UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
----------
FORM 10-Q
(Mark One)
|x| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
ENVIROTEST SYSTEMS CORP.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-21454 06-0914220
-------- ------- ----------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification Number)
ENVIROTEST TECHNOLOGIES, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-57384-01, 033-75406-01 36-2680300
-------- ------------------------- ----------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification Number)
246 Sobrante Way
Sunnyvale, CA 94086
-------------------
(Address of principal executive offices, including zip code, of registrants)
(408) 774-6300
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(Registrants' telephone number, including area code)
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes X No ___
---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class of Common Stock Outstanding at April 30, 1997
--------------------- -----------------------------
Class A Common Stock, $0.01 par value 13,204,396 shares
Class B Common Stock, $0.01 par value 1,389,749 shares
Class C Common Stock, $0.01 par value 2,026,111 shares
1
ENVIROTEST SYSTEMS CORP.
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets:
March 31, 1997 and September 30, 1996 3
Condensed Consolidated Statements of Operations:
three and six months ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows:
six months ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 5. Other 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
ENVIROTEST SYSTEMS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
March 31, September 30,
1997 1996
--------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 135,827 $ 53,104
Short-term investments -- 7,991
Settlement due from Commonwealth of Pennsylvania -- 80,000
Contract receivables, net 10,577 10,969
Prepaid and other current assets 6,708 6,432
--------- ---------
Total current assets 153,112 158,496
Restricted cash 18,935 21,108
Property, plant and equipment, net 184,597 192,400
Assets held under capital lease, net 44,858 46,108
Assets held for sale, net 31,601 32,246
Intangible assets, net 13,564 14,927
Deferred debt acquisition costs, net 13,296 13,159
Deferred charges, net 1,238 1,189
Other assets 1,325 1,151
--------- ---------
Total assets $ 462,526 $ 480,784
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,059 $ 3,825
Accrued interest 1,581 1,689
Current portion of long-term debt 4,570 4,740
Current portion of capital lease and long-term debt obligation 4,900 3,880
Accrued expenses and other current liabilities 26,120 27,754
--------- ---------
Total current liabilities 40,230 41,888
Senior long-term debt, net 199,283 199,192
Senior subordinated debt 125,000 125,000
Capital lease and long-term debt obligation, net of current portion 55,695 58,155
Other long-term debt, net of current portion 35,663 38,129
Other long-term liabilities 5,480 5,266
--------- ---------
Total liabilities 461,351 467,630
Stockholders' equity:
Common stock 166 166
Additional paid-in capital 60,172 60,172
Cumulative currency adjustment (174) (96)
Accumulated deficit (53,411) (41,510)
Predecessor carry-over basis (5,578) (5,578)
--------- ---------
Total stockholders' equity 1,175 13,154
--------- ---------
Total liabilities and stockholders' equity $ 462,526 $ 480,784
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
ENVIROTEST SYSTEMS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
Three Six
Months Ended Months Ended
March 31, March 31,
1997 1996 1997 1996
-------- -------- -------- --------
(Unaudited) (Unaudited)
Contract revenues $ 33,715 $ 30,024 $ 64,894 $ 58,208
Costs of services 25,825 28,212 50,429 50,104
-------- -------- -------- --------
Gross profit 7,890 1,812 14,465 8,104
Selling, general and administrative expenses 4,984 6,272 9,278 10,449
Consolidation expense -- 1,850 -- 1,850
Amortization expense 669 873 1,341 1,884
Gain on Pennsylvania settlement -- -- -- (15,307)
-------- -------- -------- --------
Income (loss) from operations 2,237 (7,183) 3,846 9,228
Other expense (income):
Interest expense 10,294 10,066 19,842 18,392
Other 175 (12) 95 8
Interest income (2,505) (2,740) (4,190) (3,835)
-------- -------- -------- --------
Income (loss) before income taxes (5,727) (14,497) (11,901) (5,337)
Income tax expense -- 1,918 -- 5,490
-------- -------- -------- --------
Net loss $ (5,727) $(16,415) $(11,901) $(10,827)
======== ======== ======== ========
Loss per common and common
equivalent share $ (0.34) $ (0.99) $ (0.72) $ (0.66)
======== ======== ======== ========
Weighted average common shares and
common equivalent shares 16,620 16,571 16,620 16,485
======== ======== ======== ========
Loss per common share - assuming
full dilution $ (0.34) $ (0.99) $ (0.72) $ (0.66)
