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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 31, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
COMMISSION FILE NUMBER 0-14992
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
--------------------------------------------
(exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 38-2294876
- -------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
13455 NOEL ROAD, SUITE 1500, DALLAS, TEXAS 75240
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(Address of principal executive offices)
Registrant's telephone number, including area code: (214) 770-1800
--------------
Fiscal Year-End changed from February 28 to September 30
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<S> <C>
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------
Common Stock, $0.01 par value NASDAQ National Market System
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
On September 29, 1995, the registrant had 5,857,015 outstanding shares of
common stock outstanding.
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED AUGUST 31, 1995
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1: Financial Statements
Consolidated Balance Sheets as of August 31, 1995
(unaudited) and February 28, 1995 3-4
Consolidated Statements of Operations (unaudited)
for the Three and Six Months Ended August 31, 1995 and 1994 5
Consolidated Statements of Cash Flows (unaudited)
for the Six Months Ended August 31, 1995 and 1994 6
Notes to Consolidated Financial Statements (unaudited) 7-8
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 15
Signature 16
Exhibit 11 - Computation of earnings per share, for the
period ended August 31, 1995 (Unaudited)
Exhibit 27 - Requirements for the format and input
of financial data schedules
</TABLE>
2
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PART I FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1995 1995
(unaudited)
------------ ------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash $ 211 $ 2,345
Accounts receivable, less allowance for doubtful
accounts of $997 and $1,312 51,163 41,726
Costs and estimated earnings on long-term
contracts in excess of billings 1,744 1,803
Prepaid expenses and other current assets 3,775 3,086
-------- --------
Total current assets 56,893 48,960
Property and Equipment:
Equipment 19,665 18,712
Land and buildings 4,431 4,431
Leasehold improvements 1,485 1,448
-------- --------
Total property and equipment, at cost 25,581 24,591
Less accumulated depreciation and amortization 9,966 8,681
-------- --------
Property and equipment, net 15,615 15,910
Other Assets
Intangible assets, net of accumulated amortization
of $615 and $183, respectively (Note 1) 16,435 16,867
Goodwill, net of accumulated amortization
of $297 and $127, respectively (Note 1) 11,458 11,628
Other assets 7,584 7,189
-------- --------
TOTAL ASSETS $107,985 $100,554
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1995 1995
(unaudited)
------------ ------------
<S> <C> <C>
LIABILITIES, REDEEMABLE PREFERRED STOCK
---------------------------------------
AND COMMON STOCKHOLDERS' EQUITY
-------------------------------
Current Liabilities:
Accounts and subcontracts payable $ 18,985 $ 16,793
Payable to affiliate 357 1,092
Accrued expenses and other liabilities:
Compensation and related fringes 5,043 4,763
Severance and office closures 973 3,590
Other 10,536 8,684
Billings on long-term contracts in excess
of costs and estimated earnings 1,982 636
Current maturities of long-term debt
and short-term borrowings 2,360 2,310
--------- ---------
Total current liabilities 40,236 37,868
Long-term debt 26,275 21,078
Other long-term liabilities 3,648 4,587
Convertible Senior Subordinated Note, 10% maturing
in 2004, convertible into 3,048,780 common
shares at $3.28 per share 10,000 10,000
Commitments and contingencies (Note 3)
Redeemable Preferred Stock, $0.01 par value; 78,000 share authorized;
76,218 and 78,000 shares issued, respectively; 5% cumulative
dividend; $100 redemption value, aggregate redemption
value $7,621,800 and $7,800,000, respectively 6,812 6,923
Preferred Stock, $0.01 par value; 550,500 shares -- --
authorized; none issued
Junior Convertible Preferred Stock, $0.01 par value;
371,500 shares authorized; none issued -- --
Preference stock, $0.01 par value; 1,000,000 shares
authorized; none issued -- --
Common Stockholders' Equity:
Common stock, $0.01 par value; 20,000,000 shares
authorized; 5,811,105 and 5,700,783 shares
issued, respectively 58 58
Additional paid-in capital 17,019 16,970
Retained earnings 3,937 3,070
--------- ---------
Total common stockholders' equity 21,014 20,098
--------- ---------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY $ 107,985 $ 100,554
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
----------------------- -----------------------
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $47,640 $19,778 $89,092 $38,123
Cost of revenues 41,613 17,188 76,816 33,017
------- ------- ------- -------
Gross profit 6,027 2,590 12,276 5,106
Selling, general, and administrative expenses 4,168 1,874 8,821 3,629
------- ------- ------- -------
Income from operations 1,859 716 3,455 1,477
Interest expense, net 1,013 12 1,859 42
------- ------- ------- -------
Income before income tax expense 846 704 1,596 1,435
Income tax expense (Note 2) 169 139 319 314
------- ------- ------- -------
Income before earnings (losses)
of unconsolidated affiliate: 677 565 1,277 1,121
Share in earnings (losses) of
unconsolidated affiliate. (79) 175 (153) 263
------- ------- ------- -------
Net income 598 740 1,124 1,384
Dividends and accretion on
Redeemable Preferred Stock 126 --- 257 ---
------- ------- ------- -------
Income applicable to common stock $ 472 $ 740 $ 867 $ 1,384
======= ======= ======= ========
Weighted average number of common
and common equivalent shares outstanding 5,952 5,703 5,981 5,774
======= ======= ======= ========
Earnings per common and common
equivalent share $0.08 $0.13 $0.14 $0.24
</TABLE>
See accompanying notes to consolidated financial statements.
