AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 23, 1999
REGISTRATION NO. 333-69399
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 7500 52-2096698
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
------------------------
7 KRIPES ROAD
EAST GRANBY, CONNECTICUT 06026
(860) 653-0081
(Address, including zip code, and telephone number, including
area code, of registrant's principal execute offices)
------------------------------
MR. DAVID J. LANGEVIN
CHIEF FINANCIAL OFFICER
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC.
7 KRIPES ROAD
EAST GRANBY, CONNECTICUT 06026
(860) 653-0081
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPIES TO:
Frank L. Schiff, Esq.
Thomas W. Christopher, Esq.
White & Case LLP
1155 Avenue of the Americas
New York, New York 10036-2787
(212) 819-8752
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
AMOUNT TO BE PROPOSED OFFERING PROPOSED AGGREGATE
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED PRICE PER NOTE(1) OFFERING PRICE(1)
13% Senior Subordinated Notes due 2008 $100,000,000 100% $100,000,000
Subsidiary guarantees of each of the subsidiary
guarantors(3) (4) (4) (4)
AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED FEE
13% Senior Subordinated Notes due 2008 $(2)
Subsidiary guarantees of each of the subsidiary
guarantors(3) None(4)
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933, as amended.
(2) Environmental Systems Products Holdings, Inc. previously paid $27,800 in
connection with its initial filing of the registration statement on December
22, 1998.
(3) The 13% Senior Subordinated Notes Due 2008 of Environmental Systems Products
Holdings Inc. being registered will be guaranteed by Environmental Systems
Testing, Inc., Envirotest Systems Corp. (DE), Envirotest Systems Corp. (WA),
Envirotest Holdings, Inc., Envirotest Technologies, Inc., Envirotest
Acquisitions Co., Envirotest Partners, Envirotest Illinois, Inc., Envirotest
Wisconsin, Inc., ES Funding Corporation, Remote Sensing Technologies, Inc.,
Newmall Limited, Wellman Overseas Limited and Wellman North America, Inc.
(4) No additional consideration will be paid by the recipients of the 13% Senior
Subordinated Notes Due 2008 for the subsidiary guarantees. Pursuant to Rule
437(n) under the Securities Act of 1933, no separate fee is payable for the
subsidiary guarantees.
------------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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PRIMARY STANDARD ADDRESS, INCLUDING ZIP CODE
JURISDICTION INDUSTRIAL IRS EMPLOYER AND TELEPHONE NUMBER,
OF CLASSIFICATION CODE IDENTIFICATION INCLUDING AREA CODE, OF
NAME OF CORPORATION INCORPORATION NUMBER NO. PRINCIPAL EXECUTIVE OFFICE
- ----------------------------- ------------- --------------------- ---------------- -----------------------------
Environmental Systems Delaware 7500 06-1285832 7 Kripes Road
Testing, Inc. East Granby, Connecticut
06026
(860) 653-0081
Envirotest Systems Corp. Delaware 7500 06-0914220 7 Kripes Road
East Granby, Connecticut
06026
(860) 653-0081
Envirotest Systems Corp. Washington 7500 36-3087021 7 Kripes Road
East Granby, Connecticut
06026
(860) 653-0081
Envirotest Holdings, Inc. Delaware 7500 None(1) 7 Kripes Road
East Granby, Connecticut
06026
(860) 653-0081
Envirotest Technologies, Inc. Delaware 7500 36-2680300 7 Kripes Road
East Granby, Connecticut
06026
(860) 653-0081
Envirotest Acquisitions Co. Delaware 7500 52-1958199 7 Kripes Road
East Granby, Connecticut
06026
(860) 653-0081
Envirotest Partners ) 7500 23-2736441 7 Kripes Road
Pennsylvania(2 East Granby, Connecticut
06026
(860) 653-0081
Envirotest Illinois, Inc. Delaware 7500 52-2026812 7 Kripes Road
East Granby, Connecticut
06026
(860) 653-0081
Envirotest Wisconsin, Inc. Delaware 7500 39-1844542 7 Kripes Road
East Granby, Connecticut
06026
(860) 653-0081
ES Funding Corporation Delaware 7500 77-0474306 7 Kripes Road
East Granby, Connecticut
06026
(860) 653-0081
Remote Sensing Technologies, Delaware 7500 86-0766265 7 Kripes Road
Inc. East Granby, Connecticut
06026
(860) 653-0081
Newmall Ltd. Great 7500 98-0187866 7 Kripes Road
Britain East Granby, Connecticut
06026
(860) 653-0081
Wellman Overseas Ltd. Great 7500 None 7 Kripes Road
Britain East Granby, Connecticut
06026
(860) 653-0081
Wellman North America, Inc. Delaware 7500 06-1477873 7 Kripes Road
East Granby, Connecticut
06026
(860) 653-0081
- ------------------------------
(1) Applied for.
(2) Partnership registered under the laws of Pennsylvania.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING NOTEHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITED.
THE INFORMATION IN THIS PROSPECTUS WILL BE AMENDED OR COMPLETED;
DATED FEBRUARY 23, 1999
PROSPECTUS
, 1999
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC.
$100,000,000
13% SENIOR SUBORDINATED NOTES DUE 2008
CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED, AFFILIATES OF DONALDSON, LUFKIN &
JENRETTE SECURITIES CORPORATION AND CHASE EQUITY ASSOCIATES L.P. MAY USE THIS
PROSPECTUS TO OFFER UP TO $100,000,000 OF 13% SENIOR SUBORDINATED NOTES DUE 2008
IN ONE OR MORE OFFERINGS.
TERMS OF NOTES
- - MATURITY - GUARANTEES
October 31, 2008. If we cannot make payments on the notes
- - REDEMPTION when due, some of our subsidiaries have
We may redeem the notes at any time after guaranteed that they will make them
October 31, 2003. instead. Not all of our subsidiaries are
guarantors.
Before October 31, 2001, we may redeem up - RANKING
to $35 million of the notes with the These notes and the subsidiary guarantees
proceeds of certain public offerings of our are subordinated to the following debt of
equity or that of our parent company. us and our subsidiaries who have given
- - MANDATORY OFFER TO REPURCHASE guarantees:
If a new owner purchases our company or if
we sell the stock or assets of any of our - current indebtedness other than trade
major subsidiaries, we must offer to payables; and
repurchase the notes.
- future indebtedness other than trade
payables unless the terms of that
indebtedness expressly provide otherwise.
- INTEREST
Paid every six months on April 30 and
October 31.
THIS INVESTMENT INVOLVES RISK. SEE THE RISK FACTORS SECTION BEGINNING ON PAGE
14.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful and complete. Any representation to the contrary is a
criminal offense.
TABLE OF CONTENTS
PAGE
---------
PROSPECTUS SUMMARY....................................................................................... 1
RISK FACTORS............................................................................................. 14
SOURCES AND USES OF FUNDS................................................................................ 21
CAPITALIZATION........................................................................................... 22
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC. UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS........... 23
SELECTED HISTORICAL FINANCIAL DATA....................................................................... 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 41
INDUSTRY AND REGULATORY OVERVIEW......................................................................... 56
BUSINESS................................................................................................. 59
MANAGEMENT............................................................................................... 77
SECURITY OWNERSHIP....................................................................................... 81
CERTAIN TRANSACTIONS..................................................................................... 82
DESCRIPTION OF OTHER INDEBTEDNESS........................................................................ 84
DESCRIPTION OF THE NOTES................................................................................. 88
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS.................................................. 130
BOOK-ENTRY; DELIVERY AND FORM............................................................................ 135
SELLING NOTEHOLDERS...................................................................................... 138
PLAN OF DISTRIBUTION..................................................................................... 139
LEGAL MATTERS............................................................................................ 141
EXPERTS.................................................................................................. 141
INDEX TO FINANCIAL STATEMENTS............................................................................ F-1
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
AND MAY NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD
ALSO READ THE MORE DETAILED INFORMATION AND FINANCIAL DATA INCLUDED ELSEWHERE IN
THIS PROSPECTUS.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
SEC using a "shelf" registration process. Under this shelf registration process,
the selling noteholders may sell the notes described in this prospectus in one
or more offerings up to a total dollar amount of $100,000,000.
THE COMPANY
We are the leading worldwide provider of vehicle emissions testing equipment
and services. We manufacture equipment that tests vehicle emissions for
compliance with air pollution standards and operate testing programs on behalf
of states and other jurisdictions.
We sell emissions testing equipment to numerous private sector facilities,
such as service stations, automotive repair shops and dealerships that test
vehicles for compliance with emissions standards. In the emissions testing
industry, such facilities are called decentralized facilities. We manufacture
both "basic" testing systems, that test a motor vehicle's emissions while in
neutral, and "enhanced" testing systems that test a vehicle's emissions under
simulated driving conditions. In addition, we test vehicles in high volume,
test-only facilities which we operate on behalf of governmental authorities.
Services provided at such facilities are called centralized testing services.
Our unaudited pro forma revenues for the twelve months ended September 30,
1998 which include the results of Environmental Systems Testing, Inc. (formerly
Environmental Systems Products, Inc.) and Envirotest Systems Corp., are $335.1
million. Fifty percent of these revenues are from EST, our equipment business,
and fifty percent are from Envirotest, our testing business. Our pro forma net
income for the twelve months ended September 30, 1998 is $5.3 million. Our
unaudited pro forma revenues, Net income for the twelve months ended September
30, 1998 give effect to:
- our acquisition of Envirotest; and
- the refinancing related to the acquisition
as if these transactions occurred on January 1, 1997.
PRO FORMA INFORMATION. Pro forma information does not indicate actual
results and may not indicate future results. Both historical and pro forma
information is included in this prospectus.
INDUSTRY AND REGULATORY OVERVIEW
Vehicle emissions produce approximately 50% of the ozone air pollution and
nearly all of the carbon monoxide air pollution in metropolitan areas.
Consequently, the EPA has made emissions testing an integral part of its overall
effort to reduce air pollution.
The EPA has granted state and local governmental authorities the discretion
to determine how best to establish and operate a network of emissions testing
facilities, including the flexibility to choose either a centralized or a
decentralized program. In a centralized program, vehicle owners take their
vehicles to one of a small number of special centralized facilities to be
tested. These facilities only perform tests; they do not repair vehicles.
Usually, a private contractor licensed by the government operates the
centralized facility. In a decentralized program, vehicle owners take their
vehicles to a service station, automotive repair shop or dealership to be
tested. These decentralized facilities both perform tests and repair vehicles.
In 1997, centralized programs in the U.S. and Canada performed approximately
23.0 million paid tests and generated approximately $250 million in revenues,
while facilities in decentralized markets into which we sell the testing
equipment in the United States performed approximately 41.7 million tests and
generated approximately $816 million in revenues.
In addition, a number of foreign countries have implemented various forms of
mandatory testing programs, including the United Kingdom,
Germany, Canada (certain provinces), Mexico and Japan, and a number of others
are considering developing or expanding mandatory or voluntary testing programs,
including Poland, the Philippines, Brazil, Argentina, and Chile.
BUSINESS STRENGTHS
We believe that we have the following competitive advantages:
INDUSTRY LEADER. We have leading market positions in both the production of
equipment used in the decentralized testing market and in the testing of vehicle
emissions in the centralized testing services market.
STABLE REVENUE SOURCE. Our centralized vehicle emissions testing services
business provides a stable source of revenues as our testing services contracts
typically have terms ranging from five to ten years.
TECHNOLOGICAL LEADERSHIP AND SUPERIOR CUSTOMER SERVICE. We believe that we
are the technological leaders in the design and manufacture of vehicle emissions
testing equipment. We have developed proprietary software programs and hold more
than 70 patents on emissions testing and related products. In addition, our
staff of approximately 182 company-trained direct service technicians who
operate from a network of 10 service hubs throughout the United States provides
superior customer service with an industry leading average response time for
service calls of four to six hours.
EXPERIENCED MANAGEMENT TEAM. Our management team, which is comprised of
certain of the senior members of the former managements of EST and Envirotest,
is one of the most experienced in the vehicle emissions testing industry. We
have a combined 40 years of experience in the industry and have demonstrated our
ability to succeed in both the emissions testing equipment business and the
emissions testing services business.
BUSINESS STRATEGY
Our objective is to maximize our long-term profitability by enhancing our
leading positions in the vehicle emissions testing equipment and testing
services businesses through the following strategies:
EXPAND DOMESTIC BUSINESS. We intend to expand our share of the existing
markets for emissions testing equipment and centralized testing services. In
addition, we intend to pursue new business as additional jurisdictions require
our equipment and services.
REALIZE BENEFITS FROM ACQUISITION OF ENVIROTEST. As a result of the
combination of the equipment and testing businesses, we expect to save
approximately $8.0 to $10.0 million annually, including $4.2 million as a result
of the elimination of duplicative management, staff and facilities.
EXTEND TECHNOLOGICAL LEADERSHIP. By integrating the research and
development groups of EST and Envirotest, we expect to extend our technological
leadership. We also plan to continue to work with leading government policy
makers, including particularly the California BAR, in developing testing
programs.
EXPAND INTERNATIONAL PRESENCE. We intend to expand internationally by
offering a broad range of vehicle emissions testing equipment and services to
countries around the world that are likely to adopt emissions testing programs
similar to those adopted in the U.S.
BACKGROUND
In October 1998, our wholly-owned subsidiary, Environmental Systems Testing,
Inc., the leader in the emissions testing equipment business, acquired all of
the outstanding capital stock of Envirotest Systems Corp., a publicly-owned
company and the leader in the emissions testing services business, for
approximately $266.2 million plus the assumption of all its indebtedness. The
combination of EST and Envirotest has created an emissions testing industry
leader. To finance the acquisition, we undertook a financing and refinancing of
certain indebtedness of Envirotest, EST and their subsidiaries in which we:
- repaid $300.3 million of certain existing indebtedness of Envirotest
(including the
2
repurchase and redemption of all $150.0 million of Envirotest's
outstanding 9 1/8% Senior Notes due 2001 and all $125.0 million of
Envirotest's outstanding 9 5/8% Senior Subordinated Notes due 2003;
- paid $12.5 million in debt repurchase premiums;
- repaid all $125.0 million of loans outstanding under EST's senior secured
credit facility;
- entered into a new $435.0 million senior secured credit facility;
- raised approximately $179.9 million of additional equity;
- issued $100 million aggregate principal amount of the notes we are
offering in this prospectus; and
- paid approximately $43.1 million fees and expenses related to the
foregoing and the acquisition.
After these transactions and a reorganization of our affiliated companies,
we became a direct, wholly-owned subsidiary of Environmental Systems Products,
Inc. (formerly EnviroSystems Corp.) and both Envirotest and EST became our
wholly-owned subsidiaries. Operations are at the EST and Envirotest levels and
include their direct subsidiaries. There are no significant operations or
employees at Environmental Systems Products, Inc. or Environmental Systems
Products Holdings Inc. and the only substantial asset of the former company is
the stock of the latter company and the only substantial assets of the latter
company are the stock of its subsidiaries.
We were incorporated in March 1998 under the laws of the State of Delaware.
Our chief executive offices are located at 7 Kripes Road, East Granby,
Connecticut 06026 and our telephone number is (860) 653-0081.
3
Below is an organizational chart describing the structure of our Company.
[LOGO]
4
THE NOTES
Total Amount of Notes Offered................ $100 million in principal amount of 13%
Senior Subordinated Notes due 2008.
Selling Noteholders.......................... Credit Suisse First Boston (Europe) Limited,
certain affiliates of Donaldson, Lufkin &
Jenrette Securities Corporation and Chase
Equity Associates, L.P.
Maturity..................................... October 31, 2008.
Interest..................................... Annual rate--13%.
Payment frequency--every six months on April
30 and October 31. First payment--April 30,
1999.
Original Issue Discount...................... The note should be considered to have been
issued with original issue discount (the
difference between its stated redemption
price at maturity and issue price) for United
States federal income tax purposes. In such
case, besides including stated interest in
income in accordance with its usual method of
tax accounting, a holder subject to United
States federal income tax with respect to a
note generally will be required to include
original issue discount in gross income for
United States federal income tax purposes as
it accrues, in advance of the receipt of cash
attributable to such income. See "United
States Federal Tax Considerations."
Subsidiary Guarantors........................ Each guarantor is our wholly owned
subsidiary. However, not all of our wholly
owned subsidiaries are guarantors of these
notes. If we cannot make payments on the
notes when they are due, the guarantor
subsidiaries must make them instead. Several
of our wholly-owned foreign subsidiaries are
not guarantors of these notes. Total assets
of the guarantor subsidiaries are $754.3
million on a pro forma basis and total assets
of the non guarantor subsidiaries are $7.4
million on a pro forma basis.
Ranking...................................... These notes and the subsidiary guarantees are
senior subordinated debts.
5
They rank behind all of our and our guarantor
subsidiaries' current and future
indebtedness, other than trade payables and
indebtedness that expressly provides that it
is not senior to these notes and the
guarantees. We have $438.1 million of senior
debt.
Optional Redemption.......................... On or after October 31, 2003, we may redeem
some or all of the notes at any time at the
redemption prices listed in the section
"Description of Notes" under the heading
"Optional Redemption."
Mandatory Offer to Repurchase................ If a new owner purchases our company or if we
sell the stock or assets of any of our major
subsidiaries, we must offer to repurchase the
notes at the prices listed in the section
"Description of Notes."
Basic Covenants of Indenture................. The indenture will, among other things,
restrict our ability and the ability of our
subsidiaries to:
- borrow money;
- pay dividends on stock or purchase stock;
- make investments;
- use assets as security in other
transactions; and
- sell certain assets or merge with or into
other companies.
These restrictions make it more difficult for
us to implement our business strategy and
earn the revenue necessary to service our
debt.
Use of Proceeds.............................. We used the net proceeds from the initial
offering of these notes to fund a portion of
the acquisition of Envirotest and the related
transactions.
6
SUMMARY SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF THE
COMPANY
(DOLLARS IN THOUSANDS)
The summary selected unaudited pro forma combined financial information
gives effect to the acquisition of Envirotest and related transactions. The
unaudited pro forma combined financial information is based on the respective
historical financial statements and the notes thereto, which are included
elsewhere in this prospectus. The following table sets forth summary unaudited
pro forma combined financial data for the Company. The pro forma information is
derived from and should be read in conjunction with the "Environmental Systems
Products Holdings Inc. Unaudited Pro Forma Combined Financial Statements" that
give pro forma effect to the acquisition of Envirotest and related transactions
found elsewhere in this prospectus.
The pro forma combined statement of operations and other financial data for
the year ended December 31, 1997, the twelve months ended September 30, 1998,
and the nine months ended September 30, 1998 give effect to the acquisition of
Envirotest and related transactions as if they were consummated on January 1,
1997. The pro forma combined balance sheet data give effect to the acquisition
of Envirotest and related transactions as if they were consummated on September
30, 1998.
The unaudited pro forma combined financial data is presented for
illustrative purposes only and is not necessarily indicative of the combined
financial position or results of operations of future periods or the results
that actually would have been realized had the entities been a single entity
during these periods. The unaudited pro forma combined financial data is derived
from the unaudited pro forma combined financial statements appearing elsewhere
herein and should be read in conjunction with those statements and notes hereto.
See "Unaudited Pro Forma Combined Financial Statements." The pro forma
information presented below is based on assumptions which management believes
are reasonable and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Environmental
Systems Testing, Inc.," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Envirotest Systems Corp." and the
consolidated financial statements and the notes thereto for each of EST and
Envirotest included elsewhere in this prospectus.
7
TWELVE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
----------------- ------------------ ------------------
STATEMENT OF OPERATIONS DATA:
Revenues:
Testing equipment and related services(1).......... $ 102,526 $ 166,463 $ 110,714
Testing services(2)................................ 146,422 168,650 131,713
-------- -------- --------
Total revenues................................... 248,948 335,113 242,427
Cost of revenues..................................... 162,584 211,167 151,260
Cost of revenues--inventory step-up.................. -- 2,390 2,390
-------- -------- --------
Gross profit......................................... 86,364 121,556 88,777
Selling, general and administrative expenses......... 47,199 53,827 39,072
Other gains.......................................... (3,950) (2,555) (2,555)
-------- -------- --------
Income from operations............................... 43,115 70,284 52,260
Interest expense..................................... (55,572) (53,311) (39,699)
Other expense........................................ (191) (955) (866)
-------- -------- --------
Income (loss) before income taxes and extraordinary
item............................................... (12,648) 16,018 11,695
Provision for income taxes........................... 92 10,733 7,726
-------- -------- --------
Income (loss) before extraordinary item.............. $ (12,740) $ 5,285 $ 3,969
-------- -------- --------
OTHER FINANCIAL DATA:
Cash flows provided by operations.................... $ 8,088 $ 73,466 $ 54,442
Cash flows provided by (used in) investing
activities......................................... 23,686 (276,460) (265,688)
Cash flows (used in) provided by financing
activities......................................... (169,695) 184,455 205,834
EBITDA(3)............................................ 78,812 107,192 80,280
Depreciation and amortization of intangible assets... 35,697 36,908 28,020
Ratio of total debt (at period end) to EBITDA........ N/A 5.0x N/A
Ratio of EBITDA to total interest expense............ 1.4x 2.0x 2.0x
Ratio of earnings to fixed charges(4)................ --(4) 1.3 1.3
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 8,281
Total working capital................................ (58,639)
Total assets......................................... 761,680
Long-term debt....................................... 495,875
Total stockholder's equity........................... 120,301
SUPPLEMENTAL DATA:
Centralized emissions testing contract backlog(5).... $ 873,000
- ------------------------
(1) Represents revenues from sales of emissions testing systems by EST and
after-sales service provided on such equipment.
(2) Represents revenues from vehicle emissions testing services provided by
Envirotest.
(3) EBITDA is defined as income from operations plus depreciation and
amortization of intangible assets. EBITDA should not be construed as a
substitute for, or more meaningful than, income
8
from operations, net income or cash flow from operating activities prepared
in accordance with generally accepted accounting principles for the purpose
of evaluating our operating performance, profitability or liquidity. EBITDA
of the Company may not be comparable to similarly titled measures reported
by other companies and may not be indicative of funds available for
management's discretionary use as it has not been adjusted for capital
expenditures or debt repayments. We have presented EBITDA because we
understand it is a measurement commonly used by investors as one of several
indications of the Company's ability to service debt.
(4) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as income before income taxes, plus fixed charges. Fixed charges
consist of interest expense on all indebtedness (including amortization of
deferred debt issuance costs) and that portion of operating lease rental
expense that is representative of the interest factor. Earnings were
inadequate to cover fixed charges for the year ended December 31, 1997 by
$12,648.
(5) Represents contractual backlog to provide services through 2008 under
Envirotest's 15 contracts to provide centralized testing services. Backlog,
per contract, is calculated by multiplying (i) the average annual test
volume, (ii) the fee per vehicle tested and (iii) the remaining number of
years in the contract term, excluding optional extension periods.
9
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF ENVIRONMENTAL SYSTEMS TESTING,
INC. (FORMERLY ENVIRONMENTAL SYSTEMS PRODUCTS, INC.)
(DOLLARS IN THOUSANDS)
The following summary historical consolidated financial data of EST as of
and for each of three fiscal years in the period ended December 31, 1997 have
been derived from EST's audited consolidated financial statements and the notes
thereto. Summary historical financial data as of and for the nine months ended
September 30, 1997 and 1998 have been derived from EST's unaudited condensed
consolidated financial statements and, in the opinion of management, include all
adjustments, consisting of only normal recurring accruals, necessary for the
fair presentation of the results of operations for such periods. These interim
operating results are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. This summary historical
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Environmental Systems
Testing, Inc." and the consolidated financial statements of EST and the notes
thereto included elsewhere in this Prospectus.
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------- ---------------------
1995 1996 1997 1997 1998
---------- --------- ---------- --------- ----------
STATEMENT OF OPERATIONS DATA:
Revenues............................................. $ 20,813 $ 32,212 $ 102,526 $ 46,777 $ 110,714
Cost of revenues..................................... 12,940 19,355 66,099 29,374 76,494
Cost of revenues--inventory step-up -- -- -- -- 2,390
---------- --------- ---------- --------- ----------
Gross profit......................................... 7,873 12,857 36,427 17,403 31,830
Selling, general and administrative expenses......... 6,414 9,129 17,864 9,822 16,367
---------- --------- ---------- --------- ----------
Income from operations............................... 1,459 3,728 18,563 7,581 15,463
Interest expense..................................... (166) (122) (441) (145) (5,247)
Other income (expense), net.......................... 189 (52) 23 81 (442)
---------- --------- ---------- --------- ----------
Income before income taxes........................... 1,482 3,554 18,145 7,517 9,774
Provision for income taxes........................... 871 1,904 7,580 2,961 5,541
---------- --------- ---------- --------- ----------
Net income........................................... $ 611 $ 1,650 $ 10,565 $ 4,556 $ 4,233
---------- --------- ---------- --------- ----------
---------- --------- ---------- --------- ----------
OTHER FINANCIAL DATA:
Cash flows provided by (used in) operations.......... $ 475 $ 3,651 $ (7,769) $ (8,322) $ 7,692
Cash flows used in investing activities.............. 164 58 557 517 166
Cash flows (used in) provided by financing
activities......................................... (637) (433) 7,803 6,303 (3,057)
EBITDA(1)............................................ 2,134 4,558 18,980 7,921 17,242
Depreciation and amortization of intangible assets... 675 830 417 340 1,779
Capital expenditures................................. 164 58 557 517 166
Ratio of earnings to fixed charges (2)............... 3.4x 7.1x 21.6x 18.6x 2.6x
BALANCE SHEET DATA(3):
Cash and cash equivalents............................ $ 445 $ 3,592 $ 3,045 $ 1,038 $ 7,506
Total working capital................................ 4,337 6,936 16,263 10,384 (3,690)
Total assets......................................... 14,509 19,935 72,559 50,319 228,033
Long-term debt....................................... 433 -- -- -- 95,225
Total stockholders' equity........................... 5,575 7,762 16,937 11,276 70,733
SUPPLEMENTAL DATA:
Number of basic systems sold......................... 323 870 920 781 178
Number of enhanced systems sold...................... 50 45 2,650 286 2,433
- ------------------------
(1) EBITDA is defined as income from operations plus depreciation and
amortization of intangible assets. EBITDA should not be construed as a
substitute for, or more meaningful than, income
10
from operations, net income or cash flow from operating activities prepared
in accordance with generally accepted accounting principles for the purpose
of evaluating our operating performance, profitability or liquidity. EBITDA
of the Company may not be comparable to similarly titled measures reported
by other companies and may not be indicative of funds available for
management's discretionary use as it has not been adjusted for capital
expenditures or debt repayments. We have presented EBITDA because we
understand it is a measurement commonly used by investors as one of several
indications of the Company's ability to service debt.
(2) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as income before income taxes, plus fixed charges. Fixed charges
consist of interest expense, amortization of deferred financing costs and
that portion of operating lease rental expense that is representative of the
interest factor.
(3) Balance Sheet Data at September 30, 1998 reflects pushdown accounting for
the acquisition of EST by Alchemy.
11
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF ENVIROTEST SYSTEMS CORP.
(DOLLARS IN THOUSANDS)
The following is summary historical consolidated financial data of
Envirotest. The Statement of Operations data for each of the three years ending
September 30, 1998 and the Balance Sheet data at September 30, 1998 and 1997
have been derived from Envirotest's audited consolidated financial statements
and the notes thereto included elsewhere in this Prospectus. The Balance Sheet
data as of September 30, 1996 has been derived from Envirotest's audited
consolidated financial statements not included in this Prospectus. This summary
historical financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Envirotest Systems Corp." and the consolidated financial statements
of Envirotest and the notes thereto included elsewhere in this Prospectus.
YEAR ENDED
SEPTEMBER 30,
----------------------------------
1996 1997 1998
---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Revenues................................................................... $ 124,472 $ 140,664 $ 168,650
Cost of revenues........................................................... 102,149 98,859 104,970
---------- ---------- ----------
Gross profit............................................................... 22,323 41,805 63,680
Selling, general and administrative expenses............................... 25,209 21,478 21,826
Other (gains) and losses................................................... (13,457) (3,950) 5,273
---------- ---------- ----------
Income from operations..................................................... 10,571 24,277 36,581
Interest expense........................................................... (38,940) (40,220) (33,774)
Interest and other income, net............................................. 8,943 8,642 5,071
---------- ---------- ----------
Income (loss) before income taxes and extraordinary item................... (19,426) (7,301) 7,878
Provision for income taxes................................................. 5,638 -- 675
Extraordinary loss on debt repurchase...................................... -- (1,324) --
---------- ---------- ----------
Net income (loss).......................................................... $ (25,064) $ (8,625) $ 7,203
---------- ---------- ----------
OTHER FINANCIAL DATA:
Cash flows provided by (used in) operations................................ $ (12,426) $ 12,228 $ 64,013
Cash flows provided by investing activities................................ 12,269 39,329 6,579
Cash flows provided by (used in) financing activities...................... 36,175 (85,968) (17,654)
EBITDA(1).................................................................. 35,109 48,436 66,917
EBITDA before other (gains) and losses..................................... 21,652 44,486 72,190
Depreciation and amortization of intangible assets......................... 24,538 24,159 30,336
Capital expenditures....................................................... 49,724 14,668 55,854
Ratio of earnings to fixed charges (2)..................................... --(2) --(2) 1.2x
BALANCE SHEET DATA:
Cash and cash equivalents.................................................. $ 53,104 $ 18,685 $ 71,506
Total working capital...................................................... 116,608 39,546 21,682
Total assets............................................................... 480,784 379,733 398,858
Long-term debt............................................................. 420,476 360,801 343,765
Total stockholders' equity (deficit)....................................... 13,154 (24,376) (17,366)
SUPPLEMENTAL DATA:
Number of centralized testing facilities................................... 169 176 176
Number of testing lanes.................................................... 667 689 689
Centralized emissions testing contract backlog............................. $ 660,000 $ 936,000 $ 873,000
12
- ------------------------
(1) EBITDA is defined as income from operations plus depreciation and
amortization of intangible assets. EBITDA should not be construed as a
substitute for, or more meaningful than, income from operations, net income
or cash flow from operating activities prepared in accordance with generally
accepted accounting principles for the purpose of evaluating our operating
performance, profitability or liquidity. EBITDA of the Company may not be
comparable to similarly titled measures reported by other companies and may
not be indicative of funds available for management's discretionary use as
it has not been adjusted for capital expenditures or debt repayments. We
have presented EBITDA because we understand it is a measurement commonly
used by investors as one of several indications of the Company's ability to
service debt.
(2) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as income before income taxes, plus fixed charges. Fixed charges
consist of interest expense, amortization of deferred financing costs and
that portion of operating lease rental expense that is representative of the
interest factor. Earnings were inadequate to cover fixed charges for the
year ended September 30, 1996 by $19,426 and for the year ended September
30, 1997 by $7,301.
13
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND OTHER
INFORMATION APPEARING IN THIS PROSPECTUS BEFORE BUYING THE NOTES.
SUBSTANTIAL LEVERAGE--OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR
FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THESE
NOTES.
We have a significant level of indebtedness. As of September 30, 1998, after
giving pro forma effect to the acquisition of Envirotest and related financings,
we would have had $531.5 million of consolidated indebtedness outstanding and
unused revolving commitments of $50.0 million, less outstanding letters of
credit, under the senior secured credit facility. Our pro forma ratio of total
indebtedness to total capitalization should be 0.82 as of September 30, 1998 and
our ratio of earnings to fixed charges for the nine months ended September 30,
1998 would be 1.3. Although the indenture governing the notes and the senior
secured credit facility limits our ability to borrow additional money, under
certain circumstances, we would be able to incur a significant amount of
additional indebtedness.
Our level of indebtedness could affect our operations in the following ways:
- we must dedicate a substantial portion of our cash flow from operations to
the payment of interest expense and principal and, consequently, this cash
will not be available for other purposes;
- our ability to obtain additional debt financing in the future for working
capital, capital expenditures, acquisitions, joint ventures or general
purposes may be limited;
- our level of indebtedness could limit our flexibility in reacting to
changes in the industry and economic conditions generally, making us more
vulnerable to a downturn in the industry or the economy in general;
- we may be substantially more leveraged than certain of our competitors,
placing us at a competitive disadvantage; and
- certain outstanding indebtedness, including outstanding indebtedness under
the senior secured credit facility, will mature prior to the notes and is
secured by substantially all of our assets.
ABILITY TO SERVICE INDEBTEDNESS--TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A
SIGNIFICANT AMOUNT OF CASH. WE MAY NOT BE ABLE TO GENERATE ENOUGH CASH TO
SERVICE OUR INDEBTEDNESS.
Our ability to pay interest on the notes and to satisfy other debt
obligations depends upon our future operating performance. Our future operating
performance will be affected by prevailing economic conditions, governmental
regulations regarding vehicle emissions, financial, business and other factors,
including factors beyond our control. We anticipate that our operating cash flow
and amounts available under our senior secured credit facility will cover our
operating expenses and will be sufficient to service our debt. However, we
cannot guarantee that these amounts will be sufficient.
We anticipate that at or before maturity we will refinance the notes if we
can obtain financing. If we are unable to service our indebtedness, we will be
forced to adopt an alternative strategy. Possible alternative strategies
include:
- reducing or delaying capital expenditures;
- selling assets;
- restructuring or refinancing our indebtedness; or
- seeking additional equity capital.
14
We cannot guarantee that we can effect any of these strategies on
satisfactory terms, if at all. For example, the senior secured credit facility
and the indenture pursuant to which the Notes were issued contain covenants that
restrict our ability to take certain of the foregoing actions, including selling
assets and using the proceeds therefrom.
SUBSTANTIAL RESTRICTIONS AND COVENANTS--RESTRICTIONS AND COVENANTS IN OUR DEBT
AGREEMENTS LIMIT OUR ABILITY TO TAKE CERTAIN ACTIONS, INCLUDING BORROWING
ADDITIONAL MONEY, SELLING ASSETS AND MAKING ACQUISITIONS. COMPLIANCE WITH THESE
RESTRICTIONS AND COVENANTS MAY LIMIT OUR ABILITY TO IMPLEMENT CERTAIN ELEMENTS
OF OUR BUSINESS STRATEGY.
The indenture governing the notes contains a number of significant
restrictions and covenants. These covenants limit our ability, among other
things, to:
- borrow more money;
- incur liens;
- pay dividends or make certain other restricted payments;
- sell certain assets;
- enter into certain transactions with affiliates; and
- make certain acquisitions.
The indenture also imposes restrictions on the ability of any of our
subsidiaries to:
- pay dividends or make certain payments to us;
- merge or consolidate with any other person; or
- sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of their assets.
In addition, our senior secured credit facility contains other more
restrictive covenants, including covenants that require us to maintain certain
financial ratios. If we are unable to comply with these covenants, there would
be a default under our senior secured credit facility. Such a default would also
result in a default under the indenture governing these notes. Such defaults, if
not waived, could result in acceleration of our indebtedness and, at worst, our
bankruptcy.
HOLDING COMPANY STRUCTURE--OUR STATUS AS A HOLDING COMPANY MAKES US DEPENDENT ON
THE CASH FLOWS OF OUR SUBSIDIARIES TO MEET OUR OBLIGATIONS.
We are a holding company and conduct almost all of our operations through
our subsidiaries. We do not have any significant assets other than the stock of
our subsidiaries. Accordingly, we depend on the cash flows of our subsidiaries
to meet our obligations, including the payment of the principal and interest on
the notes. In addition our parent company, EnviroSystems is highly leveraged.
While we have not guaranteed EnviroSystems' debt there is an expectation that
our operations and those of our subsidiaries will be able to service the parent
company debt.
RANKING OF THE NOTES--YOUR RIGHT TO RECEIVE PAYMENTS ON THESE NOTES IS
SUBORDINATE TO ALL SENIOR INDEBTEDNESS OF OUR COMPANY OR THE APPLICABLE
SUBSIDIARY GUARANTOR.
According to the indenture under which the notes were issued, the payment of
the principal, any premium and interest on the notes and each subsidiary
guaranty of the notes is subordinate in right of payment to the prior payment in
full of all senior indebtedness of our company or the applicable subsidiary
guarantor. The senior indebtedness includes our obligations under, and the
subsidiary guarantors' guarantees of our obligations with respect to, our senior
secured credit agreement.
Assuming we had completed the acquisition of Envirotest and the related
transactions on September 30, 1998, our senior indebtedness outstanding would
have been approximately $438.1 million
15
and each of the subsidiary guarantors would have guaranteed substantially all of
such senior indebtedness on a senior basis. Although the indenture governing
these notes and the senior secured credit facility limit the amount of money we
and the subsidiary guarantors may borrow, we and the subsidiary guarantors may
borrow a significant amount of additional money under certain circumstances. In
addition, this money may be senior indebtedness.
Holders of senior indebtedness will be able to prevent payment on the notes
or the related subsidiary guarantee of the notes:
- in the event of our bankruptcy, liquidation or reorganization or that of
any subsidiary guarantor;
- if there is a payment default under certain senior indebtedness; and
- if there are certain non-payment defaults under certain senior
indebtedness.
FRAUDULENT TRANSFER CONSIDERATIONS--A COURT MAY VOID THE GUARANTEES OF OUR
SUBSIDIARIES.
The indenture obligations of a subsidiary guarantor may be reviewed under
the appropriate fraudulent transfer or similar laws upon bankruptcy or other
financial difficulty. Under these laws a court may rule that the guarantee
obligations of the subsidiary guarantor are void, and the court may direct the
return of any amounts paid to holders of the notes. A court may find that at the
time guarantee obligations were incurred or assets were pledged, the subsidiary
guarantor:
- received less than fair consideration or reasonably equivalent value in
exchange or as consideration to enter into its subsidiary guarantee or to
pledge its assets to secure its obligations under its subsidiary
guarantee; and
- either:
-- was insolvent;
-- became insolvent;
-- engaged in or was about to engage in a business or transaction for
which its remaining unencumbered assets constituted unreasonably small
capital; or
-- intended to incur, or believed or reasonably should have believed, that
it would incur debts unable to be satisfied.
Such court could void such obligations under the subsidiary's guarantee and
direct the return of any amounts paid with respect thereto or take other action
detrimental to the holders of the notes. Moreover, regardless of the factors
identified above, a court could take action if it found that the guarantee was
entered into with actual intent to hinder, delay, or defraud creditors. We do
not believe that the factors that would lead a court to conclude that a
fraudulent transfer had occurred as a result of the issuance of the guarantees
by our subsidiaries are present in this case.
The measure of insolvency varies depending on the law of the jurisdiction
being applied. Generally, however, an entity is insolvent if the sum of its
debts is greater than the fair value of all its property or if the present fair
salable value of its assets is less than the amounts owed on its existing debts
as they become due. We cannot guarantee which standard a court would apply to
determine whether a subsidiary guarantor was "insolvent" upon either
consummation of the sale of the notes or upon the incurrence of the subsidiary
guarantees. We also cannot guarantee that a court will not decide that one or
more subsidiary guarantors was insolvent as a result of the foregoing.
DEPENDENCE ON GOVERNMENT REGULATION--OUR INDUSTRY IS HIGHLY REGULATED AND
CHANGES IN SUCH REGULATIONS MAY ADVERSELY AFFECT OUR BUSINESS.
Our business substantially depends upon Federal and state legislation and
regulations mandating air pollution controls. The vehicle emissions testing
industry in the U.S. has developed in response to
16
the Clean Air Act and related EPA regulations. The EPA is currently evaluating
the need for more stringent emissions standards for motor vehicles. We cannot
assure you that additional Federal or state legislation, or changes in
regulatory requirements would not, directly or indirectly, have a material
adverse effect on the vehicle emissions testing industry. The EPA is currently
considering a proposal that would allow states to eliminate emissions testing
for low emission vehicles. If the EPA adopts the proposal, it could have a
material adverse effect on the vehicle emissions testing industry.
Additionally, the growth of our international business, which we expect to
constitute a significant portion of our business in coming years, depends
largely upon the adoption of foreign air pollution control legislation and
related regulations requiring or encouraging vehicle emissions testing
development in those countries. Although a number of countries in Europe, Asia
and Latin America have passed or are considering such legislation, and a limited
number of countries, including the United Kingdom, Germany, Canada, Mexico and
Japan, have mandatory vehicle emissions testing, these countries may not enact
and enforce, or continue to enforce, as the case may be, the necessary
legislation and regulations. Any failure of these and other foreign countries to
implement air pollution control legislation that requires or encourages vehicle
emissions testing could limit our international expansion plans, which could
have a material adverse effect on our business, financial condition and results
of operations.
DEPENDENCE ON INTELLECTUAL PROPERTY--WE USE A SIGNIFICANT AMOUNT OF INTELLECTUAL
PROPERTY IN OUR BUSINESS. IF WE ARE UNABLE TO PROTECT THIS INTELLECTUAL
PROPERTY, OUR BUSINESS MAY BE ADVERSELY AFFECTED.
We have more than 70 patents on our emission testing equipment and we design
our own proprietary software programs to run that equipment. Our success is
dependent on our ability to protect these proprietary rights. We employ a
combination of the following methods to protect these rights:
- patents;
- trade secrets;
- copyright and trademark laws;
- license agreements;
- non-compete agreements;
- nondisclosure agreements;
- assignment of invention and other contractual provisions; and
- various security measures.
We cannot guarantee that the legal protections afforded to, or the
precautions taken by, our company or our third-party licensors will be adequate
to prevent misappropriation of our respective proprietary rights. We generally
enter into confidentiality agreements with our employees, which typically
control access to, disclosure of and ownership of, intellectual property
developed during the term of employment with us. However, these contractual
protections do not preclude independent third-parties from developing
functionally equivalent or superior technologies, products, or professional
services. Any infringement or misappropriation of our proprietary rights, or
those of our third-party licensors, could have a material adverse effect on our
business, financial condition, and results of operations.
In the future, litigation may be necessary to enforce and protect our
patents, trade secrets, copyrights and other intellectual property or
proprietary rights. We may also be subject to litigation to defend against
claimed infringement of, or to determine the scope and validity of, the
intellectual property or proprietary rights of others. We are not currently
aware that our products, trademarks, or
17
other proprietary rights infringe upon the proprietary rights of any third
parties. However, we cannot assure you that third parties will not assert
infringement claims against us which may result in a material adverse effect on
our business, financial condition, and results of operations. Any litigation
involving our use of technology may result in substantial cost to us and may
divert management's attention from operations. Either could also have a material
adverse effect on our business, financial condition and results of operations. A
negative outcome in litigation could:
- result in our loss of the rights to use the proprietary rights or of the
exclusivity of our rights therein;
- subject us to significant liabilities;
- require us to seek licenses from third parties; or
- prevent us from selling our products.
- any one of these outcomes could have a material adverse effect on our
business, financial condition and results of operations.
YEAR 2000 RISKS--ALTHOUGH WE EXPECT TO BE YEAR 2000 COMPLIANT, WE ARE NOT SO AT
THIS TIME. YEAR 2000 ISSUES MAY DISRUPT OUR OPERATIONS.
The Company has a Year 2000 project designed to identify and assess the
risks associated with its information systems, products, operations and
infrastructure, suppliers and customers that are not Year 2000 compliant and to
develop, implement and test remediation and contingency plans to mitigate these
risks.
As we continue our Year 2000 project, we may discover additional Year 2000
problems. We may not be able to develop, implement or test remediation or
contingency plans or we may find that the costs of these activities exceed
current expectations and become material. Even if we, in a timely manner,
complete all of our assessments, identify and test remediation plans believed to
be adequate, and develop contingency plans believed to be adequate, some
problems may not be identified or corrected in time to prevent material adverse
consequences to us.
MATURATION OF EMISSIONS TESTING PRODUCTS MARKET--WE EXPECT THE DOMESTIC MARKET
FOR EMISSIONS TESTING EQUIPMENT TO DECLINE SIGNIFICANTLY IN APPROXIMATELY THREE
YEARS. WE COULD SUFFER A DECLINE IN REVENUE WHICH WOULD MAKE IT MORE DIFFICULT
TO SERVICE OUR DEBT.
In the twelve months ended September 30, 1998, assuming we completed the
acquisition of Envirotest and the related transactions on September 30, 1998, we
would have obtained approximately 50% of our revenues from sales of our
equipment to decentralized facilities and after-sales services in states with
decentralized programs. We expect the domestic market for equipment used in
states with decentralized programs to continue to expand for approximately the
next three years as additional states and municipalities are either required to
or elect to implement decentralized programs and/or convert basic testing
programs which test a vehicle in neutral to enhanced programs which test
emissions under simulated driving conditions.
Thereafter, however, we expect the size of the domestic market to decline
significantly as a result of most states with large vehicle populations having
already implemented programs. Although we expect revenues from sales of our
equipment in international markets and revenues from our domestic centralized
vehicle emissions testing business to continue to grow in the future, we cannot
assure you that growth in these markets will be sufficient to offset any decline
we are likely to suffer in our domestic emissions equipment business.
18
ABILITY TO MANAGE AND SUSTAIN GROWTH--WE MAY NOT BE ABLE TO INTEGRATE
SUCCESSFULLY THE OPERATIONS OF EST AND ENVIROTEST OR TO ACHIEVE COST SAVINGS.
Our growth has resulted in new and increased responsibilities for our
management. The process of integrating the businesses of Envirotest with that of
EST may result in unforeseen operating difficulties and may require substantial
attention from members of our senior management. We cannot assure you that we
will be able to integrate successfully the operations of these businesses.
As a result of our acquisition of Envirotest, we expect to reduce our
operating expenses by eliminating duplicative management, staff and facilities,
and other cost efficiencies. Although we believe that our strategies are
reasonable, we cannot assure you that we will be able to implement our plans on
schedule. When implementing these initiatives, we could encounter unanticipated
problems, and there is no guarantee that we will attain our goal of reducing our
operating expenses. Finally, we note that our plans will require substantial
attention from members of our management, which may limit the amount of time
they can devote to our day-to-day operations.
DEPENDENCE ON SIGNIFICANT CONTRACTS--OUR CENTRALIZED TESTING BUSINESS IS
DEPENDENT ON 14 CONTRACTS FOR ITS REVENUE. THE LOSS OF ANY OF THESE CONTRACTS
COULD CAUSE OUR REVENUE TO DECLINE AND WOULD MAKE IT MORE DIFFICULT FOR US TO
SERVICE OUR DEBT.
In the twelve months ended September 30, 1998, assuming we completed the
acquisition of Envirotest and the related transactions on September 30, 1998, we
would have obtained approximately 50% of our revenues from Envirotest's
emissions testing business. For the twelve months ended September 30, 1998,
approximately 99% of Envirotest's contract revenues were derived from its 14
emissions testing contracts with governmental authorities. The termination, or
the Company's failure to obtain the renewal, of any of our significant emissions
testing contracts could have a material adverse effect on our business,
financial condition or results of operations.
DEPENDENCE ON KEY PERSONNEL--OUR SUCCESS DEPENDS ON THE EXPERIENCE OF OUR
EXECUTIVES AND OTHER KEY MANAGEMENT PERSONNEL. THE LOSS OF OUR MANAGEMENT TEAM
COULD HAVE A NEGATIVE EFFECT ON OUR BUSINESS.
Our management team has combined 40 years of experience in the industry and
that experience is crucial to our success. Our success will continue to depend
to a significant extent on our current executive officers and key employees as
well as our ability to attract and retain highly qualified experienced
electrical, software, mechanical and design engineers, service technicians and
marketing, sales personnel and key personnel to expand our international
operations. We may not be able to retain our executive officers and key
personnel or attract highly qualified management in the future. Our failure to
retain the services of key personnel could have a material adverse effect on us.
Although we have non-competition agreements with certain key personnel, courts
are sometimes reluctant to enforce these agreements.
CONTROL BY PRINCIPAL STOCKHOLDERS--ALCHEMY INVESTMENT PLAN WILL OWN ENOUGH OF
OUR PARENT COMPANY'S STOCK TO INDIRECTLY CONTROL OUR AFFAIRS AND THOSE OF OUR
SUBSIDIARIES. THEY COULD EXERCISE CONTROL IN A MANNER DETRIMENTAL TO YOUR
INTERESTS.
Alchemy Investment Plan, an investment group managed by Alchemy Partners,
owns 54.2% of the voting stock of Enviromental Systems Products, Inc., our sole
stockholder. Consequently, they will indirectly control all matters at our
Company and our subsidiaries requiring stockholder approval, including election
of the Board of Directors and approval of significant corporate transactions. We
cannot assure you that Alchemy Investment Plan will not exercise its control
over Enviromental Systems Products, Inc. in a manner detrimental to your
interests.
19
INABILITY TO REPURCHASE NOTES UPON A CHANGE OF CONTROL--WE MAY NOT HAVE THE
ABILITY TO RAISE THE NECESSARY FUNDS TO PAY FOR THE NOTES SHOULD WE BE REQUIRED
TO REPURCHASE.
Upon the occurrence of certain kinds of change of control events, as defined
in the indenture governing the notes, we will be required to make an offer to
repurchase the notes at 101% of their principal amount, plus accrued interest.
If a change of control were to occur, we may not have sufficient funds to pay
the purchase price for all the notes that we might be required to repurchase.
Additionally, in the event of a change of control, we could be prohibited under
the terms of our senior secured credit facility or indenture from paying the
required purchase price for all the notes.
ABSENCE OF PUBLIC MARKET FOR THE NOTES, RESTRICTIONS ON RESALES--YOU CANNOT BE
SURE THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THESE NOTES. IF NO MARKET
DEVELOPS, YOU MAY HAVE DIFFICULTY SELLING YOUR NOTES.
We do not intend to apply for listing or quotation of the notes on any
exchange. The notes are, however, eligible for trading in PORTAL. Credit Suisse
First Boston Corporation has advised us that they intend to make a market in the
notes, subject to the limits imposed by the securities laws. However, they are
not obligated to do so, and they may discontinue any market making at any time
without notice. Therefore, we do not know the extent to which investor interest
will lead to the development of a trading market or how liquid that market might
be.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. The market for the notes may be subjected to similar disruptions.
Any such disruptions may have an adverse effect on the note holders.
THIS PROSPECTUS INCLUDES "FORWARD LOOKING STATEMENTS". THESE FORWARD-LOOKING
STATEMENTS INCLUDE, IN PARTICULAR, THE STATEMENTS ABOUT OUR PLANS, STRATEGIES,
AND PROSPECTS UNDER THE HEADINGS "PROSPECTUS SUMMARY," "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND "BUSINESS."
ALTHOUGH WE BELIEVE THAT OUR PLANS, INTENTIONS AND EXPECTATIONS REFLECTED IN OR
SUGGESTED BY SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE MAY NOT ACHIEVE
SUCH PLANS, INTENTIONS OR EXPECTATIONS.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THE FORWARD LOOKING STATEMENTS WE MAKE IN THIS PROSPECTUS ARE SET FORTH IN THIS
"RISK FACTORS" SECTION AND ELSEWHERE IN THIS PROSPECTUS. ALL FORWARD-LOOKING
STATEMENTS ATTRIBUTABLE TO US OR PERSONS ACTING ON OUR BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS IN THIS "RISK FACTORS"
SECTION. THESE FORWARD LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, AND
THE CAUTIONARY STATEMENTS IDENTIFY IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE PREDICTED IN ANY SUCH FORWARD LOOKING
STATEMENTS. SUCH FACTORS INCLUDE, BUT ARE NOT LIMITED TO, ADVERSE CHANGES IN
GENERAL ECONOMIC CONDITIONS, INCLUDING ADVERSE CHANGES IN THE SPECIFIC MARKETS
FOR OUR PRODUCTS, ADVERSE BUSINESS CONDITIONS, DECREASED OR LACK OF GROWTH IN
THE CAR INDUSTRY, INCREASED COMPETITION, PRICING PRESSURES, LACK OF SUCCESS IN
TECHNOLOGICAL ADVANCEMENT, RISKS ASSOCIATED WITH FOREIGN OPERATIONS, RISKS
ASSOCIATED WITH OUR EFFORTS TO COMPLY WITH YEAR 2000 REQUIREMENTS, AND OTHER
FACTORS.
20
SOURCES AND USES OF FUNDS
The gross proceeds of the private sale of the notes were approximately
$100.0 million. Our company used the proceeds of the private sale of the notes,
together with additional equity, $385.0 million of borrowings under the senior
secured credit facility and $84.4 million of available cash, to consummate the
acquisition of Envirotest and the related transactions.
The following table presents the sources and uses of funds for the
acquisition of Envirotest and the related transactions:
(IN MILLIONS)
SOURCES:
- --------------------------------------------------------------------
Senior secured credit facility(1)................................... $ 385.0
The notes........................................................... 100.0
Available cash...................................................... 84.4
Additional equity (2)............................................... 179.9
---------
Total Sources................................................. $ 749.3
---------
---------
USES:
- --------------------------------------------------------------------
The acquisition of Envirotest(3).................................... $ 266.2
Repayment of Envirotest Senior Notes and Envirotest Senior
Subordinated Notes(4)............................................. 276.6
Debt repurchase premiums............................................ 12.5
Repayment of certain other Envirotest debt.......................... 25.3
Repayment of EST debt(5)............................................ 125.6
Employee termination payments made at closing(6).................... 5.2
Financing fees and professional expenses (7)........................ 37.9
---------
Total Uses.................................................... $ 749.3
---------
---------
- ------------------------
(1) On the date the notes were originally issued, borrowings of up to an
additional $50.0 million were available under the senior secured credit
facility for general corporate purposes. However, such available borrowings
are limited to the extent the Company has outstanding letters of credit and
may be limited by the Company's ability to meet its financial covenant
ratios. For more information about these borrowings, see the "Description of
Other Indebtedness--Senior Secured Credit Facility" section of this
prospectus.
(2) Additional equity of approximately $180 million contributed by Environmental
Systems Products, Inc. consisting of $80 million of additional equity
provided by Environmental Systems Products, Inc. and approximately $100
million of net proceeds from the issuance by Environmental Systems Products,
Inc. of its 15% senior discount notes.
(3) Includes option spread payments.
(4) Repayment of all such notes, through a debt tender offer or otherwise, and
includes accrued interest of $1.6 million.
(5) Repayment of debt and includes accrued interest of $0.6 million.
(6) Includes severance and change of control payments made under certain
employment agreements.
(7) Includes fees in connection with the acquisition of Envirotest and the
related transactions.
21
CAPITALIZATION
The Company was incorporated in March 1998, and did not record any
transactions until October 1998, therefore the historical capital of the Company
is not presented. The following table sets forth, as of September 30, 1998, our
unaudited capitalization after giving pro forma effect to the acquisition of
Envirotest and the related transactions. You should read this table in
conjunction with the "Environmental Systems Products Holdings Inc. Unaudited Pro
Forma Financial Statements," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
of EST and Envirotest and the notes thereto included elsewhere in this
prospectus.
AS OF SEPTEMBER 30,
1998
-------------------
(IN MILLIONS)
Senior secured credit facility(1)......................................... $ 385.0
The notes(2).............................................................. 93.4
Ohio notes................................................................ 53.1
------
Total debt.......................................................... 531.5
Stockholder's equity...................................................... 120.3
------
Total capitalization................................................ $ 651.8
------
------
- ------------------------
(1) On the date the notes were issued, borrowings of up to an additional $50
million were available under the senior secured credit facility for general
corporate purposes. However, such available borrowings are limited to the
extent the Company has outstanding letters of credit and may be limited by
the Company's ability to meet financial covenant ratios. See "Description of
Other Indebtedness--Senior Secured Credit Facility."
(2) The notes are net of $6.6 million original issue discount attributed to
Environmental Systems Products, Inc. common stock issued with the notes.
22
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements (the "Pro Forma
Financial Statements") are based on the historical consolidated financial
statements of EST and Envirotest included elsewhere in this prospectus or
derived from unaudited information not contained in this prospectus, adjusted to
give effect to the acquisition of Envirotest and the related transactions.
The Unaudited Pro Forma Combined Statement of Operations and other financial
data for the year ended December 31, 1997, the twelve months ended September 30,
1998 and the nine months ended September 30, 1998 give effect to the acquisition
of Envirotest and the related transactions as if they occurred on January 1,
1997. The Unaudited Pro Forma Combined Balance Sheet gives effect to the
acquisition of Envirotest and the related transactions as if they had occurred
as of September 30, 1998.
The historical information of EST for the year ended December 31, 1997 is
derived from the audited financial statements of EST for the year ended December
31, 1997. The historical information of Envirotest for the year ended December
31, 1997 is based on unaudited quarterly information for the calendar quarters
in 1997. The historical information of EST for the twelve months ended September
30, 1998 is based on unaudited quarterly information for the last calendar
quarter of 1997 and the first three calendar quarters of 1998. The historical
information of Envirotest for the twelve months ended September 30, 1998 is
derived from the audited financial statements of Envirotest for the year ended
September 30, 1998. The historical information of EST for the nine months ended
September 30, 1998 is based on unaudited quarterly information for the calendar
quarters of 1998. The historical information of Envirotest for the nine months
ended September 30, 1998 is based on unaudited quarterly information for the
calendar quarters of 1998.
The acquisition of Envirotest and the related transactions adjustments are
described in the accompanying notes. These related adjustments are based upon
available information and certain assumptions that management believes are
reasonable. The Pro Forma Financial Statements do not indicate what our results
of operations or financial condition would have been had the acquisition of
Envirotest and the related transactions in fact occurred on such dates; nor do
they project our results of operations or financial condition for the future.
You should read the Pro Forma Financial Statements in conjunction with the
historical consolidated financial statements of EST and Envirotest and the notes
thereto included elsewhere in this prospectus. You should also read the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus.
We accounted for our acquisition of Envirotest using the purchase method of
accounting. We allocated the total purchase price for such acquisition to the
tangible and identifiable intangible assets and liabilities of the acquired
business based upon our preliminary estimates of their fair value with the
remainder of the purchase price allocated to goodwill. We engaged an independent
valuation firm to assist us allocate the purchase price. Our allocation of
purchase price for the Envirotest acquisition is based on the preliminary
findings of the valuation firm and subject to revision when we obtain additional
information concerning asset and liability valuations. Consequently, the amounts
reflected in the pro forma financial statements are subject to change, but we do
not believe the final amounts will differ substantially.
23
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
PRO FORMA COMPANY
EST ENVIROTEST ADJUSTMENTS PRO FORMA
---------- ---------- ----------- -----------
Total revenues................................................ $ 166,463 $ 168,650 $ -- $ 335,113
Cost of revenues.............................................. 113,219 104,970 (7,022)(3) 211,167
Cost of revenues--inventory step-up........................... 2,390 -- -- 2,390
---------- ---------- ----------- -----------
Gross profit.............................................. 50,854 63,680 7,022 121,556
Selling, general and administrative expenses.................. 24,189 21,826 53,827
12,015(2)
(49)(3)
(4,154)(4)
Other (gains) and losses...................................... -- 5,273 (7,828)(5) (2,555)
---------- ---------- ----------- -----------
Income from operations.................................... 26,665 36,581 7,038 70,284
Other income (expense):
Interest income........................................... 200 5,527 (5,527)(6) 200
Interest expense.......................................... (5,763) (33,774) (941) (53,311)
(12,833)(7)
Other expense............................................. (699) (456) -- (1,155)
---------- ---------- ----------- -----------
Income before income taxes.............................. 20,403 7,878 (12,263) 16,018
Provision for income taxes................................ 10,160 675 (102)(8) 10,733
---------- ---------- ----------- -----------
Net income.............................................. $ 10,243 $ 7,203 $ (12,161) $ 5,285
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
OTHER FINANCIAL DATA:
Cash flows provided by operations...................................................
$ 73,466
Cash flows used in investing activities.......................................................... 276,640
Cash flows provided by financing activities...................................................... 184,455
EBITDA..............................................................................
107,192
Depreciation and amortization of intangible assets..................................
36,908
Ratio of total debt (at period end) to EBITDA.......................................
5.0x
Ratio of EBITDA to total interest expense...........................................
2.0x
Ratio of earnings to fixed charges..................................................
1.3
The accompanying notes are an integral part of this pro forma financial
statement.
24
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
(1) Represents the following adjustments to deferred financing fees amortization
expense:
Reversal of historical deferred financing fees amortization expense at EST.... $ (220)
Reversal of historical deferred financing fees amortization expense at
Envirotest.................................................................... (2,090)
Amortization expense for the new deferred financing fees created as a result
of the refinancing of certain indebtedness in connection with the acquisition
of Envirotest................................................................. 3,251
---------
$ 941
---------
---------
Deferred financing fees are amortized ratably over the life of the related
debt issuance.
(2) Represents the following adjustments to intangible asset amortization expense:
Reversal of historical intangible asset amortization expense at Envirotest.... $ (2,374)
Amortization expense for the new intangible assets created as a result of the
acquisition of Envirotest..................................................... 14,389
---------
$ 12,015
---------
---------
The intangible assets are being amortized on a straight line basis using
estimated useful lives of five to thirty years.
(3) Represents the following adjustments to depreciation expense:
Reversal of historical depreciation expense at Envirotest..................... $ (27,962)
Depreciation expense for the new fixed asset valuation as a result of the
acquisition of Envirotest..................................................... 20,891
---------
$ (7,071)
---------
---------
(4) Represents reductions in costs and expenses resulting from the following:
Elimination of Chairman's and CEO's offices................................... $ (1,746)
Engineering, financial and human resources redundancies....................... (1,608)
Closures of redundant facilities.............................................. (800)
---------
$ (4,154)
---------
---------
(5) Represents the elimination of merger and acquisition related costs............ $ (7,828)
---------
---------
(6) Represents the elimination of interest income on cash and cash equivalents and
restricted cash at Envirotest as such items were utilized as a source to
finance the acquisition of Envirotest and related transactions................ $ (5,527)
---------
---------
25
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (CONTINUED)
TWELVE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
(7) Net adjustment to interest expense as a result of the issuance of debt to
complete the acquisition of Envirotest and related transactions, calculated as
follows:
Elimination of actual historical interest expense on refinanced debt:
EST........................................................................... $ (5,543)
Envirotest.................................................................... (26,909)
---------
(32,452)
---------
Pro forma interest expense:
$175 million Term Loan A at an assumed annual interest rate of 8.56%.......... 12,288
$210 million Term Loan B at an assumed annual interest rate of 9.31%.......... 19,337
$100 million Notes at an annual interest rate of 13%.......................... 13,000
$6.6 million original issue discount on Notes attributed to common stock
issued with Notes, amortized on a straight line basis over life of debt....... 660
---------
45,285
---------
$ 12,833
---------
---------
The interest rate is LIBOR plus 3.25% on Term Loan A and LIBOR plus 4.00% on
Term Loan B through March 31, 1999, after which the interest rate could range
from LIBOR plus 2.25% to LIBOR plus 4.00% depending on the Company's financial
ratios. (The senior secured credit facility also permits the Company to choose
an interest rate based on the prime lending rate of Credit Suisse First Boston
plus a margin or the federal funds rate plus a margin). The pro forma interest
expense has been calculated based on the LIBOR rate at September 30, 1998 plus
3.25% on Term Loan A and 4.00% on Term Loan B.
The Company estimates that an increase or decrease in interest rates on the
Term Loan A and Term Loan B debt of 1/8% would increase or decrease annual
interest expense by approximately $480.
(8) Income tax expense adjustment related to the effects of the pro forma
adjustments based upon an assumed composite income tax rate of 41% applied to
pro forma income before income taxes adjusted for non-deductible intangible
asset amortization of $12,015 related to the acquisition of Envirotest........ $ (102)
---------
---------
26
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
PRO FORMA COMPANY
EST ENVIROTEST ADJUSTMENTS PRO FORMA
---------- ---------- ----------- -----------
Total revenues................................................ $ 102,526 $ 146,422 $ -- $ 248,948
Cost of revenues.............................................. 66,099 98,211 (1,726)(3) 162,584
---------- ---------- ----------- -----------
Gross profit.............................................. 36,427 48,211 1,726 86,364
Selling, general and administrative expenses.................. 17,864 21,217 12,030(2) 47,199
242(3)
(4,154)(4)
Other gains................................................... -- (3,950) -- (3,950)
---------- ---------- ----------- -----------
Income from operations.................................. 18,563 30,944 (6,392) 43,115
Other income (expense):
Interest income........................................... 103 8,254 (8,254)(5) 103
Interest expense.......................................... (441) (39,483) (1,027)(1) (55,572)
(14,621)(6)
Other income (expense), net............................... (79) (215) -- (294)
---------- ---------- ----------- -----------
Income (loss) before income taxes and extraordinary
item.................................................. 18,146 (500) (30,294) (12,648)
Provision for income taxes.................................... 7,581 -- (7,489)(7) 92
---------- ---------- ----------- -----------
Income (loss) before extraordinary item................. $ 10,565 $ (500) $ (22,805) $ (12,740)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
OTHER FINANCIAL DATA:
Cash flows provided by operations...................................................
$ 8,088
EBITDA..............................................................................
78,812
Depreciation and amortization of intangible assets..................................
35,697
Ratio of EBITDA to total interest expense...........................................
1.4x
Deficiency of earnings to cover fixed charges.......................................
$ 12,648
The accompanying notes are an integral part of this pro forma financial
statement.
27
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(1) Represents the following adjustments to deferred financing fees amortization
expense:
Reversal of historical deferred financing fees amortization expense at
Envirotest.................................................................... $ (2,224)
Amortization expense for the new deferred financing fees created as a result
of the refinancing related to the acquisition of Envirotest................... 3,251
---------
$ 1,027
---------
---------
Deferred financing fees are amortized ratably over the life of the related
debt issuance.
(2) Represents the following adjustments to intangible asset amortization expense:
Reversal of historical intangible asset amortization expense at Envirotest.... $ (2,359)
Amortization expense for the new intangible assets created as a result of the
acquisition of Envirotest and related transactions............................ 14,389
---------
$ 12,030
---------
---------
The intangible assets are being amortized on a straight line basis using
estimated useful lives of five to thirty years.
(3) Represents the following adjustments to depreciation expense:
Reversal of historical depreciation expense at Envirotest..................... $ (22,375)
Depreciation expense for the new fixed asset valuation as a result of the
acquisition of Envirotest..................................................... 20,891
---------
$ (1,484)
---------
---------
(4) Represents reductions in costs and expenses resulting from the following:
Elimination of Chairman's and CEO's offices................................... $ (1,746)
Engineering, financial and human resources redundancies....................... (1,608)
Closures of redundant facilities.............................................. (800)
---------
$ (4,154)
---------
---------
(5) Represents the elimination of interest income on cash and cash equivalents and
restricted cash at Envirotest as such items were utilized as a source to
finance the acquisition of Envirotest and related transactions................ $ (8,254)
---------
---------
28
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(6) Net adjustment to interest expense as a result of the issuance of debt to
complete the acquisition of Envirotest and related transactions, calculated as
follows:
Elimination of actual historical interest expense on refinanced debt:
EST........................................................................... $ (441)
Envirotest.................................................................... (32,168)
---------
(32,609)
---------
Pro forma interest expense:
$175 million Term Loan A at an assumed annual interest rate of 8.56%.......... 14,086
$210 million Term Loan B at an assumed annual interest rate of 9.31%.......... 19,484
$100 Notes at an annual interest rate of 13%.................................. 13,000
$6.6 million original issue discount on Notes attributed to common stock
issued with Notes, amortized on a straight-line basis over life of debt....... 660
---------
47,230
---------
$ 14,621
---------
---------
The interest rate is LIBOR plus 3.25% on Term Loan A and LIBOR plus 4.00% on
Term Loan B through March 31, 1999, after which the interest rate could range
from LIBOR plus 2.25% to LIBOR plus 4.00% depending on the Company's financial
ratios. The senior secured credit facility also permits the Company to choose
an interest rate based on the prime lending rate of Credit Suisse First Boston
plus a margin or the federal funds rate plus a margin. The pro forma interest
expense has been calculated based on the LIBOR rate at September 30, 1998 plus
3.25% on Term Loan A and 4.00% on Term Loan B.
