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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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DRAFT
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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 March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-14992
SMITH TECHNOLOGY CORPORATION
----------------------------
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
(exact name of registrant as specified in its charter)
DELAWARE 38-2294876
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3501 JAMBOREE ROAD, SUITE 304, NEWPORT BEACH, CA 92660
------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 737-7900
---------------
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 No X
--- ---
Registrant has not filed its Form 10-K for the twelve month period ended
September 30, 1996.
On May 9, 1997, the registrant had 6,232,464 shares of common stock outstanding.
<PAGE> 2
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1997
SMITH TECHNOLOGY CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
----
<S> <C> <C>
Item 1: Financial Statements
Consolidated Balance Sheets (unaudited) as of March 31, 1997
and September 30, 1996 3-4
Consolidated Statements of Operations (unaudited)
for the three and six months ended March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows (unaudited)
for the six months ended March 31, 1997 and 1996 6-7
Notes to Consolidated Financial Statements (unaudited) 8-11
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-18
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 19-20
Item 3: Defaults on Senior Securities 20
Item 5: Other Information 21
Consolidated Financial Statements as of 22-54
September 30, 1996 (unaudited) and 1995
Item 6: Exhibits and Reports on Form 8-K
Signature
Exhibit 11 Computation of earnings per share, for the
three and six months ended March 31, 1997 (unaudited)
Exhibit 27 Requirements for the format and input
of financial data schedules (EDGAR version only)
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, 1997 SEPTEMBER 30, 1996
-------------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 512 $ 625
Accounts receivable, less allowance for doubtful
accounts of $848 and $829 (Note 2) 40,124 40,793
Costs and estimated earnings of long-term
contracts in excess of billings 2,454 2,025
Prepaid expenses and other current assets 4,155 3,445
------- -------
Total current assets 47,245 46,888
Property and equipment:
Equipment 19,482 19,330
Land and buildings 4,017 4,017
Leasehold improvements 1,107 1,107
------- -------
Total property and equipment, at cost 24,606 24,454
Less accumulated depreciation and amortization 12,848 11,582
------- -------
Property and equipment, net (Note 2) 11,758 12,872
Other assets:
Intangible assets, net of accumulated amortization
of $2,462 and $1,878, respectively 14,588 15,172
Goodwill, net of accumulated amortization
of $912 and $714, respectively 14,756 14,953
Investment in unconsolidated affiliate 1,561 1,561
Other assets 4,082 4,038
------- -------
TOTAL ASSETS $93,990 $95,484
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and subcontracts payable $ 28,663 $ 22,597
Accrued expenses and other liabilities:
Compensation and related fringes 5,457 5,486
Severance and office closures 3,146 1,688
Other 5,887 10,686
Billings on long-term contracts in excess of
costs and estimated earnings 94 57
Current maturities of long-term debt and
short-term borrowings 4,153 2,866
-------- --------
Total current liabilities 47,400 43,380
Long-term debt 24,215 24,881
Other long-term liabilities 8,805 7,804
Convertible Senior Subordinated Note, 10% maturing
in 2004, convertible into 4,423,171 and 4,210,953
common shares, respectively at $3.28 per share 14,508 13,812
Commitments and contingencies (Note 2)
Redeemable Preferred Stock, $0.01 par value; 78,000 shares authorized; 71,128
and 74,438 shares issued, respectively; 10% cumulative
dividend; $100 redemption value 6,606 6,846
Junior Convertible Preferred Stock; $0.01 par value;
470,000 shares authorized; none issued -- --
Preference Stock; $0.01 par value, 1,000,000 shares
authorized; none issued -- --
Preferred Stock $0.01 par value; 550,500 shares
authorized; none issued -- --
Common stockholders' equity:
Common stock; $0.01 par value; 20,000,000 shares
authorized; 6,184,464 and 6,107,440 shares
issued and outstanding, respectively 61 61
Additional paid in capital 17,428 17,379
Deferred compensation (404) (404)
(Accumulated deficit) (24,629) (18,275)
-------- --------
Total common stockholders' (deficit) equity (7,544) (1,239)
-------- --------
TOTAL LIABILITIES, REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY $ 93,990 $ 95,484
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- -------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 39,017 $ 35,136 $ 83,289 $ 81,894
Cost of revenues 36,011 32,534 76,088 73,410
-------- -------- -------- --------
Gross profit 3,006 2,602 7,201 8,484
Selling, general and administrative expenses 3,461 3,542 6,414 7,391
Amortization of intangible assets, goodwill and
deferred financing fees 506 489 1,012 977
Special items 2,990 200 2,990 593
-------- -------- -------- --------
Income from operations (3,951) (1,629) (3,215) (477)
Interest expense 1,387 1,029 2,649 2,183
-------- -------- -------- --------
(Loss) income before share in earnings
of unconsolidated affiliate, income
taxes and extraordinary charge (5,338) (2,658) (5,864) (2,660)
Share in (loss) earnings of unconsolidated affiliate -- -- -- 500
-------- -------- -------- --------
(Loss) income before income taxes and
extraordinary charge (5,338) (2,658) (5,864) (2,160)
Income tax (benefit) expense 24 (63) 49 50
-------- -------- -------- --------
(Loss) income before extraordinary
charge (5,362) (2,595) (5,913) (2,210)
Extraordinary charge on debt refinancing -- 113 -- 1,395
-------- -------- -------- --------
Net loss (5,362) (2,708) (5,913) (3,605)
Dividends and accretion Redeemable Preferred
Stock 220 133 442 270
-------- -------- -------- --------
Net loss applicable to common stock $ (5,582) $ (2,841) $ (6,355) $ (3,875)
======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding 6,167 5,877 6,146 5,880
======== ======== ======== ========
Income (loss) per common and common equivalent share:
(Loss) income before extraordinary charge $ (0.87) $ (0.44) $ (0.96) $ (0.38)
Extraordinary charge -- (0.02) -- (0.24)
-------- -------- -------- --------
Net loss (0.87) (0.46) (0.96) (0.61)
======== ======== ========
Net loss applicable to common stock $ (0.91) $ (0.48) $ (1.03) $ (0.66)
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
------------------------
1997 1996
------- --------
<S> <C> <C>
OPERATING ACTIVITIES
(Loss) income before extraordinary charge $(5,913) $ (2,210)
Adjustments to reconcile net (loss) income to cash provided by (used in)
operating activities:
Depreciation and amortization 2,307 2,207
(Gain) loss on disposal of equipment (242) (347)
Share in earnings of affiliate -- (500)
Deferred interest 696 --
Compensation expense 32 --
Changes in operating assets and liabilities:
Accounts receivable 669 14,104
Costs and estimated earnings on long-term
contracts in excess of billings (429) 1,892
Prepaid expenses and other current assets (710) (12)
Other assets (44) 805
Accounts and subcontracts payable 6,066 (7,446)
Accrued expenses and other liabilities (3,116) (5,479)
Billings on long-term contracts in excess of costs
and estimated earnings 37 363
Other long-term liabilities 1,001 (1,926)
Other net (400) --
------- --------
Net cash used in operating activities (46) 1,451
------- --------
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE> 7
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
------------------------
1997 1996
-------- -------
<S> <C> <C>
INVESTING ACTIVITIES
Capital expenditures $ (185) $(1,081)
Advances from affiliates -- --
Proceeds from sale of fixed assets 268 577
-------- -------
Net cash provided by investing activities 83 (504)
-------- -------
FINANCING ACTIVITIES
Proceeds from revolving line of credit 20,649
Retirement of revolving line of credit (21,537)
(Repayments) borrowings on revolving line of credit, net (2,953) (1,641)
Proceeds from term loan 4,661 6,500
Retirement of term loan (3,400)
Repayments on term loan (962) (1,161)
Borrowings from conversion of Senior Note 1,675
Payment of financing fees (100) (1,096)
Payment of early debt extinguishment penalty (287)
Repayments of debt (470) (274)
Proceeds from exercise of stock options 14
Repurchase of Redeemable Preferred Stock (34) (179)
Dividends paid on Redeemable Preferred Stock (292) (95)
Other --
-------- -------
Net cash provided by financing activities (150) (832)
-------- -------
Net (decrease) increase in cash (113) 115
Cash at beginning of period 625 510
-------- -------
Cash at end of period $ 512 $ 625
======== =======
Supplemental Cash Flow Information:
Issuance of Stock for Bonus Compensation $ 43 $ 47
Issuance of stock for Defined Contribution Plan -- $ 107
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial
statements have been prepared by Smith Technology Corporation, formerly Smith
Environmental Technologies Corporation, (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. The financial statements should be read in conjunction
with the unaudited consolidated financial statements and the notes to the
unaudited consolidated financial statements of the Company for the twelve month
period ended September 30, 1996 included herein and the Company's report on Form
8-K filed on January 21, 1997. The Company has not filed its report on Form 10-K
for the twelve month period ended on September 30, 1996.
The results of operations for the three and six months ended March
31, 1997 are not necessarily indicative of the results that may be expected for
the fiscal year ending September 30, 1997.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
The Company (previously known as Canonie Environmental Services
Corp.) filed suit in the Circuit Court, Multnomah County, Oregon in February
1995 against NL Industries, Inc., Gould, Inc., Johnson Controls, Inc., Exide,
Inc., AT&T Technologies, Inc., Rhone-Poulenc AG Co., and Burlington Northern
Railroad Co. (the "PRPs" or "PRP Group") for breach of contract dated May 28,
1992 for the remediation of soil on property located near Portland, Oregon (the
"Contract").
The PRP Group initiated arbitration proceedings and on June 27, 1996
a Construction Industry Arbitration Tribunal of the American Arbitration
Association issued, with one dissenting opinion, a binding award in favor of the
PRPs in the amount of $4.5 million against the Company. The Company's
counterclaim in the arbitration was denied; however, the Company's plant and
equipment at the site was awarded to the Company. The Company filed exceptions
and a motion to vacate the award with the Oregon Circuit Court which were
denied.
On January 30, 1997, the Company and the PRP Group reached an
agreement for the resolution of the matter. The settlement agreement provides
for payment of the $4.5 million over a period of six years with interest at
twelve percent. The agreement provides semiannual payments which include
interest as follows: $150,000 in 1997; $300,000 in 1998; $584,000 in 1999;
$584,000 in 2000; $1,994,000 in 2001; and $3,786,000 thereafter. The agreement
also allows a discounted prepayment of $2.5 million on or before December 31,
1997 or $2.75 million on or before April 30, 1998 in complete satisfaction of
the obligation. The Company recorded a charge in fiscal 1996 of approximately
$9.7 million consisting of an obligation to the PRP Group of $4.5 million, the
write-off of $1.5 million of accounts receivable and $2.5 million of equipment,
and $1.2 million of related legal and consulting fees. The settlement agreement
provides that any proceeds from the sale of the equipment be applied to payment
of the settlement.
8
<PAGE> 9
The Company filed notice of a claim with its professional liability,
general liability, and property insurance carriers. The underwriter of the
general liability and professional liability coverage has filed an action in the
Supreme Court of the State of New York, New York County, requesting relief from
the Company's claims of coverage. The Company's claims against its general
liability and professional liability carrier have been resolved with the payment
of $500,000 to the Company.
Transcontinental Realty Investors, Inc. filed an action against the
Company's subsidiary BCM Engineers Inc. (BCM) and various unrelated parties in
the Superior Court of New Jersey, Burlington County. The action sought to
recover alleged damages exceeding $8 million based on breach of contract and
negligence. An agreement has been reached by the plaintiff and the professional
liability carrier of BCM to resolve all claims. The insurance carrier will pay
the agreed settlement directly to the plaintiff. The Company's obligation is
limited to reimburse the insurance carrier for the balance of the unexpended
portion of a self-insured retention of approximately $215,000 in installments
which is recorded as a liability on the balance sheet. The final payment of any
remaining balance is due on September 30, 1997.
U-Max Engineering and Construction Corp. filed claims based on
project delays and defective specifications against the project owner, Stroud
Township. The Township filed a cross-claim against BCM. The United States
District Court for the Middle District of Pennsylvania awarded U-Max a judgment
of $2 million against Stroud Township. The Township has been granted a judgment
of $1 million against BCM. Stroud Township has appealed the judgment against the
Township and the $1 million judgment awarded in favor of the Township against
BCM. BCM's insurance coverage will respond to losses exceeding a $500,000
deductible of which approximately $220,000 has been expended. On November 27,
1996, BCM filed a notice of appeal to the United States Third Circuit Court of
Appeals with a motion to stay execution and/or enforcement on the Township's
judgment and to waive the posting of a supersedeas bond pending BCM's appeal.
The Company's counsel believes there are grounds for reversal or modification of
the judgment on appeal, however, the likelihood of obtaining relief from the
District Court judgment is unknown. The difference between the insurance
deductible and the amount expended of $280,000 is included in other liabilities
in the accompanying balance sheets.
A settlement agreement of the claim filed in the Court of Common
Pleas of Philadelphia County, Philadelphia has been reached with Mutual
Pharmaceutical Company, Inc. whereby BCM will be required to pay the plaintiff
for site investigation and carrying costs amounting to $207,000. This amount is
to be paid in 13 monthly installments beginning September 12, 1996 of $16,000 in
lieu of exposure to the remaining deductible and further litigation. The claim
is covered by BCM's professional liability coverage which carries a $500,000
deductible. The insurance carrier has approved the settlement agreement.
Additionally, the Company's subsidiary, BCM, will be responsible for performing
certain remediation services at the site to obtain a "No Further Action" letter
from the Pennsylvania Department of Environmental Protection. The estimated cost
of the services is $50,000. If BCM fails to pay the agreed amount or perform
under the agreement, the plaintiff reserves the right to recommence the
litigation and claim additional out-of-pocket costs. The agreement leaves open a
possible claim for diminution of property value up to $420,000 for up to 10
years and requires the Company and BCM to indemnify the plaintiff for any
third-party claims not to exceed $500,000 plus costs of defense until September,
2001. The balance remaining of the payment obligation has been recorded as a
liability on the Company's balance sheet. The costs of services are expensed as
incurred. The Company is unaware of any third-party claims and has not been
notified of any claim of diminution of value of the site.
9
<PAGE> 10
In November 1993, second amended complaints and initial complaints
were filed in the Circuit Court, County of Jackson, Mississippi, against
multiple defendants including the Company's subsidiary, Riedel Environmental
Services, Inc. (RES) asserting claims in 27 separate civil actions. These civil
actions involved approximately 219 plaintiffs and include two wrongful death
claims. Plaintiffs allege that RES was negligent in transferring and clean-up
activities of the chemical diethylamine released from an overturned tanker.
Settlements of the claims of eighty-seven plaintiffs have been completed without
contribution by RES; those claims will be dismissed leaving one hundred
thirty-two plaintiffs with claims remaining against RES, including the two
wrongful death claims. The special damages of remaining plaintiffs are
approximately $800,000, not including unstated general damages. RES will be
entitled to a credit for payments made by settling defendants allocated against
any remaining plaintiffs. The Company's pollution liability coverage, having an
aggregate of $1 million, is paying the costs of investigation and defense and
will respond to losses up to the coverage balance less those costs. The Company
is vigorously defending the described litigation.
In December 1995, BellSouth filed a complaint for unstated damages in
the Circuit Court, Jefferson County, Alabama against the Company, and its
subsidiaries BCM and Canonie Technologies, Inc. The complaint, alleging
professional negligence, fraudulent and negligent misrepresentation,
non-disclosure, innocent misrepresentation and breach of contract, arises out of
BCM's alleged failure to provide oversight and certification of services
performed by BellSouth's asbestos abatement contractors. The plaintiff claims it
has expended an additional $1.6 million to perform asbestos removal which
allegedly was to have been performed by its prior contractor. BCM believes its
services were performed in compliance with all legal requirements, that it has
been released from BellSouth claims, and that a substantial amount of the claims
are barred by statute of limitations. The parties to the lawsuit have entered
into a settlement agreement dated April 21, 1997, which resolved all claims; the
agreement provides for the payment by the Company of $150,000; in monthly
installments, which amount is included as a liability in the Company's balance
sheet.
Stroudsburg Municipal Authority has filed a claim against BCM in the Monroe
County, Pennsylvania, Court of Common Pleas for damages exceeding $500,000
based on allegations of breach of contract and negligent performance of design
services. The Company and its professional liability carrier have retained
counsel to investigate the matter and defend the claim. The Company's insurance
coverage responding to this claim has a $150,000 self-insurance retention. No
provision for loss, if any, has been recorded in the accompanying balance
sheets.
BCM is the lessee of improved property formerly used as a laboratory
and office/warehouse space for field service personnel. The lease dated October
23, 1989 terminates May 31, 2000 and contains provisions for the confession of
judgment in favor of Gravers Company (the "Owner") in the event of default. The
Owner has, pursuant to the lease provisions, filed judgments in the Montgomery
County, Pennsylvania Court of Common Pleas providing for ejectment of BCM and a
money judgment against BCM in the amount of $1,094,039. BCM has brought the
lease payments current and is in the process of negotiating an agreement
providing for the deferment by the Owner of any action to retake possession of
the leased property or to take action to collect on the money judgment so long
as BCM remains in compliance with the underlying lease. BCM is attempting to
sublease this space to others. Remaining lease payments have been accrued less
anticipated sublease rent recovery.
10
<PAGE> 11
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Company is currently a party to other litigation and claims
incidental to the performance of services. The Company believes that these
matters are adequately accrued or covered by insurance, are without merit or the
disposition thereof is not anticipated to have a material effect on the
Company's financial position; however these matters, individually or in the
aggregate, could have a material adverse effect on future quarterly or annual
results of operations or cash flow when resolved.
NOTE 3 - INDUSTRY SEGMENT
The Company operates within a single industry segment in the United
States.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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 unaudited consolidated financial statements and
the notes to the unaudited consolidated financial statements of the Company for
the twelve month period ended September 30, 1996 included herein. The September
30, 1996 unaudited consolidated financial statements have been modified from
those presented in the December 31, 1996 10-Q to reflect reduced profit
recognition of approximately $1.5 million on certain construction and
remediation projects. Similarly, the current fiscal year amounts have been
reduced by $450,000 for the quarter ended December 31, 1996. The Company has
not filed its report on Form 10-K for the twelve month period ended on
September 30, 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of Revenues 92.3 92.6 91.3 89.6
------ ------ ------ ------
Gross profit (loss) 7.7 7.4 8.7 10.4
Selling, general and administrative 8.9 10.1 7.7 9.0
expenses
Amortization of intangible assets,
goodwill and deferred financing fees 1.3 1.4 1.2 1.2
Special items 7.6 0.6 3.6 0.7
------ ------ ------ ------
Income from operations (10.1) (4.7) (3.8) (0.5)
Interest expense 3.6 2.9 3.2 2.7
------ ------ ------ ------
(Loss) income before share in
earnings of unconsolidated
affiliate, income taxes and
extraordinary charge (13.7) (7.6) (7.0) (3.2)
Share in (losses) earnings of
unconsolidated affiliate -- -- -- 0.6
------ ------ ------ ------
(Loss) income before income taxes
and extraordinary charge (13.7) (7.6) (7.0) (2.6)
Income tax (benefit) expense 0.1 (.2) .1 0.1
------ ------ ------ ------
(Loss) income before extraordinary
charge (13.8) (7.4) (7.1) (2.7)
Extraordinary charge on debt refinancing -- (.3) -- (1.7)
------ ------ ------ ------
Net (loss) income (13.8)% (7.7)% (7.1)% (4.4)%
====== ====== ====== ======
</TABLE>
12
<PAGE> 13
GENERAL
The Company provides a broad range of comprehensive environmental
consulting, engineering, and waste water facility design, and on-site
construction and remediation service for clients in the private and public
sectors in the areas of environmental contamination, water resources and
infrastructure. 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. Additional detail regarding backlog is set forth under "Backlog" in
this section. 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 for any other quarter or full
fiscal year.
The Company uses the equity method of accounting for incorporated
joint ventures and affiliated companies where ownership ranges from 20 to 50
percent. The Company also includes its proportionate share in unincorporated
joint ventures entered into on large construction-type remediation contracts.
Certain amounts from prior periods have been reclassified to conform
to current period presentation.
COMPARISON OF QUARTER ENDED MARCH 31, 1997 AND 1996
Revenues for the quarter ended March 31, 1997 were $39.0 million
compared with $35.1 million for the same quarter in 1996, an increase of $3.9
million or 11.1 percent. Increased remediation services revenues of $10.2
million were offset by reduced demand for construction and engineering services.
In the prior year quarter, revenues were negatively impacted by delays in the
Federal Government budget approval process affecting revenues under the
Company's EPA ERCS contracts. Revenues from EPA contracts for the quarter ended
March 31, 1997 were approximately $16.0 million compared with $7.0 million in
the prior year quarter.
Gross profit for the quarter ended March 31, 1997 was $3.0 million or
7.7 percent of revenues compared with $2.6 million or 7.4 percent of revenues
for the quarter ended March 31, 1996, an increase of approximately $400,000. The
increase in gross profit is due primarily to the aforementioned increase in EPA
ERCS revenues, offset by reduced project profit margins due to an extremely
price competitive environmental construction and remediation market. Indirect
costs have been reduced to partially offset the effects of the decline in
project profit margins.
Selling, general and administrative expenses for the quarter ended
March 31, 1997 were $3.5 million or 8.9 percent of revenues, compared with $3.5
million or 10.1 percent of revenues for the same quarter in the prior year.
Reduced accounting, business development and other administrative costs as a
result of cost reductions implemented during the second half of fiscal year 1996
and reduced legal fees as a result of the settlement of the NL Industries
arbitration were offset by professional bid and proposal assistance utilized in
the pursuit of Federal Government remediation services contracts. Additionally,
the Company engaged a management consulting firm to assist in its working
capital management and turnaround efforts.
Amortization of intangible assets, goodwill and deferred financing
fees for the quarter ended March 31, 1997 was $506,000, compared with to
$489,000 for the same period in the prior fiscal year.
13
<PAGE> 14
Special items for the quarter ended March 31, 1997 were $3.0 million
and included $3.5 million of costs associated with the implementation of a plan
to reduce facility and equipment leasing obligations and severance and retention
costs associated with a staff reduction plan, reduced by the recovery of
$500,000 in the resolution of claims filed with its insurance carriers related
to the NL Industries arbitration settlement. Special items also related to
office consolidations of $200,000 were recorded in the quarter ended March 31,
1996.
Interest expense for the quarter ended March 31, 1997 was $1.4
million compared with $1.0 million for the same quarter in 1996. The increase in
interest expense is primarily due to increased bank borrowings and higher
interest rates.
In the quarter ended March 31, 1997, the Company provided for income
taxes of $24,000 which represents a provision for state income taxes. The
Company has not provided for federal taxes as a result of the loss for the
current quarter. The Company has significant net operating loss carryforwards to
offset future federal tax liabilities. 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.
In the quarter ended March 31, 1996, the Company recorded an
extraordinary charge of $113,000 as a result of reversing the FY96 first quarter
tax benefit in connection with the debt refinancing.
COMPARISON OF SIX MONTHS ENDED MARCH 31, 1997 AND 1996
Revenues for the six months ended March 31, 1997 were $83.3 million
compared with $81.9 million for the same period in 1996, an increase of $1.4
million or 1.7 percent. Increased remediation services revenues of $14.6 million
were offset by reduced demand for construction and engineering services. In the
prior year period, revenues were negatively impacted by delays in the Federal
Government budget approval process affecting revenues under its EPA ERCS
contracts. Revenues from EPA contracts for the six months ended March 31, 1997
were approximately $28.1 million compared with $20.0 million in the prior year
period.
Gross profit for the six months ended March 31, 1997 was $7.2 million
or 8.7 percent of revenues compared with $8.5 million or 10.4 percent of
revenues for the six months ended March 31, 1996, a decrease of approximately
$1.3 million. The increase in gross profit and decrease in the percentage return
is due primarily to increased EPA ERCS remediation service revenues at
historically lower gross profit margins. Additionally, the environmental
construction and remediation market is extremely price competitive which has
reduced project profit margins. Indirect costs have been reduced to partially
offset the effects of the decline in project profit margins.