5
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
AUGUST 31,
-----------------------
1995 1994
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $1,124 $1,384
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,158 661
Loss on disposal of equipment --- 24
Share in (earnings) losses of affiliate 153 (263)
Changes in operating assets and liabilities, net
of effects from acquisitions:
Accounts receivable (9,437) (3,106)
Costs and estimated earnings on long-term
contracts in excess of billings 59 2,833
Prepaid expenses and other current assets (689) (680)
Other assets (1,019) (93)
Accounts and subcontracts payable 1,457 (565)
Accrued expenses and other liabilities (485) 459
Billings on long-term contracts in excess of
costs and estimated earnings 1,346 1,083
Other long-term liabilities (939) ---
Other, net 112 ---
------ ------
Net cash provided by (used in) operating activities (6,160) 1,737
------ ------
INVESTING ACTIVITIES:
Capital expenditures (990) (72)
Investment in affiliate 200 ---
Proceeds from sale of fixed assets -- 50
------ ------
Net cash used in investing activities (790) (22)
------ ------
FINANCING ACTIVITIES:
Proceeds from additional revolving credit subline 4,000 ---
(Repayments) borrowings on revolving line of credit, net 1,573 ---
Repayment of debt (1,146) (1,450)
Repurchase of Redeemable Preferred Stock (178) ---
Dividends paid on redeemable Preferred Stock (191) ---
Capital leases and other notes 758 ---
------ ------
Net cash provided by (used in) financing activities 4,816 (1,450)
------ ------
Net increase (decrease) in cash (2,134) 265
Cash at beginning of period 2,345 2,290
------ ------
Cash at end of period $ 211 $2,555
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
6
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
GENERAL
Smith Environmental Technologies Corporation (the "Company") (formerly Canonie
Environmental Services Corporation) provides a broad range of comprehensive
environmental consulting, engineering, remediation and construction services to
clients with sites contaminated with hazardous materials, primarily throughout
the United States including various federal, state and local government
agencies. The timing of the Company's revenues is primarily dependent on its
backlog, contract awards and the performance requirements of each contract.
The Company's revenues are also affected by the timing of its clients'
activities. Due to these changes in demand, the Company's quarterly and annual
revenues fluctuate. Accordingly, quarterly or other interim results should not
be considered indicative of results to be expected during any quarter or full
fiscal year.
On August 10, 1995 the Company's Board of Directors approved a change of the
Company's fiscal year end from February 28 to September 30. Accordingly, all
references to fiscal 1995 refer to the twelve months ended February 28, 1995
and all references to the seven month transition period in 1995 refer to the
seven month period ending September 30, 1995.
Certain costs related to regional operations for prior periods have been
reclassified from selling, general and administrative (SG&A) expenses to cost
of revenues. The costs reclassified for the three and six months ended August
31, 1994 were $727,000 and $1,686,000, respectively.
The Company uses the equity method of accounting for incorporated joint
ventures and affiliated companies where ownership ranges from 20 percent to 50
percent.