======== ======== ======== ========
Weighted average common shares and common
equivalent shares 16,620 16,571 16,620 16,485
======== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
ENVIROTEST SYSTEMS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Six Months Ended
March 31,
1997 1996
--------- ---------
(Unaudited)
Cash flows from operating activities $ 1,894 $ 18,641
--------- ---------
Cash flows from investing activities:
Maturity of short-term investments 7,991 1,347
Payment for purchase of Systems Control, Inc.,
net of cash acquired -- (1,032)
Purchases of property, plant and equipment (4,468) (38,917)
--------- ---------
Net cash provided by (used in) investing activities 3,523 (38,602)
Cash flows from financing activities:
Proceeds from sale of Pennsylvania receivable 79,405 --
Proceeds from borrowings of long-term debt -- 17,000
Decrease in restricted cash 2,173 19,067
Repayment of long-term debt (1,776) (800)
Repayment of obligations under capital lease (2,300) --
Capitalization of loan fees (201) (855)
Other -- 148
--------- ---------
Net cash provided by financing activities 77,301 34,560
Effect of exchange rate on cash 5 17
--------- ---------
Net increase in cash and cash equivalents 82,723 14,616
Cash and cash equivalents, beginning of period 53,104 17,079
--------- ---------
Cash and cash equivalents, end of period $ 135,827 $ 31,695
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
ENVIROTEST SYSTEMS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The condensed consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
all material adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included.
The accompanying condensed consolidated financial statements should be
read in conjunction with the Company's audited consolidated financial statements
and related footnotes included in the Company's Annual Report on Form 10-K for
the year ended September 30, 1996, filed with the Securities and Exchange
Commission.
Operating results for the interim periods shown in this report are not
necessarily indicative of the results to be expected for any other interim
period or the full fiscal year.
2. Deferred Charges
The Company incurs significant expenses associated with bringing new
emissions testing programs into operation, including staff recruiting and
training, public information and similar pre-operating costs. These expenses are
deferred and amortized over a twelve month period beginning with the
commencement of the emissions program. At March 31, 1997, the Company had
incurred and deferred approximately $1.2 million, net of accumulated
amortization, of such expenses relating to the Indiana emissions program. The
Company expects that its results of operations during any fiscal period that
includes the commencement of a program will be adversely impacted by this
accelerated amortization.
3. Pennsylvania Settlement
On December 11, 1996, the Company sold its right to receive the two
remaining installment payments totaling $80 million (the "Receivables Assets")
in principal amount due under a settlement agreement with the Commonwealth of
Pennsylvania (the "Settlement Agreement") for approximately $79,405,000.
The transaction was effected through a sale of the Receivables Assets
from Envirotest Partners ("Partners"), a Pennsylvania general partnership owned
by Envirotest and ETI, to a newly formed wholly owned subsidiary of the Company,
ES Funding Corp. ("Funding"). Funding, in turn, transferred the Receivables
Assets to an affiliate of a Pennsylvania bank. Funding and Partners provided
certain representations in connection with the transaction, including
representations as to enforceability of the Settlement Agreement against the
Commonwealth, and agreed to repurchase the Receivables Assets if Partners fails
to comply with its obligations under the Settlement Agreement.
6
The Settlement Agreement requires the Company to use its best efforts
to dispose of the assets it acquired to perform vehicle emissions testing
services in Pennsylvania. If the net proceeds received by the Company from the
sale of the assets is less than $55 million, Pennsylvania is obligated to pay
the Company fifty percent of the difference up to $11 million no later than July
31, 1998. The amount of this contingent payment was reduced from $15 million in
an amendment to the Settlement Agreement that permitted the Company to complete
the sale of the receivable assets. Should the net proceeds from the sale of the
real estate and other program related assets exceed $55 million, the Company is
obligated to pay the Commonwealth 75% of the amount by which the net proceeds
exceed $55 million. Based upon the experience with recent sales of these assets
and the sufficiency of reserves, the Company is of the opinion that upon final
disposition of properties no loss will be recognized.
