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 December 27, 1997 [_] 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) Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] 2 ENVIROQ CORPORATION AND SUBSIDIARIES FORM 10-QSB DECEMBER 27, 1997 ITEM PAGE ---- ---- CONSOLIDATED CONDENSED BALANCE SHEETS - MARCH 29, 1997 AND DECEMBER 27, 1997 3 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS- THREE AND NINE MONTHS ENDED DECEMBER 27, 1997 AND DECEMBER 28, 1996 5 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - THREE AND NINE MONTHS ENDED DECEMBER 27, 1997 AND DECEMBER 28, 1996 6 NOTES TO CONSOLIDATED CONDENSED 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 CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) - -------------------------------------------------------------------------------- Dec. 27, March 29, 1997 1997 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,274,628 $ 2,379,613 Accounts receivable (no allowance considered necessary) 496,365 314,772 License fees receivable 930 930 Inventories 143,149 52,830 Notes Receivable 15,254 -- Refundable Income Taxes 113,472 101,147 Prepaid expenses and other assets 11,066 23,564 ----------- ----------- Total current assets 3,054,864 2,872,856 ----------- ----------- OTHER ASSETS: Employee notes receivable 11,858 13,819 Other 14,929 -- ----------- ----------- Total other assets 26,787 13,819 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT, at cost Land 310,135 310,135 Operating equipment 25,463 25,563 Other equipment and vehicles 57,917 40,241 ----------- ----------- 393,515 375,939 Less accumulated depreciation (50,747) (45,506) =========== =========== Property, Plant & Equipment, net 342,768 330,433 ----------- ----------- TOTAL ASSETS $ 3,424,419 $ 3,217,108 =========== =========== See accompanying notes to consolidated condensed financial statements. 3 4 ENVIROQ CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) - -------------------------------------------------------------------------------- Dec. 27, March 29, 1997 1997 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 133,659 $ 69,292 Salaries, wages and related taxes 6,488 18,824 Income taxes payable 43,520 958 ----------- ----------- Total current liabilities 183,667 89,074 =========== =========== COMMITMENTS AND CONTINGENCIES (Note 3) STOCKHOLDERS' EQUITY Common stock (par value $.01 per share), authorized 10,000,000 shares, issued and outstanding 1,009,377 shares 10,094 10,094 Additional paid-in capital 6,190,647 6,190,647 Accumulated deficit (2,959,989) (3,072,707) ----------- ----------- Total stockholders' equity 3,240,752 3,128,034 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,424,419 $ 3,217,108 =========== ============ See accompanying notes to consolidated condensed financial statements. 4 5 ENVIROQ CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (All Periods Unaudited) - -------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED ---------------------- ------------------------ DEC. 27, DEC. 28, DEC. 27, DEC. 28, 1997 1996 1997 1996 REVENUES $463,854 $ 304,289 $1,079,544 $ 939,969 COST OF REVENUES 193,820 156,145 522,777 501,430 -------- --------- ---------- --------- GROSS PROFIT 270,034 148,144 556,767 438,539 -------- --------- ---------- --------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 161,782 207,993 519,720 539,044 -------- --------- ---------- --------- INCOME (LOSS) FROM OPERATIONS 108,252 (59,849) 37,047 (100,506) -------- --------- ---------- --------- OTHER INCOME 29,691 36,661 106,395 108,011 -------- --------- ---------- --------- INCOME (LOSS) BEFORE INCOME TAXES 137,943 (23,188) 143,442 7,505 -------- --------- ---------- --------- INCOME TAX EXPENSE (BENEFIT) 29,077 (9,225) 30,724 (9,225) -------- --------- ---------- --------- NET INCOME (LOSS) $108,866 $ (32,413) $ 112,718 $ (1,720) -------- --------- ---------- --------- NET INCOME (LOSS) PER SHARE $ 0.11 $ (0.03) $ 0.11 $ (0.00) ======== ========= ========== ========= See accompanying notes to consolidated condensed financial statements. 5 6 ENVIROQ CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (All Periods Unaudited) - -------------------------------------------------------------------------------- NINE MONTHS ENDED ------------------------------------ DEC. 27, 1997 DEC. 28, 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ 112,718 ($ 1,720) Adjustments to reconcile net Income (loss) to net cash used in operating activities: Depreciation 5,110 6,714 Amortization 13,492 Decrease in income taxes payable (1,040,504) Changes in assets and liabilities which used cash: (205,133) (152,547) ----------- ----------- Net cash used in operating activities (87,305) (1,174,565) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (17,680) (4,803) ----------- ----------- Net cash used in investing activities (17,680) (4,803) ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (104,985) (1,179,368) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,379,613 3,628,990 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,274,628 $ 2,449,622 =========== =========== See accompanying notes to consolidated condensed financial statements. 