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes the disclosures made herein are adequate to
make the information presented not misleading. The financial statements
reflect all material adjustments which are all of a normal, recurring nature
and, in the opinion of management, necessary for a fair presentation. These
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K/A-1 for the fiscal year ended February 28, 1995. The
results of operations for the six-month period ended August 31, 1995, are not
necessarily indicative of the results that may be expected for the seven month
transition period ending September 30, 1995.
7
<PAGE> 8
NOTE 1 - BASIS OF PRESENTATION, CONTINUED...
During the quarter ended August 31, 1995, the Company refined its calculation
of the Cost in Excess of Net Assets of Businesses Acquired by reclassifying
costs between intangible assets and goodwill. Costs reclassified to intangible
assets represent $9.3 million of assembled work force and $7.8 million of
customer lists and contract backlog which, effective June 1, 1995, are being
amortized over their estimated useful lives of 15 years. The remaining Cost in
Excess of Net Assets of Businesses Acquired have been reclassified to goodwill
which, effective June 1, 1995, is being amortized over 40 years. Accumulated
amortization through May 31, 1995 has been allocated to intangible assets and
goodwill on a pro rata basis at that date. The Cost in Excess of Net Assets of
Businesses Acquired, at February 1995, has been reclassified to conform to the
current period presentation.
NOTE 2 - INCOME TAXES
For the six month period ended August 31, 1995, the Company provided for income
taxes of $319,000 at an effective tax rate of 20 percent. The effective tax
rate differs from the federal statutory rate of 34 percent as a result of state
income taxes and utilization of net operating loss carryforwards. A valuation
allowance has been recorded to reduce the deferred tax asset related to these
carryforwards and other deferred tax assets to zero since the realization of
such benefit is not assured.
The Company has significant net operating loss carryforwards to offset future
federal tax liabilities. However, due to a greater than 50 percent change in
ownership within the past three fiscal years, use of carryforwards to reduce
future taxable income will be limited to approximately $900,000 annually.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
The Company is currently party to various legal actions arising in the normal
course of its business, some of which may involve claims for substantial sums.
Such legal actions were previously described in the Company's report on Form
10-Q for the period ended May 31, 1995. Additional legal actions and claims
have been filed against the Company in the period ended August 31, 1995. While
such additional legal actions may result in judgments against the Company,
management believes that the outcome of such additional actions, individually
or in the aggregate, will not have a material adverse effect on the future
financial condition or results of operations of the Company and that
adequate reserves have been established at August 31, 1995 for such claims.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Smith Environmental Technologies Corporation (the "Company") (formerly Canonie
Environmental Services Corporation) provides a broad range of comprehensive
environmental consulting, engineering, remediation and construction services to
clients with sites contaminated with hazardous materials, primarily throughout
the United States including various federal, state and local government
agencies. The timing of the Company's revenues is primarily dependent on its
backlog, contract awards and the performance requirements of each contract.
The Company's revenues are also affected by the timing of its clients'
activities. Due to these changes in demand, the Company's quarterly and annual
revenues fluctuate. Accordingly, quarterly or other interim results should not
be considered indicative of results to be expected during any quarter or full
fiscal year.
On August 10, 1995 the Company's Board of Directors approved a change of the
Company's fiscal year end from February 28 to September 30 . Accordingly, all
references to fiscal 1995 refer to the twelve months ended February 28, 1995
and all references to the seven month transition period in 1995 refer to the
seven months ending September 30, 1995.
Certain costs related to regional operations for prior periods have been
reclassified from selling, general and administrative (SG&A) expenses to cost
of revenues. The costs reclassified for the three and six months ended August
31, 1994 were $727,000 and $1,686,000, respectively.
The Company uses the equity method of accounting for incorporated joint
ventures and affiliated companies where ownership ranges from 20 percent to 50
percent.