4. Business Acquisition
In January 1996, the Company purchased from Systems Control, Inc.
("SCI") the stock of SCI-WA, a Washington company and operator of the State of
Washington centralized emissions testing program, all intellectual property of
SCI and an option to purchase SCI's Indiana subsidiary for $3.2 million. The
Company exercised the option in June, 1996 and purchased the assets of the
Indiana subsidiary. The results of operations of SCI-WA have been included in
consolidated results from the date of acquisition.
5. Income Taxes
The deferred tax asset is fully reserved as of March 31, 1997. The
amount of the deferred tax asset considered realizable may change in the near
term if estimates of future taxable income are revised.
6. Legal Proceedings
The State of Connecticut has made certain claims stating that the
Company owes the State $2.4 million plus accruing amounts for certain cost
savings in the start up of the enhanced testing program in Connecticut. The
Company cannot predict the outcome of this complaint. However, the Company
believes that it has valid defense against these claims.
The Company is a defendant in Grendell, et al. V. Ohio EPA. et al, a
taxpayers' class action suit originally filed on October 3, 1996 in Geauga
County Court of Common Pleas, State of Ohio. The case has been remanded to the
Common Pleas Court in Franklin County, Ohio. Plaintiffs seek to enjoin the Ohio
motor vehicle emission inspection program and the Company's Ohio contracts as
invalid and void based on certain Ohio constitutional provisions. The Company
believes that it has valid defenses to the claims contained in the complaint and
intends to defend the matter vigorously.
On January 30, 1997, Ron Young, as relator, filed an action for a writ
of quo warranto and ancillary relief in the Ohio Supreme Court. The action named
the State Attorney General as respondent, and sought to establish by what
authority the Ohio General Assembly enacted Am. Sub. S. B. 18, the authorizing
legislation for the State's existing motor vehicle inspection and maintenance
program. On February 24, 1997, the Attorney General filed a motion to dismiss
the action. On March 12, 1997, the Ohio Supreme Court sustained the motion, and
dismissed the case matter in its entirety.
On May 12, 1997 the Company was served with a complaint asserting that
Timothy Dore purports to represent a class of all "front range drivers who have
paid to have their vehicle emissions systems tested by the Company". The
complaint, filed in Denver District Court, states two claims for relief, breach
of contract and negligence, and seeks damages equal to the difference in price
between the new emissions test and the old tail pipe test for all test for
members of the class undertaken on the front range since implementation of the
Company's testing program. The complaint also seeks cancellation of the contract
for the State of Colorado. The Company believes that it has valid defenses to
the claims contained in the complaint and intends to defend the matter
vigorously.
The Company is a party to various other legal proceedings and claims in
the ordinary course of business. The Company does not believe that the outcome
of any pending matters will have a material adverse affect on its consolidated
financial position or results of operations.
See Part II., Item 1 - Legal Proceedings for further discussion.
7
ENVIROTEST SYSTEMS CORP.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company conducts its operations directly and through its principal
wholly owned subsidiaries, Envirotest Technologies, Inc. ("ETI"), Envirotest
Wisconsin, Inc. and Systems Control, Inc., a Washington corporation. The
Company's British Columbia, Canada operations are conducted through a British
Columbia partnership, Envirotest Canada which is wholly owned by the Company
(through its subsidiaries).
Certain sections of this Form 10-Q, including "Management's Discussion
and Analysis of Financial Condition and Results of Operations," contain forward
looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, with respect to the Company's expectations or belief concerning
future events. The Company cautions that these statements are further qualified
by important factors that could cause actual results to differ materially from
those in the forward looking statements. The forward looking statements include,
without limitation, the amounts of reserves recognized, the number of annual
tests, the commencement of operations for a particular program, the amount of
revenues that will be generated under a contract, and ultimate outcome of
pending litigation.