Selling, general and administrative expenses (SG&A) for the six
months ended March 31, 1997 were $6.4 million or 7.7 percent of revenues,
compared with $7.4 million or 9.0 percent of revenues for the same period in the
prior year. The decrease in SG&A is primarily attributable to reduced
accounting, business development and other administrative costs as a result of
cost reductions implemented during the second half of fiscal year 1996 and
reduced legal fees as a result of the settlement of the NL Industries
arbitration offset by increased proposal and management consulting expenses.
Amortization of intangible assets, goodwill and deferred financing
fees for the six months ended March 31, 1997 was $1.0 million, the same as in
the prior fiscal year.
14
<PAGE> 15
Special items for the six months ended March 31, 1997 were $3.0
million and included $3.5 million of costs associated with the implementation of
a plan to reduce facility and equipment leasing obligations and severance and
retention costs associated with a staff reduction plan, reduced by the recovery
of $500,000 in the resolution of claims filed with its insurance carriers
related to the NL Industries arbitration settlement. Special items of $593,000
for severance and relocation costs were recorded in the six months ended March
31, 1996 in connection with office closings and consolidations.
Interest expense for the six months ended March 31, 1997 was $2.6
million compared with $2.2 million for the same period in 1996. The increase in
interest expense is primarily due to increased bank borrowings and higher
interest rates.
The Company's share of earnings from an unconsolidated affiliate in
the six months ended March 31, 1996 was $500,000. No activity was conducted by
the joint venture during the current fiscal year.
In the six months ended March 31, 1997, the Company provided for
income taxes of $49,000 which represents a provision for state income taxes. The
Company has not provided for federal taxes as a result of the loss for the
current quarter. The Company has significant net operating loss carryforwards to
offset future federal tax liabilities. 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 recorded an extraordinary charge of approximately $1.4
million during the six months ended March 31, 1996 as a result of refinancing
its senior credit facility. The charge includes unamortized financing fees and a
prepayment penalty in connection with the refinancing.
LIQUIDITY AND CAPITAL RESOURCES
The Company is engaged in a business which at times requires
substantial working capital for construction, remediation and engineering
services contracts that require investments of personnel and equipment by the
Company before the Company is permitted to invoice the client. Many of the
Company's contracts also provide for progress or monthly invoices as certain
benchmarks of performance are reached or costs have been incurred. The Company's
working capital and cash have been significantly impacted by the amount of debt
incurred in connection with the acquisition of BCM Engineers, Inc. ("BCM"),
Riedel Environmental Services, Inc. ("RES") and the assets of RESNA Industries,
Inc. ("RESNA") and by costs associated with consolidating the acquired
companies' operations into those of the Company. As a result of these factors
and current market conditions for the environmental industry which reflect lower
government spending, lessened regulatory enforcement and lower project profit
margins the Company has and continues to experience liquidity problems.
The Company has in place a Loan and Security Agreement (the "Loan
Agreement") with The Chase Manhattan Bank and BTM Capital Corporation
(collectively, the "Senior Lenders"). Effective April 21, 1997, the Company and
its Senior Lenders executed the Fifth Amendment, Waiver and Consent (the "Fifth
Amendment") which waived prior defaults and consented to certain conditions
under the Loan Agreement. The Fifth Amendment restructured the revolving line of
credit (the "Revolver") to be based upon eligible billed accounts receivable
only and eliminated eligible unbilled accounts receivable from the borrowing
base. Advances against eligible unbilled accounts receivable were converted to a
term loan of approximately $4.4 million as of April 21, 1997. The amended Loan
Agreement includes a $24.5 million
15
<PAGE> 16
Revolver and term loans totaling approximately $8.0 million including the
balance remaining from the original term loan of approximately $3.6 million.
The term loans are being repaid on a weekly and monthly basis and are being
amortized at the rate of approximately $2.9 million per year. Additionally, the
Fifth Amendment provides for an overadvance of $8.0 million against the Revolver
borrowing base. The overadvance provision is reduced to $6.0 million beginning
August 1, 1997 and is eliminated effective October 2, 1997 at which time the
Revolver is reduced to $23.5 million. A mandatory term loan pre-payment or a
further reduction in the overadvance of $500,000 is also required by August 1,
1997. Changes in the borrowing base occur as a result of the magnitude and
timing of the Company's billings and collections for services.
The Fifth Amendment also amended financial covenants through
September 30, 1997 and increased interest rates to 4.5 percent over the Bank's
ABR rate and contained a fee of $250,000 with payment deferred to October 2,
1997. The Company must also provide the Senior Lenders on or before May 15, 1997
detachable warrants exercisable at a nominal price for 7.5 percent of the fully
diluted common stock of the Company. At March 31, 1997, this represented
approximately 795,000 shares. The Company and its Senior Lenders have verbally
agreed to extend the date of delivery of unaudited financial statements for
the year ended September 30, 1996 and the issuance of the detachable warrants to
June 16, 1997.
The principal sources of liquidity for the Company's business and
operating needs are internally generated funds from operations and available
revolving credit borrowings under the Chase Facility. For the six months ended
March 31, 1997, operating activities used net cash of approximately $46,000,
primarily due to operating losses offset by increases in accounts and
subcontracts payable. Investing activities provided $83,000 in net cash
principally from the sale of assets. Financing activities utilized net cash of
$150,000 primarily from repayments of debt obligations. Cash generated from the
collection of accounts receivable is used to repay the Revolver and results in
an increase of available borrowings under the Revolver.
As of March 31, 1997, long term debt, including current maturities of
$4.2 million, was approximately $42.9 million, the components of which were
borrowings of $18.9 million under the Revolver and $8.2 million in term loans,
$14.5 million of convertible senior subordinated notes and $1.3 million of other
notes and capital leases.
The Company's inability to make timely payments to certain of its
trade and other creditors has resulted in the filing of multiple lawsuits
against the Company. The Company has disputed the amounts claimed in certain of
these actions and has entered into installment payment agreements or allowed
judgments to be taken against the Company in others. A number of vendors and
subcontractors have also delivered notice of non-payment to the surety company
providing payment bonds on projects being performed by the Company. Outstanding
judgments obtained by trade creditors (exclusive of the Gravers Company and
Winstead Sechrist & Minick judgments discussed in Item 1 of Part II) total
approximately $173,000. In addition, the Company has entered into agreements to
pay on an installment basis approximately $346,000 in settlement of other
creditor claims and judgments, of which approximately $183,000 will come due
during this fiscal year. There are presently seventeen unresolved lawsuits
involving claims exceeding, in the aggregate, $750,000 and claims made against
the Company's surety for non-payment exceeding, in the aggregate, $2.9 million.
All undisputed amounts have been included as liabilities in the Company's
balance sheet. These claims could also result in the termination of projects
or jeopardize the ability of the Company to continue performance under
contracts. Termination of projects would result in the loss of future
revenues, create potential liability for the Company to its clients and the
surety company
16
<PAGE> 17
for increased cost to complete projects and adversely affect the Company's
ability to pursue additional work.
The Company has attempted to improve cash flow and improve working
capital through cost reduction measures and improved billing and collection
procedures. Through these efforts and the sale of certain real estate,
management believes it will meet the $2.5 million reduction required by its
Senior Lenders as described above. The Company has implemented a strategic
restructuring program and is pursuing capital investment, merger and divestiture
opportunities. These potential transactions may require an increase in the
Common Stock, the Preferred Stock and the Preference Stock currently authorized
by the Company's Certificate of Incorporation. Proceeds from such transactions
are required to meet the mandatory reduction of the remaining overadvance of
up to $6.0 million and the $1.0 million reduction in the Revolver required by
October 2, 1997. Remaining proceeds would be utilized to reduce the Company's
trade payables and long-term debt subject to the approval of the Senior
Lenders. In the event the Company fails to improve the management of its
working capital and conclude a capital investment, merger or divestiture
transaction on a timely basis, its liquidity and financial position will be
materially adversely impacted and the Company would be required to consider
other measures of protecting its assets against creditors.
BACKLOG
As of March 31, 1997, the Company had a contract backlog of orders of
approximately $84 million compared with approximately $107 million and $114
million at September 30, 1996 and March 31, 1996, respectively. The value of
unfunded or indefinite delivery order contracts ("IDO") was approximately $106
million as of March 31, 1997 compared with approximately $140 million and $147
million at September 30, 1996 and March 31, 1996, respectively. The combined
contract backlog as of March 31, 1997 was approximately $190 million compared
with approximately $247 million and $261 million at September 30, 1996 and March
31, 1996, respectively. The Company has recently received notices of termination
of work on three significant contracts. One termination resulted from the loss
of Company personnel having substantial experience with the contracted services.
Two terminations resulted from a change in technology to be applied to the
specific site requirements. Reductions of projected revenues of approximately
$10 million resulting from these terminations are reflected in the backlog as of
March 31, 1997.
Subsequent to the end of the quarter, the Company executed a contract
for EPA ERRS Region 4 covering the southeastern portion of the United States to
be performed over a five year period. The EPA contract provides an additional
$50 million to the Company's total backlog increasing the total backlog to
approximately $240 million. The ultimate value of the backlog is subject to
change as the scope of work on projects change. Customers often retain the right
to change the scope of work with an appropriate increase or decrease in contract
price.
OTHER ITEMS AFFECTING OPERATING RESULTS
The Company generates a substantial portion of its revenues under its
Emergency Response Cleanup Services (ERCS) contracts for the Environmental
Protection Agency ("EPA"). The Company is the prime contractor for removal of
hazardous substances in ERCS Zone 4A, comprising Regions 6, 7 and 8, and ERCS
Region 5. The ERCS Zone 4A contract was extended through March 31, 1997 with
completion of
17
<PAGE> 18
work by June 30, 1997. The ERCS Region 5 contract has been renewed through
September 30, 1997, the final option year.
Revenues from EPA contracts for the three and six months ended March
31, 1997 were approximately $16.0 million and $28.1 million, respectively.
As a federal government contractor, the Company is required to comply
with various regulations and standards regarding its systems and procedures for
the accumulation and billing of contract costs and federal procurement
requirements. As a result of its federal government contract activities, the
Company is subject to audit to assure compliance with these requirements.
Although the Company to date has not experienced any materially negative audit
results, an unfavorable determining could impact the Company's ability to
complete current contracts and compete for future federal government work.
The EPA procurements of future similar services are referred to
as Emergency Response and Remediation Services (ERRS). The Company has submitted
proposals in competition for award of future ERRS contracts covering Regions 3,
4, 7 and 10. On April 17, 1997, the Company was notified that its was awarded a
contract in Region 4 covering the southeastern portion of the United States. The
contract is estimated at approximately $50 million over a five year performance
period with work scheduled to begin in June 1997. The Company intends to
actively seek the award of the EPA ERRS Region 5 contract and other future EPA
and other federal government agency and department remedial action contracts.
FORWARD LOOKING STATEMENTS AND INFORMATION
This report and other reports and statements filed by the Company
from time to time with the Securities and Exchange Commission (collectively,
"SEC Filings") contain or may contain certain forward-looking statements and
information that are based on information available to the Company's management
and various estimates, assumptions and predictions made by the Company's
management. When used in SEC Filings, the words "anticipate," "contemplate,"
"estimate," "expect," "future," "intend," "plan," "predict" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to inherent uncertainties, including, in addition to any
uncertainties specifically identified in the text surrounding such statements,
uncertainties with respect to changes or developments in social, economic,
business, industry, market, legal and regulatory circumstances and conditions
and actions taken or omitted to be taken by third parties, including the
Company's stockholders, customers, suppliers, business partners and competitors,
and legislative, regulatory, judicial and other governmental authorities and
officials. Consequently, actual events, circumstances, consequences, effects and
results may vary significantly from those described in or contemplated by such
forward-looking statements or information.
18
<PAGE> 19
SMITH TECHNOLOGY CORPORATION
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GRAVERS COMPANY VS. BCM ENGINEERS INC.
The Company's subsidiary, BCM Engineers Inc. (BCM), is the lessee of
improved property formerly used as a laboratory and office/warehouse space for
field service personnel. The lease dated October 23, 1989 terminates May 31,
2000 and contains provisions for the confession of judgment in favor of Gravers
Company (the "Owner") in the event of default. The Owner has, pursuant to the
lease provisions, on March 21, 1997 filed judgments in the Montgomery County,
Pennsylvania Court of Common Pleas providing for ejectment of BCM and a money
judgment against BCM in the amount of $1,094,039. BCM has brought the lease
payments current and is in the process of negotiating an agreement providing for
the deferment by the Owner of any action to retake possession of the leased
property or to take action to collect on the money judgment so long as BCM
remains in compliance with the underlying lease. BCM is attempting to sublease
this space to others.
WINSTEAD SECHREST & MINICK VS. SMITH TECHNOLOGY CORPORATION
The Company has entered into a settlement agreement to resolve a
lawsuit to collect money due for professional services filed March 11, 1997 in
the 101st Judicial District Court of Dallas County, Texas by Winstead Sechrest &
Minick. The agreement provides for mandatory installment payments of $50,000 per
quarter in payment of a stipulated judgment in the amount of $465,842 which may
be satisfied upon the aggregate payment of $324,459 plus interest on or before
September 30, 1997.
BELLSOUTH TELECOMMUNICATIONS INC. VS. BCM ENGINEERS INC.
In December 1995, BellSouth filed a complaint for unstated damages in
the Circuit Court, Jefferson County, Alabama against the Company, its
subsidiaries BCM and Canonie Technologies, Inc. The complaint, alleging
professional negligence, fraudulent and negligent misrepresentation,
non-disclosure, innocent misrepresentation and breach of contract, arises out of
BCM's alleged failure to provide oversight and certification of services
performed by BellSouth's asbestos abatement contractors. The plaintiff claims it
has expended an additional $1.6 million to perform asbestos removal which
allegedly was to have been performed by its prior contractor. BCM believes its
services were performed in compliance with all legal requirements, that it has
been released from BellSouth claims, and that a substantial amount of the claims
are barred by statute of limitations. The parties to the lawsuit have entered
into a settlement agreement dated April 21, 1997, which resolved all claims; the
agreement provides for the payment by the Company of $150,000 in monthly
installments.
19
<PAGE> 20
STROUDSBURG MUNICIPAL AUTHORITY VS. BCM ENGINEERS INC. A SUBSIDIARY OF SMITH
TECHNOLOGY CORPORATION
Stroudsburg Municipal Authority has filed a claim on January 8, 1997
in the Monroe County, Pennsylvania, Court of Common Pleas for damages exceeding
$500,000 based on allegations of breach of contract and negligent performance of
design services. The Company and its professional liability carrier have
retained counsel to defend the claim and investigate the matter. The Company's
insurance coverage responding to this claim has a $150,000 self-insurance
retention.
VENDOR CLAIMS
The Company's inability to make timely payments to certain of its trade
and other creditors has resulted in the filing of multiple lawsuits against the
Company. The Company has disputed the amounts claimed in certain of these
actions and has entered into installment payment agreements or allowed judgments
to be taken against the Company in others. A number of vendors and
subcontractors have also delivered notice of non-payment to the surety company
providing payment bonds on projects being performed by the Company. Outstanding
judgments obtained by trade creditors (exclusive of the Gravers Company and
Winstead Sechrist & Minick judgments discussed in Item 1 of Part II) total
approximately $173,000. In addition, the Company has entered into agreements to
pay on an installment basis approximately $346,000 in settlement of other
creditor claims and judgments, of which approximately $183,000 will come due
during this fiscal year. There are presently seventeen unresolved lawsuits
involving claims exceeding, in the aggregate, $750,000 and claims made against
the Company's surety for non-payment exceeding, in the aggregate, $2.9 million.
All undisputed amounts have been included as liabilities in the Company's
balance sheet. In the event the Company fails to achieve the strategic
restructuring discussed in Item 2. Section 1, Management's Discussion and
Analysis of Financial Condition and Results of Operations allowing for the
resolution of the Company's accounts payable, the financial condition and
operations of the Company will be materially and adversely affected by these
and other potential vendors claims for unpaid amounts.
OTHER LITIGATION AND CLAIMS
The Company is currently a party to other litigation and claims
incidental to the performance of services. The Company believes that these
matters are adequately accrued or covered by insurance, are without merit or the
disposition thereof is not anticipated to have a material effect on the
Company's financial position; however, these matters individually or in the
aggregate, could have a material adverse effect on future quarterly or annual
results of operations or cash flow when resolved.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
The Company has not made timely payment of dividends accruing on the
Redeemable Preferred Stock. The unpaid dividends are approximately $287,000 at
March 31, 1997, comprised of $178,000 due March 31, 1997 and $109,000 remaining
balance from December 31, 1996. The terms of the preferred stock provide that a
non-payment condition increases the dividend rate to seven and one-half percent
and to ten percent in the event two quarterly payments are not made. The Company
has extended a dividend payment "catch-up" plan to its Redeemable Preferred
Stockholders
20
<PAGE> 21
which has reduced the arrearage through December 31, 1996 to $81,000. The Fifth
amendment of the Chase Facility restricts subsequent payments of quarterly
dividends while an over advance condition exists on its revolving line of
credit. These dividends will accrue at the rate of 10%, or approximately
$178,000 per quarter, until all arrearages are fully paid.
ITEM 5. OTHER INFORMATION
The Company filed a Form 8-K dated February 28, 1997 reporting the
execution of a letter of intent for the sale of assets and accounts receivable
relating to three engineering offices. On April 11, 1997, the Company issued a
press release announcing that the sale of those engineering offices together
with a second sale of assets of three additional offices to a related buyer have
been terminated.
As of the date of this filing, the Company has not filed its annual
report on Form 10-K for its fiscal year ended September 30, 1996. The Form 10-K
has not been filed because the Company's auditors have not released their audit
report due to the previously existing default condition under the Chase
Facility. All of the financial data for fiscal year ended September 30, 1996
contained herein is unaudited. The Company's annual meeting which was scheduled
for March 20, 1997 has been postponed until such time as the Company's Form 10-K
is filed and a proxy statement and proxy materials can be distributed to the
stockholders of the Company.
Arthur A. Riedel resigned as a member of the Board of Directors effective March
20, 1997. The resignation of E. Brian Smith as President and Chief Executive
Officer and the appointment of Thomas F. Herlihy, a principal in the management
consulting firm of Walker, Truesdell and Associates, as interim President and
Chief Executive Officer of the Company was effective April 14, 1997. Mr. Smith
remains Chairman of the Board of Directors. On April 24, 1997, Frank J. Gorry
was appointed Senior Vice President-Chief Operating Officer and Anthony J. Dury
and William T. Campbell were each elevated to the position of Senior Vice
President.