The following table sets forth, for the periods indicated, the percentages
which certain items from the consolidated statements of operations bear to the
revenues of the Company. This table and the Management's Discussion and
Analysis of Financial Condition and Results of Operations should be read in
conjunction with the consolidated financial statements and the notes to the
consolidated financial statements of the Company included herein and the
Company's Annual Report on Form 10K/A-1 for the fiscal year ended February 28,
1995.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
-------------------- --------------------
1995 1994 1995 1994
------ ------ ------ ------
% % % %
<S> <C> <C> <C> <C>
Revenues 100.0 100.0 100.0 100.0
-----
Cost of Revenues 87.3 86.9 86.6 86.2
----- ----- ----- -----
Gross Profit 12.7 13.1 13.8 13.4
Selling, General and Administrative expenses 8.8 9.5 9.9 9.5
----- ----- ----- -----
Income from Operations 3.9 3.6 3.9 3.9
Interest Expense, net 2.1 --- 2.1 .1
----- ----- ----- -----
Income before Income Tax Expense 1.8 3.6 1.8 3.8
Income Tax Expense .4 .7 .4 .9
----- ----- ----- -----
Income before earnings (losses) of
unconsolidated affiliate
1.4 2.9 1.4 2.9
----- ----- ----- -----
Share in earnings (losses) of unconsolidated
affiliate (.2) .9 (.2) .7
----- ----- ----- -----
Net income 1.2 3.8 1.2 3.6
===== ===== ===== =====
</TABLE>
9
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LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are cash, cash flows generated from
operations and available borrowings under the Company's existing credit
facility. Cash totaled $211,000 at August 31, 1995 compared with $2.3 million
at February 28, 1995 and $2.6 at August 31, 1994. The Company's working
capital increased to $16.7 million at August 31, 1995 from $11.1 million at
February 28, 1995 and $5.6 million at August 31, 1994. The increase in working
capital is primarily a result of increases in accounts receivable during the
quarter, partially offset by increases in accounts payable and other accrued
liabilities.
At August 31, 1995, the Company had a $30.0 million credit facility consisting
of a $4.5 million term loan and a $25.5 million revolving credit, subject to
limitations pursuant to the calculation of a defined borrowing base. At August
31, 1995, $21.7 million of borrowing capacity was available to the Company
against which the Company had outstanding borrowings of $20.7 million. The
calculation of the borrowing base is based, in large part, on eligible accounts
receivable, as defined in the credit agreement with the lender. As a result,
changes in the borrowing base can occur due to the magnitude and timing of the
Company's billings for services performed, which in turn are impacted by, among
other things, contractual terms and seasonal considerations, the timing of
collection of billed receivables, and other factors.
On May 5, 1995, the Company and its lender amended the credit agreement to
increase the eligible borrowing base by an amount up to $4 million with the
creation of an "Unbilled Account Subline" whereby unbilled receivables,
previously excluded from the borrowing base calculation, are now included,
subject to limitations, in the calculation of the borrowing base. Availability
under the Unbilled Account Subline is automatically and permanently reduced in
monthly increments of $500,000 commencing on August 1, 1995 and reduces to zero
upon the Company's receipt of at least $10 million through the sale and
issuance of its equity securities. The interest rate charged under the amended
revolving credit facility has been increased by three-quarters of a percent
(3/4%) until all amounts advanced under the Unbilled Account Subline, and
interest accrued thereon, have been paid or the occurrence of an increase in
equity described herein. In order to facilitate the additional borrowings, E.
Brian Smith, Chairman, President and CEO of the Company agreed to pledge
800,000 shares of Company common stock contemporaneously with the transaction.
Pending the pledge of such stock, Mr. Smith has personally guaranteed repayment
of amounts advanced to the Company under the agreement, as amended, up to $4
million. The personal guarantee will terminate upon the pledge of 800,000
shares of Company common stock and the passage of a period of 91 days following
such pledge; the repayment of all amounts advanced under the Unbilled Account
Subline and the termination of that subline; or a $10 million increase in
equity.
As of October 12, 1995, the Company has received financing commitments from two
institutions for a new $35.0 million senior credit facility. The new facility,
which will replace the existing facility, consists of a $6.5 million term loan
and a $28.5 million revolving credit. The Company is working with these
institutions to complete final documentation and anticipates funding of the new
senior credit facility during the week of October 16, 1995. However, there can
be no assurance that the Company will be able to complete the financing. The
terms of this financing will provide additional borrowing capacity to the
Company. Under the new facility, borrowing capacity would have been
approximately $30.0 million as of October 11, 1995. Under the current
facility, as amended, $23.0 million of borrowing capacity was available to the
Company, against which there were outstanding borrowings of $23.0 million.
10
<PAGE> 11
In connection with the existing senior credit facility, the Company is required
to maintain a minimum average availability for the thirty day period preceding
the payment of any dividends. The Company is required to and did make the
quarterly dividend payment to the holders of its Redeemable Preferred Stock,
which was issued in connection with the acquisition of BCM Engineers Inc.