Recent Developments
During the second fiscal quarter, the Company signed an agreement
with the State of Florida extending the current contract at the same test fee
for two additional years to expire March 31, 2000. The extension is expected to
generate aggregate revenues of up to $32 million. The Company was also awarded a
contract to provide a vehicle safety and inspection program in Connecticut which
commenced January, 1, 1997. Under the terms of the contract, which expires in
June, 2002, Envirotest will provide safety inspections on an estimated 160,000
vehicles per year with anticipated annual revenues of approximately $2.1 million
to the Company.
As of March 31, 1997, the State of California elected to terminate the
Company's contract to provide remote sensing services. The contract was expected
to extend through June 30, 1998 and provide $2.3 million of revenue to the
Company. The termination was related to the State's decision to reassess its
future vehicle emissions testing program.
Results of Operations
Contract revenues increased to $33.7 million in fiscal second quarter
1997 from $30.0 million in fiscal second quarter 1996, an increase of $3.7
million or 12.3%. For the six months ended March 31, 1997, contract revenues
were $64.9 million, an increase of $6.7 million, or 11.5%, over contract
revenues of $58.2 million for the corresponding period in fiscal 1996. The
increase in contract revenues in fiscal second quarter 1997 as compared to
fiscal second quarter 1996 was primarily due to additional revenues of
approximately $1.4 million generated from a new program with the State of
Indiana which commenced operations in January, 1997, additional revenues of $0.8
million from the Washington State program acquired on January 30, 1996, $1.4
8
million of additional revenues in the British Columbia program of which
approximately $0.6 million is attributable to the employee strike which impacted
operations during fiscal second and third quarters of 1996 and $0.8 million from
a one time adjustment in test scheduling, and $0.5 million increase in remote
sensing unit sales. These increases were offset by a $0.5 million decrease in
revenue as a result of the expiration of the California Quality Assurance
contract on September 30, 1996.
The increase in contract revenues of $6.7 million for the six months
ended March 31, 1997 resulted primarily from additional revenues of
approximately $7.1 million generated from new contracts with the states of
Indiana and Ohio, and a full quarter of operations in the Washington state
program; $2.5 million from the British Columbia program resulting from a one
time adjustment in test scheduling and the absence of testing due to an employee
strike during the second and third quarters of fiscal year 1996; and $0.8
million increase in remote sensing unit sales. These increases were offset by a
decrease of $1.9 million in the Colorado program and $0.9 million in the
Connecticut program as more vehicles were scheduled for testing in these
programs in the corresponding period in fiscal 1996. Revenue also decreased $1.0
million as a result of the expiration of the California Quality Assurance
Contract.
Gross profit increased to $7.9 million in fiscal second quarter 1997
from $1.8 million in fiscal second quarter 1996, an increase of $6.1 million, or
335.4%. As a percentage of contract revenues, gross profit increased to 23.4% in
fiscal second quarter 1997 from 6.0% in fiscal second quarter 1996, an absolute
increase of 17.4%. This increase was attributable to several factors including
lower operating costs of $2.9 million in the Ohio and Wisconsin programs, which
were burdened with start-up and accelerated amortization of deferred charges in
the corresponding fiscal quarter; contribution of $1.4 million from new and
acquired programs in Indiana and Washington; improvement of $1.0 million in the
British Columbia program which benefited from a one time volume increase and the
settlement of the employee strike as discussed above. Most other programs also
experienced improved margins resulting from operating efficiencies.
For the six months ended March 31, 1997, gross profit increased to
$14.5 million from $8.1 million for the corresponding period in fiscal 1996, an
increase of $ 6.4 million or 78.5%. As a percentage of contract revenues, gross
profit increased to 22.3% from 13.9% in the corresponding period in fiscal 1996,
an absolute increase of 8.4%. This increase was attributable to increased
contribution of $2.3 million from the Ohio and Wisconsin programs resulting from
higher revenues in the new enhanced programs and cost efficiencies as compared
to the prior fiscal period which included higher operating expenditures
associated with the startup of these new enhanced programs. In addition,
improved gross profit resulted from the new and acquired programs in Indiana and
Washington which made additional contributions of $1.6 million. British Columbia
program contributed $1.9 million for the reasons discussed above and other
general improvements added $1.4 million to the Company's operating results.