21
<PAGE> 22
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1996 1995
----------- --------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash ......................................................... $ 625 $ 686
Accounts receivable, less allowance for doubtful
accounts of $829 and $1,502, respectively (Note 3) ........ 40,793 52,852
Costs and estimated earnings on long-term contracts
in excess of billings (Note 4) ........................... 2,025 2,287
Prepaid expenses and other current assets .................... 3,445 3,203
------- --------
Total current assets .................................. 46,888 59,028
------- --------
Property and Equipment:
Equipment .................................................... 19,330 21,949
Land, buildings and improvements ............................. 4,017 4,007
Leasehold improvements ....................................... 1,107 1,044
------- --------
Total property and equipment, at cost ................... 24,454 27,000
Less accumulated depreciation and amortization ............... 11,582 10,062
------- --------
Property and equipment, net ............................... 12,872 16,938
Other Assets:
Intangible assets, net of accumulated amortization of $1,878
and $712, respectively (Note 2) ......................... 15,172 16,338
Goodwill, net of accumulated amortization of $714 and
$322, respectively (Note 2) ............................. 14,953 15,345
Investment in unconsolidated affiliate (Note 5) ................ 1,561 1,502
Other assets (Note 6) .......................................... 4,038 5,443
------- --------
TOTAL ASSETS ......................................................... $95,484 $114,594
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1996 1995
----------- ---------
(UNAUDITED)
<S> <C> <C>
Current Liabilities:
Accounts and subcontracts payable .......................................... $ 22,597 $24,733
Accrued expenses and other liabilities:
Compensation and related fringes ....................................... 5,486 4,973
Severance and office closures .......................................... 1,688 1,618
Other .................................................................. 10,686 9,343
Billings on long-term contracts in excess of costs and
estimated earnings (Note 4) ............................................ 57 1,251
Current maturities of long-term debt and short-term borrowings (Note 7) .... 2,866 2,110
-------- --------
Total current liabilities ........................................... 43,380 44,028
Long-term debt (Note 7) ........................................................ 24,881 27,403
Other long-term liabilities .................................................... 7,804 6,017
Convertible Senior Subordinated Note; 10%; maturing in 2004, convertible
into 4,210,953 common shares at $3.28 per share (Note 8) ................ 13,812 10,000
Commitments and contingencies (Notes 9 and 14):
Redeemable Preferred Stock, $0.01 par value; 78,000 shares authorized; 74,438
and 76,218 shares issued, respectively; 10% cumulative
dividend; $100 redemption value (Notes 1 and 12) ........................ 6,846 6,857
Junior Convertible Preferred Stock, $0.01 par value; 470,000 and 371,500
shares authorized, respectively; none issued (Note 8) .................. -- --
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, 6,107,440
and 5,850,015 shares issued and outstanding, respectively ............. 61 58
Additional paid-in capital .................................................. 17,379 17,149
Deferred compensation ....................................................... (404) --
(Accumulated deficit) retained earnings ..................................... (18,275) 3,082
-------- --------
Total common stockholders' equity ............................... (1,239) 20,289
-------- --------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY $ 95,484 $114,594
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR SEVEN MONTHS
ENDED ENDED YEARS ENDED FEBRUARY 28,
SEPTEMBER 30, SEPTEMBER 30, --------------------------
1996 1995 1995 1994
----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues (Notes 3 and 15) .............................. $ 164,382 $ 105,290 $ 104,738 $ 59,461
Cost of revenues ....................................... 152,735 91,932 89,922 56,020
----------- ----------- ---------- -----------
Gross profit .................................... 11,647 13,358 14,816 3,441
Selling, general, and administrative expenses .......... 14,218 9,109 10,285 5,754
Amortization of intangible assets, goodwill
and deferred financing fees ........................ 1,957 1,025 510 --
Special items (Note 15) ................................ 11,811 393 -- 4,263
----------- ----------- ---------- -----------
(Loss) income from operations .......................... (16,339) 2,831 4,021 (6,576)
Interest expense ....................................... 4,417 2,225 1,229 412
----------- ----------- ---------- -----------
(Loss) income before share in earnings of unconsolidated
affiliate, income tax and
extraordinary item .............................. (20,756) 606 2,792 (6,988)
Share in earnings (losses) of unconsolidated
affiliates (Note 5):
Operating ...................................... 375 (173) 539 (221)
Investment write-off (Note 15) ................. -- -- -- (2,655)
----------- ----------- ---------- -----------
(Loss) income before taxes and extraordinary item ...... (20,381) 433 3,331 (9,864)
Income tax (benefit) expense (Note 10) ................. (419) 87 558 135
----------- ----------- ---------- -----------
(Loss) income before extraordinary item ................ (19,962) 346 2,773 (9,999)
Extraordinary item on debt refinancing (Note 6) ....... (1,395) -- -- --
----------- ----------- ---------- -----------
Net (loss) income ...................................... (21,357) 346 2,773 (9,999)
Dividends and accretion on Redeemable
Preferred Stock ................................... 587 334 218 --
----------- ----------- ---------- -----------
Net (loss) income applicable to Common Stock ........... $ (21,944) $ 12 $ 2,555 $ (9,999)
=========== =========== ========== ===========
Weighted average number of common and
common equivalent shares outstanding .............. 5,978,084 5,964,250 5,865,782 5,700,783
=========== =========== ========== ===========
(Loss) earnings per common and common equivalent
share before extraordinary item .................. $ (3.44) $ 0.00 $ 0.44 $ (1.75)
=========== =========== ========== ===========
(Loss) earnings per common and common
equivalent share .................................. $ (3.67) $ 0.00 $ 0.44 $ (1.75)
=========== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 25
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT COMMON SHARE DATA)
<TABLE>
<CAPTION>
SHARES OF ADDITIONAL
COMMON COMMON PAID-IN DEFERRED RETAINED
STOCK STOCK CAPITAL COMPENSATION EARNINGS TOTAL
---------- -------- -------- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 28, 1993 ................... 5,700,783 $ 57 $ 16,580 -- $ 10,514 $ 27,151
Net loss ..................................... -- -- -- -- (9,999) (9,999)
Other ........................................ -- -- 31 -- -- 31
---------- -------- -------- ----- -------- --------
Balance, February 28, 1994 ................... 5,700,783 57 16,611 -- 515 17,183
Net income ................................... -- -- -- -- 2,773 2,773
Shares issued upon conversion of stock options 106,689 1 359 -- -- 360
Dividends and accretion on Redeemable
Preferred Stock ........................... -- -- -- -- (218) (218)
---------- -------- -------- ----- -------- --------
Balance, February 28, 1995 ................... 5,807,472 58 16,970 -- 3,070 20,098
Net income ................................... -- -- -- -- 346 346
Shares issued upon conversion of stock options 42,543 -- 179 -- -- 179
Dividends and accretion on Redeemable
Preferred Stock .......................... -- -- -- -- (334) (334)
--------- -------- -------- ----- -------- --------
Balance, September 30, 1995 .................. 5,850,015 58 17,149 -- 3,082 20,289
Net Loss ..................................... (21,357) (21,357)
Shares issued upon conversion of stock options 7,625 -- 31 -- 31
Shares issued to contribute Company match
to 401 K Plan ............................ 88,949 1 210 -- -- 211
Shares issued for deferred compensation
and other obligations .................... 160,851 2 576 $(404) 174
Dividends and accretion on Redeemable
Preferred Stock .......................... -- -- (587) -- -- (587)
---------- -------- -------- ----- -------- --------
Balance, September 30, 1996 (unaudited) ...... 6,107,440 $ 61 $ 17,379 $(404) $(18,275) $ (1,239)
========== ======== ======== ===== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 26
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR SEVEN MONTHS YEARS ENDED
ENDED ENDED FEBRUARY 28,
SEPTEMBER 30, SEPTEMBER 30, --------------------
1996 1995 1995 1994
-------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating Activities:
Net (loss) income ................................. $(21,357) $ 346 $ 2,773 $(9,999)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Write-off of deferred financing fees ......... 1,108 -- -- --
Deferred interest ............................ 812 -- -- --
Compensation expense ......................... 404 -- -- --
Provisions for special items ................. 9,795 -- -- 4,263
Depreciation and amortization ................ 5,200 2,868 3,360 1,546
Gain on disposal of equipment ................ (260) 94 168 --
Share in (earnings) losses of affiliates ..... (375) 173 (539) 2,876
Income tax refund ................................. -- -- -- 2,208
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable .......................... 10,606 (10,464) 4,529 2,749
Costs and estimated earnings on long-term
contracts in excess of billings ....... (262) (1,011) 1,562 2,720
Prepaid expenses and other current assets .... (693) 410 (602) 724
Other assets ................................. 997 (357) (1,959) --
Accounts and subcontracts payable ............ (2,136) 6,848 1,130 1,386
Accrued expenses and other liabilities ....... 2,544 (2,374) (4,983) (859)
Billings on long-term contracts in excess of
costs and estimated earnings .......... (1,194) 615 (496) 178
Other long-term liabilities .................. (3,634) (3,005) (845) --
Other, net ....................................... 226 53 (218) 675
-------- -------- ------- -------
Net cash provided by (used in) operating activities $ 2,305 $ (5,804) $ 3,880 $ 8,467
======== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 27
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR SEVEN MONTHS
ENDED ENDED YEARS ENDED FEBRUARY 28,
SEPTEMBER 30, SEPTEMBER 30, ------------------------
1996 1995 1995 1994
-------- --------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
INVESTING ACTIVITIES:
Capital expenditures ............................. $ (1,402) $(2,172) $ (689) $(3,333)
Advances (to) from affiliates .................... -- 125 1,000 (1,496)
Proceeds from sale of subsidiary ................. -- -- -- 704
Proceeds from sale of fixed assets ............... 725 -- -- --
Purchase of BCM Engineers (net of cash acquired) . -- -- (4,783) --
Purchase of Riedel Environmental Services (net
of cash acquired) ............................ -- -- (18,336) --
Other ............................................ -- 388 (43) 22
-------- ------- -------- -------
Net cash used in investing activities ................ (677) (1,659) (22,851) (4,103)
-------- ------- -------- -------
FINANCING ACTIVITIES:
Proceeds from revolving line of credit used to
fund acquisitions ............................ -- -- 19,580 --
Retirement of acquired companies debt ............ -- -- (10,647) --
Proceeds from term loans used to fund acquisitions -- -- 4,500 --
Proceeds from Senior Note ........................ -- -- 2,000 --
Proceeds from Convertible Senior
Subordinated Note ........................... -- -- 10,000 --
Proceeds from new revolving credit facility ...... 20,649 -- -- --
Retirement of former revolving credit facility ... (21,537) -- -- --
(Repayments) borrowings on revolving
line of credit, net .......................... 747 7,219 (4,800) (3,200)
Proceeds from term loan .......................... 6,500 -- -- --
Retirement of term loan .......................... (3,400) -- -- --
Repayments on term loan .......................... (2,040) -- -- --
Payment of financing fees ........................ (1,096) -- -- --
Payment of early debt extinguishment penalty ..... (287) -- -- --
Repayment of other notes and capital leases ...... (986) (1,096) (1,967) --
Proceeds from exercise of stock options .......... 31 50 360 --
Repurchase of Redeemable Preferred Stock., net ... (84) (178) -- --
Dividends paid on Redeemable Preferred Stock ..... (186) (191) -- --
-------- ------- -------- -------
Net cash provided by (used in) by financing activities (1,689) 5,804 19,026 (3,200)
-------- ------- -------- -------
Net increase (decrease) in cash ...................... (61) (1,659) 55 1,164
Cash at beginning of period .......................... 686 2,345 2,290 1,126
-------- ------- -------- -------
Cash at end of period ................................ $ 625 $ 686 $ 2,345 $ 2,290
======== ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 28
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Smith Technology Corporation (formerly Smith Environmental
Technologies Corporation), a Delaware corporation (the Company), provides a
broad range of comprehensive environmental consulting, engineering, and on-site
construction and remediation services for clients, in the private and public
sectors in the areas of environmental contamination, water resources and
infrastructure. During the year ended February 28, 1995, the Company completed
three acquisitions which significantly increased its services, core competencies
and geographic coverage. See Note 2 for description of acquisitions. The
Company's operations are considered to be concentrated in one industry segment
in the United States.
The financial statements of the Company have been prepared on a
going-concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. Accordingly, the
financial statements do not include any adjustments relating to the
recoverability of recorded assets, or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
The Company incurred a net loss of $19.9 million for fiscal 1996 and
as a result its working capital decreased to $5.0 million and its common
stockholder's equity decreased to $211,000 at September 30, 1996. Further, the
Company was in default of its Loan Agreement as defined herein which has
required the Company to obtain forbearance agreements from its Senior Lenders
and an amended Loan Agreement (see Note 7).
During January 1997, the Company and its Senior Lenders agreed to an
amended Loan Agreement which waived violations of certain conditions and
financial covenants and established new financial covenants for the remainder of
the Loan Agreement (see Note 7). Also during January 1997, the Company agreed to
a resolution of an arbitration award, which while accounting for approximately
$9.7 million of the Company's fiscal 1996 loss, requires only $150,000 of
payments in fiscal 1997 (see Note 14).
The Company has developed plans to improve its operating results.
Commencing in fiscal year 1996 and continuing in fiscal year 1997, the Company
implemented measures to lower its operating cost structure and remain
competitive in the markets in which it competes. Such reductions were
principally in personnel and facilities expense, impacting the indirect cost of
revenues and selling and general and administrative expenses. Further, the
Company is continuing its focus on accelerated client billings and increased
collections of accounts receivable in order to improve its cash flow. Management
believes a significant portion of the fiscal 1996 loss can be attributed to
non-recurring events. The Company is also pursuing identified capital investment
and merger opportunities, as well as the divestiture of a portion of its
business. The Company has engaged the services of an environmental financial
consultant and investment banker to actively market certain portions of the
Company's engineering operations. Proceeds from such a capital investment or
divestiture would be utilized to reduce the Company's trade payables, subject to
approval of the Senior Lenders and long-term debt. Accordingly, management
believes operating results and cash flows will improve to a sufficient level in
fiscal year 1997 to allow the Company to meet its amended financial covenants in
the Loan Agreement, to meet its obligations to its various unsecured
28
<PAGE> 29
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
creditors and the holders of its Redeemable Preferred Stock and enable the
Company to continue as a going concern.
CHANGE IN YEAR END
Effective March 1, 1995, the Company changed its fiscal year end from
February 28 to September 30. The accompanying consolidated financial statements
include audited financial statements for the seven month transition period ended
September 30, 1995 (transition period; 1995T). Unaudited financial statements
are presented for the seven month period ended September 30, 1994 and the twelve
month period ended September 30, 1995 for comparative purposes only.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All material intercompany accounts and
transactions are eliminated. 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 Company also includes its proportionate share
of unincorporated joint ventures entered into on larger construction-type
remediation projects. Certain amounts in the prior years have been reclassified
to conform to the current year presentation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from those
estimates and such differences could be material to the consolidated financial
statements.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." (SFAS No. 21). SFAS No. 121 prescribes the
accounting for the impairment of long-lived assets such as property, plant and
equipment; identifiable intangibles including assets such as customer lists,
contract backlog and assembled workforce; and goodwill related to those assets.
The Statement is effective for fiscal years beginning after December 15, 1995.
Although the Company has not yet adopted SFAS 121, it believes that there would
be no material impact on its financial position and results of operations upon
application to its fiscal year ended September 30, 1997.
In October 1995, the FASB issued Statement No. 123 "Accounting for
Stock-Based Compensation" (SFAS No. 123) which will be effective for the
Company's 1997 fiscal year. SFAS No. 123 allows companies which have stock-based
compensation arrangements with employees to adopt a new fair-value basis of
accounting for stock options and other equity instruments, or to continue to
apply the existing accounting rules under APB Opinion 25 "Accounting for Stock
Issued to Employees" but with additional financial statement disclosure. The
Company expects to continue to account for stock-based
29
<PAGE> 30
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
compensation arrangements under APB Opinion 25 and therefore does not expect
SFAS No. 123 to have a material impact on its financial position, results of
operations and cash flows.
REVENUE AND COST RECOGNITION
Revenues from engineering and remediation service contracts are
generally recognized as the services are provided, principally under
cost-plus-fee and time and materials contracts. The Company recognizes revenues
on fixed price, long-term contracts on the percentage-of-completion method,
primarily based on contract costs incurred to date compared with total estimated
contract costs. Where appropriate, contracts are divided between engineering and
construction efforts and accordingly, gross margin related to each activity is
recognized as those separate services are rendered. Contract costs include all
direct material, labor, and subcontract costs and other direct costs related to
contract performance. Indirect costs, classified as cost of revenues, and
selling, general, and administrative costs are charged to expense as incurred.
Changes to total estimated contract costs and losses, if any, are recognized in
the period they are determined. Revenues recognized in excess of amounts billed
are classified under current assets as costs and estimated earnings on long-term
contracts in excess of billings. It is anticipated that the incurred costs
associated with contract work in progress at September 30, 1996 will be billed
and collected in fiscal 1997. Amounts received from clients in excess of
revenues recognized to date are classified under current liabilities as billings
on long-term contracts in excess of costs and estimated earnings. An amount
equal to contract costs attributable to claims, if any, is included in revenues
when realization is probable and the amount can be reasonably estimated.
PROPERTY, EQUIPMENT, AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is provided
primarily on the straight-line method except for process equipment which is
depreciated based on units of production and cost recovery methods. Depreciation
is based on the following estimated useful lives:
<TABLE>
<S> <C>
Building and improvements............................ 25-30 years
Office, process and field equipment.................. 3-12 years
</TABLE>
Leasehold improvements are amortized over the shorter of their respective useful
lives or lease terms.
30
<PAGE> 31
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
The Company utilizes the liability approach to financial accounting
and reporting for income taxes. This method requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
differences 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 reverse.
DIVIDENDS AND ACCRETION ON REDEEMABLE PREFERRED STOCK
The Company's Redeemable Preferred Stock was recorded at its
estimated fair value at the date of issuance. The original $932,000 excess
redemption value over the carrying value is being accreted using the interest
method so that the carrying value will equal the redemption value on the
scheduled redemption dates. Dividends and accretion on Redeemable Preferred
Stock for the year ended September 30, 1996, the seven months ended September
30, 1995 and for the year ended February 28, 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995T 1995
---- ---- ----
<S> <C> <C> <C>
Dividends $419 $222 $163
Accretion 168 112 55
---- ---- ----
$587 $334 $218
==== ==== ====
</TABLE>
The Redeemable Preferred Stock carries a stated dividend rate of 5%.
The Company did not make the schedule dividend payments on June 30, 1996 and
September 30, 1996. As a result, the dividend rate was increased to 7.5% for the
quarter ended September 30, 1996 and 10% for the quarters subsequent to
September 30, 1996. The penalty dividend rate of 10% will remain in effect until
such time that all accrued and unpaid dividends are paid in full. At September
30, 1996, there was $232,598 of dividends in arrears.
INCOME (LOSS) APPLICABLE TO COMMON STOCK
Income (loss) applicable to common stock represents the portion of
the Company's earnings (loss) applicable to its common stockholders. Such amount
is calculated by adjusting net income (loss) for the accretion and dividend
requirements on the Company's Redeemable Preferred Stock.
31
<PAGE> 32
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(LOSS) EARNINGS PER SHARE
(Loss) earnings per share are computed on the basis of the weighted
average number of common and common equivalent shares outstanding. The dilutive
effect of the Company's stock options was calculated using the treasury stock
method in 1995T and fiscal 1995. The effect of the Company's stock options was
excluded from the calculation of (loss) earnings per share in fiscal 1996 and
1994 due to their anti-dilutive impact. Other potentially dilutive securities at
September 30, 1996 consist of the Company's Convertible Senior Subordinated Note
and Senior Note (see Note 8). Conversion of the Convertible Senior Subordinated
Note and the Senior Note for all periods presented was not considered since
assumed conversion did not result in significant dilution or was anti-dilutive.
INTANGIBLE ASSETS AND GOODWILL
Intangible assets are amortized over an estimated useful life of
fifteen years. Goodwill is amortized over forty years. The Company continually
evaluates goodwill and intangible assets to ensure that the goodwill and
intangible assets are fully recoverable from projected undiscounted cash flows
of the acquired business operations. Impairments are recognized in operating
results in the period in which a permanent diminution in value occurs.
STATEMENT OF CASH FLOWS
Supplemental cash flow information is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED YEARS ENDED FEBRUARY 28,
SEPTEMBER 30, SEPTEMBER 30, ------------------------
1996 1995 1995 1994
------- ------- ----- -------
<S> <C> <C> <C> <C>
Interest paid ....... $(3,228) $(1,405) $(830) $ (532)
Interest received ... 86 115 40 100
Income taxes paid ... (24) (22) (391) --
Income tax refund ... -- -- 620 1,981
</TABLE>
NOTE 2 - ACQUISITIONS
On September 28, 1994, the Company purchased all of the outstanding
common stock of BCM Engineers Inc. (BCM), an environmental consulting and
engineering company, for cash of $5.0 million and 78,000 shares of Redeemable
Preferred Stock with an estimated fair value of $6.9 million on the date of
issuance and a redemption value of $7.8 million. The Redeemable Preferred Stock
has a 5 percent cumulative dividend requirement and is redeemable in equal
installments on the fifth, sixth and seventh anniversaries of its issuance (see
Note 12). The Company also repaid $9.5 million of BCM's indebtedness from the
proceeds under its LaSalle Loan Agreement.
On November 21, 1994, the Company purchased all of the capital stock
of Riedel Environmental Services, Inc. (RES), an Oregon corporation, from Riedel
Environmental Technologies, Inc. RES is an
32
<PAGE> 33
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
environmental remediation firm. The purchase price, paid in cash, was
approximately $18.2 million. The RES acquisition was funded by the Company's
issuance of a $10 million Convertible Senior Subordinated Note and a $2 million
Senior Note (see Note 8) and borrowings under the Company's revolving and term
credit facilities.
On December 30, 1994, the Company entered into an agreement with
RESNA Industries, Inc. (RESNA) to acquire substantially all of RESNA's assets in
exchange for the assumption by the Company of RESNA's debt to its principal bank
lender of $1.5 million, of which $1.1 million was paid at closing with proceeds
from the Company's revolving credit facility. The Company also assumed certain
other liabilities in connection with RESNA's operations. RESNA, based in
California, operated a full service environmental remediation business which
focuses primarily on the soil and groundwater contamination market and cleanups
related to underground storage tanks.
The transactions were accounted for as purchases; accordingly, the
purchase prices have been allocated to assets and liabilities based on estimated
fair values as of the acquisition dates and the results of operations of the
acquired companies have been included in the Company's statement of operations
since their respective acquisition dates. The cost in excess of estimated fair
value of the net tangible assets acquired upon finalization of the purchase
price, was $32.7 million. Of such amount $15.7 million was recorded as goodwill
and $17.0 million was allocated to intangible assets consisting of approximately
$9.2 million for assembled workforce and $7.8 million for customer lists and
contract backlog.
33
<PAGE> 34
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1996 1995
-------- --------
<S> <C> <C>
Commercial and non-US government customers:
Amounts billed .................................... $ 21,595 $ 25,791
Unbilled recoverable costs and estimated earnings.. 4,052 6,847
Retention ......................................... 1,605 2,829
27,252 35,467
United States Government and agencies:
Amounts billed .................................... 7,976 9,092
Unbilled recoverable costs and estimated earnings.. 6,015 9,353
Retention ......................................... 379 442
14,370 18,887
All customers ............................................. 41,622 54,354
Allowance for doubtful accounts ........................... (829) (1,502)
$ 40,793 $ 52,852
======== ========
</TABLE>
Unbilled recoverable costs and estimated earnings represent revenue
earned and recognized on contracts which are not yet billable according to
contract terms, which usually consider the passage of time, achievement of
certain milestones, or the completion of the project. Retention of approximately
$2.0 million is expected to be substantially collected during fiscal 1997.
Included within unbilled recoverable costs from the U.S. Government
is approximately $1.2 million of prior year cost adjustments to be recovered
from the EPA under the Company's ERCS contracts. The Company also has an
obligation to the EPA related to a $2.8 million settlement of a contract dispute
associated with the acquisition of RES in November 1994. The Company has not
made the required payments under this settlement on a timely basis, therefore
the $1.3 million due to EPA has been included in current liabilities.
Due to the nature of the services provided by the Company, it may
derive revenue from a single customer which exceeds 10 percent of its revenues
for the year. For the year ended September 30, 1996, and the seven month period
ended September 30, 1995, the Company derived revenues from the United States
Environmental Protection Agency (EPA) of approximately $43.5 million or 26.3
percent and $29.6 million or 28.1 percent, respectively of revenues for
Emergency Response Cleanup Services (ERCS). There were no significant commercial
customers with revenues in excess of 10 percent during the year ended September
30, 1996 or the seven month period ended September 30, 1995. For the year ended
February 28, 1995, the Company had two commercial customers with revenues of
$12.2 million and $12.1 million respectively. For the year ended February 28,
1994, the Company had two different commercial customers with revenues of $9.9
million and $6.6 million respectively.
34
<PAGE> 35
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - LONG-TERM CONTRACTS AND RECEIVABLES
Long-term contracts in process accounted for using the
percentage-of-completion method are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1996 1995
------- -------
<S> <C> <C>
Accumulated expenditures on uncompleted contracts.. $11,138 $82,778
Estimated earnings thereon ........................ 596 9,787
------- -------
11,734 92,565
Less applicable progress billings ................. 9,766 91,529
------- -------
Total ............................................. $ 1,968 $ 1,036
======= =======
</TABLE>
The long-term construction contracts are shown in the accompanying
balance sheets as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1996 1995
------- -------
<S> <C> <C>
Costs and estimated earnings on long-term
contracts in excess of billings ........... $ 2,025 $ 2,287
Billings on long term contracts in excess of
costs and estimated earnings .............. (57) (1,251)
------- -------
Total ........................................... $ 1,968 $ 1,036
======= =======
</TABLE>
35
<PAGE> 36
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - INVESTMENT IN UNCONSOLIDATED AFFILIATE
The Company owns a 50 percent interest in Soil Tech ATP Systems, Inc.
(STI). STI is a corporate joint venture that was formed to use its sublicense
rights and its related waste material processing equipment for remediation of
contaminated sites. STI has the sole U.S. license until 2012 of pyrolysis
technology, developed by a Canadian quasi-governmental agency. Under the equity
method of accounting, the investment has been adjusted to reflect the Company's
proportionate share of earnings and losses. The Company's management believes
its investment at September 30, 1996 will be realized through STI's future
undiscounted cash flows.
In addition, the Company owned a 20 percent interest in LaPosta
Recycling Center, Inc. (LRC). LRC was formed to develop a full service hazardous
waste treatment facility and recycling center. The Company wrote off its
investment in and advances to LRC in fiscal 1994 and has no further financial
commitment to LRC.
For the year ended September 30, 1996 and the seven months ended
September 30, 1995, STI was not a significant unconsolidated affiliate. A
summary of the unconsolidated affiliates' combined financial position and
results of operations for the years ended February 28, 1995 and 1994,
respectively, is as follows (in thousands):
<TABLE>
<CAPTION>
FOR YEAR ENDED FEBRUARY 28,
---------------------------
1995 1994
------ --------
<S> <C> <C>
Revenue ....................... $8,252 $ 5,166
------ --------
Net income (loss) ............. 561 (874)
------ --------
Current assets ................ 1,597 3,117
Non-current assets ............ 2,882 4,001
------ --------
Total Assets .................. 4,479 7,118
Currents liabilities .......... 922 2,722
Notes payable to stockholders.. 6,872 8,432
------ --------
Total Liabilities ............. $7,794 $ 11,154
====== ========
</TABLE>
36
<PAGE> 37
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company had no material operating transactions with STI during
the year end September 30, 1996 or in the seven months ended September 30, 1995.
The $375,000 in earnings in fiscal 1996 were the result of a claim settlement
won by the Company associated with a contract completed in a prior fiscal year.
The Company derived revenues from services performed for various affiliated
companies, primarily STI for the years ended February 28, 1995 and 1994. In
addition, the Company's cost of revenues include costs associated with services
provided by affiliated companies, primarily STI, as subcontractors on its
remediation contracts. These transactions with affiliates are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FEBRUARY 28,
-------------------------------
1995 1994
------ ------
<S> <C> <C>
Services provided to affiliates, included in revenues $ 604 $ 917
Subcontract costs, included in cost of revenues ..... $8,015 $4,614
</TABLE>
NOTE 6 - OTHER ASSETS
Other assets include the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1995
------ ------
<S> <C> <C>
Trade note receivable ................ $1,539 $1,539
Deferred financing fees .............. 722 1,173
Due from officer ..................... 105 95
Other ................................ 1,672 2,636
------ ------
$4,038 $5,443
====== ======
</TABLE>
The trade note receivable is secured by real estate located in Santa
Barbara County, California which contains a toxic waste site. The note bears
interest at 1 percent below the prime rate and is due May, 2002. Repayment terms
are accelerated upon a transfer or a modified utilization of the real estate, or
an abandonment of efforts to obtain waste permits.
Deferred financing fees are carried net of accumulated amortization.
On October 18, 1995, the Company entered into a new Loan Agreement (see Note 7)
and repaid its obligation under the prior loan agreement. Deferred financing
fees, in connection with the prior agreement, of $1.1 million, plus a prepayment
penalty of $287,500 was recorded as an extraordinary item in fiscal 1996.
Amortization expense was $396,000 for the year ended September 30, 1996,
$352,000 for the transition period ended September 30, 1995 and $200,000 for the
year ended February 28, 1995.