The Company estimates that an increase or decrease in interest rates on the
Term Loan A and Term Loan B debt of 1/8% would increase or decrease annual
interest expense by approximately $480.
(7) Income tax expense adjustment related to the effects of the pro forma
adjustments based upon an assumed composite income tax rate of 41% applied to
pro forma income (loss) before income taxes and extraordinary item adjusted
for non-deductible intangible asset amortization of $12,030 related to the
acquisition of Envirotest..................................................... $ (7,489)
---------
---------
(8) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as income before income taxes, plus fixed charges. Fixed charges
consist of interest expense on all indebtedness (including amortization of
deferred debt issuance costs) and that portion of operating lease rental
expense that is representative of the interest factor.
29
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
PRO FORMA COMPANY
EST ENVIROTEST ADJUSTMENTS PRO FORMA
---------- ----------- ----------- -----------
Total revenues............................................... $ 110,714 $ 131,713 $ -- $ 242,427
Cost of revenues............................................. 76,494 81,014 (6,248)(3) 151,260
Cost of revenues--inventory step-up.......................... 2,390 -- -- 2,390
---------- ----------- ----------- -----------
Gross profit............................................. 31,830 50,699 6,248 88,777
Selling, general and administrative expenses................. 16,147 17,121 9,014(2) 39,072
(94)(3)
(3,116)(4)
Other (gains) and losses..................................... -- 5,273 (7,828)(5) (2,555)
---------- ----------- ----------- -----------
Income from operations................................... 15,683 28,305 8,272 52,260
Other income (expense):
Interest income............................................ 149 4,333 (4,333)(6) 149
Interest expense........................................... (5,467) (24,963) (641)(1) (39,699)
(8,628)(7)
Other expense.............................................. (591) (424) -- (1,015)
---------- ----------- ----------- -----------
Income before income taxes............................... 9,774 7,251 (5,330) 11,695
Provision for income taxes................................... 5,541 675 1,510(8) 7,726
---------- ----------- ----------- -----------
Net income............................................... $ 4,233 $ 6,576 $ (6,840) $ 3,969
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
OTHER FINANCIAL DATA:
Cash flows provided by operations................................................................ $ 54,442
Cash flows used in investing activities.......................................................... 265,688
Cash flows provided by financing activities...................................................... 205,834
EBITDA........................................................................................... 80,280
Depreciation and amortization of intangible assets............................................... 28,020
Ratio of EBITDA to total interest expense........................................................ 2.0x
Ratio of earnings to fixed charges............................................................... 1.3
The accompanying notes are an integral part of this pro forma financial
statement.
30
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
(1) Represents the following adjustments to deferred financing fees amortization
expense:
Reversal of historical deferred financing fees amortization expense at EST... $ (220)
Reversal of historical deferred financing fees amortization expense at
Envirotest................................................................... (1,577)
Amortization expense for the new deferred financing fees created as a result
of the refinancing related to the acquisition of Envirotest.................. 2,438
---------
$ 641
---------
---------
Deferred financing fees are amortized ratably over the life of the related
debt issuance.
(2) Represents the following adjustments to intangible assets amortization
expense:
Reversal of historical intangible asset amortization expense at Envirotest... $ (1,778)
Amortization expense for the new intangible assets created as a result of the
acquisition of Envirotest and related transactions........................... 10,792
---------
$ 9,014
---------
---------
The intangible assets are being amortized on a straight line basis using
estimated useful lives of five to thirty years.
(3) Represents the following adjustments to depreciation expense:
Reversal of historical depreciation expense at Envirotest.................... $ (22,010)
Depreciation expense for the new fixed asset valuation as a result of the
acquisition of Envirotest.................................................... 15,668
---------
$ (6,342)
---------
---------
(4) Represents reductions in costs and expenses resulting from the following:
Elimination of Chairman's and CEO's offices.................................. $ (1,310)
Engineering, financial and human resources redundancies...................... (1,206)
Closures of redundant facilities............................................. (600)
---------
$ (3,116)
---------
---------
(5) Represents the elimination of merger and acquisition related costs........... $ (7,828)
---------
---------
(6) Represents the elimination of interest income on cash and cash equivalents
and restricted cash at Envirotest as such items were utilized as a source to
finance the acquisition of Envirotest and related transactions............... $ (4,333)
---------
---------
31
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
(7) Net adjustment to interest expense as a result of the issuance of debt to
complete the acquisition of Envirotest and related transactions, calculated
as follows:
Elimination of actual historical interest expense on refinanced debt:
EST.......................................................................... $ (5,247)
Envirotest................................................................... (19,846)
---------
(25,093)
---------
Pro forma interest expense:
$175 million Term Loan A at an assumed annual interest rate of 8.56%......... 8,991
$210 million Term Loan B at an assumed annual interest rate of 9.31%......... 14,485
$100 million Notes at an annual interest rate of 13%......................... 9,750
$6.6 million original issue discount on Notes attributed to common stock
issued with Notes, amortized on a straight-line basis over life of debt...... 495
---------
33,721
---------
$ 8,628
---------
---------
The interest rate is LIBOR plus 3.25% on Term Loan A and LIBOR plus 4.00% on
Term Loan B through March 31, 1999, after which the interest rate could range
from LIBOR plus 2.25% to LIBOR plus 4.00% depending on the Company's
financial ratios. The senior secured credit facility also permits the Company
to choose an interest rate based on the prime lending rate of Credit Suisse
First Boston plus a margin or the federal funds rate plus a margin. The pro
forma interest expense has been calculated based on the LIBOR rate at
September 30, 1998 plus 3.25% on Term Loan A and 4.00% on Term Loan B.
The Company estimates that an increase or decrease in interest rates on the
Term Loan A and Term Loan B debt of 1/8% would increase or decrease annual
interest expense by approximately $480.
(8) Income tax expense adjustment related to the effects of the pro forma
adjustments based upon an assumed composite income tax rate of 41% applied to
pro forma income before income taxes adjusted for non-deductible intangible
asset amortization of $9,014 related to the acquisition of Envirotest........ $ 1,510
---------
---------
32
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
PRO FORMA COMPANY
EST/NEWMALL (1) ENVIROTEST ADJUSTMENTS PRO FORMA
---------------- ----------- ----------- -----------
Current assets:
Cash and cash equivalents........................................... $ 9,168 $ 71,506 $ 1(2) $ 8,281
(72,394)(3)
Accounts and contracts receivable, net.............................. 21,495 12,822 -- 34,317
Inventories......................................................... 24,069 -- -- 24,069
Prepaid expenses and other.......................................... 3,412 5,183 (120)(4) 6,192
(1,000)(5)
(1,283)(6)
-------- ----------- ----------- -----------
Total current assets.............................................. 58,144 89,511 (74,796) 72,859
Restricted cash..................................................... -- 18,890 (13,162)(3) 5,728
Property, plant and equipment and assets held under capital lease,
net............................................................... 753 262,129 (16,808)(4) 246,074
Assets held for sale, net........................................... -- 3,123 -- 3,123
Intangible assets, net.............................................. 47,519 15,560 343,317(4) 406,396
Deferred charges and debt acquisition costs, net.................... 3,259 8,880 11,077(5) 23,216
Other assets........................................................ 3,519 765 -- 4,284
-------- ----------- ----------- -----------
Total assets...................................................... $ 113,194 $ 398,858 $ 249,628 $ 761,680
-------- ----------- ----------- -----------
Current liabilities:
Revolving loan...................................................... $ 17,533 $ -- $ (17,533)(3) $ --
Current portion of long-term debt and capital lease obligations..... 14,775 8,990 11,855(3) 35,620
Accounts payable.................................................... 11,507 12,900 -- 24,407
Accrued expenses and other.......................................... 17,000 45,939 (759)(3) 71,471
9,291(4)
-------- ----------- ----------- -----------
Total current liabilities......................................... 60,815 67,829 2,854 131,498
Long-term debt and capital lease obligations, net................... 95,225 343,765 63,485(3) 495,875
(6,600)(7)
Other long-term liabilities......................................... 2,776 4,630 -- 7,406
Intercompany payables............................................... -- -- 6,600(7) 6,600
-------- ----------- ----------- -----------
Total liabilities................................................. 158,816 416,224 66,339 641,379
-------- ----------- ----------- -----------
Stockholders' equity (deficit):
Common stock........................................................ 357 165 1(2) 1
(522)(6)
Additional paid-in capital.......................................... 7,678 60,173 179,872(3) 178,589
(69,134)(6)
Treasury stock (at cost)............................................ -- (29,003) 29,003(6) --
Accumulated deficit................................................. (56,423) (48,510) (322,476)(3) (60,864)
317,098(4)
10,077(5)
39,370(6)
Cumulative translation adjustment (other accrued comprehensive
income)............................................................. 2,766 (191) -- 2,575
-------- ----------- ----------- -----------
Total stockholders' equity (deficit).................................. (45,622) (17,366) 183,289 120,301
-------- ----------- ----------- -----------
Total liabilities and stockholders' equity (deficit).................. $ 113,194 $ 398,858 $ 249,628 $ 761,680
-------- ----------- ----------- -----------
-------- ----------- ----------- -----------
The accompanying notes are an integral part of this pro forma consolidated
balance sheet.
33
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
(1) To record the consolidation of Newmall Limited and its direct and indirect
subsidiaries (including EST) into the Company as follows:
NEWMALL LIMITED/
WELLMAN OVERSEAS
EST AND LIMITED/ EST/
SUBSIDIARIES WELLMAN NORTH AMERICA ELIMINATIONS NEWMALL
----------- ---------------------- ------------ ----------
Current assets:
Cash and cash equivalents.................... $ 7,506 $ 1,662 $ -- $ 9,168
Accounts and contracts receivable, net....... 21,495 -- -- 21,495
Intergroup receivable........................ 525 -- (525)(a) --
Inventories.................................. 24,069 -- -- 24,069
Prepaid expenses and other................... 3,412 -- -- 3,412
----------- -------- ------------ ----------
Total current assets....................... 57,007 1,662 (525) 58,144
Property, plant and equipment and assets held
under capital lease, net..................... 753 -- -- 753
Intercompany receivable, long-term............. 115,976 -- (115,976)(a) --
Intangible assets, net......................... 47,519 -- -- 47,519
Deferred charges and debt acquisition costs,
net.......................................... 3,259 -- -- 3,259
Other assets................................... 3,519 -- -- 3,519
Investment in subsidiary....................... -- 70,679 (70,679)(b) --
----------- -------- ------------ ----------
Total assets............................... $ 228,033 $ 72,341 $ (187,180) $ 113,194
----------- -------- ------------ ----------
Current liabilities:
Revolving loan............................... $ 17,533 $ -- $ -- $ 17,533
Current portion of long-term debt and capital
lease obligations.......................... 14,775 -- -- 14,775
Accounts payable............................. 11,389 118 -- 11,507
Accrued expenses and other................... 17,000 17,000
Intercompany payable......................... -- 116,501 (116,501)(a) --
----------- -------- ------------ ----------
Total current liabilities.................. 60,697 116,619 (116,501) 60,815
Long-term debt and capital lease obligations,
net.......................................... 95,225 -- -- 95,225
Other long-term liabilities.................... 1,378 1,398 -- 2,776
----------- -------- ------------ ----------
Total liabilities.......................... 157,300 118,017 (116,501) 158,816
----------- -------- ------------ ----------
Stockholders' equity (deficit):
Common stock................................. 1 357 (1)(b) 357
Additional paid-in capital................... 68,477 7,678 (68,477)(b) 7,678
Retained earnings (accumulated deficit)...... 2,201 (56,423) (2,201)(b) (56,423)
Cumulative translation adjustment (other
accrued comprehensive income).............. 54 2,712 -- 2,766
----------- -------- ------------ ----------
Total stockholders' equity (deficit)....... 70,733 (45,676) (70,679) (45,622)
----------- -------- ------------ ----------
Total liabilities and stockholders' equity
(deficit)................................ $ 228,033 $ 72,341 $ (187,180) $ 113,194
----------- -------- ------------ ----------
----------- -------- ------------ ----------
- ------------------------
(a) To eliminate intercompany balances between EST and Newmall.
(b) To eliminate Newmall's investment in EST.
34
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET (CONTINUED)
AS OF SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
(2) Adjustment to record the capitalization of the Company with a cash infusion
of $1.
(3) Adjustment to record the debt and equity required to finance the acquisition
of Envirotest and related transactions and use of related proceeds:
Sources:
Senior secured credit facility.................................. $ 385,000
The notes....................................................... 100,000
---------
Total debt...................................................... 485,000
Equity contribution (Alchemy)................................... 80,000
Equity contribution (EnviroSystems)............................. 99,872
Cash and cash equivalents....................................... 72,394
Restricted cash................................................. 13,162
---------
Total Sources................................................... $ 750,428
---------
---------
Uses:
The acquisition of Envirotest................................... $ 266,223
Repayment of existing indebtedness--EST......................... 127,533
Repayment of certain existing indebtedness--Envirotest.......... 300,295
Debt repurchase premiums........................................ 12,479
Accrued interest................................................ 759
Financing fees and professional expenses........................ 37,932
Employee termination payments made at closing................... 5,207
---------
Total Uses...................................................... $ 750,428
---------
---------
35
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET (CONTINUED)
AS OF SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
(4) The aggregate purchase price assumed to be paid by EST and the related
purchase accounting for the acquisition of Envirotest is as follows:
Purchase price per agreement................................... $ 266,223
Estimated legal, accounting and other advisory fees............ 12,424
---------
Total cost..................................................... 278,647
Assets acquired................................................ $ 358,904
Less: liabilities assumed...................................... (439,134)
---------
Fair market value of liabilities assumed in excess of assets
acquired..................................................... (80,230)
---------
Cost over fair market value of liabilities assumed in excess of
assets acquired.............................................. 358,877
Less: Envirotest's existing intangible assets.................. (15,560)
---------
Net increase in intangible assets.............................. $ 343,317
---------
---------
Preliminary allocation of purchase price to intangible assets
(and respective estimated useful lives) consists of:
Contracts and relationships (25 years)......................... 159,000
Remote sensing technology (15 years)........................... 28,000
Core technology (30 years)..................................... 26,000
Assembled work force (15 years)................................ 3,000
Non-compete agreement (5 years)................................ 2,000
Goodwill (30 years)............................................ 140,877
---------
$ 358,877
---------
---------
(5) Adjustment for fees and expenses attributable to the debt financing,
calculated as follows:
Fees and expenses attributable to the debt financing............ $ 21,954
Write-off of existing net deferred charges and debt acquisition
costs......................................................... (10,877)
---------
Adjustment...................................................... $ 11,077
---------
---------
(6) Adjustment to record the consolidation of EST and Envirotest into the
Company.
(7) Adjustment to record the original issue discount ascribed to the
Environmental Systems Products, Inc. common stock attached to
the Notes....................................................... $ 6,600
---------
---------
36
SELECTED HISTORICAL FINANCIAL DATA
ENVIRONMENTAL SYSTEMS TESTING, INC.
(DOLLARS IN THOUSANDS)
The following selected historical financial data of EST as of and for each
of five fiscal years in the period ended December 31, 1997 are derived from
EST's audited consolidated financial statements and the notes thereto. The
Statement of Operations Data for the years ending December 31, 1995, 1996, and
1997 and the Balance Sheet data for the years ended December 31, 1996 and 1997
are derived from the audited financial statements of the Company included
elsewhere in this prospectus. Statement of Operations Data for the years ending
December 31, 1993 and 1994 and Balance Sheet data for the years ended December
31, 1993, 1994, and 1995 are derived from the audited financial statements of
the Company not included in this prospectus. Summary historical financial data
as of and for the nine months ended September 30, 1997 and 1998 are derived from
EST's unaudited condensed consolidated financial statements and, in management's
opinion, include all adjustments (consisting of only normal recurring
adjustments) that are necessary for a fair presentation of the operating results
for such periods. Results for the interim periods do not necessarily indicate
the results for the full fiscal year or for any future periods. You should read
this selected historical financial data in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Environmental Systems Testing, Inc." and the consolidated financial statements
of EST and the notes thereto included elsewhere in this prospectus.
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ ---------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------- --------- ----------
STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 21,244 $ 20,240 $ 20,813 $ 32,212 $ 102,526 $ 46,777 $ 110,714
Cost of revenues........................... 12,493 12,009 12,940 19,355 66,099 29,374 76,494
Cost of revenues--inventory step-up........ -- -- -- -- -- -- 2,390
--------- --------- --------- --------- ---------- --------- ----------
Gross profit............................... 8,751 8,231 7,873 12,857 36,427 17,403 31,830
Selling, general and administrative
expenses................................. 8,966 7,167 6,414 9,129 17,864 9,822 16,367
--------- --------- --------- --------- ---------- --------- ----------
Income (loss) from operations.............. (215) 1,064 1,459 3,728 18,563 7,581 15,463
Interest expense........................... (220) (325) (166) (122) (441) (145) (5,247)
Other income (expense)..................... 26 633 189 (52) 23 81 (442)
--------- --------- --------- --------- ---------- --------- ----------
Income (loss) before income taxes.......... (409) 1,372 1,482 3,554 18,145 7,517 9,774
Provision for (benefit from) income
taxes.................................... (101) 606 871 1,904 7,580 2,961 5,541
--------- --------- --------- --------- ---------- --------- ----------
Net income (loss).......................... $ (308) $ 766 $ 611 $ 1,650 $ 10,565 $ 4,556 $ 4,233
--------- --------- --------- --------- ---------- --------- ----------
--------- --------- --------- --------- ---------- --------- ----------
OTHER FINANCIAL DATA:
Cash flows provided by (used in)
operations............................... $ (1,157) $ 1,361 $ 475 $ 3,651 $ (7,769) $ (8,322) $ 7,692
Cash flows used in investing activities.... 331 173 164 58 557 517 166
Cash flows provided by (used in) financing
activities............................... 772 (826) (637) (433) 7,803 6,303 (3,057)
EBITDA(1).................................. 764 2,099 2,134 4,558 18,980 7,921 17,242
Depreciation and amortization of intangible
assets................................... 979 1,035 675 830 417 340 1,779
Capital expenditures....................... 331 173 164 58 557 517 166
Ratio of earnings to fixed charges(2)...... --(2) 2.8x 3.4x 7.1x 21.6x 18.6x 2.6x
37
SELECTED HISTORICAL FINANCIAL DATA
ENVIRONMENTAL SYSTEMS TESTING, INC.
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ ---------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------- --------- ----------
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents.................. $ 402 $ 797 $ 445 $ 3,592 $ 3,045 $ 1,038 $ 7,506
Total working capital...................... 2,852 4,432 4,337 6,936 16,263 10,384 (3,690)
Total assets............................... 16,175 13,639 14,509 19,935 72,559 50,319 228,033
Long-term debt............................. 2,508 1,865 433 -- -- -- 95,225
Total stockholders' equity................. 3,870 5,054 5,575 7,762 16,937 11,276 70,733
SUPPLEMENTAL DATA:
Number of basic systems sold............... 217 297 323 870 920 781 178
Number of enhanced systems sold............ -- -- 50 45 2,650 286 2,433
- ------------------------
(1) EBITDA is defined as income from operations plus depreciation and
amortization of intangible assets. EBITDA should not be construed as a
substitute for, or more meaningful than, income from operations, net income
or cash flow from operating activities prepared in accordance with generally
accepted accounting principles for the purpose of evaluating our operating
performance, profitability or liquidity. EBITDA of the company may not be
comparable to similarly titled measures reported by other companies and may
not be indicative of funds available for management's discretionary use as
it has not been adjusted for capital expenditures or debt repayments. We
have presented EBITDA because we understand it is a measurement commonly
used by investors as one of several indications of the Company's ability to
service debt.
(2) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as income (loss) before income taxes plus fixed charges. Fixed
charges consist of interest expense, amortization of deferred financing
costs and that portion of operating lease rental expense that is
representative of the interest factor. Earnings were inadequate to cover
fixed charges for the year ended December 31, 1993 by $409.
38
SELECTED HISTORICAL FINANCIAL DATA
ENVIROTEST SYSTEMS CORP.
(DOLLARS IN THOUSANDS)
The following selected historical financial data of Envirotest as of and for
each of five fiscal years in the period ended September 30, 1998 are derived
from Envirotest audited consolidated financial statements and the notes thereto.
The Statement of Operations Data for the years ended September 30, 1996, 1997,
and 1998 and the Balance Sheet data for the years ended September 30, 1997 and
1998 are derived from the audited financial statements of Envirotest included
elsewhere in this prospectus. Statements of Operations Data for the years ended
September 30, 1994 and 1995 and Balance Sheet Data for the years ended September
30, 1994, 1995, 1996 are derived from the audited financial statements of the
Company not included in this prospectus. You should read this selected
historical financial data in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Envirotest Systems
Corp." and the consolidated financial statements of Envirotest and the notes
thereto included elsewhere in this prospectus.
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 96,395 $ 104,757 $ 124,472 $ 140,664 $ 168,650
Cost of revenues........................... 52,052 73,097 102,149 98,859 104,970
---------- ---------- ---------- ---------- ----------
Gross profit............................... 44,343 31,660 22,323 41,805 63,680
Selling, general and administrative
expenses................................. 23,494 28,928 25,209 21,478 21,826
Other (gains) and losses................... -- 892 (13,457) (3,950) 5,273
---------- ---------- ---------- ---------- ----------
Income from operations..................... 20,849 1,840 10,571 24,277 36,581
Interest expense........................... (23,567) (21,315) (38,940) (40,220) (33,774)
Interest and other income (expense)........ 6,304 3,971 8,943 8,642 5,071
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.......... 3,586 (15,504) (19,426) (7,301) 7,878
Provision for (benefit from) income
taxes.................................... 1,412 (643) 5,638 -- 675
Extraordinary loss......................... -- -- -- (1,324) --
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... $ 2,174 $ (14,861) $ (25,064) $ (8,625) $ 7,203
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
OTHER FINANCIAL DATA:
Cash flows provided by (used in)
operations............................... $ 20,299 $ (5,521) $ (12,426) $ 12,228 $ 64,013
Cash flows (used in) provided by investing
activities............................... (99,699) (183,244) 12,269 39,329 6,579
Cash flows provided by (used in) financing
activities............................... 188,654... 25,433 36,175 (85,968) (17,654)
EBITDA(1).................................. 31,461 18,640 35,109 48,436 66,917
Depreciation and amortization of intangible
assets................................... 10,612 16,800 24,538 24,159 30,336
Capital expenditures....................... 69,350 118,895 49,724 14,668 55,854
Ratio of earnings to fixed charges(2)...... 1.1x -- (2) -- (2) -- (2) 1.2x
39
SELECTED HISTORICAL FINANCIAL DATA
ENVIROTEST SYSTEMS CORP.
(DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents.................. $ 180,215 $ 17,079 $ 53,104 $ 18,685 $ 71,506
Total working capital...................... 183,365 1,770 116,608 39,546 21,682
Total assets............................... 418,205 457,273 480,784 379,733 398,858
Long-term debt............................. 328,048 386,906 420,476 360,801 343,765
Total stockholders' equity (deficit)....... 52,910 38,045 13,154 (24,376) (17,366)
SUPPLEMENTAL DATA (AT END OF PERIOD):
Number of centralized testing facilities... 113 126 169 176 176
Number of testing lanes.................... 407 479 667 689 689
- ------------------------
(1) EBITDA is defined as income from operations plus depreciation and
amortization of intangible assets. EBITDA should not be construed as a
substitute for, or more meaningful than, income from operations, net income
or cash flow from operating activities prepared in accordance with generally
accepted accounting principles for the purpose of evaluating our operating
performance, profitability or liquidity. EBITDA of the Company may not be
comparable to similarly titled measures reported by other companies and may
not be indicative of funds available for management's discretionary use as
it has not been adjusted for capital expenditures or debt repayments. We
have presented EBITDA because we understand it is a measurement commonly
used by investors as one of several indications of the Company's ability to
service debt.
(2) For purposes of calculating the ratio of earnings to fixed charges, earnings
are defined as income (loss) before income taxes plus fixed charges. Fixed
charges consist of interest expense, amortization of deferred financing
costs and that portion of operating lease rental expense that is
representative of the interest factor.
Earnings were inadequate to cover fixed charges for the years ended:
September 30, 1995................................................. $ 15,504
September 30, 1996................................................. 19,426
September 30, 1997................................................. 7,301
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSIONS ALONG WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF EST AND ENVIROTEST APPEARING ELSEWHERE IN THIS
PROSPECTUS. FOR INFORMATION REGARDING THE PRO FORMA FINANCIAL CONDITION OF THE
COMPANY, SEE "ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC. UNAUDITED PRO FORMA
FINANCIAL STATEMENTS" INCLUDED IN THIS PROSPECTUS.
OVERVIEW
Both EST and Envirotest originated from United Technologies Corporation, an
innovator in emissions testing technology. EST was formed in 1989 in connection
with a management buyout of the decentralized testing division of United
Technologies. In April 1996, a wholly-owned subsidiary of Wellman plc, a then
publicly incorporated United Kingdom company, acquired EST. In January 1998
Wellman plc was acquired by the Alchemy Plan ("Alchemy"). As a result of the
purchase, a new basis of accounting was established. Of the total Wellman plc
purchase price $69 million was attributable to the Company and allocated to net
tangible assets in the amount of $20 million and to intangible assets in the
amount of $49 million.
Envirotest has operated in the vehicle emissions testing business since 1974
through its predecessor company, Hamilton Test Systems, Inc., which was acquired
from United Technologies in a management buyout in 1990. Hamilton Test Systems
commenced operations in the emissions testing business in 1974 with the award of
the contract for the Arizona emissions testing program, the first centralized,
test-only program in the United States. Subsequently, Envirotest acquired
Envirotest Technologies, Inc., in 1992 from Electronic Data Systems, adding an
additional five emissions testing programs shortly before adoption of the rules
and regulations by the EPA implementing the 1990 amendments to the Clean Air
Act. In 1996, Envirotest acquired two additional emissions testing programs from
System Control, Inc., as well as retaining the senior management team.
ENVIRONMENTAL SYSTEMS TESTING, INC.
EST derives its revenues both in the domestic and international markets from
the sale of its emissions testing equipment and from servicing fees for repairs
and maintenance of those systems. EST's emissions testing equipment business has
been characterized by long lead times for sales cycles and relatively
predictable sales, primarily because states and municipalities in the United
States that have implemented decentralized emissions testing programs have
generally each adopted a plan and target date for implementation which have
typically been publicly announced 12 to 24 months in advance. This causes surges
in demand from a state for emissions testing equipment generally four to six
months prior to the scheduled implementation date.
EST's rapid growth in the last two quarters of 1997 and the first three
quarters of 1998, for example, is primarily the result of the implementation of:
- enhanced emissions testing programs in certain metropolitan areas with
large vehicle populations including Los Angeles, Sacramento and San Diego,
California;
- a two-phase basic/enhanced program in New York City and surrounding areas;
and
- an emissions testing program in Salt Lake City, Utah, with respect to
which EST is the exclusive provider of testing systems. Following
implementation of a decentralized emissions testing program, EST continues
to derive revenues in such jurisdiction from residual sales and, after a
one-year warranty period, from equipment servicing.
EST conducts its current international operations directly and through its
principal wholly-owned subsidiaries, Environmental Systems Products de Mexico,
S.A. de C.V., which does business in Mexico, EST Abgas- und Umwelt analysen
GmbH, which does business in Germany, and Environmental Systems Products,
Canada, Inc., which does business in Canada.
41
Technological advances in the emissions testing industry have led to the
development of enhanced emissions testing systems which have higher average
sales prices and gross margins. While basic emissions testing systems, which
only test an automobile's emissions while in neutral, sell for approximately
$12,000, enhanced emissions testing systems, which test an automobile's
emissions under simulated driving conditions, sell for approximately $35,000 to
$40,000. While five states currently require the use of the enhanced emissions
testing systems, Massachusetts and New Jersey have also publicly indicated their
intention to require such systems in the future and we believe that more and
more states are likely to require the use of these systems. Demand for enhanced
systems, in particular, has contributed to EST's increase in revenues and
profits.
EST outsources the manufacture of substantially all of its subassemblies to
third party suppliers that produce the components pursuant to EST's proprietary
specifications. The emissions testing systems are assembled, integrated, and
tested by EST and then shipped to customers based on order commitments. This
outsourcing strategy enables EST to focus its financial resources on product and
technology development and enhancement, by allowing EST to maintain a low supply
of inventory and to minimize production cost. Therefore, cost of revenues
primarily consists of purchased components and subassemblies for use in EST's
products, as well as costs associated with assembly, integration, and testing,
and associated overheads.
The following table sets forth certain income and expense items from EST's
historical consolidated statements of operations expressed as a percentage of
revenues for the periods indicated.
NINE MONTHS
FISCAL YEAR ENDED SEPTEMBER 30,
ENDED DECEMBER 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues............................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues..................................................... 62.2 60.1 64.5 62.8 69.1
Cost of revenues--inventory step-up -- -- -- -- 2.2
--------- --------- --------- --------- ---------
Gross profit......................................................... 37.8 39.9 35.5 37.2 28.7
--------- --------- --------- --------- ---------
Selling, general and administrative expenses......................... 30.8 28.3 17.4 21.0 14.6
--------- --------- --------- --------- ---------
Income from operations............................................... 7.0 11.6 18.1 16.2 14.1
Interest expense..................................................... (0.8) (0.4) (0.4) (0.3) (4.9)
Other income (expense)............................................... 0.9 (0.2) (0.0) 0.2 (0.4)
--------- --------- --------- --------- ---------
Income before income taxes........................................... 7.1 11.0 17.7 16.1 8.8
Provision for income taxes........................................... 4.2 5.9 7.4 6.4 5.0
--------- --------- --------- --------- ---------
Net income........................................................... 2.9% 5.1% 10.3% 9.7% 3.8%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES. Revenues for the nine months ended September 30, 1998 increased
by $63.9 million, or 136.5%, to $110.7 million from $46.8 million for the nine
months ended September 30, 1997. This increase was primarily attributable to
increased domestic sales of equipment as a result of the implementation of
enhanced testing programs in California and northern Virginia and implementation
of a unique two-phase basic/enhanced program in New York. In addition, EST was
the sole equipment provider of approximately 300 testing systems for Salt Lake
City, Utah's testing program, the sales of which were recorded during the first
nine months of 1998. The increase in revenues also was due to the fact that
during the first nine months of 1998 EST sold an increased number of enhanced
testing systems, which sell for approximately three times the price of basic
systems, as a result of the implementation of the enhanced testing programs in
California, New York, Utah and northern Virginia.
42
While the implementation of testing programs can vary significantly from quarter
to quarter, the large number of enhanced testing programs that were implemented
during the first nine months of 1998 is not indicative of the normal level of
state testing program implementation in any particular quarter. Accordingly, EST
does not expect its revenues to increase at this rate in future periods.
GROSS PROFIT. Gross profit for the nine months ended September 30, 1998
increased by $14.4 million, or 82.8%, to $31.8 million from $17.4 million for
the nine months ended September 30, 1997. This increase was primarily
attributable to increased revenues in the first nine months of 1998. As a
percentage of revenues, gross profit decreased to 28.7% for the nine months
ended September 30, 1998 from 37.2% for the nine months ended September 30,
1997. The decrease in gross profit as a percentage of revenues for the nine
months ended September 30, 1998 was attributable to a number of factors,
including a substantial decrease in service revenues, which produce a higher
margin than equipment sales. Service revenues declined because of the
implementation of the unusually large number of enhanced testing programs which
resulted in existing basic testing systems that were serviced under EST service
contracts being replaced with new, enhanced testing systems covered by one to
two-year warranties. Service revenues as a percentage of total revenues
decreased from approximately 24.3% for the nine months ended September 30, 1997
to approximately 7.2% for the nine months ended September 30, 1998. As a result
of the limited service contract activity, gross margin percentage for service
revenues for the nine months ended September 30, 1997 was approximately 42.8%
and was approximately 14.8% for the nine months ended September 30, 1998.
Other factors that contributed to the decrease in gross profit include
recognition of the $2.4 million inventory step-up resulting from the Alchemy
acquisition, an aggressive pricing strategy to obtain the exclusive right to
provide enhanced testing systems to emissions testing facilities located in Salt
Lake City, Utah and additional expenses, including overtime and temporary labor
costs and express freight charges, that EST incurred in order to fulfill the
large volume of customer orders.
In conjunction with the Alchemy acquisition and in accordance with generally
accepted accounting principles, the inventories of the Company were recorded at
their estimated fair value which was $2.4 million higher than their previously
recorded historical value. This higher basis in inventory was subsequently
recognized in cost of sales when the related inventory was sold during the
period from January 23, 1998 through September 30, 1998, resulting in lower
gross profit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the nine months ended September 30, 1998 increased
by $6.6 million, or 67.3%, to $16.4 million from $9.8 million for the nine
months ended September 30, 1997. Selling expenses consist primarily of salaries,
commissions and benefits paid to direct and indirect sales and marketing
personnel, professional service fees, travel related to the sales process, trade
shows, advertising and promotional expenses and other selling and distribution
costs. Selling expenses for the nine months ended September 30, 1998 increased
by $3.3 million or 91.7% to $6.9 million from $3.6 million for the nine months
ended September 30, 1997. This increase was primarily attributable to increased
compensation and benefits paid to personnel and additions necessary to promote
sales efforts, particularly in California and New York.
Administrative expenses include compensation and benefits to administrative
personnel, including directors, officers, facilities, insurance and other
general expenses. Administrative expenses for the nine months ended September
30, 1998 increased by $2.9 million or 63.0% to $7.5 million from $4.6 million
for the nine months ended September 30, 1997. This increase was primarily
attributable to an increase in performance bonuses payable to certain members of
management and amortization of intangibles resulting from the Alchemy
acquisition. Engineering expenses consist primarily of compensation, benefits
and associated costs relating to research and development personnel, occupancy
costs and new product and process development costs.
Engineering expenses for the nine months ended September 30, 1998 increased
by $0.4 million or 25.0% to $2.0 million from $1.6 million for the nine months
needed September 30, 1997. This increase
43
was primarily attributable to increased compensation and benefits paid to
additional personnel and independent contractors in connection with the
development of, and enhancements to, testing systems sold in states that
implemented testing programs during such period. As a percentage of revenues,
selling, general and administrative expenses decreased to 14.6% for the nine
months ended September 30, 1998 from 21.0% for the nine months ended September
30, 1997.
INCOME FROM OPERATIONS. As a result of the above factors, income from
operations rose 103.9% from $7.6 million in the nine months ended September 30,
1997 to $15.5 million in the nine months ended September 30, 1998, which
constituted 16.2% and 13.9% of sales, respectively, for such years.
INTEREST EXPENSE. Interest expense consists of interest expense paid on
EST's debt. Interest expense for the nine months ended September 30, 1998
increased by $5.1 million to $5.2 million from $0.1 million for the nine months
ended September 30, 1997. This increase was primarily attributable to increased
interest expense associated with outstanding debt obligations.
OTHER INCOME (EXPENSE). Other income (expense) consists primarily of
foreign exchange losses. Other expense for the nine months ended September 30,
1998 decreased by $0.5 million to ($0.4) million from $0.1 for the nine months
ended September 30, 1997. This decrease was primarily attributable to increased
foreign exchange losses due to the devaluation of the Mexican peso to the U.S.
dollar.
PROVISION FOR INCOME TAXES. Provision for income taxes for the nine months
ended September 30, 1998 increased by $2.5 million or 83.3%, to $5.5 million
from $3.0 million for the nine months ended September 30, 1997, resulting in an
effective tax rate of 56.7% and 39.4% for the nine months ended September 30,
1998 and September 30, 1997, respectively. The increase over the federal
statutory rate of 35% is a result of taxes on EST's foreign operations,
inclusion of state income taxes and goodwill associated with the acquisition of
EST by Newmall which is not tax deductible.
NET INCOME. As a result of the above factors, net income declined 8.7%,
from $4.6 million in the nine months ended September 30, 1997 to $4.2 million
for the nine months ended September 30, 1998, which constituted 9.7% and 3.8% of
sales, respectively, for such periods.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1996
REVENUES. Revenues for fiscal 1997 increased by $70.3 million, or 218.3%,
to $102.5 million from $32.2 million for fiscal 1996. Approximately $66.5
million of this increase was attributable to increased domestic sales of
equipment as a result of the implementation of enhanced emissions testing
programs in California, Pennsylvania (Philadelphia) and northern Virginia, phase
I of a two-phase, basic/ enhanced emissions testing program in New York and a
basic emissions testing program in Pennsylvania (Pittsburgh), along with
residual sales in Texas and Georgia. The remaining $3.8 million increase was due
primarily to increased international sales.
GROSS PROFIT. Gross profit for fiscal 1997 increased by $23.5 million, or
182.2%, to $36.4 million from $12.9 million for fiscal 1996. This increase was
primarily attributable to increased domestic sales. As a percentage of revenues,
gross profit decreased to 35.5% for fiscal 1997 from 39.9% for fiscal 1996. The
decrease in gross profit as a percentage of revenues was primarily attributable
to a substantial decrease in service revenues and to high gross profit margins
on certain equipment upgrades that were sold in California during fiscal 1996.
Service revenues declined because of implementation during fiscal 1997 of the
unusually large number of enhanced emissions testing programs which resulted in
existing basic testing systems that were serviced under EST service contracts
being replaced with new, enhanced testing systems that were covered by one to
two-year warranties.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 1997 increased by $8.8 million, or 96.7%, to
$17.9 million from $9.1 million for fiscal 1996. Selling expenses for fiscal
1997 increased by $6.3 million or 370.6% to $8.0 million from $1.7 million for
fiscal
44
1996. This increase was primarily attributable to increased salaries,
commissions and benefits paid to new personnel added in order to promote sales
efforts in California, Pennsylvania, New York and Virginia.
Administrative expenses for fiscal 1997 increased by $1.9 million or 33.3%
to $7.6 million from $5.7 for fiscal 1996. This increase was primarily
attributable to an increase in performance bonuses payable to certain members of
management, offset by a decrease in legal, accounting and other professional
fees and bad debt expense.
Engineering expenses for fiscal 1997 increased by $0.6 million or 35.3% to
$2.3 million from $1.7 million for fiscal 1996. This increase was primarily
attributable to increased compensation and benefits paid to additional personnel
and independent contractors in connection with the development of, and
enhancements to, testing equipment sold in states that implemented emissions
testing programs during 1997. As a percentage of revenues, selling, general and
administrative expenses decreased to 17.4% for fiscal 1997 from 28.3% for fiscal
1996.
INCOME FROM OPERATIONS. As a result of the above factors, income from
operations rose 402.7%, from $3.7 million in fiscal 1996 to $18.6 million in
fiscal 1997, which constituted 11.6% and 18.1% of sales, respectively, for such
years.
INTEREST EXPENSE. Interest expense for fiscal 1997 increased by $0.3
million or 300.0%, to $0.4 million from $0.1 million for fiscal 1996. This
increase was attributed to an increase in interest expense on EST's working
capital loan.
OTHER INCOME (EXPENSE). Other expense for fiscal 1997 decreased by $0.1
million or 100.0%, to $0.0 from $0.1 million for fiscal 1996. This decrease was
primarily attributable to a $0.1 million decrease in foreign exchange losses
associated with the Mexican peso.
PROVISION FOR INCOME TAXES. Provision for income taxes for fiscal 1997
increased by $5.7 million or 300.0%, to $7.6 million from $1.9 million for
fiscal 1996, resulting in effective tax rates of 41.8% and 53.6%, respectively.
The increase over the federal statutory rate of 35% and 34% in fiscal 1997 and
1996, respectively, is a result of taxes on EST's foreign operations and
inclusion of state income taxes. The provision for income taxes for fiscal 1996
also includes an IRS assessment for state taxes.
NET INCOME. As a result of the above factors, net income rose 523.5%, from
$1.7 million in fiscal 1996 to $10.6 million in fiscal 1997, which constituted
5.1% and 10.3% of sales, respectively, for such years.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995
REVENUES. Revenues for fiscal 1996 increased by $11.4 million, or 54.8%, to
$32.2 million from $20.8 million for fiscal 1995. $6.3 million of this increase
was attributable to the increase in domestic equipment sales as a result of the
implementation of basic emissions testing programs in Georgia and Texas, and
$3.6 million of the increase in revenue was attributable to the increase in
international sales of equipment as a result of the implementation of an
enhanced emissions testing program in Mexico City, Mexico. The remaining $1.5
million of the increase in revenues was attributable to increased revenues from
domestic service as a result of a large number of new service contracts in
California following the expiration of warranties on the related products.
GROSS PROFIT. Gross profit for fiscal 1996 increased by $5.0 million, or
63.3%, to $12.9 million from $7.9 million for fiscal 1995. This increase was
primarily attributable to an increase in revenues from domestic sales of
equipment. As a percentage of revenues, gross profit increased to 39.9% for
fiscal 1996 from 37.8% for fiscal 1995. The increase in gross profit as a
percentage of revenues was primarily a result of a higher average selling price
and profit margin for equipment sold to decentralized facilities in connection
with the implementation of basic emissions testing programs in Texas and Georgia
in fiscal 1996, compared to the average selling price and profit margin on
residual
45
sales of equipment in fiscal 1995 when no states implemented either basic or
enhanced emissions testing programs. The increase also was attributable to high
gross profit margins on certain equipment upgrades that were sold in California
during fiscal 1996. Gross profit was reduced by a one-time inventory reserve
adjustment of $0.7 million in connection with the acquisition of EST by Wellman
plc.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 1996 increased by $2.7 million, or 42.2%, to
$9.1 million from $6.4 million for fiscal 1995. Selling expenses for fiscal 1996
increased by $0.5 million or 41.7% to $1.7 million from $1.2 million for fiscal
1995. This increase was primarily attributable to increased salaries,
commissions and benefits paid to new personnel added in order to promote sales
efforts in Georgia and Texas.
Administrative expenses for fiscal 1996 increased by $1.9 million or 50.0%
to $5.7 million from $3.8 million for fiscal 1995. This increase was primarily
attributable to an increase in legal fees, charges and expenses incurred in
connection with the acquisition of EST by Wellman plc and an increase in
performance bonuses payable to certain members of management.
Engineering expenses for fiscal 1996 increased by $0.3 million or 21.4% to
$1.7 million from $1.4 million for fiscal 1995. This increase was primarily
attributable to increased compensation and benefits paid to additional personnel
and independent contractors in connection with the development of, and
enhancements to, testing equipment sold in states that implemented emissions
testing programs during 1996. As a percentage of revenues, selling, general and
administrative expenses decreased to 28.3% for fiscal 1996 from 30.8% for fiscal
1995.
INCOME FROM OPERATIONS. As a result of the above factors, income from
operations rose 146.7%, from $1.5 million in fiscal 1995 to $3.7 million in
fiscal 1996, which constituted 7.0% and 11.6% of sales for such years,
respectively.
INTEREST EXPENSE. Interest expense for fiscal 1996 decreased by $0.1
million or 50%, to $0.1 million from $0.2 million for fiscal 1995. This decrease
was attributed to a decrease in interest expense associated with EST's
outstanding debt.
OTHER INCOME (EXPENSE). Other income (expense) for fiscal 1996 decreased by
$0.3 million or 150.0%, to $(0.1) million from $0.2 million for fiscal 1995.
This decrease was primarily attributable to a $0.3 million increase in foreign
exchange losses.
PROVISION FOR INCOME TAXES. Provision for income taxes for fiscal 1996
increased by $1.0 million or 111.1%, to $1.9 million from $0.9 million for
fiscal 1995, resulting in effective tax rates of 53.6% and 58.8%, respectively.
The increase over the federal statutory rate of 34% is a result of taxes on
EST's foreign operations and inclusion of state income taxes. Additionally,
included in fiscal 1996 and 1995 is an IRS assessment for state and federal
taxes, respectively.
NET INCOME. As a result of the above factors, net income rose 183.3% from
$0.6 million in fiscal 1995 to $1.7 million in fiscal 1996, or 2.9% and 5.1% of
sales, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by (used in) operating activities was $7.7 million, $(8.3)
million, $(7.8) million, $3.7 million and $0.5 million for the nine months ended
September 30, 1998 and 1997 and for the years ended December 31, 1997, 1996 and
1995, respectively. Cash used in operations in fiscal 1997 and for the nine
months ended September 30, 1997 resulted primarily from increases in accounts
receivable and inventories associated with the increase in sales from fiscal
1996, partially offset by an increase in accounts payable.
Cash used in investing activities of $0.2 million, $0.5 million, $0.6
million, $0.1 million and $0.2 million for the nine months ended September 30,
1998 and 1997 and for the years ended December 31, 1997, 1996 and 1995,
respectively, resulted from capital expenditures.
46
Cash provided by (used in) financing activities was $(3.1) million, $6.3
million, $7.8 million, $(0.4) million and $(0.6) million for the nine months
ended September 30, 1998 and 1997 and for the years ended December 31, 1997,
1996 and 1995, respectively. Cash provided by financing activities in fiscal
1997 and for the nine months ended September 30, 1997 resulted from borrowings
under EST's revolving credit agreement. Cash used in financing activities during
the nine months ended September 30, 1998 resulted from net repayments and
borrowings under EST's revolving credit agreements and payment of debt issuance
costs.
ENVIROTEST SYSTEMS CORP.
Envirotest is the most experienced operator of centralized vehicle emissions
testing programs in the approximately $250 million North American market, having
tested more than 150 million vehicles since its inception in 1974. Envirotest
operates or is under contract to operate 14 of the 21 vehicle emissions testing
programs in the 16 states that have adopted a centralized testing program and
operates the only such program in Canada. We tested approximately 11.8 million
motor vehicles in 1998, which represented approximately 70% of the total North
American centralized testing market revenues.
Envirotest operates these programs under long-term exclusive contracts with
state and local governments. These contracts generally have terms ranging from
five to ten years. Envirotest estimates that as of September 30, 1998, it had a
contractual backlog to provide centralized emissions testing services of
approximately $873 million through 2008. Envirotest revenues are predictable and
stable due to the long term nature of its exclusive contracts, which typically
have initial terms of seven to ten years, and predictable testing volumes. Such
volumes could, however, be reduced in future contracts if EPA's draft "clean
screening" guidance is finalized in its current form, potentially reducing the
number of vehicles subject to traditional emission testing and thus reducing
Envirotest's revenues and profits. Envirotest believes that as the incumbent
operator in its existing programs it generally has a competitive advantage when
its programs are rebid, primarily because Envirotest has already incurred the
costs of establishing the program network and has gained valuable experience in
operating the program. Since 1990, all of Envirotest's emissions testing
contracts that provided for renewal or extension have been renewed or extended
beyond their initial terms except one contract with Maryland that was not
material.
Envirotest conducts its current operations directly and through its
principal wholly-owned subsidiaries, Envirotest Technologies, Inc., which does
business in Florida and Minnesota, and Envirotest Illinois, Inc., Envirotest
Wisconsin, Inc. and Envirotest Systems Corp. ("ESC--WA"), which do business in
Illinois, Wisconsin and Washington State, respectively. Envirotest's British
Columbia, Canada operations are conducted through a British Columbia
partnership, Envirotest Canada, which is wholly-owned by Envirotest through its
subsidiaries.
47
The following table sets forth certain income and expense items from
Envirotest's consolidated statements of operations expressed as a percentage of
revenues for the periods indicated.
FISCAL YEAR
ENDED SEPTEMBER 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues........................................................ 100.0% 100.0% 100.0%
Cost of revenues................................................ 82.1 70.3 62.2
--------- --------- ---------
Gross profit.................................................... 17.9 29.7 37.8
Operating expenses:
Selling, general and administrative expenses.................. 17.5 13.5 11.6
Amortization expense.......................................... 2.8 1.8 1.4
Other (gains) and losses...................................... (10.9) (2.9) 3.1
--------- --------- ---------
Total operating expenses.................................... 9.4 12.4 16.1
--------- --------- ---------
Income from operations.......................................... 8.5 17.3 21.7
Interest expense................................................ (31.3) (28.6) (20.0)
Interest and other income, net.................................. 7.2 6.2 3.0
--------- --------- ---------
Income (loss) before income taxes............................... (15.6) (5.1) 4.7
Provision (benefit) for income taxes............................ 4.5 0.0 0.4
Extraordinary loss.............................................. 0.0 (1.0) --
--------- --------- ---------
Net income (loss)............................................... (20.1)% (6.1)% 4.3%
--------- --------- ---------
--------- --------- ---------
FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1997
REVENUES. Contract revenues increased to $168.7 million in fiscal 1998 from
$140.7 million in fiscal 1997, an increase of $28.0 million or 19.9%. The
increase is primarily attributable to additional revenues of $20.8 million
generated by new or extended emissions programs in Illinois and Connecticut and
other increases of $7.2 million from additional test volumes and contractual fee
increases.
GROSS PROFIT. Gross profit increased to $63.7 million in fiscal 1998 from
$41.8 million in fiscal 1997, an increase of $21.9 million or 52.4%. As a
percentage of contract revenues, gross profit increased to 37.8% in fiscal 1998
from 29.7% in the corresponding period in fiscal 1997, an absolute increase of
8.1%. This increase was attributable to increased revenues and continued
improvements in operational efficiencies, partially offset by a $2.6 million
write-off of machinery and equipment that will not be utilized due to the
conversion of the Ohio and Connecticut programs to a new emissions test.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $19.5 million in fiscal 1998 from $19.0
million in fiscal 1997, an increase of $0.5 million or 2.6%. As a percentage of
contract revenues, selling, general and administrative expenses decreased to
11.6% in fiscal 1998 from 13.5% in fiscal 1997, an absolute decrease of 2.1%.
The increase in selling, general and administrative expenses is not specific to
any one event.
AMORTIZATION EXPENSE. Amortization expense remained constant at $2.4
million for fiscal 1998 and fiscal 1997.
OTHER (GAINS) AND LOSSES. Non-recurring acquisition costs associated with
Envirotest's sale to EST on October 16, 1998 totaled $7.8 million for fiscal
1998 and represented attorney, investment banking and other consulting fees that
Envirotest was responsible for paying and was partially offset by the gain on
the Pennsylvania settlement of $2.6 million in fiscal 1998 represents
adjustments to provisions made earlier for claims resulting from the
Pennsylvania contract cancellation that have been settled or
48
resolved and are unlikely to present future liability. A gain on the
Pennsylvania settlement of $4.0 million was included in fiscal 1997.
INCOME FROM OPERATIONS. Income from operations increased to $36.6 million
in fiscal 1998 compared to $24.3 million in fiscal 1997. Income from operations
as a percentage of contract revenues increased to 21.7% in fiscal 1998 compared
to 17.3% in fiscal 1997, an absolute increase of 4.4%. The increase is primarily
attributable to increases in revenue and improvements in gross profit margins.
INTEREST EXPENSE. Interest expense decreased to $33.8 million in fiscal
1998 from $40.2 million in fiscal 1997, a decrease of $6.4 million. This
increase was primarily attributable to the redemption of $50 million of senior
debt in September of 1997 reducing interest expense in fiscal 1998 by $4.6
million. In addition, Envirotest capitalized $1.2 million of interest expense in
fiscal 1998 related to the upgrade of the Illinois program.
INTEREST AND OTHER INCOME. Interest and other income of $5.1 million in
fiscal 1998 decreased $3.5 million from $8.6 million in fiscal 1997. The
decrease is directly related to the use of cash, cash equivalents and
available-for-sale securities in the redemption of the $50 million of senior
debt and the $29 million repurchase of 4.4 million shares in the "Dutch" auction
tender offer in September 1997.
PROVISION FOR INCOME TAXES. Fiscal 1998 income tax expense of $0.7 million,
primarily represents the federal alternative minimum tax, after giving effect to
the use of $5.5 million of deferred tax assets. There was no income tax benefit
on the pretax loss of $7.3 million in fiscal 1997, as Envirotest increased a
valuation allowance by $3.6 million to fully reserve the net deferred tax asset.
In fiscal 1998 and 1997, the income tax expense (benefit) was lower than the
combined federal and state effective tax rate of approximately 39%, as a result
of adjusting the valuation allowance to restate the net deferred tax asset to an
amount estimated to be realizable in future years. The estimate on the amount of
deferred tax asset to be realized is reviewed quarterly and the valuation
allowance adjusted accordingly.
EXTRAORDINARY LOSS. During fiscal 1997, Envirotest recognized a
non-recurring charge, reflected as an extraordinary loss from the write-off of
capitalized debt acquisition costs and transaction costs of $1.3 million, in
connection with the repurchase of $50.0 million aggregate principal amount of
its 9 1/8% Senior Notes due 2001, completed September 17, 1997.
NET INCOME. Net income was $7.2 million in fiscal 1998 compared to a net
loss of $8.6 million in fiscal 1997, an increase of $15.8 million.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1996
REVENUES. Revenues in fiscal 1997 increased by $16.2 million, or 13.0%, to
$140.7 million from $124.5 million in fiscal 1996. The increase is primarily
attributable to additional revenues of $13.5 million generated by new or
extended emissions programs in Indiana, Illinois and Ohio and a full year of
operations in the Washington State program, acquired on January 30, 1996;
additional revenues from the British Columbia program of $2.1 million,
operations of which were impacted by the employee strike during fiscal 1996; and
other increases of $3.2 million from additional test volumes and contractual fee
increases. These increases were partly offset by the loss in revenue of $2.4
million from the expiration of the California Quality Assurance contract in
September 1996.
GROSS PROFIT. Gross profit increased to $41.8 million in fiscal 1997 from
$22.3 million in fiscal 1996, an increase of $19.5 million or 87.3%. As a
percentage of contract revenues, gross profit increased to 29.7% in fiscal 1997
from 17.9% in the corresponding period in fiscal 1996, an absolute increase of
11.8%. This increase was attributable to several factors including contributions
of $9.0 million from new or extended contracts in Indiana, Illinois and Ohio;
$2.6 million in the British Columbia program, which benefited from an additional
volume increase and settlement of an employee strike that hampered results in
fiscal 1996; $4.1 million from improvements in operational efficiencies
49
and test volume increases in most other programs; and $3.3 million from the
reduction in the deferred charge amortization.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $19.0 million in fiscal 1997 from $21.8
million in fiscal 1996, a decrease of $2.8 million or 12.6%. As a percentage of
contract revenues, selling, general and administrative expenses decreased to
13.5% in fiscal 1997 from 17.5% in fiscal 1996, an absolute decrease of 4.0%.
The decrease in selling, general and administrative expenses is primarily due to
absence of relocation costs of $1.5 million recorded in fiscal 1996 resulting
from the consolidation of the corporate headquarters to Sunnyvale, California,
and lower engineering support costs as new programs matured.
AMORTIZATION EXPENSE. Amortization expense decreased to $2.4 million in
fiscal 1997, a decrease of $1.0 million from $3.4 million in fiscal 1996. The
decrease was attributable to the expiration of the California Quality Assurance
contract as of September 30, 1996.
OTHER (GAINS) AND LOSSES. A corporate relocation expense of $1.9 million
for fiscal 1996 represents the costs associated with closing the Phoenix
corporate headquarters and other restructuring costs. Gain on the Pennsylvania
settlement of $3.9 million in fiscal 1997 represents adjustments to provisions
made earlier for claims resulting from the Pennsylvania contract cancellation
that have been settled or resolved and are unlikely to present future liability.
A gain on the Pennsylvania settlement of $15.3 million was included in fiscal
1996.
INCOME FROM OPERATIONS. Income from operations increased to $24.3 million
in fiscal 1997 compared to $10.6 million in fiscal 1996. Income from operations
as a percentage of contract revenues increased to 17.3% in fiscal 1997 compared
to 8.5% in fiscal 1996, an absolute increase of 8.8%. The increase is primarily
attributable to increases in revenue, improvements in gross profit margins,
reductions in selling, general and administrative expenses and amortization
expenses, and the absence of non-recurring relocation expenses, partially offset
by the gain recorded on the Pennsylvania settlement in fiscal 1996.
INTEREST EXPENSE. Interest expense increased to $40.2 million in fiscal
1997 from $38.9 million in fiscal 1996, an increase of $1.3 million. These
increases were primarily attributable to a full year of interest expense on debt
associated with the Wisconsin, Washington and Indiana programs.
INTEREST AND OTHER INCOME. Interest and other income of $8.6 million in
fiscal 1997 represented a decrease of $0.3 million from $8.9 million in fiscal
1996.
PROVISION FOR INCOME TAXES. There was no income tax benefit on the pretax
loss of $7.3 million in fiscal 1997, as Envirotest increased a valuation
allowance by $3.6 million to fully reserve the net deferred tax asset. In fiscal
1996, income tax expense was $5.6 million on pre-tax loss of $19.4 million. In
both fiscal 1997 and 1996, the income tax benefit was lower than the combined
federal and state effective tax rate of approximately 39%, as a result of
increasing the valuation allowance to reduce the net deferred tax asset to an
amount estimated to be realizable in future years. The estimate on the amount of
net deferred tax asset to be realized is reviewed quarterly and the valuation
allowance adjusted accordingly.
EXTRAORDINARY LOSS. During fiscal 1997, Envirotest recognized a
non-recurring charge, reflected as an extraordinary loss from the write-off of
capitalized debt acquisition costs and transaction costs of $1.3 million, in
connection with the repurchase of $50.0 million aggregate principal amount of
the Envirotest Senior Notes, which was completed on September 17, 1997.
NET LOSS. The net loss was $8.6 million in fiscal 1997 compared to $25.1
million in fiscal 1996, a decrease of $16.5 million.
50
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, available-for-sale securities, and restricted
cash increased to $90.4 million at September 30, 1998 from $79.2 million at
September 30, 1997. The increase of $11.2 million was primarily a result of cash
generated from operations of $64.0 million and proceeds from the sale of excess
properties of $21.8 million, offset by the purchase of property, plant and
equipment for $55.9 million; and debt and capital lease payments of $18.4
million.
Envirotest's primary uses of cash include funding capital expenditure
requirements, payments on capital and operating leases, principal and interest
payments, and other working capital needs. Envirotest's capital and operating
leases currently require minimum lease payments of approximately $14.9 million
in 1998, decreasing to approximately $10.3 million in 2003 and further
decreasing thereafter as certain leases are scheduled to expire.
Envirotest's capital expenditures include maintenance capital expenditures
for existing facilities and development and construction expenditures for new
emissions facilities. Envirotest's development and construction capital
expenditures are dependent on the number of contracts we are awarded and are
only incurred after the contract has been signed. After signing a contract,
Envirotest may incur significant development and construction expenditures,
which Envirotest 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.
Envirotest's principal commitments at September 30, 1998 consist of capital
expenditures for the implementation of the Illinois program, estimated at $1.2
million net of the $7.1 million payments from the state. In fiscal 1999,
Envirotest also intends to spend approximately $10.2 million on implementation
of the Kentucky program, enhancement and other maintenance capital expenditures.
Subsequent to September 30, 1998, the Company agreed to pay $1.5 million to
settle the Ganzcorp claim.
Envirotest believes that its existing cash, cash generated from operations
and alternative financing sources, including leasing alternatives, will be
sufficient to complete implementation of the Illinois program and to meet its
liquidity requirements for the foreseeable future.
Accrued expenses and other current liabilities increased to $45.4 million at
September 30, 1998 from $23.6 million at September 30, 1997. The increase is
primarily attributable to $18.9 million received from the State of Illinois in
conjunction with the implementation of the new testing procedure.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY FOLLOWING THE ACQUISITION OF
ENVIROTEST AND RELATED TRANSACTIONS
Following the acquisition of Envirotest and the related transactions, our
debt capitalization consists of:
- $100 million aggregate principal amount of notes; and
- a committed $435 million senior secured credit facility of which $36.1
million will be available for liquidity requirements. As of December 15,
1998, availability under the senior secured credit facility was reduced by
$8.9 million in outstanding letters of credit and by $13.0 million due to
revolving borrowings. The borrowings under the senior secured credit
facility and the notes increase debt service costs.
The notes accrue interest at 13% per annum and will be payable semi-annually
commencing April 30, 1999. The notes will mature on October 31, 2008. The senior
secured credit facility and the indenture governing these notes limit our
ability to incur additional debt, to pay dividends, to redeem capital stock and
to sell certain assets. We may incur additional indebtedness as long as our
consolidated cash flow coverage ratio, as defined in the indenture governing
these notes, is greater than certain minimum levels or if such additional
indebtedness fits within certain exceptions. The senior
51
secured credit facility bears interest at various interest rates ranging from
LIBOR plus 2.25% to LIBOR plus 4.00% depending on the Company's financial
ratios. The senior secured credit facility also permits the Company to choose an
interest rate based on the prime lending rate of Credit Suisse First Boston plus
a margin or the federal funds rate plus a margin. Through March 31, 1999, Term
Loan A of the senior secured credit facility bears interest at LIBOR plus 3.25%
and Term Loan B bears interest at LIBOR plus 4.00%.
Management believes that based on current financial performance and
anticipated growth, cash flow from operations, together with the available
sources of funds including borrowings under the senior secured credit facility,
will be adequate to make required payments of interest on our indebtedness, to
fund anticipated capital expenditures and working capital requirements and to
enable us to comply with the terms of our debt agreements. Actual capital
requirements may change, particularly as a result of acquisitions we may make,
although no acquisitions are currently contemplated. We expect that capital
expenditures, excluding acquisitions, will be approximately $5 to $15 million
annually from 1999 to 2003. We believe that these capital expenditures will be
sufficient to maintain high quality equipment and services. Our future
performance and ability to service or refinance the notes and to extend or
refinance the senior secured credit facility will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond our control.
In connection with the acquisition of Envirotest, our sole stockholder,
Environmental Systems Products, Inc., issued 15% senior discount notes due 2009
with a principal amount at maturity of $207 million. Interest on these senior
discount notes will accrue from October 16, 1998 and be payable semiannually on
April 30 and October 31 of each year, but will not be payable in cash prior to
April 30, 2004. Since Environmental Systems Products, Inc. has no material
business operations, sources of income or assets of its own, other than its
shares of the Company, it is dependent upon the profitability and cash flows of
the Company and the payment of funds by the Company to it in the form of loans,
dividends, fees and otherwise, as well as its own credit arrangements.
INFLATION
Inflation was not a material factor in either the sales or the operating
expenses of the Company during the periods presented herein.
YEAR 2000 ISSUE
The Company's Year 2000 plan began in September 1998. The plan addresses the
issue of computer programs (i.e., systems and application software) and embedded
computer chips (i.e., PC-based BIOS firmware) being unable to distinguish
between the year 1900 and the year 2000. Such computer programs and computer
chips reside in the Company's business offices and the centralized testing
programs it operates, as well as in Company-manufactured testing equipment owned
or leased by customer-owned and operated, garage-based decentralized facilities.
The Year 2000 plan addresses both the centralized and decentralized portions
of the Company's business. As part of the Year 2000 plan, coordinators have been
assigned to all of the applicable business areas of the Company. With
engineering support, the role of each coordinator is to manage and monitor the
Year 2000 activity for their assigned area. The Company's corporate information
technology department is responsible for non-engineering server and PC computer
systems, networks, and telecommunication systems in the East Granby, Tucson and
Sunnyvale offices.
Management believes many of the Company's computer systems and related
software are already Year 2000 compliant. This is a result of either the system
being recently purchased and Year 2000-certified by its vendor or the system
having been upgraded to be Year 2000 compliant. The Year 2000 plan addresses the
remainder of the Company's computer systems that have to be verified for Year
2000 compliancy. The Year 2000 plan covers business systems and
engineering-delivered systems
52
for both the centralized and decentralized business areas. The Year 2000 plan
includes a compliance organization responsible for management of the Year 2000
plan.
The objectives of the Year 2000 plan are as follows:
- INVENTORY: Inventory all the computer systems (including application
software, operating systems, hardware, non-IT embedded software and
Company products) throughout the Company considered critical to the
day-to-day operation;
- ASSESSMENT: Assess the extent of Year 2000 compliance for all the critical
computer systems throughout the Company and prioritize remediation;
- REMEDIATION: Provide corrective action to address Year 2000 problems
(i.e., software fixes, hardware/software upgrades, etc.);
- TESTING: Verify that corrective actions have fixed previously identified
Year 2000 problems; and
- CONTINGENCY: Provide a contingency plan for operation into the Year 2000.
The timeline for the Year 2000 plan is as follows:
- INVENTORY: Systems will be grouped into Server, PC, Network and
Telecommunications categories. The Company's initial goal was to be 90%
complete by the end of the first quarter of 1999 and 100% complete by the
end of the second quarter of 1999;
- ASSESSMENT: Systems in each category will be designated as "Business
Critical", "Urgent" and "Legacy". Each system will be indicated as
"Compliant", "Testing" or "Non-Compliant". These designations will be used
to prioritize the Company's subsequent remediation, testing and
contingency activities. The Company's goal is to be 60% complete by the
end of the first quarter of 1999 and 100% by end of the second quarter of
1999;
- REMEDIATION: The Company's initial goal was to start activity in the
second quarter of 1999 and be 90% complete by the end of the third quarter
of 1999;
- TESTING: The Company's initial goal was to start activity in the third
quarter of 1999 and be 90% complete by end of the third quarter of 1999;
and
- CONTINGENCY: The Company's goal is to start activity in the third quarter
of 1999 and be 90% complete by end of the third quarter of 1999.
The status of the Year 2000 plan is as follows:
- INVENTORY: These activities will be 100% complete by the end of April
1999;
- ENGINEERING ASSESSMENT: These activities are currently 60% complete. The
Company's goal is to complete 100% by end of the second quarter of 1999;
- FIELD ASSESSMENT: These activities are already started. The Company's goal
is to complete 50% by end of the first quarter of 1999 and 100% by end of
the second quarter of 1999;
- REMEDIATION: These activities have started ahead of schedule. The
Company's goal is now to complete 100% by end of the third quarter of
1999;
- TESTING: These activities have started ahead of schedule. The Company's
goal is now to complete 100% by end of the third quarter of 1999; and
- CONTINGENCY: The Company has not started its contingency planning. Its
goal is to begin contingency planning in the third quarter of 1999 and be
90% complete by end of the third quarter of 1999.
The total cost of the Year 2000 plan is not known at this time. The systems
already found to be non-compliant at this time would cost approximately $11,000
to bring into compliance. Additional software tools to complete assessments of
all desktop PC's will cost approximately $10,000. Additional software licensing
to bring all desktop PC's up to compliant versions of software could be $25,000.