These increases were offset by a decrease in contribution from the California
Quality Assurance contract that expired in September 30, 1996.
Selling, general and administrative ("SG&A") expenses decreased to $5.0
million in fiscal second quarter 1997 from $6.3 million in fiscal second quarter
1996, a decrease of $1.3 million or 20.5%. As a percentage of contract revenues,
SG&A expenses decreased to 14.8% in fiscal second quarter 1997 from 20.9% in
fiscal second quarter 1996, an absolute decrease of 6.1%. For the six months
ended March 31, 1997, SG&A decreased to $9.3 million from $10.4 million for the
corresponding period in fiscal 1996, a decrease of $1.1 million or 11.2%. As a
percentage of contract revenues, SG&A expenses decreased to 14.3% for the six
months ended
9
March 31, 1997 from 18.0% for the corresponding period in 1996, an absolute
decrease of 3.7%. The decrease in SG&A expenses is primarily due to relocation
costs of $1.5 million resulting from the consolidation of the corporate
headquarters to Sunnyvale, California during fiscal second quarter 1996. Also,
in fiscal second quarter 1996, the Company recorded a consolidation expense of
$1.9 million representing the costs associated with the closure of the Phoenix
corporate headquarters and other restructuring costs.
Amortization expense decreased to $0.7 million in fiscal second quarter
1997 from $0.9 million in fiscal second quarter 1996, a decrease of $0.2
million. For the six months ended March 31, 1997, amortization expense decreased
to $1.3 million from $1.9 million for the corresponding period in fiscal 1996.
The decrease was attributable to the expiration of the California Quality
Assurance contract as of September 30, 1996.
A one time gain on the Pennsylvania settlement of $15.3 million was
included in the six months ended March 31, 1996.
Income from operations increased to $2.2 million in fiscal second
quarter 1997 from a $7.2 million loss in fiscal second quarter 1996, an increase
of $9.4 million. As a percentage of contract revenues, income from operations
increased to 6.6% as compared to a 23.9% loss in the corresponding period of the
prior year, an absolute increase of 30.5%. The increase in income is due to the
increase in gross profit of $6.1 million, SG&A reductions of $1.3 million,
reduced amortization expenses of $0.2 million, and the absence of the
consolidation expense incurred in fiscal second quarter 1996 of $1.9 million, as
discussed above. For the six months ended March 31, 1997, income from operations
decreased to $3.8 million from $9.2 million in the corresponding period of the
prior year, a decrease of $5.4 million. For the six months ended March 31, 1997,
income from operations as a percentage of contract revenues decreased to 5.9%
compared to 15.9% in the corresponding period of the prior year, an absolute
decrease of 10.0%. The decrease is due to the inclusion of the gain on the
Pennsylvania settlement of $15.3 million in the comparable fiscal period in 1996
offset by the absence of the prior year consolidation expense of $1.9 million,
reduced SG&A expenses of $1.2 million, lower amortization expense of $0.5
million, and increased gross profit of $6.4 million in the six month period
ending March 31, 1997.
Interest expense increased to $10.3 million in fiscal second quarter
1997 from $10.0 million in fiscal second quarter 1996, an increase of $0.3
million. For the six months ended March 31, 1997, interest expense increased to
$19.8 million from $18.4 million in the corresponding period of the prior year,
an increase of $1.4 million. These increases were primarily attributable to debt
associated with the Wisconsin, Washington and Indiana programs.
Interest income decreased to $2.5 million in fiscal second quarter 1997
from $2.7 million in fiscal second quarter of 1996, a decrease of $0.2 million.
For the six months ended March 31, 1997, interest income increased to $4.2
million compared to $3.8 million in the corresponding period of the prior year.
This increase over the prior year was primarily attributable to the interest
earned on amounts under the Pennsylvania settlement.