37
<PAGE> 38
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1996 1995
-------- --------
<S> <C> <C>
Bank borrowings:
Revolving credit loans ............................... $ 21,858 $ 21,999
Term loans ........................................... 4,536 3,476
Senior Note (Note 8) ......................................... -- 2,000
Capitalized lease obligations at interest rates of 6% to 12%.. 779 1,091
ESOP notes payable to individuals at interest rates of
7.5% to 11.75% ....................................... 453 604
Other ........................................................ 121 343
-------- --------
Total debt ........................................... 27,747 29,513
Less: current maturities ..................................... (2,866) (2,110)
Total long-term debt ......................................... $ 24,881 $ 27,403
======== ========
</TABLE>
On October 18, 1995, the Company entered into a $35 million credit
facility with The Chase Manhattan Bank (formerly Chemical Bank) and BTM Capital
Corporation (formerly BOT Financial Corporation) (the "Senior Lenders"). The
facility (the "Chase Facility" or the "Loan Agreement") replaced a facility with
another bank. The Chase Facility consists of a three year $28.5 million
revolving line of credit, including a $5 million unbilled account subline, and a
$6.5 million term loan. The Company may choose an interest rate equal to 2.0
percent over the Bank's ABR rate or 3.75 percent over the Bank's Eurodollar loan
rate on revolving credit borrowings and 2.25 percent over the ABR rate or 4.0
percent over the Eurodollar loan rate on the term loan. At September 30, 1996,
all borrowings under the Chase Facility were determined by adding the applicable
margin percent to the Bank's ABR rate, as defined. At September 30, 1996, the
Bank's ABR Rate was 8.25%. At September 30, 1996 there were no letters of credit
issued pursuant to the Chase Facility.
Borrowings pursuant to the Loan Agreement are secured by
substantially all of the assets of the Company and its subsidiaries. Under the
revolving credit line, the Company may borrow up to 80 percent of eligible
billed accounts receivable, and up to 50 percent of the eligible unbilled
accounts, as defined by the Loan Agreement. The unused credit facility at
September 30, 1996 was $360,000. The term loans are based on eligible property
and equipment at the time of the loans and are being amortized over 48 months
with final payment due on October 18, 1998.
The Chase Facility requires the Company to meet financial targets,
maintain certain key ratios and comply with numerous financial covenants and
reporting requirements. Additionally, the Loan Agreement places restrictions on
the repayment of debt (Note 8) and other conditions on the payment of dividends
on common and preferred stock.
During 1996, the Company violated certain covenants and terms of the
Loan Agreement and has operated under forbearance agreements through January 14,
1997.
38
<PAGE> 39
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On January 14, 1997, the Company and its Senior Lenders executed the
Fourth Amendment, Waiver and Consent (the "Fourth Amendment") subject to the
execution on January 30, 1997 of the settlement agreement with the PRP Group
(note 14). The Fourth Amendment waived and consented to certain conditions and
actions related to (1) the BCM Employee Stock Ownership Plan, and (2) financial
covenant violations for periods ended June 30, 1996 and September 30, 1996 under
the Loan Agreement. The Fourth Amendment also increased the interest rates to
2.5 percent over the Bank's ABR rate or 4.25 percent over the Bank's Eurodollar
loan rate on revolving credit borrowings and 2.75 percent over the ABR rate or
4.5 percent over the Eurodollar loan rate on the term loan. The Fourth Amendment
also modified certain fees and reduced the Revolving Line of Credit from $28.5
million to $27 million. The Term Loan Maturity date was modified to October 18,
1998, concurrent with the terms of the Revolving Line of Credit. The Fourth
Amendment also established new financial covenants for the remaining term of the
Loan through October 18, 1998.
Subsequent to the execution of the Fourth Amendment, the Company
determined that its eligible accounts receivable used to calculate its borrowing
base was overstated in calendar months December 1996 and January 1997. As a
result of this determination, the Company is in an over-advance position which
is a default under the terms of the Loan Agreement. The Senior Lenders have
advised the Company that the over-advance must be cured by April 15, 1997, which
cure may include the use of proceeds from a potential sale of a portion of the
Company's engineering operations, and that its Revolver will be reduced to a
maximum of approximately $24.3 million. The Company and its Senior Lenders are
discussing the language of an amendment to the Loan Agreement pending a
determination of the magnitude of the overstatement of the Company's eligible
accounts receivable and method of resolution on the effect on the Company's
borrowing base. In the interim, the Company has agreed to reduce its outstanding
unbilled account subline with repayments to its Senior Lenders of $25,000 per
week.
The fair value of the Company's long-term debt at September 30, 1996
approximates the carrying value.
Maturities of long-term debt outstanding at September 30, 1996 based
on the amended Loan Agreement are as follows (in thousands):
<TABLE>
<S> <C>
1997 .......................................... $ 2,866
1998 .......................................... 1,693
1999 .......................................... 23,162
2000 .......................................... 13
2001 .......................................... 13
Thereafter .................................... --
-------
$27,747
-------
</TABLE>
39
<PAGE> 40
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - CONVERTIBLE SUBORDINATED NOTE
On November 15, 1994, the Company executed an Amended and Restated
Note Purchase Agreement with 399 Venture Partners, Inc. (the "Investor"), an
affiliate of Citicorp Venture Capital, Ltd., in connection with the purchase of
RES, pursuant to which the Company issued, and the Investor purchased, $10
million aggregate principal amount of a Convertible Senior Subordinated Note
(the "Convertible Senior Subordinated Note") and $2 million aggregate principal
amount of a Senior Note (the "Senior Note", and collectively with the
Convertible Senior Subordinated Note, the "Subordinated Notes"). The Amended and
Restated Note Purchase Agreement provided allocation to various individual
distributees of promissory notes formerly held by 399 Venture Partners, Inc.
(the "Holders"). On October 21, 1995, the Senior Note, including accrued
interest, was not paid and therefore became due and convertible by the holder on
the same basis as the Convertible Senior Subordinated Note. The Subordinated
Notes mature on November 21, 2004 with interest payable semi-annually at 10
percent per annum. As of September 30, 1996, the Notes were convertible by the
holder at any time prior to maturity into approximately 421,095 shares of Junior
Convertible Preferred Stock, par value $.01 per share. The Junior Convertible
Preferred Stock is in turn convertible to Common Stock, par value $.01 per
share, of the Company. Subject to certain adjustments for future below market
stock issuances and similar events, the Subordinated Notes, if fully converted
for Common Stock, would be convertible into approximately 4.2 million shares of
Common Stock.
Additionally, the Holders previously agreed to defer the payment of
interest due May 21, 1995 and November 21, 1995, and by amendment have also
agreed to defer all interest due through May 21, 1998. The amended agreement
provides for the issuance of additional notes (maturing on November 21, 2004) in
lieu of all such deferred interest payments. The effect as of September 30, 1996
of this deferral was to reclassify approximately $1.8 million of accrued
interest expenses to long-term debt under the Subordinated Notes, which
reclassification is reflected in the Company's financial statements. All of the
interest converted to principal will be subject to conversion rights on the same
terms and conditions as the original principal amount of the Subordinated Notes.
The Holders are not entitled to voting rights as stockholders of the
Company. Upon conversion of the Subordinated Notes to Junior Convertible
Preferred Stock, the Holders are entitled to participate with Common Stock, on
an as-if converted basis, with respect to dividends, certain voting rights and,
upon liquidation, dissolution and winding up of the Company; provided, however,
that, except as required by law and as to matters which the Junior Convertible
Preferred Stock is entitled to vote separately as a class, the total voting
power of the Junior Convertible Preferred Stock will not represent more than
19.9 percent of the total voting power of the then outstanding Common Stock and
Junior Convertible Preferred Stock, taken together.
The Company has the right to prepay the Subordinated Notes, subject
to certain provisions in the Company's credit facilities discussed in Note 7.
However, if prepayment occurs prior to November 21, 1999, and prior to the later
of a two year period ending November 21, 1996 or the "Positive Development
Trading Date", which date occurs after the Common Stock of the Company has
traded above $7.00 per share for ninety consecutive days, the Holder is entitled
to a prepayment premium of up to 5% which reduces over time. Additionally, the
Holders retain an exercise right, in the event prepayment occurs prior to the
later of November 21, 1996 and the "Positive Development Trading Date", to
purchase shares of
40
<PAGE> 41
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Junior Convertible Preferred Stock, at the same terms as were
provided in the Subordinated Notes, within a one year exercise period. The
Company has filed a designation of a series of Junior Convertible Preferred
Stock of 470,000 shares and has reserved 4,700,000 shares of Common Stock in the
event of conversion of Junior Convertible Preferred Stock.
41
<PAGE> 42
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - LEASES
The Company leases office space and various equipment under
non-cancelable leases expiring through 2001. For the year ended September 30,
1996, the transition period ended September 30, 1995, and the years ended
February 28, 1995 and 1994 total lease expense charged to operations was
approximately $6.0 million, $4.1 million, $7.1 million and $3.6 million,
respectively and includes rentals under short-term cancelable leases.
As of September 30, 1996, future minimum rental payments required
under operating leases that have initial or remaining non-cancelable terms in
excess of one year are as follows (in thousands):
<TABLE>
<S> <C>
1997 $ 7,075
1998 5,747
1999 4,949
2000 3,278
2001 923
Thereafter ............. 1,996
-------
$23,968
=======
</TABLE>
42
<PAGE> 43
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - INCOME TAXES
Provision (benefit) for federal and state income taxes are comprised
of the following components (in thousands):
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED YEARS ENDED FEBRUARY 28,
SEPTEMBER 30, SEPTEMBER 30, ------------------------
1996 1995 1995 1994
----- ---- ---- ----
<S> <C> <C> <C> <C>
Current
Federal ......... $(519) $ -- $405 $ --
State .......... 100 87 153 135
----- ---- ---- ----
(419) 87 558 135
Deferred:
Federal ......... -- -- -- --
State .......... -- -- -- --
Total .............. $(419) $ 87 $558 $135
===== ==== ==== ====
</TABLE>
(Space intentionally left blank)
43
<PAGE> 44
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the Company's deferred tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1995
-------- -------
<S> <C> <C>
Deferred tax assets:
Bad debt allowance ................. $ 26 $ 277
Restructuring and related items .... 1,369 1,976
Capital loss carryforward .......... 1,331 1,331
Net operating loss carryforward .... 7,893 3,005
AMT and other credits .............. 999 999
Unconsolidated affiliates .......... 370 370
Accrued liabilities ................ 4,294 1,370
Other .............................. 1,007 1,087
Valuation allowance ................ (13,427) (5,434)
-------- -------
Total deferred tax assets ....... 3,862 4,981
-------- -------
Deferred tax liabilities:
Property and equipment ............. (1,336) (1,475)
Cash to accrual .................... (909) (1,819)
Other .............................. (43) (113)
Goodwill ........................... (1,574) (1,574)
-------- -------
Total deferred tax liabilities .. (3,862) (4,981)
-------- -------
Net deferred taxes .............. $ -- $ --
======== =======
</TABLE>
The Company had net operating loss and net capital loss carryforwards
for federal income tax purposes of approximately $19.7 million and $3.3 million,
respectively, at September 30, 1996. If unused, the net operating loss will
expire beginning in fiscal 2008. The capital loss carryforward, if unused, will
expire beginning in fiscal 1999. For financial reporting purposes, a valuation
allowance has been recorded to reduce the deferred tax asset related to these
carryforwards and other deferred tax assets, including approximately $1.3
million of deferred tax assets related to companies acquired during the year
ended February 28, 1995, net of deferred tax liabilities, to zero since the
realization of such amounts is not assured. Future tax benefits from the
carryforwards will reduce income tax expense when realized. Future tax benefits
associated with the unrecognized net deferred tax assets of the companies
acquired in fiscal 1995 will reduce goodwill when realized. Due to a greater
than 50 percent change in ownership of the Company within the past three fiscal
years, use of the preacquisition loss carryforwards to reduce future taxable
income will be limited to approximately $900,000 annually. Postacquisition
losses are not subject to any annual limitations.
44
<PAGE> 45
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of income tax expense (benefit) to amounts computed
using federal statutory rates are shown below (in thousands):
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED FEBRUARY 28,
------------------------
1996 1995 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Income tax expense (benefit) computed
at the federal statutory rate $(7,173) $ 35 $ 977 $(2,446)
Loss carryforward for which no benefit
was provided 6,994 -- -- 2,446
Utilization of previously unbenefited
losses -- (372) (826) --
Elimination of deferred taxes -- -- --
State taxes 100 87 100 135
Non-deductible goodwill amortization 97 142 69 --
Other (437) 195 238 --
------- ------- ------- -------
Income tax expense (benefit) $ (419) $ 87 $ 558 $ 135
======= ======= ======= =======
</TABLE>
NOTE 11 - EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan covering substantially
all employees. Under the plan, employees may make tax deferred voluntary
contributions which, at the discretion of the Company's Board of Directors, are
matched within certain limits by the Company. In addition, the Company may make
additional discretionary contributions to the plan as profit sharing
contributions. All contributions to the plan are limited by applicable Internal
Revenue Code regulations. For the year ended September 30, 1996, the seven
months ended September 30, 1995 and the year ended February 28, 1995, the
Company recorded matching contributions of $169,000, $147,000 and $161,000,
respectively. There were no Company contributions for year ended February 28,
1994. Of the amounts recorded during the year ended September 30, 1996 and the
seven month period ended September 30, 1995, $117,000 and $53,000 were made by
the contribution of Smith Technology Corporation common stock.
NOTE 12 - REDEEMABLE PREFERRED STOCK
In connection with the acquisition of BCM, the Company authorized and
issued 78,000 shares of Redeemable Preferred Stock (the "Redeemable Preferred
Stock"). Each share has a $100 redemption value, is senior to the Company's
common stock and has a liquidation preference of $100 per share plus accrued and
unpaid dividends. The Redeemable Preferred Stock was recorded at its initial
fair value of $6,868,000 on the date of issuance. The excess of the redemption
value over the carrying value is being accreted to redemption value by periodic
charges to retained earnings using the interest method and an effective annual
rate of return of 7.5 percent. The Redeemable Preferred Stock has a 5.0 percent
per annum cumulative dividend payable quarterly. If the Company fails for any
reason to make a scheduled quarterly dividend payment on the Redeemable
Preferred Stock, the rate of the dividends shall increase from 5 percent per
annum to 7.5 percent per annum per share, and if failure to pay a quarterly
dividend occurs a second consecutive time, the rate of dividends shall increase
to 10 percent per annum per share. When all accrued
45
<PAGE> 46
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
but unpaid dividends have been paid in full at the adjusted rate, the dividend
rate for future dividends will return to the initial rate of 5 percent per
annum. The Company did not make the required June 30, 1996 or September 30, 1996
dividend payment when due. As a result, the dividend rate for the quarter ended
September 30, 1996 was increased to 7.5% and for quarters subsequent to
September 30, 1996, the dividend rate will be 10% until all accrued but unpaid
dividends are paid in full. The Redeemable Preferred Stock shall not have any
right or power to vote on any question or in any proceeding or to be represented
at any meeting of the Company's stockholders. The Company at its option may
redeem shares of Redeemable Preferred Stock, in whole or in part, at any time.
The Company is required to redeem at a redemption price of $100 per share plus
accrued but unpaid dividends, and to the extent such redemption payments are
permitted in accordance with the covenant set forth therein, no later than each
of the fifth, sixth and seventh anniversaries of the date of issuance of the
shares of Redeemable Preferred Stock, and not less than one-third of the total
shares originally authorized and issued. In the event the Company fails to make
a scheduled redemption payment, the redemption date for all remaining shares of
Redeemable Preferred Stock is accelerated and the rate of dividends increases to
15 percent per annum.
The Redeemable Preferred Stock issued in connection with the
acquisition of BCM is principally held by the BCM Employee Stock Ownership and
Profit Sharing Plan (the ESOP) for the future benefit of vested participants.
Effective September 28, 1994, the ESOP was amended to fully vest all
participants who were employed by BCM on September 28, 1994 and to provide that
no further contributions are to be made to the ESOP. The Company has entered
into a Trust and Security Agreement which created a trust (the Trust) to provide
partial security for payment of certain current and future obligations of the
Company arising in connection with the acquisition of BCM, principally the
payment of dividends on and the redemption of the Redeemable Preferred Stock.
Participants become eligible for distribution of the Redeemable Preferred Stock
held for their account in the ESOP upon retirement, death, disability or in the
sixth year following termination of employment. The participants can put the
Redeemable Preferred Stock back to the Company at the $100 redemption value in
exchange for cash or cash and a subordinated promissory note. Payments to a
participant by the Company are limited to the greater of 20 percent of the
redemption value of the shares of Redeemable Preferred Stock or $10,000 per
year. Certain insurance policies on the lives of former and present employees of
BCM, with aggregate death benefits of approximately $41 million and an aggregate
cash surrender value (net of policy loans) of approximately $976,000, are held
by the Trust for the benefit of the beneficiaries. The Company is obligated to
contribute $100,000 each fiscal quarter to fund premium payments on the
insurance policies. The Company has not made contributions in the full amount
when due. However, sufficient contributions have been made to enable the trustee
to maintain all insurance policies in force through September 30, 1996. The
Trust will terminate after all secured indebtedness has been satisfied, and any
remaining assets will be returned to the Company.
The Stock Repurchase Agreement provides that certain shares of the
Company's Redeemable Preferred Stock, put back to the Company, be repurchased
within 30 days of receiving the stock. At September 30, 1996 there was 3,245
shares of Redeemable Preferred Stock with a value of $324,532, which were put
back to the Company that was not repurchased in accordance with the agreement
nor within the cure periods provided therein. Therefore, these amounts have been
included in current liabilities.
46
<PAGE> 47
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - STOCK OPTION PLANS
The Company has various plans which provide for the grant of
incentive awards to employees, advisors and non-employee directors. During
fiscal 1994, the 1986 Employee Stock Option Plan and the 1992 Non-employee
Directors Stock Option Plans were terminated except as to options then
outstanding. The terminated plans were replaced by the 1994 Stock Incentive Plan
and the 1994 Non-employee Directors Stock Option Plan (1994 Directors' Plan). A
maximum of 1,200,000 and 250,000 shares of the Company's common stock are
issuable in connection with awards granted under the 1994 Stock Option Incentive
Plan and 1994 Directors' Plan, respectively.
The 1994 Stock Incentive Plan provides for the granting of incentive
stock options and other stock-based awards to key employees and advisors. The
exercise price of options granted under the plan is 100 percent of the fair
market value of common stock on the date the option is granted. Options become
exercisable as determined at the date of grant by a committee of the Board of
Directors and expire ten years after the date of grant unless an earlier
expiration date is set at the time of grant. At September 30, 1996, there were
160,851 shares outstanding pursuant to other stock-based compensation awards
under the plan.
47
<PAGE> 48
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The 1994 Non-employee's Directors' Plan provides for the granting of
options to acquire the Company's common stock to non-employee directors. The
exercise price of options granted under the plan is 100 percent of the fair
market value of common stock on the date the option is granted. Options become
exercisable one to four years after the grant date and expire ten years after
the date of grant unless an earlier expiration date is set at the time of grant.
On September 19, 1996, the Company approved a plan whereby all option
Holders have the right to receive 1 option at the exercise price of $1.00 for
every 3 options held. The price of reissued stock options was determined by the
price of the Company's stock at the close of business on September 19, 1996.
Under the plan, 362,688 stock options were cancelled at option prices ranging
from $2.25 to $11.00 per share and 120,894 were reissued at $1.00 per share.
The following table summarizes activity under the Company's stock
plans:
<TABLE>
<CAPTION>
Option Price
Shares Per Share
------------------ ----------------------------
<S> <C> <C>
February 28, 1993.......................... 774,250 $3.40 -- $15.73
Granted 369,000 $2.88 -- $ 5.00
Lapsed or canceled.................. (343,000) $2.88 -- $15.73
------------------
February 28, 1994 800,250 $2.88 -- $15.73
Granted 491,456 $3.25 -- $ 7.00
Exercised........................... (106,689) $2.88 -- $ 5.00
Lapsed or canceled.................. (307,862) $2.88 -- $15.73
------------------
February 28, 1995 ......................... 877,155 $2.88 -- $15.73
Granted 327,400 $5.38 -- $ 6.50
Exercised........................... (92,799) $2.88 -- $ 4.38
Lapsed or canceled.................. (101,652) $2.88 -- $11.00
------------------
September 30, 1995 1,010,104 $2.88 -- $11.00
Granted 258,694 $1.00 -- $ 5.63
Exercised .......................... (7,625) $3.75 -- $ 4.88
Lapsed or canceled.................. (502,846) $2.25 -- $11.00
------------------
September 30, 1996 758,327 $1.00 -- $ 7.75
</TABLE>
At September 30, 1996, 619,322 shares of the Company's Common Stock
were reserved for future grant under the plans. At September 30, 1996, 1995, and
February 28, 1995 and 1994 options for 236,856, 191,247, 358,617 and 700,250
shares, respectively, were exercisable.
48
<PAGE> 49
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - COMMITMENT AND CONTINGENCIES
The Company (previously known as Canonie Environmental Services
Corp.) filed suit in the Circuit Court, Multnomah County, Oregon in February
1995 against NL Industries, Inc., Gould, Inc., Johnson Controls, Inc., Exide,
Inc., AT&T Technologies, Inc., Rhone-Poulenc AG Co., and Burlington Northern
Railroad Co. (the "PRPs" or "PRP Group") for breach of contract dated May 28,
1992 for the remediation of soil on property located near Portland, Oregon (the
"Contract").
In the suit, the Company sought recovery for amounts due as a result
of services performed under the Contract, including $1.5 million in accounts
receivable, $2.5 million of plant and equipment at the site, and other damages
resulting in a total claim of $8.5 million. Prior to the Company filing suit,
activity at the site had been suspended pending EPA approval of changes in the
remedial activities proposed by the PRPs and supported by independent
engineering reports which indicated significant differences in the waste
materials at the site from the materials specified in the EPA Record of Decision
and in the initial remedial investigation performed by others at the site. The
PRPs alleged the Contract required the dispute be arbitrated. The Company's
objections were overruled by the court and the court action was abated pending
arbitration before the American Arbitration Association. In the arbitration, the
PRPs sought reimbursement from the Company for amounts ranging from $3.4 million
to $18.0 million, under various damage theories relating to work performed by
the Company under the Contract alleging negligent performance and breach of
contract. The Company filed a counterclaim in the arbitration to recover the
damages claimed in the court action.
On June 27, 1996 a Construction Industry Arbitration Tribunal of the
American Arbitration Association issued, with one dissenting opinion, a binding
award in favor of the PRPs in the amount of $4.5 million against the Company.
The counterclaim of the Company was denied; however, the Company's plant and
equipment at the site was awarded to the Company. The Company filed exceptions
and a motion to vacate the award with the Oregon Circuit Court which were
denied.
On January 30, 1997, the Company and the PRP Group reached an
agreement for the resolution of the matter. The settlement agreement provides
for payment of the $4.5 million over a period of six years with interest at
twelve percent. The agreement provides semiannual payments which include
interest as follows: $150,000 in 1997; $300,000 in 1998; $584,000 in 1999;
$584,000 in 2000; $1,994,000 in 2001; and $3,786,000 thereafter. The agreement
also allows a discounted prepayment of $2.5 million on or before December 31,
1997 or $2.75 million on or before April 30, 1998 in complete satisfaction of
the obligation. The Company recorded a charge in fiscal 1996 of approximately
$9.7 million consisting of an obligation to the PRP Group of $4.5 million, the
write-off of $1.5 million of accounts receivable and $2.5 million of equipment,
and $1.2 million of related legal and consulting fees. The settlement agreement
provides that any proceeds from the sale of the equipment be applied to payment
of the settlement.
49
<PAGE> 50
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has filed notice of a claim with its professional
liability, general liability, and property insurance carriers. The underwriter
of the general liability and professional liability coverage has filed an action
in the Supreme Court of the State of New York, New York County, requesting
relief from the Company's claims of coverage. The Company's professional
liability coverage includes a $500,000 self-insured retention requirement which
has been met by the Company through the costs of investigation and defense
related to this matter. The likelihood of recovery is unknown at this time.