If
53
the Company's Microdata minicomputer hardware and/or software are found to be
non-compliant, the accounting, manufacturing and customer service functions
currently served on that platform would have to be migrated to the newer Solomon
IV-based system in an accelerated mode. Costs-to-date in the business system
have been negligible.
Total engineering costs-to-date are approximately $70,000. These costs
represent a formal system and code assessment project performed by
Compaq/Digital Corporation on the Ohio program. The results from this project
are being used to establish system and code assessment data for the Connecticut,
Colorado, and Wisconsin programs. An additional system assessment project was
performed in our Vancouver, British Columbia program, but was executed and
funded by the BC program. The results from this are being used to establish
system assessment data for the Tennessee program. It is estimated that total
cost for external services and products as well as internal engineering cost
will be $625,000.
In the worst case scenario, a failure to correct a Year 2000 problem could
result in an interruption of certain normal business activities or operations
and erroneous or incomplete results could result. For example, for
Company-delivered systems, a Year 2000 problem could generate invalid vehicle
test results, erroneous fee collection and/or billing data or printed/display
information with an erroneous date. The Company is developing contingency plans
to be implemented in the event of a material Year 2000 problem. The Company
expects to complete its contingency plans by the beginning of the fourth quarter
1999. Depending on the components affected, these plans may include accelerated
replacement of affected equipment or software, short-term use of back-up
equipment and software and use of temporary personnel to correct Year 2000
problems or provide manual workarounds.
Because the Company uses a variety of information systems and has additional
systems embedded in its operations and infrastructure, the Company cannot be
sure that all of its systems will work together in a Year 2000 compliant
fashion. Furthermore, the Company cannot be sure that it will not suffer
business interruptions, either because of its own Year 2000 problems or those of
its customers or suppliers whose Year 2000 problems may make it difficult or
impossible for them to fulfill their commitments to the Company. If the Company
fails to satisfactorily resolve Year 2000 issues related to its products in a
timely manner, it could be exposed to liability to third parties.
The Company is continuing to evaluate Year 2000 related risks and corrective
actions. Risks associated with the Year 2000 problem are pervasive and complex,
can be difficult to identify and to address, and can result in material adverse
consequences to the Company. Even if the Company, in a timely manner, completes
all of its assessments, identifies and tests remediation plans believed to be
adequate, and develops contingency plans believed to be adequate, some problems
may not be identified or corrected in time to prevent material adverse
consequences to the Company.
RECENT DEVELOPMENTS
We recently acquired all of the outstanding capital stock of Transervice
Limited, a subsidiary of Wellman (Holdings) Limited for a purchase price of
$18.0 million. Of this purchase price, we paid $9.25 million in cash, $4.25 in
the form of a note periodically due over the next six months and $4.5 million in
the form of a note due in three years. Transervice provides installation and
warranty and other services in respect of automobile lift and brake equipment
manufactured by Wellman Bradbury plc and warranty support services in respect of
diagnostic and emissions testing equipment manufactured by Crypton plc. In 1997,
Transervice had revenues and operating profits of approximately L7.2 million and
L1.0 million, respectively.
The Company has entered into an agreement with Bank of America and BA Credit
Corporation, pursuant to which a Delaware limited liability company, ESP
Financial Services LLC, has been established to provide financing for vehicle
emissions testing equipment to be sold by EST to decentralized facilities. ESP
Financial Services LLC is 90% owned by EST and 10% owned by BA Credit
Corporation. After EST has arranged a sale of vehicle emissions testing
equipment with a
54
decentralized facility owner or operator, ESP Financial will purchase the
equipment from EST and lease it to the facility. EST will receive payment in
full for the sale from ESP Financial at the time of sale. ESP Financial will
securitize the lease payments from the decentralized facilities and after
repayment to BA Credit Corporation and its affiliates of the purchase price for
the equipment, EST and BA Credit Corporation will share in the spread between
the actual or implied interest rates on the lease payments and on the
instruments issued in connection with the securitization based on their
respective interests in ESP Financial. It is expected that EST will at any time
provide up to a maximum of approximately $3,000,000 of equity capital to EST
Financial, which may be partially or completely lost in the event that one or
more decentralized facilities defaults on their lease payments.
We recently entered into an agreement to purchase MARTA Technologies, Inc.
MARTA operates three centralized emissions testing programs, testing
approximately 2.3 million vehicles annually.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 applies to all
companies and is effective for fiscal years beginning after December 15, 1997.
SFAS 130 establishes standards for the reporting and display of comprehensive
income in a set of financial statements. Comprehensive income is defined as the
change in net assets of a business enterprise during a period from transactions
generated from non-owner sources. It includes all changes in equity during a
period except those resulting from investment by owners and distributions to
owners. The Company has adopted SFAS 130 beginning January 1, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 "Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). SFAS 131 applies to all public companies and is effective for fiscal years
beginning after December 15, 1997. SFAS 131 requires that business segment
financial information be reported in the financial statements utilizing the
management approach. The management approach is defined as the manner in which
management organizes the segments within the enterprise for making operating
decisions and assessing performance. The Company has adopted SFAS 131 beginning
January 1, 1998. The Company's operations prior to the acquisition of Envirotest
are managed all within one segment. The Company is presently reviewing its
reporting as required by SFAS 131.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
133). The new standard requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives should be reported in
the statement of operations or as a deferred item, depending on the use of the
derivatives and whether they qualify for hedge accounting. The key criterion for
hedge accounting is that the derivative must be highly effective in achieving
offsetting changes in fair value or cash flows of the hedged items during the
term of the hedge. No material impact is expected with the adoption of FAS 133.
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." SOP
98-5 provides guidance on the financial reporting of start-up costs and
organization costs, which should be expensed as incurred. This SOP is effective
for the Company's 2000 fiscal year. The Company has reviewed the provisions of
this SOP and does not believe that adoption of this standard will have a
material effect upon its results of operations, financial position, or cash
flows.
In March 1998, the Accounting Standards Executive Committee issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 provides guidance on when costs related to software
developed or obtained for internal use should be capitalized or expensed. This
SOP is effective for the Company's 1999 fiscal year. The Company has reviewed
the provisions of the SOP and does not believe adoption of this standard will
have a material effect upon its results of operations, financial position, or
cash flows.
55
INDUSTRY AND REGULATORY OVERVIEW
Public awareness of air pollution and its hazardous effects on human health
and the environment has increased in recent years. The EPA estimates that in the
United States alone approximately 46 million persons live in areas where air
quality levels have failed to meet the EPA's national air quality standards.
Increased awareness of air pollution and its hazardous effects on human health
and the environment has led many governmental authorities to pass more stringent
pollution control measures. One especially effective measure which many
governmental authorities have adopted is vehicle emissions testing. Vehicle
emissions produce approximately 50% of the ozone air pollution and nearly all of
the carbon monoxide air pollution in metropolitan areas. The EPA estimates that
enhanced emissions testing on motor vehicles is approximately 10 times more
cost-effective in reducing air pollution than increasing controls on stationary
pollution sources such as factories and utilities. Consequently, the EPA has
made emissions testing an integral part of its overall effort to reduce air
pollution by ensuring that vehicles meet emissions standards throughout their
lives.
We estimate that the world market potential for vehicle emissions testing
services is currently in excess of 670 million vehicles. There are approximately
230 million vehicles, or 34% of the world total, in the U.S. and Canada. Over 90
million of these U.S. and Canadian vehicles are currently subject to annual or
biennial emissions testing and approximately 65 million paid tests and re-tests
are conducted annually in these markets.
In general, these tests are performed either in a centralized program or in
a decentralized program. In a centralized program, vehicle owners take their
vehicles to one of a small number of special centralized facilities to be
tested. These facilities only perform tests; they do not repair vehicles.
Usually, a private contractor licensed by the government operates the
centralized facility. In a decentralized program, vehicle owners take their
vehicles to a service station, automotive repair shop or dealership to be
tested. These decentralized facilities both perform tests and repair vehicles.
The EPA has granted state and local governmental authorities the discretion to
determine how best to establish and operate a network of emissions testing
facilities, including the flexibility to choose either a centralized or a
decentralized program.
In 1997, centralized programs in the U.S. and Canada performed approximately
23.0 million paid tests and generated approximately $250 million in revenues,
while facilities in decentralized markets in the United States performed
approximately 41.7 million tests and generated approximately $816 million in
revenues. The percentage of programs which are either centralized or
decentralized has remained relatively constant since 1991. We estimate that the
North American market for decentralized vehicle emissions testing equipment will
total approximately $1.0 billion through 2001 and that thereafter the North
American market will decline significantly, with future demand for these
products dependent on the growth of demand in international markets.
Vehicle emissions control requirements have become progressively more
stringent since the passage of the Clean Air Act in 1970. The 1990 Amendments,
in particular, emphasized the need for effective emissions control programs and
in 1992 the EPA adopted regulations that required 181 geographic areas to
implement certain types of emissions control programs by certain dates,
depending on the area's population and its level of air pollution. The EPA has
the authority under the Clean Air Act to withhold non-safety related federal
highway funds from states that fail to implement such mandated programs by
prescribed deadlines. To date, the EPA has been willing, in certain
circumstances, to grant extensions of these deadlines and it has yet to impose
any sanctions or penalties for non-compliance.
The EPA recently announced certain proposals that may impact emissions
testing programs. On May 7, 1998, the EPA issued a proposal on the potential use
of so-called "clean screening" methods in emissions testing programs. Under the
proposal, individual states would be able to modify existing or planned
emissions testing programs to reduce or eliminate vehicle emissions testing for
certain categories of low emission vehicles. If the EPA adopts guidelines
substantially along the lines of its
56
May 7, 1998 proposal, the number of vehicles subject to traditional emissions
testing would decrease. We believe that such a decrease would not significantly
affect our revenues because our current contracts with states that operate
centralized programs guarantee specified numbers of tests, and in states that
operate decentralized programs we do not earn revenue from performing tests but
from selling testing equipment to private sector facilities.
The clean screening proposal would also permit states to consider the use of
roadside remote sensing devices to excuse certain categories of vehicles from
regularly scheduled testing. We believe it is premature to consider what effect,
if any, remote sensing might have on our business because such devices have not
been developed to the point where they are sufficiently accurate to be used as a
substitute for current emissions tests, and because we ourselves are engaged in
research and development of remote sensing devices and would expect to pursue
growth opportunities in this area.
More recently, on July 31, 1998, the EPA issued a final study which
concluded that more stringent air quality standards for motor vehicle emissions
are needed, technologically feasible, and cost-effective. We believe that the
setting of such standards will be the most important EPA regulatory initiative
affecting motor vehicles since the passage of the 1990 Amendments. We believe
that the EPA study is likely to result in more stringent standards that will
have the effect of increasing the number of areas which must implement emissions
testing programs and therefore potentially increase the market for our products
and services.
Since 1977, when Federal legislation first required states to comply with
emissions standards through the use of testing programs, California has been a
leader in testing procedures and technical standards. California has
approximately 22 million vehicles subject to emissions testing, more than three
times that of any other state. California's testing program is overseen by the
California Bureau of Automotive Repair ("BAR"). The California BAR has revised
its emissions testing standards three times: in 1984, 1990 and, most recently,
in 1997. With each of these revisions, the California BAR has required the use
of new, more sophisticated and more accurate emissions testing and analysis
equipment, which must be certified by the California BAR. California's testing
standards have become the benchmark for emissions testing both in the United
States and in many foreign countries. All states with decentralized programs and
many states with centralized programs require emissions testing and analysis
equipment used in their programs to be either "BAR-84," "BAR-90," or "BAR-97"
certified, with all newly-implemented enhanced programs requiring BAR-97
certification.
As emissions testing equipment has become more technologically advanced,
government regulators have required that testing facilities use this more
advanced equipment. The most significant technological advance that has occurred
in the emissions testing industry over the past decade is the development of
"enhanced" testing systems. Prior to 1990, the EPA required government agencies
to test vehicles only for emissions of carbon monoxide and hydrocarbons, which
form smog. During this "basic" test, a technician inserts a probe in the
vehicle's tailpipe while the vehicle is idling and emissions analyzers then
measure pollution levels in the exhaust. These basic tests worked well for
pre-1981, non-computerized vehicles containing carburetors because typical
emission control problems involved incorrect air/fuel mixtures and such problems
increase pollution levels in the exhaust even when the vehicle is idling.
However, today's vehicles have different emissions problems. For tests on
modern vehicles to be effective, the equipment must measure nitrogen oxide
emissions which also cause smog and must test the vehicle under simulated
driving conditions. The EPA now requires these "enhanced" tests in some areas. A
technician conducts these enhanced tests on a dynamometer, a treadmill-type
device that simulates actual driving conditions, including periods of
acceleration, deceleration and cruising.
A number of recent international initiatives evidence the increasing
recognition by foreign countries of the hazardous effects of air pollution to
human health and the environment. We believe that foreign countries will
continue to follow the lead of the United States in pollution control and,
57
more particularly, vehicle emissions testing, and will adopt or upgrade existing
emissions testing programs as an efficient and effective step towards reducing
air pollution. A number of foreign countries have implemented various forms of
mandatory testing programs, including the United Kingdom, Germany, Canada,
Mexico and Japan, and a number of others are considering developing or expanding
mandatory or voluntary testing programs, including Poland, the Philippines,
Brazil, Argentina, and Chile.
58
BUSINESS
OVERVIEW
GENERAL
We are the leading worldwide provider of vehicle emissions testing equipment
and services. We manufacture equipment that tests vehicle emissions for
compliance with air pollution standards and operate testing programs on behalf
of states and other jurisdictions. We estimate that we have an approximate 35%
share of the domestic market for vehicle emissions testing equipment used by
independent service stations and other service providers in states that have
adopted a "decentralized" program. This 35% overall share represents an
approximate 25% share of the domestic market for basic testing equipment and an
approximate 56% share of the domestic market for higher-margin enhanced testing
equipment. We also operate, or are under contract to operate, 14 of the 21
testing programs in the 16 states that have adopted a centralized program and we
operate the only such program in Canada. Envirotest tested approximately 11.8
million motor vehicles in fiscal 1998 which represented approximately 70% of the
total North American centralized testing market revenues. As of September 30,
1998, we had a contractual backlog to provide centralized emissions testing
services of approximately $873 million through 2008.
HISTORY
Both EST and Envirotest originated from United Technologies Corporation, an
innovator in emissions testing technology. EST was formed in 1989 in connection
with a management buyout of the decentralized testing division of United
Technologies Corporation. In April 1996, Wellman plc, a then-publicly
incorporated United Kingdom company, bought EST. Alchemy recently bought Wellman
plc and thus became the indirect parent of EST and its subsidiaries. Envirotest
has operated in the vehicle emissions testing business since 1974 through its
predecessor company, Hamilton Testing Systems, which was acquired in a
management buyout from United Technologies Corporation in 1990. Hamilton Testing
Systems commenced operations in the emissions testing business in 1974 with the
award of the contract for the Arizona testing program, the first centralized,
test-only program in the United States. Subsequently, Envirotest acquired
Envirotest Technologies, Inc., from Electronic Data Systems, adding an
additional five testing programs shortly before adoption of the rules and
regulations by the EPA implementing the 1990 amendments to the Clean Air Act. In
1996, Envirotest acquired two additional testing programs from Systems Control,
Inc. and hired the senior management team of Systems Control. Envirotest became
a publicly owned company in 1993.
THE ACQUISITION OF ENVIROTEST AND RELATED TRANSACTIONS
The combination of EST and Envirotest has created an emissions testing
industry leader. In the combination, EST acquired all of the outstanding capital
stock of Envirotest through a tender offer and related merger transaction for
approximately $266.3 million. In connection with the acquisition, we made a
private offering of these notes and redeemed or repaid certain indebtedness of
Envirotest, EST and their subsidiaries.
After these transactions and a reorganization of our affiliated companies,
we became a direct wholly-owned subsidiary of Environmental Systems Products,
Inc. and EST and Envirotest became our direct, wholly-owned subsidiaries.
We believe our new position as the overall industry leader will allow us to
solidify our domestic position and expand internationally by offering a broad
range of vehicle emissions testing equipment and services. We also believe that
Envirotest's relatively consistent revenues will complement the revenues of EST,
which historically have fluctuated significantly as states have periodically
implemented decentralized testing programs or modified existing programs. In
addition, the combination of EST and
59
Envirotest will allow us to eliminate duplicative management, staff and
facilities. We estimate this will save $8.0 to $10.0 million, of which $4.2
million has been realized to date.
BUSINESS STRENGTHS
We believe that we have the following competitive advantages:
INDUSTRY LEADER. We enjoy leading market positions in both our emissions
testing equipment business and our emissions testing services business. We have
an estimated 35% overall share of the domestic market for emissions testing
equipment systems used in decentralized programs. We also currently operate, or
are under contract to operate, 14 of the 21 programs in the 16 states that have
adopted centralized programs and the only such program in Canada. In 1998, we
performed over three times the number of tests as our closest competitor in the
United States and Canada and received approximately 70% of the total revenues in
the centralized testing market for such period.
STABLE REVENUE SOURCE. Our centralized vehicle emissions testing services
business provides a stable source of revenues. We generally provide services to
states, municipalities and other jurisdictions under long-term contracts of
between five and ten years that include agreed upon per test fees that we earn
over the life of the contracts. The demand for our testing services in these
jurisdictions presently is generally fixed because the tests are mandated by
current law. The actual number of tests may fluctuate. For the twelve months
ended September 30, 1998, our centralized vehicle emissions testing business
generated revenues of $168.7 million and EBITDA of $66.9 million. We estimate
that as of September 30, 1998, we had a contractual backlog to provide
centralized emissions testing services of approximately $873 million through
2008.
TECHNOLOGICAL LEADERSHIP AND SUPERIOR CUSTOMER SERVICE. We believe that we
are the technological leader in the design and manufacture of vehicle emissions
testing equipment. Our intellectual property includes proprietary software
programs and more than 70 patents on emissions testing and related products.
Moreover, EST frequently conducts its technology research and product
development efforts in conjunction with governmental authorities. For example,
in 1994, the California BAR awarded EST two pilot programs for the development
of testing standards at a test facility in Sacramento, California and, in 1995,
New Jersey awarded EST a study contract to evaluate alternative emissions
testing procedures and systems. Our testing systems are among the most
user-friendly, efficient products available. This efficiency allows testing
facilities to maximize the number of tests they can perform in a set period of
time and therefore their revenues. In addition, our staff of approximately 182
company-trained direct service technicians who operate from a network of 10
service hubs throughout the United States provides the best customer service in
the industry.
EXPERIENCED MANAGEMENT TEAM. Our management team is one of the most
experienced in the vehicle emissions testing industry. Our management team,
which is comprised of certain of the senior members of the former managements of
EST and Envirotest, has a combined 40 years of experience in the industry and
has demonstrated its ability to succeed in both the emissions testing equipment
business and the emissions testing services business. We believe that the
combination of EST and Envirotest creates the leading management team in the
vehicle emissions testing industry.
60
BUSINESS STRATEGY
Our objective is to maximize our long term profitability by enhancing our
leading positions in the vehicle emissions testing equipment and testing
services businesses through the following strategies:
EXPAND DOMESTIC BUSINESS. We intend to:
- expand our share of the market for emissions testing equipment,
particularly higher margin enhanced systems, in states and other
jurisdictions that have adopted decentralized testing programs;
- capture as large a share as possible of new business if additional states
and municipalities implement laws and regulations that require use of
these products;
- extend or renew our existing contracts with states, municipalities and
other jurisdictions to which we provide centralized testing services; and
- bid successfully for any new mandates to provide these services.
REALIZE BENEFITS FROM ACQUISITION OF ENVIROTEST. We will integrate the
equipment and testing businesses to take advantage of synergies and economies of
scales in, among other things, research and development, marketing and
government relations. We believe that the combination of the two businesses will
help us penetrate the developing international market for vehicle emissions
testing because our breadth of experience and expertise will allow us to offer a
broad range of vehicle emissions products and services. As a result of the
combination of the two businesses, we also expect to save approximately $9.4
million as a result of the elimination of duplicative management, staff and
facilities. Finally, we believe that Envirotest's relatively consistent revenues
will complement the revenues of EST, which historically have fluctuated
significantly as states have periodically implemented decentralized testing
programs or modified existing programs.
EXTEND TECHNOLOGICAL LEADERSHIP. By integrating the research and
development groups of EST and Envirotest, we will be able to extend our
technological leadership. We intend to improve our emissions testing equipment
and expand our product offerings to provide the most accurate, reliable and
user-friendly emissions testing equipment available. In addition, we intend to
update our computer software to maximize the rate at which we can test vehicles
in our centralized testing operations. We also plan to continue to work with
leading government policy makers, including particularly the California BAR, in
developing state-of-the-art testing technologies.
EXPAND INTERNATIONAL PRESENCE. We intend to expand internationally by
offering a broad range of vehicle emissions testing equipment and services to
countries and other jurisdictions around the world that are likely to adopt
emissions testing programs similar to those adopted in the United States. We
plan to offer our advisory services to these countries at the early stages of
their program development, thereby positioning ourselves to become the provider
of choice for both centralized and decentralized testing programs. We intend to
expand our international marketing efforts and offices in the future and expect
to enter into strategic relationships with partners in selected locales.
EMISSIONS TESTING EQUIPMENT BUSINESS
OVERVIEW
Through EST, we are the leading worldwide provider of vehicle emissions
testing and analysis equipment to the decentralized market. EST designs,
manufactures, markets and services equipment that tests motor vehicle emissions
for compliance with air pollution standards imposed by various Federal, state,
and international regulations. Since 1990, EST has sold over 10,000 testing
systems in 11 states and 4 foreign countries. This number includes 5,683 systems
we sold in the twelve months ended June 30, 1998. EST sells its emissions
testing equipment primarily to private sector facilities such as
61
service stations, automotive repair shops, and dealerships that perform
emissions testing in states which have adopted a decentralized program. EST, by
focusing almost exclusively on designing and developing emissions testing
products for the decentralized market, has developed significant expertise in
producing emissions testing equipment that meets the needs of the owners of
emissions testing facilities. Specifically, EST has used its extensive
technological capabilities to provide its customers with technologically
advanced, easy to use and more efficient equipment with superior service for
that equipment.
EST's business has been characterized by long lead times for sales and
generally cyclical sales. This is primarily because the states and
municipalities in the United States that have implemented a decentralized
program have generally adopted a target date for implementation which they have
publicly announced 12 to 24 months in advance. This causes surges in demand for
emissions testing equipment from facility owners in a state generally four to
six months prior to the scheduled implementation date. The level of demand is
predictable to a certain extent based on the state's vehicle population.
Following implementation of a state's testing program, EST continues to earn
revenues in that state from residual sales and, after a one-year warranty
period, from equipment servicing. This pattern of implementation permits EST to
channel its engineering resources to develop equipment modifications required to
comply with a particular state's testing program and allows EST to allocate and
relocate marketing personnel to that state prior to its scheduled implementation
date in order to capitalize on the expected customer demand.
In addition, EST has also experienced surges in demand when states with
existing testing programs have introduced more stringent regulations requiring
the use of enhanced testing systems. Technological advances in the emissions
testing industry have led to the development of enhanced testing systems which
have higher average sales prices and gross margins. While basic testing systems,
which test an automobile's emissions only while the vehicle is in neutral, sell
for approximately $12,000, enhanced testing systems, which test an automobile's
emissions under simulated driving conditions, sell for approximately $35,000 to
$40,000. There are five states which currently require the use of the enhanced
testing systems, and Massachusetts and New Jersey have publicly indicated their
intention to require such systems in the future. The Company believes that more
and more states are likely to require the use of these systems, which EST
expects will result in continued revenues to EST at least through 2001. By 2001
substantially all of the states with large vehicle populations will have
completed implementation of their programs. As a result, EST believes that its
revenues and profits generated by domestic sales of its testing systems will
decline significantly.
EST believes, however, that domestic demand for testing systems will
continue at a reduced level even after implementation of mandated testing
programs is completed for the following reasons:
- states and municipalities will adopt more stringent pollution control
standards which may require more technologically advanced testing systems;
- advances in technology will produce emissions testing equipment that is
superior to the technology that is currently available; and
- facility owners will need to replace testing systems after the end of
their useful lives.
PRODUCTS
EST currently designs, manufactures and sells three testing systems under
the tradename SystemOne:
- an idle testing system that complies with basic testing requirements;
- a loaded mode testing system that complies with enhanced testing
requirements; and
- a transient loaded mode testing system that complies with enhanced testing
requirements.
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In an idle test, a technician inserts a probe which measures exhaust
emissions into the vehicle's tailpipe while the vehicle is idling. A loaded mode
emissions test involves the use of an instrument known as a dynamometer that
measures the vehicle's exhaust emissions under simulated driving conditions. A
transient loaded mode test also uses a dynamometer and in addition uses a system
which captures the entire exhaust stream during a test and measures the total
mass of emissions from a vehicle in grams of pollutant per mile driven.
An emissions testing system is comprised of:
- an outer-frame cabinet;
- a personal computer with a keyboard, modem, monitor and printers; and
- internal and external sampling devices for measuring and analyzing
emissions.
The computer systems are pre-loaded with EST's proprietary emissions testing
software. The testing systems have a modular design, which means that each
component is installed separately. This allows for the addition of optional
testing equipment and for upgrades and modifications. The emissions testing
systems also contain certain anti-tampering devices designed to assure the
integrity of emissions testing results. The central processing unit of the
personal computers contained in all testing systems is secured in a locked
compartment accessible only by EST and its authorized service technicians. If
someone tampers with the lock on the compartment, the testing system
automatically shuts down and can only be turned on by typing in a computer
access code. This code changes daily and only EST's authorized service
technicians can access it.
EST's testing systems are designed to be more mobile than the systems sold
by its competitors. This mobility permits the test operators to move the
equipment to accommodate a variety of vehicles, and allows facility owners to
use the systems in decentralized facilities that have limited available space
for emissions testing. Certain components used in the emissions testing systems
also allow the test operators to perform required emissions tests with less need
for direct contact with specific engine components. These "non intrusive"
devices reduce the time to perform certain tests and the risk of injury to the
test operator.
Vehicle emissions testing equipment must be certified for use in each state
prior to sale. All of EST's testing systems are either BAR-84, BAR-90 or BAR-97
compliant and EST's emissions testing and analysis equipment is currently
certified in 13 of the 16 states which have adopted decentralized programs and 4
foreign countries. EST has elected not to apply for certification in Alaska, New
Mexico and Rhode Island because of the relatively small number of vehicles
subject to emissions testing in those states.
Due to the customized nature of the equipment used in the high volume,
test-only facilities that Envirotest designs, constructs and operates for states
that have adopted centralized testing programs, EST does not manufacture or sell
a material amount of such equipment for the centralized testing market.
MANUFACTURING
EST's manufacturing activities consist primarily of
- materials management, assembly and integration;
- testing and quality control of parts and component subassemblies; and
- final systems testing.
EST performs these activities in its East Granby, Connecticut facility. EST
has outsourced the manufacture of substantially all of its subassemblies to
companies who make the component parts
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pursuant to EST's proprietary specifications. This permits EST's management to
focus on EST's core business. EST believes that its outsourcing strategy also
enables EST to concentrate its financial resources on product development and
enhancement by allowing EST to maintain a low supply of inventory and to
minimize production cost. In addition, EST also believes that the outsourced
content and modular design of its testing systems allows for reduced
manufacturing cycle times and increased testing system production. In 1997,
EST's average monthly production was 298 systems, with each system taking
approximately four hours to assemble.
EST's systems are assembled from components or subassemblies supplied solely
by suppliers who are selected only after EST has performed significant testing
to ensure that any components or subassemblies used by EST in its testing
systems can be effectively integrated with EST's other hardware and software
components or subassemblies. By using quality components and performing such
testing, EST is able to minimize the number of malfunctions in its systems.
Although many of the components of the testing systems, such as the dynamometer,
are readily available from a number of sources, EST typically purchases such
components from single suppliers. To date, EST has not experienced any material
difficulty or delay in obtaining any components or sub-assemblies.
SERVICES
EST provides customers with a one year warranty for its emissions testing
systems. Approximately 85% of EST's customers enter into a service contract with
EST for the repair and maintenance of the emissions testing systems following
the warranty period. Service contracts typically have a one year term and the
annual servicing fee is approximately 10% of the purchase price of the related
emissions testing system. EST's revenues for equipment servicing and maintenance
in 1997 were $14.6 million, or 14.3% of EST's total revenue for the year.
EST guarantees to its service program participants that any non-operational
emissions testing system will be fully operational within eight hours of the
time of the initial service call, with the typical time until a system is fully
operational ranging between four and six hours. EST believes that no other
competitor offers a faster service response time guarantee. The modular design
of EST's emissions testing equipment also helps to expedite the repair time
because it allows EST's service technicians to remove and replace a defective
part at the customer site. EST can then repair the defective part at EST's
facilities, while the customer has full use of an operational system. EST has
established a customer service network of 149 company-trained direct service
technicians, who account for 54% of EST's entire workforce. A majority of EST's
service technicians have been employed with EST since its formation in 1989.
SALES AND MARKETING
EST markets and sells its emissions testing equipment through both a direct
marketing and sales staff and indirectly through a network of independent sales
representatives and distributors. EST uses independent sales representatives and
distributors primarily in foreign countries and in connection with the marketing
of emissions testing equipment to states with limited market potential because
of low demand testing equipment. As of September 30, 1998, EST has a direct
marketing and sales staff of 49 full-time employees and 3 independent sales
representatives and distributors.
Unlike its competitors, which sell a wide variety of tools and other
equipment in addition to emissions testing equipment, EST focuses solely on
emissions testing equipment. EST believes this enhances the capabilities and
effectiveness of its sales force. Each member of EST's marketing and sales staff
receives intensive training in recent developments in Federal, state, and
international legislation and regulation related to air pollution controls, as
well as highly specialized training regarding the design, operation, and
maintenance of EST's emissions testing equipment. In addition, because states
and municipalities in the United States generally announce their plans to
implement an
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emissions testing program 12 to 24 months in advance of the program's
implementation date, EST is able to allocate and relocate necessary marketing
and sales personnel to those states and municipalities so that EST can undertake
an effective marketing campaign in those locales in advance of the
implementation date.
EST offers its customers flexible financing and leasing alternatives through
sale and leaseback arrangements. Through a joint venture with Bank of America,
EST offers leases ranging from 12 to 84 months. Most customers select terms
ranging from 60 to 84 months. The leases offer various purchase options which
permit the customer to purchase the equipment upon expiration of the lease. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments."
CUSTOMERS
Since 1990, EST has sold over 10,000 emission testing systems to customers
in 11 states and 4 foreign countries. Substantially all of EST's customers are
independently owned and operated service stations, automotive repair shops and
dealerships that purchase emissions testing equipment to generate testing
revenue and vehicle repair revenues. No single customer accounts for a material
portion of EST's sales over the long term. The fees derived by decentralized
facilities from emissions testing generally are substantially in excess of the
cost of owning or leasing emission testing systems. Decentralized facilities
that offer emissions testing also have the opportunity to perform automotive
repairs that are related to emissions test failures as well as other vehicle
repairs and to service vehicles that might not otherwise be serviced at the
facility.
COMPETITION
EST has two principal competitors in the decentralized emissions testing
market: Sun Electric, a division of Snap-on Incorporated, and Automotive
Diagnostics, a division of SPX Corporation. EST believes that competition in the
decentralized market is based primarily on the following factors:
- product performance;
- ease of use;
- functionality;
- reliability and quality;
- expertise and customer satisfaction with service and rate of response
time;
- certification by governmental authorities with early, and particularly
first, certification being a significant advantage;
- prior customer relationships;
- technological capabilities of the product; and
- overall cost of the emissions testing equipment.
In the international emissions testing market, EST typically competes with
providers of vehicle emissions testing equipment on a country-by-country basis.
Three of EST's primary competitors in Europe are Sun Electric Europe, Robert
Bosch GmbH, and Technotest. EST believes that the superior quality and
innovative features of its emissions testing systems and the responsive service
it provides to its customers will enable it to maintain its relationships with
existing customers and to expand its customer base both in domestic and
international markets.
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RESEARCH AND DEVELOPMENT
EST conducts the majority of its research and development at its facility in
Tucson, Arizona. EST's research and development program employs approximately 23
electrical, software, mechanical and design engineers, approximately 75% of whom
were former employees of United Technologies Corporation and have over 10 years
experience in the vehicle emissions testing industry. EST's research and
development program is equipped with the latest development tools, including
software engineering tools, mechanical CAD systems, laboratories and a
state-of-the-art test facility. EST considers research and development to be a
vital part of its operations and dedicates substantial resources to research and
development of product improvements, new products and product applications.
EST's research and development expenses were approximately $1.4 million in 1995,
$1.7 million in 1996, and $2.3 million in 1997. See "Business--Facilities."
EST frequently conducts its technology research and product development
efforts in conjunction with governmental authorities. For example, in 1994, the
California BAR awarded EST two pilot programs for the development of testing
standards at a test facility in Sacramento, California and, in 1995, New Jersey
awarded EST a study contract to evaluate alternative emissions testing
procedures and systems.
The experience and expertise of EST and its employees in the vehicle
emissions testing industry has enabled EST to develop proprietary technology and
has permitted EST to respond successfully to technological advances in the
vehicle emissions testing industry. EST's products are protected by
approximately 20 United States and 25 foreign patents and trademarks. While EST
believes that its proprietary technology rights are valuable, it also believes
that because of the technological advances in the vehicle emissions testing
industry, factors such as innovative skills, technical expertise and the ability
to adapt quickly to new technologies and government regulation are of greater
competitive significance.
EMISSIONS TESTING SERVICES BUSINESS
OVERVIEW
Through Envirotest, we are the leading operator of centralized emissions
testing programs in the growing North American vehicle emissions testing market.
Envirotest is the most experienced operator in the approximately $250 million
North American centralized testing market, having tested more than 150 million
vehicles since its inception in 1974. Envirotest currently operates, or is under
contract to operate, 14 of the 21 existing centralized emissions testing
programs in the 16 states that have adopted centralized programs and the only
such program in Canada. Envirotest tested approximately 11.8 million vehicles in
1998, which represented approximately 70% of the total North American
centralized testing market revenues.
EMISSIONS TESTING CONTRACTS
Envirotest conducts its centralized testing business under exclusive,
long-term contracts with state, local or other governmental authorities.
Pursuant to these contracts, Envirotest generally
- structures the testing program,
- designs a testing facility network,
- selects, designs and constructs individual inspection and test facilities
with multiple test lanes,
- designs and installs the required computer network and
- operates the testing program.
Envirotest's emissions testing contracts have an initial term that generally
ranges from five to ten years and may contain options permitting the
governmental authority to extend the contract under
66
similar terms and conditions for one or more periods of up to two years. A
governmental authority may negotiate renewals or extensions on terms different
from those in the initial contract or expand the program to include additional
counties or services.
Envirotest derives most of its contract revenues from its 14 operating
emissions testing contracts with governmental authorities in 10 states and one
Canadian province. Envirotest's five largest state and provincial program
contracts generated approximately 66.9% of its total contract revenues during
the twelve months ended September 30, 1998, with Illinois accounting for 18.0%,
Connecticut for 13.7%, Ohio for 13.0%, Colorado for 12.1%, and Florida for
10.1%. In addition, northern Kentucky recently awarded Envirotest a new
contract.
The table below describes certain contract terms and operating data for each
of Envirotest's existing emissions programs as of September 30, 1998.
NUMBER
NUMBER COMMENCEMENT EXPIRATION OF
COMMENCEMENT OF TIMES OF OF PAID TESTS
OF INITIAL EXTENDED/ CURRENT CURRENT IN
STATE/JURISDICTION CONTRACT RENEWED CONTRACT TERM FISCAL 1998
- -------------------------------------------------- --------------- --------------- --------------- ----------- ------------
Colorado (Denver)................................. 1/1/95 -- 1/1/95 12/31/01 847,000
Connecticut....................................... 1/1/83 3 1/1/95 6/30/02 1,159,000
Florida (Dade & Palm Beach Counties).............. 4/1/91 1 4/1/91 3/31/00 2,035,000
Illinois.......................................... 5/1/86 2 7/1/97 11/30/06 1,641,000
Indiana........................................... 1/1/97 -- 1/1/97 12/31/06 284,000
Kentucky(1)....................................... 6/1/99 -- 6/1/99 6/30/08 --
Minnesota......................................... 7/1/91 2 7/1/98 6/30/99 1,002,000
Ohio (Cuyahoga, Cleveland/Akron, &
Dayton/Springfield)............................. 1/1/91 3 1/1/96 12/31/05 1,230,000
Tennessee (Nashville)............................. 1/1/91 2 1/1/96 6/30/01 754,000
Washington........................................ 1/2/82 3 6/1/93 12/31/99 1,133,000
Wisconsin......................................... 4/1/84 2 12/1/95 11/30/02 728,000
British Columbia (Vancouver)...................... 9/1/92 -- 9/1/92 8/31/99 1,012,000
------------
Total............................................. 11,825,000
------------
------------
- ------------------------
(1) Northern Kentucky contract awarded in June 1998, expected to commence
operation in 1999.
As of September 30, 1998, Envirotest estimates that it had a contractual
backlog to provide centralized emissions testing services of approximately $873
million through 2008, compared to approximately $936 million at September 30,
1997, approximately $660 million at September 30, 1996, and approximately $724
million at September 30, 1995. Envirotest realized approximately $165 million of
the backlog during the fiscal year ended September 30, 1998. Envirotest
calculates its revenue backlog per contract by multiplying:
- the average annual test volume;
- the fee per vehicle tested; and
- the remaining number of years in the contract term, excluding optional
extension periods.
Envirotest believes that, as the incumbent operator in its existing
programs, it generally has a competitive advantage when the programs are rebid,
primarily because Envirotest has already incurred the costs of establishing the
program network and has gained valuable experience in operating the program.
Since 1990, all of Envirotest's emissions testing contracts that provided for
renewal or extension have been renewed or extended beyond their initial terms
except one contract with Maryland that was not material.
67
The fee which Envirotest receives for each vehicle it tests is based on
Envirotest's bid. Envirotest's bid, in turn, is based on a number of factors,
including the type of test performed under the program, the vehicle population
of a test area, the number of test lanes installed, any volume guarantee, the
cost of labor and real estate, and cost of living adjustment. The governmental
authority sets the frequency at which vehicles must be tested, typically
annually or biennially, and imposes penalties on motorists for noncompliance.
Penalties usually take the form of denial or suspension of vehicle registration.
A governmental entity may, during the term of a contract, request that
Envirotest change the scope of work specified in the contract. These changes may
include an expansion of the geographic area covered by the contract or program
enhancements. Generally the governmental entity pays an additional fee to
Envirotest based on the additional scope of work.
Under most of Envirotest's contracts, the governmental authority has the
right, and in some case may be obligated, to purchase Envirotest's program sites
and facilities upon termination of the contract. The contract usually specifies
that the price is based on either fair market value, book value or actual cost
of the program sites and facilities. We believe that these prices provide
Envirotest adequate compensation for the value of the assets purchased.
Most of these contracts also expressly provide for termination if the
relevant governmental authority repeals the legislation authorizing the
emissions testing program or does not appropriate sufficient funds for the
program. More than half of Envirotest's contracts also allow the governmental
authority to terminate the contract for convenience, upon giving advance written
notice of not less than 30 days. Envirotest believes that it is generally
entitled, either under the express terms of the contract or under applicable
law, to equitable or reasonable compensation for certain costs associated with
the termination of a contract for convenience. Envirotest's contracts also
permit the governmental authority to terminate the contract for cause, generally
after specified notice and cure periods. The repeal of a program or
non-appropriation of funds does not constitute "cause" under such contracts.
In addition, under most of Envirotest's centralized testing contracts,
Envirotest must pay liquidated damages as a penalty if it fails to meet
specified start-up dates or performance requirements, in many cases after a
specified notice and cure period. Liquidated damages provisions are customary in
emissions testing contracts. Some examples of such penalties are
- up to $10,000 a day for late system start-up,
- up to $5,000 per day for inaccurate reports submitted by Envirotest,
- up to ten percent of the fee due to Envirotest for the tests performed for
submitting incomplete, incorrect, or illegible reports, or
- up to $10,000 per day for failing to allow access to Envirotest's program
facility or emissions testing data.
At least one contract requires Envirotest to pay liquidated damages if the
state terminates the contract for cause. In fiscal 1998, Envirotest incurred an
aggregate of approximately $0.5 million in liquidated damages under its
contracts with Colorado and Connecticut, compared with $0.7 million in the full
fiscal year 1997. Envirotest is also required to post performance bonds once the
contract is awarded. Those bonds, which range in amount from $100,000 to
$3,000,000, protect the governmental authority for the cost of replacing
Envirotest if the governmental authority terminates the contract for cause prior
to expiration.
RECENT DEVELOPMENTS IN CENTRALIZED PROGRAMS
In June 1998, after a competitive bidding process, Envirotest signed a
contract with Kentucky to conduct centralized emissions testing in three
northern counties. Envirotest expects to perform 140,000
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tests per year and generate $23 million over the competing term of the contract.
The contract begins in June 1999 and ends in June 2008.
In June 1997, the Company signed an agreement with Illinois to upgrade the
state's existing centralized vehicle emissions testing program to an enhanced
program. The agreement also extended the program term by nine years, to 2005.
Revenues for the nine-year term are expected to total approximately $385.0
million, including the sum of $48.0 million which the state will pay to
Envirotest during the course of the implementation period for performance of
basic tests and other services provided during this period. Envirotest will
spend approximately $75.0 million to implement the new program. This expenditure
will be partially offset by the $48.0 million to be received from the state.
Enhanced testing will commence in early 1999.
As of March 1997, California elected to terminate, for the convenience of
the state, Envirotest's contract to provide remote sensing services. The
contract was expected to extend through June 30, 1998. The termination was
related to the state's decision to reassess its future vehicle emissions testing
program. On August 15, 1997, Envirotest entered into a Settlement Agreement with
the state resolving the issues related to the termination. Under the terms of
the Settlement Agreement, Envirotest received $2.7 million, including
outstanding receivables.
In December 1995, Envirotest entered into a settlement agreement with
Pennsylvania which awarded Envirotest more than $105 million. This award was
compensation for damages Envirotest incurred when Pennsylvania cancelled a
contract under which Envirotest was supposed to provide centralized testing
services in Pennsylvania. Pennsylvania canceled the contract in reaction to a
change in EPA regulations which allowed Pennsylvania to retain its existing
decentralized program. Envirotest has now received all payments due under the
settlement agreement. Envirotest realized a gain of approximately $21.8 million
on the settlement.
CONTRACT AWARD AND PROGRAM IMPLEMENTATION PROCESS
A state or municipality planning to implement a centralized vehicle
emissions testing program generally solicits bids for the right to provide the
testing services. Set forth below is a summary of that competitive bidding
process and the marketing and government relations resources that Envirotest
generally devotes to the bidding process.
PRE-BID MARKETING. Envirotest considers its participation in the
legislative and regulatory authorization process for emission testing programs
to be an important initial step in marketing its services. Once a government
agency has authorized a centralized contractor-operated program, the government
agency often asks interested parties to help draft the technical aspects of a
bid request. This effort often includes reviewing bid criteria and recommending
specified test programs. Once drafted, the bid request is typically revised
several times as a result of input provided by potential bidders and other
interested members of the public. Generally, the bid request establishes several
convenience factors such as the average waiting time and driving distance to a
testing station and specifies the technical requirements of the program.
BID REQUESTS. Typically, a government agency requests bids through either a
"request for proposal" or an "invitation to bid". In the more commonly used
"request for proposal" process, the government agency evaluates bids on the
following criteria:
- the operating experience, reputation, and financial capability of the
bidder;
- the bidder's ability to install and operate a technically sophisticated
testing system in terms of both hardware and software;
- the bidder's ability to integrate testing results with vehicle
registration information in state computer data systems;
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- the bidder's ability to provide additional services such as safety
inspections, enhanced diagnostic tests, and mobile testing;
- the bidder's ability to meet specified performance requirements; and
- price.
Because the government agency considers several factors in the "request for
proposal" process, the agency does not necessarily award the contract to the
lowest bidder. In the ITB process, the governmental authority generally conducts
a limited review of a bid to determine if it meets a minimally acceptable
technical standard and generally awards the contract to the lowest-priced
qualified bidder.
BID PREPARATION PROCESS. Envirotest has developed a sophisticated
optimization model that it uses to design the most efficient program network for
any given set of program requirements. The model assists Envirotest in designing
a network that provides the greatest convenience and fastest rate of testing
with the fewest number of testing locations. Envirotest has also developed a
sophisticated costing model, which assists Envirotest in predicting the
engineering, development, construction and operating costs of a proposed
program. In using the costing model, Envirotest takes into account the real
estate, construction, labor, equipment and other costs that may be unique to a
specific geographic region or program.
CONTRACTOR SELECTION AND NEGOTIATION. After the submission of bids by
competing bidders, the governmental authority selects one contractor and the two
parties begin negotiations regarding a contract. The "request for proposal" and
the bid submitted by the selected contractor contain the main terms of the
contract. The time period between bid submission and award is generally between
one to three months.
PROGRAM IMPLEMENTATION. Once Envirotest and the governmental authority
enter into a contract, Envirotest begins the process of purchasing or leasing
real estate, constructing the program facilities, and developing and installing
the necessary hardware and software. This process generally takes six months to
two years to complete, depending on the size of the network. A typical facility
consisting of an office and four test lanes costs an average of approximately
$1.5 million to $2.0 million to acquire, build and equip. Approximately six
months prior to the anticipated commencement of testing, Envirotest begins a
media campaign to educate the public about the new program. At the same time,
Envirotest also begins to hire and train its workers.
A start-up team implements each program. The team consists of a program
manager, who is responsible for communicating with the governmental authority
and for managing Envirotest's operations under the contract, station managers,
who are responsible for the individual operation of each station, and other
support staff. Once Envirotest implements the program, its senior management
monitors the operation of the program on an ongoing basis.
Prior to the expiration of a contract term, Envirotest and the government
agency generally discuss the possibility of an extension or renewal of the
contract and the principal terms of any such extension or renewal. Depending on
the program's enabling legislation, the governmental authority may either extend
the contract or begin a new competitive bidding process. Since 1990, all of
Envirotest's emissions testing contracts that provided for renewal or extension
have been renewed or extended beyond their initial terms except for the Maryland
contract, which was not material. In the cases in which a state has begun a new
competitive bidding process, Envirotest has either made the winning bid or has
been the only company to bid.
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SOFTWARE AND RELATED TESTING EQUIPMENT
Envirotest has developed sophisticated proprietary computer software and
hardware that is essential to the efficient operation of its centralized testing
facilities. Central host computers and various peripheral devices located at
each program's headquarters monitor each of Envirotest's inspection lanes and
process and permanently store vehicle test histories.
SOFTWARE. Envirotest believes that its ability to develop program-specific
software is important to the efficient operation of its testing facilities.
Envirotest has devoted significant efforts to its development of software
systems which enable it to conduct highly automated and rapid tests.
Envirotest's software has allowed it to automate most of the important functions
of the testing process, including applying the appropriate emissions standards
against which vehicles are tested. These standards vary by manufacturer, model
and year. Envirotest's lane operators are prompted with step-by-step
instructions for performing the tests and processing the results. Envirotest is
using its expertise in this area to develop new software systems for its
enhanced programs.
TESTING EQUIPMENT. Envirotest's computer-managed inspection systems control
the automated inspection of a motor vehicle based on identifying characteristics
such as make, model, year and engine size. The inspection process usually
includes multiple tests at multiple testing stations that are designed for
specialized functions and are serviced by computers, specialized test equipment
and associated applications software. Envirotest also uses a variety of data
entry devices such as optical-code and bar-code readers, and various test
equipment such as dynamometers and emissions measurement systems. Envirotest
chooses from a number of equipment suppliers to meet the requirements of a
specific system design, depending on applicable specifications and pricing.
Specialized hardware, software and engineering are combined to provide a highly
automated inspection systems with an emphasis on test data integrity and a rapid
rate of operation. Envirotest acts as a systems integrator and does not
manufacture any hardware. However, Envirotest does design specialized hardware.
REMOTE SENSING DEVICES
Envirotest sees a potential growth opportunity in the development of remote
sensing technology. In 1991, Envirotest entered into a Development and Exclusive
Licensee Agreement with the University of Denver and two University of Denver
research scientists pursuant to which Envirotest acquired the exclusive right to
manufacture and market a remote sensing device system. The device is used to
monitor carbon monoxide, carbon dioxide, and hydrocarbons emitted from a moving
vehicle. The remote sensing technology measures vehicle emissions from as many
as 1,500 vehicles per hour and photographs the subject vehicle to record its
license plate number. The term of the license runs until the later of 2016 or
the expiration of the last patent included in the license. In exchange for these
rights, Envirotest must pay a 10% royalty on gross receipts from sales and
leases of devices which incorporate the licensed technology or software, and
$.25 on each vehicle Envirotest tests by means of such device.
Envirotest has conducted pilot demonstration programs or studies of remote
sensing technology for several governmental entities, including a pilot program
in May 1998 for the City of New York. Envirotest has also leased remote sensing
units to companies in Taiwan for use in a study there. On August 29, 1997,
Envirotest purchased a remote emissions sensing product line from Hughes
Aircraft Company and acquired or obtained a long term royalty-free license to
the related technologies for $3.7 million. In addition, Envirotest agreed to pay
a 3% royalty on future net revenues related to remote sensing sales and services
over the next five years up to a cap of $10.0 million. Envirotest also assumed
Hughes' contract with Arizona to provide remote sensing services.
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ADDITIONAL GROWTH OPPORTUNITIES
Envirotest offers a variety of program enhancements, including on-road
testing, safety inspection and vehicle registration services. These program
enhancements offer governmental authorities and motorists the convenience of
multiple vehicle certification services at a single location. Once its network
of emissions testing facilities are in place, Envirotest is able to offer these
services for an additional fee without incurring significant additional costs.
However, the market for these services is presently small.
SAFETY INSPECTION SERVICES. Envirotest designs and implements
highly-automated vehicle safety inspection systems that test the safety features
of vehicles such as brakes, headlight alignment and intensity, front and rear
chassis alignment, shock absorber performance, steering system integrity, noise
level, tire condition, safety belts, mirrors, and glass. Envirotest has provided
fully-automated safety inspection services at its testing facilities in
Connecticut and Florida. Envirotest has a contract with Connecticut to provide
safety inspection services in that state to an estimated 160,000 vehicles
annually. In addition, Envirotest has designed and currently maintains a
state-of-the-art facility for inspection of New York City taxicabs and
limousines. Envirotest also inspects the taxicab fleet in the City of Miami on
behalf of Dade County, Florida.
Envirotest's existing centralized testing infrastructure and its expertise
in safety inspection testing equipment and procedure put it in a favorable
competitive position if centralized safety inspections are mandated in the
future in states in which it conducts centralized emissions testing. The
National Highway Transportation Safety Administration has stated that it favors
the adoption of periodic safety inspection programs. The award by Connecticut of
a safety inspection contract to Envirotest demonstrates the states' potential
interest in providing their residents with the convenience of safety and
emissions testing services in one location.
VEHICLE REGISTRATION SERVICES. Envirotest has developed software which
allows it to access motor vehicle records, so that it can offer consumers the
convenience of vehicle registration as part of the emissions testing process.
Wisconsin and certain other states required bidders for their emissions testing
programs to include a proposal for conducting vehicle registration services in
the emissions inspection lanes. In 1997, Wisconsin asked Envirotest to
demonstrate a pilot registration program at one station. Based on the success of
this demonstration, the state has requested Envirotest to provide the service at
five additional stations. Although no assurance can be given as to whether other
states will include vehicle registration services in their programs, Envirotest
anticipates that there will be increasing state interest in the performance of
registration services in the test stations.
ANCILLARY SERVICES. Envirotest is investigating ancillary service
opportunities that complement its core business. The opportunities will use
Envirotest's existing infrastructure and operating assets. Envirotest executed a
contract with an agency to sell advertising space and design a direct marketing
campaign for its customers at certain of its existing emissions testing
programs. Envirotest also signed a contract to provide vehicle data from certain
of its existing emissions testing programs to a third party. The revenue from
these two contracts is not material to Envirotest at present.
COMPETITION
The market for contractor-operated emissions testing programs is highly
competitive. Envirotest typically competes against numerous bidders for new or
renewal contracts.
Envirotest's principal domestic competitor is Gordon-Darby, Inc.
Gordon-Darby operates four programs, testing approximately 3.9 million vehicles
per year. Envirotest also competes with several other domestic and foreign
companies who choose to bid from time to time on select programs.
72
OPPORTUNITIES IN INTERNATIONAL MARKETS
We believe the international market represents a significant growth
opportunity, especially in light of our ability to offer products and services
for both the centralized and decentralized markets. We estimate that there are
629 million motor vehicles currently located in Europe, Asia and North, Central
and South America. This is over seven times the estimated 90 million vehicles in
the United States and Canada subject to emissions testing. We intend to expand
aggressively internationally by offering a broad range of vehicle emissions
testing equipment and services to countries and other jurisdictions around the
world that are, in our view, likely to adopt vehicle emissions testing programs
similar to those adopted in the United States.
We plan to offer advisory services to these countries at the early stages of
their program development, thereby positioning us to become the provider of
choice for both centralized and decentralized programs. We believe that the
international community will continue to look to the United States, and
especially the California BAR, for technical guidance on emissions testing
programs. In recent years, representatives from the following countries have
toured EST's emissions test lane at the California BAR facility in Sacramento,
California: Australia, Canada, Germany, Japan, Mexico, New Zealand, Philippines
and Taiwan. We believe that there are significant market opportunities in the
certain countries which have implemented emissions testing programs or which
have announced or are considering the implementation of such programs,
particularly Canada, Germany, Mexico, Australia and the United Kingdom.
Envirotest currently operates Canada's only centralized emissions testing
program through its Canadian subsidiary, Envirotest Canada. We also see a
significant emerging market for emissions and safety testing in South and
Central America and the Asia-Pacific region, and we are currently evaluating bid
opportunities with local parties in several of these areas. In November 1997,
Envirotest's Argentine joint venture partner was awarded a 15-year contract for
the safety and emissions testing program in the Province of San Luis, Argentina.
The joint venture will compensate Envirotest for implementation services and
delivery of the testing system for the San Luis program and Envirotest will
receive a royalty per test. However, the total royalties will not be material to
Envirotest.
In 1997, Chemonics International, Inc. awarded Envirotest a four-year
subcontract valued at approximately $1.8 million to design the vehicle emissions
test program for the USAID Cairo Air Improvement Project. Envirotest has also
completed several other international projects in recent years. In 1995,
Envirotest installed a state-of-the-art demonstration lane in Mexico City,
Mexico. In 1996, Envirotest built four heavy duty vehicle emissions and safety
lanes for the Government of India. In 1986, Envirotest developed and installed a
safety and emissions testing system with 26 inspection lanes in Taiwan.
FACILITIES
EST leases all its facilities. The remaining lease terms range from one
month to four years. EST's executive offices and its manufacturing, warehouse
and principal marketing and sales facility are located in East Granby,
Connecticut, in two buildings occupying a total of approximately 35,600 square
feet. These two buildings are leased through March 31, 2002. EST's primary
research and development and engineering facility is located in Tucson, Arizona,
in one building occupying approximately 9,760 square feet. It is leased through
July 2001. ESP also has 17 sales and service offices located in nine states and
in Canada, Germany and Mexico.
Envirotest designs, builds and equips its testing sites to meet each
program's specific requirements. Envirotest's testing sites typically range from
one to three acres, depending on the number of testing lanes, specific equipment
requirements and lot configuration. Envirotest currently owns 128 testing
stations and leases 48 testing stations totaling in excess of 1,200,000 square
feet. Envirotest also maintains a program headquarters in each of the states in
which it operates. Envirotest's engineering
73
staff occupies 40,000 square feet of leased space in Tucson, Arizona. Envirotest
also has executive offices in Bethesda, Maryland.
In the near future, Envirotest plans to move its executive offices to the
East Granby facility and to close the Bethesda offices. In addition, EST and
Envirotest will integrate their research and development groups into one of the
two Tucson facilities, and will close the other.
We believe our current facilities are in good condition and adequate to
support our current operations, but we plan to open additional sales and service
offices to support continued growth and expansion both domestically and
internationally. We currently anticipate that we will be able to renew the
leases that are scheduled to expire in the next few years on terms substantially
similar to those currently in effect.
EMPLOYEES
We believe that the knowledge, skills and experience of our employees are
key components of our success. As of September 30, 1998, EST had 275 employees,
of which 149 were in its service organization, 49 were in marketing and sales,
32 were in production and manufacturing, and 23 were in research and development
and engineering. 75% of EST's employees have more than eight years of experience
in the emissions testing market and 40% have college and/or advanced degrees.
None of EST's employees is represented by a labor union and ESP has not
experienced any work stoppages. EST believes that its employee relations are
good.
As of September 30, 1998, Envirotest had 3,374 employees, of which 1,411 are
full-time and 1,936 are part-time employees. None of Envirotest's domestic
employees is represented by a labor union. Of the 206 employees employed in the
British Columbia program, 191 are represented by a labor union under the terms
of a collective bargaining agreement that expires on August 31, 1999. Although
there were strikes at the British Columbia program in 1992 and 1996, Envirotest
believes that its employee relations are currently good.
LEGAL PROCEEDINGS
On September 26, 1995 Ganzcorp Investments, Inc. d/b/a/ Mustang Dynamometer
filed suit against Envirotest Systems Corp. in U.S. District Court for the
Northern District of Ohio. The suit alleged breach of contract and asked for
damages in excess of $10.0 million. The suit was voluntarily dismissed by the
parties on December 22, 1995 so that the parties could focus on settlement
negotiations. On October 8, 1997, the case was re-filed by Ganzcorp when
settlement negotiations broke down between the parties. In 1993, the parties
signed an agreement for the supply of chassis dynamometers by Ganzcorp to the
Company for its emission testing programs in Ohio, Connecticut, and
Pennsylvania. When the Company's testing program with the State of Pennsylvania
was canceled, the Company canceled its contract with Ganzcorp per a "termination
for convenience" clause. Under such clause Ganzcorp would be allowed to make a
claim for certain costs incurred but such a claim would be substantially below
its stated claim of more than $10.0 million. Additionally, the Company has
counterclaims against Ganzcorp for breach of contract and warranty obligations
which it believes to be in excess of $7.9 million. Subsequent to September 30,
1998, the Company has agreed in principal to pay Ganzorp up to $1.5 million in
settlement of all of the above claims. The settlement amount has been included
in the accompanying financial statements within the balance sheet caption
"accrued expenses and other current liabilities."
R.W. Granger & Sons filed a Demand for Arbitration in the East Hartford,
Connecticut, office of the American Arbitration Association in September 1996.
The demand alleged that Envirotest breached a contract with Granger and failed
to pay amounts due Granger in connection with the construction of certain of
Envirotest's testing facilities in the State of Connecticut. On December 29,
1997, Granger filed a complaint in State Superior Court in the Judicial District
of Hartford/New Britain at New
74
Britain alleging that Envirotest's failure to pay amounts due to Granger is an
unfair trade practice under the Connecticut Unfair Trade Practices Act. The
arbitrators awarded Granger approximately $495,000, including the costs of the
arbitration, in a decision rendered on August 12, 1998. Granger had claimed
damages of approximately $2.0 million in its Demand for Arbitration. Envirotest
intends to defend vigorously against Granger's remaining claim in State Superior
Court. We believe that any judgment against Envirotest with respect to the
remaining claim will not have a material adverse effect on our business,
financial condition and results of operations.
On November 22, 1997, the Denver District Court granted Envirotest's motion
to dismiss a class action complaint filed by Timothy Dore on behalf of all
persons who paid to have a vehicle tested in Envirotest's metro Denver
facilities from January 2, 1995 to present. The complaint alleged breach of
contractual obligation to the class and the negligent performance of emissions
testing under Envirotest's contract with the State of Colorado. On January 6,
1998, Dore filed an appeal in the Colorado Court of Appeals from the trial
court's order of dismissal. On June 1, 1998 Dore filed a motion to dismiss the
appeal and on June 15, 1998 the Colorado Court of Appeals granted the motion to
dismiss the appeal with prejudice. On June 1, 1998, the attorneys for Dore filed
a new class action complaint in the Boulder District Court. The new complaint
has replaced Timothy Dore with two new representative plaintiffs, Jay Sherrit
and Arthur D. Gonzales, and the new complaint is brought on behalf of virtually
the identical class. Although the new complaint purports to state a new cause of
action, it alleges claims for breach of contract and negligence which are
similar to Dore's class action complaint. On June 23, 1998 Envirotest filed a
motion to change venue to the Denver District Court. Envirotest intends to
defend vigorously against the plaintiff's claims. We believe that any judgment
obtained against Envirotest will not have a material adverse effect on our
business, financial condition and results of operations.
On November 18, 1998, Timothy J. Grendell, on behalf of himself and all
others similarly situated, filed a class action lawsuit in the Court of Common
Pleas, Summit County, Akron, Ohio. The defendants include the Ohio Environmental
Protection Agency and the Company. Grendell filed a virtually identical suit in
1996 and it was dismissed without prejudice exactly one year before the above-
noted class action lawsuit was filed. Like the 1996 lawsuit, the above-noted
class action lawsuit asserts that the statute and contract that created E-Check
are unconstitutional under Ohio law, and requests declaratory and injunctive
relief, attorney fees and costs. We intend to defend the matter vigorously.
In addition to the above, we are a party to various other legal proceedings
and claims in the ordinary course of business. Although the claims cannot be
estimated, in our opinion the resolution of these matters will not have a
material adverse effect on our business, financial condition and results of
operations.
ENVIRONMENTAL MATTERS
Our operations are subject to federal, state and local environmental laws
and regulations relating to the protection of human health and the environment
and the handling and management of hazardous materials. We believe that we are
in substantial compliance with all applicable environmental laws and regulations
and that the costs of compliance are not material to us.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, and similar state superfund statutes generally impose joint
and several liability on present and former owners and operators for remediation
of contaminated properties regardless of fault. At a number of the properties
that we own, former owners and operators may have released hazardous materials
on or under such properties in connection with their operations. We do not have
sufficient information to estimate its potential liability, if any, in
connection with any potential contamination from historical operations at such
properties.
75
INTELLECTUAL PROPERTY
We regard our patents, copyrights, trade secrets, trademarks and similar
intellectual property as important to our success. We depend upon a combination
of patents, trade secrets, copyright and trademark laws, license agreements,
nondisclosure and confidentiality agreements with our employees, customers and
others and various security measures to protect our proprietary rights. Although
our success and competitive position in the market depends to a great extent on
our ability to exploit and protect our proprietary intellectual property rights,
apart from the "ENVIROTEST", "ESP" and "EST" trade names, we do not believe that
any single patent, copyright, trade secret, or trademark is material to our
business.
We believe we own or license from third parties the intellectual property
rights in substantially all of our material products and services. We have not
received notice of any claim, which we believe is valid, that our products or
services infringe upon another party's intellectual property. Given the
technological complexity of our products and services, however, there can be no
assurance that claims of infringement will not be asserted against us or against
our customers in connection with their use of our systems or products, nor can
there be any assurance as to the outcome of any such claims.
We own, either individually or jointly with a third party, approximately 35
U.S. and foreign patents and are actively prosecuting approximately 25 patent
applications in the U.S. and abroad covering a variety of inventions in the
vehicle emissions testing equipment and services field. Our patents have
expiration dates ranging from 1998 through 2017. Patents cannot be renewed or
extended. We also pursue the registration of our trademarks in the United States
and internationally, and have applied for or obtained registrations for certain
products and services, including ENVIROTEST, SMOG DOG, AUTOSENSE, and SYSTEM
ONE. Trademarks can have a perpetual existence so long as they continue to be
used on substantially the same products and services and the appropriate steps
are taken with respect to maintaining the registrations in effect.
Envirotest claims copyright protection in its proprietary software programs.
Such protection extends to the source code and can also protect certain visual
aspects of the programs from copying. However, such protection does not preclude
others from creating programs which perform the same function.
We are party to a number of technology and software licenses pursuant to
which we have obtained the rights to use third party technology in our business.
Our most material licenses include those with the University of Denver and
Hughes Aircraft relating to the remote emissions sensing technology.
76
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our shareholder elects directors annually to serve during the ensuing year
or until the shareholder elects a successor. The Board of Directors elects
executive officers to serve until the board elects their successors. The table
below sets forth certain information with respect to our directors and executive
officers.
NAME AGE POSITION
- ------------------------------------------ ----------- -------------------------------------------------------------
Eric Walters.............................. 54 Chairman of the Board of Directors
Terrence P. McKenna....................... 48 President and Chief Executive Officer; Director
Rinaldo R. Tedeschi....................... 48 Executive Vice President, Engineering/Technical Development;
Director
David J. Langevin......................... 47 Executive Vice President, Chief Financial Officer; Director
Richard Webb.............................. 57 Executive Vice President, Chief Operating Officer
ERIC WALTERS is a partner in Alchemy Partners and chair of the German
operations of Alchemy. Until 1997 he was a partner in Schroder Ventures where
for over 10 years he played an instrumental role in a wide variety of LBO
transactions including Century Inns, The Tetley Group, Ushers of Trowbridge,
Paramount Hotels, Sytner Group, Precision Instruments, Burlington International
and Glass Glover. At Alchemy, Mr. Walters played a key role in the acquisition
of Wellman plc. Previously he worked for Lex Service and was Chief Executive of
Grand Metropolitan's Retailing Division.
TERRENCE P. MCKENNA served as President and Chief Executive Officer and as a
Director of ESP since its formation in 1989. Mr. McKenna, one of the founding
members of EST, was instrumental in formulating a management buyout of ESP from
United Technologies Corporation. From 1983 to 1989, Mr. McKenna held various
positions with United Technologies Corporation, including Vice President of
Finance and General Manager of United Technologies Corporation's Automotive
Systems Division, which position he held until the formation of ESP.
RINALDO R. TEDESCHI served as Executive Vice President and as a Director of
EST since its formation in 1989, and is one of its founding members. From 1973
to 1989, Mr. Tedeschi held various positions with United Technologies
Corporation, including Engineering Manager of the Automotive Systems Group at
UTC Control Systems, which position he held until the formation of ESP.
DAVID J. LANGEVIN joined ESP in April 1998 as Executive Vice President and
Chief Financial Officer and was appointed to the Board of Directors of EST in
May 1998. From 1994 to 1998, Mr. Langevin served as Executive Vice President of
Terex Corporation, a global manufacturer of construction and mining related
capital equipment, and from March 1993 to December 1993, he served as its Acting
Chief Financial Officer. From 1988 to 1993, he held the position of Vice
President of KCS Industries, Inc., an affiliate of Terex Corporation. From 1977
to 1988, Mr. Langevin was employed by Ernst & Young, where he was a partner
specializing in acquisitions and business development.
