value to its shareholders.
Such opportunities may or may not involve the Company's traditional
businesses and markets."
12
13
ITEM 6 - Exhibits and Reports on Form 8-K
(a) The following exhibits are included or are incorporated by reference
into this Form 10-QSB:
Description of Exhibits
Item
----
3.01 Certificate of Incorporation of New Enviroq Corporation. Exhibit 3.01 to the Company's
Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by
reference (Commission File No. 0-25528).
3.02 Certificate of Amendment to Certificate of Incorporation of New Enviroq Corporation. Exhibit
3.02 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is
incorporated herein by reference (Commission File No. 0-25528).
3.03 Bylaws of New Enviroq Corporation. Exhibit 3.03 to the Company's Registration Statement on
Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No.
0-25528).
4.01 Certificate of Designation of Rights and Preferences of Series A Preferred Stock. Exhibit 4.01
to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated
herein by reference (Commission File No. 0-25528).
4.02 Form of Certificate of Common Stock. Exhibit 4.02 to the Company's Registration Statement on
Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No.
0-25528).
4.03 Form of Certificate of Series A Preferred Stock. Exhibit 4.03 to the Company's Registration
Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference
(Commission File No. 0-25528).
10.01 Consolidated Note dated October 21, 1996 and issued by Sprayroq, Inc. in favor of the Company
in aggregate principal sum of $840,249.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8K filed during the period:
None.
13
14
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ENVIROQ CORPORATION
Date: November 5, 1996 By: /s/ William J. Long
--------------------
William J. Long, President
and Chief Executive Officer
(Principal Financial and
Accounting Officer
14