Transcontinental Realty Investors, Inc. filed an action against the
Company's subsidiary BCM Engineers Inc. (BCM) and various unrelated parties in
the Superior Court of New Jersey, Burlington County. The action sought to
recover alleged damages exceeding $8 million based on breach of contract and
negligence. An agreement has been reached by the plaintiff and the professional
liability carrier of BCM to resolve all claims. The insurance carrier will pay
the agreed settlement directly to the plaintiff. The Company's obligation is
limited to reimburse the insurance carrier for the balance of the unexpended
portion of a self-insured retention of approximately $215,000 in installments of
$50,000 payable quarterly beginning September 26, 1996, with final payment of
any remaining balance due on September 30, 1997.
U-Max was awarded a judgment in the United States District Court for
the Middle District of Pennsylvania of $2 million against Stroud Township. The
Township has been granted a judgment of $1 million against the Company's
subsidiary, BCM Engineers Inc. (BCM). Stroud Township has appealed the judgment
against the Township and the $1 million judgment awarded in favor of the
Township against BCM. BCM's insurance coverage will respond to losses exceeding
a $500,000 deductible of which approximately $220,000 has been expended. On
November 27, 1996, BCM filed a notice of appeal to the United States Third
Circuit Court of Appeals with a motion to stay execution and/or enforcement on
the Township's judgment and to waive the posting of a supersedeas bond pending
BCM's appeal. The Company's counsel believes there are grounds for reversal or
modification of the judgment on appeal, however, the likelihood of obtaining
relief from the District Court judgment is unknown. The difference between the
insurance deductible and the amount expended of $280,000 is included in other
liabilities at September 30, 1996.
A settlement agreement of the claim filed in the Court of Common
Pleas of Philadelphia County, Philadelphia has been reached with Mutual
Pharmaceutical Company, Inc. whereby BCM Engineers Inc. will be required to pay
the plaintiff for its out-of-pocket costs incurred to date for the site
investigation and carrying costs amounting to $207,000. This amount is to be
paid in 13 monthly installments beginning September 12, 1996 of $16,000 in lieu
of exposure to the remaining deductible and further litigation. The claim is
covered by BCM's professional liability coverage which carries a $500,000
deductible. The insurance carrier has approved the settlement agreement.
Additionally, the Company's subsidiary, BCM, will be responsible for performing
certain remediation services at the site to obtain a "No Further Action" letter
from the Pennsylvania Department of Environmental Protection. The estimated cost
of the services is $50,000. If BCM fails to pay the agreed amount or perform
under the agreement, the plaintiff reserves the right to recommence the
litigation and claim additional out-of-pocket costs. The agreement leaves open a
possible claim for diminution of property value up to $420,000 for up to 10
years and requires the Company and BCM to indemnify the plaintiff for any
third-party claims not to exceed $500,000 plus costs of defense until September,
2001. The Company is unaware of any third-party claims and has not been notified
of any claim of diminution of value of the site.
50
<PAGE> 51
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In November 1993, second amended complaints and initial complaints
were filed in the Circuit Court, County of Jackson, Mississippi, which include
RES along with a number of other defendants in claims pending in 27 separate
civil actions. These civil actions involved approximately 219 plaintiffs and
include two wrongful death claims. Plaintiffs allege that RES was negligent in
transferring and clean-up activities of the chemical diethylamine released from
an overturned tanker. Settlements of the claims of eighty-seven plaintiffs have
been completed without contribution by RES; those claims will be dismissed
leaving one hundred thirty-two plaintiffs with claims remaining against RES,
including the two wrongful death claims. The special damages of remaining
plaintiffs are approximately $800,000, not including unstated general damages.
RES will be entitled to a credit for payments made by settling defendants
allocated against any remaining plaintiffs. The Company's pollution liability
coverage, having an aggregate of $1 million, is paying the costs of
investigation and defense and will respond to losses up to the coverage balance
less those costs. The Company is vigorously defending the described litigation.
No provision for loss, if any, has been recorded at September 30, 1996.
In December 1995, BellSouth filed a complaint for unstated damages in
the Circuit Court, Jefferson County, Alabama against the Company, its subsidiary
BCM Engineers Inc. (BCM) and Canonie Technologies, Inc. The complaint, alleging
professional negligence, fraudulent and negligent misrepresentation,
non-disclosure, innocent misrepresentation and breach of contract, arises out of
BCM's alleged failure to provide oversight and certification of services
performed by BellSouth's asbestos abatement contractors. The plaintiff claims it
has expended an additional $1.6 million to perform asbestos removal which
allegedly was to have been performed by its prior contractor. The matter is
being investigated and discovery is being conducted. BCM believes its services
were performed in compliance with all legal requirements, that it has been
released from BellSouth claims, and that a substantial amount of the claims are
barred by statute of limitations. The Company is vigorously defending the
matter. No provision for loss, if any, has been recorded at September 30, 1996.
Stroudsburg Municipal Authority has filed a claim in the Monroe
County, Pennsylvania, Court of Common Pleas for damages exceeding $500,000 based
on allegations of breach of contract and negligent performance of design
services. The Company and its professional liability carrier are investigating
the claim.
The Company is currently a party to other litigation and claims
incidental to its business. The Company believes that these matters are
adequately accrued or covered by insurance, are without merit or the disposition
thereof is not anticipated to have a material effect on the Company's financial
position; however, one or more of these matters, individually or in the
aggregate could have a material adverse effect on future quarterly or annual
results of operations or cash flow when resolved.
51
<PAGE> 52
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - SPECIAL ITEMS
Special items were $11.8 million for the year ended September 30,
1996 and include a charge associated with the NL Industries arbitration
settlement of $9.7 million (Note 14), additional acquisition legal settlement
and associated defense costs of approximately $900,000 and costs of $1.2 million
associated with the further consolidation of facilities, including related
personnel severance and relocation costs. The Company recorded $10.6 million of
these special items including $8.9 million related to the arbitration settlement
in the fourth quarter of fiscal 1996. In September, 1995, the Company incurred
$393,000 in severance and relocation costs in connection with the Company's
continuing effort to reduce operating costs.
In the second and fourth quarters of fiscal 1994, the Company
recorded special items aggregating $9.3 million associated with management's
focus on resolving ongoing operational issues, such as project specific claims
issues, investments in non-core business activities, and new information
systems, staff reductions and office closings. Of the $9.3 million of aggregate
special items, $2.3 million was attributable to additional costs and changes in
profit estimates related to construction contracts and is included in cost of
revenues and $2.7 million related primarily to the write-off of the Company's
equity method investment in LRC, a joint venture formed to develop an
incinerator and is included in losses of unconsolidated affiliates. The
remaining $4.3 million in charges is included in special charges. Included in
the special items were $2.4 million of restructuring charges resulting from
office closures and severance costs aggregating $1.8 million and the write-off
of an investment in a non-core business no longer fitting the strategic
direction of the Company of approximately $600,000. The effect of the office
closures and restructuring charges was to eliminate the costs of operating
certain offices in fiscal 1995 and thereafter. These costs, primarily indirect
costs classified in cost of revenues, aggregated $2.3 million in fiscal 1994.
Since the offices were closed and staff reductions occurred in March and April
of 1994, the first two months of the fiscal year, savings were realized
immediately and for virtually all of fiscal 1995. Additionally in 1994, there
were other special charges which included an asset write-off resulting from the
implementation of a new information system of approximately $400,000, a
writedown of process equipment determined to have impaired value of
approximately $500,000, and an accrual of costs associated with litigation of
$1.0 million.
52
<PAGE> 53
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - UNAUDITED CONSOLIDATED STATEMENT OF OPERATION FOR THE TWELVE MONTHS
ENDED SEPTEMBER 30, 1995
The table below lists the consolidated statement of operations for the year
ended September 30, 1996, the unaudited twelve month period ended September 30,
1995 and the unaudited seven month period ended September 30, 1994.
<TABLE>
<CAPTION>
YEAR ENDED 12 MONTHS ENDED SEVEN MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
(UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- -----------
<S> <C> <C> <C>
Revenues ........................................... $ 164,382 $ 166,257 $ 43,771
Cost of revenues ................................... 152,735 145,723 38,006
----------- ----------- -----------
Gross profit ................................ 11,647 20,534 5,765
Selling, general, and administrative expenses ...... 14,218 13,327 4,192
Amortization of intangibles, goodwill and
deferred financing fees ...................... 1,957 1,535 --
Special items ...................................... 11,811 393 --
----------- ----------- -----------
(Loss) income from operations ...................... (16,339) 5,279 1,573
Interest expense ................................... 4,417 3,413 41
----------- ----------- -----------
Income before share in earnings of unconsolidated
affiliate and income tax .................. (20,756) 1,866 1,532
Share in earnings of unconsolidated affiliates ..... 375 103 263
----------- ----------- -----------
(Loss) income before taxes and extraordinary item .. (20,381) 1,969 1,795
Income tax (benefit) expense ........................ (419) 310 335
----------- ----------- -----------
(Loss) income before extraordinary item ............. (19,962) 1,659 1,460
Extraordinary charge on debt refinancing ............ (1,395) -- --
----------- ----------- -----------
Net (loss) income ................................... (21,357) 1,659 1,460
Dividends and accretion on redeemable
Preferred Stock............................. 587 552 --
----------- ----------- -----------
Net (loss) income applicable to Common Stock ........ $ (21,944) $ 1,107 $ 1,460
----------- ----------- -----------
Weighted average number of common and common
equivalent shares outstanding ............... 5,978,084 5,897,881 5,782,100
(Loss) earnings per common and common
equivalent share before extraordinary item ...... $ (3.44) $ .19 $ .25
----------- ----------- -----------
(Loss) earnings per common and common equivalent
share ........................................ $ (3.67) $ .19 $ .25
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
53
<PAGE> 54
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET (WRITE-OFFS)
BALANCE AT CHARGED RECOVERIES BALANCE AT
BEGINNING OTHER TO CHARGED END OF
OF PERIOD RESERVES EXPENSE AGAINST RESERVE PERIOD
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year-Ended September 30, 1996 ............ $1,502 $ -- $ 118 $ (791) $ 829
Seven Months Ended September 30, 1995..... 1,312 442(b) 124 (376) 1,502
Year Ended February 28, 1995 ............. 485 1,188(a) 165 (526) 1,312
Year Ended February 28, 1994 ............. 1,300 -- (122) (693) 485
</TABLE>
- -----------
(a) Additional reserves recognized with the acquisitions of BCM Engineers $(777)
and Riedel Environmental Services $(411)
(b) Additional reserves recognized as a result of the finalization of the
purchase price allocation.
54
<PAGE> 55
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.36 Fifth Amendment, Waiver and Consent dated as
of April 21, 1997 by and among the
Registrant, BCM Engineers Inc. (a
Pennsylvania corporation), BCM Engineers
Inc. (an Alabama corporation) Riedel
Environmental Services, Inc. and The Chase
Manhattan Bank (formerly known as Chemical
Bank), as agent for the lenders.
11 Statement regarding computation of earnings
per share.
27 Requirements for the format and input of
financial data schedules (EDGAR version
only).
(b) Reports on Form 8-K
Form 8-K dated October 30, 1996 was filed on January 9,
1997 in connection with (i) the Execution of the Fifth
Amendment to the Forbearance Agreement dated June 7, 1996
by and among the Registrant, BCM Engineers Inc., a
Pennsylvania corporation, BCM Engineers Inc., an Alabama
corporation, Riedel Environmental Services, Inc., and
Chemical Bank, as Agent for the Lenders, (ii) the
execution of the Sixth Amendment to the Forbearance
Agreement dated June 7, 1996 by and among the Registrant,
BCM Engineers Inc., a Pennsylvania corporation, BCM
Engineers Inc., an Alabama corporation, Riedel
Environmental Services, Inc., and Chemical Bank, as
Agent for the Lenders.
Form 8-K dated December 30, 1996 was filed on January 21,
1997 in connection with (i) the execution of the Fourth
Amendment and Waiver to the Loan and Security Agreement
dated as of January 14, 1997 by and among the Registrant,
BCM Engineers Inc., a Pennsylvania corporation, BCM
Engineers Inc., an Alabama corporation, Riedel
Environmental Services, Inc., and Chemical Bank, as Agent
for the Lenders, (ii) the Third Amended and Restated Note
Purchase Agreement effective January 13, 1997 between the
Registrant and 399 Venture Partners, Inc., (iii) the
Seventh Amendment to the Forbearance Agreement made as of
December 30, 1996 by and among the Registrant, BCM
Engineers Inc., a Pennsylvania corporation, BCM Engineers
Inc., an Alabama corporation, Riedel Environmental
Services, Inc., and Chase Manhattan Bank, as Agent for the
Lenders, and (iv) an announcement of the Company's delay
in filing its Form 10-K which filing was due on December
29, 1996 and extended to January 14, 1997. The Company has
not filed its Form 10-K for the twelve month period ended
September 30, 1996.
Form 8-K dated February 28, 1997, was filed on March 10,
1997, in connection with the execution of a letter of
intent for the sale of accounts receivable and other
assets related to the Company's operations conducted in
Mobile, Alabama; Panama City, Florida; and Dallas, Texas.
55
<PAGE> 56
SIGNATURES
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 Technology Corporation
(Registrant)
By: /s/ William T. Campbell
------------------------------------
William T. Campbell
Senior Vice President - Finance
Date: May 15, 1997
56
<PAGE> 1
EXHIBIT 10.36
EXECUTION COPY
FIFTH AMENDMENT, WAIVER AND CONSENT dated as of April 21, 1997
(the "Agreement") among SMITH TECHNOLOGY CORPORATION (formerly known as Smith
Environmental Technologies Corporation), BCM ENGINEERS INC., a Pennsylvania
corporation, BCM ENGINEERS INC., an Alabama corporation, RIEDEL ENVIRONMENTAL
SERVICES INC., each of the Lenders which are parties to the Loan Agreement, as
hereinafter defined, and THE CHASE MANHATTAN BANK (formerly known as Chemical
Bank), as Agent for the Lenders. This Agreement is entered into in connection
with a certain Loan and Security Agreement dated as of October 18, 1995 (as
amended through the date hereof, the "Loan Agreement") among the parties to this
Agreement. Terms which are capitalized herein and not otherwise defined shall
have the meanings ascribed to them in the Loan Agreement.
WHEREAS, the Lenders, the Agent and the Borrowers entered into
the Fourth Amendment, Waiver and Consent to the Loan Agreement, dated as of
January 14, 1997 (the "Fourth Amendment"), the effectiveness of which was
subject to the fulfillment of various conditions precedent, the failure of which
to occur as of the date of execution of the Fourth Amendment, and which failure
continues as of the date hereof, has rendered the Fourth Amendment ineffective;
and
WHEREAS, because the various waivers granted by the Lenders
pursuant to Sections 1, 2 and 3 of the Fourth Amendment are not effective, the
payment default and financial covenant violations described in Section 3 of the
Fourth Amendment, the other defaults described in the Fourth Amendment, as well
as certain Specified Defaults (as hereinafter defined) continue to be Events of
Default as of the date hereof; and
WHEREAS, the Borrower has requested the Agent and the Lenders
to consider granting a waiver of the Specified Defaults and (ii) amending the
Loan Agreement in various respects, and the Agent and the Lenders have so
agreed, upon the terms and subject to the conditions contained in this
Agreement;
NOW, THEREFORE, in consideration of the foregoing, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:
SECTION 1. AFFIRMATION OF INDEBTEDNESS AND OTHER LIABILITIES.
(a) Each of the Borrowers acknowledges, agrees and certifies
to the Agent and the Lenders that as of the close of business on April 21, 1997,
the aggregate outstanding and unpaid principal amount of (i) the Revolving Loans
equals $25,288,033.23, of which $6,706,700.00 equals the Overadvance, which
shall mean the amount by which the Consolidated Borrowing Base is exceeded by
the aggregate outstanding principal balance of the Revolving
<PAGE> 2
Loans, as of any date of determination and (ii) the Term Loans equals
$3,588,471.06. Each of the Borrowers (i) represents and warrants to the Lenders
that with respect to the Liabilities there is no offset, defense, claim or
counterclaim of any nature whatsoever (whether known or unknown) as of the date
hereof, including without limitation any offset, defense, claim or counterclaim
arising under the U.S. Bankruptcy Code (the "Code") and (ii) waives any such
offset, defense, claim or counterclaim to the extent the same may exist as of
the date hereof, whether known or unknown;
(b) Each of the Borrowers acknowledges and agrees that the
prompt payment and performance when due of all Liabilities is guaranteed by each
Borrower pursuant to an instrument of Continuing Unconditional Guaranty dated as
of October 18, 1995 (each such instrument a "Guaranty") executed in favor of the
Agent and the Lenders by such Borrower (in such capacity, a "Guarantor") and
each Borrower acknowledges and agrees that the Guaranty executed by it continues
to be valid, binding and enforceable against it; and
(c) Each of the Borrowers acknowledges and agrees that the
lien and security interest held by the Agent for the ratable benefit of the
Lenders in and to the Collateral continues to be a perfected lien against the
Collateral, subject to no other liens or encumbrances thereon except for
Permitted Liens.
SECTION 2. WAIVER AND MODIFICATION OF PRIOR CONSENTS. Subject to the terms and
conditions hereof, the Lenders hereby waive the Specified Defaults, as
hereinafter defined, as Events of Default; provided, however, that the Lenders'
waiver of the Specified Defaults, as Events of Default, shall not constitute,
and shall not be deemed to constitute, a waiver of any other existing Event of
Default, whether or not known to the Lenders, or any future Event of Default
whatsoever. As used herein, the term "Specified Defaults" shall mean (i) the
previous collateral reporting irregularities relating to certain Accounts (the
"Referenced Accounts"), (ii) the failure of the Borrowers to repay the
Overadvance in full; (iii) the violation of certain representations and
warranties relating to Referenced Accounts; (iv) the failure to comply with
financial covenants in prior reporting periods, through the reporting period
ending February 28, 1997, (v) the entry of a judgment in the District Court of
Dallas County, Texas, 101st Judicial District in the amount of $465,842.06 in
favor of Winstead, Sechrest & Minick, P.C., against Smith Technology (the
"Winstead Judgment"), provided that (A) the disposition, payment or satisfaction
of the Winstead Judgment occurs on or before September 30, 1997 in a manner
satisfactory to the Agent, (B) the entry of the Winstead Judgment does not
create a lien on any property of any Borrower or Account Owner and (C) the
holder of the Winstead Judgment does not take any action or commence any
proceeding, the effect of which is to create or impose such lien, or take any
action or commence any proceeding, to enforce or execute on the Winstead
Judgment or levy or foreclose upon any such lien, (vi) the entry of a judgment
in the Montgomery County (Pennsylvania) Court of Common Pleas - Civil Division
in the amount of $1,094,038.72 in favor of Gravers Company, against BCM (the
"Gravers Judgment"), provided that (A) the disposition, payment or satisfaction
of the Gravers Judgment occurs on or before September 30, 1997 in a manner
satisfactory to the Agent, (B) the entry of the Gravers Judgment does not create
a lien on any property of any Borrower or Account Owner and (C) the holder of
the Gravers Judgment does not take any action or commence any proceeding, the
effect of which is to create or impose such lien, or take any action or commence
any proceeding, to enforce or execute on the Gravers Judgment or levy or
foreclose upon any such lien, and (vii)
2
<PAGE> 3
any other Default specified in Sections 1, 2 and 3 of the Fourth Amendment,
provided, however, that the conditions to the effectiveness of the waiver of
such other Defaults set forth in the following subparagraphs of Section 3 of the
Fourth Amendment shall be fully incorporated herein by reference thereto as if
fully repeated and restated herein: Section 3(f), (g), (h), (i) and (j). In
addition, the Lenders hereby revoke the consent given by them pursuant to
Section 1 and Section 2 of the Fourth Amendment to the payment in cash, at any
time after the date of this Agreement, of any ESOP Dividends, or to the
redemption for cash, at any time after the date of this Agreement, of any shares
of ESOP Stock, unless any such payment or redemption is made strictly in
accordance with the terms of Paragraph 14(l)(I) of the Loan Agreement.
SECTION 3. RESTRUCTURING OF REVOLVING LINE OF CREDIT. The Lenders and the
Borrowers hereby agree to restructure the Revolving Line of Credit, effective as
of April 21, 1997, by (a) eliminating the Unbilled Account Subline and
eliminating from the Consolidated Borrowing Base all Eligible Unbilled Accounts,
(b) adding a new dollar component to the Consolidated Borrowing Base in an
aggregate amount equal to the sum of (i) $8,000,000, at all times prior to
August 1, 1997, (ii) $6,000,000 (or $5,500,000, in the event a prepayment of the
Term Loans made in accordance with the terms of Paragraph 3(d) of the Loan
Agreement shall not have occurred by August 1, 1997) at all times on and after
August 1, 1997 and prior to October 2, 1997 and (iii) $-0-, at all times on and
after October 2, 1997, (c) converting into a separate term loan that portion of
the outstanding Revolving Loans which, as of April 21, 1997, represents advances
made by the Lenders against Eligible Unbilled Accounts (as so converted, the
"Unbilled Term Loan") and (d) permanently reducing the Revolving Line of Credit
from $27,000,000 to $24,500,000 until October 2, 1997, at which time the
Revolving Line of Credit shall automatically and permanently reduce to
$23,500,000.
SECTION 4. UNBILLED TERM LOAN. The aggregate amount of the original principal
indebtedness outstanding under the Unbilled Term Loan shall be evidenced by the
Borrowers' joint and several promissory notes payable to each Lender, each in
the form of Exhibit F to this Agreement (each an "Unbilled Term Note"). The
Borrowers jointly and severally warrant and represent to the Agent and the
Lenders that as of April 21, 1997, the outstanding and unpaid principal balance
of the Unbilled Term Loan equals $4,435,863.00, and the Borrowers hereby
acknowledge that they are, and hereby confirm their agreement to be, jointly and
severally liable for the payment and satisfaction in full in cash of the
principal amount of the Unbilled Term Loan, and all accrued and unpaid interest
thereon and further confirm that all Liabilities arising from or relating to the
Unbilled Term Loan, and the payment and performance of each of the Unbilled Term
Notes, are secured by the Collateral. The unpaid principal balance of the
Unbilled Term Loan shall be paid in successive weekly installments of $25,000
per week, the first of which installments shall be due and payable on April 25,
1997, and the remaining installments of which shall be due and payable on the
last Business Day of each week thereafter, until paid and satisfied in full,
provided, however, that the unpaid principal balance of the Unbilled Term Loan,
and all accrued and unpaid interest thereon, shall be due and payable in full on
the applicable Maturity Date. If, as of any date of determination on or after
April 21, 1997, the then outstanding principal balance of the Unbilled Term Loan
exceeds an amount equal to fifty per cent (50%) of the Eligible Unbilled
Accounts of the Borrowers as of such date, then the Borrowers shall immediately
make a mandatory prepayment of the unpaid principal balance of the Unbilled Term
Loan, in an amount equal to the amount of such excess, to be applied in the
inverse order of payment of the scheduled installments of principal thereof.
Interest accrued
3
<PAGE> 4
on the Unbilled Term Loan shall be payable monthly in arrears, on the first day
of each month, and shall accrue on the unpaid principal balance thereof at the
per annum rate of the ABR plus the Applicable Margin. The Agent is hereby
authorized to debit any Borrower's loan account with the amount of each
installment of interest on and principal of the Unbilled Term Loan, as and when
such installments become due and payable.
SECTION 5. APPLICATION OF PROCEEDS OF COLLATERAL. The Borrowers jointly and
severally agree that, notwithstanding any understanding or provision in the Loan
Agreement or any Other Agreement to the contrary, unless otherwise directed by
the Agent in writing, as the Agent and the Lenders may direct in their sole and
absolute discretion, all cash Proceeds arising from the sale, transfer or other
disposition of each of the kinds or types of property which constitutes
Collateral shall be immediately delivered to, and applied by, the Agent, as a
mandatory prepayment of the Liabilities, in such order as the Agent and the
Lenders may determine, in their sole and absolute discretion.