RICHARD P. WEBB served as Chief Operating Officer of Envirotest for two
years. As Executive Vice President, Centralized Programs, he is responsible for
general management and control of all operations relating to centralized
test-only programs. Before joining Envirotest, he led efforts resulting in
substantial operational improvements at Shared Technologies Cellular, Inc., an
early-stage, high-growth company and at various manufacturing companies acquired
from United Technologies Corporation. Previously, he worked for six years at
United Technologies Corporation, including positions as president of United
Technologies Finance Corporation, United Technologies Communications Company,
and Headquarters Company and as Chairman and Chief Executive Officer
77
of Building Systems Company. Mr. Webb holds a Masters in Business Administration
from the Columbia Graduate School of Business and a Bachelor of Arts in Liberal
Arts from Colgate University.
EXECUTIVE COMPENSATION
In October 1998, we entered into employment agreements with Messrs. McKenna,
Tedeschi, Webb and Langevin. The employment agreements replace previous
employment agreements between such individuals and EST. The employment
agreements provide for an initial term of three years and for payment of a base
salary and incentive compensation. All such agreements provide for the grant to
such individuals of nonqualified stock options in Environmental Systems
Products, Inc. with an exercise price equal to the fair market value of common
stock in Environmental Systems Products, Inc. Such agreements also provide for
severance payments in the event that we terminate the executive's employment for
reasons other than for cause or incapacity and in the event that the executive
elects to terminate his employment upon a change in control of the company. In
such cases, the executive shall be entitled to receive from us his salary,
incentive compensation payments, and benefits in accordance with his employment
agreement through the last date of his employment and a lump sum severance
payment in an amount equal to the greater of:
- one year's base salary; or
- the base salary payable during the unexpired term of the agreement.
Each executive agrees that he will not compete with us for a period of six
months following his termination of employment if such termination is for any
reason other than termination by the executive following a change in control of
the company or termination of the executive by us without cause. If the
executive terminates his own employment following a change of control or if we
terminate him without cause, the executive agrees that he will not compete with
us during the period for which he receives severance payments. The agreements
also include confidentiality commitments.
78
The following table summarizes the compensation paid by EST and Envirotest
to each of their Chief Executive Officers and to each of the other three most
highly compensated executive officers of EST and Envirotest. Information with
respect to EST executive officers is given for the year ended December 31, 1998.
Information with respect to Envirotest executive officers is given for the
fiscal year ended September 30, 1998. EST did not have any pension plan or a
long-term incentive plan, did not issue any restricted stock awards and did not
grant any stock options during 1997.
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------- AWARDS
SALARY BONUS OTHER ANNUAL ------------- ALL OTHER
NAME AND PRINCIPAL POSITION $ $ COMPENSATION OPTIONS COMPENSATION
- --------------------------------------- --------- ----------- --------------- ------------- -------------
Terrence P. McKenna.................... $
President and Chief Executive Officer
(EST)
Rinaldo R. Tedeschi....................
Executive Vice President (EST)
F. Robert Miller.......................
President and Chief Executive Officer
(Envirotest)
Mark Thomas............................ 145,833 -- -- 706,250(7) --
Executive Vice President, Chief
Development Officer (Envirotest)
Raj Modi............................... 231,525 -- 1,209(5) 309,375(6) 274,842(8)
Vice President, Chief Financial
Officer and Assistant Secretary
(Envirotest)
- ------------------------
(1) Includes a matching contribution in the amount of $1,387 that EST made on
Mr. McKenna's behalf to EST's 401(k) Plan.
(2) Includes a matching contribution in the amount of $1,142 that EST made on
Mr. Tedeschi's behalf to EST's 401(k) Plan.
(3) Messrs. McKenna and Tedeschi are entitled to the above referenced amount
pursuant to a bonus agreement entered into with EST. See "--Employment and
Bonus Agreements." The agreement provides that Messrs. McKenna and Tedeschi,
in their sole and absolute discretion, may distribute any bonuses paid by
EST to any persons. In the past, Messrs. McKenna and Tedeschi have elected
to distribute a portion of the bonuses to other employees of EST. Of the
total bonus amount payable to each of Messrs. McKenna and Tedeschi for
fiscal year 1997, $1,412,500 has been paid to each of them in the form of
cash. Messrs. McKenna and Tedeschi have elected to share $213,000 of their
bonus with other employees of EST.
(4) Represents annual premiums of $4,000 and $1,000 paid by EST on an individual
disability income insurance policy and a term life insurance policy,
respectively, for each of Messrs. McKenna and Tedeschi.
(5) Represents reimbursement made under Envirotest's medical reimbursement
program.
(6) Represents options to purchase Envirotest Class A common stock at an
exercise price of $6.875 per share under Envirotest's Stock Option Plan.
(7) Represents options to purchase Envirotest Class A common stock at an
exercise price of $7.0625 per share under Envirotest's Stock Option Plan.
(8) Represents relocation expense payment of $272,648 and contributions matching
employee's deferred compensation of $2,194.
(9) Represents contributions matching employee's deferred compensation.
79
OPTION GRANTS
The following table sets forth certain information regarding options granted
to the named executive officers. Information with respect to EST executive
officers is given for the year ended December 31, 1998. Information with respect
to Envirotest executive officers is given as of September 30, 1998.
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
ANNUAL
RATES OF
STOCK
INDIVIDUAL GRANTS APPRECIATION
FOR OPTION
TERM
---------------------------------------------------------------
% OF
TOTAL
NUMBER OF OPTIONS
SHARES GRANTED
UNDERLYING TO -----------
OPTIONS EMPLOYEES EXERCISE MARKET EXPIRATION
NAME GRANTED IN 1998 PRICE PRICE DATE
- ---------------------------------------------------------- ----------- ------------- ----------- --------- -----------
Terrence P. McKenna.......................................
Rinaldo R. Tadeschi.......................................
F. Robert Miller.......................................... 100,000 9.9% 6.875 6.875 2008
Mark Thomas............................................... 100,000 9.9 7.0625 7.0625 2008
Raj Modi.................................................. 45,000 4.5 6.875 6.875 2008
NAME 5% 10%
- ---------------------------------------------------------- --------- ---------
Terrence P. McKenna.......................................
Rinaldo R. Tadeschi.......................................
F. Robert Miller.......................................... N/A(1) N/A(1)
Mark Thomas............................................... N/A(1) N/A(1)
Raj Modi.................................................. N/A(1) N/A(1)
- ------------------------------
(1) Messers. Miller, Thomas and Modi exercised all of their respective options
in October 1998 in connection with EST's acquisition of Envirotest.
OPTION EXERCISES AND YEAR-END VALUES
The following table sets forth certain information concerning options to
purchase common stock exercised by the named executive officers during 1998 and
the number and value of unexercised options held by each of the named executive
officers. Information with respect to EST executive officers is given for the
year ended December 31, 1998. Information with respect to Envirotest executive
officers is given as of September 30, 1998.
AGGREGATED OPTION EXERCISES IN THE YEAR
AND YEAR-END OPTION VALUES
VALUE OF
NUMBER OF SHARES UNDERLYING UNEXERCISED
IN-THE-MONEY
SHARES UNEXERCISED OPTIONS AT OPTIONS AT
ACQUIRED YEAR END YEAR END(1)
ON VALUE ---------------------------- -------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE
- ------------------------------------------ --------------- --------------- ------------ -------------- -------------
Terrence P. McKenna.......................
Rinaldo R. Tadeschi.......................
F. Robert Miller.......................... 0 0 266,640 233,360 $ 2,093,959
Mark Thomas............................... 0 0 96,666 88,834 494,578
Raj Modi.................................. 0 0 -- 100,000 --
NAME UNEXERCISABLE
- ------------------------------------------ --------------
Terrence P. McKenna.......................
Rinaldo R. Tadeschi.......................
F. Robert Miller.......................... $ 1,413,541
Mark Thomas............................... 482,922
Raj Modi.................................. 356,250
- ------------------------------
(1) Represents the difference between the exercise price and the fair market
value of the common stock at fiscal year-end (10 5/8 at September 30, 1998).
80
SECURITY OWNERSHIP
Environmental Systems Products, Inc. owns all of the issued and outstanding
capital stock of the Company. The authorized capital stock of Environmental
Systems Products, Inc. consists of 70,000 shares of Series A common stock, par
value $.00001 and 70,000 shares of non-voting Series B common stock, par value
$0.0001 per share, of which 41,352.545 shares of Series A common stock and
4,473.177 shares of Series B common stock are issued and outstanding. 1,780.488
shares of Series B common stock are owned by nominees of Alchemy Partners.
2,692.689 shares of Series B common stock are owned by Chase Equity Associates
L.P. The following table sets forth certain information known to Environmental
Systems Products, Inc. regarding the beneficial ownership of shares of Series A
common stock by:
- all persons who beneficially own 5% or more of the outstanding shares of
Series A common stock;
- each of Environmental Systems Products, Inc. officers and directors; and
- all directors and executive officers of Environmental Systems Products,
Inc. as a group.
NUMBER OF SHARES OF
SERIES A
COMMON STOCK
BENEFICIALLY OWNED (1)
-------------------------
NAME OF
BENEFICIAL OWNER NUMBER PERCENT
- -------------------------------------------------------------------- ------------ -----------
Alchemy Partners (Guernsey) Limited(2).............................. 24,815.174 54.2%
Alan J. Baxter...................................................... 3,013.332 6.6
DLJMB Funds(3)...................................................... 6,071.908 13.3
Terrence P. McKenna................................................. 840.000 1.8
Rinaldo R. Tedeschi................................................. 840.000 1.8
David J. Langevin................................................... 210.000 0.5
Richard Gallant(4).................................................. -- --
Susan G. Schnabel(5)................................................ -- --
All executive officers and directors as a group..................... 1,890.000 4.1
- ------------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. As of the date of this prospectus, there
are no outstanding options to purchase common shares. To the Company's
knowledge, except as set forth in the footnotes to this table and subject to
applicable community property laws, each person named in the table has sole
voting and investment power with respect to the shares set forth opposite
such person's name.
(2) Alchemy Partners (Guernsey) Limited is the manager of Alchemy and has sole
power to vote and dispose of the Shares held by Alchemy. Such shares are
held of record by Alchemy Partners Nominees Ltd., as nominee for Alchemy.
Alchemy consists of a number of general partnerships organized under the
laws of Guernsey that invest in parallel in private and public companies.
(3) Consists of Series A common stock held directly by (i) DLJ Merchant Banking
Partners II, L.P. ("DLJMB") and the following related investors: DLJ
Merchant Banking Partners II-A, L.P., DLJ Offshore Partners II, C.V., DLJ
Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJMB Funding
II, Inc., DLJ Millenium Partners, L.P., DLJ Millenium Partners-A, L.P., DLJ
EAB Partners, L.P., UK Investment Plan 1997 Partners, DLJ ESC II, L.P. and
DLJ First ESC, L.P. and (ii) DLJ Investment Partners, L.P. and the following
related investors: DLJ Investment Funding, Inc. and DLJ ESC II, L.P.
(4) Mr. Gallant is an officer of Credit Suisse First Boston Corporation.
(5) Ms. Schnabel is an officer of DLJMB Inc., an affiliate of DLJMB and DLJSC.
Share data shown for Ms. Schnabel excludes Series A common stock shown as
held by the DLJMB Funds, as to which Ms. Schnabel disclaims beneficial
ownership.
81
CERTAIN TRANSACTIONS
REORGANIZATION
We were incorporated in Delaware on March 12, 1998. Prior to the
consummation of the acquisition of Envirotest and the related transactions, we
had no outstanding shares of capital stock and EST was an indirect wholly owned
subsidiary of Newmall. In April 1996, EST was acquired by a wholly owned
subsidiary of Wellman plc, a then-publicly incorporated United Kingdom company.
In January 1998, Wellman plc was acquired by Newmall plc, a United Kingdom
public limited company that was controlled by Alchemy. Alchemy Investment Plan
is an investment consortium principally composed of United States institutional
investors that is advised by Alchemy Partners. In contemplation of the
acquisition of Envirotest and the related transactions, in May 1998, Newmall plc
divested itself of all of its holdings except for Wellman North America, Inc.
and its subsidiaries, which included EST. Newmall plc reorganized as Newmall
Limited, a United Kingdom private limited company whose controlling shareholder
remains Alchemy.
As part of the acquisition of Envirotest and the related transactions,
Environmental Systems Products, Inc. and our company reorganized in a manner to:
- cause the shareholders of Newmall to acquire 82.5% of the shares
Environmental Systems Products, Inc.; and
- cause us to become a wholly owned subsidiary of Environmental Systems
Products, Inc.
This reorganization took place in several steps. First, the Newmall
shareholders capitalized us with cash (pro rata to their Newmall shareholdings),
receiving in exchange 95% of the shares that we ultimately issued as part of the
reorganization. Next, the Newmall shareholders transferred their Newmall shares
to us and, in exchange, were issued the remaining 5% of the shares issued as
part of the reorganization. At this stage, the former shareholders of Newmall
owned 100% of our shares (in the same proportion as their Newmall shareholdings
and we owned 100% of the shares of Newmall. Each of the former Newmall
shareholders then transferred its shares of our company to Environmental Systems
Products, Inc. in exchange for shares in Environmental Systems Products, Inc. At
that point, the former Newmall shareholders owned 100% of the Environment
Systems Products, Inc. shares and Environment Systems Products, Inc. held 100%
of our shares. Immediately thereafter, we issued additional shares to the
noteholders so as to cause them, in the aggregate, to hold 17.5% of the
Environment Systems Products, Inc. shares and the former Newmall shareholders to
hold 82.5% of the Environment Systems Products, Inc. shares.
Further, as part of the acquisition of Envirotest and the related
transactions, we acquired 76.5% of the shares of Envirotest. The remaining 23.5%
was held by EST. Subsequent to the consummation of the acquisition of
Envirotest, we acquired from EST the Envirotest shares it held so that
Envirotest became our direct, wholly owned subsidiary. EST remained an indirect
wholly owned subsidiary of our company.
SUBSCRIPTION AGREEMENTS
Prior to the acquisition of Envirotest and the related transactions, Messrs.
McKenna and Tedeschi entered into an agreement with Newmall and EST under which
Newmall granted to each of such individuals 840,000 of its ordinary shares in
consideration of such individual's agreement to terminate a previously existing
management bonus agreement between EST and such individual. Subject to certain
exceptions, including transfers among themselves and any exchange of the
ordinary shares for shares of our common stock, Messrs. McKenna and Tedeschi
have agreed, for a period of one year from the effective date of the agreement,
not to sell, assign, exchange, transfer, distribute or otherwise dispose of any
of the ordinary shares they receive. Under the terms of the agreement, prior to
any initial public offering of Newmall's ordinary shares or our common stock, or
any "change of control" of Newmall or
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our company, such individuals also granted to each other a right of first
refusal such that if one individual wishes to sell his shares, the other
individual shall have the right to acquire these shares at fair market price.
In addition, in October 1998, Mr. Langevin entered into an agreement with
Newmall and EST under which Newmall granted to Mr. Langevin 210,000 of its
ordinary shares in consideration of his services as an employee of EST. Subject
to certain exceptions, including transfers to Messrs. McKenna and Tedeschi, and
any exchange of the ordinary shares for shares of our common stock, Mr. Langevin
agreed not to sell, assign, exchange, transfer, distribute or otherwise dispose
of the shares he receives for one year from the effective date of the agreement.
Under the terms of the agreement, prior to any initial public offering of
Newmall's ordinary shares or our common stock, or any "change of control" of
Newmall or our company, Mr. Langevin also granted to Messrs. McKenna and
Tedeschi a right of first refusal such that if Mr. Langevin wishes to sell his
shares, Messrs. McKenna and Tedeschi shall have the right to acquire such shares
at fair market price.
In addition, under the agreements, each of Messrs. McKenna, Tedeschi and
Langevin agrees that in the event Newmall or our company enters into an
underwriting agreement in connection with an initial public offering of the
ordinary shares or our common stock pursuant to a registration statement under
the Securities Act, each of such individuals will execute an agreement that for
a period of up to 180 days following the effective date of such registration
statement, each of such individuals will not, without the prior written consent
of the lead underwriter of the initial public offering, offer, pledge, sell,
contract to sell, grant any option for the sale of, or otherwise dispose,
directly or indirectly;
- any of the ordinary shares they receive;
- any shares of our common stock they receive upon an exchange of such
ordinary shares; or
- any other securities of Newmall or our Company convertible into,
exercisable for, or exchangeable for common stock or other shares of
Newmall or our Company.
OTHER TRANSACTIONS
The issuances of shares of Newmall and our Company to Messrs. McKenna,
Tedeschi and Langevin under the agreements described above occurred prior to the
reorganization. Therefore, in connection with the reorganization, Messrs.
McKenna, Tedeschi and Langevin became shareholders of EnviroSystems. For more
information see the "Security Ownership" section of this prospectus.
EST had revenues of approximately $368,000 and $1,152,000 from other Wellman
owned entities for the years ended December 31, 1997 and 1996, respectively, and
approximately $49,000 and $361,000 for the nine month periods ended September
30, 1998 and 1997, respectively. EST accrued approximately $260,000 for
management charges payable to Wellman as of December 31, 1996. There were no
management charges in 1997.
Included in income taxes payable for EST are additional taxes payable to
Wellman North America, Inc. of $297,900 as of December 31, 1997.
EST had notes receivable from former stockholders and current officers
totaling approximately $69,000 as of December 31, 1996. The notes were repaid in
1997.
In 1995, EST purchased $207,000 of consulting services from a company owned
by one of EST's former stockholders.
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DESCRIPTION OF OTHER INDEBTEDNESS
SENIOR SECURED CREDIT FACILITY
The following description briefly outlines the provisions of our senior
secured credit facility. We have filed a copy of the senior secured credit
agreement as an exhibit to the registration statement which includes this
prospectus.
The description set forth below is not complete and is qualified in its
entirety by reference to certain agreements setting forth the principal terms
and conditions of our senior secured credit facility.
On October 16, 1998, we entered into a credit agreement among our company,
Environmental Systems Products, Inc., the lenders party thereto, Credit Suisse
First Boston as Administrative and Collateral Agent, DLJ Capital Funding, Inc.
as Syndication Agent and Credit Suisse First Boston and Donaldson, Lufkin &
Jenrette Securities Corporation, as Arrangers.
The Company's senior secured credit facility consists of:
- term loan facilities of $385 million, consisting of a Term Loan A facility
of $175 million, maturing approximately five and a half years after
funding; and a Term Loan B facility of $210 million, maturing
approximately seven years after funding; and
- a revolving loan facility for revolving borrowings of up to $50 million
and maturing approximately five and one half years after funding of the
Term Loan Facility.
Loans under the senior secured credit facility bear interest at a floating
rate equal, at our option, to either:
- the base rate (as defined below) plus a certain additional percentage per
year; or
- LIBOR (as defined below) plus a certain additional percentage per year.
The term "base rate" means the higher of:
- the prime lending rate of Credit Suisse First Boston in effect from time
to time; or
- the federal funds effective rate plus 0.5%.
For base rate loans, the additional percentage is as follows:
- for Term Loan A and the revolving loan facility, the additional percentage
varies between 1.25% and 2.50% depending on the leverage ratio of our
company and its subsidiaries; and
- for Term Loan B, the additional percentage is 3.00%.
The term "LIBOR" has a market-standard definition reflecting the rate
established daily in the London interbank market for Eurodollar funds adjusted
for required reserves.
For LIBOR loans, the additional percentage is as follows:
- for Term Loan A and the revolving loan facility, the additional percentage
varies between 2.25% and 3.50% depending on the leverage ratio of our
company and its subsidiaries; and
- for Term Loan B, the additional percentage is 4.00%.
Interest on base rate borrowings is payable quarterly in arrears and
interest on LIBOR borrowings is payable at the end of the relevant interest
period, but at least quarterly.
Amounts owed under the senior secured credit facility will be our direct
obligations. They will be unconditionally guaranteed by Environmental Systems
Products, Inc., each of our existing and subsequently acquired or organized
domestic subsidiaries and certain of our foreign subsidiaries.
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Our obligations under the senior secured credit facility are secured by a
first priority, perfected security interest in:
- substantially all of our tangible and intangible assets other than the
assets of Envirotest in Ohio; substantially all of the assets of each of
our existing and subsequently acquired or organized domestic subsidiaries
and certain foreign subsidiaries of the Company; and
- all of Environmental Systems Products, Inc.'s equity interest in our
Company.
The term loan facility provides for mandatory prepayments, in amounts not
less than:
- 75% of consolidated excess cash flow, as such term is defined in the
senior secured credit facility, or if our leverage ratio is less than or
equal to 3:1, then 50%;
- 100% of the net cash proceeds of all non-ordinary course of business asset
sales by Environmental Systems Products, Inc. or the Company and its
subsidiaries including insurance and condemnation proceeds, subject to
certain exceptions for reinvestment in certain assets within 270 days;
- 100% of the net cash proceeds of issuances of debt obligations of
Environmental Systems Products, Inc. or the Company and its subsidiaries
other than issuances of debt expressly permitted by the senior secured
credit facility; and
- 100% of the net cash proceeds of issuances of equity securities of
Environmental Systems Products, Inc. or the Company and its subsidiaries,
subject to certain exceptions.
Mandatory prepayments shall be made without premium or penalty, except in the
case of Term Loan B. Term Loan B shall be prepayable during the first and second
year following the Issue Date at a premium equal to 101% of the aggregate
principal amount to be prepaid and thereafter, without premium or penalty.
However, mandatory prepayments are subject to breakage costs and actual
reemployment costs. Mandatory prepayments will be applied to Term Loans A and B,
in each case PRO RATA to the remaining amortization payments of such loans.
However, holders of Term Loan B may elect to have their portion of any mandatory
prepayment applied to any outstanding portion of Term Loan A.
The senior secured credit facility contains customary representations and
covenants for facilities of this type, as well as others agreed upon by our
company, DLJ and CSFB. These covenants include, but are not limited to,
financial maintenance covenants and limitations on:
- additional debt;
- liens;
- investments;
- sale and leaseback transactions;
- sales of assets;
- mergers and acquisitions;
- dividend payments and stock repurchases;
- capital expenditures;
- prepayments of senior debt and subordinated debt;
- changes in business conduct; and
- capital expenditures.
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The senior secured credit facility contains typical events of default,
including, without limitation:
- the failure to pay principal when due;
- the failure to pay any interest when due;
- failure to perform, or breach of, any covenant;
- the occurrence of any cross-default and cross-acceleration;
- the imposition of any material judgments
- the occurrence of changes of control;
- the occurrence of certain events involving bankruptcy or insolvency; and
- the invalidity of any guarantees or security agreements.
OHIO NOTES
In April 1995, Envirotest issued to the Ohio Air Quality Development
Authority $64.38 million original principal amount of its senior secured notes
(the "Ohio Notes"), $53.1 million of which were outstanding as of September 30,
1998. Envirotest used the proceeds of the Ohio Notes to finance the development
of the vehicle emission test stations it operates in Ohio. The Ohio Notes are
secured by Envirotest's interest in such stations and the assets related to such
stations. These Ohio assets include, without limitation, the land, buildings and
equipment used at such stations; and the gross revenues of such stations.
The Ohio Notes are currently supported by a letter of credit issued under
the Company's senior secured credit facility. The Ohio Notes in turn secure the
Ohio Air Authority's Air Quality Revenue Bonds, Series 1995 which were sold to
investors in a private placement. Such bonds have the same economic terms as the
Ohio Notes.
The final maturity date of the Ohio Notes is December 31, 2005. Principal of
the Ohio Notes is repayable in sinking-fund installments on the first day of
each month. The monthly installment is $440,000 for September 1998 and is
scheduled to increase to $800,000 by the final maturity date. In addition,
principal on the Ohio Notes is subject to mandatory prepayment in the event the
relevant Ohio vehicle emissions testing program is terminated by law or
discontinued and Envirotest receives compensation from the State of Ohio for
such termination or discontinuation. Voluntary repayments of the Ohio Notes are
permitted subject to the payment of a yield maintenance premium.
Interest on the Ohio Notes accrues at a per annum rate of 8.10%, and is
payable on each monthly principal repayment installment date.
The Ohio Notes contain covenants and events of default that are customary
for transactions of this type, including limitations on consolidations, mergers
and other fundamental changes involving Envirotest and limitations on further
liens on the collateral securing the Ohio Notes.
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. SENIOR DISCOUNT NOTES
On October 16, 1998, Environmental Systems Products, Inc. issued $207.0
million aggregate principal amount of its 15% Senior Discount Notes due 2009.
These senior discount notes are unsecured senior obligations of Environmental
Systems Products, Inc. and will mature on October 31, 2009. These senior
discount notes bear interest at a rate of 15% per year. Interest on these senior
discount notes will accrue and be payable semiannually on April 30 and October
31 of each year beginning on the date of issuance, but will not be payable in
cash prior to April 30, 2004. Interest on these senior discount notes will
accrue from the most recent date on which interest has been paid or, if no
interest has been paid, from the date of issuance.
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Environmental Systems Products, Inc. may redeem these senior discount notes,
in whole or in part, at any time or on various occasions upon not less than
thirty nor more than 60 days' notice to holders of these senior discount notes.
The redemption price of these senior discount notes is equal to the percentages
of the principal amount of these senior discount notes set forth below, plus
accrued and unpaid interest to the redemption date, if redeemed during the
12-month period beginning October 31 of the years indicated below (or, in the
case of 1998, commencing on the date of issuance).
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
1998........................................................................ 115.000%
1999........................................................................ 113.500%
2000........................................................................ 112.000%
2001........................................................................ 110.500%
2002........................................................................ 109.000%
2003........................................................................ 107.500%
2004........................................................................ 106.000%
2005........................................................................ 104.500%
2006........................................................................ 103.000%
2007........................................................................ 101.500%
2008 and thereafter......................................................... 100.000%
Upon the occurrence of certain change of control situations, Environmental
Systems Products, Inc. is required to repurchase all or any part of such
holder's senior discount notes at a purchase price in cash equal to 101% of the
principal amount of the senior discount notes plus accrued and unpaid interest,
if any, to the date of purchase. This requirement is subject to the right of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date.
The indenture governing Environmental Systems Products, Inc. senior discount
notes imposes certain affirmative covenants and other requirements on
Environmental Systems Products, Inc. and us and also contains certain negative
covenants that include, among other things, limitations on:
- the amount of indebtedness Environmental Systems Products, Inc. and its
restricted subsidiaries may incur;
- certain payments Environmental Systems Products, Inc. and its restricted
subsidiaries may make;
- restrictions on distributions from restricted subsidiaries;
- sales of assets by Environmental Systems Products, Inc. and its restricted
subsidiaries;
- affiliate transactions;
- investments;
- Environmental Systems Products, Inc.'s ability to merge or consolidate or
transfer all or substantially all of its assets; and
- certain acquisitions by Environmental Systems Products, Inc. and its
restricted subsidiaries.
This indenture also contains customary events of defaults, including default
in any payment of principal and interest on any senior discount notes when due.
If an event of default occurs and is continuing, the holders of a majority in
principal amount of the outstanding senior discount notes by notice to
Environmental Systems Products, Inc. may declare the principal and accrued and
unpaid interest on all of the then outstanding senior discount notes to be due
and payable. Upon such a declaration, such principal and accrued and unpaid
interest shall be due and payable immediately.
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DESCRIPTION OF THE NOTES
You can find the definitions of certain terms used in this description under
the subheading "Certain Definitions." In this description, the word "Company"
refers only to Environmental Systems Products Holdings Inc. and not to any of
its subsidiaries.
The Company issued the notes under an indenture, dated as of October 16,
1998 (the "Indenture"), between the Company, the Subsidiary Guarantors and
United States Trust Company of Texas, N.A., as Trustee (the "Trustee").
The following is a summary of the material provisions of the Indenture and
the notes; a copy of such Indenture and the form of notes is available upon
request to the Company. The following summary of the material provisions of the
Indenture and the notes does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, all the provisions of the
Indenture and the notes, including the definitions of certain terms therein and
those terms made a part thereof by the Trust Indenture Act.
Principal of, premium, if any, and interest on the notes is payable, and the
notes may be exchanged or transferred, at the office or agency of the Company in
the Borough of Manhattan, The City of New York (which initially shall be the
corporate trust office of the Trustee, at 114 West 47(th) Street, New York, New
York 10036), except that, at the option of the Company, payment of interest may
be made by check mailed to the address of the Holders as such address appears in
the note register.
The notes are issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. See "Book-Entry;
Delivery and Form". No service charge shall be made for any registration or
exchange of notes, but the Company may require payment of a sum sufficient to
cover any transfer tax or other similar governmental charge payable in
connection therewith.
BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES
THE NOTES:
- are unsecured senior subordinated obligations of the Company;
- are subordinated in right of payment to all Senior Indebtedness of the
Company;
- rank PARI PASSU with all other Senior Subordinated Indebtedness of the
Company;
- are senior in right of payment to any future Subordinated Obligations of
the Company; and
- are unconditionally guaranteed by the Subsidiary Guarantors.
THE GUARANTEES:
- are issued by the following Subsidiary Guarantors:
Environmental Systems Testing, Inc. Envirotest Illinois, Inc.
Envirotest Systems Corp. (DE) Envirotest Wisconsin, Inc.
Envirotest Systems Corp. (WA) ES Funding Corporation
Envirotest Holdings, Inc. Remote Sensing Technologies, Inc.
Envirotest Technologies, Inc. Newmall Limited
Envirotest Acquisitions Co. Wellman Overseas Limited
Envirotest Partners Wellman North America, Inc.
- are senior subordinated obligations of each Subsidiary Guarantor;
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- are subordinated in right of payment to all Senior Indebtedness of each
Subsidiary Guarantor;
- rank PARI PASSU with all other Senior Subordinated Indebtedness of each
Subsidiary Guarantor; and
- are senior in right of payment to all other Subordinated Obligations of
each Subsidiary Guarantor.
TERMS OF THE NOTES
The notes are unsecured senior subordinated obligations of the Company,
limited to $100 million aggregate principal amount, and mature on October 31,
2008. The notes are subordinate in right of payment to certain other debt
obligations of the Company. The notes bear interest at the rate per annum shown
on the cover page hereof from October 16, 1998, or from the most recent date to
which interest has been paid or provided for, payable semiannually to Holders of
record at the close of business on April 15 and October 15 immediately preceding
the interest payment date on April 30 and October 31 of each year, commencing
April 30, 1999. For U.S. federal income tax purposes, however, the "issue price"
of the notes is less than the aggregate principal amount to the extent of the
fair market value of the Shares acquired in connection with the purchase of the
notes. To the extent of such difference, "original issue discount" ("OID") will
be recognized by a Holder during such Holder's ownership of the notes. See
"Certain United States Federal Income Tax Considerations" for a discussion
regarding the taxation of such OID. The Company will pay interest on overdue
principal at 1% per annum in excess of such rate, and it will pay interest on
overdue installments of interest at such higher rate to the extent lawful.
Interest on the notes is computed on the basis of a 360-day year of twelve
30-day months.
OPTIONAL REDEMPTION
At any time prior to October 31, 2001, the Company may redeem in the
aggregate up to 35% of the original principal amount of the notes with the Net
Cash Proceeds of one or more Public Equity Offerings, at a redemption price of
113% of the principal amount thereof plus accrued interest to the redemption
date; PROVIDED, HOWEVER, that at least 65% of the aggregate principal amount of
the notes originally outstanding must remain outstanding after each such
redemption.
Except as set forth in the preceding paragraph, the notes are not redeemable
at the option of the Company prior to October 31, 2003. After October 31, 2003,
the Company may redeem all or a part of the notes upon not less than 30 nor more
than 60 days' notice, at the following redemption prices (expressed in
percentages of principal amount), plus accrued and unpaid interest to the
redemption date, if redeemed during the 12-month period commencing on October 31
of the years set forth below:
REDEMPTION
PERIOD PRICE
- --------------------------------------------------------------------------------- -----------
2003............................................................................. 106.500%
2004............................................................................. 104.333%
2005............................................................................. 102.167%
2006 and thereafter.............................................................. 100.000%
In the case of any partial redemption, selection of the notes for redemption
will be made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the notes are listed or, if the
notes are not listed on a securities exchange, by the Trustee on a pro rata
basis, by lot or by such other method as the Trustee in its sole discretion
shall deem to be fair and appropriate, although no note of $1,000 in original
principal amount or less shall be redeemed in part. If any note is to be
redeemed in part only, the notice of redemption relating to such note shall
state the portion of the principal amount thereof to be redeemed. A new note in
principal amount
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equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original note.
The notes do not have the benefit of a sinking fund.
SUBSIDIARY GUARANTEES
The Subsidiary Guarantors unconditionally guarantee, jointly and severally,
on a senior subordinated basis, the obligations of the Company pursuant to the
notes, including the repurchase obligation resulting from a Change of Control.
The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee is
limited as necessary to that Subsidiary Guaranty from constituting a fraudulent
conveyance under applicable law. See "Risk Factors--Fraudulent Transfer
Considerations".
A Subsidiary Guarantor may consolidate with, merge with or into, or transfer
all or substantially all its assets to any other Person to the extent described
below under "--Certain Covenants--Merger and Consolidation"; PROVIDED, HOWEVER,
that if such other Person is not the Company or another Subsidiary Guarantor,
such Subsidiary Guarantor's obligations under its Subsidiary Guarantee must be
expressly assumed by such other Person. However, upon the sale or other
disposition (including by way of consolidation or merger) of a Subsidiary
Guarantor or the sale or disposition of all or substantially all the assets of a
Subsidiary Guarantor (in each case other than to the Company or an Affiliate of
the Company) permitted by the Indenture (including pursuant to the exercise of
remedies in respect of any Lien on the capital stock of a Subsidiary Guarantor,
which Lien secures outstanding Bank Indebtedness), such Subsidiary Guarantor
will be released and relieved from all its obligations under its Subsidiary
Guarantee.
SUBORDINATION
The payment of principal, premium and interest, if any, on the notes is
contractually subordinated to the prior payment in full of all Senior
Indebtedness of the Company.
The obligations of a Subsidiary Guarantor under its Subsidiary Guarantee is
a senior subordinated obligation of such Subsidiary Guarantor. As such, the
rights of Holders of the notes to receive payment by a Subsidiary Guarantor
pursuant to its Subsidiary Guarantee is contractually subordinated in right of
payment to the rights of holders of Senior Indebtedness of such Subsidiary
Guarantor. The terms of the subordination provisions described herein with
respect to the Company's obligations under the notes apply equally to a
Subsidiary Guarantor and the obligations of such Subsidiary Guarantor under its
Subsidiary Guarantee.
Indebtedness of the Company and the Subsidiary Guarantors that constitutes
Senior Indebtedness ranks senior to the notes and the relevant Subsidiary
Guarantee in accordance with the provisions of the Indenture. The notes and the
Subsidiary Guarantees in all respects rank PARI PASSU with all other Senior
Subordinated Indebtedness of the Company and the Subsidiary Guarantors,
respectively, and rank senior to all other Subordinated Obligations of the
Company and the Subsidiary Guarantors, respectively. See "--Subsidiary
Guarantees", "Risk Factors--Subordinated Ranking of Notes" and "Risk
Factors--Fraudulent Transfer Considerations".
As of September 30, 1998, after giving pro forma effect to the acquisition
of Envirotest and the related transactions:
(1) the Senior Indebtedness of the Company and the Subsidiary Guarantors, to
which the notes and the Subsidiary Guarantees are subordinated, would have
been approximately $438.1 million, consisting principally of approximately
$385.0 million of Indebtedness Incurred under the Senior Secured Credit
Facility and $53.1 million of Indebtedness Incurred under the Ohio Notes;
and
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(2) there would have been no Senior Subordinated Indebtedness of the Company or
the Subsidiary Guarantors ranking PARI PASSU with the notes or the
Subsidiary Guarantees, or any Subordinated Obligations ranking junior to the
notes or the Subsidiary Guarantees.
In addition, claims of creditors of the Company's Subsidiaries, including
trade creditors, secured creditors and creditors holding indebtedness and
guarantees issued by such Subsidiaries, and claims of preferred stockholders, if
any, of such Subsidiaries, generally have priority with respect to the assets
and earnings of such Subsidiaries over the claims of the creditors of the
Company, including the Holders of the notes, even if such obligations do not
constitute Senior Indebtedness. The notes therefore are effectively subordinated
to existing and future liabilities of Subsidiaries of the Company, except to the
extent that the Subsidiary Guarantees may be enforceable by Holders of the notes
against the Subsidiary Guarantors.
Each of the Company and the Subsidiary Guarantors will not Incur, directly
or indirectly, any Indebtedness that is subordinate or junior in ranking in
right of payment to its Senior Indebtedness unless such Indebtedness is, among
other things, Senior Subordinated Indebtedness or is expressly subordinated in
right of payment to Senior Subordinated Indebtedness. Unsecured Indebtedness is
not deemed to be subordinated or junior to Secured Indebtedness merely because
it is unsecured.
The Company may not make any payment in respect of the notes if:
(1) a payment default on Senior Indebtedness occurs and is continuing beyond any
applicable grace period; or
(2) any other default on any Senior Indebtedness occurs and the maturity of such
Senior Indebtedness is accelerated in accordance with its terms unless, in
either case, the default has been cured or waived and any such acceleration
has been rescinded or such Senior Indebtedness has been paid in full in
cash. However, the Company may pay the notes without regard to the foregoing
if the Company and the Trustee receive written notice approving such payment
from the Representative of such Senior Indebtedness.
During the continuance of any default with respect to any Designated Senior
Indebtedness pursuant to which the maturity thereof may be accelerated either
immediately without further notice (except such notice as may be required to
effect such acceleration) or upon notice or the expiration of any applicable
grace periods, the Company may not pay the notes for a period (a "Payment
Blockage Period") commencing upon the receipt by the Trustee (with a copy to the
Company) of written notice (a "Blockage Notice") of such default from the
Representative of the holders of such Designated Senior Indebtedness specifying
an election to effect a Payment Blockage Period and ending 179 days thereafter.
Payments on the notes may and shall be resumed if such Payment Blockage Period
is terminated:
(1) by written notice to the Trustee and the Company from the Person or Persons
who gave such Blockage Notice;
(2) because the default giving rise to such Blockage Notice is no longer
continuing (solely as evidenced by written notice to the Trustee by the
Representative of such Designated Senior Indebtedness which notice shall be
promptly delivered); or
(3) because such Designated Senior Indebtedness has been repaid in full in cash.
Unless the holders of such Designated Senior Indebtedness or the
Representative of such holders have accelerated the maturity of such Designated
Senior Indebtedness, the Company may resume payments on the notes after the end
of such Payment Blockage Period.
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No more than one Payment Blockage Period may be commenced in any consecutive
360-day period, irrespective of the number of defaults with respect to
Designated Senior Indebtedness during such period.
During the continuance of, or upon any payment or distribution of the assets
of either the Company or any Subsidiary Guarantor upon, a total or partial
liquidation or dissolution or reorganization of or similar proceeding, or any
bankruptcy, insolvency, receivership or similar proceedings, relating to either
the Company or any Subsidiary Guarantor or its property or an assignment for the
benefit of creditors or marshalling of assets and liabilities of the Company or
any Subsidiary Guarantor, the holders of Senior Indebtedness will be entitled to
receive payment in full of such Senior Indebtedness before the Holders of the
notes are entitled to receive any payment, and until the Senior Indebtedness is
paid in full in cash, any payment or distribution to which Holders of the notes
would be entitled but for the subordination provisions of the Indenture will be
made to holders of such Senior Indebtedness as their interests may appear. If a
payment or distribution is made to Holders of the notes that, due to the
subordination provisions, should not have been made to them, such Holders of the
notes are required to hold it in trust for the holders of Senior Indebtedness
and pay it over to them as their interests may appear.
If payment of the notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of Designated Senior
Indebtedness or the Representative of such holders of the acceleration.
By reason of the subordination provisions contained in the Indenture, in the
event of insolvency, creditors of the Company or a Subsidiary Guarantor who are
holders of Senior Indebtedness of the Company or such Subsidiary Guarantor, as
the case may be, may recover more, ratably, than the Holders of the notes, and
creditors of the Company or such Subsidiary Guarantor who are not holders of
Senior Indebtedness may recover less, ratably, than holders of Senior
Indebtedness and may recover more, ratably, than the Holders of the notes.
The terms of the subordination provisions described above do apply to
payments from money or the proceeds of U.S. Government Obligations held in trust
by the Trustee for the payment of principal of and interest on the notes
pursuant to the provisions described under "--Defeasance".
No provision contained in the Indenture, the notes or the Subsidiary
Guarantees affects the obligation of the Company and the Subsidiary Guarantors,
which is absolute and unconditional, to pay, when due, principal of, premium, if
any, and interest on the notes. The subordination provisions of the Indenture
the notes and the Subsidiary Guarantees does not prevent the occurrence of any
Default or Event of Default under the Indenture or limit the rights of the
Trustee or any Holder to pursue any other rights or remedies with respect to the
notes or the Subsidiary Guarantees.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder shall have the right
to require that the Company repurchase all or, at each Holder's option, any part
of such Holder's notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase. Within 20 days following any Change of Control, the Company shall
mail a notice to the Trustee and to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
notes on the Change of Control payment date specified in such notice, pursuant
to the procedures required by the Indenture and described in such notice. The
Company shall comply with the requirements of Section 14(e) of the Exchange Act
and any other securities laws or regulations in connection with the repurchase
of notes pursuant to the covenant described hereunder. To the extent that the
provisions of any securities laws or regulations conflict with the provisions of
the covenant described hereunder, the Company shall comply with the applicable
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securities laws and regulations and shall not be deemed to have breached its
obligations under the covenant described hereunder by virtue thereof.
The Change of Control repurchase feature is a result of negotiations between
the Company and the purchasers of the notes. Management has no present intention
to engage in a transaction involving a Change of Control, although it is
possible that the Company would decide to do so in the future. Subject to the
limitations discussed below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of Indebtedness outstanding at
such time or otherwise affect the Company's capital structure or credit ratings.
Restrictions on the ability of the Company to Incur additional Indebtedness are
contained in the covenant described under "--Certain Covenants--Limitation on
Indebtedness". Such restrictions can be waived only with the consent of the
Holders of a majority in principal amount of the notes then outstanding. Except
for the limitations contained in such covenant, however, the Indenture does not
contain any covenants or provisions that may afford Holders protection in the
event of a highly leveraged transaction.
If a Change of Control offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
of the notes that might be delivered by Holders seeking to accept the Change of
Control offer. The failure of the Company to make or consummate the Change of
Control offer or pay the purchase price when due will give the Trustee and the
Holders the rights described under "--Events of Default".
The existence of a Holder's right to require the Company to offer to
repurchase such Holder's notes upon a Change of Control may deter a third party
from acquiring the Company in a transaction which constitutes a Change of
Control.
The Senior Secured Credit Facility prohibits the Company from purchasing any
notes prior to its expiration, and also provides that the occurrence of certain
change of control events with respect to the Company would constitute a default
thereunder. In the event a Change of Control occurs at a time when the Company
is prohibited by the terms of any Indebtedness from purchasing notes, the
Company may seek the consent of its lenders thereunder to the purchase of notes
or may attempt to refinance the borrowings that contain such prohibition. If the
Company does not obtain such a consent or repay such borrowings, the Company
will remain contractually prohibited from purchasing notes. In such case, the
Company's failure to purchase tendered notes would constitute an Event of
Default under the Indenture which would, in turn, constitute a default under the
Senior Secured Credit Facility. In such circumstances, the subordination
provisions in the Indenture would likely restrict payment to the Holders of
notes.
Future Indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such Indebtedness to be repaid or repurchased upon a Change of Control.
Moreover, the exercise by the Holders of their right to require the Company to
repurchase the notes could cause a default under such Indebtedness, even if the
Change of Control itself does not, due to the financial effect of such
repurchase on the Company. Finally, the Company's ability to pay cash to the
Holders following the occurrence of a Change of Control may be limited by the
Company's then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases of notes. The provisions under the Indenture relating to the
Company's obligation to make an offer to repurchase the notes as a result of a
Change of Control may be waived or modified with the written consent of each
Holder of notes at the time outstanding.
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CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS.
(a) The Company shall not, and shall not permit any Restricted Subsidiary
to, Incur, directly or indirectly, any Indebtedness (including Acquired
Indebtedness); PROVIDED, HOWEVER, that the Company or any Subsidiary Guarantor
shall be permitted to Incur such Indebtedness if, on the date of such
Incurrence, and after giving pro forma effect thereto, no Default or Event of
Default shall have occurred and be continuing or would occur and the
Consolidated Cash Flow Coverage Ratio at the date of such Incurrence exceeds
2.10 to 1.0 if such Indebtedness is Incurred prior to October 31, 1999, and 2.35
to 1 if such Indebtedness is Incurred thereafter.
(b) So long as no Default shall have occurred and be continuing or would be
caused thereby, paragraph (a) of this covenant will not prohibit the incurrence
of any of the following items of Indebtedness:
(1) Indebtedness Incurred pursuant to the Senior Secured Credit Facility not to
exceed $435 million in aggregate principal amount outstanding at any time,
less the aggregate amount of all mandatory payments applied to permanently
reduce the commitments with respect to such Indebtedness, including but not
limited to reductions pursuant to the first paragraph of the covenant
described under the caption "--Limitation on Sale of Assets and Subsidiary
Stock";
(2) Indebtedness of the Company to a Restricted Subsidiary; PROVIDED that any
such Indebtedness is subordinated in right of payment to the notes;
PROVIDED, FURTHER, that any subsequent issuance, sale, transfer or other
disposition of any Capital Stock (including by consolidation or merger) or
other event (including the designation of a Restricted Subsidiary as an
Unrestricted Subsidiary under the covenant described under the caption
"--Limitation on Designations of Unrestricted Subsidiaries") which results
in such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any
subsequent transfer or other disposition of any such Indebtedness (except to
the Company or another Restricted Subsidiary) shall be deemed, in each case,
to be an Incurrence of such Indebtedness by the issuer thereof at the time
of any such issuance, sale, transfer or other disposition, as the case may
be;
(3) Indebtedness of a Restricted Subsidiary to the Company or another Restricted
Subsidiary; PROVIDED that (x) if a Subsidiary Guarantor Incurs such
Indebtedness to a Restricted Subsidiary that is not a Subsidiary Guarantor,
such Indebtedness is subordinated in right of payment to the Subsidiary
Guarantee of such Subsidiary Guarantor; and (y) if a Restricted Subsidiary
that is not a Subsidiary Guarantor Incurs such Indebtedness to the Company
or a Restricted Subsidiary that is a Subsidiary Guarantor, the Incurrence of
such Indebtedness constitutes a Restricted Investment for the purposes of
the covenant described under the caption "--Limitation on Restricted
Payments"; PROVIDED, FURTHER, that any subsequent issuance, sale, transfer
or other disposition of any Capital Stock (including by consolidation or
merger) of any Restricted Subsidiary to which such Indebtedness is owed or
any other event (including the designation of a Restricted Subsidiary as an
Unrestricted Subsidiary under the covenant described under the caption
"--Limitation on Designations of Unrestricted Subsidiaries") which results
in such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any
subsequent transfer or other disposition of any such Indebtedness (except to
the Company or another Restricted Subsidiary that is a Subsidiary Guarantor)
shall be deemed, in each case, to be an Incurrence of such Indebtedness by
the issuer thereof at the time of any such issuance, sale, transfer or other
disposition, as the case may be;
(4) the Notes and the Subsidiary Guarantees;
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(5) Indebtedness (other than Indebtedness described in clause (1), (2), (3) or
(4) above) outstanding on the Issue Date;
(6) any Refinancing Indebtedness in respect of Indebtedness Incurred pursuant to
paragraph (a) of this covenant or pursuant to clause (4) or (5) of this
paragraph (b) or this clause (6);
(7) obligations of the Company or any Restricted Subsidiary pursuant to (A)
Interest Rate Protection Agreements designed to protect the Company or such
Restricted Subsidiary against fluctuations in interest rates in respect of
Indebtedness of the Company or such Restricted Subsidiary that is permitted
by the terms of the Indenture to be outstanding to the extent the notional
principal amount of such obligation does not exceed the aggregate principal
amount of the Indebtedness to which such Interest Rate Protection Agreements
relate, (B) Currency Agreement Obligations in respect of foreign exchange
exposures Incurred by the Company or any Restricted Subsidiary in the
ordinary course of its business and (C) commodity agreements of the Company
or any Restricted Subsidiary to the extent entered into in the ordinary
course of business to protect the Company or such Restricted Subsidiary from
fluctuations in the prices of raw materials used in its business;
(8) Indebtedness of the Company or any Restricted Subsidiary consisting of
obligations in respect of purchase price adjustments in connection with the
acquisition or disposition of assets by the Company or such Restricted
Subsidiary permitted under the Indenture;
(9) Capital Lease Obligations, Purchase Money Indebtedness and Acquired
Indebtedness (to the extent not Incurred in connection with, or in
anticipation or contemplation of, the relevant transaction), in each case
Incurred in connection with a Related Business, and any Refinancing
Indebtedness in respect thereof in an aggregate principal amount not
exceeding $10.0 million at any time outstanding;
(10) Attributable Debt in connection with Sale/Leaseback Transactions in an
aggregate principal amount not exceeding $10.0 million at any time
outstanding;
(11) PROVIDED, that the Company would be able to Incur $1.00 of Indebtedness
pursuant to paragraph (a) of this covenant, Indebtedness Incurred by one or
more SPCs in an aggregate principal amount not exceeding $30.0 million at
any one time outstanding;
(12) Indebtedness in an amount not to exceed $4.5 million issued in connection
with the Investment permitted pursuant to clause (12) of the definition of
"Permitted Investment"; and
(13) Indebtedness in an aggregate principal amount which, together with all
other Indebtedness of the Company and its Restricted Subsidiaries then
outstanding (other than Indebtedness Incurred pursuant to clauses (1)
through (12) of this Section or paragraph (a)), does not exceed $10.0
million.
(c) Notwithstanding that such Indebtedness is permitted to be incurred
pursuant to paragraphs (a) and (b) above, the Company shall not, and shall not
permit any Restricted Subsidiary to, Incur any Indebtedness if the proceeds
thereof are used, directly or indirectly, to repay, prepay, redeem, defease,
retire, refund or refinance any Subordinated Obligations unless such
Indebtedness shall be subordinated to the notes or the relevant Subsidiary
Guarantee, as applicable, to at least the same extent as such Subordinated
Obligations.
(d) For purposes of determining compliance with the covenant entitled
"--Limitation on Indebtedness" in the event that an item of Indebtedness meets
the criteria of more than one of the types of Indebtedness described in
paragraphs (a) or (b) above, the Company, in its sole discretion at the time of
the Incurrence of such Indebtedness, will classify such item of Indebtedness,
and, except as specifically stated otherwise, will only be required to include
the amount of such Indebtedness, in one
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of the above clauses, and such item of Indebtedness may be divided and
classified among more than one of such types.
(e) For purposes of determining amounts of Indebtedness outstanding under
the covenant entitled "--Limitation on Indebtedness" and for the purpose of
avoiding duplication only, Indebtedness resulting from security interests
granted with respect to Indebtedness otherwise included in the determination of
Indebtedness, and Guarantees (and security interests with respect thereof) of,
or obligations with respect to letters of credit supporting, Indebtedness
otherwise included in the determination of Indebtedness shall not be included in
the determination of Indebtedness.
(f) Indebtedness of any Person which is outstanding at the time such Person
becomes a Restricted Subsidiary of the Company (including upon designation of
any subsidiary or other person as a Restricted Subsidiary) or is merged with or
into or consolidated with the Company or a Restricted Subsidiary of the Company
shall be deemed to have been Incurred at the time such Person becomes a
Restricted Subsidiary of the Company or merged with or into or consolidated with
the Company or a Restricted Subsidiary of the Company, as applicable.
LIMITATION ON LIENS SECURING SUBORDINATED INDEBTEDNESS. The Company will
not, and will not permit any Restricted Subsidiary to, directly or indirectly,
create, Incur, assume or suffer to exist any Liens of any kind (other than
Permitted Liens) upon any of their respective assets or properties now owned or
acquired after the date of the Indenture or any income or profits therefrom
securing:
(1) any Indebtedness of the Company or a Restricted Subsidiary which is
expressly by its terms subordinate or junior in right of payment to any
other Indebtedness of the Company or such Restricted Subsidiary, as the case
may be, unless the notes or the relevant Subsidiary Guarantee, as the case
may be, are equally and ratably secured for so long as such Indebtedness is
so secured; PROVIDED that, if such Indebtedness which is expressly by its
terms subordinate or junior in right of payment to any other Indebtedness of
the Company or a Restricted Subsidiary is expressly subordinate or junior to
the notes or the relevant Subsidiary Guarantee, as the case may be, then the
Lien securing such subordinated or junior Indebtedness shall be subordinate
and junior to the Lien securing the notes or the relevant Subsidiary
Guarantee, as the case may be, with the same relative priority as such
subordinated or junior Indebtedness shall have with respect to the notes or
the relevant Subsidiary Guarantee, as the case may be; or
(2) any assumption, Guarantee or other liability of the Company or such
Restricted Subsidiary in respect of any Indebtedness of the Company or a
Restricted Subsidiary which is expressly by its terms subordinate or junior
in right of payment to any other Indebtedness of the Company or such
Restricted Subsidiary, unless the notes or the relevant Subsidiary
Guarantee, as the case may be, are equally and ratably secured for so long
as such assumption, guaranty or other liability is so secured; PROVIDED
that, if such subordinated Indebtedness which is expressly by its terms
subordinate or junior in right of payment to any other Indebtedness of the
Company or a Restricted Subsidiary is expressly by its terms subordinate or
junior to the notes or the relevant Subsidiary Guarantee, as the case may
be, then the Lien securing the assumption, Guarantee or other liability of
such Subsidiary shall be subordinate and junior to the Lien securing the
notes or the relevant Subsidiary Guarantee, as the case may be, with the
same relative priority as such subordinated or junior Indebtedness shall
have with respect to the notes or the relevant Subsidiary Guarantee, as the
case may be.
LIMITATION ON OTHER SENIOR SUBORDINATED INDEBTEDNESS. The Company will not,
and will not permit any Restricted Subsidiary to, create, Incur, assume,
guarantee or in any other manner become liable with respect to any Indebtedness
that is subordinate in right of payment to any other Indebtedness of the Company
or any such Restricted Subsidiary, unless such Indebtedness is also PARI PASSU
with, or subordinate in right of payment to, the notes, or the relevant
Subsidiary Guarantee, as the case may be.
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LIMITATION ON RESTRICTED PAYMENTS.
(a) The Company shall not, and shall not permit any Restricted Subsidiary
to, directly or indirectly:
(A) declare or pay any dividend or make any distribution on or in respect
of, or to the direct or indirect holders of, the Capital Stock of
EnviroSystems, the Company, any Restricted Subsidiary or any other
Affiliate of the Company in their capacities as such except dividends or
distributions payable solely in its respective Capital Stock (other than
Disqualified Stock or, except in the case of the Company, Preferred
Stock) or in options, warrants or other rights to purchase its respective
Capital Stock (other than Disqualified Stock or, except in the case of
the Company, Preferred Stock) and except dividends or distributions
payable to the Company or a Restricted Subsidiary;
(B) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of EnviroSystems, the Company, any Restricted Subsidiary or any
other Affiliate of the Company to the extent such Capital Stock is held
by Persons other than the Company or any Wholly Owned Subsidiary that is
a Subsidiary Guarantor,
(C) purchase, repurchase, redeem, defease or otherwise acquire or retire for
value, prior to scheduled maturity, scheduled repayment or scheduled
sinking fund payment, any Subordinated Obligations or;
(D) make any Restricted Investment (any such dividend, distribution,
purchase, redemption, repurchase, defeasance, other acquisition,
retirement or Investment being herein referred to as a "Restricted
Payment").
if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result therefrom);
or
(2) the Company would not be permitted to Incur an additional $1.00 of
Indebtedness pursuant to clause (a) of the covenant described under the
caption "--Limitation on Indebtedness" after giving pro forma effect to such
Restricted Payment; or
(3) the aggregate amount of such Restricted Payment (other than Restricted
Payments made on or about the Issue Date in connection with the acquisition
by the Company of Envirotest Systems Corp. and the transactions related
thereto) and all other Restricted Payments since the beginning of the fiscal
quarter during which the notes were originally issued would exceed the sum
of:
(A) 50% of the Consolidated Net Income accrued during the period (treated as
one accounting period) from the beginning of the fiscal quarter during
which the notes were originally issued to the end of the most recent
fiscal quarter for which financial statements are available (or, in case
such Consolidated Net Income shall be a deficit, minus 100% of such
deficit); and
(B) the aggregate Net Cash Proceeds received by the Company from the issue
or sale of its Capital Stock (other than Disqualified Stock) or from
Capital Contributions subsequent to the Issue Date (other than an
issuance or sale (q) to a Restricted Subsidiary, an employee stock
ownership plan or similar trust for the benefit of employees or (r) with
respect to which the purchase price thereof is financed directly or
indirectly using funds (x) borrowed from the Company or a Restricted
Subsidiary unless and until such borrowing is repaid in full or (y)
contributed, extended, Guaranteed or advanced by the Company or a
Restricted Subsidiary) to the extent such proceeds or Capital
Contributions are not used to redeem, repurchase, retire, defease or
otherwise acquire Capital Stock or any Indebtedness of the Company or
such Restricted Subsidiary.
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(b) The provisions of clauses (2) and (3) of paragraph (a) of this covenant
shall not prohibit the following Restricted Payments:
(1) any purchase or redemption of Capital Stock of the Company or any Restricted
Subsidiary or Subordinated Obligations of the Company or any Subsidiary
Guarantor made by exchange for, or out of the proceeds of the substantially
concurrent sale or issuance of, Capital Stock of the Company (other than
Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary or an employee stock ownership plan or similar trust for the
benefit of employees); PROVIDED, HOWEVER, that the Net Cash Proceeds from
such sale and such purchases shall be excluded from the calculation in
clause (3) of paragraph (a) of this covenant;
(2) dividends paid within 60 days after the date of declaration if at such date
of declaration such dividend would have complied with the provisions of the
Indenture; PROVIDED, HOWEVER, that, such dividend shall be deducted in the
calculation of the amount of Restricted Payments available to be made
referred to in clause (3) of paragraph (a) of this covenant;
(3) dividends and distributions made by a Restricted Subsidiary to stockholders
other than the Company or another Restricted Subsidiary on no more than a
PRO RATA basis, measured by value;
(4) any purchase or redemption of Subordinated Obligations of the Company or any
Subsidiary Guarantor made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Refinancing Indebtedness of the Company or
any Subsidiary Guarantor that is permitted to be incurred pursuant to
paragraph (b) of the covenant described under the caption "--Limitation on
Indebtedness";
(5) the repurchase of shares of, or options to purchase shares of, Capital Stock
of EnviroSystems or the Company or any of its Subsidiaries from employees,
former employees, directors or former directors of EnviroSystems or the
Company or any of their respective Subsidiaries (or permitted transferees of
such employees, former employees, directors or former directors), pursuant
to the terms of the agreements (including employment agreements) or plans
(or amendments thereto) approved by the board of directors of EnviroSystems
or Board of Directors, as the case may be, under which such individuals
purchase or sell or are granted the option to purchase or sell, shares of
such Capital Stock; PROVIDED, HOWEVER, that the aggregate amount of such
repurchases shall not exceed $1.5 million per year or $5.0 million in the
aggregate on or after the Issue Date; PROVIDED, FURTHER, that such
repurchases shall be deducted in the calculation of the amount of Restricted
Payments available to be made referred to in clause (3) of paragraph (a) of
this covenant;
(6) payments to EnviroSystems (x) in an amount sufficient to enable
EnviroSystems to pay necessary operating expenses and other reasonable
administrative expenses and (y) to enable EnviroSystems to pay foreign,
federal, state or local tax liabilities, not to exceed the amount of any tax
liabilities that would otherwise be payable by the Company and its
Subsidiaries to the appropriate taxing authorities if they filed separate
tax returns to the extent that EnviroSystems has an obligation to pay such
tax liabilities relating to the operations, assets or capital of the Company
and its Subsidiaries; PROVIDED that any such payment shall either be used by
EnviroSystems to pay such tax liabilities within 30 days of receipt of such
payment or refunded to the payee; PROVIDED, FURTHER, that such payments
shall be excluded from the calculation of the amount of Restricted Payments
available to be made referred to in clause (3) of paragraph (a) of this
covenant; and
(7) payments to EnviroSystems (i) to enable EnviroSystems to make purchases of
Senior Discount Notes with the Net Cash Proceeds of an Asset Disposition
required to be made pursuant to the indenture governing the Senior Discount
Notes and permitted under the covenant described under the caption
"--Limitation on Sales of Assets and Subsidiary Stock" or (ii) from and
after April 30, 2004, to enable EnviroSystems to make required interest
payments on the Senior Discount Notes; PROVIDED, in each case, that at the
time and immediately following such payment, no Default or
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Event of Default shall have occurred and be continuing; PROVIDED FURTHER,
that such payments shall be deducted in the calculation of the amount of
Restricted Payments available to be made referred to in clause (3) of
paragraph (a) of this covenant.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES. The Company shall not, and shall not permit any Restricted
Subsidiary to, directly or indirectly, create or permit to exist or become
effective any encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock or with
respect to any other interest or participation in, or measured by, its
profits to the Company or a Restricted Subsidiary or pay any Indebtedness or
other obligation owed to the Company or a Restricted Subsidiary;
(2) make any loans or advances to the Company or any other Restricted
Subsidiary; or
(3) transfer any of its property or assets to the Company or any other
Restricted Subsidiary.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) the Indenture, the Senior Secured Credit Facility, or the indenture
governing the Senior Discount Notes, in each case as in effect on the Issue
Date, and any amendments, restatements, renewals, replacements or
refinancings thereof; PROVIDED, HOWEVER, that any such amendments,
restatements, renewals, replacements or refinancings to or under the Senior
Secured Credit Facility or the indenture governing the Senior Discount Notes
are not materially more restrictive, when taken as a whole, with respect to
such dividend and other payment restrictions, to the Company or any
Restricted Subsidiary than those contained in the Senior Secured Credit
Facility or such indenture, as the case may be, (or, if more restrictive,
than those contained in the Indenture) immediately prior to any such
amendment, restatement, renewal, replacement or refinancing;
(2) the indenture relating to any Public Debt issued after the date hereof,
which encumbrances or restrictions are not materially more restrictive, when
taken as a whole, with respect to such dividend and other payment
restrictions, to the Company or any Restricted Subsidiary than those
contained in the Indenture;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of an Acquired Person
acquired by the Company or any of its Restricted Subsidiaries as in effect
at the time of such acquisition (except to the extent such Indebtedness was
incurred in connection with or in contemplation of such acquisition or in
violation of the covenants described above under the caption "--Limitation
on Indebtedness"); PROVIDED, HOWEVER, that (A) such restriction is not
applicable to any Person, or the properties or assets of any Person, other
than the Acquired Person, and (B) the consolidated net income of such
Acquired Person for any period prior to such acquisition shall not be taken
into account in determining whether such acquisition was permitted by the
terms of the Indenture;
(5) customary non-assignment provisions in leases or other agreements entered
into the ordinary course of business;
(6) Purchase Money Indebtedness for property acquired in the ordinary course of
business that only impose restrictions on the property so acquired;
(7) an agreement for the sale or disposition of the Capital Stock or assets of
such Restricted Subsidiary; PROVIDED, HOWEVER, that such restriction is only
applicable to such Restricted Subsidiary or assets, as applicable, and such
sale or disposition otherwise is permitted pursuant to the covenant
described under the caption "--Limitation on Sales of Assets and Subsidiary
Stock"; PROVIDED, FURTHER, HOWEVER, that such restriction or encumbrance
shall be effective only for a period from the execution and delivery of such
agreement through a termination date not later than 180 days after such
execution and delivery;
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(8) Refinancing Indebtedness permitted under the Indenture; PROVIDED, HOWEVER,
that the restrictions contained in the agreements governing such Refinancing
Indebtedness are no more restrictive in the aggregate than those contained
in the agreements governing the Indebtedness being refinanced immediately
prior to such refinancing;
(9) customary provisions restricting subletting or assignment of any lease
entered into in the ordinary course of business; or
(10) Liens permitted under the Indenture.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK.
(a) The Company shall not, and shall not permit any Restricted Subsidiary
to, make any Asset Disposition unless:
(1) (x) the Company or such Restricted Subsidiary receives consideration at the
time of such Asset Disposition at least equal to the fair market value, as
determined in good faith by the Board of Directors (including as to the
value of all non-cash consideration), of the shares and assets subject to
such Asset Disposition and (y) at least 80% of the consideration thereof
received by the Company or such Restricted Subsidiary, as the case may be,
is in the form of cash or Cash Equivalents, PROVIDED, HOWEVER, that the
requirement set forth in (x) above shall not apply to any Asset Disposition
to any governmental authority as may be required, from time to time, by such
governmental authority; and
(2) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted Subsidiary, as the
case may be):
(A) first, to the extent the Company elects (or is required by the terms of
any Senior Indebtedness), to prepay, repay or purchase Senior
Indebtedness of the Company or any Subsidiary Guarantor or any
Indebtedness or other Obligations under the Senior Secured Credit
Facility or, if the Asset Disposition was made by a Restricted Subsidiary
that is not a Subsidiary Guarantor, of any Restricted Subsidiary within
360 days of the Company's or such Restricted Subsidiary's receipt of Net
Available Cash from such Asset Disposition;
(B) second, to the extent of the balance of such Net Available Cash after
application in accordance with clause (A), at the Company's election, to
the investment by the Company or any Subsidiary Guarantor or, if the
Asset Disposition was made by a Restricted Subsidiary that is not a
Subsidiary Guarantor, any Restricted Subsidiary, in (1) assets of the
Company, such Subsidiary Guarantor or, if the Asset Disposition was made
by a Restricted Subsidiary that is not a Subsidiary Guarantor, such
Restricted Subsidiary (other than Indebtedness or Capital Stock) to
replace the assets that were the subject of such Asset Disposition or (2)
assets (other than inventory or other current assets or Indebtedness or
Capital Stock) of the Company, any Subsidiary Guarantor or, if the Asset
Disposition was made by a Restricted Subsidiary that is not a Subsidiary
Guarantor, any Restricted Subsidiary that (as determined in good faith by
the Board of Directors) are related to the business of the Company and
the Wholly Owned Subsidiaries existing on the Issue Date or which are
used in a Related Business, in each case within 360 days from the date of
the Company's or such Restricted Subsidiary's receipt of Net Available
Cash from such Asset Disposition;
(C) third, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B), to make a PRO RATA
offer to purchase notes at par (and, to the extent required by the
instrument governing such Indebtedness, any other Senior Subordinated
Indebtedness designated by the Company, at a price no greater than par or
accreted value, whichever is less) plus accrued and unpaid interest; and
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(D) fourth, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A), (B) and (C), in any manner
that does not violate the Indenture; PROVIDED, HOWEVER, that in
connection with any prepayment, repayment or purchase of Indebtedness
pursuant to clause (A) or (C) above, the Company or such Subsidiary shall
permanently retire such Indebtedness and cause the related loan
commitment, if any, to be permanently reduced in an amount equal to the
principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions of this clause (a), the Company and
its Restricted Subsidiaries shall not be required to apply any Net Available
Cash in accordance with clause (a)(2)(C) above except to the extent that the
aggregate Net Available Cash from all Asset Dispositions which are not applied
in accordance with clauses (a)(2)(A) and (B) above exceeds $10.0 million.