6 7 ENVIROQ CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - MANAGEMENT'S REPRESENTATION The accompanying unaudited consolidated condensed 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 three months ended December 27, 1997 are not necessarily indicative of the results to be expected for the full year ending March 28, 1998. For further information, refer to the financial statements and footnotes thereto included in the Company's Form 10-KSB for the year ended March 29, 1997, 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"), of which the Company owns 50% of the outstanding capital stock. Sprayroq is engaged in the development, commercialization, manufacture and marketing of spray-applied resinous materials. Synox(R) Corporation, a Delaware corporation and a wholly-owned subsidiary of the Company ("Synox"), has been 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. While the Company intends to maintain Synox as a subsidiary, management does not expect any significant revenues or other activity for the foreseeable future, and intends to minimize expenses*. - -------------------------------------------------------------------------------- *See Safe Harbor Statement on Page 14. 7 8 B. BASIS OF PRESENTATION Principles of Consolidation - The consolidated financial statements include the accounts of Enviroq Corporation, Synox and Sprayroq. 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 (loss) per share was computed by dividing net income (loss) by the 1,009,377 shares of common stock outstanding as of December 27, 1997, 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 granted an option to acquire additional territory on a payment of a prepaid royalty. The option rights expired on December 31, 1997. Under the terms of its license agreement (as amended), 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. The license agreement was amended on December 22, 1997 to change the expiration date of the license and to provide that no minimum royalty payment would be due on January 1, 1998, but that such minimum royalty payments would resume on January 1, 1999, in accordance with the following schedule. DUE DATE AMOUNT January 1, 1999 $ 90,336 January 1, 2000 180,671 January 1, 2001 180,671 January 1, 2002 through 2009 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 December 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 - -------------------------------------------------------------------------------- *See Safe Harbor Statement on Page 14. 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. Prior to October 15, 1996, the Company had made loans to Sprayroq to fund the working capital and other needs of Sprayroq. 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. As of December 27, 1997, the principal amount of the debt was approximately $747,000. 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. ********* - -------------------------------------------------------------------------------- *See Safe Harbor Statement on Page 14. 9 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenue For the three months ended December 27, 1997, the Company generated revenues of approximately $464,000, as compared to approximately $304,000 for the three months ended December 28, 1996, representing an increase of approximately 53%. The increase in revenues for the three-month period is primarily attributable to an increase in orders for materials from Sprayroq's licensees. For the nine months ended December 27, 1997, the Company generated revenues of approximately $1,080,000, as compared to approximately $940,000 for the nine months ended December 28, 1996, representing an increase of approximately 15%. The increase in revenues for the nine-month period is primarily attributable to an increase in orders for materials from Sprayroq's licensees. Cost of Revenues / Gross Profit Cost of revenues were approximately $194,000 for the three months ended December 27, 1997, as compared to approximately $156,000 for the three months ended December 28, 1996, representing an increase of approximately 24%. Cost of revenues for the three-month period increased primarily as a result of an increase in revenues resulting from orders for materials from Sprayroq's licensees. Cost of revenues were approximately $523,000 for the nine months ended December 27, 1997, as compared to approximately $501,000 for the nine months ended December 28, 1996, representing an increase of approximately 4%. Cost of revenues for the nine-month period increased primarily as a result of an increase in revenues resulting from orders for materials from Sprayroq's licensees. Gross profit margin was approximately 58% for the three months ended December 27, 1997, as compared to approximately 49% for the three months ended December 28, 1996. Gross profit margin was approximately 52% for the nine months ended December 27, 1997, as compared to approximately 47% for the nine months ended December 28, 1996. Selling, General and Administrative Expenses Selling, General and Administrative Expenses ("S,G&A") for the three months ended December 27, 1997 were approximately $162,000, as compared to approximately $208,000 for the three months ended December 28, 1996, a decrease of 22%. S,G&A for the nine months ended December 27, 1997 were approximately $520,000, as compared to approximately $539,000 for the nine months ended December 28, 1996, a decrease of 4%. The decrease in S,G&A for the three month and the nine month period is primarily attributable to the reduction in expenses at Enviroq. Other Income Other Income was approximately $30,000 in income for the three months ended December 27, 1997, as compared to approximately $37,000 for the three months ended December 28, 1996. Other Income was approximately $106,000 in income for the nine months ended December 27, 1997, as compared to approximately $108,000 for the nine months ended December 28, 1996. For the three month period and the nine month period ended December 27, 1997, 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. - -------------------------------------------------------------------------------- *See Safe Harbor Statement on Page 14. 