SECTION 6. AMENDMENTS TO LOAN AGREEMENT. Upon the fulfillment of the conditions
set forth in Section 7 hereof, the Loan Agreement is hereby amended as follows:
(a) Paragraph 1. Definitions. The definitions of the terms (i)
BCM Borrowing Base, BCM Subline, Borrowing Base, Riedel Borrowing Base, Riedel
Subline, Smith Environmental Borrowing Base, Smith Environmental Subline,
Subline, Term Loan Maturity Date and Unbilled Account Subline are deleted in
their entireties and (ii) Excess Availability, Net Income, Note, Revolving Line
of Credit, Term Loan Commitment and Total Credit Facility are deleted in their
entirety and the following definitions are substituted in lieu thereof. In
addition, the terms "Administrative Borrower", "ESOP Dividend", "ESOP Stock",
"Fifth Amendment", "Gould Arbitration Award", "Gould Settlement Agreement",
"Gravers Settlement Agreement", "Intangible Assets, "Joint Venture Arrangement",
"Maturity Date", "Mutual Pharmaceutical Settlement Agreement", "Net Worth",
"Note", "PRP Group", "Repayment Conditions", "Stock Repurchase Agreement",
"U-Max Litigation", and "Winstead Settlement Agreement", and the definitions
thereof, are added to Paragraph 1 in the appropriate alphabetical order:
"Administrative Borrower" shall mean Smith Technology, or such
other Borrower as the Board of Directors of Smith Technology
may designate in advance, in writing, to the Agent, to perform
the functions of the Administrative Borrower to be performed
by it pursuant to Paragraphs 4 and 6 hereof.
"ESOP Dividend" means dividends payable in cash to the ESOP,
as holder of the ESOP Stock, or to any other holders of the
ESOP Stock.
"ESOP Stock" means the outstanding shares of non-voting
preferred stock of Smith Technology.
"Excess Availability" means as of any date of determination by
the Agent, the excess, if any, of (i) an amount equal to the
excess, if any, of the Consolidated Borrowing Base over the
then applicable sum set forth in
4
<PAGE> 5
clause (y) of Paragraph 2 (b)(1), over (ii) the outstanding
Revolving Loans and Letter of Credit Obligations. For purposes
of calculating Excess Availability, the Agent may, in the
exercise of its commercially reasonable credit judgment,
establish a reserve in an aggregate amount based on the
Borrowers' outstanding trade payables which are not current or
which are past due in any material respect, as of such date of
determination, to the extent thereof.
"Fifth Amendment" shall mean the Fifth Amendment, Waiver and
Consent, dated as of April 21, 1997, among the Lenders, the
Agent and the Borrowers.
"Gould Arbitration Award" shall mean the arbitration award in
the amount of $4,500,000 made on or about June 27, 1996
against Smith Technology in favor of the PRP Group.
"Gould Settlement Agreement" shall mean the Settlement
Agreement dated as of January 4, 1997 between Smith Technology
and the PRP Group.
"Gravers Settlement Agreement" shall mean the settlement
agreement which may be entered after the date of the Fifth
Amendment between BCM and Gravers Company.
"Intangible Assets" shall mean, with respect to any Person as
of any date of determination, the book value of all assets of
such Person classified as intangible under GAAP, including
without limitation, good will, deferred taxes, trademarks,
trade names, patents, copyrights, and licenses.
"Joint Venture Arrangement" shall mean any joint venture
agreement or arrangement, whether or not in writing, between
or among Smith Technology and/or any other Borrower, on the
one hand, and one or more unrelated Persons, on the other
hand, the primary purpose of which relates to the provision of
environmental remediation or consultation, or other
technological services.
"Maturity Date" shall mean (i) October 2, 1997, in the event
that the Repayment Conditions shall not have occurred on or
before such date or (ii) October 18, 1998, in the event that
the Repayment Conditions shall have occurred on or before
October 2, 1997.
"Mutual Pharmaceutical Settlement Agreement" shall mean the
settlement agreement dated September 12, 1996, as amended,
among Mutual Pharmaceutical Company, Inc., Smith Technology
and BCM.
"Net Income" (or Net Loss) shall mean, with respect to any
Person and its subsidiaries, on a consolidated basis, for any
period, the aggregate income (or loss) of such Person for such
period which shall be an amount
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<PAGE> 6
equal to revenues and other proper items of income for such
Person, less the aggregate for such Person of any and all
items that are treated as expenses under GAAP, less Federal,
state and local income taxes, but excluding any extraordinary
gains or losses or any gains or losses from the sale or
disposition of assets other than in the ordinary course of
business, and less dividends charged to income during such
period, all computed and calculated in accordance with GAAP
applied on a consistent basis.
"Net Worth" shall mean, with respect to any Person as of any
date of determination, an amount equal to the sum of (i) the
amount appearing on the balance sheet, as of the most recently
ended financial period, of such Person, under the caption
"common stockholders' equity" or under a similarly worded
caption plus (ii) the outstanding principal balance as of such
date of all debt securities which are Junior Securities and
the value as of such date of all equity securities which are
Junior Securities, such value to be based on the amount
carried on the books of the issuer of such equity securities
and reflected on its balance sheet as of the most recently
ended financial period.
"Note" shall mean a Revolving Note, a Term Note or an Unbilled
Term Note.
"PRP Group" shall mean each of the parties to the Gould
Settlement Agreement other than Smith Technology or any other
Borrower.
"Repayment Conditions" shall mean the permanent repayment (i)
in full of all Revolving Loans made against the component of
the Consolidated Borrowing Base described in Paragraph
2(b)(1)(y) and (ii) of all Revolving Loans to an aggregate
outstanding principal amount not to exceed $23,500,000.
"Revolving Line of Credit" shall mean the sum of (i)
$24,500,000, during the period from the date of the Fifth
Amendment through and including October 1, 1997 and (ii)
$23,500,000 at all times on and after October 2, 1997.
"Stock Repurchase Agreement" means the agreement dated
September 28, 1994, between Canonie Environmental Services
Corp. and the trustees of the ESOP, relating to the repurchase
of certain of the shares of ESOP Stock.
"Term Loan Commitment" of a Lender shall mean its commitment
to fund its proportionate share of the Term Loans and its
Proportionate Share of the Unbilled Term Loan (as defined in
the Fifth Amendment), up to the amount set forth opposite its
name on Annex I.
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<PAGE> 7
"Total Credit Facility" shall mean the sum of $32,524,334.06,
as such amount may be decreased in accordance with the terms
of this Agreement.
"U-Max Litigation" shall mean Civil Action No. 3:93-CV-14
brought in the U.S. District Court for the Middle District of
Pennsylvania, captioned U-Max Engineering and Construction
Corp. v. Stroud Township Board of Supervisors v. BCM
Engineers, Inc. and Woodward -- Clyde Consulting.
"Winstead Settlement Agreement" shall mean the settlement
agreement which may be entered after the date of the Fifth
Amendment, between Smith Technology and Winstead, Sechrest &
Minick, P.C.
(b) Paragraph 2. Revolving Loans. Paragraphs 2(a), (b) and (d)
are deleted in their entirety and the following is substituted in lieu thereof:
"2. REVOLVING LOANS.
(a) Subject to the terms and conditions of
this Agreement and the Other Agreements, during the Revolving
Credit Term, absent the existence of an Event of Default, the
Lenders shall make such revolving loans and advances (the
"Revolving Loans") to each Borrower as the Administrative
Borrower shall from time to time request, in accordance with
the terms of paragraph 2(b) hereof, within the Revolving Line
of Credit. The aggregate unpaid principal amount of all
Revolving Loans outstanding as of any date of determination
shall not exceed the lesser of (A) the Consolidated Borrowing
Base and (B) the Revolving Line of Credit minus the
outstanding Letter of Credit Obligations, in each case as of
such date of determination. All Revolving Loans shall be
repaid in full upon the earliest to occur of (i) the
applicable Maturity Date; (ii) the date upon which the
Borrowers shall elect to terminate this Agreement pursuant to
paragraph 12 hereof; and (iii) the date upon which the
Liabilities shall have been accelerated pursuant to paragraph
17 hereof. If as of any date of determination the outstanding
principal balance of the Revolving Loans exceeds (A) the
Revolving Line of Credit then in effect less the outstanding
Letter of Credit Obligations, or (B) the Consolidated
Borrowing Base as of such date of determination, then the
Borrowers shall immediately, and without the necessity of a
demand by the Agent or the Lenders, pay to the Agent such
amounts as may be necessary to eliminate such excess and the
Agent shall apply such payment against the outstanding
principal balance of the Revolving Loans. Each Borrower hereby
authorizes the Agent, in its reasonable credit judgment, to
charge any of such Borrower's accounts to make any payments of
principal or interest required by this Agreement. All
Revolving Loans shall, in the Agent's sole discretion, be
evidenced by one or more promissory notes in form and
substance satisfactory to the Agent. However, if such
Revolving Loans are not so evidenced, such Revolving Loans may
be evidenced solely by entries upon the books and records
maintained by the Agent.
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<PAGE> 8
The Borrowers shall be jointly and severally liable for the
payment of interest on and principal of all Revolving Loans.
(b) The Lenders shall make Revolving Loans
to the Borrowers up to the lesser of the amounts calculated
pursuant to clauses (1) and (2) below, the amount calculated
pursuant to clause (1) below being the "Consolidated Borrowing
Base":
(1) an amount equal to the sum of
(x) up to eighty percent (80%) of the face amount (less
maximum discounts, credits and allowances which may be taken
by or granted to Account Debtors in connection therewith) of
the Eligible Accounts of each of the Account Owners, less such
reserves as the Agent elects to establish from time to time in
the exercise of its commercially reasonable credit judgment
plus (y) (i) at all times on and after the date of the Fifth
Amendment and prior to August 1, 1997, the sum of $8,000,000,
(ii) at all times on and after August 1, 1997 and prior to
October 2, 1997, the sum of $6,000,000, unless at least
$500,000 in principal amount of the Term Loans shall not have
been prepaid, in accordance with Paragraph 3(d) hereof, in
which case the amount in effect under this clause (ii) shall
equal $5,500,000 and (iii) at all times on and after October
2, 1997, the sum of $-0-, minus (z) the outstanding amount of
all Letter of Credit Obligations and
(2) the Revolving Line of Credit,
minus the outstanding amount of all Letter of Credit
Obligations.
(d) Borrowing of Revolving Loans;
Disbursement of Proceeds. The Lenders and the Borrower
anticipate that the Administrative Borrower may request the
Lenders to make Revolving Loans on a daily or similarly
periodic basis, and in such event, as a matter of
administrative convenience, the Lenders have established
certain borrowing mechanics and procedures for the making of
such Revolving Loans, as set forth in paragraphs (2)(d)(i) and
2(e) hereof. Should the Administrative Borrower request the
Lenders to make Revolving Loans on a less frequent basis, the
Lenders have established other borrowing mechanics and
procedures for the making of such Revolving Loans, as set
forth in paragraphs 2(d)(ii) and 2(f) hereof.
(i) Agent Advances. The Agent is
authorized by the Lenders, but is not obligated, to make
Revolving Loans on any Business Day on their behalf ("Agent
Advances"), up to the amount available for borrowing under
paragraph 2(b) hereof, based upon the Administrative
Borrower's representations that the conditions for borrowing
are satisfied, as set forth in paragraph 15(b) hereof.
(ii) Lender Advances. Subject to the
limitations of paragraph 2(b) hereof and the determination by
the Agent and the
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<PAGE> 9
Lenders that the conditions for borrowing contained in
paragraph 15(b) hereof are satisfied, Revolving Loans shall be
made directly by each Lender, to the extent of its
Proportionate Share thereof, upon notice from the
Administrative Borrower to the Agent pursuant to paragraph
6(a) hereof ("Lender Advances")."
(c) Paragraph 3. Term Loans. The second sentence of Paragraph
3(a) is deleted in its entirety and the following is substituted in lieu
thereof, and a new Paragraph 3(d) is added as follows:
"Principal payable on account of each Term Loan shall be
payable in successive monthly installments in the amount of
$37,500 each, in the case of the Term Loan made to Smith
Technology, $37,500 each, in the case of the Term Loan made to
BCM and $60,416.67 each in the case of the Term Loan made to
Riedel. Each such installment shall be due and payable on the
last day of each month, the first of which installments shall
be due and payable on the last day of the month immediately
following the 30th day after the Closing Date. Each such
installment shall be based on an amortization schedule
consisting of forty-eight (48) equal and level payments, the
last installment of which shall be in an amount equal to the
then unpaid principal balance thereof, provided, however, that
the entire unpaid principal balance of each Term Loan shall be
due and payable in full upon the earliest to occur of (A) the
applicable Maturity Date, (B) the date upon which the
Borrowers shall have elected to terminate this Agreement,
pursuant to paragraph 12 hereof and (C) the date upon which
the Liabilities shall have been accelerated pursuant to
paragraph 17 hereof."
"(d) In addition to the mandatory prepayments of the
unpaid principal balance of the Term Loans to be made by the
Borrowers pursuant to subparagraphs 3(b) and (c) hereof, on or
before August 1, 1997, the Borrowers shall make a mandatory
prepayment of the Term Loans in an amount equal to not less
than $500,000 in the aggregate, to be applied pro rata against
the scheduled installments of principal of the Term Loans, in
the inverse order thereof. Such prepayment may be funded in
such manner as the Borrowers may elect, whether from
internally generated cash flow, proceeds of asset sales, or
otherwise."
(d) Paragraph 4. Letters of Credit. Paragraph 4(a) is deleted
in its entirety and the following is substituted in lieu thereof:
"4. LETTERS OF CREDIT.
(a) Subject to the terms and conditions of
this Agreement and the Other Agreements, during the Revolving
Credit Term, absent the existence of an Event of Default, from
time to time upon the Administrative Borrower's request, the
Issuing Bank may issue Letters of
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<PAGE> 10
Credit in its sole and absolute discretion, provided that no
Letter of Credit shall have an expiry date (i) more than 365
days from the date of issuance or (ii) not later than the
thirtieth day prior to the expiration of the Revolving Credit
Term. The Borrowers' reimbursement obligations in respect of
each Letter of Credit issued for any Borrower's account shall
be joint and several obligations. Any payment made by the
Issuing Bank, the Agent or any Lender to any Person on account
of any Letter of Credit shall constitute a Revolving Loan
hereunder. At no time shall the aggregate sum of direct
Revolving Loans made by the Lenders to Borrowers plus the
contingent liability of the Lenders under the outstanding
Letters of Credit be in excess of the Revolving Line of Credit
or an amount equal to the sum of the amounts calculated
pursuant to clauses (x) and (y) of Paragraph 2(b)(1) hereof."
(e) Paragraph 5. Interest, Fees and Charges. Paragraph 5(b) is
deleted in its entirety and the following is substituted in lieu thereof:
"(b) Determination of Applicable Margin. The Applicable Margin
shall mean, in the case of all Loans, four and one-half per
cent (4 1/2%), it being understood that on and after the
effective date of the Fifth Amendment, the Lenders shall make
only ABR Revolving Loans, ABR Term Loans and ABR Unbilled Term
Loans (as defined in the Fifth Amendment), and the Lenders
shall not make, nor shall the Borrowers be entitled to borrow,
any Loans bearing interest based on the Eurodollar Rate."
(f) Paragraph 11. Schedules and Reports. Paragraph 11(a) is
deleted in its entirety and the following is substituted in lieu thereof, and
paragraph 11(b) is amended by (i) deleting the word "and" at the end of clause
(viii) thereof and substituting a semi-colon in lieu thereof and (ii) deleting
the period at the end of clause (ix) thereof and substituting the following in
lieu thereof:
"(a) Each Account Owner shall, on a daily basis,
deliver by facsimile transmission to the Agent, on each
Business Day for the previous Business Day, a borrowing base
certificate of such Account Owner for such previous Business
Day, in form and substance satisfactory to the Agent, together
with a report of such Account Owner's sales, collections,
debit and credit adjustments for such previous Business Day.
Each Account Owner shall, on a monthly basis, deliver by
facsimile transmission to the Agent, on the first Business Day
each month for the previous month, a report of such Account
Owner's Eligible Unbilled Accounts and Unbilled Accounts for
such previous month. In addition, each Account Owner shall
deliver to the Agent on the last Business Day of each month a
projection, prepared by an authorized representative of such
Account Owner, of the checks, cash, instruments and other
collections such Account Owner expects to receive during the
following month in payment of Accounts owing to such Account
Owner which are not Eligible Accounts."
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<PAGE> 11
"(x) a progress report in reasonable detail of work
performed and to be performed under outstanding contracts and
other agreements to which any Borrower or Account Owner is a
party, individually representing gross revenues of at least
$10,000 for such month or $50,000 in the aggregate (based on
the amounts reflected on the Borrowers' invoices for such
month), in respect of environmental remediation or
consultation, or other technological services, provided in the
usual course of its business by such Borrower or Account
Owner, together with a schedule setting forth in reasonable
detail such Borrower's or Account Owner's related accruals and
related cash expenditures and receipts; (xi) a status report,
together with all pertinent documentation, in respect of (A)
the Gould Arbitration Award, including without limitation the
docketing of or levy of execution upon any judgment in
connection therewith, and, if applicable, the Gould Settlement
Agreement, (B) the judgment entered on October 18, 1995, as
amended, in favor of the plaintiffs in the U-Max Litigation,
the appeal by BCM of such judgment and any levy of execution
upon such judgment and (C) the Mutual Pharmaceutical
Settlement Agreement; (xii) a status report regarding any
proposed amendment, modification or waiver of any material
term or provision of any of the Junior Securities; and (xiii)
all documentation relating to any proposed or existing Joint
Venture Arrangement, together with a description, in
reasonable detail, of all projects in respect of which any
such Joint Venture Arrangement is or will be engaged."
(g) Paragraph 12. Termination. Paragraph 12(a) is amended by
deleting the first sentence thereof in its entirety and by substituting the
following in lieu thereof:
"(b) The Revolving Loan Commitments shall be in
effect during the period commencing on the Closing Date and
ending on the applicable Maturity Date (such period, the
"Revolving Credit Term"), at which time all Revolving Loans
and Letter of Credit Obligations, all accrued but unpaid
interest thereon, and all fees, costs, charges and other
expenses payable in connection therewith shall be due and
payable unless (i) the due date of the Liabilities is
accelerated pursuant to paragraph 17 hereof or (ii) the
Borrowers elect to terminate this Agreement prior to the end
of the Revolving Credit Term, in which case each Borrower
shall pay all of the Liabilities of such Borrower in full on
the effective date of such termination, provided, however,
that the security interests and liens created under this
Agreement and the Other Agreements shall survive such
termination until the date upon which payment and satisfaction
in full of the Liabilities shall have occurred."
(h) Paragraph 14. Covenants. Paragraph 14(a) is amended by
deleting the date "September 30, 1996" and by substituting therefor the date
"December 31, 1997".
(i) Paragraph 14. Covenants. Paragraph 14(b)(i) is deleted in
its entirety and the following is substituted in lieu thereof:
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<PAGE> 12
"(i) no later than thirty (30) days after each
calendar month (except with respect to any such calendar month
which coincides with the last month of any fiscal quarter, as
to which such financial statements shall be delivered no later
than forty-five (45) days after such calendar month) copies of
internally prepared financial statements of Smith Technology
and its Subsidiaries on a consolidated and consolidating,
monthly and year-to-date, basis, including, without
limitation, (x) balance sheets and statements of income of
Smith Technology and its Subsidiaries (which shall disclose in
reasonable detail the effect on the income statement and on
the balance sheet of (A) the sale, transfer or other
disposition, if any, of any plant, property or equipment, and
(B) any checks, cash, instruments and other collections, if
any, received in payment of Accounts which are not Eligible
Accounts) and (y) statements of retained earnings of Smith
Technology and its Subsidiaries, certified by the chief
financial officer of Smith Technology and accompanied by a No
Default Certificate and a Leverage Ratio Certificate, each
signed by the Borrowers' Chief Financial Officer (which
Certificates, for purposes hereof, may be consolidated into
one certificate);"
(j) Paragraph 14. Covenants. The parenthetical proviso
contained in Paragraph 14(k) is deleted in its entirety and the following is
substituted in lieu thereof:
"(provided, however, that on and after the date of
the Fifth Amendment, Borrower shall not create any new
Subsidiary or Affiliate, and provided further that Borrower
shall (1) deliver to the Agent for the ratable benefit of the
Lenders, pursuant to an executed stock pledge and security
agreement, the form and substance of which shall be
satisfactory to the Agent, the stock certificates evidencing
all of the issued and outstanding shares of the capital stock
of such newly created Subsidiary or Affiliate, together with
stock transfer powers relating thereto, executed in blank and
(2) cause each such newly created Subsidiary or Affiliate,
upon the organization thereof, to execute and deliver to the
Agent, for the ratable benefit of the Lenders (a) financing
statements on form UCC-1, suitable for recordation in all
requisite jurisdictions and (b) a secured guaranty of the
Liabilities of each Borrower pursuant to an instrument of
secured guaranty in form and substance satisfactory to the
Agent)"
(k) Paragraph 14. Covenants. Paragraph 14(l) through the end
of clause (I) thereof is deleted in its entirety and the following is
substituted in lieu thereof:
"(l) Borrower shall not (i) declare or pay any
dividend or other distribution (whether in cash or in kind) on
any class of its capital stock, or purchase, redeem or retire
any shares of any class of its stock, or make any payment on
account of, or set apart assets for the repurchase,
redemption, defeasance or retirement of, any class of its
stock, or (ii) make any optional payment on, or any prepayment
on or redemption of (including without limitation by making
payments to a sinking fund or
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<PAGE> 13
analogous fund) or repurchase of any indebtedness for borrowed
money other than indebtedness pursuant to this Agreement,
provided, however, that
(I) Borrower may pay ESOP Dividends and
redeem shares of ESOP Stock, so long as any such payment or
redemption is made strictly in accordance with the terms of
the dividend and redemption schedule annexed to the Fifth
Amendment, and Borrower may make additional dividend payments
on any Junior Securities which are equity securities,
additional redemptions of ESOP Stock and scheduled payments of
principal of and interest on Junior Securities which are debt
securities, so long as (A) the amount and timing of any such
payment is made strictly in accordance with the terms of the
Junior Security relating thereto (or the agreement or
instrument pursuant to which such Junior Security shall have
been issued), (B) no Default or Event of Default shall have
occurred and be continuing at the time of such payment or
would occur as a result thereof and (C) the Excess
Availability of the Borrowers, after giving effect to any such
payment, when averaged with the Excess Availability of the
Borrowers for the preceding period of ninety (90) consecutive
days, shall be not less than (i) the sum of $8,000,000, at all
times on and after the date of the Fifth Amendment and prior
to October 2, 1997 or (ii) the sum of $6,000,000, at all times
on and after October 2, 1997, unless at least $500,000 in
principal amount of the Term Loans shall not have been
prepaid, in accordance with Paragraph 3(d) hereof, in which
case the amount in effect under this clause (ii) shall equal
$5,500,000; and"
(l) Paragraph 14. Covenants. Paragraph 14(n) is deleted in its
entirety and the following is substituted in lieu thereof:
"(n) Borrower shall not change its fiscal year from a
fiscal year ending on September 30, nor amend its
organizational documents, or without the Lenders' prior
written consent, materially amend or modify any material term
or condition of the CVC Notes, the CVC Bridge Notes, the CVC
Note Purchase Agreement, the Gould Settlement Agreement, the
Mutual Pharmaceutical Settlement Agreement or the Consent
Judgment."
(m) Paragraph 14. Covenants. Clauses (i) through (vii) of
paragraph 14(o) are deleted in their entireties, the following are substituted
in lieu thereof, and clause (viii) thereof is renumbered as clause (v) thereof:
"(o) Borrowers shall maintain and keep in full force
and effect each of the financial covenants set forth below.