Pending application of Net Available Cash pursuant to this clause (a), such Net
Available Cash shall be used to temporarily reduce Senior Indebtedness or
invested in Cash Equivalents.
For the purposes of this covenant, the following is deemed to be cash or
Cash Equivalents: the express assumption of Indebtedness (other than any
Indebtedness that is by its terms subordinated to the notes) of the Company or
any Restricted Subsidiary, but only to the extent that such assumption is
effected on a basis under which there is no further recourse to the Company or
any of the Restricted Subsidiaries with respect to such liabilities.
(b) In the event of an Asset Disposition that requires the purchase of the
notes (and other Senior Subordinated Indebtedness) pursuant to clause (a)(2)(C)
above, the Company will be required to purchase notes tendered pursuant to an
offer by the Company for the notes (and, to the extent required, other Senior
Subordinated Indebtedness) at a purchase price of 100% of their principal amount
or the accreted value thereof, whichever is less, (without premium) plus accrued
but unpaid interest (or, in respect of such other Senior Subordinated
Indebtedness such lesser price, if any, as may be provided for by the terms of
such other Senior Subordinated Indebtedness) in accordance with the procedures
(including prorating in the event of oversubscription) set forth in the
Indenture which shall include, among other things, that the offer shall remain
open for 20 Business Days following commencement. If the aggregate purchase
price of notes (and, to the extent required, any other Senior Subordinated
Indebtedness) tendered pursuant to such offer is less than the Net Available
Cash allotted to the purchase thereof, the Company will be required to apply the
remaining Net Available Cash in accordance with clause (a)(2)(D) above.
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
(d) The Senior Secured Credit Facility requires the Company to repay all of
its obligations under the Senior Secured Credit Facility prior to repurchasing
notes as a result of an Asset Disposition. In order to repurchase notes pursuant
to clauses (a) and (b) above prior to repaying its obligations under the Senior
Secured Credit Facility, the Company would have to obtain the consent of the
lenders under the Senior Secured Credit Facility. If the Company does not obtain
such a consent or repay its obligations under the Senior Secured Credit
Facility, the Company will be contractually prohibited from repurchasing the
notes. In such case, the Company's failure to repurchase the notes would
constitute an Event of Default under the Indenture which would, in turn,
constitute a default under the Senior Secured Credit Facility.
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LIMITATION ON AFFILIATE TRANSACTIONS.
The Company shall not, and shall not permit any Restricted Subsidiary to,
directly or indirectly, conduct any business or enter into any transaction or
series of similar transactions (including the purchase, sale, lease, transfer or
other disposition or exchange of any asset or property or the rendering of any
service) with any Affiliate of the Company (other than the Company or any Wholly
Owned Subsidiary of the Company or any employee stock ownership plan or similar
trust for the benefit of the Company's or a Restricted Subsidiary's employees)
unless:
(1) the terms of such business, transaction or series of transactions are no
less favorable to the Company or such Restricted Subsidiary as terms that
would be obtainable at the time for a comparable transaction or series of
similar transactions in arms' length dealings with an unrelated third
Person; and
(2) the Company delivers to the Trustee:
(A) with respect to any transaction involving an aggregate amount in excess
of $5.0 million, a resolution of the Board of Directors certifying that a
majority of the disinterested members of such Board have determined in
good faith that such business or transaction or series of transactions
meets the criteria set forth in (1) above and have approved the
transaction; and
(B) with respect to any transaction involving an amount in excess of $10.0
million, the Board resolution set forth in (2)(A) above, as well as an
opinion as to the fairness from a financial point of view to the Company
or its Restricted Subsidiary, as the case may be, issued by a nationally
recognized independent investment banking firm, accounting firm or
appraisal firm with experience in evaluating the terms and conditions of
the type of business or transaction.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any Restricted Payment permitted to be made pursuant to the covenant
described under the caption "--Limitation on Restricted Payments", or any
payment or transaction specifically excepted from the definition of
Restricted Payment;
(2) any issuance of securities, or other payments, awards or grants in cash,
securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans entered into in the
ordinary course of business and approved by a majority of the entire Board
of Directors or by a majority of the disinterested members of the Board of
Directors or a majority of the entire board of directors or by a majority of
the disinterested members of the board of directors of the relevant
Restricted Subsidiary;
(3) the grant of stock options or similar rights to employees and directors
pursuant to plans approved by a majority of the entire Board of Directors or
by a majority of the disinterested members of the Board of Directors or a
majority of the entire board of directors or by a majority of the
disinterested members of the board of directors of the relevant Restricted
Subsidiary;
(4) loans or advances to officers, directors or employees in the ordinary course
of business which, except with respect to ordinary travel expenses and
advances, have been approved by the Board of Directors;
(5) the payment of reasonable fees to directors of EnviroSystems, the Company
and the Subsidiaries who are not employees of Environmental Systems
Products, Inc., the Company or the Subsidiaries for rendering of services
(including attending meetings of the board of directors) as a director;
(6) any Affiliate transaction between the Company and a Subsidiary Guarantor,
between Subsidiary Guarantors, or between Restricted Subsidiaries which are
each not Subsidiary Guarantors;
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(7) indemnification or insurance provided to officers or directors of
EnviroSystems, the Company or any Subsidiary of the Company approved in good
faith by the Board of Directors;
(8) payment of compensation and benefits to directors, officers and employees of
the Company and Subsidiaries of the Company approved in good faith by the
Board of Directors;
(9) payment of a management or similar fee by Environmental Systems Products,
Inc., the Company or any Restricted Subsidiary to Alchemy Partners (or a
Person designated by Alchemy Partners) in an amount, together with all other
such payments made by the Company and Restricted Subsidiaries, not to exceed
$1.0 million per year (or the equivalent thereof in another currency) plus
reasonable out of pocket expenses;
(10) loans made to officers of the Company or its Subsidiaries in an aggregate
amount not to exceed $4.5 million outstanding at any time solely for the
purpose of reimbursing such officers for the amount of income taxes payable
by such officers in connection with shares of Capital Stock of Environmental
Systems Products, Inc. issued to such officers, which shares are pledged to
the Company or the Subsidiary making such loans; and
(11) the Permitted Investment contemplated by clause (12) of the definition of
"Permitted Investment".
MERGER AND CONSOLIDATION. The Company shall not, in a single transaction or
a series of related transactions, consolidate with or merge with or into, or
sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all its assets (computed on a consolidated basis) to, any Person
or group of affiliated Persons, unless:
(1) the resulting, surviving or transferee Person shall be the Company or, if
not the Company, shall be a corporation organized and existing under the
laws of the United States of America, any State thereof or the District of
Columbia (the "Successor Company"), and such Successor Company shall
expressly assume, by an indenture supplemental to the Indenture in form
reasonably satisfactory to the Trustee, executed and delivered to the
Trustee, all the obligations of the Company under the notes and the
Indenture (and the Subsidiary Guarantees shall be confirmed as applying to
such Person's obligations);
(2) at the time of and immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any Indebtedness which
becomes an obligation of the resulting, surviving or transferee Person or
any Subsidiary as a result of such transaction as having been Incurred by
such Person or such Subsidiary at the time of such transaction), no Default
or Event of Default shall have occurred and be continuing;
(3) immediately after giving effect to such transaction, (and treating any
Indebtedness which becomes an obligation of the resulting, surviving or
transferee Person or any Subsidiary as a result of such transaction as
having been Incurred by such Person or such Subsidiary at the time of such
transaction) the resulting, surviving or transferee Person would be able to
Incur at least $1.00 of Indebtedness pursuant to the first paragraph of the
covenant described under the caption "--Limitation on Indebtedness"; and
(4) the Company shall have delivered to the Trustee an Officers' Certificate and
if a supplemental indenture is required, an Opinion of Counsel, each stating
that such consolidation, merger or transfer and such supplemental indenture
(if any) comply with the Indenture.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, and the predecessor company, in the case of a
sale, assignment conveyance, transfer or other disposition (but not in the case
of a lease), shall be released from the obligation to pay the principal of and
interest on the notes.
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Notwithstanding the foregoing, the consolidation or merger of the Company
with, or the sale, assignment, conveyance, transfer, lease or other disposition
by the Company of all or substantially all of its property or assets to, one or
more Subsidiaries of the Company shall not relieve the Company from its
obligations under the notes and the Indenture.
For purposes of the foregoing, the transfer (by sale, assignment,
conveyance, transfer, lease or otherwise) of all or substantially all of the
properties and assets of one or more Subsidiaries, the Company's interest in
which constitutes all or substantially all of the properties and assets of the
Company, shall be deemed to be the transfer of all or substantially all of the
properties and assets of the Company.
The Company will not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or sell, assign, convey, transfer, lease or otherwise
dispose of, in one transaction or a series of transactions, all or substantially
all of its assets to, any Person unless:
(1) the resulting, surviving or transferee Person shall be the Company or a
Subsidiary Guarantor or, if not the Company or such a Subsidiary Guarantor,
shall be a corporation organized and existing under the laws of the
jurisdiction under which such Subsidiary was organized or under the laws of
the United States of America, or any State thereof or the District of
Columbia, and such Person shall expressly assume, by executing a Subsidiary
Guarantee, all the obligations of such Subsidiary, if any, under its
Subsidiary Guarantee;
(2) immediately after giving effect to such transaction or transactions on a pro
forma basis (and treating any Indebtedness which becomes an obligation of
the resulting, surviving or transferee Person as a result of such
transaction as having been issued by such Person at the time of such
transaction), no Default or Event of Default shall have occurred and be
continuing;
(3) immediately after giving effect to such transaction, the Company would be
able to Incur at least $1.00 of Indebtedness pursuant to the first paragraph
of the covenant described under the caption "--Limitation on Indebtedness";
and (iv) the Company delivers to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that such consolidation, merger or transfer
and such Subsidiary Guarantee, if any, complies with the Indenture. The
provisions of clauses (1), (2) and (3) above shall not apply to any one or
more transactions which constitute an (a) Asset Disposition if the Company
has complied with the applicable provisions of the covenant described under
the caption "--Limitation on Sales of Assets and Subsidiary Stock" above or
(b) the grant of any Lien on the assets of a Restricted Subsidiary to secure
outstanding Indebtedness under the Senior Secured Credit Facility, which
Lien is permitted by the terms of the Indenture, or any conveyance or
transfer of such assets resulting from an exercise of remedies in respect of
any such Lien.
Notwithstanding the foregoing but subject to the terms of the first and
fifth paragraphs of this "Merger and Consolidation" section, as applicable, the
Company may merge with or into, or sell, assign, convey, transfer, lease or
otherwise dispose of all or substantially all of its assets to, any Subsidiary
Guarantor, and a Subsidiary Guarantor may merge with or into, or convey,
transfer or lease all or substantially all of its assets to, any other
Subsidiary Guarantor.
The phrase "all or substantially all" of the assets of the Company or a
Subsidiary Guarantor will likely be interpreted under applicable state law and
will be dependent upon particular facts and circumstances. As a result, there
may be a degree of uncertainty in ascertaining whether a sale or transfer of
"all or substantially all" of the assets of the Company or a Subsidiary
Guarantor has occurred.
FUTURE SUBSIDIARY GUARANTORS. If the Company or any of the Subsidiary
Guarantors (other than SPCs) acquires or creates another Restricted Subsidiary
after the date of the Indenture:
104
(1) that is organized or existing under the laws of the United States, any state
thereof or the District of Columbia;
(2) more than 65% of the Capital Stock of which is pledged to a United States
lender; or
(3) that Guarantees any Indebtedness owed to a United States lender, on and
after the date of the Indenture (if not then a Subsidiary Guarantor),
then that newly acquired or created Restricted Subsidiary must execute and
deliver an indenture supplemental to the Indenture and thereby become a
Subsidiary Guarantor which shall be bound by the Subsidiary Guarantee of the
notes in the form set forth in the Indenture (without such future Subsidiary
Guarantor being required to execute and deliver the Subsidiary Guarantee
endorsed on the notes).
In addition, the Company will not permit any Restricted Subsidiary that is
not a Subsidiary Guarantor to either:
(1) Guarantee any other Indebtedness of the Company or any Subsidiary Guarantor;
or
(2) otherwise become obligated with respect to Indebtedness of the Company or
any Subsidiary Guarantor, including but not limited to, Indebtedness
Incurred by the Company or a Subsidiary Guarantor under the Senior Secured
Credit Facility, unless such Restricted Subsidiary simultaneously executes a
supplemental indenture to the Indenture providing for the Guarantee of the
payment of the notes by such Restricted Subsidiary, which Guarantee of the
payment of the notes shall be subordinated to the Guarantee of such other
Indebtedness to the same extent as the notes or the Subsidiary Guarantees,
as applicable, are subordinated to such other Indebtedness; PROVIDED,
HOWEVER, that such Restricted Subsidiary shall not be required to so
Guarantee the payment of the notes to the extent that such other
Indebtedness does not exceed $1 million individually or, together with any
other Indebtedness of the Company or any Subsidiary Guarantor Guaranteed by
such Restricted Subsidiary, $3 million in the aggregate. Such Restricted
Subsidiary shall be deemed released from its obligations under the Guarantee
of the payment of the notes at any such time that such Restricted Subsidiary
is released from all of its obligations under its Guarantee of such other
Indebtedness unless such release results from the payment under such
Guarantee of other Indebtedness.
LIMITATION ON ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND THE HOLDING
COMPANIES. Environmental Systems Products, Inc. and the Holding Companies shall
not, and the Company shall not permit the Holding Companies to, engage in any
business other than holding the securities of their respective direct
subsidiaries.
LIMITATION ON LINES OF BUSINESS. Neither the Company nor any of its
Subsidiaries shall directly or indirectly engage to any substantial extent in
any line or lines of business activity other than that which, in the reasonable
good faith judgment of the Board of Directors, is a Related Business.
LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. The Company may
designate any Subsidiary of the Company (other than a Subsidiary Guarantor) as
an "Unrestricted Subsidiary" under the Indenture (a "Designation") only if:
(1) no Default shall have occurred and be continuing at the time of or after
giving effect to such Designation; and
(2) either (x) the assets of such Subsidiary do not exceed $1,000 or (y) the
Company would be permitted under the Indenture to make an Investment at the
time of Designation (assuming the effectiveness of such Designation) in an
amount (the "Designation Amount") equal to the fair market value of the
Company's Investment in such Subsidiary on such date.
105
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under the caption "--Limitation on Restricted Payments" for all
purposes of the Indenture in the Designation Amount. The Company shall not, and
shall not permit any Restricted Subsidiary to, at any time (a) provide credit
support for, or a guarantee of, any Indebtedness of any Unrestricted Subsidiary
(including any undertaking, agreement or instrument evidencing such
Indebtedness) or (b) be directly or indirectly liable for any Indebtedness of
any Unrestricted Subsidiary.
The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") if:
(1) no Default shall have occurred and be continuing at the time of and after
giving effect to such Revocation; and
(2) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if Incurred at such time, have
been permitted to be Incurred for all purposes of the Indenture and for all
purposes of the Indenture shall be deemed to have been Incurred at such
time.
All Designations and Revocations must be evidenced by resolutions of the
Board of Directors delivered to the Trustee certifying compliance with the
foregoing provisions.
Notwithstanding the foregoing, no Subsidiary that is a Subsidiary Guarantor
as of the Issue Date shall be permitted to become an Unrestricted Subsidiary.
SEC REPORTS. Whether or not required by the rules and regulations of the
SEC, so long as any Notes are outstanding beginning with the year ended December
31, 1998, the Company will furnish to the Trustee and all Holders of notes:
(1) all quarterly and annual financial information that would be required to be
contained in a filing with the SEC on Forms 10-Q and 10-K, as applicable, if
the Company were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and, with respect to the annual information only, a report thereon by the
Company's certified independent accountants; and
(2) all current reports that would be required to be filed with the SEC on Form
8-K if the Company were required to file such reports, in each case within
the time periods specified in the SEC's rules and regulations; PROVIDED that
the foregoing shall not require the Company to furnish separate financial
results of its Subsidiaries. In addition, the Company will make such
information available to securities analysts and prospective investors upon
request. In addition, the Company has agreed that, for so long as any notes
remain outstanding, it will furnish to the Trustee, Holders and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
DEFAULTS
Each of the following is an Event of Default:
(1) a default in the payment of interest on the notes when due, continued for 30
days (whether or not prohibited by the subordination provisions of the
Indenture);
(2) a default in the payment of principal of any note when due at its Stated
Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise (whether or not prohibited by the subordination
provisions of the Indenture);
106
(3) the failure by the Company to comply with its obligations in the covenants
described above under the captions "--Change of Control", "--Certain
Covenants"--Limitations on Sales of Assets and Subsidiary Stock" or
"--Merger and Consolidation" above;
(4) the failure by the Company to comply for 30 days after notice with any of
its obligations in the covenants described above under the captions
"--Limitation on Indebtedness", "--Limitation on Liens Securing Subordinated
Indebtedness", "--Limitation on Other Senior Subordinated Indebtedness",
"--Limitation on Restricted Payments", "--Limitation on Restrictions on
Distributions from Restricted Subsidiaries", "--Limitation on Affiliate
Transactions", "--Future Subsidiary Guarantors", "--Limitation on
EnviroSystems and the Holding Companies", "--Limitation on Lines of
Business", "--Limitation on Designations of Unrestricted Subsidiaries", or
"--SEC Reports";
(5) the failure by the Company to comply for 60 days after notice with its other
covenants, obligations, warranties or agreements contained in the Indenture;
(6) Indebtedness of Environmental Systems Products, Inc., the Company or any
Subsidiary which is not paid within any applicable grace period after final
maturity or which is accelerated by the Holders thereof because of a default
and the total amount of such Indebtedness unpaid or accelerated exceeds
$10.0 million and such default shall not have been cured or such
acceleration rescinded (the "cross acceleration provision");
(7) certain events of bankruptcy, insolvency or reorganization of the Company or
any Significant Subsidiary (the "bankruptcy provisions");
(8) any judgment or decree for the payment of money in excess of $10.0 million
is rendered against the Company or any Subsidiary and is not discharged and
either (A) an enforcement proceeding has been commenced by any creditor upon
such judgment or decree or (B) there is a period of 60 days following such
judgment during which such judgment or decree is not discharged, waived or
the execution thereof stayed; or
(9) any Subsidiary Guarantee of a Significant Subsidiary ceases to be in full
force and effect or becomes unenforceable or invalid or is declared null and
void (other than in accordance with the terms of the Subsidiary Guarantee)
or any Subsidiary Guarantor that is a Significant Subsidiary denies or
disaffirms its obligations under its Subsidiary Guarantee.
However, a default under clause (4) or (5) will not constitute an Event of
Default until the Trustee or the Holders of 25% in principal amount of the
outstanding notes notify the Company of the default and the Company does not
cure such default within the time specified after receipt of such notice.
If an Event of Default (other than the bankruptcy provisions relating to the
Company or any Significant Subsidiary) occurs and is continuing, the Trustee or
the Holders of at least 25% in principal amount of the outstanding notes may
declare the principal of and accrued but unpaid interest on all the notes to be
due and payable. Upon such a declaration, such principal and interest shall be
due and payable immediately; PROVIDED, HOWEVER, that for so long as the Senior
Secured Credit Facility remains in effect, such declaration shall not become
effective until the earlier of five Business Days following delivery of notice
to the Representative of such creditors of the intention to accelerate the notes
or the acceleration of any Indebtedness under the Senior Secured Credit
Facility. If an Event of Default relating to the bankruptcy provisions relating
to the Company or any Significant Subsidiary occurs and is continuing, the
principal of and interest on all the notes will IPSO FACTO become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holders. Under certain circumstances, the Holders of a
majority in principal amount of the outstanding notes may rescind any such
acceleration with respect to the notes and its consequences.
107
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium, if any, or interest when due, no Holder of a note may pursue
any remedy with respect to the Indenture or the notes unless:
(1) such Holder has previously given the Trustee notice that an Event of Default
is continuing;
(2) Holders of at least 25% in principal amount of the outstanding notes have
requested the Trustee to pursue the remedy;
(3) such Holders have offered the Trustee reasonable security or indemnity
against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days after the
receipt thereof and the offer of security or indemnity; and
(5) the Holders of a majority in principal amount of the outstanding notes have
not given the Trustee a direction inconsistent with such request within such
60-day period.
Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee reasonably determines is unduly prejudicial to the
rights of any other Holder or that would involve the Trustee in personal
liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of or interest on any note, the notes Trustee may withhold notice
if and so long as the board of directors, the executive committee or a committee
of its trust officers reasonably determines that withholding notice is in the
best interest of the Holders. In addition, the Company is required to deliver to
the Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred during
the previous year. The Company also is required to deliver to the Trustee,
within 30 days after the occurrence thereof, written notice of any event which
would constitute certain Defaults, their status and what action the Company is
taking or proposes to take in respect thereof.
AMENDMENTS, SUPPLEMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended or supplemented
with the consent of the Holders of a majority in principal amount of the notes
then outstanding (including consents obtained in connection with a tender offer
or exchange for the notes) and, subject to certain exceptions, any past default
or compliance with any provisions may also be waived with the consent of the
Holders of a majority in principal amount of the notes then outstanding.
Without the consent of each Holder of an outstanding note affected thereby,
no amendment or supplement may:
(1) reduce the amount of notes whose Holders must consent to an amendment,
supplement or waiver;
(2) reduce the rate of or extend the time for payment of interest on any note;
(3) reduce the principal of or extend the Stated Maturity of any note;
108
(4) alter the provisions with respect to the mandatory redemption of the notes
or the redemption of the notes at the option of the Company in a manner
adverse to the Holders;
(5) waive a Default or Event of Default in the payment of principal of, premium,
if any, or interest on, the notes;
(6) waive a mandatory redemption payment with respect to any note;
(7) make any note payable in money or payable in a place other than that stated
in the note;
(8) impair the right of any Holder to receive payment of principal of and
interest on such Holder's notes on or after the due dates therefor or to
institute suit for the enforcement of any payment on or with respect to such
Holder's notes;
(9) make any change in the amendment provisions which require each Holder's
consent or in the waiver provisions;
(10) make any change to the subordination provisions (including definitions) of
the Indenture that would adversely affect the Holders; or
(11) make any change in any Subsidiary Guarantee that would adversely affect the
Holders.
Without the consent of any Holder, the Company and the Trustee may amend or
supplement the Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation of the
obligations of the Company under the Indenture, to provide for uncertificated
notes in addition to or in place of certificated notes (PROVIDED that the
uncertificated notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated notes are
described in Section 163(f)(2)(B) of the Code), to add guarantees with respect
to the notes, to secure the notes, to add to the covenants of the Company for
the benefit of the Holders or to surrender any right or power conferred upon the
Company, to make any change that does not adversely affect the rights of any
Holder or to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act. However, no
amendment may be made to the subordination provisions of the Indenture that
adversely affects the rights of any Holder of Senior Indebtedness of the Company
or any Restricted Subsidiary then outstanding unless the Holders of such Senior
Indebtedness (or their Representative) consent to such change.
The consent of the Holders is not necessary under the Indenture to approve
the particular form of any proposed amendment or supplement. It is sufficient if
such consent approves the substance of the proposed amendment or supplement.
After an amendment or supplement under the Indenture becomes effective, the
Company is required to mail to Holders a notice briefly describing such
amendment or supplement. However, the failure to give such notice to all
Holders, or any defect therein, will not impair or affect the validity of the
amendment or supplement.
TRANSFER
The registered holder of a note is treated as the owner of it for all
purposes. The notes are issued in registered form and are transferable only upon
the surrender of the notes being transferred for registration of transfer. The
Company may require payment of a sum sufficient to cover any tax, assessment or
other governmental charge payable in connection with certain transfers and
exchanges.
DEFEASANCE
The Company at its option at any time may terminate all of its obligations
under the notes and the Indenture ("legal defeasance"). In addition, the Company
at its option at any time may terminate its
109
obligations under "Change of Control" and under the covenants described under
the caption "--Certain Covenants" (other than the covenant described under
"--Merger and Consolidation") (and any omission to comply with such obligations
shall not constitute a Default or Event of Default with respect to the notes),
and the limitations contained in clause (3) of the first paragraph of the
covenant described under the caption "--Certain Covenants--Merger and
Consolidation" above ("covenant defeasance"). Despite either a legal or covenant
defeasance certain obligations, including, but not limited to, those respecting
the defeasance trust and obligations to register the transfer or exchange of the
notes, to replace mutilated, destroyed, lost or stolen notes and to maintain a
registrar and paying agent in respect of the notes shall remain in effect. In
the event that a covenant defeasance occurs, certain events (not including
non-payment, bankruptcy and insolvency events) described under "--Defaults" will
no longer constitute Events of Default with respect to the notes.
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises either its
legal defeasance option or its covenant defeasance option, each Subsidiary
Guarantor will be released from all of its obligations with respect to its
Subsidiary Guarantee.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations in such amounts as will be sufficient, in the opinion of
a nationally recognized firm of independent public accountants or a nationally
recognized investment banking firm, to pay and discharge the principal of,
premium, if any, and interest on the outstanding notes to redemption or
maturity, as the case may be, and must comply with certain other conditions,
including delivery to the Trustee of an Opinion of Counsel to the effect that
Holders will not recognize income, gain or loss for Federal income tax purposes
as a result of such deposit and defeasance and will be subject to Federal income
tax on the same amount and in the same manner and at the same times as would
have been the case if such deposit and defeasance had not occurred (and, in the
case of legal defeasance only, such Opinion of Counsel must be based on a ruling
of the Internal Revenue Service or other change in applicable Federal income tax
law).
If the funds deposited with the Trustee to effect legal defeasance or
covenant defeasance are insufficient to pay the principal of, premium, if any,
and interest on the notes when due, then the obligations of the Company and the
Subsidiary Guarantors under the Indenture will be revived and no such defeasance
will be deemed to have occurred.
CONCERNING THE TRUSTEE
United States Trust Company of Texas, N.A. is the Trustee under the
Indenture and has been appointed by the Company as Registrar and Paying Agent
with regard to the notes. Such bank may also act as a depositary of funds for,
or make loans to and perform other services for, the Company or its Affiliates
in the ordinary course of business in the future.
The Holders of a majority in principal amount of the outstanding notes are
given the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that if an Event of Default occurs
(and is not cured), the Trustee will be required, in the exercise of its power,
to use the degree of care of a prudent man in the conduct of his own affairs.
Subject to such provisions, the Trustee will be under no obligation to exercise
any of its rights or powers under the Indenture at the request of any Holder of
notes, unless such Holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense and then
only to the extent required by the terms of the Indenture. The Trustee may
resign at any time or may be removed by the Company. If the Trustee resigns, is
removed or becomes incapable of acting as Trustee or if a vacancy occurs in the
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office of the Trustee for any cause, a successor Trustee shall be appointed in
accordance with the provisions of the Indenture.
If the Trustee has or shall acquire a conflicting interest within the
meaning of the Trust Indenture Act, the Trustee shall either eliminate such
interest or resign, to the extent and in the manner provided by, and subject to
the provisions of, the Trust Indenture Act and the Indenture. The Indenture also
contains certain limitations on the right of the Trustee, as a creditor of the
Company, to obtain payment of claims in certain cases, or to realize on certain
property received by it in respect of any such claims, as security or otherwise.
GOVERNING LAW
The Indenture, the Guarantees and the notes are governed by, and construed
in accordance with, the laws of the State of New York without giving effect to
applicable principles of conflicts of law to the extent that the application of
the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries (the "Acquired Person"):
(1) existing at the time such Person becomes a Restricted Subsidiary of the
Company or at the time it merges or consolidates with the Company or any of
its Restricted Subsidiaries, including, without limitation, Indebtedness
Incurred in connection with, or in contemplation of, such other Person
merging with or into or becoming a Restricted Subsidiary of such specified
Person; or
(2) assumed in connection with the acquisition of assets from such Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, control of
a Person means the power, direct or indirect, to direct or cause the direction
of the management and policies of such Person whether through the ownership of
voting securities, by contract or otherwise and the terms "controlling" and
"controlled" have meanings correlative to the foregoing. For purposes of the
provisions described in "--Limitation on Restricted Payments" and "--Limitation
on Affiliate Transactions" only, "Affiliate" shall also mean any beneficial
owner of Capital Stock representing 5% or more of the total voting power of the
Voting Stock (on a fully diluted basis) of the Company or of rights or warrants
to purchase such Capital Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
"Alchemy" means Alchemy Investment Plan, a group of funds advised by Alchemy
Partners, and its Affiliates.
"Alchemy Partners" means Alchemy Partners, an English partnership.
"Asset Disposition" means any sale, lease, transfer, conveyance, issuance or
other disposition (or series of related sales, leases, transfers, conveyances,
issuances or dispositions) by the Company or any Restricted Subsidiary,
including any disposition by means of a merger or consolidation (each referred
to for the purposes of this definition as a "disposition") (including by way of
a sale-and-leaseback), of:
(1) any shares of Capital Stock of a Restricted Subsidiary (other than
directors' qualifying shares or shares required by applicable law to be held
by a Person other than the Company or a Restricted Subsidiary);
111
(2) all or substantially all the assets of any division or line of business of
the Company or any Restricted Subsidiary; or
(3) any other assets of the Company or any Restricted Subsidiary outside of the
ordinary course of business of the Company or such Restricted Subsidiary
(including as a result of a termination of an Emissions Contract).
Notwithstanding the preceding, the following items shall not be deemed to be
Asset Dispositions:
(1) a disposition by (a) the Company to a Wholly Owned Subsidiary that is a
Subsidiary Guarantor, (b) a Restricted Subsidiary that is a Subsidiary
Guarantor to the Company or a Wholly Owned Subsidiary that is a Subsidiary
Guarantor or (c) a Restricted Subsidiary that is not a Subsidiary Guarantor
to the Company or any Restricted Subsidiary;
(2) a disposition of obsolete equipment or equipment that is no longer useful in
the conduct of the business of the Company and any Restricted Subsidiary and
that is disposed of in each case in the ordinary course of business;
(3) the sale of other assets so long as the fair market value of the assets
disposed of pursuant to this clause (c) does not exceed $3.0 million in the
aggregate in any fiscal year;
(4) for the purposes of the covenant described under "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" only, a
disposition subject to the covenant described under "--Limitation on
Restricted Payments"; and
(5) the disposition of all or substantially all of the assets of the Company in
the manner permitted pursuant to the provisions described under "--Certain
Covenants-Merger and Consolidation".
The term "Asset Disposition" shall include the receipt by the Company or any
Restricted Subsidiary of any termination payments, settlement or judgment awards
or similar payments in connection with, or as a result of, the termination or
cancellation of any Emissions Contract.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination:
(1) if such Sale/Leaseback Transaction is a Capital Lease Obligation, the amount
of Indebtedness represented thereby according to the definition of "Capital
Lease Obligations"; and
(2) in other instances, the present value (discounted at the interest rate borne
by the Notes, compounded annually) of the total obligations of the lessee
for rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has
been renewed or extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing:
(1) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payment of
such Indebtedness or redemption or similar payment with respect to such
Preferred Stock multiplied by the amount of such payment by;
(2) the sum of all such payments.
"Bank Indebtedness" means:
(1) the Indebtedness outstanding or arising under the Senior Secured Credit
Facility;
(2) all obligations incurred by or owing to the holders of such Indebtedness or
any agent or representative thereof outstanding or arising under the Senior
Secured Credit Facility (including, but not limited to, all interest
(including, but not limited to, interest accruing pursuant to the
112
terms of the Senior Secured Credit Facility on or after the filing of any
petition in any bankruptcy, reorganization or similar proceeding relating to
the Company or any Restricted Subsidiary, whether or not a claim for such is
allowed in such proceeding), all fees and expenses of counsel, reimbursement
obligations, indemnities and all other charges, fees, expenses and other
claims); and
(3) all interest rate agreement obligations arising in connection thereafter
with any party to the Senior Secured Credit Facility.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Contribution" means a contribution to capital received by the
Company from any holder of the Company's Capital Stock whereby the Company
receives cash solely in exchange for either no consideration or Capital Stock of
the Company other than Disqualified Stock.
"Capital Lease Obligations" of a Person means any obligation which is
required to be classified and accounted for as a capital lease on the face of a
balance sheet of such Person prepared in accordance with GAAP; the amount of
such obligation shall be the capitalized amount thereof, determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such person, including any Preferred Stock,
but excluding any debt securities convertible into or exchangeable for such
equity.
"Cash Equivalents" means:
(1) marketable direct obligations issued by, or unconditionally guaranteed by,
the United States Government or issued by any agency thereof and backed by
the full faith and credit of the United States, in each case maturing within
one year from the date of acquisition thereof;
(2) marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either Standard & Poor's Rating Services or
Moody's Investors Service, Inc.;
(3) commercial paper maturing no more than one year from the date of creation
thereof and, at the time of acquisition, having a rating of at least A-1
from Standard & Poor's Rating Services or at least P-1 from Moody's
Investors Service, Inc.;
(4) certificates of deposit or bankers' acceptances maturing within one year
from the date of acquisition thereof issued by (x) any (A) bank organized
under the laws of the United States of America or any state thereof or the
District of Columbia or (B) commercial banking institution organized and
located in a country recognized by the United States of America, in each
case having at the date of acquisition thereof combined capital and surplus
of not less than $200 million (or the foreign currency equivalent thereof)
or (y) any lender under the Senior Secured Credit Facility;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any bank meeting the qualifications specified in clause (4) above;
113
(6) investments in money market funds which invest substantially all their
assets in securities of the types described in clauses (1) through (5)
above; and
(7) other short-term investments utilized by foreign Restricted Subsidiaries in
accordance with normal investment practices for cash management not
exceeding $1.0 million in aggregate principal amount outstanding at any
time.
"Cash Flow" for any period means the Consolidated Net Income for such
period, plus the following (but without duplication) to the extent deducted in
calculating such Consolidated Net Income for such period:
(1) income tax expense;
(2) Consolidated Interest Expense;
(3) depreciation expense and amortization expense, provided that consolidated
depreciation and amortization expense of a Subsidiary that is not a Wholly
Owned Subsidiary shall only be added to the extent of the equity interest of
the Company in such Subsidiary; and
(4) all other non-cash charges (other than any non-cash charges to the extent
such charges represent an accrual of or reserve for cash expenditures in any
future period). Notwithstanding clause (4) above, there shall be deducted
from Cash Flow in any period any cash expended in such period that funds a
non-recurring, non-cash charge accrued or reserved in a prior period which
was added back to Cash Flow pursuant to clause (4) in such prior period.
"Change of Control" means the occurrence of any of the following events:
(1) Prior to the consummation of an Initial Equity Offering, Alchemy ceases to
be the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, of at least 40% in the aggregate of
the total voting power of the Voting Stock of the Company or Environmental
Systems Products, Inc., in each case whether as a result of issuance of
securities of the Company or Environmental Systems Products, Inc., any
merger, consolidation, liquidation or dissolution of the Company or
Environmental Systems Products, Inc., any direct or indirect transfer of
securities by the Company or otherwise (for purposes of this clause (1) and
clause (2) below, Alchemy shall be deemed to beneficially own any Voting
Stock of a corporation (the "specified corporation") held by any other
corporation (the "parent corporation") so long as Alchemy beneficially own
(as so defined), directly or indirectly, in the aggregate a majority of the
voting power of the Voting Stock of the parent corporation);
(2) Following the first Initial Equity Offering, any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act), other than Alchemy,
is or becomes the beneficial owner (as defined in clause (1) above, except
that for purposes of this clause (2) such person shall be deemed to have
"beneficial ownership" of all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 35% of the total
voting power of the Voting Stock of the Company or Environmental Systems
Products, Inc. (whichever entity has consummated such public offering);
PROVIDED, HOWEVER, that Alchemy beneficially owns (as defined in clause (1)
above), directly or indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Stock of the Company or Environmental
Systems Products, Inc. than such other person and do not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the Board of Directors (for the purposes of this
clause (2), such other person shall be deemed to beneficially own any Voting
Stock of a specified corporation held by a parent corporation, if such other
person is the beneficial owner (as defined in this clause (2)), directly or
indirectly, of more than 35% of the voting power of the Voting Stock of such
parent corporation and Alchemy beneficially owns (as defined in clause (1)
above), directly or indirectly, in the aggregate a lesser
114
percentage of the voting power of the Voting Stock of such parent
corporation and do not have the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of the board of
directors of such parent corporation);
(3) during any period of two consecutive years, individuals who at the beginning
of such period constituted the Board of Directors or the board of directors
of Environmental Systems Products, Inc., as the case may be, (together with
any new directors whose election or appointment by the Board of Directors or
the board of directors of Environmental Systems Products, Inc., as the case
may be, or whose nomination for election by the shareholders of the Company
or Environmental Systems Products, Inc., as the case may be, was approved by
a vote of 60% of the directors of the Company or Environmental Systems
Products, Inc., as the case may be, then still in office who were either
directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason to constitute
a majority of the Board of Directors or the board of directors of
EnviroSystems, as the case may be, then in office; or
(4) the merger or consolidation of the Company or Environmental Systems
Products, Inc. with or into another Person or the merger of another Person
with or into the Company or Environmental Systems Products, Inc., or the
sale of all or substantially all the assets of the Company or Environmental
Systems Products, Inc. to another Person (other than a Person that is
controlled by Alchemy), and, in the case of any such merger or
consolidation, the securities of the Company or Environmental Systems
Products, Inc. that are outstanding immediately prior to such transaction
and which represent 100% of the aggregate voting power of the Voting Stock
of the Company or Environmental Systems Products, Inc. are changed into or
exchanged for cash, securities or property, unless pursuant to such
transaction such securities are changed into or exchanged for, in addition
to any other consideration, securities of the surviving corporation that
represent immediately after such transaction, at least a majority of the
aggregate voting power of the Voting Stock of the surviving corporation.
The phrase "all or substantially all" of the assets of the Company or
Environmental Systems Products, Inc. will likely be interpreted under applicable
state law and will be dependent upon particular facts and circumstances. As a
result, there may be a degree of uncertainty in ascertaining whether a sale or
transfer of "all or substantially all" of the assets of the Company or
Environmental Systems Products, Inc. has occurred.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Cash Flow Coverage Ratio" as of any date of determination
means the ratio of (x) the aggregate amount of Cash Flow for the period of the
most recent four consecutive fiscal quarters to (y) Consolidated Interest
Expense for such four fiscal quarters; PROVIDED, HOWEVER, to the extent relevant
to the calculation for any period, Cash Flow and Consolidated Interest Expense
shall be calculated using the pro forma consolidated statements of operations of
the Company included in the prospectus, which pro forma statements of operations
shall give effect to the acquisition of Envirotest and related transactions as
if they occurred at the beginning of the relevant period; PROVIDED, FURTHER,
HOWEVER, that:
(1) if the Company or any Restricted Subsidiary has issued any Indebtedness
since the beginning of such period and on or prior to the relevant date of
determination that remains outstanding or if the transaction giving rise to
the need to calculate the Consolidated Cash Flow Coverage Ratio is an
issuance of Indebtedness, or both, Cash Flow and Consolidated Interest
Expense for such period shall be calculated after giving effect on a pro
forma basis to such Indebtedness as if such Indebtedness had been issued on
the first day of such period and the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds of
such new Indebtedness as if such discharge had occurred on the first day of
such period;
115
(2) if since the beginning of such period and on or prior to the relevant date
of determination, the Company or any Restricted Subsidiary shall have made
any Asset Disposition, the Cash Flow for such period shall be reduced by an
amount equal to the Cash Flow (if positive) directly attributable to the
assets which are the subject of such Asset Disposition for such period, or
increased by an amount equal to the Cash Flow (if negative), directly
attributable thereto for such period, and Consolidated Interest Expense for
such period shall be reduced by an amount equal to the Consolidated Interest
Expense directly attributable to any Indebtedness of the Company or any
Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged
with respect to the Company and its continuing Restricted Subsidiaries in
connection with such Asset Dispositions for such period (or, if the Capital
Stock of any Restricted Subsidiary is sold, the Consolidated Interest
Expense for such period directly attributable to the Indebtedness of such
Restricted Subsidiary to the extent the Company and its continuing
Restricted Subsidiaries are no longer liable for such Indebtedness after
such sale);
(3) to the extent not duplicative with (2) above, if since the beginning of such
period and on or prior to the relevant date of determination, any Emissions
Contract ceased or ceases to be in effect, the Cash Flow for such period
shall be reduced by an amount equal to the Cash Flow (if positive) directly
attributable to such Emissions Contract for such period, or increased by an
amount equal to the Cash Flow (if negative), directly attributable thereto
for such period, and Consolidated Interest Expense for such period shall be
reduced by an amount equal to the Consolidated Interest Expense directly
attributable to any Indebtedness of the Company or any Restricted Subsidiary
repaid, repurchased, defeased or otherwise discharged with respect to the
Company and its Restricted Subsidiaries with the proceeds of any termination
fee or similar payment received by the Company or a Restricted Subsidiary as
a result of the cessation of such Emissions Contract;
(4) if since the beginning of such period and on or prior to the relevant date
of determination, the Company or any Restricted Subsidiary (by merger or
otherwise) shall have made an Investment in any Restricted Subsidiary (or
any Person which becomes a Restricted Subsidiary) or an acquisition of
assets (including Capital Stock of a Subsidiary), including any acquisition
of assets occurring in connection with a transaction causing a calculation
to be made hereunder, Cash Flow and Consolidated Interest Expense for such
period shall be calculated after giving pro forma effect thereto (including
the issuance of any Indebtedness and including pro forma cost reductions, in
each case as calculated in accordance with the applicable accounting
requirements of Rule 11-02 of Regulation S-X under the Securities Act or any
successor provision relating to the preparation of pro forma financial
statements (it being understood that all cost reductions set forth in Note
(3) to the unaudited pro forma consolidated statements included in the
prospectus shall be deemed to be calculated on a basis consistent with such
requirements)) as if such Investment or acquisition occurred on the first
day of such period; and
(5) if since the beginning of such period and on or prior to the relevant date
of determination, any Person (that subsequently became a Restricted
Subsidiary or was merged with or into the Company or any Restricted
Subsidiary since the beginning of such period) shall have made any Asset
Disposition or any Investment, or any Emissions Contract entered into by
such Person shall cease to be in effect, that would have required an
adjustment pursuant to clause (2), (3) or (4) above if made by, or if in
respect of, the Company or a Restricted Subsidiary during such period, Cash
Flow and Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto (including pro forma cost reductions,
in each case as calculated in accordance with the applicable accounting
requirements of Rule 11-02 of Regulation S-X under the Securities Act or any
successor provision relating to the preparation of pro forma financial
statements (it being understood that all cost reductions set forth in Note
(3) to the unaudited pro forma consolidated statements included in the
prospectus shall be deemed to be calculated on a basis consistent with such
requirements)) as if such Asset Disposition, Investment or cessation of such
Emissions Contract occurred on the first day of such period.
116
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto, and
the amount of Consolidated Interest Expense associated with any Indebtedness
issued in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest of such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Protection Agreement
applicable to such Indebtedness if such Interest Rate Protection Agreement has a
remaining term in excess of 12 months). For purposes of this definition,
whenever pro forma effect is to be given to any Indebtedness Incurred pursuant
to a revolving credit facility the amount outstanding under such Indebtedness
shall be equal to the average of the amount outstanding during the period
commencing on the first day of the first of the four most recent fiscal quarters
for which financial statements are available and ending on the date of
determination.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries determined
in accordance with GAAP, plus, to the extent not included in such interest
expense but Incurred by the Company or its Restricted Subsidiaries:
(1) interest expense attributable to capital leases;
(2) amortization of debt discount and debt issuance cost (other than those debt
discounts and debt issuance costs incurred on the Issue Date);
(3) capitalized interest;
(4) original issue discount and non-cash interest payments or accruals;
(5) commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing;
(6) net costs under Hedging Obligations (including amortization of fees);
(7) dividends in respect of all Disqualified Stock or Preferred Stock held by
Persons other than the Company, a Subsidiary Guarantor or a Wholly Owned
Subsidiary;
(8) interest Incurred in connection with investments in discontinued operations;
(9) the interest portion of any deferred payment obligations;
(10) the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust to pay
interest or fees to any Person (other than the Company) in connection with
Indebtedness Incurred by such plan or trust; and
(11) imputed interest expense associated with any Attributable Debt. For
purposes of this definition, interest expense attributable to any
Indebtedness represented by the Guarantee by such person or a Subsidiary of
such person of an obligation of another person shall be deemed to be the
interest expense attributable to the Indebtedness Guaranteed.
"Consolidated Net Income" means, for any period, the net income or loss of
the Company and its consolidated Subsidiaries determined in accordance with
GAAP; PROVIDED, HOWEVER, that there shall not be included in such Consolidated
Net Income:
(1) any net income of any Person if such Person is not a Restricted Subsidiary
or that is accounted for by the equity method of accounting, except that (A)
the Company's equity in the net income of any such Person for such period
shall be included in such Consolidated Net Income up to the aggregate amount
of cash actually distributed by such Person during such period to the
Company or a Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution to a Restricted
Subsidiary, to the limitations contained in clause (3) below) and
117
(B) the Company's equity in a net loss of any such Person for such period
shall be included in determining such Consolidated Net Income;
(2) any net income of any Person acquired by the Company or a Subsidiary in a
pooling of interests transaction for any period prior to the date of such
acquisition;
(3) any net income of any Restricted Subsidiary (other than Envirotest Systems
Corp. and Environmental Systems Testing, Inc., in each case, solely for the
period prior to the Issue Date) if such Restricted Subsidiary is subject to
restrictions (other than restrictions under the Senior Secured Credit
Facility, the Indenture or the indenture governing the Senior Discount
Notes), directly or indirectly, on the payment of dividends or the making of
distributions by such Subsidiary, directly or indirectly, to the Company,
except that (A) the Company's equity in the net income of any such
Restricted Subsidiary for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually distributed by such
Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend or other distribution (subject, in the
case of a dividend or other distribution to another Restricted Subsidiary,
to the limitation contained in this clause) and (B) the Company's equity in
a net loss of any such Restricted Subsidiary for such period shall be
included in determining such Consolidated Net Income;
(4) any gain (but not loss) realized upon the sale or other disposition of any
property, plant or equipment of the Company or its consolidated subsidiaries
(including pursuant to any sale and leaseback arrangement) which is not sold
or otherwise disposed of in the ordinary course of business and any gain
(but not loss) realized upon the sale or other disposition of any Capital
Stock of any Person;
(5) all extraordinary, unusual or non-recurring gains but not losses; and
(6) the cumulative effect of a change in accounting principles.
"Currency Agreement Obligations" means the obligations of any person under a
foreign exchange contract, currency swap agreement or other similar agreement or
arrangement to protect such person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means:
(1) so long as any Bank Indebtedness is outstanding, such Bank Indebtedness; and
(2) provided no Bank Indebtedness is outstanding, any other Senior Indebtedness
of the Company permitted to be incurred under the Indenture which, at the
date of determination, has an aggregate principal amount outstanding of, or
under which, at the date of determination, the holders thereof are committed
to lend up to, at least $25.0 million and is specifically designated by the
Company in the instrument evidencing or governing such Senior Indebtedness
as "Designated Senior Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event
(1) matures or is mandatorily redeemable, pursuant to a sinking fund obligation
or otherwise;
(2) is convertible or exchangeable for Indebtedness or Disqualified Stock; or
(3) is redeemable at the option of the holder thereof, in whole or in part, in
each case on or prior to 123 days after the Stated Maturity of the Notes;
PROVIDED, HOWEVER, that any Capital Stock that
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would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of
control" occurring prior to 123 days after the Stated Maturity of the Notes
shall not constitute Disqualified Stock if the "asset sale" or "change of
control" provisions applicable to such Capital Stock are not more favorable
to the holders of such Capital Stock than the provisions described under
"--Change of Control" and "--Certain Covenants--Limitation on Sales of
Assets and Subsidiary Stock".
"Emissions Contract" means a contract with a governmental authority to
provide motor vehicle emissions testing, motor vehicle emissions testing
equipment testing, or calibration, data collection and reporting (auditing
emissions testing equipment and data) relating to motor vehicle emissions
testing; PROVIDED, HOWEVER, that such contract may also relate to the provision
of motor vehicle safety inspection or motor vehicle registration but only if it
primarily relates to the provisions of the services enumerated above.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute thereto.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing in any manner any Indebtedness or other
obligation of any other Person and any obligation, direct or indirect,
contingent or otherwise, of such Person
(1) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness or other obligation of such other Person (whether
arising by virtue of partnership arrangements, or by agreement to keep-well,
to purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement conditions or otherwise); or
(2) entered into for purposes of assuring in any other manner the obligee of
such Indebtedness or other obligation of the payment thereof or to protect
such obligee against loss in respect thereof (in whole or in part);
PROVIDED, HOWEVER, that the term "Guarantee" shall not include endorsements
of negotiable instruments for collection or deposit in the ordinary course
of business.
The term "Guarantee" used as a verb has a corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any interest rate swap agreement, foreign currency exchange
agreement, interest rate collar agreement, option or futures contract or other
similar agreement or arrangement designed to protect such Person against changes
in interest rates or foreign exchange rates.
"Holder" or "Noteholder" means the Person in whose name a note is registered
on the Registrar's books.
"Holding Company" means each of Newmall Ltd., a private limited company
incorporated in England and Wales, Wellman Overseas Ltd., a private limited
company incorporated in England and Wales, and Wellman North America, Inc., a
private limited company incorporated in England and Wales, and each of their
successors and assigns, if any.
"Incur" means create, issue, assume, Guarantee, incur or otherwise become
liable for, directly or indirectly, or otherwise become responsible for,
contingently or otherwise, Indebtedness, Disqualified Stock or Preferred Stock;
PROVIDED, HOWEVER, that any Indebtedness, Disqualified Stock or Preferred
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Stock of a Person existing at the time such Person merges with the Company or
becomes a Subsidiary (whether by merger, consolidation, acquisition or
otherwise), including, without limitation, Indebtedness Incurred and
Disqualified Stock and Preferred Stock issued in connection with, or in
contemplation of, such other Person merging with or into the Company or a
Subsidiary or becoming a Subsidiary, shall be deemed to be Incurred by the
Company or such Subsidiary at the time it merges with the Company or becomes a
Subsidiary. The term "Incurrence" when used as a noun shall have a correlative
meaning.
"Indebtedness" of any Person means, without duplication, and whether or not
contingent:
(1) the principal of and premium, if any, in respect of (A) indebtedness of such
Person for money borrowed and (B) indebtedness evidenced by notes,
debentures, bonds (other than performance bonds) or other similar
instruments for the payment of which such Person is responsible or liable,
if and to the extent any of the foregoing indebtedness would appear as a
liability upon a balance sheet of such Person prepared in accordance with
GAAP;
(2) all Capital Lease Obligations of such Person and all Attributable Debt in
respect of Sale/ Leaseback Transactions to which such Person is a party;
(3) all obligations of such Person issued or assumed as the deferred purchase
price of property, all conditional sale obligations of such Person and all
obligations of such Person under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of
business);
(4) all obligations of such Person for the reimbursement of any obligor on any
letter of credit, banker's acceptance or similar credit transaction;
(5) Disqualified Stock (measured by the amount of all obligations of such Person
with respect to the redemption, repayment or other repurchase of such
Disqualified Stock of such Person and measured at the greater of its
voluntary or involuntary maximum fixed repurchase price plus accrued and
unpaid dividends) or, with respect to any Subsidiary of such Person, any
Preferred Stock (measured by its liquidation preference);
(6) all Hedging Obligations;
(7) all obligations of the type referred to in clauses (1) through (6) of other
Persons and all dividends of other Persons for the payment of which, in
either case, such Person is responsible or liable, directly or indirectly,
as obligor, guarantor or otherwise, including by means of any Guarantee
(other than in each case by reason of activities described in the proviso to
the definition of "Guarantee"); and
(8) all obligations of the type referred to in clauses (1) through (7) of other
Persons secured by any Lien on any property or asset of such Person (whether
or not such obligation is assumed by such Person), the amount of such
obligation being deemed to be the lesser of the value of such property or
assets or the amount of the obligation so secured.
For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Stock as if such
Disqualified Stock was purchased on any date on which Indebtedness shall be
required to be determined pursuant to the Indenture, and if such price is based
upon, or measured by, the fair market value of such Disqualified Stock, such
fair market value to be determined in good faith by the Board of Directors. For
purposes hereof, the amount of any Indebtedness issued with original issue
discount shall be the original purchase price plus accrued interest, PROVIDED,
HOWEVER, that such accretion shall not be deemed an incurrence of Indebtedness.
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"Initial Equity Offering" means an underwritten primary or combined primary
and secondary public offering of common stock of the Company or EnviroSystems,
pursuant to an effective registration statement under the Securities Act.
"Interest Rate Protection Agreement" means any interest rate swap agreement,
interest rate cap agreement or other financial agreement or arrangement designed
to protect the Company or any Restricted Subsidiary against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of the Person making the advance or
loan, in each case in accordance with GAAP) or other extensions of credit
(including by way of Guarantee or similar arrangement) or capital contribution
to (by means of any transfer of cash or other property to others or any payment
for property or services for the account or use of others), or any purchase or
acquisition of Capital Stock, Indebtedness or other similar instruments issued
by such Person and shall include the designation of a Restricted Subsidiary as
an Unrestricted Subsidiary.
For purposes of the definition of "Unrestricted Subsidiary", the definition
of "Restricted Payment" and the covenant described under "--Certain
Covenants--Limitation on Restricted Payments"
(1) "Investment" shall include the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net
assets of any Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; PROVIDED, HOWEVER, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company
shall be deemed to continue to have a permanent investment in an
Unrestricted Subsidiary in an amount, if positive, equal to (x) the
Company's "Investment" in such Subsidiary at the time of such redesignation
less (y) the portion (proportionate to the Company's equity interest in such
Subsidiary) of the fair market value of the net assets of such Subsidiary at
the time of such redesignation; and
(2) any property transferred to or from an Unrestricted Subsidiary shall be
valued at its fair market value at the time of such transfer, in each case
as determined in good faith by the Board of Directors.
The Company and any Restricted Subsidiary shall be deemed to have made an
Investment in a Person that is or was required to be a Subsidiary Guarantor if,
upon the issuance, sale or other disposition of any portion of the Company's or
such Restricted Subsidiary's ownership in the Capital Stock of such Person, such
Person ceases to be a Subsidiary Guarantor. For purposes of the immediately
preceding sentence, the amount of the Investment by the Company or such
Restricted Subsidiary shall be the portion (proportionate to the Company's or
such Restricted Subsidiary's equity interest in such Person after the issuance,
sale or disposition) of the fair market value of such Person at the time of the
issuance, sale or disposition, as determined by the issue, sale or other
disposition price of the Capital Stock with respect to which the measurement of
the Investment is required.
"issue" means issue, assume, Guarantee, Incur or otherwise become liable
for; PROVIDED, HOWEVER, that any Indebtedness or Capital Stock of a Person
existing at the time such Person merges with the Company becomes a Subsidiary
(whether by merger, consolidation, acquisition or otherwise) shall be deemed to
be issued by the Company or such Subsidiary at the time mergers with the Company
or becomes a Subsidiary; and the term "issuance" has a corresponding meaning.
"Issue Date" means the date of original issuance of the notes.
"Joint Ventures" means joint ventures entered into by the Company or any of
its Subsidiaries for the primary purpose of operating a Related Business where
such joint venture is not a Subsidiary.
"Lien" means any mortgage, pledge, security interest, privilege, conditional
sale or other title retention agreement or other similar lien (statutory or
otherwise), or encumbrance upon or with
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respect to any property of any kind, real or personal, moveable or immovable,
now owned or hereafter acquired.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other non-cash form) therefrom,
in each case net of:
(1) all legal, title and recording tax expenses, commissions and other fees and
expenses Incurred, and all Federal, state, provincial, foreign and local
taxes required to be paid or accrued as a liability under GAAP, as a
consequence of such Asset Disposition;
(2) all payments made on any Indebtedness which (A) is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any lien
upon or other security agreement of any kind with respect to such assets, or
(B) must by its terms, or in order to obtain a necessary consent to such
Asset Disposition, or by applicable law be repaid out of the proceeds from
such Asset Disposition;
(3) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such Asset
Disposition; and
(4) reasonable amounts provided by the seller as a reserve, in accordance with
GAAP, against any liabilities associated with the property or other assets
disposed of in such Asset Disposition and retained by the Company or any
Restricted Subsidiary after such Asset Disposition, including, without
limitation, pension and other post -employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Disposition. Further,
with respect to an Asset Disposition by a Subsidiary which is not a Wholly
Owned Subsidiary, Net Available Cash shall be reduced pro rata for the
portion of the equity of such Subsidiary which is not owned by the Company.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock
or any Capital Contribution, means the cash proceeds of such issuance, sale or
Capital Contribution plus, in the case of an issuance of Capital Stock upon any
exercise, exchange or conversion of securities (including options, warrants,
rights and convertible or exchangeable debt) of the Company that were issued for
cash on or after the Issue Date, the amount of cash originally received by the
Company upon the issuance of such securities (including options, warrants,
rights and convertible or exchangeable debt), net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees and expenses actually
Incurred in connection with such issuance, sale or Capital Contribution and net
of taxes paid or payable as a result thereof.
"Obligations" means with respect to any Indebtedness all obligations for
principal, premium, interest, penalties, fees, indemnifications, reimbursements,
and other amounts payable pursuant to the documentation governing such
Indebtedness.
"Opinion of Counsel" means a written opinion from legal counsel, who may be
counsel for the Company, and who is reasonably acceptable to the Trustee, but
who is not an employee of the Company or any of its Affiliates or Subsidiaries.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in
(1) the Company, a Subsidiary Guarantor or a Person that will, upon the making
of such Investment, become a Subsidiary Guarantor; PROVIDED, HOWEVER, that
the primary business of such Restricted Subsidiary is a Related Business;
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(2) another Person if as a result of such Investment such other Person is merged
or consolidated with or into, or transfers or conveys all or substantially
all its assets to, the Company or a Subsidiary Guarantor; PROVIDED, HOWEVER,
that such Person's primary business is a Related Business;
(3) Investments in Cash Equivalents;
(4) receivables owing to the Company or any Restricted Subsidiary if created or
acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms;
(5) loans or advances to employees made in the ordinary course of business
consistent with past practices of the Company or such Restricted Subsidiary;
(6) stock, obligations or securities received in settlement of debts created in
the ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments;
(7) Investments in connection with pledges, deposits, payments or performance
bonds made or given in the ordinary course of business in connection with or
to secure statutory, regulatory or similar obligations, including
obligations under health, safety or environmental obligations;
(8) any Person to the extent such Investment represents the non-cash portion of
the consideration received for an Asset Disposition as permitted pursuant to
the covenant described under "--Certain Covenants--Limitation on Sales of
Assets and Subsidiary Stock";
(9) Joint Ventures and other Persons that are not Subsidiary Guarantors that do
not exceed an aggregate of $20.0 million at any time outstanding under and
pursuant to this clause (9) without giving effect to changes in the value of
such Investment occurring after the date of such Investment, but giving
effect (by increasing such amount) to all liquidation distributions or other
returns of capital received in respect of such Investment in cash or Cash
Equivalents;
(10) ESP Financing LLC or such other Joint Venture, in each case which entity is
primarily engaged in the financing of purchases of the Company's or its
Subsidiaries' equipment by independent third parties, that do not exceed
$3.0 million at any time outstanding under and pursuant to this clause (10)
without giving effect to changes in the value of such Investment occurring
after the date of such Investment, but giving effect (by increasing such
amount) to all liquidation distributions or other returns of capital
received in respect of such Investment in cash or Cash Equivalents;
(11) loans permitted by the provisions of clause (b)(10) of the covenant
described under "--Certain Covenants--Limitation on Affiliate Transactions";
and
(12) 100% of the issued and outstanding Capital Stock of Transervice; provided,
that (a) the aggregate purchase price of such Capital Stock shall not exceed
$18.0 million and (b) no Indebtedness shall be assumed by the Company or any
of its Subsidiaries in connection therewith and any Indebtedness of
Transervice, if not paid in full, shall be non-recourse to the Company, any
Subsidiary of the Company other than Transervice or any of their respective
assets.
"Permitted Liens" means, with respect to any Person:
(1) pledges or deposits by such Person under workmen's compensation laws,
unemployment insurance laws or similar legislation, or good faith deposits
in connection with bids, tenders, contracts (other than for the payment of
Indebtedness) or leases to which such Person is a party, or deposits to
secure public or statutory obligations of such Person or deposits or cash or
United States government bonds to secure surety or appeal bonds to which
such Person is a party, or deposits as security for contested taxes or
import duties or for the payment of rent, in each case Incurred in the
ordinary course of business;
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(2) Liens imposed by law, including carriers', warehousemen's and mechanics'
Liens, in each case for sums not yet due or being contested in good faith by
appropriate proceedings; or other Liens arising out of judgments or awards
against such Person with respect to which such Person shall then be
proceeding with an appeal or other proceedings for review;
(3) Liens for taxes, assessments or other governmental charges not yet subject
to penalties for non-payment or which are being contested in good faith by
appropriate proceedings provided appropriate reserves have been taken on the
books of the Company;
(4) Liens to secure the performance of statutory obligations or in favor of
issuers of surety bonds, performance bonds, appeal bonds or letters of
credit or other obligations of a like nature issued pursuant to the request
of and for the account of such Person in the ordinary course of its
business; PROVIDED, HOWEVER, that such letters of credit do not constitute
Indebtedness;
(5) Liens securing a Hedging Obligation so long as the related Indebtedness is,
and is permitted to be under the Indenture, secured by a Lien on the same
property securing the Hedging Obligation;
(6) Liens for the purpose of securing the payment (or the refinancing of the
payment) of all or a part of any Purchase Money Indebtedness or Capital
Lease Obligations relating to assets or property acquired, constructed or
leased in the ordinary course of business PROVIDED that (x) the aggregate
principal amount of Indebtedness secured by such Liens shall not exceed the
cost of the assets or property so acquired or constructed and (y) such Liens
shall not encumber any other assets or property of the Company or any
Restricted Subsidiary other than such Assets or property and assets affixed
or appurtenant thereto;
(7) Liens arising from precautionary Uniform Commercial Code financing statement
filings regarding operating leases entered into by the Company and its
Subsidiaries in the ordinary course of business;
(8) Liens in favor of the Company and/or any of its Restricted Subsidiaries,
other than such a Lien with respect to intercompany indebtedness if the
Company or a Subsidiary Guarantor is not the beneficiary of such a Lien;
(9) Liens existing on the date of the Indenture;
(10) encumbrances consisting of zoning restrictions, surety exceptions, utility
easements, licenses, rights of way, easements of ingress or egress over
property of the Company or any Restricted Subsidiary, rights or restrictions
of record on the use of real property, minor defects in title, landlords'
and lessors' liens under leases on property located on the rented premises,
in each case not interfering in any material respect with the ordinary
conduct of the business of the Company and the Restricted Subsidiaries; and
(11) any extension, renewal, refinancing, refunding or replacement of any
Permitted Lien, provided that such new Lien is limited to the property or
assets that secured (or under the arrangement under which the original
Permitted Lien, could secure) the obligations to which such Liens relate.
"Permitted Testing Center Assets" means vehicles emission test site
equipment and the related test site or sites located in the United States of
America (or, solely with respect to Restricted Subsidiaries domiciled outside of
the United States, in any foreign jurisdiction) used or to be used by the
Company or any of its Subsidiaries in connection with a centralized emission
testing program pursuant to a contract with a governmental authority.
"Person" means any individual, corporation, limited liability company,
limited or general partnership, joint venture, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
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"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares
of Capital Stock of any other class of such Person.
"Prospectus" means the prospectus dated October 16, 1998, pursuant to which
the Notes were offered, and any supplement thereto.
"Public Debt" means any Indebtedness represented by debt securities issued
by the Company or any Restricted Subsidiary in connection with a public offering
or a sale exempt from registration under the Securities Act (provided such debt
securities are intended to be distributed by a resale pursuant to Rule 144A,
Regulation S or otherwise under the Securities Act or sold on an agency basis by
a broker-dealer or one of its affiliates); it being understood that the term
"Public Debt" shall not include any commercial bank borrowings or similar
borrowings, any receivables financing, recourse transfers of financial assets,
capital leases or other types of borrowings Incurred in a manner not customarily
viewed as a "securities offering".
"Public Equity Offering" means an underwritten primary or combined primary
and secondary public offering of Capital Stock (other than Disqualified Stock)
of the Company or Environmental Systems Products, Inc., all of the net proceeds
of which, if issued by Environmental Systems Products, Inc., are contributed to
the Company as a Capital Contribution, pursuant to an effective registration
statement under the Securities Act.
"Purchase Money Indebtedness" means any Indebtedness of a Person to any
seller or other Person incurred to finance the acquisition (including in the
case of a Capitalized Lease Obligation, the lease) of any after acquired real or
personal tangible property which, in the reasonable good faith judgment of the
Board of Directors, is directly related to a Related Business of the Company and
which is incurred substantially concurrently with such acquisition and is
secured only by the assets so financed.
"Refinance" means, in respect of any Indebtedness, to extend, refinance,
renew, replace, defease or refund, or to issue other Indebtedness in exchange or
replacement for, such indebtedness. "Refinanced" and "Refinancing" shall have
correlative meanings.
"Refinancing Indebtedness" means any Indebtedness of the Company or any of
its Subsidiaries issued in exchange for, or the net proceeds of which are used
to extend, refinance, renew, replace, defease or refund other Indebtedness of
the Company or any of its Subsidiaries; PROVIDED that:
(1) the principal amount of such Refinancing Indebtedness does not exceed (after
deduction of reasonable and customary fees and expenses incurred in
connection with such refinancing and the amount of any premium or prepayment
penalty paid in connection with such Refinancing to the extent in accordance
with the terms of the document governing such Indebtedness (except for any
modification to any such document made in connection with or in
contemplation of such refinancing)) the lesser of (x) the principal amount
of the Indebtedness so extended, refinanced renewed, replaced, defeased or
refunded; and (y) if such Indebtedness being Refinanced was issued with an
original issue discount, the accreted value thereof (as determined in
accordance with GAAP) at the time of such Refinancing, plus, in each case
accrued interest on such Indebtedness being Refinanced;
(2) such Refinancing Indebtedness has a Weighted Average Life to Maturity equal
to or greater than the Weighted Average Life to Maturity of the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; and
(3) if the Indebtedness being extended, refinanced, renewed, replaced, defeased
or refunded is subordinated in right of payment to the Notes or the
Subsidiary Guarantees, as the case may be, such Refinancing Indebtedness has
a final maturity date later than the final maturity date of the
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Notes and is subordinated in right of payment to the Notes or the relevant
Subsidiary Guarantee on terms at least as favorable to the Holders of Notes
as those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
Notwithstanding the foregoing, Refinancing Indebtedness shall not include:
(1) Indebtedness of a Subsidiary that is not a Subsidiary Guarantor that
Refinances Indebtedness of the Company;
(2) Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary; or
(3) Indebtedness of the Company or a Subsidiary Guarantor that Refinances
Indebtedness of a Restricted Subsidiary which is not a Subsidiary Guarantor.