(BCM). During the thirty day period preceding the September 30, 1995
Redeemable Preferred Stock dividend payment, the Company did not meet the
minimum average availability requirement. The Company has advised its lender
that it has not met this requirement and will require a waiver. A similar
situation occurred prior to the June 30, 1995 Redeemable Preferred Stock
dividend payment and the Company was granted a waiver. However, in view of the
proposed new senior credit facility, the issue may render itself moot.
The Company's funding requirements arise primarily from its operating expenses
and the debt service and acquisition related expenses incurred in fiscal 1995.
Historically, the Company has met such requirements primarily with cash flows
generated by operations and limited debt financing. During fiscal 1995, the
Company substantially increased its size through the acquisition of BCM,
Riedel Environmental Services, Inc. (RES), and certain assets of RESNA
Environmental Services, Inc. (RESNA), and in the process, incurred long-term
debt of approximately $31 million and issued $7.8 million of Redeemable
Preferred Stock. The increased debt service and Redeemable Preferred Stock
dividend requirements related to the BCM, RES and RESNA acquisitions, together
with additional working capital requirements for the operation of the acquired
businesses, has substantially increased the Company's liquidity requirements.
Management of the Company has continued its focus on consolidating the acquired
companies by resolving operational issues, taking actions to increase the
efficiency of the Company's operations, and improving the management of its
working capital by implementing programs designed to accelerate the collection
of its accounts receivables. Management believes that the above actions and
the new senior credit facility will enhance the Company's ability to fund its
obligations in future periods. However, in the event the Company fails to
improve the management of its working capital and is unable to conclude the new
senior credit facility on a timely basis, its liquidity and financial position
will be materially adversely impacted.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED AUGUST 31, 1995 AND 1994
Revenues for the three months ended August 31, 1995 were $47.6 million compared
with $19.8 for the same period last year, an increase of $27.8 million or 140%.
The increase in revenues was primarily attributable to the acquisition of BCM
and RES in September and November 1994, respectively. Revenues of BCM and RES
included in the quarter were approximately $12.3 million and $23.1 million,
respectively. Revenues for the quarter ended August 31, 1995, exclusive of
revenues attributable to BCM and RES, were approximately $12.2 million, 38%
lower than the three months ended August 31, 1994. The decrease in revenues is
primarily attributable to a lower backlog entering the quarter.
11
<PAGE> 12
Gross profit for the three months ended August 31, 1995 was $6.0 million or
12.7% of revenues compared with $2.6 million or 13.1% of revenues for the three
months ended August 31, 1994, an increase of $3.4 million. The increase in
gross profit was primarily attributable to the acquisitions of BCM and RES in
September and November of 1994. Gross profit, exclusive of operating results
attributable to acquisitions was approximately $1.4 million during the quarter,
a decrease of approximately $1.2 million from same quarter in 1994. The
decrease in gross profit , exclusive of the acquisitions, is primarily
attributable to a lower backlog of work entering the quarter.
Selling, general and administrative expenses (SG&A) for the three months ended
August 31, 1995 were $4.2 million compared with $1.9 million for the same
period last year, an increase of $2.3 million. SG&A as a percentage of
revenues for the three months ended August 31, 1995 was 8.8% compared with 9.5%
for the same period in 1994. The $2.3 million increase in SG&A is principally
a result of additional administration costs, primarily marketing and legal, and
amortization of goodwill and intangible assets relating to the acquisition of
BCM, RES and RESNA.
Net interest expense for the three month-period ended August 31, 1995 was $1.0
million compared with $12,000 for the same quarter in 1994. The increase in
interest expense is primarily due to increased bank borrowings and related debt
in connection with acquisitions of BCM, RES and RESNA.
In the three-month period ended August 31, 1995, the Company provided for
income taxes of $169,000 at an effective tax rate of 20%. The effective tax
rate differs from the federal statutory rate of 34% as a result of state income
taxes and the utilization of net operating loss carryforwards. In the same
three-month period in 1994, the Company provided $139,000 at an effective tax
rate of 20% which was similarly reduced by the utilization of available net
operating loss carryforwards. A valuation allowance has been recorded to
reduce the deferred tax asset related to these carryforwards and other deferred
tax assets to zero since the realization of such is not assured.