The calculation and determination of each such financial
covenant, and all accounting terms contained therein, shall be
so calculated and construed in accordance with GAAP, applied
on a basis consistent with the financial statements of the
Borrowers delivered on or before the Closing Date:
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<PAGE> 14
(i) Consolidated Net Income or Loss. Smith
Technology and its Subsidiaries, on a consolidated basis,
shall not have, as of the end of (A)(1) the fiscal quarter
ending in December 1996, a Net Loss of greater than $355,000,
(2) the fiscal quarter ending in March, 1997, a Net Loss of
greater than $4,000,000, (3) the fiscal quarter ending in
June, 1997, a Net Loss of greater than $1,000,000 and (4) the
fiscal quarter ending in September, 1997, a Net Loss of
greater than $500,000 and (B) the fiscal month of October,
1997 and each fiscal month thereafter, a Net Loss of greater
than $100,000, provided, however, that solely for purposes of
determining compliance with this covenant only, the
calculation of the Net Loss of Smith Technology and its
Subsidiaries, on a consolidated basis, as of the end of any
period of determination, shall exclude the aggregate amount of
ESOP Dividends paid in accordance with Section 14(1) during
such period;
(ii) Consolidated Net Worth. Smith
Technology and its Subsidiaries, on a consolidated basis,
shall maintain at all times during (A) the fiscal quarter
ending in March, 1997, a Net Worth of not less than
$17,000,000, (B) the fiscal quarter ending in June, 1997, a
Net Worth of not less than $16,500,000 and (C) the fiscal
quarter ending in September, 1997, a Net Worth of not less
than $16,000,000, provided, however, that solely for purposes
of determining compliance with this covenant only, the
calculation of such Net Worth shall exclude any restructuring
charges taken or incurred by Smith Technology and its
Subsidiaries, on a consolidated basis, not to exceed
$3,500,000, in the aggregate;
(iii) Minimum FFO. Smith Technology and its
Subsidiaries, on a consolidated basis, shall maintain a
minimum FFO of not less than (A) $150,000 for the fiscal
quarter ending in June, 1997 and (B) $650,000 for the fiscal
quarter ending in September, 1997;
(iv) Consolidated Capital Expenditures.
Smith Technology and its Subsidiaries, on a consolidated
basis, shall not make Capital Expenditures of an aggregate
amount during (A) the fiscal quarter ending in March, 1997 in
excess of $525,000, (B) each fiscal quarter thereafter in
excess of $450,000 and (C) any fiscal year in excess of
$1,700,000;
(n) Paragraph 15(b). Conditions Precedent. Paragraph 15(b) is
amended by (i) deleting the word "and" at the end of clause (ii) thereof, (ii)
deleting the period at the end of clause (iii) thereof and substituting a
semi-colon in lieu thereof and (iii) adding the following new clauses (iv) and
(v) as follows:
"(iv) The Agent shall be satisfied with the
information delivered to it from time to time by the Borrowers
with respect to the Collateral; and
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<PAGE> 15
(v) no lien in the nature of a materialman's,
supplier's, mechanic's or laborer's lien, or other similar
lien or security interest (any such lien, a "Mechanic's
Lien"), encumbering any property of any of the Borrowers, to
secure the payment of any amounts due to a subcontractor of
any of the Borrowers, shall have been created (other than by
operation of law) or shall have attached or become perfected."
(o) Paragraph 16. Default. Paragraph 16 is amended by (i)
deleting clause (a) thereof and substituting the following in lieu thereof, (ii)
deleting the word "or" at the end of clause (j) thereof, (iii) deleting the
period at the end of clause (k) thereof and substituting a semi-colon in lieu
thereof, and (iv) adding the following new clauses (1), (m), (n) and (o) as
follows:
"(a) the failure of any Obligor to pay when due, declared due,
or demanded by the Lenders, the principal amount of the Loans,
or any of the other Liabilities, provided, however, that the
failure of the Borrowers to make a mandatory prepayment of the
Term Loans in accordance with the terms of Paragraph 3(d)
shall not constitute an Event of Default hereunder;
(l) Smith Technology, any other Borrower or Account Owner, to
the extent it is a party to the Gould Settlement Agreement,
the Winstead Settlement Agreement, the Mutual Pharmaceutical
Settlement Agreement, or the Gravers Settlement Agreement,
shall be in default thereunder or the holder of the judgment
in favor of the Stroud Township Board of Directors against BCM
in connection with the U-Max Litigation, the holder of the
judgment in favor of Winstead, Sechrest & Minick, P.C. against
Smith Technology in the amount of $465,842.06 or the holder of
the judgment in favor of Gravers Company against BCM in the
amount of $1,094,038.72 shall take any action or commence any
proceeding, the effect of which is to (i) create or impose a
lien on any property of any Borrower or Account Owner or (ii)
enforce or execute on such judgment or levy or foreclose upon
such lien.
(m) the engagement of the consulting firm of Walker Truesdell
& Associates (the "Consultants") by Smith Technology shall be
terminated by Smith Technology, or notice of the termination
of such engagement shall have been given by Smith Technology,
or the scope of such engagement shall be limited by Smith
Technology in any material manner;
(n) any Borrower shall cause Thomas F. Herlihy to cease to
perform the functions of President or Chief Executive Officer
of Smith Technology, or
(o) the creation (other than by operation of law), attachment
or perfection of a Mechanic's Lien on any property of the
Borrower shall have occurred and such Mechanic's Lien shall
secure the repayment of
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<PAGE> 16
indebtedness, together with the outstanding principal amount
of indebtedness secured by all other then existing Mechanic's
Liens, in an aggregate amount greater than $50,000."
(p) Paragraph 26. The Administrative Borrower. A new Paragraph
26, captioned "The Administrative Borrower", is added to the Loan Agreement as
follows:
"26. The Administrative Borrower. Each Borrower
hereby irrevocably appoints Smith Technology as the
Administrative Borrower, agent and attorney-in-fact for the
Borrowers, which appointment shall remain in full force and
effect unless and until the Agent shall have received prior
written notice signed by the Borrowers that such appointment
has been revoked and that another Borrower has been appointed
Administrative Borrower. Each Borrower hereby irrevocably
appoints and authorizes the Administrative Borrower (i) to
provide the Agent with all notices with respect to all Loans
obtained for the benefit of any Borrower and all other notices
and instructions under this Agreement and (ii) to take such
action as the Administrative Borrower deems appropriate on its
behalf to obtain all Loans and to exercise such other powers
as are reasonably incidental thereto to carry out the purposes
of this Agreement. Each Borrower hereby irrevocably appoints
and authorizes the Administrative Borrower to provide the
Agent with all notices and to take all action as the
Administrative Borrower deems appropriate with respect to all
Letters of Credit under this Agreement. It is understood that
the handling of the Loans and the Collateral of the Borrowers
in a combined fashion, as more fully set forth herein, is done
solely as an accommodation to the Borrowers in order to
utilize the collective borrowing powers of the Borrowers in
the most efficient and economical manner and at their request,
and that none of the Agent, the Lenders or the Letter of
Credit Issuer shall incur liability to the Borrowers as a
result hereof. Each of the Borrowers expects to derive
benefit, directly or indirectly, from the handling of the
Loans and the Collateral in a combined fashion since the
successful operation of each Borrower is dependent on the
continued successful performance of the integrated group. To
induce the Agent, the Lenders and the Letter of Credit Issuer
to do so, and in consideration thereof, each of the Borrowers
hereby jointly and severally agrees to indemnify the
Indemnified Parties and hold the Indemnified Parties harmless
against any and all liability, expense, loss or claim of
damage or injury, made against the Indemnified Parties by the
Borrowers or by any third party whosoever, arising from or
incurred by reason of (a) the handling of the Loans and
Collateral of the Borrowers as herein provided or (b) the
Agent, any Lender and the Letter of Credit Issuer relying on
any instructions of the Administrative Borrower but excluding
such liabilities, expenses, losses or claims to the extent
finally judicially determined to have resulted from the gross
negligence or willful misconduct of the Indemnified Party.
(q) Annex I to the Loan Agreement is deleted in its entirety
and Annex I hereto is substituted in lieu thereof.
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<PAGE> 17
(r) Schedules 1(a), 13(q), 13(s) and 13(t) to the Loan
Agreement are deleted in their entireties and the Schedules annexed to the
Fourth Amendment, captioned Schedules 1(a), 13(q), 13(s) and 13(t), are
respectively substituted in lieu thereof, and Schedules 13(e), 13(f) and 13(g)
to the Loan Agreement are added thereto in the forms of the Schedules annexed to
the Fourth Amendment, captioned Schedules 13(e), 13(f) and 13(g), respectively.
(s) New Exhibit F to the Loan Agreement is hereby added in the
form of Exhibit F to this Agreement.
(t) The first sentence of each of (i) the Revolving Note, (ii)
the Term Note executed by Smith Technology, (iii) the Term Note executed by BCM
and (iv) the Term Note executed by Reidel, in each case in favor of The Chase
Manhattan Bank, is deleted and the following are substituted in lieu thereof,
respectively:
(i) "FOR VALUE RECEIVED, SMITH TECHNOLOGY
CORPORATION, a Delaware corporation, BCM ENGINEERS, INC., a
Pennsylvania corporation, and RIEDEL ENVIRONMENTAL SERVICES,
INC., an Oregon corporation (each a "Borrower" and
collectively the "Borrowers"), jointly and severally promise
to pay to the order of THE CHASE MANHATTAN BANK ("Payee"), at
the office of the Agent located at 633 Third Avenue, 7th
Floor, New York, New York 10017, Attention: Credit Deputy, the
principal sum of FOURTEEN MILLION TWO HUNDRED FIFTY THOUSAND
DOLLARS ($14,250,000) on the applicable Maturity Date, or so
much of such principal sum as shall be outstanding and unpaid
on the applicable Maturity Date, all as more fully set forth
in the Loan and Security Agreement dated as of October 18,
1995 (the "Loan Agreement") among the Borrowers, BCM
Engineers, Inc., an Alabama corporation, the various lenders
which are or which may become parties to the Loan Agreement
(the "Lenders") and The Chase Manhattan Bank (formerly known
as Chemical Bank), as agent for the Lenders (in such capacity,
the "Agent")."
(ii) "FOR VALUE RECEIVED, SMITH TECHNOLOGY
CORPORATION, a Delaware corporation (the "Borrower"), promises
to pay to the order of THE CHASE MANHATTAN BANK ("Payee"), at
the office of the Agent located at 633 Third Avenue, 7th
Floor, New York, New York 10017, Attention: Credit Deputy, the
principal sum of NINE HUNDRED THOUSAND DOLLARS ($900,000) on
the last day of the applicable Maturity Date, or so much of
such principal sum as shall be outstanding and unpaid on the
applicable Maturity Date, all as more fully set forth in the
Loan and Security Agreement dated as of October 18, 1995 (the
"Loan Agreement") among the Borrower, BCM Engineers, Inc., a
Pennsylvania corporation, Riedel Environmental Services Inc.,
an Oregon corporation, BCM Engineers, Inc., an Alabama
corporation, the various lenders which are or which may become
parties to the Loan Agreement (the "Lenders") and The Chase
Manhattan Bank (formerly
17
<PAGE> 18
known as Chemical Bank), as agent for the Lenders (in such
capacity, the "Agent")."
(iii) "FOR VALUE RECEIVED, BCM ENGINEERS INC., a
Pennsylvania corporation (the "Borrower"), promises to pay to
the order of THE CHASE MANHATTAN BANK ("Payee"), at the office
of the Agent located at 633 Third Avenue, 7th Floor, New York,
New York 10017, Attention: Credit Deputy, the principal sum of
NINE HUNDRED THOUSAND DOLLARS ($900,000) on the last day of
the applicable Maturity Date, or so much of such principal sum
as shall be outstanding and unpaid on the applicable Maturity
Date, all as more fully set forth in the Loan and Security
Agreement dated as of October 18, 1995 (the "Loan Agreement")
among the Borrower, Smith Technology Corporation (formerly
known as Smith Environmental Technologies Corporation), a
Delaware corporation, Riedel Environmental Services, Inc., an
Oregon corporation, BCM Engineers, Inc., an Alabama
corporation, the various lenders which are or which may become
parties to the Loan Agreement (the "Lenders") and The Chase
Manhattan Bank (formerly known as Chemical Bank), as agent for
the Lenders (in such capacity, the "Agent")."
(iv) "FOR VALUE RECEIVED, RIEDEL ENVIRONMENTAL
SERVICES, INC., an Oregon corporation (the "Borrower"),
promises to pay to the order of THE CHASE MANHATTAN BANK
("Payee"), at the office of the Agent located at 633 Third
Avenue, 7th Floor, New York, New York 10017, Attention: Credit
Deputy, the principal sum of ONE MILLION FOUR HUNDRED FIFTY
THOUSAND DOLLARS ($1,450,000) on the last day of the
applicable Maturity Date, or so much of such principal sum as
shall be outstanding and unpaid on the applicable Maturity
Date, all as more fully set forth in the Loan and Security
Agreement dated as of October 18, 1995 (the "Loan Agreement")
among the Borrower, BCM Engineers, Inc., a Pennsylvania
corporation, Smith Technology Corporation (formerly known as
Smith Environmental Technologies Corporation), a Delaware
corporation, BCM Engineers, Inc., an Alabama corporation, the
various lenders which are or which may become parties to the
Loan Agreement (the "Lenders") and The Chase Manhattan Bank
(formerly known as Chemical Bank), as agent for the Lenders
(in such capacity, the "Agent")."
(u) The first sentence of each of (i) the Revolving Note, (ii)
the Term Note executed by Smith Technology, (iii) the Term Note executed by BCM
and (iv) the Term Note executed by Reidel, in each case in favor of BTM Capital
Corporation, is deleted and the following are substituted in lieu thereof,
respectively:
(i) "FOR VALUE RECEIVED, SMITH TECHNOLOGY
CORPORATION, a Delaware corporation, BCM ENGINEERS, INC.,
a Pennsylvania corporation, and RIEDEL ENVIRONMENTAL
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<PAGE> 19
SERVICES, INC., an Oregon corporation (each a "Borrower" and
collectively the "Borrowers"), jointly and severally promise
to pay to the order of BTM CAPITAL CORPORATION (formerly known
as BOT Financial Corporation) ("Payee"), at the office of the
Agent located at 633 Third Avenue, 7th Floor, New York, New
York 10017, Attention: Credit Deputy, the principal sum of
FOURTEEN MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS
($14,250,000) on the applicable Maturity Date, or so much of
such principal sum as shall be outstanding and unpaid on the
applicable Maturity Date, all as more fully set forth in the
Loan and Security Agreement dated as of October 18, 1995 (the
"Loan Agreement") among the Borrowers, BCM Engineers, Inc., an
Alabama corporation, the various lenders which are or which
may become parties to the Loan Agreement (the "Lenders") and
The Chase Manhattan Bank (formerly known as Chemical Bank), as
agent for the Lenders (in such capacity, the "Agent")."
(ii) "FOR VALUE RECEIVED, SMITH TECHNOLOGY
CORPORATION, a Delaware corporation (the "Borrower"), promises
to pay to the order of BTM CAPITAL CORPORATION (formerly known
as BOT Financial Corporation) ("Payee"), at the office of the
Agent located at 633 Third Avenue, 7th Floor, New York, New
York 10017, Attention: Credit Deputy, the principal sum of
NINE HUNDRED THOUSAND DOLLARS ($900,000) on the last day of
the applicable Maturity Date, or so much of such principal sum
as shall be outstanding and unpaid on the applicable Maturity
Date, all as more fully set forth in the Loan and Security
Agreement dated as of October 18, 1995 (the "Loan Agreement")
among the Borrower, BCM Engineers, Inc., a Pennsylvania
corporation, Riedel Environmental Services Inc., an Oregon
corporation, BCM Engineers, Inc., an Alabama corporation, the
various lenders which are or which may become parties to the
Loan Agreement (the "Lenders") and The Chase Manhattan Bank
(formerly known as Chemical Bank), as agent for the Lenders
(in such capacity, the "Agent")."
(iii) "FOR VALUE RECEIVED, BCM ENGINEERS INC., a
Pennsylvania corporation (the "Borrower"), promises to pay to
the order of BTM CAPITAL CORPORATION (formerly known as BOT
Financial Corporation) ("Payee"), at the office of the Agent
located at 633 Third Avenue, 7th Floor, New York, New York
10017, Attention: Credit Deputy, the principal sum of NINE
HUNDRED THOUSAND DOLLARS ($900,000) on the last day of the
applicable Maturity Date, or so much of such principal sum as
shall be outstanding and unpaid on the applicable Maturity
Date, all as more fully set forth in the Loan and Security
Agreement dated as of October 18, 1995 (the "Loan Agreement")
among the Borrower, Smith Technology Corporation (formerly
known as Smith Environmental Technologies Corporation), a
Delaware corporation, Riedel Environmental Services, Inc., an
Oregon corporation, BCM Engineers, Inc., an Alabama
corporation, the various lenders which are
19
<PAGE> 20
or which may become parties to the Loan Agreement (the
"Lenders") and The Chase Manhattan Bank (formerly known as
Chemical Bank), as agent for the Lenders (in such capacity,
the "Agent")."
(iv) "FOR VALUE RECEIVED, RIEDEL ENVIRONMENTAL
SERVICES, INC., an Oregon corporation (the "Borrower"),
promises to pay to the order of BTM CAPITAL CORPORATION
(formerly known as BOT Financial Corporation) ("Payee"), at
the office of the Agent located at 633 Third Avenue, 7th
Floor, New York, New York 10017, Attention: Credit Deputy, the
principal sum of ONE MILLION FOUR HUNDRED FIFTY THOUSAND
DOLLARS ($1,450,000) on the last day of the applicable
Maturity Date, or so much of such principal sum as shall be
outstanding and unpaid on the applicable Maturity Date, all as
more fully set forth in the Loan and Security Agreement dated
as of October 18, 1995 (the "Loan Agreement") among the
Borrower, BCM Engineers, Inc., a Pennsylvania corporation,
Smith Technology Corporation (formerly known as Smith
Environmental Technologies Corporation), a Delaware
corporation, BCM Engineers, Inc., an Alabama corporation, the
various lenders which are or which may become parties to the
Loan Agreement (the "Lenders") and The Chase Manhattan Bank
(formerly known as Chemical Bank), as agent for the Lenders
(in such capacity, the "Agent")."
SECTION 7. CONDITIONS PRECEDENT TO EFFECTIVENESS OF AGREEMENT. This Agreement
shall not be effective unless and until each of the following conditions shall
have been satisfied in the sole discretion of the Lenders or waived by the
Lenders, for whose sole benefit such conditions exist:
(a) The Agent and each of the Lenders shall have received a
fully executed counterpart or original of this Agreement and each Lender shall
have received an executed Unbilled Term Note, each payable to its order in an
amount equal to its Proportionate Share of the Unbilled Term Loan, in the form
of Exhibit F to this Agreement.
(b) The Agent and the Lenders shall have received and reviewed
to their satisfaction a true and correct copy, duly executed, of the corporate
resolutions of the Board of Directors of Smith Technology adopted pursuant to
the meeting held by them on April 14, 1997, as described in the letter dated
April 16, 1997 from W. D. Nelson, Vice President and General Counsel of Smith
Technology to James Laughlin, Esq., The Chase Manhattan Bank.
(c) The Agent and the Lenders shall have received and reviewed
to their satisfaction a schedule, in reasonable detail, captioned "Schedule of
ESOP Dividend Payments and ESOP Stock Redemptions", of the amounts, dates,
payment terms and other pertinent details in respect of all payments which the
Borrowers propose to make after the date of this Agreement of ESOP Dividends and
all redemptions or repurchases which the Borrowers propose to make after the
date of this Agreement of shares of ESOP Stock.
(d) Upon the effectiveness of this Agreement, all
representations and warranties set forth in the Loan Agreement (except for such
inducing representations and
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<PAGE> 21
warranties that were only required to be true and correct as of a prior date and
except for such representations and warranties as relate to the defaults
described in clause (ii) hereof) shall be true and correct in all material
respects on and as of the effective date hereof, and no Default or Event of
Default shall have occurred and be continuing, other than (i) the Specified
Defaults and (ii) the failure of Borrowers to pay their trade accounts payable
and subcontractors when due.
(e) Except for the incurrence of the Overadvance, no event or
development shall have occurred since the date of delivery to the Lenders of the
Borrowers' most recent financial statements which event or development has had
or is reasonably likely to have a Material Adverse Effect.
(f) The Agent shall have received a certificate from Smith
Technology, executed by its Chief Executive Officer or other authorized officer,
as to the accuracy and, completeness of the representations and warranties
contained in Section 12 hereof.
(g) All corporate and legal proceedings and all documents and
instruments executed or delivered in connection with this Agreement shall be
satisfactory in form and substance satisfactory to the Lenders and their
counsel, and the Lenders and their counsel shall have received all information
and copies of all documents which the Lenders and their counsel may have
requested in connection herewith and the matters contemplated hereunder, such
documents, when requested by them, to be certified by appropriate corporate
authorities.
(h) The Agent shall have received an opinion of the Borrowers'
counsel as to the authority of various officers of the Borrowers.
(i) The Lenders shall have received such further agreements,
consents, instruments and documents specifically as may be necessary or proper
in the reasonable opinion of the Lenders, the Agent and their counsel to carry
out the provisions and purposes of this Agreement.
SECTION 8. EVENTS OF DEFAULT; REMEDIES.
(a) The occurrence of any one or more of the following events
or conditions shall constitute a default (an "Event of Default") under this
Agreement and an Event of Default under the Loan Agreement and the Other
Agreements:
(i) any of the Borrowers shall fail to pay any amount
when due under this Agreement or shall fail to discharge when
due any other Liability to the Lenders or shall fail to pay
any other indebtedness when due to the Lenders;
(ii) any of the Borrowers shall fail to perform any
obligation or covenant required to be performed by it under
the terms of this Agreement;
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<PAGE> 22
(iii) any of the Borrowers shall make or furnish any
warranty, representation or statement to the Agent or any of
the Lenders in connection with this Agreement, or any other
agreement to which such Borrower, the Agent, or such lender
are parties, which is or was knowingly false or misleading in
any material respect when made or furnished;
(iv) The Lenders shall have failed to receive on or
before May 15, 1997 the financial statements of Smith
Technology and its Subsidiaries, on a consolidated basis, for
the fiscal year ending September 30, 1996, certified without
qualification;
(v) The Lenders shall have failed to receive on or
before May 15, 1997 detachable warrants, in form and
substance, and containing such terms and conditions,
satisfactory to them, to acquire on a pro rata basis, at a
nominal exercise price, that number of shares of the common
voting stock of Smith Technology equal to 7.5%, on a fully
diluted basis, of such stock; or
(vi) The Lenders shall have failed to receive on or
before June 1, 1997 (A) a copy of an executed settlement
agreement between BCM and Gravers Company pertaining to the
judgment in the amount of $1,094,038.72 in their favor against
BCM, and (B) a subordination agreement executed by the Gravers
Company in favor of the Agent and the Lenders, such settlement
agreement and subordination agreement to be in form and
substance and to contain such terms and conditions, as are
satisfactory to the Agent and the Lenders.
(b) Upon the occurrence and during the continuance of an
"Event of Default", as defined in this Section 8, or any other Event of Default,
the Lenders, at their sole option and in their sole discretion, may exercise any
and all of their rights and remedies under this Agreement or any Other
Agreements, and all other rights and remedies available to the Lenders at law or
in equity.
SECTION 9. RELEASE. For and in consideration of the mutual covenants and
obligations set forth herein, each of the Borrowers (collectively the
"Releasors") hereby releases and discharges each of the Lenders and the Agent,
and each of their respective officers, directors, partners, agents, employees,
attorneys and other professionals, affiliates, successors and assigns
(collectively the "Releasee") from all actions, causes of action, claims for
contribution or indemnification that may be brought by the Releasors or any
third party, suits, debts, dues, sums of money, accounts, reckonings, bonds,
bills, specialties, covenants, contracts, controversies, agreements, premises,
variances, trespasses, damages, judgments, extents, executions, claims, and
demands whatsoever, in law, admiralty or equity (including, without limitation,
any action under 11 U.S.C. Sections 542-553) (all of the foregoing being
collectively, "Claims"), which against the Releasee, the Releasors or the
Releasors' partners, agents, employees, attorneys, affiliates, heirs, executors,
administrators, successors or assigns ever had, now have or hereafter can, shall
or may, have for, upon, or by reason of any matter, cause or thing whatsoever
from the
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<PAGE> 23
beginning of the world to the date of the delivery of this Agreement by reason
or on account of or in any way related to any acts, omissions or circumstances
(whether known or unknown) occurring prior to or as of the date hereof in
connection with or arising out of or referring or relating in any way to (a) any
and all Claims based upon, relating to or arising from any and all transactions,
relationships or dealings relating to loans or other financial accommodations
made by the Releasee to or for the account of Releasors; and (b) all
documentation underlying the indebtedness of the Releasors to the Releasee,
provided, however, that the Releasee shall not be released from any Claim
arising from the Releasee's gross negligence or willful misconduct.