"Related Business" means any business reasonably related, ancillary or
complementary to the businesses of the Company and the Restricted Subsidiaries
on the Issue Date.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Indebtedness; PROVIDED that
if, and for so long as, any Designated Senior Indebtedness lacks such a
representative, then the Representative for such Designated Senior Indebtedness
shall at all times be the holders of a majority in outstanding principal amount
of such Designated Senior Indebtedness in respect of any Designated Senior
Indebtedness.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an agreement relating to property now
owned or hereafter acquired whereby the Company or any Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person, other than leases required to be classified as
capitalized leases for financial reporting purposes in accordance with GAAP.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of any Person secured by a
Lien.
"Senior Discount Notes" means the 15% Senior Discount Notes due 2009 of
Environmental Systems Products, Inc. issued pursuant to an Indenture, dated as
of October 16, 1998, between Environmental Systems Products, Inc. and United
States Trust Company of New York, as Trustee.
"Senior Indebtedness" means with respect to the Company or any Subsidiary
Guarantor Bank Indebtedness and all other Indebtedness (and interest thereon
(including, but not limited to, interest accruing pursuant to the terms of such
Indebtedness on or after the filing of any petition in any bankruptcy,
reorganization or similar proceeding relating to the Company or such Subsidiary
Guarantor, whether or not a claim for such is allowed in such proceeding)),
whether outstanding on the Issue Date or thereafter, unless, by the terms of the
instrument creating or evidencing such Indebtedness, such Indebtedness is made
not senior in right of payment to the Notes or the applicable Subsidiary
Guarantee, other than:
(1) any obligation of such Person to any subsidiary of such Person or to any
officer, director or employee of such Person or any such subsidiary;
(2) any liability of such Person for federal, state, local or other taxes owed
or owing by such Person;
(3) any accounts payable or other liability of such Person to trade creditors
arising in the ordinary course of business (including Guarantees thereof or
instruments evidencing such liabilities);
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(4) any Indebtedness, Guarantee or obligation of such Person which is, expressly
by its terms, subordinate or junior in any respect to any other
Indebtedness, Guarantee or obligation of such Person;
(5) that portion of any Indebtedness of such Person which at the time of
issuance is issued in violation of the Indenture;
(6) Indebtedness of such Person represented by Disqualified Stock or Preferred
Stock; or
(7) Capitalized Lease Obligations.
"Senior Secured Credit Facility" means the credit agreement dated as of
October 16, 1998, by and among the Company, Environmental Systems Products,
Inc., certain banks, financial institutions and other entities, Credit Suisse
First Boston, as Administrative Agent, Collateral Agent and Arranger, and DLJ
Capital Funding, Inc., as Syndication Agent, and Donaldson, Lufkin and Jenrette
Securities Corporation, as an Arranger, initially providing for an aggregate
$435 million of term loan and revolving credit facilities, including any related
notes, guarantees, collateral documents, instruments and agreements executed in
connection therewith, as such credit facilities and/or related documents may be
further amended, restated, supplemented, renewed, refinanced, replaced or
otherwise modified from time to time whether or not with the same agent,
trustee, representative lenders or holders, and irrespective of any changes in
the terms and conditions thereof. Without limiting the generality of the
foregoing, the term "Senior Secured Credit Facility" shall include agreements in
respect of reimbursement of letters of credit issued pursuant to the Senior
Secured Credit Facility and agreements in respect of Hedging Obligations with
lenders party to the Senior Secured Credit Facility and their affiliates and
shall also include any amendment, amendment and restatement, renewal, extension,
restructuring, supplement or modification to any Senior Secured Credit Facility
and all refunding, refinancings (in whole or in part) and replacements of any
Senior Secured Credit Facility, including any agreement extending the maturity
of, or increasing the amount of, any Indebtedness incurred thereunder or
contemplated thereby, or adding or deleting borrowers or guarantors thereunder,
so long as borrowers and issuers include one or more of the Company and its
Restricted Subsidiaries and their respective successors and assigns.
"Senior Subordinated Indebtedness" means the notes and any other
Indebtedness of the Company which ranks PARI PASSU with the Notes in right of
payment and is not subordinated by its terms in right of payment to any
Indebtedness or other obligation of the Company which is not Senior
Indebtedness.
"Significant Subsidiary" means any Subsidiary that would be a "Significant
Subsidiary" of the Company within the meanings of Rule 1-02 under Regulation S-X
promulgated by the SEC.
"SPC" means any special purpose Restricted Subsidiary of the Company
(1) created for the purpose of incurring, directly or indirectly, Indebtedness
permitted under paragraph (b)(6) of the covenant described under "Limitation
on Indebtedness";
(2) whose Indebtedness and other obligations are without recourse to the Company
or any of its other Subsidiaries or any of their respective assets; and
(3) that does not and shall not at any time,
(A) engage in any business or activity other than operating, owning and/or
financing the acquisition or build-out of Permitted Testing Center Assets
and any activities incidental thereto; or
(B) Incur any Indebtedness other than the Indebtedness described in clause
(1) above.
"Stated Maturity" means, with respect to any security, the final date
specified in such security as the fixed date on which all outstanding principal
of such security is due and payable, including pursuant
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to any mandatory redemption provision (but excluding any provision providing for
the repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company or any
Subsidiary Guarantor (whether outstanding on the Issue Date or thereafter
Incurred) which is subordinate or junior in right of payment to the notes or the
relevant Subsidiary Guarantee, as applicable, pursuant to the terms thereof or
any written agreement to that effect.
"Subsidiary" means:
(1) any corporation, association, partnership, limited liability company or
other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned
or controlled, directly or indirectly, by the Company and/or one or more
Subsidiaries;
(2) any limited partnership of which the Company or any Subsidiary is a general
partner; or
(3) any other Person (other than a corporation or limited partnership) in which
the Company, or one or more other Subsidiaries or the Company and one or
more other Subsidiaries, directly or indirectly, has more than 50% of the
outstanding partnership or similar interests or has the power, by contract
or otherwise, to direct or cause the direction of the policies, management
and affairs thereof.
Unless the context otherwise requires, Subsidiary means each direct and indirect
Subsidiary of the Company. Unrestricted Subsidiaries shall not be included in
the definition of Subsidiary for any purposes of the Indenture, except, as the
context may otherwise require, for purposes of the definitions of "Significant
Subsidiary" and "Unrestricted Subsidiary" and the covenant described above under
"--Limitation on Designations of Unrestricted Subsidiaries".
"Subsidiary Guarantee" means a Guarantee by a Subsidiary Guarantor of the
Company's Obligations with respect to the notes.
"Subsidiary Guarantor" means any Subsidiary of the Company that Guarantees
the Company's Obligations with respect to the notes.
"Transervice" means Transervice Limited, all of the Capital Stock of which
will be owned by the Company or a Restricted Subsidiary, conducting emissions
testing activities in the United Kingdom.
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C.
SectionSection 77aaa-77bbbb) as in effect on the date of the Indenture.
"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor.
"Unrestricted Subsidiary" means any Subsidiary of the Company (other than a
Subsidiary Guarantor) designated as such pursuant to and in compliance with the
covenant described under "Limitation on Designations of Unrestricted
Subsidiaries". Any such designation may be revoked by a resolution of the Board
of Directors of the Company delivered to the Trustee, subject to the provisions
of such covenant.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
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"Voting Stock" of a Person means Capital Stock of such Person of the class
or classes pursuant to which the holders thereof have the general voting power
under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not
at the time stock of any other class or classes shall have or might have voting
power by reason of the happening of any contingency).
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying:
(A) the amount of each of the remaining installment, sinking fund, serial
maturity or other required payments of principal, including payment at
final maturity, in respect thereof, by
(B) the number of years (calculated to the nearest one-twentieth) that will
elapse between such date and the making of such payment, by
(2) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by other
Persons to the extent such shares are required by applicable law to be held by a
Person other than the Company or a Restricted Subsidiary, which shares in each
such case shall not exceed more than 5% of the Capital Stock of such Restricted
Subsidiary) is owned by the Company or one or more Wholly Owned Subsidiaries.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The discussion below, insofar as it purports to constitute summaries of
matters of United States federal income tax law or legal conclusions with
respect thereto, is the opinion of White & Case LLP, special tax counsel to the
Company, with respect to the material United States federal income tax
consequences that may be relevant to the registration of the notes and the
purchase, ownership and sale of the registered notes. This description is based
on (1) the Internal Revenue Code of 1986, as amended (the "Code"), (2) income
tax regulations (proposed and final) issued under the Code, and (3)
administrative and judicial interpretations of the Code and regulations, each as
in effect and available as of the date of this prospectus. These income tax
laws, regulations, and interpretations, however, may change at any time. Any
change could be retroactive and could affect the tax consequences described
below. These income tax laws and regulations are also subject to various
interpretations, and the Internal Revenue Service (the "IRS") or the courts
could later disagree with the explanations or conclusions contained in this
summary. The IRS has not formally ruled (and we do not intend to seek a ruling)
on the tax consequences of purchasing, holding or selling the notes.
Accordingly, the IRS could challenge the opinions expressed in this prospectus
concerning such consequences, and a court could agree with the IRS.
A "U.S. Holder" is a note holder who or which for United States federal
income tax purposes is:
- a United States citizen or resident individual;
- a corporation or partnership created or organized in or under the laws of
the United States;
- an estate if its income is subject to United States federal income
taxation regardless of its source; or
- a trust if such trust has validly elected to be treated as a United States
person for United States federal income tax purposes or if (1) a United
States court can exercise primary supervision over its administration and
(2) one or more United States persons have the authority to control all of
its substantial decisions.
We do not address all of the tax consequences that may be relevant to a
holder. We also do not address, except as stated below, any of the tax
consequences to (1) holders that do not hold notes as capital assets (as defined
in the Code), (2) holders that may be subject to special tax treatment such as
financial institutions, thrift institutions, real estate investment trusts,
tax-exempt organizations, regulated investment companies, insurance companies
and brokers and dealers or traders in securities or currencies, (3) holders
whose functional currency is not the United States dollar and (4) holders that
hold notes as part of a position in a straddle or as part of a hedging,
conversion or other integrated investment transaction. Further, except as stated
below, we do not address:
- the United States federal estate and gift or alternative minimum tax
consequences of the ownership or sale of notes or
- any state, local or foreign tax consequences of the ownership and sale of
notes.
INVESTORS ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS IN LIGHT OF
THEIR OWN PARTICULAR CIRCUMSTANCES AS TO THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF NOTES, AS WELL AS THE
EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
ISSUANCE OF THE NOTES
The notes were originally sold to the selling noteholders pursuant to a
private placement as part of an investment unit. Each investment unit was
comprised of an unregistered note and common stock of Environmental Systems
Products, Inc. For United States federal income tax purposes, original issue
discount ("OID") is the excess of the stated redemption price at maturity of a
note over its issue price, if such excess is greater than or equal to a DE
MINIMIS amount (generally 1/4 of 1% of the note's stated redemption price at
maturity multiplied by the number of complete years to maturity from the issue
130
date). Under the Treasury Regulations addressing OID (the "OID Regulations"),
the issue price of a note generally is equal to the price at which a substantial
amount of such notes are sold for money. For this purpose, sales to bond houses,
brokers or similar persons or organizations acting in the capacity of
underwriters, placement agents or wholesalers are ignored. The stated redemption
price at maturity of a note is the sum of all payments provided by the note
other than payments of "qualified stated interest." Under the OID Regulations,
"qualified stated interest" includes stated interest that is unconditionally
payable in cash at least annually at a single fixed rate. A holder of a note
issued with OID is required to include OID in taxable income as it accrues
before the receipt of cash attributable to such income, regardless of such
holder's method of accounting for tax purposes. As stated above, the OID
Regulations provide that for purposes of determining the issue price of a debt
instrument, sales to certain entities, including organizations acting in the
capacity of underwriters, placement agents or wholesalers are ignored. The
selling noteholders should not be treated as acting in the capacity of
underwriters or placement agents. The Treasury Regulations, however, include
persons acting in the capacity of wholesalers. The meaning of the term
"wholesalers" is not clear. Although each selling noteholder purchased notes for
their own account pursuant to the subscription agreement, the selling
noteholders are affiliates of underwriters and currently intend to sell the
notes pursuant to this transaction. Accordingly, it is unclear whether the scope
of the Treasury Regulations would encompass the selling noteholders as
"wholesalers" for this purpose. Given that the selling noteholders have
represented to us that they originally purchased the notes for their own
accounts, and have held such notes for more than three months, we believe that
they should be treated as having purchased the notes as holders (and not in the
capacity of wholesalers) and thus, although not free from doubt, the issue price
should be the purchase price of the selling noteholders. Accordingly, the notes
should be considered to have been issued with original issue discount at the
time of their issuance. This discussion assumes that the notes will be
considered to have been issued with original issue discount at such time for
United States federal income tax purposes.
REGISTRATION OF THE NOTES
The registration of the notes will not constitute a material modification of
the notes and thus, will not constitute a taxable exchange for United States
federal income tax purposes. A U.S. Holder will not recognize gain or loss upon
the receipt of a registered note pursuant to this registration and will be
required to continue to include interest on the notes in gross income for United
States federal income tax purposes in the same manner as such interest was
included in income under the unregistered notes.
THE NOTES
U.S. HOLDERS
STATED INTEREST. Stated interest paid on a note will be includible in a
U.S. Holder's gross income as ordinary interest income in accordance with the
U.S. Holder's usual method of tax accounting.
ORIGINAL ISSUE DISCOUNT. The notes should be considered to have been issued
with original issue discount ("OID"). See "United States Federal Income Tax
Considerations--Issuance of the Notes" on page 128. As a result, a U.S. Holder
generally is required to include OID in gross income (as interest) for United
States federal income tax purposes as it economically accrues, in advance of the
receipt of the cash attributable to such income. The amount included in gross
income will be the sum of the daily portions of OID on a note calculated under a
constant yield method for all days during a taxable year in which a U.S. Holder
held such note.
Generally, the daily portion of the original issue discount is determined by
allocating to each day in any "accrual period" a ratable portion of the original
issue discount allocable to such accrual period. Under the OID Regulations, the
"accrual periods" for a note may be selected by each holder, may be of any
length, and may vary in length over the term of a note, provided that each
accrual period is no longer than one year and each scheduled payment of
principal or interest occurs either on the first day
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or final day of an accrual period. The amount of original issue discount
allocable to each accrual period is equal to the excess (if any) of:
(1) the product of a note's adjusted issue price at the beginning of
such accrual period and its yield to maturity (determined on the basis of
compounding at the close of each accrual period and adjusted for the length
of such accrual period) over
(2) the amount of qualified stated interest, if any, payable on such
note and allocable to such accrual period.
The "adjusted issue price" of a note at the beginning of any accrual period
will be the sum of its issue price and the amount of OID allocable to all prior
accrual periods, reduced by the amount of all payments other than qualified
stated interest payments made with respect to such note in all prior accrual
periods. The notes were initially issued to the selling noteholders as part of
an investment unit consisting of a note and Environmental Systems Products, Inc.
common stock. The issue price of such investment unit for United States federal
income tax purposes was $1,000 which was allocated between the note and the
Environmental Systems Products, Inc. common stock based on their respective fair
market values at the time of issuance and a holder's initial tax basis in each
is equal to the amount so allocated. Based upon the estimate of the fair market
value of the common stock, the Company is treating $66 of the issue price of the
investment unit as allocable to the common stock and $934 as allocable to the
note (which amount the Company will therefore treat as its issue price for
United States federal income tax purposes). The Company intends to file
information returns with the Internal Revenue Service (the "IRS") based on such
allocation.
As stated above, "qualified stated interest" generally is stated interest
that is unconditionally payable in cash or property (other than debt instruments
of the issuer) at least annually at a single fixed rate during the entire term
of the debt instrument. All of the stated interest on a note should be treated
as qualified stated interest. Accordingly, since all of the stated interest on a
note is qualified stated interest, the total amount of OID on a note at issuance
should be $66 (representing the difference between a note's principal amount and
issue price).
Under these rules, a holder of a note generally will have to include in
taxable income increasingly greater amounts of original issue discount in
successive accrual periods.
A U.S. Holder will be required to include in gross income (as interest), in
the manner set forth above, (i) stated interest payments on a note and (ii) OID
accruing on such note.
PREMIUM AND MARKET DISCOUNT. A U.S. Holder that purchases a note at a cost
greater than its adjusted issue price will be considered to have purchased the
note at a premium and may make an election an election, applicable to all debt
securities purchased at a premium and held by such holder, to amortize such
premium, using a constant yield method, over the remaining term of the note.
A U.S. Holder that purchases a note at a price that produces a yield to
maturity higher than the yield to maturity at which the note was first issued
will be considered to have purchased a note having market discount. Generally,
market discount is the amount by which the stated redemption price at maturity
of a note exceeds its purchase price. Gain realized by such U.S. Holder on the
sale (including a redemption for cash) of a note having market discount
generally will be treated as ordinary income to the extent of the market
discount that accrued on the note while held by such holder. In general, market
discount will be treated as accruing ratably over the term of the note, or, at
the election of the holder, under a constant yield method. Moreover, a holder of
a note having market discount could be required to defer the deduction of a
portion of the interest paid on any indebtedness incurred or continued to
purchase or hold a note (unless the holder elects to include such market
discount in income as its accrues).
SALE, EXCHANGE OR RETIREMENT. Subject to the discussion of market discount,
upon the sale (including a redemption for cash) of a note, a U.S. Holder will
recognize taxable gain or loss equal to
132
the difference, if any, between the amount realized on the sale (other than,
accrued but unpaid interest which will be taxable as ordinary income) and the
U.S. Holder's adjusted tax basis in such note. A U.S. Holder's adjusted tax
basis generally will equal the cost of such note increased by any amounts
includible in income by the holder as original issue discount or market discount
(if the U.S. Holder elects to include such market discount in income on a
current basis) and decreased by any amortized premium, if any. Except as
discussed above under "PREMIUM AND MARKET DISCOUNT," the gain or loss recognized
by a U.S. Holder will be capital gain or loss. Moreover, in the case of a U.S.
Holder that is not a corporation, the maximum marginal United States federal
income tax rate applicable to such capital gain will be lower than the maximum
marginal United States federal income tax rate applicable to ordinary income if
such U.S. Holder's holding period for such note exceeds one year.
NON-U.S. HOLDERS
INTEREST ON NOTES. Subject to the discussion under "United States Backup
Withholding Tax and Information Reporting" below, interest paid on a note to a
Non-U.S. Holder (other than, (a) a controlled foreign corporation related to the
Company by stock ownership, (b) a shareholder owning actually or constructively
10% or more of the total combined voting power of all classes of stock of the
Company entitled to vote or (c) a bank which acquired such notes in
consideration of an extension of credit made pursuant to a loan agreement
entered into in the ordinary course of business) will not be subject to United
States federal income or withholding tax provided that (i) such interest is not
effectively connected with the conduct of a trade or business within the United
States by such Non-U.S. Holder and (ii) valid certifications of non-United
States status are received or an exemption is otherwise established.
If a Non-U.S. Holder is engaged in a trade or business in the United States
and interest on the note is effectively connected with the conduct of such trade
or business, the Non-U.S. Holder will be subject to United States federal income
tax on such interest on a net income basis in the same manner as if it were a
U.S. Holder. In addition, if such holder is a foreign corporation, it may be
subject to a branch profits tax equal to 30% (or lower applicable treaty rate)
of its effectively connected earnings and profits, including interest on a note,
for the taxable year, subject to adjustments.
SALE, EXCHANGE OR RETIREMENT. A Non-U.S. Holder generally will not be
subject to United States federal income tax on gain recognized on a sale
(including a redemption for cash) of a note unless (i) such gain is effectively
connected with the conduct of a trade or business within the United States by
the Non-U.S. Holder or (ii) in the case of an individual Non-U.S. Holder, such
holder is present in the United States for 183 or more days in the taxable year
of disposition and certain other requirements are met.
FEDERAL ESTATE TAXES. A note that is held by an individual who at the time
of death is not a citizen or resident of the United States will not be subject
to United States federal estate tax as a result of such individual's death,
provided that such individual is not a shareholder owning actually or
constructively 10% (or more) of the total combined voting power of all classes
of stock of the Company entitled to vote and, at the time of such individual's
death, payments of interest with respect to such notes would not have been
effectively connected with the conduct by such individual of a trade or business
in the United States.
UNITED STATES BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
Certain noncorporate holders of notes may be subject to backup withholding
at a rate of 31% on payments made on a note. Backup withholding will apply to
you only if you are a United States person (as defined in the Code) and you (i)
fail to furnish your Taxpayer Identification Number ("TIN") which, in the case
of an individual, would be your Social Security number, (ii) furnish an
incorrect TIN, (iii) are notified by the IRS that you have failed to properly
report payments of interest or dividends or (iv) under certain circumstances,
fail to certify, under penalty of perjury, that you furnished a correct
133
TIN and have not been notified by the IRS that it is subject to backup
withholding. The amounts withheld under the backup withholding rules are not an
additional tax and may be refunded, or credited against your United States
federal income tax liability provided that the required information is furnished
to the IRS. Further, information reporting will apply to such payments.
THE ABOVE DESCRIPTION IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF
ALL TAX CONSEQUENCES RELATING TO THE REGISTRATION OF THE NOTES AND TO THE
ACQUISITION, OWNERSHIP AND SALE OF NOTES. ACCORDINGLY, YOU ARE URGED TO CONSULT
YOUR OWN TAX ADVISORS TO DETERMINE THE UNITED STATES FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES RELATING TO THE REGISTRATION OF THE NOTES AND THE
ACQUISITION, OWNERSHIP AND SALE OF NOTES IN LIGHT OF YOUR PARTICULAR SITUATIONS.
134
BOOK-ENTRY; DELIVERY AND FORM
GENERAL
Except as set forth below, the notes will be represented by one permanent
global registered note in global form, without interest coupons. The global note
will be deposited with, or on behalf of, The Depository Trust Company and
registered in the name of Cede & Co., as nominee of The Depository Trust
Company, or will remain in the custody of the Trustee according to the FAST
Balance Certificate Agreement between The Depository Trust Company and the
Trustee.
We are providing the following descriptions of the operations and procedures
of The Depository Trust Company, Euroclear and Cedel solely as a matter of
convenience. These operations and procedures are solely within the control of
the respective settlement systems and are subject to change by them from time to
time. Neither we nor Credit Suisse First Boston Corporation take any
responsibility for these operations or procedures. If you wish to discuss these
matters, we urge you to contact the relevant system or its participants
directly.
The Depository Trust Company has advised us that it is:
- a limited purpose trust company organized under the laws of the State of
New York;
- a "banking organization" within the meaning of the New York Banking Law;
- a member of the Federal Reserve System;
- a "clearing corporation" within the meaning of the Uniform Commercial
Code, as amended; and
- a "clearing agency" registered pursuant to Section 17A of the Exchange
Act.
The Depository Trust Company was created to hold securities for its
participants and facilitates the clearance and settlement of securities
transactions between participants through electronic book-entry changes to the
accounts of its participants. This system eliminates the need for physical
transfer and delivery of certificates. The Depository Trust Company's
participants include:
- securities brokers and dealers
- banks and trust companies;
- clearing corporations; and
- certain other organizations.
Indirect access to The Depository Trust Company's system is also available
to other entities. These indirect participants include banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a participant, either directly or indirectly. Investors who are not participants
may beneficially own securities held by or on behalf of The Depository Trust
Company only through participants or indirect participants.
We expect that under the procedures established by The Depository Trust
Company:
- upon deposit of the global note, The Depository Trust Company will credit
the accounts of participants designated by Credit Suisse First Boston
Corporation with an interest in the global note; and
- ownership of the notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by The
Depository Trust Company with respect to the interests of participants and
the records of participants and the indirect participants with respect to
the interests of persons other than participants.
135
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer interests in the Notes represented by the
global note to such persons may be limited. In addition, The Depository Trust
Company can act only on behalf of its participants, who in turn act on behalf of
persons who hold interests through participants. Consequently, the ability of a
person having an interest in Notes represented by the global note to pledge or
transfer such interest to persons or entities that do not participate in The
Depository Trust Company's system, or to otherwise take actions in respect of
such interest, may be affected by the lack of a physical definitive security in
respect of such interest.
So long as The Depository Trust Company or its nominee is the registered
owner of the global note, The Depository Trust Company or such nominee, as the
case may be, will be considered the sole owner or holder of the Notes
represented by the global note for all purposes under the Indenture. Except as
provided below, owners of beneficial interests in the global note:
- will not be entitled to have notes represented by the global note
registered in their names;
- will not receive or be entitled to receive physical delivery of
certificated notes; and
- will not be considered the owners or holders thereof under the indenture
for any purpose, including with respect to the giving of any direction,
instruction or approval to the Trustee thereunder.
Accordingly, each holder owning a beneficial interest in the global note
must rely on the procedures of The Depository Trust Company. If such holder is
not a participant or an indirect participant, then it must rely on the
procedures of the participant through which such holder owns its interest to
exercise any rights of a note holder under the indenture or the global note. We
understand that under existing industry practice, in the event that we request
any action of note holders, or a holder that is an owner of a beneficial
interest in the global note desires to take any action that The Depository Trust
Company, as the holder of the global note, is entitled to take, The Depository
Trust Company would authorize the participants to take such action and the
participants would authorize holders owning through such participants to take
such action or would otherwise act upon the instruction of such holders. Neither
our Company nor the Trustee will have any responsibility or liability for any
aspect of the records relating to or payments made on account of notes by The
Depository Trust Company, or for maintaining, supervising or reviewing any
records of The Depository Trust Company relating to such notes.
Payments with respect to the principal of, and premium, if any, and interest
on, any notes represented by the global note registered in the name of The
Depository Trust Company or its nominee on the applicable record date will be
payable by the Trustee to or at the direction of The Depository Trust Company or
its nominee in its capacity as the registered holder of the global note
representing such Notes under the indenture. Under the terms of the indenture,
we and the Trustee may treat the persons in whose names the notes, including the
global note, are registered as the owners of the notes for the purpose of
receiving payment on the notes and for any and all other purposes whatsoever.
Accordingly, neither our Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to owners of
beneficial interests in a global note . Payments by the participants and the
indirect participants to the owners of beneficial interests in a global note
will be governed by standing instructions and customary industry practice and
will be the responsibility of the participants or the indirect participants and
The Depository Trust Company.
Transfers between participants in The Depository Trust Company will be
effected in accordance with The Depository Trust Company's procedures, and will
be settled in same-day funds. Transfers between participants in Euroclear or
Cedel will be effected in the ordinary way in accordance with their respective
rules and operating procedures.
136
Subject to compliance with the transfer restrictions applicable to the
Notes, cross-market transfers between the participants in The Depository Trust
Company and Euroclear or Cedel participants will be effected through The
Depository Trust Company in accordance with its rules on behalf of Euroclear or
Cedel by its respective depositary. However, such cross-market transactions will
require delivery of instructions to Euroclear or Cedel by the counterparty in
such system in accordance with the rules and procedures and within the
established deadlines (Brussels time) of such system. Euroclear or Cedel will,
if the transaction meets its settlement requirements, deliver instructions to
its respective depositary to take action to effect final settlement on its
behalf by delivering or receiving interests in the relevant global notes in The
Depository Trust Company, and making or receiving payment in accordance with
normal procedures for same-day funds settlement applicable to The Depository
Trust Company. Euroclear participants and Cedel participants may not deliver
instructions directly to the depositaries for Euroclear or Cedel.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in the global note from a participant
in The Depository Trust Company will be credited, and any such crediting will be
reported to the relevant Euroclear or Cedel participant, during the securities
settlement processing day immediately following the settlement date of The
Depository Trust Company. The securities settlement processing day must be a
business day for Euroclear and Cedel. Cash received in Euroclear or Cedel as a
result of sales of interest in the global note by or through a Euroclear or
Cedel participant to a participant in The Depository Trust Company will be
received with value on the settlement date of The Depository Trust Company but
will be available in the relevant Euroclear or Cedel cash account only as of the
business day for Euroclear or Cedel following The Depository Trust Company's
settlement date.
Although The Depository Trust Company, Euroclear and Cedel have agreed to
the foregoing procedures to facilitate transfers of interests in the global note
among participants in The Depository Trust Company, Euroclear and Cedel, they
are under no obligation to perform or to continue to perform such procedures,
and such procedures may be discontinued at any time. Neither our company nor the
Trustee will have any responsibility for the performance by The Depository Trust
Company, Euroclear or Cedel or their respective participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED NOTES
Certificated notes will be issued to each person that The Depository Trust
Company identifies as the beneficial owner of the notes represented by the
global Note if the following events occur:
- The Depository Trust Company notifies us that it is no longer willing or
able to act as a depositary or The Depository Trust Company ceases to be
registered as a clearing agency under the Securities Exchange Act of 1934
and a successor depositary is not appointed within 90 days of such notice
or cessation;
- we, at our option, notify the Trustee in writing that we elect to cause
the issuance of certificated notes under the indenture; or
- upon the occurrence of an event of default as provided in the indenture
occurs and is continuing in the indenture, then, upon surrender by The
Depository Trust Company of the global note.
Upon any such issuance, the Trustee shall register such certificated notes
in the name of such person or persons or any nominee and deliver the
certificated notes as instructed.
Neither we nor the Trustee shall be liable for any delay by The Depository
Trust Company or any participant or indirect participant in identifying the
beneficial owners of the related Notes. Each person may conclusively rely on,
and shall be protected in relying on, instructions from The Depository Trust
Company for all purposes .
137
SELLING NOTEHOLDERS
The following table sets forth certain information with respect to the Notes
held by each Selling Noteholder at the date hereof. The Notes offered by this
Prospectus may be offered from time to time by the Selling Noteholders.
PRINCIPAL AMOUNT OF PERCENTAGE OF
NAME OF SELLING NOTEHOLDER NOTES CLASS
- -------------------------------------------------------------------- ------------------------ ------------------
DLJ Investment Partners, L.P........................................ $ 32,323,000 32.323%
DLJ ESC II, L.P..................................................... $ 3,071,000 3.071%
DLJ Investment Funding, Inc......................................... $ 4,606,000 4.606%
Credit Suisse First Boston (Europe) Limited......................... $ 40,000,000 40.000%
Chase Equity Associates L.P......................................... $ 20,000,000 20.000%
------------- ----------
Total............................................................... $ 100,000,000 100.000%
------------- ----------
------------- ----------
Because each Selling Noteholder may offer some or all of its Notes pursuant
to the offerings contemplated by this Prospectus, because the offerings of the
Notes are not necessarily being made on a firm commitment basis and because one
or more Selling Noteholder could purchase additional Notes from time to time, no
estimate can be given as to the amount of Notes that will be held by the Selling
Noteholders after completion of this offering. See "Plan of Distribution".
138
PLAN OF DISTRIBUTION
We are registering the notes on behalf of the Selling Noteholders. All
costs, expenses and fees in connection with the registration of the notes
offered hereby will be borne by us. Any or all of the notes may be sold from
time to time to purchasers directly by the Selling Noteholders. Alternatively,
the selling Noteholders may, from time to time, offer the notes through
underwriters, dealers or agents, which may include Credit Suisse First Boston or
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC"), who may receive
compensation in the form of discounts, concessions or commissions from the
Selling Noteholders and/or the purchasers of notes for whom they may act. The
Selling Noteholders have advised us that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their notes, nor is there an underwriter or
coordinating broker acting in connection with the proposed sale of the notes by
the Noteholders. All of the Selling Noteholders are affiliates of
broker-dealers. We will not receive any proceeds from the sale of any of the
Notes by any Selling Noteholder.
The notes were originally issued to the Selling Noteholders in a private
transaction on October 16, 1998. We are registering the notes to allow the
resale of the notes, if any, by the Selling Noteholders. We retained Credit
Suisse First Boston to act as our advisor in connection with the private
placement of the notes, for which Credit Suisse First Boston received $2 million
as compensation. In addition, DLJSC received a $2 million placement fee in
connection with the private placement of the notes.
There is currently no trading market for the notes. Furthermore, there can
be no assurance that any trading market will develop, or that, if such market
does develop, it will be sustained.
The Selling Noteholders and any such underwriters, dealers or agents that
participate in the distribution of the notes might be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by such broker-dealers and any profit on the resale of
the notes sold by them while acting as principals might be deemed to be
underwriting discounts or commissions under the Securities Act.
Pursuant to a Registration Rights Agreement dated October 16, 1998 among us
and the Selling noteholders on such date, we agreed to file the Registration
Statement, of which this prospectus forms a part, with the SEC, and agreed to
use our best efforts to keep the Registration Statement continuously effective
for 180 days from its effective date or until such earlier time as all of the
notes which may be offered hereby have been publicly sold. Pursuant to the
Registration Rights Agreement, we agreed to indemnify the Selling noteholders,
any underwriters of an offering made hereby and certain other persons against
certain liabilities, including liabilities under the Securities Act.
Because Selling Noteholders may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, the Selling Noteholders will be
subject to the prospectus delivery requirements of the Securities Act. We have
informed the Selling Noteholders that the anti-manipulative provisions of
Regulation M promulgated under the Exchange Act may apply to their sales in the
market.
Selling Noteholders also may resell all or a portion of the notes in open
market transactions in reliance upon Rule 144 under the Securities Act, provided
they meet the criteria and conform to the requirements of such Rule.
139
When we are notified by a Selling Noteholder that a particular offer of
notes is made, to the extent required, we will file a supplement to this
prospectus, pursuant to Rule 424(b) under the Act, disclosing:
- the name of each such selling Selling Noteholder and of the participating
broker-dealer(s);
- the aggregate principal amount of notes involved;
- the price at which such notes were sold;
- the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable;
- that such broker-dealer(s) did not conduct any investigation to verify the
information set out or incorporated by reference in this prospectus; and
- other facts material to the transaction.
140
LEGAL MATTERS
The validity of the issuance of securities offered hereby and certain tax
matters will be passed upon for the Company and the subsidiary guarantors by
White & Case LLP, New York, New York.
EXPERTS
The consolidated financial statements of Environmental Systems Products,
Inc. (now known as Environmental Systems Testing, Inc.) as of December 31, 1997
and 1996 and for each of the three years in the period ended December 31, 1997
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of Envirotest as of September 30, 1998
and 1997 and for each of the three years in the period ended September 30, 1998
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
141
INDEX TO FINANCIAL STATEMENTS
PAGE
---------
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND SUBSIDIARIES
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and September 30, 1998 (unaudited)............ F-3
Consolidated Statements of Income for the years ended December 31, 1995, 1996 and 1997 for the nine months
ended September 30, 1997 and 1998 (unaudited) and for the period from January 23, 1998 through September
30, 1998 (unaudited)..................................................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and for the nine
months ended September 30, 1997 and 1998 (unaudited)..................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1995, 1996 and
1997 and for the nine months ended September 30, 1998 (unaudited)........................................ F-6
Notes to Consolidated Financial Statements................................................................. F-7
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
Report of Independent Accountants.......................................................................... F-20
Consolidated Balance Sheets as of September 30, 1997 and 1998.............................................. F-21
Consolidated Statements of Operations for the years ended September 30, 1996, 1997 and 1998................ F-22
Consolidated Statements of Cash Flows for the years ended September 30, 1996, 1997 and 1998................ F-23
Consolidated Statements of changes in Stockholders' Deficit for the years ended September 30, 1996, 1997
and 1998................................................................................................. F-24
Notes to Consolidated Financial Statements................................................................. F-25
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND SUBSIDIARIES:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Environmental Systems Products, Inc. and its subsidiaries (the "Company") at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
Hartford, Connecticut
July 13, 1998
F-2
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998
DECEMBER 31,
----------------------
1996 1997
---------- ----------
SEPTEMBER
30,
-----------
1998
-----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................... $3,592,497 $3,044,994 $ 7,506,035
Accounts receivable, net of an allowance for doubtful accounts of
$1,153,083, $1,551,086 and $1,329,057 respectively.................... 3,635,959 38,067,874 21,495,279
Intergroup receivable................................................... 2,087,410 -- 524,708
Notes receivable........................................................ 391,318 322,036 322,036
Inventories............................................................. 7,488,127 26,846,480 24,068,774
Prepaid expenses and other.............................................. 319,454 1,261,403 1,197,979
Deferred taxes.......................................................... 1,523,607 1,167,276 1,892,619
---------- ---------- -----------
Total current assets................................................ 19,038,372 70,710,063 57,007,430
Property and equipment, net of accumulated depreciation................... 847,582 833,807 753,475
Intergroup receivable..................................................... -- -- 115,976,000
Deferred taxes............................................................ 49,193 975,609 924,598
Intangible assets, net of accumulated amortization of $1,312,266.......... -- -- 47,518,986
Other assets.............................................................. -- 39,415 2,592,725
Deferred charges, net of accumulated amortization of $219,871............. -- -- 3,259,402
---------- ---------- -----------
Total assets........................................................ $19,935,147 $72,558,894 $228,032,616
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable........................................................... $ 780,849 $9,975,649 $ --
Revolving loan.......................................................... -- -- 17,532,610
Current portion of long-term debt....................................... 399,984 -- 14,775,000
Accounts payable........................................................ 3,396,674 17,340,236 11,389,405
Intergroup payable...................................................... -- 1,670,076 --
Deferred revenue........................................................ 4,301,610 10,044,030 12,254,506
Liability for estimated product warranties.............................. 382,835 2,508,067 2,677,899
Income taxes payable.................................................... 1,050,552 4,889,929 41,327
Accrued expenses........................................................ 1,789,395 8,019,124 2,025,931
---------- ---------- -----------
Total current liabilities........................................... 12,101,899 54,447,111 60,696,678
Long-term debt............................................................ -- -- 95,225,000
Liability for estimated product warranties................................ 71,396 841,956 1,377,759
---------- ---------- -----------
Total liabilities................................................... 12,173,295 55,289,067 157,299,437
---------- ---------- -----------
Commitments and contingencies
Mandatorily redeemable preferred stock, Class B, $100 par value, 5,000
shares authorized, 3,332 issued and outstanding at December 31, 1997 and
0 issued and outstanding at September 30, 1998.......................... -- 333,200 --
STOCKHOLDERS' EQUITY:
Common Stock, Class A, $1 par value, 19,000 shares authorized, 450
shares issued and outstanding......................................... 450 450 450
15% Convertible Preferred Stock, $1 par value, 550 shares authorized,
issued and outstanding................................................ 550 550 550
Preferred Stock, Class B, $100 par value, 5,000 shares authorized,
issued and outstanding at December 31, 1996........................... 500,000 -- --
Additional paid-in capital.............................................. 2,221,222 2,221,222 68,476,738
Retained earnings....................................................... 5,159,891 14,858,594 2,201,406
Cumulative translation adjustment (other accumulated comprehensive
income)............................................................... (120,261) (144,189) 54,035
---------- ---------- -----------
Total stockholders' equity.......................................... 7,761,852 16,936,627 70,733,179
---------- ---------- -----------
Total liabilities, mandatorily redeemable preferred stock and
stockholders' equity.............................................. $19,935,147 $72,558,894 $228,032,616
---------- ---------- -----------
---------- ---------- -----------
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997,
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
AND FOR THE PERIOD FROM JANUARY 23, 1998 THROUGH SEPTEMBER 30, 1998
PERIOD FROM
JANUARY 23,
NINE MONTHS ENDED 1998
SEPTEMBER 30, THROUGH
----------------------- SEPTEMBER 30,
1995 1996 1997 1997 1998 1998
---------- ---------- ----------- ---------- ----------- --------------
(UNAUDITED) (UNAUDITED)
Net revenues........ $20,813,007 $32,212,227 $102,526,360 $46,777,283 $110,713,834 $ 94,636,834
Cost of revenues.... 12,939,804 19,354,579 66,098,761 29,373,711 76,493,470 65,531,470
Cost of revenues--
inventory
step-up........... -- -- -- -- 2,390,000 2,390,000
---------- ---------- ----------- ---------- ----------- --------------
Gross
profit...... 7,873,203 12,857,648 36,427,599 17,403,572 31,830,364 26,715,364
---------- ---------- ----------- ---------- ----------- --------------
Selling expenses.... 1,187,776 1,751,335 7,993,351 3,616,273 6,931,267 5,530,267
Engineering
expenses.......... 1,418,230 1,667,004 2,254,425 1,569,280 1,964,141 1,815,141
Administrative
expenses.......... 3,808,264 5,711,186 7,616,648 4,637,167 7,251,717 5,920,717
---------- ---------- ----------- ---------- ----------- --------------
6,414,270 9,129,525 17,864,424 9,822,720 16,147,125 13,266,125
---------- ---------- ----------- ---------- ----------- --------------
Income from
operations... 1,458,933 3,728,123 18,563,175 7,580,852 15,683,239 13,449,239
---------- ---------- ----------- ---------- ----------- --------------
Other income
(expense):
Interest income... 95,097 116,984 102,566 51,782 149,187 137,187
Interest
expense......... (166,071) (122,434) (440,964) (144,784) (5,467,259) (5,393,259)
Other............. 94,268 (168,393) (79,035) 29,054 (591,211) (509,211)
---------- ---------- ----------- ---------- ----------- --------------
23,294 (173,843) (417,433) (63,948) (5,909,283) (5,765,283)
---------- ---------- ----------- ---------- ----------- --------------
Income before
provision
for income
taxes....... 1,482,227 3,554,280 18,145,742 7,516,904 9,773,956 7,683,956
Provision for income
taxes............. 871,341 1,903,883 7,580,379 2,961,045 5,540,550 4,657,550
---------- ---------- ----------- ---------- ----------- --------------
Net income.... $ 610,886 $1,650,397 $10,565,363 $4,555,859 $ 4,233,406 $ 3,026,406
---------- ---------- ----------- ---------- ----------- --------------
---------- ---------- ----------- ---------- ----------- --------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1995 1996 1997 1997 1998
----------- ------------ ------------- ------------- --------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 610,886 $ 1,650,397 $ 10,565,363 $ 4,555,859 $ 4,233,406
----------- ------------ ------------- ------------- --------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation...................................... 431,803 368,042 416,929 340,469 246,768
Amortization...................................... 243,011 461,533 -- -- 1,532,137
Purchased assets step-up.......................... -- -- -- -- 1,516,901
Provision for losses on receivables............... 201,396 626,877 398,003 (131,578) (222,029)
Deferred taxes.................................... 151,204 (804,055) (570,085) (5,788) (674,332)
Translation adjustment............................ (39,630) 37,359 332 (7,004) 48,294
Change in assets and liabilities:
Accounts receivable............................. (245,210) (1,092,400) (34,829,918) (19,734,445) 16,794,624
Intergroup receivable/payable................... -- (1,504,629) 3,757,486 1,591,275 (2,194,784)
Notes receivable................................ -- (1,546) 69,282 69,282 --
Inventories..................................... (1,684,045) (79,573) (19,204,599) (13,529,970) 2,777,706
Prepaid expenses and other...................... (137,545) 316,029 (941,949) (987,081) 63,424
Other assets.................................... 1,942 -- (39,415) (33,515) (2,553,310)
Accounts payable................................ 1,175,177 559,703 13,943,562 13,476,309 (5,950,831)
Deferred revenue................................ 215,782 1,318,666 5,742,420 (11,870) 2,210,476
Liability for estimated product warranties...... (401,383) 224,715 2,895,792 2,309,103 705,635
Income taxes payable............................ 194,680 534,400 3,839,377 1,404,487 (4,848,602)
Accrued expenses................................ (243,460) 1,035,221 6,188,069 2,372,000 (5,993,193)
----------- ------------ ------------- ------------- --------------
Total adjustments............................... (136,278) 2,000,342 (18,334,714) (12,878,326) 3,458,884
----------- ------------ ------------- ------------- --------------
Net cash provided by (used in) operating
activities.................................... 474,608 3,650,739 (7,769,351) (8,322,467) 7,692,290
----------- ------------ ------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................. (164,212) (58,407) (556,908) (517,203) (166,436)
----------- ------------ ------------- ------------- --------------
Net cash used in investing activities........... (164,212) (58,407) (556,908) (517,203) (166,436)
----------- ------------ ------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolver.............................. -- -- -- -- 20,000,000
Repayments on revolver.............................. -- -- -- -- (2,467,390)
Proceeds from (repayments of) notes payable......... (250,000) -- 9,194,800 7,594,800 (9,975,649)
Principal proceeds from (payments on) long-term
debt.............................................. (366,674) (433,342) (399,984) (300,006) 110,000,000
Loan to parent...................................... (115,976,000)
Dividends paid...................................... -- -- (825,000) (825,000) (825,000)
Redemption of mandatorily redeemable Class B
preferred stock................................... -- -- (166,800) (166,800) (333,200)
Debt issuance costs................................. (20,466) -- -- -- (3,479,273)
----------- ------------ ------------- ------------- --------------
Net cash provided by (used in) financing
activities.................................... (637,140) (433,342) 7,803,016 6,302,994 (3,056,512)
----------- ------------ ------------- ------------- --------------
Net increase in cash and cash equivalents............. (326,744) 3,158,990 (523,243) (2,536,676) 4,469,342
Cash and cash equivalents at beginning of period...... 796,948 444,960 3,592,497 3,592,497 3,044,994
Effect of exchange rate changes on cash............... (25,244) (11,453) (24,260) (17,544) (8,301)
----------- ------------ ------------- ------------- --------------
Cash and cash equivalents at end of period........ $ 444,960 $ 3,592,497 $ 3,044,994 $ 1,038,277 $ 7,506,035
----------- ------------ ------------- ------------- --------------
----------- ------------ ------------- ------------- --------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Intergroup transfer of subsidiary................... $ -- $ 510,690 $ -- $ -- $ --
Intergroup transfer of property and equipment....... -- 72,091 -- -- --
Accrual of dividends on Class B preferred stock..... 25,000 -- 41,660 25,000 --
Property and equipment transfers from (to)
inventories....................................... 718,246 -- (153,754) (153,754) --
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
CLASS A 15% CONVERTIBLE CLASS B ADDITIONAL
COMMON PREFERRED PREFERRED PAID-IN RETAINED
STOCK STOCK STOCK CAPITAL EARNINGS
----------- ----------------- ---------- ------------ -------------
Balance at January 1, 1995................... $ 450 $ 550 $ 500,000 $ 2,221,222 $ 2,412,918
Net income................................... -- -- -- -- 610,886
Class B preferred stock dividends declared
($5 per share)............................. -- -- -- -- (25,000)
Translation adjustment....................... -- -- -- -- --
----- ----- ---------- ------------ -------------
Balance at December 31, 1995................. 450 550 500,000 2,221,222 2,998,804
Net income................................... -- -- -- -- 1,650,397
Transfer of Autosense Systems Ltd. to Wellman
plc........................................ -- -- -- -- 510,690
Translation adjustment....................... -- -- -- -- --
----- ----- ---------- ------------ -------------
Balance at December 31, 1996................. 450 550 500,000 2,221,222 5,159,891
Net income................................... -- -- -- -- 10,565,363
Dividends.................................... -- -- -- -- (866,660)
Conversion of Class B Preferred Stock to
mandatorily redeemable preferred stock..... -- -- (500,000) -- --
Translation adjustment....................... -- -- -- -- --
----- ----- ---------- ------------ -------------
Balance at December 31, 1997................. 450 550 -- 2,221,222 14,858,594
Net income (unaudited)....................... -- -- -- -- 1,207,000
Translation adjustment (unaudited)........... -- -- -- -- --
Purchase of ESP by Alchemy (unaudited)....... -- -- -- 66,255,516 (16,065,594)
----- ----- ---------- ------------ -------------
Balance at January 23, 1998 (unaudited)...... 450 550 -- 68,476,738 --
----- ----- ---------- ------------ -------------
Net income (unaudited)....................... -- -- -- -- 3,026,406
Dividends (unaudited)........................ -- -- -- -- (825,000)
Translation adjustment (unaudited)........... -- -- -- -- --
----- ----- ---------- ------------ -------------
Balance at September 30, 1998
(unaudited)................................ $ 450 $ 550 $ -- $ 68,476,738 $ 2,201,406
----- ----- ---------- ------------ -------------
----- ----- ---------- ------------ -------------
CUMULATIVE
TRANSLATION
ADJUSTMENT TOTAL
(OTHER ACCUMULATED STOCKHOLDERS'
COMPREHENSIVE INCOME) EQUITY
--------------------- ------------
Balance at January 1, 1995................... $ (81,293) $5,053,847
Net income................................... -- 610,886
Class B preferred stock dividends declared
($5 per share)............................. -- (25,000)
Translation adjustment....................... (64,874) (64,874)
---------- ------------
Balance at December 31, 1995................. (146,167) 5,574,859
Net income................................... -- 1,650,397
Transfer of Autosense Systems Ltd. to Wellman
plc........................................ -- 510,690
Translation adjustment....................... 25,906 25,906
---------- ------------
Balance at December 31, 1996................. (120,261) 7,761,852
Net income................................... -- 10,565,363
Dividends.................................... -- (866,660)
Conversion of Class B Preferred Stock to
mandatorily redeemable preferred stock..... -- (500,000)
Translation adjustment....................... (23,928) (23,928)
---------- ------------
Balance at December 31, 1997................. (144,189) 16,936,627
Net income (unaudited)....................... -- 1,207,000
Translation adjustment (unaudited)........... (14,042) (14,042)
Purchase of ESP by Alchemy (unaudited)....... 158,231 50,348,153
---------- ------------
Balance at January 23, 1998 (unaudited)...... -- 68,477,738
---------- ------------
Net income (unaudited)....................... -- 3,026,406
Dividends (unaudited)........................ -- (825,000)
Translation adjustment (unaudited)........... 54,035 54,035
---------- ------------
Balance at September 30, 1998
(unaudited)................................ $ 54,035 $70,733,179
---------- ------------
---------- ------------
The accompanying notes are an integral part of the consolidated financial
statements
F-6
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
Environmental Systems Products, Inc. (the "Company") designs, sells,
services and leases engine diagnostic and automotive emissions test equipment.
For the years ended December 31, 1997, 1996 and 1995, approximately 91%, 83% and
92%, respectively, and for the nine month periods ended September 30, 1998 and
1997, approximately 98% (unaudited) and 82% (unaudited), respectively, of
consolidated sales were in the United States, with the balance being
international, primarily in Mexico and Germany.
ORGANIZATION
The Company was incorporated on November 13, 1989 and effective December 29,
1989, acquired substantially all of the assets and assumed certain liabilities
of Automotive Systems, a business unit of Hamilton Test Systems, Inc., a
wholly-owned subsidiary of United Technologies Corporation. The acquisition was
accounted for as a purchase transaction.
On April 19, 1996, for approximately $16.3 million, all the outstanding
shares of Class A common stock and the 15% convertible preferred stock of the
Company were acquired by Wellman North America, Inc., a wholly-owned subsidiary
of Wellman Overseas Limited, a wholly-owned subsidiary of Wellman plc
(collectively, "Wellman").
In January 1998 Wellman was acquired by unrelated investors, the Alchemy
Plan ("Alchemy"). All of the outstanding common stock of Wellman was acquired
for $127 million. As a result of the purchase, a new basis of accounting was
established. Of the total purchase price of $127 million, $64 million
(unaudited) plus transaction related costs for a total of $69 million
(unaudited) was attributable to the Company. The purchase price has been
allocated to net tangible assets in the amount of $20 million (unaudited) and
intangible assets in the amount of $49 million (unaudited), with a resulting
adjustment to additional paid-in capital of $50 million (unaudited). The
unaudited balance sheet as of September 30, 1998 includes the aforementioned
adjustments.
SUBSIDIARIES
On March 23, 1992, Environmental Systems Products International was formed
as the Company's foreign sales corporation. On August 4, 1992, E.S.P. de Mexico,
S.A. de C.V. was incorporated to provide service for emissions units sold in
Mexico. On November 16, 1993, ESP-GmbH was incorporated to provide service for
emissions units sold in Germany. On June 23, 1995, Autosense Systems, Ltd. was
formed to provide service for emissions units sold in the United Kingdom. On
April 19, 1996, operating control of this subsidiary was transferred from the
Company to Wellman plc, at book value, which resulted in an increase in the
Company's retained earnings of approximately $511,000.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
F-7
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FOREIGN CURRENCY MEASUREMENT
The Company translates the assets and liabilities of its foreign
subsidiaries at rates of exchange in effect at the end of the year. Revenues and
expenses are translated at average rates in effect during the year.
In accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation", the Company has included the losses resulting
from the intercompany foreign currency transactions in net income. However, the
losses from the translation of the foreign currency financial statements have
been reported as a separate component of stockholders' equity.
REVENUE RECOGNITION
Revenues are derived primarily from companies in the automotive aftermarket.
Amounts billed for service contracts are deferred and recognized as revenue over
the term of the service contract on a straight-line basis. Cash received from
customers in advance of shipment is included in deferred revenue.
CASH AND CASH EQUIVALENTS
Cash equivalents include short-term investments maturing within three
months. As of December 31, 1997 and 1996 and September 30, 1998, cash
equivalents were comprised primarily of repurchase agreements, collateralized by
government securities.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by
the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost at the time of acquisition.
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets as follows:
ASSET CATEGORY LIFE IN YEARS
- -------------------------------------------------------------------------------- ---------------
Machinery....................................................................... 3-10
Computer equipment.............................................................. 3
Demonstration and service equipment............................................. 3-5
Office equipment................................................................ 5
Leasehold improvements.......................................................... 2-5
Transportation equipment........................................................ 5
At January 23, 1998 the property and equipment acquired by Alchemy was
restated to fair value. The property and equipment acquired are now being
depreciated over their remaining estimated useful lives which are estimated to
be 2-3 years.
Maintenance and repairs are charged to expense as incurred. For assets sold
or otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is recorded in income
for the year. The cost of major improvements is capitalized.
F-8
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INTANGIBLE ASSETS
The purchase price paid by Alchemy for the Company in excess of the market
value of net assets acquired has been pushed down to the Company and is included
in the September 30, 1998 consolidated balance sheet as intangible assets.
Intangible assets are being amortized over their estimated useful lives, which
management estimates to be twenty-five years, using the straight-line method. It
is the Company's policy to re-evaluate the estimated useful lives of intangible
assets on an annual basis and may adjust the estimated useful lives accordingly.
It is possible, given the political, legislative and competitive environment in
which the Company operates, that the estimate could change and may result in
accelerated amortization charges.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, trade accounts
receivable, notes receivable, trade accounts payable, notes payable and accrued
liabilities are a reasonable estimate of their fair value due to their
short-term nature. The estimated values of the Company's long-term debt are
based on interest rates at December 31, for issues with similar remaining
maturities.
The estimated fair value amounts of the Company's financial instruments have
been determined by the Company, using appropriate market information and
valuation methodologies. Considerable judgment is required to develop the
estimates of fair value, therefore the estimates provided here are not
necessarily indicative of the amounts that could be realized in a current market
exchange.
LIABILITY FOR ESTIMATED PRODUCT WARRANTIES
The Company provides warranties for its equipment which range from one to
five years. Costs associated with these programs are provided at the time of
sale of the warranted product and are included in cost of sales. For the years
ended December 31, 1997, 1996 and 1995, approximately $2,406,000, $535,000 and
$291,000, respectively; and for the nine month periods ended September 30, 1998
and 1997, approximately $2,896,000 (unaudited) and $913,000 (unaudited)
respectively, was charged to warranty expense.
INCOME TAXES
The Company uses the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Statements No. 109, "Accounting for
Income Taxes". Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the financial statement carrying amounts and the tax basis of the assets
and liabilities using presently enacted tax rates. The Company files its Federal
income tax return as a member of a consolidated group through its parent. The
tax liability of the group is allocated among its members according to their
respective tax liabilities, computed as though separate returns had been filed,
increased for the additional tax savings resulting from the absorption by one
member of another member's tax attributes.
F-9
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Estimates are primarily used in determining valuation allowances for
accounts receivable, inventories, warranty and deferred tax assets. Accrued
expenses for the self funded health insurance benefits include estimates for
claims reported as well as claims incurred but not reported.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 applies to all
companies and is effective for fiscal years beginning after December 15, 1997.
SFAS 130 establishes standards for the reporting and display of comprehensive
income in a set of financial statements. Comprehensive income is defined as the
change in net assets of a business enterprise during a period from transactions
generated from non-owner sources. It includes all changes in equity during a
period except those resulting from investment by owners and distributions to
owners. The Company has adopted SFAS 130 beginning January 1, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 "Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). SFAS 131 applies to all public companies and is effective for fiscal years
beginning after December 15, 1997. SFAS 131 requires that business segment
financial information be reported in the financial statements utilizing the
management approach. The management approach is defined as the manner in which
management organizes the segments within the enterprise for making operating
decisions and assessing performance. The Company has adopted SFAS 131 beginning
January 1, 1998. The Company's operations are currently managed all within one
segment.
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements of the Company as of September 30,
1998 and for the nine months ended September 30, 1998 and 1997 are unaudited.
All adjustments, consisting only of normal recurring adjustments, have been made
which, in the opinion of management, are necessary for a fair presentation of
the interim financial information. Results of operations for the nine months
ended September 30, 1998 are not necessarily indicative of the results that may
be expected for any future period. The unaudited consolidated financial
statements for the nine months ended September 30, 1998 include the results of
operations from January 1, 1998 through January 23, 1998, predecessor ownership,
and from January 24, 1998 through September 30, 1998, new ownership, for
comparative purposes with the same period in 1997. The unaudited balance sheet
at September 30, 1998 reflects the new basis of accounting from January 24, 1998
through September 30, 1998.
F-10
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES:
Inventories consist of the following:
DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------
1996 1997 1998
------------ ------------- -------------
(UNAUDITED)
Component parts.................................. $ 4,649,891 $ 12,586,351 $ 14,439,328
Finished goods................................... 2,838,236 14,260,129 9,629,446
------------ ------------- -------------
$ 7,488,127 $ 26,846,480 $ 24,068,774
------------ ------------- -------------
------------ ------------- -------------
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------
1996 1997 1998
------------ ------------ -------------
(UNAUDITED)
Machinery.......................................... $ 1,827,896 $ 1,857,355 $ 455,135
Computer equipment................................. 509,908 563,284 159,660
Demonstration and service equipment................ 562,595 562,595 150,827
Office equipment................................... 240,808 347,000 111,901
Leasehold improvements............................. 111,033 171,820 51,667
Transportation equipment........................... 88,578 105,138 27,903
------------ ------------ -------------
3,340,818 3,607,192 957,093
Less: accumulated depreciation and amortization.... (2,493,236) (2,773,385) (226,204)
------------ ------------ -------------
847,582 833,807 730,889
Construction in progress........................... -- -- 22,586
------------ ------------ -------------
$ 847,582 $ 833,807 $ 753,475
------------ ------------ -------------
4. ACCRUED EXPENSES:
Accrued expenses consist of the following:
DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------
1996 1997 1998
------------ ------------ -------------
(UNAUDITED)
Accrued commissions................................ $ 301,291 $ 3,648,248 $ 845,181
Accrued compensation............................... 1,051,500 2,934,071 1,032,586
Other.............................................. 436,604 1,436,805 148,164
------------ ------------ -------------
$ 1,789,395 $ 8,019,124 $ 2,025,931
------------ ------------ -------------
------------ ------------ -------------
F-11
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LOAN AND SECURITY AGREEMENT:
The Company has a loan and security agreement including a $10,000,000
revolving credit agreement with Bank One Corporation, formerly known as Banc One
Corporation (the "Bank"). Interest is assessed on borrowings at an annual rate
equal to the Bank's prime rate (8.25% and 8.5% as of December 31, 1997 and 1996,
respectively), plus 0.6 percent. As of December 31, 1997 and 1996, the Company
had borrowings of $9,975,649 and $780,849, respectively, outstanding under this
agreement. The revolving credit agreement provides for borrowings based on 80%
of eligible accounts receivable, plus the lesser of 40% of eligible inventory,
$4,000,000, or 50% of the Revolving Credit Loan.
In October 1997, the Company and the Bank modified the revolving credit
agreement. Maximum borrowings under the revolving credit agreement increased to
$10,000,000 and the agreement was extended to August 31, 1998. The Company has
the option to fix the annual interest rate of certain borrowings for up to 90
days at the LIBOR rate plus 2.55%, if certain conditions are met. The non-LIBOR
borrowings have interest assessed at an annual rate equal to the Bank's prime
rate plus or minus the prime rate margin. The prime rate margin varies from 0.3%
to (0.3%), depending on the Company's leverage ratio. The prime rate margin was
9.4% as of December 31, 1997.
The Company also had a term loan under the loan and security agreement, due
in monthly principal installments of $33,334, plus interest for three years, and
a final principal payment made in 1997. Interest was assessed at an annual rate
equal to the Bank's prime rate plus 0.9 percent. The term loan was
collateralized by all of the Company's assets except those supporting the
revolving credit agreement.
The loan and security agreement requires the Company to maintain a current
ratio of at least 1.2 to 1, keep their leverage ratio below 3.75 to 1, and to
have tangible net worth of not less than $7,000,000.
Cash paid for interest for the years ended December 31, 1997, 1996 and 1995
was $440,964, $122,434 and $188,909, respectively and for the nine month periods
ended September 30, 1998 and 1997, $4,362,678 (unaudited) and $144,784
(unaudited), respectively.
The outstanding balance of the revolving credit agreement was fully repaid
in March 1998. See Note 15 for a discussion of the subsequent refinancing of the
loan and security agreement.
6. LEASES:
The Company has several operating leases, primarily for office and warehouse
space and office equipment.
The following is a schedule of future minimum lease payments for operating
leases (with initial or remaining terms in excess of one year) as of December
31, 1997:
1998............................................................ $ 706,164
1999............................................................ 550,338
2000............................................................ 398,996
2001............................................................ 343,448
2002............................................................ 270,529
---------
$2,269,475
---------
---------
F-12
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LEASES: (CONTINUED)
Rent expense for all operating leases was approximately $1,102,000, $582,000
and $619,000 for the years ended December 31, 1997, 1996 and 1995, respectively;
and for the nine month periods ended September 30, 1998 and 1997 was $1,395,000
(unaudited) and $659,000 (unaudited), respectively.
7. INCOME TAXES:
The components of the net deferred tax asset recognized in the accompanying
consolidated balance sheets are as follows:
DECEMBER 31, SEPTEMBER 30,
---------------------------------------------- --------------------
1996 1997 1998
---------------------- ---------------------- --------------------
(UNAUDITED)
CURRENT NONCURRENT CURRENT NONCURRENT CURRENT NONCURRENT
--------- ----------- --------- ----------- --------- ---------
Deferred tax assets...... $1,541,909 $ 49,193 $2,056,156 $ 975,609 $2,314,024 $1,616,434
Deferred tax
liabilities............ (18,302) -- (888,880) -- (421,405) (691,836)
--------- ----------- --------- ----------- --------- ---------
$1,523,607 $ 49,193 $1,167,276 $ 975,609 $1,892,619 $ 924,598
--------- ----------- --------- ----------- --------- ---------
--------- ----------- --------- ----------- --------- ---------
DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- --------------------
1996 1997 1998
---------------------- -------------------- --------------------
(UNAUDITED)
DEFERRED DEFERRED DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES
--------- ----------- --------- --------- --------- ---------
Accounts receivable........ $ 455,740 $ -- $ 381,085 $ 816,724 $ 562,548 $ 773,769
Inventories reserve........ 594,152 -- 554,846 -- 723,565 --
Prepaid insurance.......... -- 18,302 -- 72,156 -- 39,000
Liability for estimated
product warranties....... 182,045 -- 1,331,016 -- 1,831,107 --
Accrued expenses........... 268,017 -- 735,146 -- 668,301 --
Other...................... 91,148 -- 29,672 -- 144,937 300,472
--------- ----------- --------- --------- --------- ---------
$1,591,102 $ 18,302 $3,031,765 $ 888,880 $3,930,458 $1,113,241
--------- ----------- --------- --------- --------- ---------
--------- ----------- --------- --------- --------- ---------
F-13
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES: (CONTINUED)
The provision for income taxes comprised the following:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- --------------------------
1995 1996 1997 1997 1998
---------- ------------ ------------ ------------ ------------
(UNAUDITED)
Currently payable:
Federal.................................... $ 645,137 $ 2,186,127 $ 6,255,852 $ 2,545,849 $ 5,453,253
Foreign.................................... -- 77,053 70,440 51,830 --
State...................................... 75,000 444,758 1,824,172 790,930 1,372,306
---------- ------------ ------------ ------------ ------------
720,137 2,707,938 8,150,464 3,388,609 5,759,481
---------- ------------ ------------ ------------ ------------
Deferred:
Federal.................................... 131,234 (741,544) (465,054) (348,791) (169,098)
State...................................... 19,970 (62,511) (105,031) (78,773) (49,833)
---------- ------------ ------------ ------------ ------------
151,204 (804,055) (570,085) (427,564) (218,931)
---------- ------------ ------------ ------------ ------------
$ 871,341 $ 1,903,883 $ 7,580,379 $ 2,961,045 $ 5,540,550
---------- ------------ ------------ ------------ ------------
---------- ------------ ------------ ------------ ------------
F-14
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES: (CONTINUED)
The Company's effective tax rate differs from the statutory federal tax rate
for the following reasons:
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- --------------------------
1995 1996 1997 1997 1998
---------- ------------ ------------ ------------ ------------
(UNAUDITED)
Provision for income taxes at statutory
federal income tax rate.................... $ 503,957 $ 1,208,455 $ 6,351,010 $ 2,630,916 $ 3,420,885
Increase (decrease) resulting from:
State income taxes, net of federal
benefit.................................. 62,680 252,283 1,108,074 459,022 748,209
Foreign income taxes....................... 202,502 233,965 295,954 75,616 294,120
Goodwill amortization...................... -- -- -- -- 455,758
Penalties and assessments.................. 75,000 -- -- -- 211,750
Other...................................... 27,202 209,180 (174,659) (204,509) 409,828
---------- ------------ ------------ ------------ ------------
$ 871,341 $ 1,903,883 $ 7,580,379 $ 2,961,045 $ 5,540,550
---------- ------------ ------------ ------------ ------------
---------- ------------ ------------ ------------ ------------
Cash paid for income taxes for the years ended December 31, 1997, 1996 and
1995 approximated $4,311,000, $2,174,000 and $525,000, respectively.
8. EMPLOYEE BENEFITS PLANS:
The Company provides health insurance benefits to its employees through a
self-funded employees' benefit trust. Under the Plan, employees' contributions
are charged based upon variable fees depending upon their coverage selection.
The Company pays actual employee health benefits claims as incurred and other
associated Plan costs from the benefit trust. A $50,000 deposit balance is
maintained in the Trust account at all times.
The Trust has a year-end of October 31. For the years ended December 31,
1997, 1996 and 1995, the Company costs associated with the Plan were
approximately $561,000, $458,000 and $516,000, respectively; and for the nine
month periods ended September 30, 1998 and 1997, $458,000 (unaudited) and
$321,000 (unaudited), respectively.