10 11 Net Income (Loss) For the three months ended December 27, 1997, net income was approximately $109,000, as compared to net loss of approximately $32,000 for the three months ended December 28, 1996. For the nine months ended December 27, 1997, net income was approximately $113,000, as compared to net loss of approximately $2,000 for the nine months ended December 28, 1996. The increase in net income for the three months and the nine months ended December 27, 1997 was primarily attributable to increased revenues, improved gross profit margins and decreased S,G&A. Financial Condition For the three months ended December 27, 1997, stockholders' equity increased as compared to the preceding quarter ended September 27, 1997, primarily as a result of net income generated over the period. For the nine months ended December 27, 1997, stockholders' equity increased as compared to the fiscal year ended March 29, 1997, primarily as a result of net income generated over the period. At December 27, 1997, the Company had approximately $2,871,000 in working capital and a current ratio of 16.6-to-1, as compared to working capital of approximately $2,784,000 and a current ratio of 32.3-to-1 at March 29, 1997. At December 27, 1997, the Company's cash and cash equivalents totaled approximately $2,275,000. In addition, accounts receivable totaled approximately $496,000. The Company used approximately $105,000 in cash from operating and investing activities during the nine month period ended December 27, 1997, primarily as a result of increases in accounts receivable and inventories. Depreciation expense was approximately $5,000 for the nine months ended December 27, 1997. Net fixed assets increased approximately $13,000 between March 29, 1997 and December 27, 1997. 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 1998*. - -------------------------------------------------------------------------------- *See Safe Harbor Statement on Page 14. 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 None. 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." Management has continued to search for opportunities for growth or other strategic alliances. Their can be no assurances, however, that the Company will be successful in locating or capitalizing on any such opportunities for growth or for other strategic alliances*. - -------------------------------------------------------------------------------- *See Safe Harbor Statement on Page 14. 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 Further Amended Agreement as of December 22, 1997 by and between Long Enterprises, Inc. and Synox Corporation. 27 Financial Data Schedule (for S.E.C. Use Only) (b) Reports on Form 8K filed during the period: None. 13 14 "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: With the exception of historical factual information, the matters and statements discussed, made or incorporated by reference in this Quarterly Report on Form 10-QSB (including statements regarding trends in the industry and the business and growth and financing strategies of the Company), as well as those statements specifically designated with an asterisk (*), constitute forward-looking statements, contain the words "estimates," "projects," "intends," "believes," "anticipates," "expects," and words of similar import, are based upon current expectations and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements and words involve known and unknown assumptions, risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements or words. Such assumptions, risks, uncertainties and factors include those associated with general economic and business conditions; industry trends, cyclicality and seasonality; litigation arising in the course of the Company's business; dependence on key personnel and favorable relationships with employees; relationships with and dependence on customers, and suppliers; changes in the business strategy or development plans of the Company; the availability, terms and deployment of capital; changes in or the failure to comply with government regulations; and the inability or failure to identify or consummate successful acquisitions or to assimilate the operations of any acquired businesses with those of the Company; and other assumptions, risks, uncertainties and factors reflected from time to time in the Company's filings with the Securities and Exchange Commission. The Company expressly disclaims any obligation to update any forward-looking statements as a result of developments occurring after the filing of this report. 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: February 10, 1998 By: /s/ William J. Long ------------------------------ William J. Long, President and Chief Executive Officer (Principal Financial and Accounting Officer) 14