SECTION 10. CONSENT TO RELIEF FROM AUTOMATIC STAY. Each of the Borrowers hereby
agrees that if any of them shall (i) file with any bankruptcy court of competent
jurisdiction or be the subject of any petition under the Code, (ii) be the
subject of any order for relief under the Code, (iii) file or be the subject of
any petition seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution, or similar relief under any present or future federal
or state act or law relating to bankruptcy, insolvency, or other relief for
debtors, (iv) seek, consent to or acquiesce in the appointment of any trustee,
receiver, conservator or liquidator, (v) be the subject of any order judgment or
decree entered by any court of competent jurisdiction approving a petition filed
against any of them for any reorganization, arrangement, composition,
readjustment, liquidation, dissolution, or similar relief under any present or
future federal or state act or law relating to bankruptcy, insolvency, or relief
for debtors, the Agent and the Lenders shall thereupon be entitled to relief
from any automatic stay imposed by Section 362 of the Code or from any other
stay or suspension of remedies imposed in any other manner with respect to the
exercise of the rights and remedies otherwise available to the Agent and the
Lenders under the Loan Agreement, any of the Other Agreements, hereunder or
under any documents delivered in connection therewith.
SECTION 11. INDEMNITY. Each of the Borrowers jointly and severally agrees to
defend and hold the Agent and each of the Lenders harmless from and against any
and all claims, charges, actions, suits, proceedings, lawsuits, obligations,
liabilities, fines, penalties, costs and expenses, including, but not limited
to, reasonable attorneys' fees, in connection with the breach of any
representation or warranty of such Borrower, the breach or default by such
Borrowers of any term, covenant or condition hereunder, the collection or
recovery of any portion of the Liabilities or the Agent's or any of the Lenders'
enforcement of its rights under this Agreement, the Loan Agreement or any of the
Other Agreements. The obligations and provisions contained in this Section shall
continue and remain in full force and effect after the Liabilities have been
paid and discharged in full.
SECTION 12. REPRESENTATIONS AND WARRANTIES. In order to induce the Lenders and
the Agent to enter into this Agreement, Smith Technology and each other Borrower
makes the following representations and warranties in favor of each of the
Lenders and the Agent (which representations and warranties shall survive the
execution and delivery of this Agreement) as of the date hereof.
(a) Smith Technology and each other Borrower has the corporate
power, authority and legal right to execute, deliver and perform this Agreement,
and the instruments, agreements, documents and transactions contemplated hereby,
and has taken all actions necessary
23
<PAGE> 24
to authorize the execution, delivery and performance of this Agreement, and the
instruments, agreements, documents and transactions contemplated hereby.
(b) No consent of any Person (including, without limitation,
shareholders or creditors of Smith Technology, as the case may be) other than
the Lenders, and no consent, permit, approval or authorization of, exemption by,
notice or report to, or registration, filing or declaration with, any
governmental authority, is required in connection with the execution, delivery,
performance, validity or enforceability of this Agreement, and the instruments,
agreements, documents and transactions contemplated hereby.
(c) This Agreement has been duly executed and delivered on
behalf of Smith Technology and each other Borrower by its duly authorized
officer, and constitutes the legal, valid and binding obligation of Smith
Technology and each such Borrower, enforceable in accordance with its terms.
(d) Except for the Specified Defaults and except for the
failure of the Borrowers to (i) pay their trade accounts payable and
subcontractors when due, (ii) make timely payment of their rental obligations
under lease agreements and (iii) make timely payment of their obligations under
the Gould Settlement Agreement, the Winstead Settlement Agreement and the Mutual
Pharmaceutical Settlement Agreement, neither Smith Technology nor any other
Borrower is in default under any indenture, mortgage, deed of trust, agreement
or other instrument to which it is a party or by which it may be bound. Neither
the execution and delivery of this Agreement, nor the consummation of the
transactions herein contemplated, nor compliance with the provisions hereof or
thereof will (i) violate any law or regulation, (ii) result in or cause a
violation by Smith Technology or by any other Borrower of any order or decree of
any court or government instrumentality, (iii) conflict with, or result in the
breach of, or constitute a default under, any indenture, mortgage, deed of
trust, agreement or other instrument to which Smith Technology or any other
Borrower is a party or by which it may be bound, (iv) result in the creation or
imposition of any lien, charge, or encumbrance upon any of the property of Smith
Technology or of any other Borrower, except in favor of the Agent for the
benefit of the Lenders, to secure the Liabilities, or (v) violate any provision
of the Articles or Certificate of Incorporation, By-Laws or any capital stock
provisions of Smith Technology or of any other Borrower.
(e) No Default or Event of Default has occurred and is
continuing, except for the Specified Defaults and except for the default
described in Section 7(d)(ii) of this Agreement.
(f) Since the date of the Agent's receipt of Smith
Technology's consolidated financial statements for the period ended February 28,
1997, no change or event has occurred which has had or is reasonably likely to
have a Material Adverse Effect, except for the Specified Defaults and matters
related thereto.
(g) On September 23, 1996 Smith Technology filed with the
Secretary of State of Delaware a Certificate of Ownership and Merger, pursuant
to which Smith Technology changed its corporate name from "Smith Technology
Technologies Corporation" to "Smith Technology Corporation". Such change of name
became effective on September 23, 1996.
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<PAGE> 25
Such change of name is only a change in the corporate name of Smith Technology,
and not a change in Smith Technology's corporate structure or business.
(h) Neither the entry of the Stroud Township Judgment, the
Gravers Judgment nor the Winstead Judgment creates a lien on any property of any
Borrower or Account Owner, and no holder of any such judgment is as of the date
of this Agreement a "lien creditor" of any Borrower, or Account Owner, as such
term is defined under Section 9-301 of the Uniform Commercial Code as in effect
under applicable law.
(i) the Agent has a perfected lien on and security interest in
all of the Collateral, wherever located, subject to no other liens except for
Permitted Liens.
(j) The recitals contained in this Agreement are due and
correct in all respects.
(k) The Borrowers have consulted with counsel and with such
other experts and advisors as they have deemed necessary in connection with the
negotiation, execution and delivery of this Agreement.
SECTION 13. NO PARTNERSHIP. Nothing contained in this Agreement shall be deemed
to create any rights or obligations of partnership, joint venture or similar
association between any of the Lenders and the Agent, on the one hand, and any
of the Borrowers, on the other hand, nor cause the Agent or any Lender to be
responsible in any way for the debts or obligations of the Borrowers or any
Person.
SECTION 14. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and
shall inure to the benefit of, the parties hereto and their respective heirs,
executors, administrators, successors and assigns.
SECTION 15. NO OTHER AGREEMENTS. All prior understandings and agreements among
the parties are merged in this Agreement, which alone fully and completely
expresses the understandings and agreements among them and which is entered into
after full investigation. None of the parties hereto is relying upon any
statement or representation made by any other party not embodied in this
Agreement.
SECTION 16. NO WAIVER. No failure or delay of any party hereto in the exercise
of any right given to such party hereunder shall be deemed to be a waiver
thereof. No waiver by any party hereto of any condition hereunder for its
benefit (unless the time specified herein for exercise of such right, or
satisfaction of such condition, has expired), shall constitute a waiver of any
other or further right nor shall any single or partial exercise of any right
preclude other or further exercise thereof or of any other rights. The waiver of
any breach hereunder shall not be deemed to be a waiver of any other or
subsequent breach hereof. No extensions of time for the performance of any
obligation shall be deemed or construed as an extension of time for the
performance of any other obligation.
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SECTION 17. FURTHER ASSURANCES. Each party shall, from time to time, execute,
acknowledge and deliver such further instruments, and perform such additional
acts, as any other party may reasonably request in order to consummate the
transactions contemplated by this Agreement.
SECTION 18. SEVERABILITY. If any term or provisions of this Agreement or the
application thereof to any person or entity or circumstance shall to any extent
be invalid or unenforceable, the remainder of this Agreement, or the application
of such term or provision to such person or entity or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby, and each term and provision of this Agreement shall be valid and be
enforced to the fullest extent permitted by law.
SECTION 19. SUBMISSION TO JURISDICTION.
(a) Any legal action or proceeding with respect to this Agreement may
be brought in the courts of the State of New York or, if requisites of
jurisdiction obtain, of the United States of America for the Southern District
of New York, and, by execution and delivery hereof, each Borrower hereby accepts
for itself and in respect of its property, generally and unconditionally, the
jurisdiction of the aforesaid courts. Nothing contained herein, however, shall
affect the right of the Agent or the Lenders to commence legal proceedings or
otherwise proceed against any of the Borrowers in any other jurisdiction. Each
of the Borrowers waives (i) the right to trial by jury in the event of any
litigation to which any of the Agent, the Lenders and such Borrower are parties
in respect of any matter arising under or in connection with this Agreement,
whether or not such litigation has been commenced in respect of the Loan
Agreement or this Agreement and whether or not other persons are also parties
thereto, (ii) any claim that New York County, New York, is an inconvenient forum
and (iii) any claim against any of the Lenders for consequential or special
damages respecting any loan documents or the transactions contemplated
thereunder or hereunder. Execution of this Agreement by the Lenders shall be
deemed to constitute a waiver by the Lenders of the right to trial by jury in
the event of any litigation in respect of which a Borrower has waived its right
to trial by jury hereunder; and
(b) No delay on the part of the Agent or any of the Lenders in
exercising any of its options, powers or rights, or partial or single exercise
thereof, whether arising hereunder and the Loan Agreement, under any of the
Other Agreements or otherwise, shall constitute a waiver thereof or affect any
right hereunder or thereunder. No waiver of any of such rights under this
Agreement shall be deemed to be made unless the same shall be in writing, duly
signed by the Agent, the Lenders and the Borrowers. Each such waiver (if any)
shall apply only with respect to the specific instance involved and shall in no
way impair the rights of the Agent, the Lenders or the obligations of the
Borrowers hereunder in any other respect at any other time.
SECTION 20. GENERAL PROVISIONS.
(a) Each Guarantor (i) has signed below to indicate its
consent to the terms and provisions of this Agreement and all documents and
agreements to be executed or delivered in connection herewith and (ii)
reaffirms, ratifies and confirms the continuing validity and enforceability of
the Guaranty executed by it in accordance with its terms and acknowledges that
its liability, and the rights of the Agent and the Lenders under such Guaranty,
shall be
26
<PAGE> 27
unaffected by the terms of this Agreement and shall remain in full force and
effect through the final and indefeasible payment of all sums owed to the
Lenders under this Agreement and the Loan Agreement.
(b) The Borrowers and Lenders agree that on or before August
15, 1997, they shall meet and confer for the purpose of negotiating in good
faith the financial covenants to be observed by the Borrowers during the period
from September 30, 1997 through the applicable Maturity Date (such financial
covenants, the "Referenced Covenants"), such Referenced Covenants to be based on
the financial projections, prepared by the Borrowers, of their operations and
financial performance for the fiscal year ending September 30, 1998. The
Borrowers further agree that, notwithstanding anything to the contrary contained
in Paragraph 15(b) of the Loan Agreement, in the event that the Borrowers and
the Lenders fail for any reason to reach agreement by September 30, 1997 as to
the Referenced Covenants to be observed by the Borrowers, then, in such event,
on and after October 2, 1997, any Revolving Loans or other extensions of credit
which the Lenders may make to or for the Borrowers' benefit shall be made solely
at the Lenders' discretion, exercised in a commercially reasonable manner.
(c) The Borrowers jointly and severally agree that, in
consideration of the Lenders' willingness to enter into this Agreement and to
consummate the transactions described herein, the Borrowers shall pay to the
Agent, to be shared by the Lenders on a pro rata basis, a fee of, $250,000,
which shall be due and payable in full on October 2, 1997. The Borrowers'
obligation to pay such fee shall constitute a Liability secured by all of the
Collateral.
(d) Nothing contained in this Agreement shall be deemed to be
a waiver of any Defaults or Events of Default other than the Designated
Defaults, whether or not the Agent or any of the Lenders shall have any
knowledge thereof, nor shall anything contained in this Agreement be deemed to
be a waiver of any future Default or Events of Default whatsoever, it being
understood that the waiver contained herein shall only extend to the specific
Events of Default identified herein.
(e) Except as expressly amended on the terms set forth in this
Agreement, the Loan Agreement and all other agreements, documents, instruments
and certificates executed in connection therewith, are ratified and confirmed in
all respects and shall remain in full force and effect in accordance with their
respective terms.
(f) All references in the Other Agreements to the Loan
Agreement shall mean the Loan Agreement as waived and amended as of the
effective date hereof, and as waived and amended hereby and as hereafter
amended, supplemented or modified from time to time. From and after the date
hereof, all references in the Loan Agreement to "this Agreement," "hereof,"
"herein," or similar terms, shall mean and refer to the Loan Agreement as waived
and amended by this Agreement.
(g) This Agreement may be executed by the parties hereto
individually or in combination, in one or more counterparts, each of which shall
be an original and all of which shall constitute one and the same agreement.
27
<PAGE> 28
(h) This Agreement shall be governed and controlled by the
laws of the State of New York without reference to its choice of law principles.
(Signature Page Follows)
28
<PAGE> 29
IN WITNESS WHEREOF, each of the Borrowers, BCM-Alabama, the
Lenders and the Agent have caused this Agreement to be duly executed by their
respective officers thereunto duly authorized as of the day and year first above
written.
SMITH TECHNOLOGY CORPORATION, RIEDEL ENVIRONMENTAL SERVICES INC.,
formerly known as
Smith Environmental
Technologies Corporation By:
--------------------------------
(Title)
By:
-----------------------------------
(Title)
BCM ENGINEERS INC., THE CHASE MANHATTAN BANK, as a
a Pennsylvania corporation Lender and as Agent, formerly
known as Chemical Bank
By: By:
----------------------------------- -------------------------------
(Title) (Title)
BCM ENGINEERS INC., BTM CAPITAL CORPORATION,
an Alabama corporation formerly known as
BOT Financial Corporation
By: By:
----------------------------------- -------------------------------
(Title) (Title)
29
<PAGE> 30
ANNEX I
<TABLE>
<CAPTION>
TERM LOAN, AND
UNBILLED TERM
REVOLVING LOAN LOAN
NAME AND ADDRESS OF LENDERS COMMITMENT COMMITMENT COMMITMENT
- ----------------------------------------- ------------------------ ------------------------ -------------------------
<S> <C> <C> <C>
BTM Capital Corporation, $16,262,167.03 $12,250,000 $4,012,167.03
formerly known as BOT Financial
Corporation
2001 Ross Avenue
Suite 3160
Dallas, Texas 75201
The Chase Manhattan Bank, $16,262,167.03 $12,250,000 $4,012.167.03
formerly known as
Chemical Bank
633 Third Avenue
New York, New York 10017
======================== ======================== =========================
$32,524, 334.06 $24,500,000 $8,024,334.06
</TABLE>
30
<PAGE> 31
EXHIBIT F
FORM OF UNBILLED TERM NOTE
EXECUTED AS OF THE ____ DAY OF
_______, 1997
$---------------
FOR VALUE RECEIVED, SMITH TECHNOLOGY CORPORATION, BCM
ENGINEERS INC., AN ALABAMA CORPORATION AND RIEDEL ENVIRONMENTAL SERVICES INC.
(each a "Borrower"), jointly and severally promise to pay to the order of [NAME
OF LENDER ("PAYEE")], at the office of the Agent located at 633 Third Avenue,
7th Floor, New York, New York 10017, Attention: Credit Deputy, the principal sum
of __________________ __________ DOLLARS ($________) on the applicable Maturity
Date or so much of such principal sum as shall be outstanding and unpaid on the
applicable Maturity Date. This Unbilled Term Note is executed and delivered in
connection with the Loan and Security Agreement dated as of October 18, 1995 (as
amended through the date hereof, the "Loan Agreement") among the Borrowers, BCM
Engineers, Inc., an Alabama corporation, the various lenders which are or which
may become parties to the Loan Agreement (the "Lenders") and The Chase Manhattan
Bank, as agent for the Lenders (in such capacity, the "Agent"). Terms which are
capitalized in this Unbilled Term Note but are not otherwise defined shall have
the meanings ascribed to them in the Loan Agreement. The Borrowers further
promise to make scheduled payments of principal and mandatory prepayments of
principal of this Unbilled Term Note as set forth in the Fifth Amendment, Waiver
and Consent dated as of April 21, 1997 among the Borrowers, the Lenders and the
Agent (the "Fifth Amendment") and to pay interest on the outstanding principal
amount hereof on the dates and at the rates provided in the Fifth Amendment from
the date hereof until payment in full hereof. This Unbilled Term Note is
referred to in the Fifth Amendment and is subject to and entitled to all
provisions and benefits thereof and of the Loan Agreement.
The Borrowers hereby authorize the Agent to charge
any account of any of the Borrowers for all sums payable hereunder as and when
such sums become due. If payment hereunder becomes due and payable on a day
which is not a Business Day, the due date thereof shall be extended to the next
succeeding Business Day, and interest shall be payable thereon at the rate
specified during such extension. Credit shall be given for payments made in the
manner and at the times provided in the Loan Agreement. It is the intent of the
parties that the rate of interest and other charges to the Borrowers under this
Unbilled Term Note shall be lawful; therefore, if for any reason the interest or
other charges payable hereunder are found by a court of competent jurisdiction,
in a final determination, to exceed the limit which Payee may lawfully charge
the Borrowers, then the obligation to pay interest or other charges shall
automatically be reduced to such limit and, if any amount in excess of such
limit shall have been paid, then such amount shall be refunded to the Borrowers.
F-1
<PAGE> 32
The principal and all accrued interest hereunder may
be prepaid by the Borrowers, in part or in full, at any time, without penalty.
The Borrowers waive the benefit of any law that would
otherwise restrict or limit Payee in the exercise of its right, which is hereby
acknowledged, to set-off against the Liabilities, without notice and at any time
hereafter, any liability owing from Payee to the Borrowers. The Borrowers waive
every defense, counterclaim or setoff which the Borrowers may now have or
hereafter may have to any action by the Agent or Payee in enforcing this
Unbilled Term Note and/or any of the other Liabilities, or in enforcing the
Agent's rights in the Collateral and ratify and confirm whatever the Agent may
do pursuant to the terms hereof and of the Loan Agreement and with respect to
the Collateral and agree that the Agent shall not be liable for any error in
judgment or mistakes of fact or law, other than for gross negligence.
The Borrowers, any other party liable with respect to
the Liabilities and any and all endorsers and accommodation parties, and each
one of them, if more than one, waives any and all presentment, demand, notice of
dishonor, protest, and all other notices and demands in connection with the
enforcement of Payee's rights hereunder.
The loan evidenced hereby has been made and this
Unbilled Term Note has been delivered at New York, New York. THIS UNBILLED TERM
NOTE SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF THE STATE OF NEW
YORK AS TO INTERPRETATION, ENFORCEMENT, VALIDITY, CONSTRUCTION, EFFECT, AND IN
ALL OTHER RESPECTS, INCLUDING WITHOUT LIMITATION, THE LEGALITY OF THE INTEREST
RATE AND OTHER CHARGES, and shall be binding upon the Borrowers and each of
their heirs, legal representatives, successors and assigns. If this Unbilled
Term Note contains any blanks when executed by the Borrowers, Payee is hereby
authorized, without notice to the Borrowers to complete any such blanks
according to the terms upon which the loan or loans were granted. Wherever
possible, each provision of this Unbilled Term Note shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of this Unbilled Term Note shall be prohibited by or be invalid under such law,
such provision shall be severable, and be ineffective to the extent of such
prohibition or invalidity, without invalidating the remaining provisions of this
Unbilled Term Note.
To induce Payee to make the loan evidenced by this
Unbilled Term Note, the Borrowers (i) irrevocably agree that, subject to Payee's
sole and absolute election, all actions arising directly or indirectly as a
result or in consequence of this Unbilled Term Note or any other agreement with
Payee, or the Collateral, shall be instituted and litigated only in courts
having situs in the City of New York, New York, (ii) hereby consent to the
exclusive jurisdiction and venue of any State or Federal Court located and
having its situs in said city, and (iii) waive any objection based on forum
non-conveniens. IN ADDITION, THE BORROWERS HEREBY WAIVE TRIAL BY JURY IN ANY
ACTION OR PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS UNBILLED TERM
NOTE, THE LIABILITIES, THE COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT BY THE
BORROWERS OR PAYEE OR WHICH IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR
RELATES TO THE RELATIONSHIP BETWEEN THE BORROWERS AND PAYEE, waives personal
service of any and all process, and consents that all such service of process
may be made by certified mail, return receipt requested, directed to the
Borrowers
F-2
<PAGE> 33
at the address indicated in the Agent's records; and service so made shall be
complete five (5) days after the same has been deposited in the U.S. mails as
aforesaid.
IN WITNESS WHEREOF, the Borrowers have executed this Unbilled
Term Note on the date above set forth.
SMITH TECHNOLOGY CORPORATION
By:___________________________________
Name:
Title:
BCM ENGINEERS INC.,
a Pennsylvania corporation
By:___________________________________
Name:
Title:
RIEDEL ENVIRONMENTAL SERVICES,
INC.
By:___________________________________
Name:
Title:
F-3
<PAGE> 1
EXHIBIT 11
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
COMPUTATION OF (LOSS) EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT COMMON SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
1997 1996 1997 1996
------- ------- ------- -------
PRIMARY
<S> <C> <C> <C> <C>
Weighted average shares of common
stock outstanding 6,167 5,862 6,146 5,857
Incremental shares applicable to assumed
exercise of stock options -- 15 -- 23
------- ------- ------- -------
Weighted average number of common and
common equivalent shares outstanding 6,167 5,877 6,146 5,880
======= ======= ======= =======
Income before extraordinary charge $(5,362) $(2,595) $(5,913) $(2,210)
Extraordinary charge -- (113) -- (1,395)
------- ------- ------- -------
Net (loss) income $(5,362) $(2,708) $(5,913) $(3,605)
======= ======= ======= =======
Net (loss) income applicable to common stock $(5,582) $(2,841) $(6,355) $(3,875)
======= ======= ======= =======
Income (loss) per common and common equivalent share:
Income before extraordinary charge $ (0.87) $ (0.44) $ (0.96) $ (0.38)
Extraordinary charge -- (0.02) -- (0.24)
------- ------- ------- -------
Net (loss) income $ (0.87) $ (0.46) $ (0.96) $ (0.61)
======= ======= ======= =======
Net (loss) income applicable to common stock $ (0.91) $ (0.48) $ (1.03) $ (0.66)
======= ======= ======= =======
</TABLE>
The computation of income (loss) per common equivalent share on a fully diluted
basis does not materially differ from the amounts calculated on a primary basis.
57
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS ON THE COMPANY'S FORM 10-Q FOR THE SIX MONTH
PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS ON THE COMPANY'S FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 512
<SECURITIES> 0
<RECEIVABLES> 40,124
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 47,245
<PP&E> 24,606
<DEPRECIATION> 12,848
<TOTAL-ASSETS> 93,990
<CURRENT-LIABILITIES> 47,400
<BONDS> 38,723
6,606
0
<COMMON> 61
<OTHER-SE> (7,605)
<TOTAL-LIABILITY-AND-EQUITY> 93,990
<SALES> 0
<TOTAL-REVENUES> 83,289
<CGS> 0
<TOTAL-COSTS> 76,088
<OTHER-EXPENSES> 10,416
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,649
<INCOME-PRETAX> (5,864)
<INCOME-TAX> 49
<INCOME-CONTINUING> (6,355)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,355)
<EPS-PRIMARY> (0.96)
<EPS-DILUTED> (0.96)
</TABLE>