The Company has a Plan under Section 401(k) of the Internal Revenue Code
covering all eligible employees. Under the Plan, the Company will match a
certain percentage of an employee's contribution up to a maximum amount. The
Company's matching contribution under the Plan for the years ended December 31,
1997, 1996 and 1995 was approximately $58,000, $51,000 and $49,000,
respectively; and for the nine month periods ended September 30, 1998 and 1997,
$58,000 (unaudited) and $40,000 (unaudited), respectively.
9. RELATED PARTY TRANSACTIONS:
The Company had revenues of approximately $368,000 and $1,152,000 from other
Wellman-owned entities for the years ended December 31, 1997 and 1996,
respectively; and for the nine month periods ended September 30, 1998 and 1997,
$49,000 (unaudited) and $361,000 (unaudited), respectively. The
F-15
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS: (CONTINUED)
Company accrued approximately $260,000 for management charges payable to Wellman
plc as of December 31, 1996. There were no management charges in 1997. Included
in income taxes payable are taxes payable to Wellman, North America of $297,900
as of December 31, 1997.
The Company had notes receivable from former stockholders and current
officers totaling approximately $69,000 as of December 31, 1996. The notes were
repaid in 1997. In 1995, the Company purchased $207,000 of consulting services
from a company owned by one of the Company's former stockholders.
10. MANDATORILY REDEEMABLE PREFERRED STOCK
During 1994, the Company issued 5,000 shares of Class B non-voting $100 par
value Preferred Stock to the Connecticut Development Authority for $500,000. In
April 1997 the Class B Preferred Stock converted to mandatorily redeemable
preferred stock and 1,668 shares were redeemed and retired in 1997 for $166,800
and the remaining 3,332 shares are redeemable in 1998 at $335,699. The Class B
Preferred Stock pays an annual dividend when and if declared, on a
non-cumulative basis, equal to 5% of the par value per share. The distribution
rights of this preferred stock were subordinate to those of the 15% convertible
preferred stock, but superior to those of the Class A Common Stock.
In April 1996, the Company amended its certificate of incorporation, whereby
the certificate allows for the payment of dividends to the Class B non-voting
preferred stockholders or the redemption, purchase or acquisition of the Class B
non-voting Preferred Stock without requiring declaration or payment of dividends
to any other capital stock of the Company. The amendment was retroactive to
1994.
11. PREFERRED STOCK:
The Company has 550 shares of 15% Convertible Preferred Stock authorized,
issued and outstanding. The Preferred Stock is convertible to shares of Class A
Common Stock at a conversion rate of 1:1. The shares earn dividends at the rate
of $200.55 per share on July 15 and on January 15 of each year. These dividends
are cumulative with effect from July 15, 1990 and interest will be payable at
15% per annum on any unpaid dividends. The Convertible Preferred Stock is senior
to all other classes of capital stock with regards to capital and dividend
distributions. In the event of liquidation, dissolution or winding up of the
Company, each holder of the 15% Convertible Preferred Stock shall be entitled to
receive $2,674 per share plus all accrued and unpaid dividends and accrued
interest thereon to the date fixed for distribution out of the assets available
for distribution.
In addition, the Company has authorized 9,450 shares of PIK redeemable
Preferred Stock and 1,000 shares of Class B non-voting Common Stock of which
none are outstanding as of December 31, 1997 and 1996 and September 30, 1998.
12. COMMITMENTS AND CONTINGENCIES:
The Company and its subsidiaries are parties to lawsuits or may in the
future become parties to lawsuits involving various types of commercial claims.
Legal proceedings tend to be unpredictable and costly and may be affected by
events outside the control of the Company. The Company maintains various levels
of insurance to apply to product liability and certain other claims in excess of
deductibles.
F-16
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
There is no assurance that litigation will not have an adverse effect on the
Company's financial position, results of operations or cash flows.
13. FOREIGN SALES:
For the years ended December 31, 1997, 1996 and 1995, the Company and its
subsidiaries had sales to foreign countries totaling approximately $9,161,000,
$5,422,000 and $1,600,000, which represents about 9%, 17% and 8% of sales for
each year, respectively. Foreign sales for the nine month periods ended
September 30, 1998 and 1997 approximated $2,428,000 (unaudited), $8,400,000
(unaudited) representing about 2% and 18% of sales, respectively.
Outstanding receivables from foreign customers approximated $3,980,000 and
$2,868,000 as of December 31, 1997 and 1996, respectively; and $2,371,000
(unaudited) as of September 30, 1998.
14. FOREIGN EXCHANGE LOSSES:
As a result of the devaluation of the Mexican peso, the Company experienced
the following exchange losses:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ----------------------
1995 1996 1997 1997 1998
----------- ----------- ---------- --------- -----------
(UNAUDITED)
Foreign currency transaction gain
(loss).......................... $ (174,546) $ (120,261) $ (79,035) $ 506 $ (567,028)
Foreign currency translation
adjustment...................... 142,110 168,388 30,980 679 66,043
15. SUBSEQUENT EVENTS (UNAUDITED):
On April 29, 1998, the Company entered into a $150,000,000 senior secured
revolving credit and term loan agreement (the "Credit Agreement") with Bank of
America National Trust and Savings Association. The Credit Agreement consists of
a $70,000,000 five-year term loan ("Term Loan A"), a $40,000,000 six and
one-half year term loan ("Term Loan B") and a five-year revolving credit
facility in the amount of $40,000,000 ("Revolving Loan"). Borrowings under the
Credit Agreement are secured by liens on substantially all of the assets of the
Company. The Company is also required to comply with certain customary
covenants, including certain financial ratios.
As of September 30, 1998, the Company had borrowings of $17,532,610
outstanding under the Revolving Loan. The Revolving Loan provides for borrowings
based on 80% of eligible accounts receivable, plus 50% of eligible inventory and
is in effect until the earliest of (a) April 30, 2003, (b) the date on which all
outstanding term loans are repaid or prepaid in full or (c) the date in which it
shall otherwise terminate in accordance with the Credit Agreement.
F-17
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS (UNAUDITED): (CONTINUED)
Long-term debt consists of the following at September 30, 1998:
Term Loan A, principal installments of $2,500,000 due on
September 30 and December 31, 1998; $3,125,000 due quarterly
in 1999; $3,750,000 due quarterly beginning March 31, 2000
through December 31, 2002, with a final principal payment of
$7,500,000 due April 30, 2003................................. $ 70,000,000
Term Loan B, annual principal installments of $400,000
beginning June 30, 1999 through June 30, 2004, with a final
principal payment of $37,600,000 due on October 31, 2004...... 40,000,000
------------
110,000,000
Less current portion.......................................... (14,775,000)
------------
Long-term debt................................................ $ 95,225,000
------------
------------
Maturities of long-term debt are as follows:
1999.......................................................... $ 14,775,000
2000.......................................................... 14,775,000
2001.......................................................... 15,400,000
2002.......................................................... 15,400,000
2003.......................................................... 11,650,000
Thereafter.................................................... 38,000,000
------------
$110,000,000
------------
------------
In the third quarter of 1998, pursuant to a board resolution and subsequent
separate management stock award agreements, several senior executives of the
Company were awarded Common Stock of the Company's parent holding company and
cash in lieu of individual income taxes. The stock awards vest immediately and
the stock and cash were estimated by the Company to have a fair value of
approximately $1,091,000. Accordingly, such amount has been recorded as
compensation expense for the nine months ended September 30, 1998.
The Company, through a wholly-owned subsidiary, entered into a merger
agreement, dated as of August 12, 1998, with Envirotest Systems Corp. (ESC), a
Delaware corporation, pursuant to which the Company commenced a tender offer for
all of the issued and outstanding shares of ESC's Class A Common Stock for
$266.3 million in cash, or $17.25 per share, plus the assumption of
approximately $275 million in net debt. The Class B and Class C shares of ESC's
Common Stock are convertible by the holders thereof into shares of Class A
Common Stock on a one-for-one basis and thus may be tendered as well. At
September 30, 1998, the Company has incurred approximately $2.5 million in
acquisition related costs which are deferred in the accompanying balance sheet.
F-18
ENVIRONMENTAL SYSTEMS PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS (UNAUDITED): (CONTINUED)
On October 8, 1998, the Company entered into an agreement with Bank of
America and BA Credit Corporation, pursuant to which a Delaware limited
liability company, ESP Financial Services LLC, ("ESP Financial") has been
established to provide financing for vehicle emissions testing equipment to be
sold by ESP to decentralized facilities. ESP Financial Services LLC is 90% owned
by ESP and 10% owned by BA Credit Corporation. After ESP has arranged a sale of
vehicle emissions testing equipment with a decentralized facility owner
operator, ESP Financial will purchase the equipment from ESP and lease it to the
facility. ESP will receive payment in full for the sale from ESP Financial at
the time of sale, ESP Financial will securitize the lease payments from the
decentralized facilities and after repayment to BA Credit Corporation and its
affiliates of the purchase price for the equipment, ESP and BA Credit
Corporation will share in the spread between the actual or implied interest
rates on the lease payments and on the instruments issued in connection with the
securitization based on their respective interests in ESP Financial.
Effective October 15, 1998 the Company completed its tender offer and merger
with ESC. This business combination will be accounted for by the Company by the
purchase method. ESC had revenue of approximately $168 million for the year
ended September 30, 1998. In connection with the merger and related financing
the Company paid, among other professional fees, $5 million to Alchemy for
arranging the merger and financing.
F-19
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' deficit and
of cash flows present fairly, in all material respects, the financial position
of Envirotest Systems Corp. and its subsidiaries (the "Company") at September
30, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
December 7, 1998
F-20
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30,
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1998
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................................................ $ 18,685 $ 71,506
Available-for-sale securities............................................................................ 40,955 --
Contract receivables, net of allowance for doubtful accounts of $1,026 and $1,299, respectively.......... 11,789 12,822
Prepaid and other current assets......................................................................... 5,911 5,183
--------- ---------
Total current assets................................................................................. 77,340 89,511
Restricted cash............................................................................................ 19,567 18,890
Property, plant, and equipment, net........................................................................ 188,342 218,889
Assets held under capital lease, net....................................................................... 44,564 43,240
Assets held for sale, net.................................................................................. 21,482 3,123
Intangible assets, net..................................................................................... 16,479 15,560
Deferred charges and debt acquisition costs, net........................................................... 11,249 8,880
Other assets............................................................................................... 710 765
--------- ---------
Total assets......................................................................................... $ 379,733 $ 398,858
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable......................................................................................... $ 3,697 $ 12,900
Current portion of long-term debt and capital lease obligations.......................................... 10,184 8,990
Accrued expenses and other current liabilities........................................................... 23,575 45,441
Income taxes payable..................................................................................... 338 498
--------- ---------
Total current liabilities............................................................................ 37,794 67,829
Senior subordinated debt................................................................................... 125,000 125,000
Senior debt, net........................................................................................... 149,531 149,365
Long-term debt, net........................................................................................ 33,175 21,825
Long-term capital lease obligation, net.................................................................... 53,095 47,575
Other long-term liabilities................................................................................ 5,514 4,630
--------- ---------
Total liabilities.................................................................................... 404,109 416,224
--------- ---------
Commitments and contingencies (Notes 18 and 20)
Stockholders' deficit:
Common stock, $0.01 per share par value; Class A Common Stock, 40,000 shares authorized, 8,843 and 8,833
shares issued and outstanding at September 30, 1998 and 1997, respectively; Class B Common Stock, 5,000
shares authorized, 1,250 shares issued and outstanding at September 30, 1998 and 1997, respectively;
Class C Common Stock, 5,000 shares authorized, 2,026 shares issued and outstanding at September 30,
1998 and 1997.......................................................................................... 165 165
Additional paid-in capital............................................................................... 60,140 60,173
Treasury stock, at cost.................................................................................. (29,003) (29,003)
Cumulative currency translation adjustment............................................................... 43 (191)
Unrealized loss on available-for-sale securities......................................................... (8) --
Accumulated deficit...................................................................................... (55,713) (48,510)
--------- ---------
Total stockholders' deficit.......................................................................... (24,376) (17,366)
--------- ---------
Total liabilities and stockholders' deficit.......................................................... $ 379,733 $ 398,858
--------- ---------
--------- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
F-21
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30,
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1997 1998
---------- ---------- ----------
Contract revenues............................................................ $ 124,472 $ 140,664 $ 168,650
Cost of revenues............................................................. 102,149 98,859 104,970
---------- ---------- ----------
Gross profit................................................................. 22,323 41,805 63,680
Operating costs, expenses and gain:
Selling, general and administrative........................................ 21,782 19,046 19,453
Corporate relocation....................................................... 1,850 -- --
Amortization............................................................... 3,427 2,432 2,373
Merger and acquisition..................................................... -- -- 7,828
Gain on Pennsylvania settlement............................................ (15,307) (3,950) (2,555)
---------- ---------- ----------
Income from operations....................................................... 10,571 24,277 36,581
Other expense (income):
Interest expense........................................................... 38,940 40,220 33,774
Interest income............................................................ (3,259) (7,636) (4,540)
Interest income from Pennsylvania settlement............................... (5,684) (1,109) (987)
Other...................................................................... -- 103 456
---------- ---------- ----------
Income (loss) per share before income taxes and extraordinary item........... (19,426) (7,301) 7,878
Income tax expense......................................................... 5,638 -- 675
---------- ---------- ----------
Income (loss) before extraordinary item...................................... (25,064) (7,301) 7,203
Extraordinary loss on debt repurchase...................................... -- 1,324 --
---------- ---------- ----------
Net income (loss)............................................................ $ (25,064) $ (8,625) $ 7,203
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) per common share:
Income (loss) per share before extraordinary item............................ $ (1.51) $ (0.44) $ 0.59
Extraordinary loss per share................................................. -- $ (0.08) --
Net income (loss) per share, basic........................................... $ (1.51) $ (0.52) $ 0.59
Net income (loss) per share, diluted......................................... $ (1.51) $ (0.52) $ 0.49
Weighted average common shares outstanding................................... 16,552 16,439 12,114
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares outstanding and common equivalent shares
outstanding................................................................ 16,552 16,439 14,836
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of the consolidated financial
statements.
F-22
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1997 1998
--------- --------- ---------
Cash flows from operating activities:
Net income (loss)................................................................ $ (25,064) $ (8,625) $ 7,203
Adjustment to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization.................................................. 24,538 24,159 30,336
Allowance for doubtful accounts................................................ 74 850 (273)
Amortization of loan discount and deferred debt issuance costs................. 2,516 1,277 2,375
Gain on Pennsylvania settlement................................................ (15,307) (3,950) (2,555)
Gain on sale of property, plant and equipment and assets held for sale......... -- -- (447)
Extraordinary loss on debt repurchase.......................................... -- 1,324 --
Deferred taxes................................................................. 5,476 -- --
Other.......................................................................... (96) 738 (117)
Changes in assets and liabilities:
Contract receivables........................................................... (2,585) (1,670) (760)
Prepaid and other current assets............................................... (1,793) (514) 728
Deferred charges............................................................... (2,200) (341) (448)
Accounts payable............................................................... 470 (128) 9,203
Accrued interest............................................................... 190 (519) (40)
Accrued expenses and other current liabilities................................. 1,358 (725) 659
Advances from customer......................................................... -- -- 18,928
Income taxes payable........................................................... 79 (336) 160
Other.......................................................................... (82) 688 (939)
--------- --------- ---------
Net cash provided by (used in) operating activities.............................. (12,426) 12,228 64,013
--------- --------- ---------
Cash flows from investing activities:
Purchases of available-for-sale securities....................................... (6,644) (127,597) --
Maturities of available-for-sale securities...................................... -- 94,625 40,963
Purchases of property, plant and equipment....................................... (49,724) (14,668) (55,854)
Proceeds from sales of property, plant and equipment............................. 3,835 1,434 1,126
Proceeds from Pennsylvania settlement............................................ 65,000 79,405 --
Proceeds from sale of Pennsylvania assets........................................ 2,362 9,077 21,797
Other............................................................................ (2,560) (2,948) (1,453)
--------- --------- ---------
Net cash provided by investing activities.......................................... 12,269 39,328 6,579
--------- --------- ---------
Cash flows from financing activities:
Senior debt repurchase........................................................... -- (50,000) (300)
Stock repurchase and transaction costs........................................... -- (29,040) --
Repayment of capital lease obligation............................................ (1,485) (4,710) (5,090)
Repayment of long term debt...................................................... (2,457) (3,739) (12,974)
Capitalization of loan fees...................................................... (1,765) (24) --
Proceeds from capital lease and long term debt................................... 31,345 -- --
Proceeds from issuance of common stock........................................... 148 4 33
Decrease in restricted cash...................................................... 10,389 1,541 677
--------- --------- ---------
Net cash provided by (used in) financing activities................................ 36,175 (85,968) (17,654)
--------- --------- ---------
Effect of exchange rate on cash and cash equivalents............................... 7 (7) (117)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................... 36,025 (34,419) 52,821
Cash and cash equivalents, beginning of year....................................... 17,079 53,104 18,685
--------- --------- ---------
Cash and cash equivalents, end of year............................................. $ 53,104 $ 18,685 $ 71,506
--------- --------- ---------
--------- --------- ---------
Supplemental cash flow information:
Cash paid for interest and income taxes for the years ended September 30, 1998,
1997 and 1996 was as follows:
Interest, net of capitalized interest............................................ $ 38,751 $ 38,744 $ 32,614
Income taxes..................................................................... 245 40 448
The accompanying notes are an integral part of the consolidated financial
statements.
F-23
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
CUMULATIVE
COMMON STOCK TREASURY STOCK CURRENCY
-------------------------- ADDITIONAL ------------------------ TRANSLATION
SHARES AMOUNT PAID IN CAPITAL SHARES AMOUNT ADJUSTMENT
----------- ------------- ----------------- ----------- ----------- -----------------
Balance at October 1,
1995................... 16,158 $ 162 $ 60,028 -- -- $ (121)
Exercise of Options...... 462 4 144
Foreign Currency
Translation
Adjustment............. 25
Net Loss.................
----------- ----- ------- ----- ----------- -----
Balance at September 30,
1996................... 16,620 166 60,172 -- -- (96)
Exercise of Options...... 17 4
Other Adjustments........ (140) (1) (36)
Stock repurchases........ (4,388) 4,388 $ (29,003)
Foreign Currency
Translation
Adjustment............. 139
Unrealized loss on
available-for-sale
securities.............
Net loss.................
----------- ----- ------- ----- ----------- -----
Balance at September 30,
1997................... 12,109 165 60,140 4,388 (29,003) 43
Exercise of Options...... 9 -- 33
Foreign Currency
Translation
Adjustment............. (234)
Unrealized loss on
available for-sale
securities...........
Net Income...............
----------- ----- ------- ----- ----------- -----
Balance at September 30,
1998................... 12,118 $ 165 $ 60,173 4,388 $ (29,003) $ (191)
----------- ----- ------- ----- ----------- -----
----------- ----- ------- ----- ----------- -----
UNREALIZED
LOSS ON
AVAILABLE-
FOR-SALE ACCUMULATED
SECURITIES (DEFICIT) TOTAL
----------------- ---------------- ---------
Balance at October 1,
1995................... -- $ (22,024) $ 38,045
Exercise of Options...... 148
Foreign Currency
Translation
Adjustment............. 25
Net Loss................. (25,064) (25,064)
--- -------- ---------
Balance at September 30,
1996................... -- (47,088) 13,154
Exercise of Options...... 4
Other Adjustments........ (37)
Stock repurchases........ (29,003)
Foreign Currency
Translation
Adjustment............. 139
Unrealized loss on
available-for-sale
securities............. $ (8) (8)
Net loss................. (8,625) (8,625)
--- -------- ---------
Balance at September 30,
1997................... (8) (55,713) (24,376)
Exercise of Options...... 33
Foreign Currency
Translation
Adjustment............. (234)
Unrealized loss on
available for-sale
securities........... 8 8
Net Income............... 7,203 7,203
--- -------- ---------
Balance at September 30,
1998................... $ -- $ (48,510) $ (17,366)
--- -------- ---------
--- -------- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
F-24
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION:
Envirotest Systems Corp. ("Envirotest" or the "Company") markets, installs
and operates centralized vehicle emissions testing programs under contracts
entered into with state and municipal governments within the United States and a
program in British Columbia, Canada. The Company also offers states and
municipalities services in a variety of sophisticated data management and
vehicle identification capabilities.
Envirotest provides governmental authorities an all-inclusive service
whereby it designs, constructs, and operates centralized vehicle emissions
programs. The Company's services include: designing a network that provides
convenience to motorists; identifying and procuring adequate inspection sites;
constructing emissions facilities with multiple test lanes; designing and
installing a proprietary vehicle emissions inspection system and computer
network to collect and process emissions testing data; and managing and
operating the inspection program using sophisticated software and equipment
developed by the Company.
On August 12, 1998, Envirotest, entered into a merger agreement with Stone
Rivet, Inc. ("Purchaser"), a Delaware corporation and wholly owned subsidiary of
Environmental Systems Products, Inc. ("Parent"), a Delaware corporation, for the
acquisition of the Company's outstanding shares of Class A Common Stock by
Purchaser at a price of $17.25 per share in cash. Under the terms of the Merger
Agreement, upon consummation of the Merger, each outstanding share of Class B
Common Stock, $.01 par value per share, and Class C Common Stock, $.01 par value
per share, of the Company will be converted into the right to receive an amount
in cash equal to the price per Share paid pursuant to the Class A Common Stock
Offer.
Under the terms of the transaction, the Purchaser commenced a cash tender
offer for all outstanding shares of the Company common stock at $17.25 per
share. Effective October 15, 1998, approximately 11,963,529 shares were tendered
and were accepted by the Purchaser for payment. The acquisition was completed by
a merger of Envirotest with the Purchaser, in which the remaining Envirotest
shares were canceled and converted into the right to receive $17.25 per share in
cash. Subsequently, Envirotest became a 100% owned subsidiary of the purchaser.
In connection with the closing of the tender offer, among other actions, the
Purchaser repaid senior subordinated debt (Note 9), senior debt (Note 10), and
long term debt (Note 11), plus any accrued interest. In connection with the
merger agreement, Envirotest incurred costs of approximately $7,828 million in
connection with the merger transaction and the amount is included in the
consolidated statement of operations as of September 30, 1998 within the caption
"Merger and acquisition costs."
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Envirotest and
its domestic and foreign subsidiary companies. All inter-company balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements
F-25
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH, CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES
The Company considers all highly liquid investments with an original
maturity of three months or less from the date of purchase to be cash
equivalents. Cash and cash equivalents are stated at cost, which approximates
market value. Included in the Company's cash and cash equivalents are
approximately $67,686 and $8,369 of commercial paper invested through registered
broker/dealers at September 30, 1998 and 1997, respectively. The Company intends
to hold these investments until maturity.
Investments are classified as "available-for-sale" and have maturities
greater than three months from the date of acquisition. Investments classified
as "available-for-sale" are reported at fair value with gains and losses net of
related tax, if any, reported as a separate component of shareholders' equity.
Available-for-sale securities of $40,955 as of September 30, 1997 primarily
consisted of certificates-of-deposit and high-grade commercial paper, with
maturity dates ranging from December 1997 through May 1998.
CONTRACTS AND CONTRACT RECEIVABLES
The Company's contract receivables primarily consist of uncollateralized
amounts due from state, municipal and foreign governments.
Under most of the Company's contracts, the governmental authority has the
right, and in some cases may be obligated, to purchase the Company's program
facilities on termination of the contract, at a price generally determined by
applying specified criteria set forth in the contract. Most contracts expressly
provide for termination if the legislation authorizing the (I/M) program is
repealed or if sufficient funds for the program are not appropriated by the
relevant governmental authority. More than half of the Company's contracts also
allow the governmental authority to terminate the contract without cause, upon
giving advance written notice of not less than 30 days. The Company is also
required to post performance bonds once the contract is awarded.
Under most of the Company's I/M contracts, the Company is required to pay
liquidated damages as a penalty for failure to meet specified start-up dates or
performance requirements, in many cases after a specified notice and cure
period.
RESTRICTED CASH
Restricted cash of $18,890 and $19,567 at September 30, 1998 and 1997
respectively, primarily consisted of certificates of deposit for the Company's
financing and performance bonds related to the emissions testing contracts with
state and municipal governments. Included in restricted cash as of September 30,
1998, are $6,579, $2,369 and $1,700 required under credit agreements for the
financing of Ohio, Indiana and Wisconsin programs, respectively. Also, $2,515 in
proceeds from bonds issued by the Indiana Development Finance Authority for the
Indiana program are being held in trust pending use of the funds and $5,727 as
collateral for performance bonds and worker's compensation insurance. The
Washington debt was paid in full in December 1997, thus releasing the $600
Washington restricted cash. Included in restricted cash as of September 30, 1997
are $6,519, $2,253, $1,700 and $600 required under credit agreements for the
financing of Ohio, Indiana, Wisconsin and Washington programs, respectively.
Also, $4,253 in proceeds from bonds issued by the Indiana Development Finance
F-26
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Authority for the Indiana program are being held in trust pending use of the
funds and $4,242 as collateral for performance bonds and worker's compensation
insurance.
PROPERTY, PLANT, EQUIPMENT AND CAPITAL LEASE
Property, plant and equipment are recorded at cost. The capital lease is
recorded at the present value of the future lease principal payments.
Depreciation and amortization are provided on the straight-line method over the
estimated useful lives of the assets or lease term as follows:
Buildings and site improvements............................ 30 years
Machinery and equipment.................................... 2-10 years
Leasehold improvements..................................... Lease term
Buildings and site improvements are depreciated on a straight-line basis
over the estimated useful life, generally 30 years. Periodically the Company
prepares an analysis to compare the estimated net book value of the buildings,
site improvements and land at the estimated completion date of individual
contracts (assuming certain renewals, if any) to the estimated residual value.
Adjustments to depreciable lives are made accordingly.
It is possible, given the political, legislative and competitive environment
in which the Company operates, that the estimates discussed above could change
and may result in accelerated depreciation charges. Also, the actual values
realized on disposal could differ from the amounts used in estimating the
residual values of these properties.
Interest costs relating to the acquisition and construction of major
projects are capitalized and depreciated over the estimated useful lives of the
related assets. Interest expense capitalized for the years ended September 30,
1998, 1997 and 1996 was $1,218, $103 and $981, respectively.
The cost of maintenance and repairs is charged to expense in the year
incurred. Expenditures that increase the useful lives of property and equipment
are capitalized.
When items are retired or disposed of, the cost and accumulated depreciation
are removed from the accounts and any gain or loss is included in income.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the recoverability of its long-lived assets by
determining whether the depreciation and amortization of the asset's net book
value over its remaining life can be recovered through projected undiscounted
future cash flows.
INTANGIBLE ASSETS
Intangible assets are stated as cost and are amortized on a straight-line
basis over their estimated useful lives as follows:
Goodwill................................................... 12 years
Government contracts....................................... 12 years
10-17
License agreement.......................................... years
15-17
Patents.................................................... years
Covenants not-to-compete................................... 12 years
Copyrights................................................. 12 years
F-27
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
It is the Company's policy to re-evaluate the estimated useful life of each
of its intangible assets on a quarterly basis and may adjust the estimated
useful life accordingly. It is possible, given the political, legislative and
competitive environment in which the Company operates, that the estimates
discussed above could change and may result in accelerated amortization charges.
DEFERRED DEBT ACQUISITION COSTS
Costs associated with obtaining long-term debt financing have been
capitalized and are amortized over the repayment term of the related debt.
Accumulated amortization is $8,541 and $6,817 for fiscal 1998 and 1997,
respectively.
DEFERRED CHARGES
Significant expenses incurred in bringing new emissions testing programs
into operation including staff recruitment, staff training, public information
and similar pre-operating costs are deferred and amortized over a twelve-month
period commencing with the start of program operations. Deferred charge
amortization expenses were $609, $1,124 and $4,419 for fiscal 1998, 1997 and
1996 respectively. Accumulated amortization is $7,465 and $6,457 for fiscal 1998
and 1997, respectively.
CONTRACT REVENUES
Generally, for vehicle emissions inspection contracts, revenue is based on
the fees that are collectible for the tests performed. Where contracts provide
for up-front payments in addition to test fees per contract, the payments are
recognized as revenue over the contract term.
The Company's contract revenues from major customers, which individually
account for in excess of 10% of the Company's total contract revenue, were as
follows:
CUSTOMER 1996 1997 1998
- ------------------------------------------- ---------------- --------- ---------
State A.................................... less than 10% $ 15,383 $ 30,315
State B.................................... $17,000 17,341 23,225
State C.................................... 18,700 20,905 21,945
State D.................................... 20,300 20,353 20,445
State E.................................... 16,500 16,840 16,981
For the fiscal year ended September 30, 1998, significantly all of the
Company's contract revenues were derived from its 14 emission testing contracts.
Contracts for the Company's existing emissions contracts expire between the
years 1999 and 2008.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
Research and development expenses for the periods ended September 30, 1998, 1997
and 1996 were approximately $36, $97 and $44, respectively and are included in
general and administrative expenses.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to
F-28
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
reverse. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized.
FOREIGN CURRENCY TRANSLATION
The Company has determined that the functional currency of its international
subsidiary is the local currency. In accordance with Statement of Financial
Accounting Standard No. 52, "Foreign Currency Translation," the assets and
liabilities denominated in foreign currency are translated into U.S. dollars at
the current rate of exchange existing at period-end, and revenues and expenses
are translated at average monthly exchange rates. Related translation
adjustments are reported as a separate component of stockholders' equity,
whereas gains or losses resulting from foreign currency transactions are
included in results of operations.
EARNINGS (LOSS) PER SHARE
Basic EPS is computed as net income (loss) divided by the weighted average
number of common shares outstanding for the year. Diluted EPS reflects the
potential dilution that could occur from common shares issuable through stock
options, warrants and other convertible securities. Common equivalent shares are
excluded from the computation of net loss per share if their effect is
anti-dilutive.
The following is a reconcilliation of the numerator - net income/(loss) and
the denominator - number of shares, used in the basic and diluted EPS
calculation (amounts in thousands except per share data):
1996 1997 1998
---------- --------- ---------
Basic:
Net income (loss)........................................... $ (25,064) $ (8,625) $ 7,203
---------- --------- ---------
---------- --------- ---------
Weighted average common shares outstanding.................. 16,552 16,439 12,114
Basic EPS................................................... $(1.51) $(0.52) $0.59
---------- --------- ---------
---------- --------- ---------
Diluted:
Weighted average common shares outstanding.................. 16,552 16,439 12,114
---------- --------- ---------
Stock option common equivalents............................. -- -- 2,722
Weighted average common shares outstanding and common
equivalent shares outstanding............................. 16,552 16,439 14,836
---------- --------- ---------
---------- --------- ---------
Diluted EPS................................................. $(1.51) $(0.52) $0.49
---------- --------- ---------
---------- --------- ---------
There were 813 and 805 shares excluded from the calculation of diluted EPS
as their effect was anti-dilutive for the years ended September 30, 1996 and
1997, respectively.
RELATED PARTY TRANSACTIONS
The Company does not enter into any transaction with a related person unless
such transaction is made in good faith and is on terms, which are (i) fair and
reasonable to the Company and (ii) on an arms-length basis. Any transaction or
series of transactions with a related person with an aggregate value in excess
of a certain amount first must be approved by a special committee of the Board
as fair and reasonable and on an arms length basis; and further, for any
transaction or series of transactions
F-29
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
with an aggregate value in excess of a certain amount, the Company obtains a
favorable opinion as to fairness from a financial point of view from an
independent financial advisor of national reputation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, other receivables and
accrued liabilities are a reasonable estimate of their fair value due to their
short-term nature. The estimated values of the Company's long-term debt are
based on interest rates at September 30, for issues with similar remaining
maturities.
The estimated fair value amounts of the Company's financial instruments have
been determined by the Company, using appropriate market information and
valuation methodologies. Considerable judgment is required to develop the
estimates of fair value, therefore the estimates provided here are not
necessarily indicative of the amounts that could be realized in a current market
exchange.
The Company calculates the fair value of financial instruments and includes
this additional information in the notes to financial statements when the fair
value is different from the book value of those financial instruments. When the
fair value is equal to the book value, no additional disclosure is made. The
Company uses quoted market prices whenever available to calculate these fair
values. When quoted market prices are not available, the Company uses standard
pricing models for various types of financial instruments, which take into
account the present value of estimated future cash flows. The effect of using
different market assumptions and/or estimation methodologies may be material to
the estimated fair value amounts.
RISKS AND UNCERTAINTIES
The market for the Company's services is substantially dependent on state
and federal legislation and regulations mandating air pollution controls and
vehicle emissions testing. The availability of new emissions testing contracts
depends largely on the manner by which governmental authorities choose to
implement emissions testing programs to comply with governmental negotiations.
Specifically, governmental authorities may, with certain limitations, implement
decentralized or state-run programs, as opposed to centralized
contractor-operated programs. In order to build or retain its market share the
Company must continue to successfully compete for new government contracts.
CONCENTRATIONS OF CREDIT RISK
As of September 30, 1997 and 1998, the Company's cash and cash equivalents
and short-term investments, which consist principally of demand deposits,
commercial paper and certificates of deposit, were on deposit with several
commercial banks and an investment house. Deposits in these banks may exceed the
amount of insurance, if any, provided on such deposits. The Company has not
experienced any losses on its cash or cash equivalents.
The Company maintains allowances for potential credit losses and such losses
have been within management's expectations. Financial instruments that
potentially subject the Company to concentrations of credit risk principally
comprise cash and cash equivalents, available-for-sale securities, accounts
receivable and long-term debt.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements have been
reclassified to conform with the current year's presentation. The
reclassification had no impact on previously reported net loss or stockholders'
equity.
F-30
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and displaying
comprehensive income and its components in the consolidated financial
statements. It does not, however, require a specific format for the statement,
but requires the Company to display an amount representing total comprehensive
income for the period in that financial statement. This Statement is effective
for the Company's 1999 fiscal year.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The Statement establishes standards for
how public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. This Statement is effective for the Company's 1998
fiscal year. The Company does not believe it currently has any separately
reportable segments.
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." SOP
98-5 provides guidance on the financial reporting of start-up costs and
organization costs, which should be expensed as incurred. This SOP is effective
for the Company's 2000 fiscal year. The Company has reviewed the provisions of
this SOP and does not believe that adoption of this standard will have a
material effect upon its results of operations, financial position, or cash
flows.
In March 1998, the Accounting Standards Executive Committee issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 provides guidance on when costs related to software
developed or obtained for internal use should be capitalized or expensed. This
SOP is effective for the Company's 1999 fiscal year. The Company has reviewed
the provisions of the SOP and does not believe adoption of this standard will
have a material effect upon its results of operations, financial position, or
cash flows.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following at September 30,
1998 and 1997:
1997 1998
---------- ----------
Property, plant and equipment:
Land.............................................................. $ 31,798 $ 36,431
Buildings and site improvements................................... 110,953 112,170
Machinery and equipment........................................... 98,496 103,749
Leasehold improvements............................................ 3,457 5,524
---------- ----------
244,704 257,874
Construction in progress............................................ 3,285 36,171
---------- ----------
247,989 294,045
Less accumulated depreciation....................................... (59,647) (75,156)
---------- ----------
$ 188,342 $ 218,889
---------- ----------
---------- ----------
Depreciation expense for the years ended September 30, 1996, 1997 and 1998
was $20,061, $20,341 and $26,639, respectively.
F-31
4. ASSETS HELD UNDER CAPITAL LEASES:
Assets held under capital leases consisted of the following at September 30,
1997 and 1998:
1997 1998
---------- ----------
Land................................................................ $ 5,455 $ 5,455
Buildings and site improvements..................................... 41,599 41,599
---------- ----------
47,054 47,054
Less accumulated amortization....................................... (2,490) (3,814)
---------- ----------
$ 44,564 $ 43,240
---------- ----------
---------- ----------
Amortization expense for the years ended September 30, 1996, 1997 and 1998
was $1,050, $1,386 and $1,324, respectively.
5. ASSETS HELD FOR SALE:
Assets held for sale primarily includes property, plant and equipment at
testing sites formerly operated under the Pennsylvania program. These properties
are currently being marketed for sale.
At September 30, 1998, the Company believes it has sufficient reserves for
potential losses on the sale of properties held for sale. At September 30, 1996
the estimated loss on sale of properties of $109,402, has been recognized in the
accompanying financial statements. Losses are based on management's estimates of
the amounts expected to be realized on the sale of these assets, net of disposal
costs. The amounts the Company will ultimately realize may differ materially
from the amounts assumed in arriving at the estimated loss.
Assets held for sale consisted of the following at September 30, 1997 and
1998:
1997 1998
--------- ---------
Land, buildings and site improvements................................... $ 21,548 $ 4,317
Machinery and equipment................................................. 378 378
--------- ---------
21,926 4,695
Less accumulated depreciation........................................... (444) (1,572)
--------- ---------
$ 21,482 $ 3,123
--------- ---------
--------- ---------
F-32
6. GAIN ON PENNSYLVANIA SETTLEMENT:
Legislation adopted by the Commonwealth of Pennsylvania General Assembly
directed the Pennsylvania Department of Transportation ("PennDOT") to delay
implementation of the Pennsylvania emissions testing program until March 31,
1995. On February 28, 1995, the Governor announced an indefinite suspension of
the implementation of any program until the Commonwealth receives clarification
regarding the elements of a testing program that the federal EPA would find
acceptable.
On December 15, 1995, the Company entered into a General Release and
Settlement Agreement ("Agreement") with the Commonwealth of Pennsylvania that
resolves the issues related to the Company's contract with PennDOT. Under the
terms of the Agreement, the Company was paid $25,000 on December 29, 1995 and
$40,000 on July 31, 1996 and was to be paid $40,000 on each of July 1997, and
1998 plus interest at 6% from December 15, 1995. On December 11, 1996, the
Company sold its right to receive the two remaining installment payments
totaling $80,000 in principal amount under the Agreement. The Company retained
the right to receive accrued interest of approximately $1,749, which was paid in
August 1997.
The transaction was effected through a sale of the Receivables Assets from
Envirotest 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 Envirotest Partners provided
certain representations in connection with the transaction, including
representations as to enforceability of the Agreement against the Commonwealth,
and agreed to repurchase the Receivables Assets if Envirotest Partners fails to
comply with its obligations under the Agreement.
In addition, the Company will sell the assets and retain the proceeds and
the Commonwealth will pay the Company 50% of the amount by which the net
proceeds from the sale of the assets (as defined by the Agreement as amended
December 1996) are less than $55,000 up to a maximum of $11,000 plus interest at
6% from December 15, 1995. Should the net proceeds from the sale of the assets
exceed $55,000, the Company will pay the Commonwealth 75% of the amount by which
the net proceeds exceed $55,000. The Commonwealth paid the Company $11,000, plus
accrued interest of $1,734 on July 31, 1998.
The Company is of the opinion that sufficient reserves have been recognized
and that, upon final disposition of properties, no additional loss will be
recognized.
During fiscal 1997 and 1998, management adjusted its estimated loss expected
to be realized for claims resulting as a consequence of the Pennsylvania
contract cancellation that have been settled, resolved or are unlikely to
present future liability. The adjustment resulted in a $3,950 and $2,555 gain on
the Pennsylvania settlement in fiscal 1997 and 1998, respectively.
The gain on the Pennsylvania settlement in fiscal 1996 was calculated as
follows:
Proceeds (excluding contingent payment)........................... $ 145,000
Property, plant and equipment write down.......................... (109,402)
Other assets write down........................................... (7,732)
Additional reserves............................................... (12,559)
---------
$ 15,307
---------
---------
F-33
7. INTANGIBLE ASSETS:
Intangible assets consisted of the following at September 30, 1997 and 1998:
1997 1998
--------- ---------
Government contracts.................................................... $ 21,921 $ 21,923
Covenants not-to-compete................................................ -- 830
Goodwill................................................................ 4,435 5,058
License agreement....................................................... 1,903 1,903
Copyrights.............................................................. 1,000 1,000
Patents................................................................. 1,962 1,962
--------- ---------
31,221 32,676
Less accumulated amortization........................................... (14,742) (17,116)
--------- ---------
$ 16,479 $ 15,560
--------- ---------
--------- ---------
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consisted of the following at
September 30, 1997 and 1998:
1997 1998
--------- ---------
Accrued employee-related expenses....................................... $ 6,237 $ 8,027
Accrued real and personal property taxes................................ 2,217 1,955
Pennsylvania settlement reserves........................................ 4,098 1,970
Accrued interest........................................................ 1,170 1,130
Professional services................................................... 2,874 1,238
Deferred Revenue........................................................ -- 20,783
Construction Retainage Payable.......................................... -- 2,393
Other................................................................... 6,979 7,945
--------- ---------
$ 23,575 $ 45,441
--------- ---------
--------- ---------
9. SENIOR SUBORDINATED DEBT:
Senior subordinated debt consisted of the following at September 30, 1997
and 1998:
1997 1998
---------- ----------
Senior Subordinated Notes, due April 1, 2003; interest at 9 5/8%,
payable semi-annually................................................ $ 125,000 $ 125,000
---------- ----------
---------- ----------
The Senior Subordinated Notes ("Notes") are redeemable by the Company after
April 1998. The Notes will be redeemable at any time at the option of the
Company, in whole or in part, at the redemption prices beginning at 103.609% of
the principal amount for the period beginning April 1, 1998 and declining
ratably to 100% of the principal amount on or after April 1, 2001 plus accrued
or unpaid interest to the date of redemption.
The Notes are uncollateralized obligations of the Company, subordinated in
right of payment to all Senior Debt (as defined). The Notes carry various
covenants, including a limitation on payment of dividends, incurrence of
additional indebtedness and issuance of disqualified stock (as defined).
As of September 30, 1997 and 1998, the fair value of the Notes, which is
determined based on quoted market price, was $117,500 and $129,824,
respectively.
F-34
10. SENIOR DEBT:
Senior debt consisted of the following at September 30, 1997 and 1998:
1997 1998
---------- ----------
Senior Notes, due March 15, 2001; interest at 9 1/8% (net of discount
of $469 and $335 respectively)...................................... $ 149,531 $ 149,365
---------- ----------
---------- ----------
The Senior Notes are redeemable by the Company after March 15, 1998. The
Senior Notes will be redeemable at any time at the option of the Company, in
whole or in part, at redemption prices beginning at 103.083% of the principal
amount for the period beginning March 15, 1998 and declining ratably to 100% of
the principal amount on or after March 15, 2000 plus accrued or unpaid interest
to the date of redemption.
The Senior Notes are senior unsecured obligations of the Company, senior in
right of payment to the 9 5/8% Senior Subordinated Notes of the Company. The
Senior Notes carry various covenants, including a limitation on payment of
dividends, incurrence of additional indebtedness and issuance of disqualified
stock (as defined).
In August 1997, the Company received permission from the Senior debt holders
to redeem up to $50,000 of the Senior Notes. In September 1997, $50,000
aggregate principal amount of Senior Notes were purchased by the Company. The
Company recognized a non-recurring charge, reflected as an extraordinary loss
from the write-off of amortization of deferred issuance costs, original issue
discounts and tender offer fees of $1.3 million in connection with this
repurchase.
As of September 30, 1997 and 1998, the fair value of the Senior Notes, which
is determined based on quoted market price, was $148,000 and $154,690,
respectively.
11. OTHER LONG TERM DEBT:
On December 29, 1995, the Company's wholly owned subsidiary, Envirotest
Wisconsin, Inc., issued $17,000 principal amount of notes (the "Notes"). The
Notes bear interest at the rate of 7.53% per annum with monthly payments,
including interest, beginning at approximately $230 and increasing to
approximately $340 with maturity on November 30, 2002. The Notes are
collateralized by all assets used in the Wisconsin program. At September 30,
1998, the unpaid principal balance is $12,645.
In January 1996, the Company acquired Systems Control, Inc., a Washington
corporation (SC-WA), the operator of the centralized emissions testing program
in the State of Washington. At the time of the acquisition, SC-WA had debt
outstanding under a credit agreement. During December 1997, the Company
restructured this loan as a revolving facility and paid off the outstanding
principal balance.
In June 1996, the Company issued $14,345 principal amount of notes for the
Indiana program. The notes bear interest at the rate of 7.82% per annum with
quarterly payments, including interest of approximately $540, and mature in
2006. Principal payments began June 1997. The notes are collateralized by all
assets used in the Indiana program. At September 30, 1998, the unpaid principal
is $12,650.
F-35
11. OTHER LONG TERM DEBT: (CONTINUED)
The other long-term debt matures as follows:
1999 $ 3,470
2000 4,075
2001 4,495
2002 5,230
2003 2,650
Thereafter......................................................... 5,375
---------
Total principal payments........................................... 25,295
Less current portion............................................... (3,470)
---------
$ 21,825
---------
---------
12. STOCK OPTIONS:
The Company has adopted a Stock Option Plan (the "Plan") providing for the
grant of options to purchase shares of Class A Common Stock to certain employees
of the Company and its subsidiaries and to Outside Directors (as defined) on an
annual, nondiscretionary basis. The Plan provides for the grant of options
intended to qualify as Incentive Stock Options ("ISOs") as defined by Section
422 of the Internal Revenue Code and options that do not qualify as ISOs
("NQSOs"). The exercise price per share for all ISOs generally may not be less
than 100% of the fair market value on the date of grant. The exercise price per
share for NQSOs may be less than, equal to or greater than the fair market value
on the date of grant, but not less than par value, except that the exercise
price for NQSOs granted to Outside Directors shall be the fair market value on
the date of grant. Under the Plan, such options are exercisable according to a
vesting schedule pursuant to the terms of each Option Agreement. Unless earlier
terminated by the Board of Directors, the Plan will terminate in January 2003,
10 years after its effective date.
In 1993, pursuant to an agreement for consulting services, a director and
principal stockholder of the Company was granted options to purchase 50,000
shares of Class A Common Stock at an exercise price of $9.75 per share and
50,000 shares at an exercise price of $14.00 per share. Options to purchase
25,000 shares of each of the foregoing options (an aggregate of 50,000) vested
upon grant, with the remaining options vesting in September 1994. The
unexercised options expire August 31, 1998. In 1997 the Company granted new
options in exchange for the surrender and cancellation of certain of its
existing Options with this director; such new Options to have a purchase price
equal to $6.125 with the other terms of such new Options to be identical to the
terms of the surrendered and cancelled Options, including the vesting schedule.
In the first quarter of 1997, the Company granted non-qualified options to
purchase shares of the Class A Common Stock to certain Non-Executive Directors
of the Company at an exercise price equal to the fair market value of the
Company's Class A Common Stock on the date of grant. The options vest ratably
over three years and terminate after ten years.
In the first and second quarter of fiscal year 1998, the Company granted
non-qualified options to purchase shares of the Class A Common Stock to certain
Non-Executive Directors of the Company at an exercise price equal to the fair
market value of the Company's Class A Common Stock on the date of grant. The
options vest ratably over three years and terminate after ten years.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
1993 Plan. Had compensation cost for the 1993 Plan been determined based on the
fair value at the grant date for options granted in fiscal 1998 and 1997
F-36
12. STOCK OPTIONS: (CONTINUED)
consistent with the provisions of SFAS 123, the Company's net income (loss) and
net income (loss) per share for fiscal 1997 and 1998 would have been increased
to the pro forma amounts indicated below:
1996 1997 1998
---------- ---------- ---------
Net income (loss)--as reported.............................. $ (25,064) $ (8,625) $ 7,203
Net income (loss)--pro forma................................ $ (25,422) $ (10,911) $ 4,675
Net income (loss) per share--as reported.................... $ (0.52) $ (0.52) $ 0.59
Net income (loss)--pro forma................................ $ (0.66) $ (0.66) $ 0.39
The fair value of each option that was granted after October 1, 1995 is
estimated on the date of the grant using the Black-Scholes multiple option
pricing model with the following weighted average assumptions:
1996 1997 1998
------------- ------------- -------------
Risk free interest............ 5.0%--5.938% 5.0%--5.938% 4.87%--5.82%
Expected life................. 4.56 years 4.56 years 6.92 years
Expected volatility........... 82.1% 82.1% 81.1%
Expected dividend............. -- -- --
The weighted average expected life was calculated based on the vesting
period and the exercise behavior of the employees.
The weighted average fair value of options granted in 1996, 1997 and 1998
was $3.50, $2.09 and $1.38, respectively.
The following table summarizes the stock options outstanding at September
30, 1998:
OPTIONS OUTSTANDING
NUMBER WEIGHTED AVERAGE NUMBER EXERCISABLE
EXERCISE OUTSTANDING AS OF REMAINING WEIGHTED AVERAGE AS OF SEPTEMBER 30,
PRICES SEPTEMBER 30, 1998 CONTRACTUAL LIFE EXERCISE PRICE 1998
- -------------- ------------------- ------------------------- ----------------- ---------------------
$ 0.2700 493 2.22 $ 0.27 493
$ 0.4800 383 3.53 $ 0.48 383
$ 2.0000 200 8.53 $ 2.00 100
$ 2.2500 3 8.25 $ 2.25 2
$ 2.7500 200 7.32 $ 2.75 200
$ 2.8375 200 7.32 $ 2.84 66
$ 3.2500 100 8.12 $ 3.25 33
$ 3.3750 752 8.07 $ 3.38 271
$ 4.7500 15 9.09 $ 4.75 0
$ 5.2500 200 9.04 $ 5.25 0
$ 6.1250 1,126 7.03 $ 6.13 1,127
$ 6.7500 40 9.36 $ 6.75 0
$ 6.8750 485 9.33 $ 6.88 0
$ 7.0625 100 9.42 $ 7.06 0
$ 10.8750 15 9.56 $ 10.88 0
----- -----
4,312 2,675
F-37
12. STOCK OPTIONS: (CONTINUED)
The following table summarizes the status of, and changes in, options
granted during the years ended September 30, 1996, 1997 and 1998:
WEIGHTED AVERAGE
SHARES OPTION PRICE PER
UNDER OPTION SHARE
--------------- ---------------------
Outstanding at September 30, 1995....................... 2,660 $ 5.39
Granted................................................. 400 $ 2.78
Exercised............................................... (462) $ 0.34
Canceled................................................ (185) $ 11.10
-----
Outstanding at September 30, 1996....................... 2,413 $ 5.35
Granted................................................. 1,262 $ 3.95
Reissued and repurchased................................ 590 $ 4.65
Exercised............................................... (16) $ 0.27
Canceled and expired.................................... (618) $ 13.25
-----
Outstanding at September 30, 1997....................... 3,631 $ 3.38
Granted................................................. 1,008 $ 6.52
Exercised............................................... (10) $ 3.38
Canceled................................................ (317) $ 4.47
-----
Outstanding at September 30, 1998....................... 4,312 $ 3.99
-----
-----
OPTIONS AVAILABLE
EXERCISABLE FOR GRANT
--------------- ---------------------
September 30, 1996...................................... 1,506 816
September 30, 1997...................................... 1,470 33
September 30, 1998...................................... 2,675 --
The Company has granted certain employees and Directors non-qualified stock
options outside the Plan, which have been included in the above table.
Non-qualified stock options granted in 1996, 1997 and 1998 were zero, 35,000,
and 981,667, respectively.
13. STOCKHOLDERS' EQUITY:
Envirotest Systems Corp. was incorporated on August 20, 1990 for the purpose
of purchasing Hamilton Test Systems, Inc. ("HTS"), a wholly owned subsidiary of
United Technologies Corporation (the "Prior Parent"). At the time of the HTS
acquisition, a subsidiary of the Prior Parent had an equity interest in
Envirotest of approximately 23.6% of the outstanding stock. Generally Accepted
Accounting Principles require that a portion of the equity participation in
Envirotest by the Prior Parent be valued using the carry-over basis of its
equity interest in HTS. Accordingly, a portion of HTS' assets were recorded at
the book value of the Prior Parent. The effect of the predecessor carry-over
basis of $5,578 is reflected as a component of stockholders' equity.
In September, 1997, the Company purchased 4,388 shares of its Class A Common
Stock, par value $0.01 per share (the "Common Stock"), at a price of $4.50 per
share pursuant to its "Dutch" auction tender offer. All such shares were
purchased by the Company for approximately $29,003, including associated
repurchase costs. The repurchased shares are accounted for at cost, including
associated repurchase costs, and recorded as treasury stock in the accompanying
balance sheet at September 30, 1997. Cost directly related to the repurchase of
shares were $9,257 and are included as part of the cost of the shares acquired.
Payment of cash dividends is restricted by the terms of the Indenture
covering the Senior and Senior Subordinated Notes (under a formula based on the
consolidated net income of the Company plus proceeds of equity offerings) and
subject to the maintenance of a certain consolidated fixed charge coverage
ratio.
F-38
14. INCOME TAXES:
Income (loss) before income taxes and income tax expense for the years ended
September 30, 1996, 1997 and 1998 are shown below:
1996 1997 1998
---------- ---------- ----------
Income (loss) before income taxes:
Domestic operations...................................................... $ (18,938) $ (10,519) $ 5,928
Foreign operations....................................................... (488) 1,894 1,950
---------- ---------- ----------
Total.............................................................. (19,426) (8,625) $ 7,878
---------- ---------- ----------
Income tax:
Domestic operations:
Current.................................................................. 162 -- 675
Deferred................................................................. 5,161 -- --
---------- ---------- ----------
Total domestic..................................................... 5,323 675
---------- ---------- ----------
Foreign operations:
Current.................................................................. -- --
Deferred................................................................. 315 -- --
---------- ---------- ----------
Total foreign...................................................... 315 -- --
---------- ---------- ----------
Total.............................................................. $ 5,638 $ -- $ 675
---------- ---------- ----------
---------- ---------- ----------
The Company's tax expense differs from the expense calculated using the
statutory federal income tax rate for the following reasons:
1996 1997 1998
--------- --------- ---------
Tax benefit at statutory federal income tax rate.............................. $ (6,605) $ (2,933) $ 2,679
Increase (decrease) resulting from:
Goodwill amortization..................................................... 66 66 --
Nondeductible expenses.................................................... 179 64 2,111
Adjustments of the valuation allowance.................................... 13,044 3,553 (5,546)
State income taxes, net of federal tax benefit............................ (837) (603) 203
Federal alternative minimum tax........................................... -- -- 687
Foreign taxes, net of federal tax benefit................................. (52) 227 234
Other..................................................................... (157) (374) 307
--------- --------- ---------
Total income tax expense...................................................... $ 5,638 $ -- $ 675
--------- --------- ---------
--------- --------- ---------
F-39
14. INCOME TAXES: (CONTINUED)
The components of deferred tax balances as of September 30, 1997 and 1998
are as follows:
1997 1998
--------- ---------
Deferred taxes:
Contract revenue................................................................ $ -- $ 7,514
Accrued vacation pay............................................................ 537 682
Charitable contributions........................................................ 377 --
Other liabilities............................................................... 4,559 4,589
Pennsylvania settlement reserves................................................ 1,628 425
Net operating loss carryforwards................................................ 30,123 16,292
Capital loss carry forward...................................................... -- 202
Alternative minimum tax credit carryforward..................................... -- 687
Difference between financial reporting and tax bases of fixed and intangible
assets........................................................................ (11,583) (10,296)
Valuation allowance............................................................. (25,641) (20,095)
--------- ---------
Net deferred taxes.............................................................. $ -- $ --
--------- ---------
--------- ---------
The valuation allowance at September 30, 1998 is included in the
accompanying analysis due to the change in ownership of the Company effective
October 16, 1998.
The net change in the valuation allowance for the deferred tax assets of the
Company is as follows:
1997 1998
--------- ---------
Beginning balance................................................................... $ 19,452 $ 25,641
Adjustment of valuation allowance due to a reassessment of the realizability of
deferred tax assets (1997 includes $3,553 adjustment to the Income Statement and
$2,636 adjustment to equity) 6,189 (5,546)
--------- ---------
Ending balance...................................................................... $ 25,641 $ 20,095
--------- ---------
--------- ---------
At September 30, 1998, the Company had federal net operating loss
carryforwards for federal tax purposes of approximately $37,547. The amounts
expire between 2010 and 2012. The state loss carryforwards vary in amount and
expiration date depending on the jurisdiction.
15. DEFINED CONTRIBUTION PLAN AND SUPPLEMENTAL RETIREMENT PLAN:
The Company has adopted a defined contribution 401(k) plan (the "Plan")
covering substantially all its employees. Eligible employees may contribute up
to 16% of base compensation to the Plan. The Company has an optional matching
program where the Company can match 50% of the employee's first 6% of
contribution. Company-matched contributions vest in full after three years of an
employee's credited service to the Company. The Company also has an option to
make additional profit-sharing contributions equal to 2% of the base salary of
each Plan participant. Defined contribution expense for the Company was
approximately $696, $457 and $304 for the years ended September 30, 1996, 1997
and 1998, respectively.
The Company has supplemental employee retirement plans covering six of its
key employees or former employees. The plan benefits for each employee range
from $13 to $100 per year commencing at age 65 for a period of ten years payable
in equal monthly installments. The plans also provide death and disability
benefits in the event of the death or total disability of an employee while
employed by the Company. The Company's policy is to fund the plan through
certain life insurance policies or
F-40
15. DEFINED CONTRIBUTION PLAN AND SUPPLEMENTAL RETIREMENT PLAN: (CONTINUED)
through the general unrestricted assets of the Company. Supplemental retirement
expense for the Company was approximately $119, $105, and $43, for the years
ended September 30, 1996, 1997 and 1998, respectively.
16. RELATED PARTY TRANSACTIONS:
In 1993, the Company entered into a three-year agreement for consulting
services with a director and principal stockholder of the Company. The agreement
provides for a base-consulting fee of $240 plus expenses annually for the first
year and $120 annually thereafter, as well as the grant of options. For the
years ended September 30, 1996, 1997 and 1998, the Company expensed $120, $0 and
$0, respectively under this agreement.
The Company retained a director of the Company to render consulting
services. The agreement originally provided for a base-consulting fee of $10 per
month plus expenses which decreased to $5 per month plus expenses in August
1997. For the year ended September 30, 1998 and 1997 the Company expensed $0 and
101, respectively, under this agreement. This agreement expired in 1998.
The Company has employee agreements with five executive employees whereby
the Company is obligated to pay the employee's salary, including benefits, from
one to three years. In addition, the Company is required to pay bonuses to two
employees upon change of ownership (as defined by the agreements). Total salary
and bonuses payable to the five employees is $3.5 million. These amounts were
either paid to the employees as of the effective date of the merger or will be
paid in the form of a monthly annuity over a one to three year period.
As the Company has previously disclosed in its periodic reports filed with
the Securities and Exchange Commission under the Securities and Exchange Act of
1934, the facilities and assets used by the Company in the Cuyahoga County, Ohio
I/M testing program (the "Ohio Assets") and the Tennessee I/M testing program
(the "Tennessee Assets") were leased to the Company pursuant to separate Sale
and Leaseback Agreements with Kane Partners, L.P. ("Kane Partners"). Richard
Gelfond, a director of the Company, is Vice President of the General Partners of
Kane Partners and holds a 25% limited partnership interest in Kane Partners.
Chester C. Davenport, Chairman of the Company, holds a 25% limited partnership
interest in Kane Partners. In November 1992, Kane Partners acquired the
underlying leasehold property and the related rights and obligations from the
original lessors of the Ohio and Tennessee Assets.
The statute and regulations governing Ohio's new I/M240 test program require
that the land and buildings be owned by a third party having no affiliation with
the operator of the program. The Ohio program is divided into four separate
zones, three of which were subject to competitive bid and, when awarded,
complied with this requirement. The fourth zone, Cuyahoga County, was subject to
an existing contract held by Envirotest at the time contracts for the other
zones were awarded by the State (two of which were awarded to the Company). As a
condition to entering into a new 10 year contract with Envirotest to conduct
I/M240 vehicle inspections in Cuyahoga County, Ohio (and not submitting this
zone to a competitive bid), the State of Ohio required Envirotest to comply with
its new I/M legislation and caused Kane Partners to divest its ownership
interest in the Ohio Assets. Accordingly, the third party developer utilized
approximately $10,000 of the net proceeds of the Authority offering described in
Note 17 to acquire ownership of the Ohio Assets that will be used in the new
Cuyahoga County, Ohio program to be operated by the Company. As a result, the
land and buildings used by the Company under its three Ohio I/M240 program
contracts will be owned by the developer and leased to the Company.
F-41
16. RELATED PARTY TRANSACTIONS: (CONTINUED)
In connection with the negotiations related to the Ohio Assets, the Company
agreed to purchase from Kane Partners the Tennessee Assets for $1,800 and one
Ohio test site that will not be used in the new test program for $300, for an
aggregate purchase price of $2,100. Although Tennessee Assets and Ohio Assets
have been subject to separate sale and leaseback agreements, the assets have
served as functional security for a financing provided to the Company in 1990
and were held by Kane Partners since 1992 for the same purpose. Kane Partners
utilized a portion of the aggregate proceeds received by it from the sale of the
Ohio Assets and Tennessee Assets to retire certain debt obligations held by
Chemical Venture Partners and Apollo Advisors, L.P., affiliates of which are
directors of the Company and beneficially own approximately 14% and 17%,
respectively, of the Company's outstanding Class A Common Stock. These debt
obligations were incurred by Kane Partners in connection with its initial
acquisition of the Ohio Assets and Tennessee Assets.
In connection with the evaluation and approval of the acquisition of the
Ohio Assets and the Tennessee Assets, and as required by the Senior Notes debt
covenants, a committee of disinterested directors of the Company retained an
independent financial advisor which rendered an opinion stating that (i) the
purchase price paid for the Ohio Assets and Tennessee Assets (collectively, the
"Purchase Price") was fair to the public shareholders of the Company from a
financial point of view, and (ii) the Purchase Price was fair and reasonable to
the Company from a financial point of view and was on financial terms at least
as favorable as financial terms that could be obtained by the Company in a
comparable transaction made on an arm's length basis with persons who are not
related persons.
17. CAPITAL LEASE AND LONG-TERM DEBT OBLIGATION:
On June 30, 1995, the Ohio Air Quality Development Authority (Authority)
issued $64,380 of bonds with an 8.1% interest rate to finance the costs of the
acquisition, construction, renovation and equipping of the Company's emissions
testing network in Ohio. The bonds are subject to mandatory sinking fund
redemption and are due December 31, 2005. The land and buildings are owned by a
developer (the "Developer") and leased to the Company pursuant to a capital
lease. The equipment is owned by the Company. The Developer and the Company
separately have entered into loan agreements with the Authority under which the
payments will provide for timely payment of principal and interest on the bonds.
The Developer and the Company have entered into a master lease agreement
pursuant to which the developer will lease the land and buildings to the
Company. The proceeds are held in trust pending use of the funds and the
unexpended proceeds are reflected on the Company's balance sheet as restricted
cash.
Pursuant to the master lease and loan agreements, all revenues from the
operation of the Ohio emissions testing network are paid into certain accounts
held by the Trustee pursuant to a cash management services agreement. The excess
of revenues from operations over the amount required to be paid monthly to the
Authority under the loan agreements and to the Ohio Environmental Protection
Agency per the contracts will be available to the Company. The bonds are
collateralized by all Ohio program assets.
F-42
17. CAPITAL LEASE AND LONG-TERM DEBT OBLIGATION: (CONTINUED)
The future minimum annual payments under the master lease and Company loan
agreement for fiscal years ending September 30 are as follows:
1999.............................................................. $ 9,619
2000.............................................................. 9,629
2001.............................................................. 9,639
2002.............................................................. 9,623
2003.............................................................. 9,626
Thereafter........................................................ 22,451
---------
Total minimum payments............................................ 70,587
Amount representing interest...................................... (17,492)
---------
Present value of minimum payments................................. 53,095
Less current portion.............................................. (5,520)
---------
$ 47,575
---------
---------
18. OPERATING LEASES:
The Company is obligated under noncancelable operating leases for the
building sites in Vancouver, British Columbia. The Vancouver lease runs for
seven years ending August 31, 1999, with monthly payments averaging
approximately $300. The Company has the option to renew this lease for an
additional seven-year period.
As of September 30, 1998, approximate future minimum lease commitments under
noncancelable operating leases are as follows:
1999............................................................... $ 5,343
2000............................................................... 1,824
2001............................................................... 1,425
2002............................................................... 1,101
2003............................................................... 681
Thereafter......................................................... 2,970
---------
$ 13,343
---------
---------
Rental expense for the years ended September 30, 1996, 1997 and 1998 was
approximately $4,112, $6,043 and $5,760 respectively, net of sublease income of
approximately $289, $429 and $185 for 1996, 1997 and 1998 respectively.
19. EXTRAORDINARY LOSS:
During fiscal 1997, the Company recognized an extraordinary loss from the
write-off of amortization of deferred issuance costs, original issue discounts
and tender offer fees of $1,324, in connection with the repurchase of $50,000
aggregate principal amount of its 9 1/8% Senior Notes due 2001, completed
September 17, 1997.
20. COMMITMENTS AND CONTINGENCIES:
The Company has several performance bonds on its long-term contracts. These
bonds are required by the contracts and vendor agreements in the event the
Company cannot perform and complete the
F-43
20. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
contracts and agreements. In addition, a bank holds a letter of credit in the
amount of $2,400 guaranteed by the Company in connection with its performance
obligations in respect to the Washington State contract. In the opinion of
management, the Company will be able to fulfill the requirements of the
long-term contracts and leases. In June 1997, the Company signed an agreement
with the State of Illinois to upgrade the State's existing centralized auto
emissions testing program to an enhanced program. The agreement also extends the
program term to 2006. Capital expenditures required to implement the new program
are expected to total approximately $75,000. Enhanced testing will commence in
early 1999.
On August 29, 1997, the Company purchased from Hughes Aircraft Company
("Hughes") the assets comprising Hughes' remote emissions sensing product line
and related technologies for $3,700. In addition, the Company agreed to pay a 3%
royalty on future net revenues related to remote sensing sales and services over
the next five years up to a cap of $10.0 million. The royalty payments are
contingent on future revenues from remote sensing sales and services and totaled
$55 as of September 30, 1998. The Company also assumed Hughes' contract with the
State of Arizona to provide remote sensing services. The acquisition has been
accounted for as a purchase. The impact on the 1997 financial statements was not
material.
The Company and its subsidiaries are parties to lawsuits or may in the
future become parties to lawsuits involving various types of commercial claims,
including, but not limited to, breach of contract and intellectual property
matters. Legal proceedings tend to be unpredictable and costly and may be
affected by events outside the control of the Company. There is no assurance
that litigation will not have an adverse effect on the Company's financial
position, results of operations, or cash flows.
State of Connecticut v. Envirotest Systems Corp. Under the new contract
entered into with the Company in April 1994, the State unilaterally decided to
continue the old testing procedure and phase in the enhanced testing required by
the new contract. Additionally, the Company was unable to build two test
facilities, one due to the State's inability to provide the land the contract
required and the other due to the inability to obtain zoning. As a result, the
Company and the State of Connecticut were in dispute concerning various
financial issues related to the performance by each of their respective
obligations under the Contract. On May 8, 1998, the Company and the State of
Connecticut entered into an agreement (the "Agreement") settling the State's
claims against the Company, except for certain penalties unrelated to the
settled claims which the parties are to negotiate, and the Company's claims
against the State. The Agreement modifies the terms of the Company's existing
vehicle inspection and safety inspection contracts with the State to provide
among other things, for the Company to add five emissions inspection lanes to
its existing network in lieu of constructing an additional station as required
under the existing contracts.