The Company's share of operating losses of its unconsolidated affiliate in the
three-month period ended August 31, 1995 was $79,000 compared with income of
$175,000 for the same quarter in 1994. The decrease in income is primarily due
to a lower level of work available to the affiliate.
COMPARISON OF SIX MONTHS ENDED AUGUST 31, 1995 AND 1994
Revenues for the six months ended August 31, 1995 were $89.1 million compared
with $38.1 million for the same period last year, an increase of $51.0 million
or 134%. The increase in revenues was primarily attributable to the
acquisition of BCM and RES in September and November 1994, respectively.
Revenues of BCM and RES included in the six month period are approximately
$26.2 million and $43.6 million, respectively. Revenues for the period,
exclusive of revenues attributable to BCM and RES, were approximately $19.3
million, or 49% lower than the six months ended August 31, 1994. The decrease
in revenues is primarily attributable to a lower level of work during the
period.
12
<PAGE> 13
Gross profit for the six months ended August 31, 1995 was $12.3 million or
13.8% of revenues compared with $5.1 million or 13.4% of revenues for the six
months ended August 31, 1994, an increase of $7.2 million or 141%. The
increase in gross profit was primarily attributable to the acquisitions of BCM
and RES in September and November of 1994. Gross profit, exclusive of
operating results attributable to acquisitions was approximately $1.9 million
for the period, a decrease of approximately $3.2 million from the same period
in 1994. The decrease in gross profit, exclusive of the acquisitions, is
primarily attributable to a lower level of work during the period.
Selling, general and administrative expenses (SG&A) for the six months ended
August 31, 1995 were $8.8 million compared with $3.6 million for the same
period last year, an increase of $5.2 million. SG&A as a percentage of
revenues for the period was 9.9% compared with 9.5% for the same period in
1994. The increase in SG&A is principally a result of additional
administration costs, primarily marketing and legal, and amortization of
goodwill and intangible assets relating to the acquisition of BCM, RES and
RESNA.
Net interest expense for the six month-period ended August 31, 1995 was $1.9
million compared with $42,000 for the same six-month period in 1994. The
increase in interest expense from 1994 is primarily due to increased bank
borrowings and related debt in connection with acquisitions of BCM and RES.
In the six-month period ended August 31, 1995, the Company provided for income
taxes of $319,000 at an effective tax rate of 20%. The effective tax rate
differs from the federal statutory rate of 34% as a result of state income
taxes and the utilization of net operating loss carryforwards. In the same
six-month period in 1994, the Company provided $314,000 at an effective tax
rate of 20% which was similarly reduced by the utilization of available net
operating loss carryforwards. A valuation allowance has been recorded to
reduce the deferred tax asset related to these carryforwards and other deferred
tax assets to zero since the realization of such is not assured.
The Company's share of operating losses of its unconsolidated affiliate in the
six-month period ended August 31, 1995 was $153,000 compared with income of
$263,000 for the same of period in 1994. The decrease in income was primarily
due the lower level of work available to the affiliate.
BACKLOG
As of August 31, 1995, the Company had a contract backlog of orders it believed
to be firm of approximately $112 million compared with $105 million at February
28, 1995 and $38 million at August 31, 1994. The value of unfunded or
indefinite delivery order contracts was approximately $146 million at August
31, 1995 compared with $170 million at February 28, 1995. The combined
contract backlog at August 31, 1995 totals $258 million compared with $275 at
February 28, 1995. The ultimate realization of the backlog is subject to
change as the scope of work on projects varies. Customers often retain the
right to alter the scope of work with an appropriate increase or decrease in
the contract price. There was no unfunded backlog at August 31, 1994.
13
<PAGE> 14
OTHER ITEMS AFFECTING OPERATING RESULTS
With the acquisition of RES in November of 1994, the Company now generates a
significant portion of revenues under its contracts with the Environmental
Protection Agency ("EPA"). Under its current Emergency Response Cleanup
Services ("ERCS") contracts, the Company is the prime contractor for removal of
hazardous substances in ERCS Zone 4A, covering 15 midwestern and southern
states, and ERCS Region 5, comprising six states bordering the Great Lakes.
ERCS Zone 4A and ERCS Region 5 contracts are renewable for one year periods
through February 1996 and September 1997, respectively.
The Company was recently notified by ERCS Region 5 of their intention to
exercise a third option period of its Indefinite Delivery Order Contract. The
option period will run from September 29, 1995 through September 28, 1996. The
maximum contract amount available for this region is approximately $19 million.