There was no income tax benefit on the pretax loss in the fiscal second
quarter 1997 compared to income tax expense of $1.9 million in fiscal second
quarter 1996. There was no income tax benefit on the pretax loss for the six
months ended March 31, 1997 compared to income tax expense of $5.5 million for
the six months ended March 31, 1996. The absence of the tax credit at the
combined federal and state effective tax rate of approximately 39% is a result
of recording a valuation allowance to fully reserve the net deferred tax asset.
10
Net loss was $5.7 million in fiscal second quarter 1997 compared to a
$16.4 million loss in fiscal second quarter 1996, a decrease of $10.7 million.
For the six months ended March 31, 1997, net loss was $11.9 million compared to
$10.8 million for the corresponding period in fiscal 1996.
Liquidity, Capital Resources and Commitments
Cash and cash equivalents, short-term investments and restricted cash
increased to $154.8 million at March 31, 1997 from $82.2 million at September
30, 1996. The increase of $72.6 was primarily a result of the proceeds of $79.4
million received as a result of the Company selling its rights to receive the
two remaining installment payments totaling $80 million from the Commonwealth of
Pennsylvania and $1.9 million of cash generated from operations. These increases
in cash were partially offset by $4.3 million of debt and capital lease payments
and $4.5 million of purchases of property, plant and equipment primarily for the
new Indiana program.
The Company's primary uses of cash are the funding of the Company's
capital expenditure requirements, debt repayments, payments on capital and
operating leases, interest payments and other working capital needs. The
Company's capital and operating leases currently require minimum lease payments
of approximately $15.7 million in fiscal year 1997, decreasing to approximately
$14.3 million through 1999 and decreasing thereafter as certain leases are
scheduled to expire.
The Company's capital expenditures include expenditures for maintenance
of existing facilities, and development and construction expenditures for new
emissions facilities. The Company's development and construction capital
expenditures are dependent on the number of contracts it is awarded, and are
only incurred after the contract has been signed. After signing a contract, the
Company may incur significant development and construction expenditures, which
the Company expects to finance with existing cash resources, internally
generated funds, additional borrowings and alternative financing sources,
including leasing alternatives. It generally takes one to two years after a
contract has been signed for a program to begin operations and generate
revenues, depending on the size of the program.
The Company's principal commitments at March 31, 1997 consist of
approximately $2.1 million of capital expenditure requirements for two
facilities still to be completed in the Indiana program . Also in fiscal year
1997, the Company intends to spend approximately $1.2 million on maintenance
capital expenditures. The Company believes that its existing cash resources,
cash generated from operations and alternative financing sources, including
leasing alternatives, will be sufficient to complete implementation of the
Indiana program and to meet its liquidity requirements for the foreseeable
future.
Recent Accounting Pronouncements
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128 , "Earnings per Share"(SFAS No. 128) which establishes
standards for computing and presenting earnings per share (EPS) more comparable
to international standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. The Company is studying the impact of SFAS No. 128,
which is effective for the financial statements issued for periods ending after
December 15, 1997, will have on its EPS calculation.
11
ENVIROTEST SYSTEMS CORP.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company's new contract with the State of Connecticut began January 1, 1995.
Enhanced testing was scheduled to begin on April 3, 1995. Just prior to the
startup of enhanced testing, the State unilaterally decided to continue the old
testing procedure and phase in the enhanced testing. Additionally, the Company
was unable to build two facilities, one due to the State's inability to provide
the land the contract required and the other due to the Company's inability to
obtain zoning. The State claimed that it was entitled to be paid for the cost
savings to the Company for not having performed the enhanced test and not having
built the facilities. The Company claimed additional costs incurred when the
State unilaterally changed the test. After unsuccessful settlement negotiations,
the Commissioner of Department of Motor Vehicles decided on February 9, 1996
that the Company owed the State $2.4 million plus other non-qualified amounts
for 1995 and additional accruing amounts until the enhanced test was performed
and the facilities built. In accordance with the contract and to protect its
rights, the Company appealed the Commissioner's decision to binding arbitration
under rules of the American Arbitration Association. On May 1, 1996, prior to
the appointment of the arbitrators, the State filed a complaint in the Superior
Court in Hartford, Connecticut to enjoin the arbitration claiming that the
American Arbitration Association had no power to administer hearings in this
matter. The State has taken no further action on this matter and no hearing date
with regard to the State's complaint has been scheduled.