Ganzcorp Investments, Inc. v. Envirotest Systems Corp. On September 26, 1995
Ganzcorp Investments, Inc. d/b/a/ Mustang Dynamometer filed suit against
Envirotest Systems Corp. in U.S. District Court for the Northern District of
Ohio. The suit alleged breach of contract and asked for damages in excess of
$10.0 million. The suit was voluntarily dismissed by the parties on December 22,
1995 so that the parties could focus on settlement negotiations. On October 8,
1997, the case was re-filed by Ganzcorp when settlement negotiations broke down
between the parties. In 1993, the parties signed an agreement for the supply of
chassis dynamometers by Ganzcorp to the Company for its emission testing
programs in Ohio, Connecticut, and Pennsylvania. When the Company's testing
program with the State of Pennsylvania was canceled, the Company canceled its
contract with Ganzcorp per a "termination for convenience" clause. Under such
clause Ganzcorp would be allowed to make a claim for certain costs incurred but
such a claim would be substantially below its stated claim of more than $10,000.
Additionally, the Company has counterclaims against Ganzcorp for breach of
contract
F-44
20. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
and warranty obligations which it believes to be in excess of $7,900. Subsequent
to September 30, 1998, the Company has agreed in principal to pay Ganzorp up to
$1.5 million in settlement of all of the above claims. The settlement amount has
been included in the accompanying financial statements within the balance sheet
caption "accrued expenses and other current liabilities."
R.W. Granger & Sons filed a Demand for Arbitration in the East Hartford,
Connecticut, office of the American Arbitration Association in September 1996
alleging breach of contract and failure to pay amounts due Granger in connection
with the construction of certain of the Company's testing facilities in the
State of Connecticut. On December 29, 1997, Granger filed a complaint in State
Superior Court in the Judicial District of Hartford/New Britain at New Britain
alleging that the Company's failure to pay amounts due to Granger is an unfair
trade practice under the Connecticut Unfair Trade Practices Act. The Arbitrators
awarded Granger approximately $495, including the costs of the Arbitration, in a
decision rendered on August 12, 1998. Granger was claiming damages of
approximately $2.0 million in its Demand for Arbitration. Granger has moved to
modify the arbitration award seeking additional alleged damages of approximately
$200,000, which motion is pending. The Company intends to vigorously defend
against Granger's remaining claim in State Superior Court and the Company
believes that any judgment against the Company with respect to the remaining
claim will not have a material adverse effect on its financial position and
results of operations.
Timothy J. Grendell, et al v. Ohio Environmental Protection Agency, et al.
On November 18, 1998, Timothy J. Grendell, on behalf of himself and all others
similarly situated, filed a class action lawsuit in the Court of Common Pleas,
Summit County, Akron, Ohio. The defendants include the Ohio Environmental
Protection Agency and the Company. Grendell filed a virtually identical suit in
1996 and it was dismissed without prejudice exactly one year before the
above-noted class action lawsuit was filed. Like the 1996 lawsuit, the
above-noted class action lawsuit asserts that the statute and contract that
created E-Check are unconstitutional under Ohio law, and requests declaratory
and injunctive relief, attorney fees and costs. The Company believes that it has
valid defenses to the claims contained in the complaint and intends to defend
the matter vigorously.
In addition to the above, the Company is a party to various other legal
proceedings and claims in the ordinary course of business. Although the claims
cannot be estimated, in the opinion of management the resolution of these
matters will not have a material adverse effect on the Company's consolidated
financial position and results of operations.
21. FOREIGN OPERATIONS:
The Company's contract revenues from its foreign subsidiary, located in
Vancouver, British Columbia, Canada, were approximately $10,147, $14,062 and
$13,475 for the years ended September 30, 1996, 1997 and 1998, respectively, and
were earned from a single customer. Identifiable assets of the foreign
subsidiary totaled approximately $5,019, $4,786, and $6,913 at September 30,
1998, 1997 and 1996, respectively. The foreign subsidiary had a gross profit
before selling, general and administrative expenses of approximately $572,
$3,173 and $3,715 for the years ended September 30, 1996, 1997 and 1998,
respectively.
F-45
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- --------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY
INFORMATION OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST
NOT RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT OFFER TO SELL
OR TO BUY THE NOTES IN ANY JURISDICTION WHERE IT IS UNLAWFUL. THE INFORMATION IN
THIS PROSPECTUS IS CURRENT AS OF , 1999.
------------------------
Until , 1999, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
ENVIRONMENTAL
SYSTEMS PRODUCTS
HOLDINGS INC.
$100,000,000
13% SENIOR SUBORDINATED
NOTES DUE 2008,
WHICH ARE UNCONDITIONALLY
GUARANTEED ON A SENIOR
SUBORDINATED BASIS BY THE
DOMESTIC AND CERTAIN
FOREIGN SUBSIDIARIES OF THE
COMPANY
---------------------
PROSPECTUS
---------------------
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ALTERNATE COVER FOR MARKET-MAKING PROSPECTUS]
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
[SELLING NOTEHOLDERS] MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITED.
THE INFORMATION IN THIS PROSPECTUS WILL BE AMENDED OR COMPLETED;
DATED FEBRUARY , 1999
PROSPECTUS
, 1999
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC.
$100,000,000
13% SENIOR SUBORDINATED NOTES DUE 2008
CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED, AFFILIATES OF DONALDSON, LUFKIN &
JENRETTE SECURITIES CORPORATION AND CHASE EQUITY ASSOCIATES L.P. MAY USE THIS
PROSPECTUS TO OFFER UP TO $100,000,000 OF 13% SENIOR SUBORDINATED NOTES DUE 2008
IN ONE OR MORE OFFERINGS.
TERMS OF NOTES
- - MATURITY - GUARANTEES
October 31, 2008. If we cannot make payments on the notes
- - REDEMPTION when due, some of our subsidiaries have
We may redeem the notes at any time after guaranteed that they will make them
October 31, 2003. instead. Not all of our subsidiaries are
guarantors.
Before October 31, 2001, we may redeem up - RANKING
to $35 million of the notes with the These notes and the subsidiary guarantees
proceeds of certain public offerings of our are subordinated to the following debt of
equity or that of our parent company. us and our subsidiaries who have given
- - MANDATORY OFFER TO REPURCHASE guarantees:
If a new owner purchases our company or if
we sell the stock or assets of any of our - current indebtedness other than trade
major subsidiaries, we must offer to payables; and
repurchase the notes.
- future indebtedness other than trade
payables unless the terms of that
indebtedness expressly provide otherwise.
- INTEREST
Paid every six months on April 30 and
October 31.
THIS INVESTMENT INVOLVES RISK. SEE THE RISK FACTORS SECTION BEGINNING ON PAGE
13.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful and complete. Any representation to the contrary is a
criminal offense.
THIS PROSPECTUS IS TO BE USED BY (I) DONALDSON, LUFKIN & JENRETTE SECURITIES
CORPORATION ("DLJSC") IN CONNECTION WITH OFFERS AND SALES IN MARKET-MAKING
TRANSACTIONS AT NEGOTIATED PRICES RELATED TO PREVAILING MARKET PRICES AT THE
TIME OF SALE AND (II) BY DLJ INVESTMENT PARTNERS, L.P., DLJ ESC II, L.P. AND DLJ
INVESTMENT FUNDING, INC. (THE "DLJ INVESTORS"), OR OTHER SELLING NOTEHOLDER
NAMED IN AN ACCOMPANYING PROSPECTUS SUPPLEMENT, IN THE OVER-THE-COUNTER MARKET,
IN PRIVATELY NEGOTIATED TRANSACTIONS, IN UNDERWRITTEN OFFERINGS OR BY A
COMBINATION OF SUCH METHODS OF SALE, AT FIXED PRICES THAT MAY BE CHANGED, AT
MARKET PRICES PREVAILING AT THE TIME OF SALE, AT PRICES RELATING TO SUCH
PREVAILING PRICES OR NEGOTIATED PRICES. THE DLJ INVESTORS OR SUCH OTHER SELLING
NOTEHOLDER MAY EFFECT SUCH TRANSACTIONS BY SELLING NOTES TO OR THROUGH
BROKER-DEALERS AND SUCH BROKER-DEALERS MAY RECEIVE COMPENSATION IN THE FORM OF
DISCOUNTS, CONCESSIONS OR COMMISSIONS FROM THE DLJ INVESTORS OR SUCH OTHER
SELLING NOTEHOLDER OR THE PURCHASERS OF THE NOTES FOR WHOM SUCH BROKER-DEALERS
MAY ACT AS AGENT OR TO WHOM THEY SELL AS PRINCIPAL OR BOTH (WHICH COMPENSATION
TO A PARTICULAR BROKER-DEALER MIGHT BE IN EXCESS OF CUSTOMARY COMMISSIONS). IF
REQUIRED, THE NAMES OF ANY SUCH BROKER-DEALERS AND THE APPLICABLE COMPENSATION,
IF ANY, WILL BE SET FORTH IN AN ACCOMPANYING SUPPLEMENT TO THIS PROSPECTUS. WE
DO NOT INTEND TO LIST THE NOTES ON ANY SECURITIES EXCHANGE. DLJSC HAS ADVISED US
THAT IT INTENDS TO MAKE A MARKET IN THE NOTES; HOWEVER, IT IS NOT OBLIGATED TO
DO SO AND MAY STOP AT ANY TIME. WE WILL NOT RECEIVE THE PROCEEDS OF THE SALE OF
THE NOTES BUT WILL BEAR THE EXPENSES OF REGISTRATION.
------------------------
DONALDSON, LUFKIN & JENRETTE
THE DATE OF THIS PROSPECTUS IS , 1999.
[ALTERNATE RISK FACTOR FOR MARKET-MAKING PROSPECTUS]
TRADING MARKET FOR THE NOTES
There is no existing trading market for the notes, and we cannot assure you
about the future development of a market for the notes or your ability to sell
the notes or the price at which you may be able to sell your notes. If such
market were to develop, the notes could trade at prices that may be higher or
lower than their initial offering price depending on many factors, including
prevailing interest rates, our operating results and the market for similar
securities. Although it is not obligated to do so, DLJSC intends to make a
market in the notes. Any such market-making activity may be discontinued at any
time, for any reason, without notice at the sole discretion of DLJSC. No
assurance can be given as to the liquidity of or the trading market for the
notes. DLJSC may be deemed to be our "affiliate" (as defined the Securities Act)
and, as such, may be required to deliver a prospectus in connection with its
market-making activities in the notes.
2
[ALTERNATE SECTION FOR MARKET-MAKING PROSPECTUS]
USE OF PROCEEDS
This Prospectus is delivered in connection with the sale of the notes by
DLJSC in market-making transactions or by the DLJ Investors or other selling
noteholder named in an accompanying prospectus supplement in resale
transactions. We will not receive any of the proceeds from such transactions.
3
[ALTERNATE SECTION FOR MARKET-MAKING PROSPECTUS]
PLAN OF DISTRIBUTION
This Prospectus is to be used by DLJSC in connection with offers and sales
of the notes in market-making transactions effected from time to time. DLJSC may
act as a principal or agent in such transactions, including as agent for the
counterparty when acting as principal or as agent for both counterparties, and
may receive compensation in the form of discounts and commissions, including
from both counterparties when it acts as agent for both. Such sales will be made
at prevailing market prices at the time of sale, at prices related thereto or at
negotiated prices.
In addition, this Prospectus is to be used by the DLJ Investors or other
selling noteholder named in an accompanying prospectus supplement in connection
with resales in the over-the-counter market, in negotiated transactions, in
underwritten offerings, or a combination of such methods of sale, at fixed
prices which may be changed, at market prices prevailing at the time of sale, at
prices related to prevailing market prices or at negotiated prices. The DLJ
Investors or such other selling noteholder may effect such transactions by
selling the notes to or through broker-dealers, and such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the DLJ Investors or such other selling noteholder and/or the purchasers of the
notes for whom such broker-dealer may act as agents or to whom they sell as
principals, or both (which compensation as to a particular broker-dealer might
be in excess of customary commissions). The address of each of the DLJ Investors
is 277 Park Avenue, New York, NY 10172.
In order to comply with the securities laws of certain states, if
applicable, the notes will be sold in such jurisdictions only through registered
or licensed brokers or dealers. In addition, in certain states the notes may not
be sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
The DLJ Investors or such other selling noteholder and any broker-dealers or
agents that participate with the DLJ Investors in the distribution of the notes
may be deemed to be "underwriters" within the meaning of the Securities Act, and
any commissions received by them and any profit on the resale of the notes
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
Each of the DLJ Investors or such other selling noteholder will be subject
to applicable provisions of the Exchange Act and the rules and regulations
thereunder, which provisions may limit the timing of purchases and sales of the
notes by the DLJ Investors.
The DLJMB Funds, each of which may be deemed to be an affiliate of DLJSC,
beneficially own approximately 13.3% of the Series A Common Stock of
Environmental Systems Products, Inc. Susan C. Schnabel, a principal of DLJMB, is
a member of the Board of Directors of Environmental Systems Products, Inc.
Further, DLJ Capital Funding, Inc., an affiliate of DLJSC, acted as syndication
agent, and DLJSC acted as arranger, in connection with the Senior Secured Credit
Facility for which they received certain customary fees. In addition, DLJSC
received a $2 million placement fee in connection with the initial placement of
the notes. DLJSC has, from time to time, provided investment banking and other
financial advisory services to Environmental Systems Products, Inc. and the
Company and expects to provide such services to Environmental Systems Products,
Inc. and the Company in the future.
DLJSC has informed the Company that it does not intend to confirm sales of
the notes to any accounts over which it exercises discretionary authority
without the prior specific written approval of such transactions by the
customer.
The Company has been advised by DLJSC that, subject to applicable laws and
regulations, DLJSC currently intends to make a market in the notes. However,
DLJSC is not obligated to do so and any such market-making may be interrupted or
discontinued at any time without notice. In addition, such market-making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act. There can be no assurance that an active trading market will
develop or be sustained. See "Risk Factors--Trading Market for the Notes."
4
[ALTERNATE BACKCOVER FOR MARKET-MAKING PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY
INFORMATION OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST
NOT RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT OFFER TO SELL
OR TO BUY THE NOTES IN ANY JURISDICTION WHERE IT IS UNLAWFUL. THE INFORMATION IN
THIS PROSPECTUS IS CURRENT AS OF , 1999.
------------------------
Until , 1999, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
ENVIRONMENTAL
SYSTEMS PRODUCTS
HOLDINGS INC.
$100,000,000
13% SENIOR SUBORDINATED
NOTES DUE 2008,
WHICH ARE UNCONDITIONALLY
GUARANTEED ON A SENIOR
SUBORDINATED BASIS BY THE
DOMESTIC AND CERTAIN
FOREIGN SUBSIDIARIES OF THE
COMPANY
---------------------
PROSPECTUS
---------------------
DONALDSON, LUFKIN & JENRETTE
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses payable in connection with the issuance and distribution of the
Notes being registered (other than underwriting discount)(*) are as follows:
SEC registration fee.............................................. $ 27,800
Printing and engraving expenses...................................
Accounting fees and expenses......................................
Legal fees and expenses...........................................
Trustees' fees and expenses.......................................
Miscellaneous expenses............................................
---------
Total......................................................... $
---------
- ------------------------
* Each of the expenses listed above is estimated except for the SEC
registration fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The information below briefly outlines the provisions of Section 102(b)(7)
of the General Corporation Law of the State of Delaware, Article X of our
Certificate of Incorporation and Article VIII of our By-Laws. For more
information, you may review the provisions of our Certificate of Incorporation
and By-Laws that we filed with the SEC.
ELIMINATION OF LIABILITY
Section 102(b)(7) of Delaware's corporation law gives each Delaware
corporation the power to eliminate or limit its directors' personal liability to
the corporation or its stockholders for monetary damages for certain breaches of
fiduciary duty as a director, except:
- for any breach of the director's duty of loyalty to the corporation or its
stockholders;
- for acts or omissions in bad faith, or involving intentional misconduct or
a knowing violation of the law;
- under Section 174 of Delaware's corporation law (providing for liability
of directors for the unlawful payment of dividends or unlawful stock
purchases or redemptions); or
- for any transaction from which a director derived an improper personal
benefit.
You should know that our Certificate of Incorporation eliminates the
personal liability of our directors to the fullest extent permitted by Section
102(b)(7) of Delaware's corporation law.
INDEMNIFICATION
Section 145 of Delaware's corporation law grants each Delaware corporation
the power to indemnify its directors and officers against liability for certain
of their acts.
Our By-Laws provide, among other things, that under certain circumstances we
are required or permitted to indemnify any officer or director of our company
(or such person's estate):
- who was or is a party (or is threatened to be made a party) to a
threatened, pending or completed action, suit or other proceeding;
- whether or not the action, suit or other proceeding was or is in the right
of our company;
II-1
- regardless of whether the suit or other proceeding was or is civil,
criminal, administrative or investigative in nature; and
- by reason of the fact that he or she is or was one of our directors or
officers, or is or was serving at our request as a director or officer of
another corporation, partnership or other enterprise.
Unless otherwise permitted by applicable laws, our By-Laws require us to
make a case-specific determination, in accordance with applicable laws, that
indemnification is proper in the circumstances. Our by-laws only require us to
indemnify an officer or director if he or she acted in good faith and in a
manner he or she reasonably believed to be consistent with our best interests.
Moreover, with respect to any criminal action or proceeding, one of our officers
or directors is only entitled to indemnification if he or she had no reasonable
cause to believe his or her conduct was unlawful. We are not required to
indemnify, or advance expenses to any person in connection with any action, suit
or other proceeding (including any counterclaim) initiated by or on his or her
behalf.
You should know, however, that in the event that an officer or director of
our company is entitled to indemnification under our By-Laws, we may be required
to indemnify him or her against expenses (including, for example, attorneys'
fees, judgments, penalties, fines and settlement amounts actually and reasonably
incurred and not recovered related to such officer or director's investigation,
preparation to defend or defense of such action, suit, or other proceeding). You
should also know that, to the extent permitted by our By-Laws, our By-Laws
authorize us to pay any such expenses in advance of the final disposition of the
action, suit or other proceeding in question. Our By-Laws also authorize us to
make, to the extent permitted by law, such advance payments even if the officer
or director in question is alleged to have failed to meet the "good faith"
standard of conduct discussed above, or is alleged to have committed conduct
which, if true, would avail us from indemnifying such officer or director.
Before making any advance payment, our By-Laws require us to receive an
undertaking by or on behalf of the director or officer in question to repay the
advance if it is ultimately determined that he or she is not entitled to
indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In October 1998, Environmental Systems Products Holdings Inc. sold $100
million aggregate principal amount of 13% Senior Subordinated Notes due 2008 to
Credit Suisse First Boston (Europe) Limited, affiliates of Donaldson, Lufkin &
Jenrette Securities Corporation and Chase Equity Associates, L.P pursuant to an
exemption provided by Section 4(2) of the Securities Act of 1933, as amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
1.1 Subscription Agreement, dated as of October 15, 1998, between Environmental Systems Products Holdings
Inc., EnviroSystems Corp., the Subsidiary Guarantors named therein and the Initial Purchasers named
therein.*
2.1 Agreement and Plan of Merger among Environmental Systems Products, Inc., Stone Rivet, Inc. and
Envirotest Systems Corp., dated as of August 12, 1998.*
3.1 Certificate of Incorporation of Environmental Systems Products Holdings Inc., as amended, filed with the
Secretary of State of the State of Delaware.*
3.2 By-Laws of Environmental Systems Products Holdings Inc.*
* Previously filed.
II-2
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
4.1 Indenture, dated as of October 16, 1998, by and among Environmental Systems Products Holdings Inc., as
Issuer, the Subsidiary Guarantors and United States Trust Company of Texas, N.A., as Trustee.*
4.2 Specimen Certificate of the 13% Senior Subordinated Note due 2008 (included in Exhibit 4.1 hereto).
4.3 Registration Rights Agreement, dated as of October 16, 1998, by and among Environmental Systems Products
Holdings Inc., EnviroSystems Corporation, the Subsidiary Guarantors, DLJ Investment Partners, L.P., DLJ
ESC II, L.P., DLJ Investment Funding, Inc., Credit Suisse First Boston (Europe) Limited and Chase Equity
Associates, L.P.*
4.4 Placement Agreement, dated as of October 15, 1998, by and among Environmental Systems Products Holdings
Inc., EnviroSystems Corporation, the Subsidiary Guarantors named therein, and Credit Suisse First Boston
Corporation.*
5.1 Opinion of White & Case LLP regarding the legality of the Notes.**
8.1 Opinion of White & Case LLP regarding certain tax matters.**
10.1 Motor Vehicle Emissions Inspection and Maintenance Program Agreement, as amended, dated for reference
April 15, 1991, by and between Her Majesty the Queen in Right of the Province of British Columbia and
Ebco-Hamilton Test Systems Ltd., and Guaranteed by Hamilton Test Systems, Inc. (incorporated herein by
reference to Exhibit 10.35 to Envirotest Systems Corporation's Registration Statement on Form S-1 (No.
33-57386), filed on January 25, 1993).
10.2 Amendment No. 1 to the Motor Vehicle Emissions Inspection and Maintenance Program Agreement, dated April
15, 1991, by and between Her Majesty the Queen in Right of the Province of British Columbia and
Ebco-Hamilton Test Systems Ltd., Ebco Automotive Testing Holdings Ltd. and Hamilton Test Systems (B.C.)
Ltd., carrying on business as Ebco-Hamilton Partners (incorporated herein by reference to Exhibit 10.40
to Envirotest Systems Corporation's Registration Statement on Form S-1 (No. 33-57386), filed on January
25, 1993).
10.3 Amendment No. 2 to the Motor Vehicle Emissions Inspection and Maintenance Program Agreement, dated May
31, 1991, by and between Her Majesty the Queen in Right of the Province of British Columbia and
Ebco-Hamilton Test Systems Ltd., Ebco Automotive Testing Holdings Ltd. and Hamilton Test Systems (B.C.)
Ltd., carrying on business as Ebco-Hamilton Partners (incorporated herein by reference to Exhibit 10.41
to Envirotest Systems Corporation's Registration Statement on Form S-1 (No. 33-57386), filed on January
25, 1993).
10.4 Amendment No. 3 to the Motor Vehicle Emissions Inspection and Maintenance Program Agreement, dated
December 13, 1991, by and between Her Majesty the Queen in Right of the Province of British Columbia and
Ebco-Hamilton Test Systems Ltd., Ebco Automotive Testing Holdings Ltd. and Hamilton Test Systems (B.C.)
Ltd., carrying on business as Ebco-Hamilton Partners (incorporated herein by reference to Exhibit 10.42
to Envirotest Systems Corporation's Registration Statement on Form S-1 (No. 33-57386), filed on January
25, 1993).
* Previously filed.
** To be filed by amendment.
II-3
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
10.5 Amendment No. 4 to the Motor Vehicle Emissions Inspection and Maintenance Program Agreement, dated April
1, 1992, by and between Her Majesty the Queen in Right of the Province of British Columbia and
Ebco-Hamilton Test Systems Ltd., Ebco Automotive Testing Holdings Ltd. and Hamilton Test Systems (B.C.)
Ltd., carrying on business as Ebco-Hamilton Partners (incorporated herein by reference to Exhibit 10.43
to Envirotest Systems Corporation's Registration Statement on Form S-1 (No. 33-57386), filed on January
25, 1993).
10.6 Amendment No. 5 to the Motor Vehicle Emissions Inspection and Maintenance Program Agreement, dated
August 14, 1992, by and between Her Majesty the Queen in Right of the Province of British Columbia and
Ebco-Hamilton Test Systems Ltd., Ebco Automotive Testing Holdings Ltd. and Hamilton Test Systems (B.C.)
Ltd., carrying on business as Ebco-Hamilton Partners.*
10.7 Amendment No. 6 to the Motor Vehicle Emissions Inspection and Maintenance Program Agreement, dated July
15, 1994, by and between Her Majesty the Queen in Right of the Province of British Columbia and
Ebco-Hamilton Test Systems Ltd., Ebco Automotive Testing Holdings Ltd. and Hamilton Test Systems (B.C.)
Ltd., carrying on business as Ebco-Hamilton Partners.
10.8 Contract between the Colorado Department of Health, the Colorado Department of Revenue and Envirotest
Systems Corporation, dated February 22, 1994 (incorporated herein by reference to Exhibit 10.90 to
Envirotest Systems Corporation's Registration Statement on Form S-1/A (No. 033-75406), filed on March 8,
1994).
10.9 Contract between the State of Connecticut and Envirotest Systems Corporation for the Establishment and
Operation of the Motor Vehicle Inspection Program Facilities for the State of Connecticut dated April
15, 1994 (incorporated herein by reference to Exhibit 10.91 to Envirotest Systems Corporation's
Quarterly Report on Form 10-Q (No. 000-21454) for the quarterly period ended March 31, 1994).
10.10 Amendment No. 1 to the Contract between the State of Connecticut and Envirotest Systems Corporation for
the Establishment and Operation of the Motor Vehicle Inspection Program Facilities for the State of
Connecticut dated October 20, 1997 (incorporated herein by reference to Exhibit 10.134 to Envirotest
Systems Corporation's Quarterly Report on Form 10Q (No. 001-13241) for the quarterly period ended June
30, 1998).
10.11 Amendment No. 2 to the Contract between the State of Connecticut and Envirotest Systems Corporation for
the Establishment and Operation of the Motor Vehicle Inspection Program Facilities for the State of
Connecticut dated May 8, 1998 (incorporated herein by reference to Exhibit 10.134 to Envirotest Systems
Corporation's Quarterly Report on Form 10Q (No. 001-13241) for the quarterly period ended June 30,
1998).
10.12 Agreement by and between Envirotest Systems Corp. and the Department of Motor Vehicles of the State of
Connecticut, dated May 8, 1998 (incorporated herein by reference to Exhibit 10.135 to Envirotest Systems
Corporation's Quarterly Report on Form 10Q (No. 001-13241) for the quarterly period ended June 30,
1998).
10.13 Contract for Motor Vehicle Inspection Program (for Zone 3--Palm Beach County), dated as of January 31,
1990, by and between the State of Florida, the Department of Highway Safety and Motor Vehicles, and
Systems Control, Inc. (incorporated herein by reference to Exhibit 10.47 to Envirotest Systems
Corporation's Registration Statement on Form S-1 (No. 033-57386), dated January 25, 1993).
** To be filed by amendment.
II-4
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
10.14 Amendment No. 1 to the Motor Vehicle Inspection Program (for Zone 3--Palm Beach County), dated as of
January 31, 1990, by and between the State of Florida, the Department of Highway Safety and Motor
Vehicles, and Systems Control, Inc., dated February 1, 1990 (incorporated herein by reference to Exhibit
10.50 to Envirotest Systems Corporation's Registration Statement on Form S-1 (No. 033-57386), dated
January 25, 1993).
10.15 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 (incorporated
herein by reference to Exhibit 10.117 to Envirotest Systems Corporation's Quarterly report on Form 10-Q
(No. 000-21454) for the quarterly period ended March 31, 1997).
10.16 Agreement for Renewal of Contract for Motor Vehicle Inspection Program (for Zone 3--Palm Beach County)
between Envirotest Technologies and the Florida Department of Highway Safety and Motor Vehicles.*
10.17 Contract for Motor Vehicle Inspection Program (for Zone 5--Dade County), dated January 31, 1990, by and
between the State of Florida, the Department of Highway Safety and Motor Vehicles, and Systems Control,
Inc. (incorporated herein by reference to Exhibit 10.47 to Envirotest Systems Corporation's Registration
Statement on Form S-1 (No. 033-57386), dated January 25, 1993).
10.18 Amendment No. 1 to the Motor Vehicle Inspection Program (for Zone 5--Dade County), dated as of January
31, 1990, by and between the State of Florida, the Department of Highway Safety and Motor Vehicles, and
Systems Control, Inc., dated February 1, 1990 (incorporated herein by reference to Exhibit 10.52 to
Envirotest Systems Corporation's Registration Statement on Form S-1 (No. 033-57386), dated January 25,
1993).
10.19 Agreement for Renewal of Contract for Motor Vehicle Inspection Program (for Zone 5--Dade County) between
Envirotest Technologies and the Florida Department of Highway Safety and Motor Vehicles.*
10.20 State of Illinois Environmental Protection Agency Service Agreement with Envirotest Illinois, Inc. dated
May 19, 1997 (incorporated herein by reference to Exhibit 10.118 to Envirotest Systems Corporation's
Quarterly Report on Form 10-Q (No. 000-21454) for the quarterly period ended June 30, 1997).
10.21 Amendment No. 1 to the State of Illinois Agency Service Agreement dated May 19, 1997, between the State
of Illinois Environmental Protection Agency and Envirotest Illinois, Inc., dated October 22, 1997.*
10.22 Amendment No. 2 to the State of Illinois Agency Service Agreement dated May 19, 1997, between the State
of Illinois Environmental Protection Agency and Envirotest Illinois, Inc., dated October 22, 1997.*
10.23 Amendment No. 3 to the State of Illinois Agency Service Agreement dated May 19, 1997, between the State
of Illinois Environmental Protection Agency and Envirotest Illinois, Inc., dated November 19, 1997.*
10.24 Amendment No. 4 to the State of Illinois Agency Service Agreement dated May 19, 1997, between the State
of Illinois Environmental Protection Agency and Envirotest Illinois, Inc., dated February 19, 1998.*
10.25 Amendment No. 5 to the State of Illinois Agency Service Agreement dated May 19, 1997, between the State
of Illinois Environmental Protection Agency and Envirotest Illinois, Inc.
II-5
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
10.26 Amendment No. 6 to the State of Illinois Agency Service Agreement dated May 19, 1997, between the State
of Illinois Environmental Protection Agency and Envirotest Illinois, Inc., dated May 1, 1998.*
10.27 Agreement between Indiana Department of Environmental Management and Envirotest Systems Corp. dated June
26, 1996 (incorporated herein by reference to Exhibit 10.106 to Envirotest Systems Corporation's
Quarterly Report on Form 10-Q (No. 000-21454) for the quarterly period ended June 30, 1996).
10.28 Contract for the Provision and Operation of an Improved Basis Vehicle Inspection Maintenance Program in
Boone, Campbell, and Kenton Counties in Kentucky, effective as of July 1, 1998 by and between Envirotest
Systems Corp. and the Commonwealth of Kentucky, and Addenda 1-3 thereto (incorporated herein by
reference to Exhibit 10.136 to Envirotest Systems Corp.'s Quarterly Report on Form 10-Q (No. 001-13241)
for the quarterly period ended June 30, 1998).
10.29 General Conditions of the Contract for the Establishment and Operation of Motor Vehicle
Inspection/Maintenance Program for the State of Minnesota, dated July 18, 1990, by and between the State
of Minnesota, acting through the Pollution Control Agency, and Systems Control, Inc., doing business in
Minnesota as Systems Control Vehicle Testing, Inc. (incorporated herein by reference to Exhibit 10.73 to
Envirotest Systems Corporation's Registration Statement on Form S-1 (No. 033-57386) dated January 25,
1993).
10.30 Amendment No. 1 to the General Conditions of the Contract for the Establishment and Operation of Motor
Vehicle Inspection/Maintenance Program for the State of Minnesota, dated as of June 17, 1991, by and
between the State of Minnesota, acting through the Pollution Control Agency, and Systems Control, Inc.,
doing business in Minnesota as Systems Control Vehicle Testing, Inc. (incorporated herein by reference
to Exhibit 10.68 to Envirotest Systems Corporation's Registration Statement on Form S-1 (No. 033-57386),
filed on January 25, 1993).
10.31 Amendment No. 2 to the General Conditions of the Contract for the Establishment and Operation of Motor
Vehicle Inspection/Maintenance Program for the State of Minnesota, dated as of May 15, 1992, by and
between the State of Minnesota, acting through the Pollution Control Agency, and Systems Control, Inc.,
doing business in Minnesota as Systems Control Vehicle Testing, Inc. (incorporated herein by reference
to Exhibit 10.69 to Envirotest Systems Corporation's Registration Statement on Form S-1 (No. 033-57386),
filed on January 25, 1993).
10.32 Amendment No. 3 to the General Conditions of the Contract for the Establishment and Operation of Motor
Vehicle Inspection/Maintenance Program for the State of Minnesota Pollution Control Agency, dated as of
September 30, 1993, by and between the State of Minnesota, acting through the Pollution Control Agency,
and Envirotest Technologies, Inc.
10.33 Amendment No. 4 to the General Conditions of the Contract for the Establishment and Operation of Motor
Vehicle Inspection/Maintenance Program for the State of Minnesota Pollution Control Agency, dated as of
September 6, 1995, by and between the State of Minnesota, acting through the Pollution Control Agency,
and Envirotest Technologies, Inc.*
10.34 Amendment No. 5 to the General Conditions of the Contract for the Establishment and Operation of Motor
Vehicle Inspection/Maintenance Program for the State of Minnesota Pollution Control Agency, dated as of
October 31, 1995, by and between the State of Minnesota, acting through the Pollution Control Agency,
and Envirotest Technologies, Inc.*
* Previously filed.
** To be filed by amendment.
II-6
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
10.35 Amendment No. 6 to the General Conditions of the Contract for the Establishment and Operation of Motor
Vehicle Inspection/Maintenance Program for the State of Minnesota Pollution Control Agency, dated as of
April 22, 1998, by and between the State of Minnesota, acting through the Pollution Control Agency, and
Envirotest Technologies, Inc. (incorporated herein by reference to Exhibit 10.123 to Envirotest Systems
Corporation's Quarterly Report on Form 10Q (No. 001- 13241) for the quarterly period ended March 31,
1998).
10.36 Change Order for Services issued by the Ohio Environmental Protection Agency to Envirotest Systems Corp.
(incorporated herein by reference to Exhibit 10.113 to Envirotest Systems Corporation's Quarterly Report
on Form 10Q (No. 001- 13241) for the quarterly period ended June 30, 1998).
10.37 Contract, as amended, for Operation of Vehicle Inspection and Maintenance Program, dated July 1990, by
and between the Metropolitan Government of Nashville and Davidson County and Hamilton Test Systems, Inc.
(original contract incorporated herein by reference to Exhibit 10.73 to Envirotest Systems Corporation's
Registration Statement on Form S-1 (No. 033-57386) filed on January 25, 1993).
10.38 Amendment No. 1 to Contract by and between the Metropolitan Government of Nashville and Davidson County
and Hamilton Test Systems, Inc. for Operation of Vehicle Inspection and Maintenance Program.
10.39 Amendment No. 2 to Contract by and between the Metropolitan Government of Nashville and Davidson County
and Envirotest Systems Corp. for Operation of Vehicle Inspection and Maintenance Program, dated February
15, 1994.
10.40 Amendment No. 3 to Contract by and between the Metropolitan Government of Nashville and Davidson County
and Envirotest Systems Corp. for Operation of Vehicle Inspection and Maintenance Program, dated December
19, 1995.*
10.41 Contract, as amended, between the Department of Environment and Conservation State of Tennessee and
Envirotest Systems Corporation, dated May 12, 1994 (original contract incorporated herein by reference
to Exhibit 10.92 to Envirotest Systems Corporation's Quarterly Report on Form 10-Q (No. 000-21454) for
the quarterly period ended June 30, 1994).
10.42 Amendment 1 to Contract, as amended, between the Department of Environment and Conservation State of
Tennessee and Envirotest Systems Corporation, dated May 12, 1994.*
10.43 Amendment 2 to Contract, as amended, between the Department of Environment and Conservation State of
Tennessee and Envirotest Systems Corporation, dated May 12, 1994.
10.44 Amendment 3 to Contract, as amended, between the Department of Environment and Conservation State of
Tennessee and Envirotest Systems Corporation, dated May 12, 1994.
10.45 Amendment 4 to Contract No. RV-5-000575-5-00 between the State of Tennessee, Department of Environment
and Conservation and Envirotest Systems Corp. dated as of May 5, 1998 (incorporated by reference herein
to Exhibit 10.126 to Envirotest Systems Corporation's Quarterly Report on Form 10Q (No. 001- 13241) for
the quarterly period ended March 31, 1998).
10.46 Contract between State of Washington and Envirotest Systems Corp. (incorporated by reference herein to
Exhibit 10.111 to the Envirotest Systems Corporation's Annual Report on Form 10-K (No. 000-21452) for
the fiscal year ended September 30, 1996, filed on December 30, 1996).
* Previously filed.
** To be filed by amendment.
II-7
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
10.47 Agreement between the Wisconsin Department of Transportation and Envirotest Systems Corp. for the
Establishment and Operation of Motor Vehicle, Emissions Inspection Facilities for the State of
Wisconsin, dated January 25, 1995 (incorporated herein by reference to Exhibit 10.15 to Envirotest
Systems Corporation's Quarterly Report on Form 10-Q (No. 000-21454) for the quarterly period ended
December 31, 1994).
10.48 Employment Agreement, dated October 16, 1998, between Terrence P. McKenna and Environmental Systems
Products Holdings, Inc.*
10.49 Employment Agreement, dated October 16, 1998, between Rinaldo R. Tedeschi and Environmental Systems
Products Holdings, Inc.*
10.50 Employment Agreement, dated October 16, 1998, between David J. Langevin and Environmental Systems
Products Holdings, Inc.*
10.51 Credit Agreement, dated as of October 15, 1998, by and among Environmental Systems Products Holdings
Inc., EnviroSystems Corporation, the banks, financial institutions and other entities listed therein, as
Lenders, Credit Suisse First Boston Corporation, as Administrative Agent and Collateral Agent, DLJ
Capital Funding, Inc., as Syndication Agent and Credit Suisse First Boston Corporation and Donaldson,
Lufkin & Jenrette Securities Corporation as Arrangers.*
12.1 Statement regarding computation of ratios.*
21.1 Subsidiaries of Environmental Systems Products Holdings Inc.*
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
23.7 Consent of White & Case LLP (included in exhibit 5.1 hereto).
23.8 Consent of White & Case LLP (included in Exhibit 6.1 hereto).
24.1 Power of Attorney.*
25.1 Statement of eligibility of trustee.*
* Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned Registrants hereby undertake:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) under the Securities Act if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
II-8
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) that, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(3) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering;
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the Registrants
have been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrants of expenses incurred or
paid by a director, officer or controlling person of the Registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in East Granby,
Connecticut on February 23, 1999.
ENVIRONMENTAL SYSTEMS PRODUCTS HOLDINGS INC.
By: /s/ TERRENCE P. MCKENNA
-----------------------------------------
Terrence P. McKenna
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on February 23, 1999:
SIGNATURE TITLE
- ------------------------------ --------------------------
Director, President and
/s/ TERRENCE P. MCKENNA Chief Executive Officer
- ------------------------------ (Principal Executive
Terrence P. McKenna Officer)
Director and Executive
Vice President, Finance
/s/ DAVID J. LANGEVIN and Administration
- ------------------------------ (Principal Financial
David J. Langevin Officer and Principal
Accounting Officer)
Director and Executive
* Vice President,
- ------------------------------ Engineering and Technical
Rinaldo R. Tedeschi Development
*
- ------------------------------ Director
Eric Walters
- ------------------------
* David J. Langevin as attorney-in-fact for each of the persons indicated.
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in East Granby,
Connecticut, on February 23, 1999.
ENVIRONMENTAL SYSTEMS TESTING, INC.
By: /s/ TERRENCE P. MCKENNA
-----------------------------------------
Terrence P. McKenna
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on February 23, 1999:
SIGNATURE TITLE
- ------------------------------ --------------------------
Director, President and
/s/ TERRENCE P. MCKENNA Chief Executive Officer
- ------------------------------ (Principal Executive
Terrence P. McKenna Officer)
Director and Executive
Vice President, Finance
/s/ DAVID J. LANGEVIN and Administration
- ------------------------------ (Principal Financial
David J. Langevin Officer and Principal
Accounting Officer)
Director and Executive
* Vice President,
- ------------------------------ Engineering and
Rinaldo R. Tedeschi Technical Development
*
- ------------------------------ Director
Eric Walters
- ------------------------
* David J. Langevin as attorney-in-fact for each of the persons indicated.
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in East Granby,
Connecticut, on February 23, 1999.
ENVIROTEST SYSTEMS CORP. (DE)
By: /s/ TERRENCE P. MCKENNA
-----------------------------------------
Terrence P. McKenna
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on February 23, 1999:
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ TERRENCE P. MCKENNA
- ------------------------------ President (Principal
Terrence P. McKenna Executive Officer)
Director, Executive Vice
/s/ DAVID J. LANGEVIN President and Secretary
- ------------------------------ (Principal Financial
David J. Langevin Officer and Principal
Accounting Officer)
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in East Granby,
Connecticut, on February 23, 1999.
ENVIROTEST SYSTEMS CORP. (WA)
By: /s/ TERRENCE P. MCKENNA
-----------------------------------------
Terrence P. McKenna
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on February 23, 1999:
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ TERRENCE P. MCKENNA
- ------------------------------ President (Principal
Terrence P. McKenna Executive Officer)
Director, Executive Vice
/s/ DAVID J. LANGEVIN President and Secretary
- ------------------------------ (Principal Financial
David J. Langevin Officer and Principal
Accounting Officer)
II-13
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in East Granby,
Connecticut, on February 23, 1999.
ENVIROTEST HOLDINGS, INC.
By: /s/ TERRENCE P. MCKENNA
-----------------------------------------
Terrence P. McKenna
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on February 23, 1999:
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ TERRENCE P. MCKENNA Director and President
- ------------------------------ (Principal Executive
Terrence P. Mckenna Officer)
Director, Executive Vice
/s/ DAVID J. LANGEVIN President and Secretary
- ------------------------------ (Principal Financial
David J. Langevin Officer and Principal
Accounting Officer)
*
- ------------------------------ Director
Rinaldo R. Tedeschi
- ------------------------
* David J. Langevin as attorney-in-fact for each of the persons indicated.
II-14
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in East Granby,
Connecticut, on February 23, 1999.
ENVIROTEST TECHNOLOGIES, INC.
By: /s/ TERRENCE P. MCKENNA
-----------------------------------------
Terrence P. McKenna
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on February 23, 1999:
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ TERRENCE P. MCKENNA
- ------------------------------ President (Principal
Terrence P. McKenna Executive Officer)
Director, Executive Vice
/s/ DAVID J. LANGEVIN President and Secretary
- ------------------------------ (Principal Financial
David J. Langevin Officer and Principal
Accounting Officer)
II-15
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in East Granby,
Connecticut, on February 23, 1999.
ENVIROTEST ACQUISITIONS CO.
By: /s/ TERRENCE P. MCKENNA
-----------------------------------------
Terrence P. McKenna
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on February 23, 1999:
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ TERRENCE P. MCKENNA
- ------------------------------ President (Principal
Terrence P. McKenna Executive Officer)
Director, Executive Vice
/s/ DAVID J. LANGEVIN President and Secretary
- ------------------------------ (Principal Financial
David J. Langevin Officer and Principal
Accounting Officer)
II-16
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in East Granby,
Connecticut, on February 23, 1999.
ENVIROTEST PARTNERS
By: Envirotest Systems Corp. (DE)
By: /s/ TERRENCE P. MCKENNA
-----------------------------------------
Terrence P. McKenna
PRESIDENT
II-17
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in East Granby,
Connecticut, on February 23, 1999.
ENVIROTEST ILLINOIS, INC.
By: /s/ TERRENCE P. MCKENNA
-----------------------------------------
Terrence P. McKenna
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on February 23, 1999:
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ TERRENCE P. MCKENNA
- ------------------------------ President (Principal
Terrence P. McKenna Executive Officer)
Director, Executive Vice
/s/ DAVID J. LANGEVIN President and Secretary
- ------------------------------ (Principal Financial
David J. Langevin Officer and Principal
Accounting Officer)
II-18
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in East Granby,
Connecticut, on February 23, 1999.
ENVIROTEST WISCONSIN, INC.
By: /s/ TERRENCE P. MCKENNA
-----------------------------------------
Terrence P. McKenna
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on February 23, 1999:
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ TERRENCE P. MCKENNA
- ------------------------------ President (Principal
Terrence P. McKenna Executive Officer)
Director, Executive Vice
/s/ DAVID J. LANGEVIN President and Secretary
- ------------------------------ (Principal Financial
David J. Langevin Officer and Principal
Accounting Officer)
*
- ------------------------------ Director
Rinaldo R. Tedeschi
- ------------------------------ Director
Douglas K. Johnson
* David J. Langevin as attorney-in-fact for each of the persons indicated.
II-19
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in East Granby,
Connecticut, on February 23, 1999.
ES FUNDING CORPORATION
By: /s/ TERRENCE P. MCKENNA
-----------------------------------------
Terrence P. McKenna
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on February 23, 1999:
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ TERRENCE P. MCKENNA
- ------------------------------ President (Principal
Terrence P. McKenna Executive Officer)
Director, Executive Vice
/s/ DAVID J. LANGEVIN President and Secretary
- ------------------------------ (Principal Financial
David J. Langevin Officer and Principal
Accounting Officer)
*
- ------------------------------ Director
Rinaldo R. Tedeschi
- ------------------------------ Director
Alicia Burke
- ------------------------------ Director
Bradley Woodhill
* David J. Langevin as attorney-in-fact for each of the persons indicated.
II-20
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in East Granby,
Connecticut, on February 23, 1999.
REMOTE SENSING TECHNOLOGIES, INC.
By: /s/ TERRENCE P. MCKENNA
-----------------------------------------
Terrence P. McKenna
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on February 23, 1999:
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ TERRENCE P. MCKENNA
- ------------------------------ President (Principal
Terrence P. McKenna Executive Officer)
Director, Executive Vice
/s/ DAVID J. LANGEVIN President and Secretary
- ------------------------------ (Principal Financial
David J. Langevin Officer and Principal
Accounting Officer)
II-21
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in East Granby,
Connecticut, on February 23, 1999.
NEWMALL LIMITED
By: *
-----------------------------------------
Eric Walters
DIRECTOR
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on February 23, 1999:
SIGNATURE TITLE
- ------------------------------ --------------------------
*
- ------------------------------ Director
Eric Walters
- ------------------------------ Director
Amanda Shipman
*
- ------------------------------ Director (Principal
Alan Baxter executive officer)
Director(Principal
* financial officer and
- ------------------------------ principal accounting
Terrence Smith officer)
*
- ------------------------------ Director
Kevin Murphy
* David J. Langevin as attorney-in-fact for each of the persons indicated.
II-22
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in East Granby,
Connecticut, on February 23, 1999.
WELLMAN OVERSEAS LIMITED
By: /s/ DAVID J. LANGEVIN
-----------------------------------------
David J. Langevin
DIRECTOR
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on February 23, 1999:
SIGNATURE TITLE
- ------------------------------ --------------------------
*
- ------------------------------ Director (Principal
Alan Baxter executive officer)
*
- ------------------------------ Director
Jonathan Smith
Director(Principal
* financial officer and
- ------------------------------ principal accounting
Terrence Smith officer)
/s/ DAVID J. LANGEVIN
- ------------------------------ Director
David J. Langevin
/s/ TERRENCE P. MCKENNA
- ------------------------------ Director
Terrence P. McKenna
* David J. Langevin as attorney-in-fact for each of the persons indicated.
II-23
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in East Granby,
Connecticut, on February 23, 1999.
WELLMAN NORTH AMERICA, INC.
By: /s/ TERRENCE P. MCKENNA
-----------------------------------------
Terrence P. McKenna
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on February 23, 1999:
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ TERRENCE P. MCKENNA
- ------------------------------ President (Principal
Terrence P. McKenna Executive Officer)
Director, Executive Vice
/s/ DAVID J. LANGEVIN President and Secretary
- ------------------------------ (Principal Financial
David J. Langevin Officer and Principal
Accounting Officer)
II-24
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
1.1 Subscription Agreement, dated as of October 15, 1998, between Environmental Systems Products Holdings
Inc., EnviroSystems Corp., the Subsidiary Guarantors named therein and the Initial Purchasers named
therein.*
2.1 Agreement and Plan of Merger among Environmental Systems Products, Inc., Stone Rivet, Inc. and
Envirotest Systems Corp., dated as of August 12, 1998.*
3.1 Certificate of Incorporation of Environmental Systems Products Holdings Inc., as amended, filed with the
Secretary of State of the State of Delaware.*
3.2 By-Laws of Environmental Systems Products Holdings Inc.*
4.1 Indenture, dated as of October 16, 1998, by and among Environmental Systems Products Holdings Inc., as
Issuer, the Subsidiary Guarantors and United States Trust Company of Texas, N.A., as Trustee.*
4.2 Specimen Certificate of the 13% Senior Subordinated Note due 2008 (included in Exhibit 4.1 hereto).
4.3 Registration Rights Agreement, dated as of October 16, 1998, by and among Environmental Systems Products
Holdings Inc., EnviroSystems Corporation, the Subsidiary Guarantors, DLJ Investment Partners, L.P., DLJ
ESC II, L.P., DLJ Investment Funding, Inc., Credit Suisse First Boston (Europe) Limited and Chase Equity
Associates, L.P.*
4.4 Placement Agreement, dated as of October 15, 1998, by and among Environmental Systems Products Holdings
Inc., EnviroSystems Corporation, the Subsidiary Guarantors named therein, and Credit Suisse First Boston
Corporation.*
5.1 Opinion of White & Case LLP regarding the legality of the Notes.**
8.1 Opinion of White & Case LLP regarding certain tax matters.**
10.1 Motor Vehicle Emissions Inspection and Maintenance Program Agreement, as amended, dated for reference
April 15, 1991, by and between Her Majesty the Queen in Right of the Province of British Columbia and
Ebco-Hamilton Test Systems Ltd., and Guaranteed by Hamilton Test Systems, Inc. (incorporated herein by
reference to Exhibit 10.35 to Envirotest Systems Corporation's Registration Statement on Form S-1 (No.
33-57386), filed on January 25, 1993).
10.2 Amendment No. 1 to the Motor Vehicle Emissions Inspection and Maintenance Program Agreement, dated April
15, 1991, by and between Her Majesty the Queen in Right of the Province of British Columbia and
Ebco-Hamilton Test Systems Ltd., Ebco Automotive Testing Holdings Ltd. and Hamilton Test Systems (B.C.)
Ltd., carrying on business as Ebco-Hamilton Partners (incorporated herein by reference to Exhibit 10.40
to Envirotest Systems Corporation's Registration Statement on Form S-1 (No. 33-57386), filed on January
25, 1993).
10.3 Amendment No. 2 to the Motor Vehicle Emissions Inspection and Maintenance Program Agreement, dated May
31, 1991, by and between Her Majesty the Queen in Right of the Province of British Columbia and
Ebco-Hamilton Test Systems Ltd., Ebco Automotive Testing Holdings Ltd. and Hamilton Test Systems (B.C.)
Ltd., carrying on business as Ebco-Hamilton Partners (incorporated herein by reference to Exhibit 10.41
to Envirotest Systems Corporation's Registration Statement on Form S-1 (No. 33-57386), filed on January
25, 1993).
* Previously filed
** To be filed by amendment.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
10.4 Amendment No. 3 to the Motor Vehicle Emissions Inspection and Maintenance Program Agreement, dated
December 13, 1991, by and between Her Majesty the Queen in Right of the Province of British Columbia and
Ebco-Hamilton Test Systems Ltd., Ebco Automotive Testing Holdings Ltd. and Hamilton Test Systems (B.C.)
Ltd., carrying on business as Ebco-Hamilton Partners (incorporated herein by reference to Exhibit 10.42
to Envirotest Systems Corporation's Registration Statement on Form S-1 (No. 33-57386), filed on January
25, 1993).
10.5 Amendment No. 4 to the Motor Vehicle Emissions Inspection and Maintenance Program Agreement, dated April
1, 1992, by and between Her Majesty the Queen in Right of the Province of British Columbia and
Ebco-Hamilton Test Systems Ltd., Ebco Automotive Testing Holdings Ltd. and Hamilton Test Systems (B.C.)
Ltd., carrying on business as Ebco-Hamilton Partners (incorporated herein by reference to Exhibit 10.43
to Envirotest Systems Corporation's Registration Statement on Form S-1 (No. 33-57386), filed on January
25, 1993).
10.6 Amendment No. 5 to the Motor Vehicle Emissions Inspection and Maintenance Program Agreement, dated
August 14, 1992, by and between Her Majesty the Queen in Right of the Province of British Columbia and
Ebco-Hamilton Test Systems Ltd., Ebco Automotive Testing Holdings Ltd. and Hamilton Test Systems (B.C.)
Ltd., carrying on business as Ebco-Hamilton Partners.*
10.7 Amendment No. 6 to the Motor Vehicle Emissions Inspection and Maintenance Program Agreement, dated July
15, 1994, by and between Her Majesty the Queen in Right of the Province of British Columbia and
Ebco-Hamilton Test Systems Ltd., Ebco Automotive Testing Holdings Ltd. and Hamilton Test Systems (B.C.)
Ltd., carrying on business as Ebco-Hamilton Partners.
10.8 Contract between the Colorado Department of Health, the Colorado Department of Revenue and Envirotest
Systems Corporation, dated February 22, 1994 (incorporated herein by reference to Exhibit 10.90 to
Envirotest Systems Corporation's Registration Statement on Form S-1/A (No. 033-75406), filed on March 8,
1994).
10.9 Contract between the State of Connecticut and Envirotest Systems Corporation for the Establishment and
Operation of the Motor Vehicle Inspection Program Facilities for the State of Connecticut dated April
15, 1994 (incorporated herein by reference to Exhibit 10.91 to Envirotest Systems Corporation's
Quarterly Report on Form 10-Q (No. 000-21454) for the quarterly period ended March 31, 1994).
10.10 Amendment No. 1 to the Contract between the State of Connecticut and Envirotest Systems Corporation for
the Establishment and Operation of the Motor Vehicle Inspection Program Facilities for the State of
Connecticut dated October 20, 1997 (incorporated herein by reference to Exhibit 10.134 to Envirotest
Systems Corporation's Quarterly Report on Form 10Q (No. 001-13241) for the quarterly period ended June
30, 1998).
10.11 Amendment No. 2 to the Contract between the State of Connecticut and Envirotest Systems Corporation for
the Establishment and Operation of the Motor Vehicle Inspection Program Facilities for the State of
Connecticut dated May 8, 1998 (incorporated herein by reference to Exhibit 10.134 to Envirotest Systems
Corporation's Quarterly Report on Form 10Q (No. 001-13241) for the quarterly period ended June 30,
1998).
10.12 Agreement by and between Envirotest Systems Corp. and the Department of Motor Vehicles of the State of
Connecticut, dated May 8, 1998 (incorporated herein by reference to Exhibit 10.135 to Envirotest Systems
Corporation's Quarterly Report on Form 10Q (No. 001-13241) for the quarterly period ended June 30,
1998).
* Previously filed
** To be filed by amendment.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
10.13 Contract for Motor Vehicle Inspection Program (for Zone 3--Palm Beach County), dated as of January 31,
1990, by and between the State of Florida, the Department of Highway Safety and Motor Vehicles, and
Systems Control, Inc. (incorporated herein by reference to Exhibit 10.47 to Envirotest Systems
Corporation's Registration Statement on Form S-1 (No. 033-57386), dated January 25, 1993).
10.14 Amendment No. 1 to the Motor Vehicle Inspection Program (for Zone 3--Palm Beach County), dated as of
January 31, 1990, by and between the State of Florida, the Department of Highway Safety and Motor
Vehicles, and Systems Control, Inc., dated February 1, 1990 (incorporated herein by reference to Exhibit
10.50 to Envirotest Systems Corporation's Registration Statement on Form S-1 (No. 033-57386), dated
January 25, 1993).
10.15 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 (incorporated
herein by reference to Exhibit 10.117 to Envirotest Systems Corporation's Quarterly report on Form 10-Q
(No. 000-21454) for the quarterly period ended March 31, 1997).
10.16 Agreement for Renewal of Contract for Motor Vehicle Inspection Program (for Zone 3--Palm Beach County)
between Envirotest Technologies and the Florida Department of Highway Safety and Motor Vehicles.*
10.17 Contract for Motor Vehicle Inspection Program (for Zone 5--Dade County), dated January 31, 1990, by and
between the State of Florida, the Department of Highway Safety and Motor Vehicles, and Systems Control,
Inc. (incorporated herein by reference to Exhibit 10.47 to Envirotest Systems Corporation's Registration
Statement on Form S-1 (No. 033-57386), dated January 25, 1993).
10.18 Amendment No. 1 to the Motor Vehicle Inspection Program (for Zone 5--Dade County), dated as of January
31, 1990, by and between the State of Florida, the Department of Highway Safety and Motor Vehicles, and
Systems Control, Inc., dated February 1, 1990 (incorporated herein by reference to Exhibit 10.52 to
Envirotest Systems Corporation's Registration Statement on Form S-1 (No. 033-57386), dated January 25,
1993).
10.19 Agreement for Renewal of Contract for Motor Vehicle Inspection Program (for Zone 5--Dade County) between
Envirotest Technologies and the Florida Department of Highway Safety and Motor Vehicles.*
10.20 State of Illinois Environmental Protection Agency Service Agreement with Envirotest Illinois, Inc. dated
May 19, 1997 (incorporated herein by reference to Exhibit 10.118 to Envirotest Systems Corporation's
Quarterly Report on Form 10-Q (No. 000-21454) for the quarterly period ended June 30, 1997).
10.21 Amendment No. 1 to the State of Illinois Agency Service Agreement dated May 19, 1997, between the State
of Illinois Environmental Protection Agency and Envirotest Illinois, Inc., dated October 22, 1997.*
10.22 Amendment No. 2 to the State of Illinois Agency Service Agreement dated May 19, 1997, between the State
of Illinois Environmental Protection Agency and Envirotest Illinois, Inc., dated October 22, 1997.*
10.23 Amendment No. 3 to the State of Illinois Agency Service Agreement dated May 19, 1997, between the State
of Illinois Environmental Protection Agency and Envirotest Illinois, Inc., dated November 19, 1997.*
10.24 Amendment No. 4 to the State of Illinois Agency Service Agreement dated May 19, 1997, between the State
of Illinois Environmental Protection Agency and Envirotest Illinois, Inc.,
* Previously filed.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
dated February 19, 1998.*
10.25 Amendment No. 5 to the State of Illinois Agency Service Agreement dated May 19, 1997, between the State
of Illinois Environmental Protection Agency and Envirotest Illinois, Inc.
10.26 Amendment No. 6 to the State of Illinois Agency Service Agreement dated May 19, 1997, between the State
of Illinois Environmental Protection Agency and Envirotest Illinois, Inc., dated May 1, 1998.*
10.27 Agreement between Indiana Department of Environmental Management and Envirotest Systems Corp. dated June
26, 1996 (incorporated herein by reference to Exhibit 10.106 to Envirotest Systems Corporation's
Quarterly Report on Form 10-Q (No. 000-21454) for the quarterly period ended June 30, 1996).
10.28 Contract for the Provision and Operation of an Improved Basis Vehicle Inspection Maintenance Program in
Boone, Campbell, and Kenton Counties in Kentucky, effective as of July 1, 1998 by and between Envirotest
Systems Corp. and the Commonwealth of Kentucky, and Addenda 1-3 thereto (incorporated herein by
reference to Exhibit 10.136 to Envirotest Systems Corp.'s Quarterly Report on Form 10-Q (No. 001-13241)
for the quarterly period ended June 30, 1998).
10.29 General Conditions of the Contract for the Establishment and Operation of Motor Vehicle
Inspection/Maintenance Program for the State of Minnesota, dated July 18, 1990, by and between the State
of Minnesota, acting through the Pollution Control Agency, and Systems Control, Inc., doing business in
Minnesota as Systems Control Vehicle Testing, Inc. (incorporated herein by reference to Exhibit 10.73 to
Envirotest Systems Corporation's Registration Statement on Form S-1 (No. 033-57386) dated January 25,
1993).
10.30 Amendment No. 1 to the General Conditions of the Contract for the Establishment and Operation of Motor
Vehicle Inspection/Maintenance Program for the State of Minnesota, dated as of June 17, 1991, by and
between the State of Minnesota, acting through the Pollution Control Agency, and Systems Control, Inc.,
doing business in Minnesota as Systems Control Vehicle Testing, Inc. (incorporated herein by reference
to Exhibit 10.68 to Envirotest Systems Corporation's Registration Statement on Form S-1 (No. 033-57386),
filed on January 25, 1993).
10.31 Amendment No. 2 to the General Conditions of the Contract for the Establishment and Operation of Motor
Vehicle Inspection/Maintenance Program for the State of Minnesota, dated as of May 15, 1992, by and
between the State of Minnesota, acting through the Pollution Control Agency, and Systems Control, Inc.,
doing business in Minnesota as Systems Control Vehicle Testing, Inc. (incorporated herein by reference
to Exhibit 10.69 to Envirotest Systems Corporation's Registration Statement on Form S-1 (No. 033-57386),
filed on January 25, 1993).
10.32 Amendment No. 3 to the General Conditions of the Contract for the Establishment and Operation of Motor
Vehicle Inspection/Maintenance Program for the State of Minnesota Pollution Control Agency, dated as of
September 30, 1993, by and between the State of Minnesota, acting through the Pollution Control Agency,
and Envirotest Technologies, Inc.
10.33 Amendment No. 4 to the General Conditions of the Contract for the Establishment and Operation of Motor
Vehicle Inspection/Maintenance Program for the State of Minnesota Pollution Control Agency, dated as of
September 6, 1995, by and between the State of Minnesota, acting through the Pollution Control Agency,
and Envirotest Technologies, Inc.*
10.34 Amendment No. 5 to the General Conditions of the Contract for the Establishment and Operation of Motor
Vehicle Inspection/Maintenance Program for the State of Minnesota Pollution Control Agency, dated as of
October 31, 1995, by and between the State of Minnesota, acting through the Pollution Control Agency,
and Envirotest Technologies, Inc.*
* Previously filed
** To be filed by amendment.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
10.35 Amendment No. 6 to the General Conditions of the Contract for the Establishment and Operation of Motor
Vehicle Inspection/Maintenance Program for the State of Minnesota Pollution Control Agency, dated as of
April 22, 1998, by and between the State of Minnesota, acting through the Pollution Control Agency, and
Envirotest Technologies, Inc. (incorporated herein by reference to Exhibit 10.123 to Envirotest Systems
Corporation's Quarterly Report on Form 10Q (No. 001- 13241) for the quarterly period ended March 31,
1998).
10.36 Change Order for Services issued by the Ohio Environmental Protection Agency to Envirotest Systems Corp.
(incorporated herein by reference to Exhibit 10.113 to Envirotest Systems Corporation's Quarterly Report
on Form 10Q (No. 001- 13241) for the quarterly period ended June 30, 1998).
10.37 Contract, as amended, for Operation of Vehicle Inspection and Maintenance Program, dated July 1990, by
and between the Metropolitan Government of Nashville and Davidson County and Hamilton Test Systems, Inc.
(original contract incorporated herein by reference to Exhibit 10.73 to Envirotest Systems Corporation's
Registration Statement on Form S-1 (No. 033-57386) filed on January 25, 1993).
10.38 Amendment No. 1 to Contract by and between the Metropolitan Government of Nashville and Davidson County
and Hamilton Test Systems, Inc. for Operation of Vehicle Inspection and Maintenance Program.
10.39 Amendment No. 2 to Contract by and between the Metropolitan Government of Nashville and Davidson County
and Envirotest Systems Corp. for Operation of Vehicle Inspection and Maintenance Program, dated February
15, 1994.
10.40 Amendment No. 3 to Contract by and between the Metropolitan Government of Nashville and Davidson County
and Envirotest Systems Corp. for Operation of Vehicle Inspection and Maintenance Program, dated December
19, 1995.*
10.41 Contract, as amended, between the Department of Environment and Conservation State of Tennessee and
Envirotest Systems Corporation, dated May 12, 1994 (original contract incorporated herein by reference
to Exhibit 10.92 to Envirotest Systems Corporation's Quarterly Report on Form 10-Q (No. 000-21454) for
the quarterly period ended June 30, 1994).*
10.42 Amendment 1 to Contract, as amended, between the Department of Environment and Conservation State of
Tennessee and Envirotest Systems Corporation, dated May 12, 1994.*
10.43 Amendment 2 to Contract, as amended, between the Department of Environment and Conservation State of
Tennessee and Envirotest Systems Corporation, dated May 12, 1994.
10.44 Amendment 3 to Contract, as amended, between the Department of Environment and Conservation State of
Tennessee and Envirotest Systems Corporation, dated May 12, 1994.
10.45 Amendment 4 to Contract No. RV-5-000575-5-00 between the State of Tennessee, Department of Environment
and Conservation and Envirotest Systems Corp. dated as of May 5, 1998 (incorporated by reference herein
to Exhibit 10.126 to Envirotest Systems Corporation's Quarterly Report on Form 10Q (No. 001- 13241) for
the quarterly period ended March 31, 1998).
10.46 Contract between State of Washington and Envirotest Systems Corp. (incorporated by reference herein to
Exhibit 10.111 to the Envirotest Systems Corporation's Annual Report on Form 10-K (No. 000-21452) for
the fiscal year ended September 30, 1996, filed on December 30, 1996).
* Previously filed
** To be filed by amendment.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
10.47 Agreement between the Wisconsin Department of Transportation and Envirotest Systems Corp. for the
Establishment and Operation of Motor Vehicle, Emissions Inspection Facilities for the State of
Wisconsin, dated January 25, 1995 (incorporated herein by reference to Exhibit 10.15 to Envirotest
Systems Corporation's Quarterly Report on Form 10-Q (No. 000-21454) for the quarterly period ended
December 31, 1994).
10.48 Employment Agreement, dated October 16, 1998, between Terrence P. McKenna and Environmental Systems
Products Holdings, Inc.*
10.49 Employment Agreement, dated October 16, 1998, between Rinaldo R. Tedeschi and Environmental Systems
Products Holdings, Inc.*
10.50 Employment Agreement, dated October 16, 1998, between David J. Langevin and Environmental Systems
Products Holdings, Inc.*
10.51 Credit Agreement, dated as of October 15, 1998, by and among Environmental Systems Products Holdings
Inc., EnviroSystems Corporation, the banks, financial institutions and other entities listed therein, as
Lenders, Credit Suisse First Boston Corporation, as Administrative Agent and Collateral Agent, DLJ
Capital Funding, Inc., as Syndication Agent and Credit Suisse First Boston Corporation and Donaldson,
Lufkin & Jenrette Securities Corporation as Arrangers.*
12.1 Statement regarding computation of ratios.*
21.1 Subsidiaries of Environmental Systems Products Holdings Inc.*
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
23.7 Consent of White & Case LLP (included in exhibit 5.1 hereto).
23.8 Consent of White & Case LLP (included in Exhibit 6.1 hereto).
24.1 Power of Attorney.*
25.1 Statement of eligibility of trustee.*
* Previously filed.