Revenues from ERCS contracts for the six months ended August 31, 1995 were
approximately $25 million. Annual revenues from ERCS contracts for RES in the
years prior to the Company's acquisition averaged approximately $35 million.
The Company anticipates that it will continue to receive similar levels of
revenues in future years. The Company intends to actively seek the award of
future EPA remedial action contracts, particularly the replacement contract for
the ERCS Zone 4A, which expires in February 1996.
Results for the quarter ended August 31, 1995 may not be indicative of future
operations as the Company's and its clients' businesses are subject to evolving
regulations by the EPA and other federal, state and local environmental
authorities. Environmental engineering, consulting and remediation services
are purchased primarily because of legal or regulatory requirements. Changes
in applicable regulatory standards or current regulatory policies, resulting in
delays in project approvals or modified treatment standards, may impact
environmental compliance and cleanup spending levels, especially with respect
to discretionary cleanups by industrial companies. Accordingly, the Company's
revenues from remediation projects may vary from year to year. The Company
believes that, despite possible changes in regulatory policies and spending
levels for both the public and private sectors, it will continue to gain market
share as a result of the expanded service capabilities resulting from recent
acquisitions.
14
<PAGE> 15
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
PART II OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
Exhibit 11 - Statement regarding computation of earnings per share.
Exhibit 27 - Requirements for the format and input of financial data
tables.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the three months
ended August 31, 1995.
Form 8-K dated August 10, 1995 relating to the change in the Company's
fiscal year end from February 28 to September 30, effective
September 30, 1995.
15
<PAGE> 16
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
(Registrant)
By: /s/ William T. Campbell
---------------------------
William T. Campbell
Vice President - Finance
Date: October 16, 1995
16
<PAGE> 1
ITEM 6(A)
EXHIBIT 11
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
EARNINGS PER SHARE
PERIOD ENDING AUGUST 31, 1995
<TABLE>
<CAPTION>
SIX MONTHS ENDING
AUGUST 31, AUGUST 31,
1995 1994
===============================
<S> <C> <C>
PRIMARY
Weighted Average Shares of Common
Stock Outstanding 5,830,538 5,707,033
Net Effect of dilutive stock options and stock awards -
based on the treasury stock method using average
market price 149,962 66,988
--------- ---------
Total Weighted Average Number of Common and
Common Equivalent Shares Outstanding 5,980,500 5,774,021
========= =========
Income Applicable to Common Stock $867,000 $1,384,000
========= =========
Earnings Per Common and Common Stock Equivalent $ .14 $ .24
========= =========
FULLY DILUTED
Weighted Average Shares of Common
Stock Outstanding 5,830,538 5,707,033
Common Stock Issued Upon Conversion of
Convertible Subordinated Notes 3,048,780 --
Net Effect of dilutive stock options and stock awards -
based on the treasury stock method using the period
ending market price, if higher than average market price 149,962 105,120
--------- ---------
Total Weighted Average number of Common and
Common Equivalent Shares Outstanding 9,029,280 5,812,153
========= =========
Income Applicable to Common Stock $867,000 $1,384,000
Interest on Convertible Subordinated Notes,
Net of tax 400,000 --
--------- ---------
Income Applicable to Common Stock on a Fully Diluted Basis 1,267,000 1,384,000
========= =========
Earnings Per Common and Common Stock Equivalent $0.14 $0.24
========= =========
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> MAR-01-1995
<PERIOD-END> AUG-31-1995
<CASH> 211
<SECURITIES> 0
<RECEIVABLES> 52,160
<ALLOWANCES> 997
<INVENTORY> 0
<CURRENT-ASSETS> 56,893
<PP&E> 25,581
<DEPRECIATION> 9,966
<TOTAL-ASSETS> 107,985
<CURRENT-LIABILITIES> 40,236
<BONDS> 36,275
<COMMON> 58
6,812
0
<OTHER-SE> 20,956
<TOTAL-LIABILITY-AND-EQUITY> 107,985
<SALES> 0
<TOTAL-REVENUES> 47,640
<CGS> 0
<TOTAL-COSTS> 41,613
<OTHER-EXPENSES> 4,168
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,013
<INCOME-PRETAX> 846
<INCOME-TAX> 169
<INCOME-CONTINUING> 677
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 472
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