The Company is a defendant in Grendell, et al. V. Ohio EPA. et al, a taxpayers'
class action suit originally filed on October 3, 1996 in Geauga County Court of
Common Pleas, State of Ohio. The case has been remanded to the Common Pleas
Court in Franklin County, Ohio. Plaintiffs seek to enjoin the program and the
Company's Ohio contracts as invalid and void based on certain Ohio
constitutional provisions. The Company believes that it has valid defenses to
the claims contained in the complaint and intends to defend the matter
vigorously.
On January 30, 1997, Ron Young, as relator, filed an action for a writ of
quo warranto and ancillary relief in the Ohio Supreme Court. The action named
the State Attorney General as respondent, and sought to establish by what
authority the Ohio General Assembly enacted Am. Sub. S. B. 18, the State's most
recent version of its motor vehicle inspection and maintenance program. On
February 24, 1997, the Attorney General filed a motion to dismiss the action. On
March 12, 1997, the Ohio Supreme Court sustained the motion, and dismissed the
case in its entirety.
On May 12, 1997 the Company was served with a complaint asserting that
Timothy Dore purports to represent a class of all "front range drivers who have
paid to have their vehicle emissions systems tested by the Company". The
complaint, filed in Denver District Court, states two claims for relief, breach
of contract and negligence, and seeks damages equal to the difference in price
between the new emissions test and the old tail pipe test for all test for
members of the class undertaken on the front range since implementation of the
Company's testing program. The complaint also seeks cancellation of the contract
for the State of Colorado. The Company believes that it has valid defenses to
the claims contained in the complaint and intends to defend the matter
vigorously.
12
The Company is a party to various other legal proceedings and claims in the
ordinary course of business. The Company does not believe that the outcome of
any pending matters will have a material adverse affect on its consolidated
financial position or results of operations.
Item 5. OTHER
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Employment Agreement between Richard Webb and Envirotest Systems
Corp. as of April 14, 1997.................................................10.115
Agreement for Renewal of Contract for Motor Vehicle Inspection
Program between Envirotest Technologies and the Florida Department
of Highway Safety and Motor Vehicles dated February 97......................10.116
Connecticut Safety Inspection Extension Contract for the period
September 24, 1996 through June 30, 2002, between Envirotest Systems
Corp. and the Connecticut Department of Motor Vehicles......................10.117
Statement of Computation of Loss Per Share .....................................11
Financial Data Schedule.........................................................27
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended March 31, 1997.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused their report to be signed on their behalf by the
undersigned thereunto duly authorized.
ENVIROTEST SYSTEMS CORP.
------------------------
(Registrant)
ENVIROTEST TECHNOLOGIES, INC.
-----------------------------
(Registrant)
Date: May 13, 1997 By /s/ F. Robert Miller
--------------------------------------
F. Robert Miller
President and Chief Executive Officer
Date: May 13, 1997 By /s/ Raj Modi
---------------------------------------
Raj Modi
Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
(Principal Financial Officer)
14
ENVIROTEST SYSTEMS CORP.
EXHIBIT INDEX
Exhibit
Number: Page No.
- ------- --------
(11) Statement of Computation of Per Share Earnings
(27) Financial Data Schedule
(10.115) Employment Agreement between Richard Webb and Envirotest
Systems Corp. as of April 14, 1997.
(10.116) Agreement for Renewal of Contract for Motor Vehicle Inspection
Program between Envirotest Technologies and the Florida Department of
Highway Safety and Motor Vehicles dated February 1997.
(10.117) Connecticut Safety Inspection Extension Contract for the period
September 24, 1996 through June 30, 2002, between Envirotest Systems
Corp. and the Connecticut Department of Motor Vehicles
15