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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
[ ] 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)
<TABLE>
<S> <C>
DELAWARE 38-2294876
- -------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization)
Identification No.)
</TABLE>
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 January 31, 1996, the registrant had 6,160,882 shares of common stock
outstanding.
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QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED DECEMBER 31, 1996
SMITH TECHNOLOGY CORPORATION
TABLE OF CONTENTS
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<CAPTION>
PART I. FINANCIAL INFORMATION
Page
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Item 1: Financial Statements
Consolidated Balance Sheets (unaudited) as of December 31, 1996
and September 30, 1996 3-4
Consolidated Statements of Operations (unaudited)
for the three months December 31, 1996 and 1995 5
Consolidated Statements of Cash Flows (unaudited)
for the three months ended December 31, 1996 and 1995 6-7
Notes to Consolidated Financial Statements (unaudited) 8-11
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-17
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 18-20
Item 3: Defaults on Senior Securities 21
Item 5: Other Information 21
Item 6: Exhibits and Reports on Form 8-K 22
Signature 23
Exhibit 11 Computation of earnings per share, for the
three months ended December 31, 1996 (unaudited) 24
Exhibit 27 Requirements for the format and input
of financial data schedules (EDGAR version only)
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
---------------- -----------------
(UNAUDITED) (UNAUDITED)
ASSETS
------
<S> <C> <C>
Current Assets:
Cash $ 454 $ 625
Accounts receivable, less allowance for doubtful
accounts of $888 and $829 (Note 2) 41,565 40,793
Costs and estimated earnings of long-term
contracts in excess of billings 5,918 3,275
Prepaid expenses and other current assets 3,285 3,445
---------------- -----------------
Total current assets 51,222 48,138
Property and equipment:
Equipment 19,402 19,330
Land and buildings 4,017 4,017
Leasehold improvements 1,107 1,107
---------------- -----------------
Total property and equipment, at cost 24,526 24,454
Less accumulated depreciation and amortization 12,240 11,582
---------------- -----------------
Property and equipment, net (Note 2) 12,286 12,872
Other assets:
Intangible assets, net of accumulated amortization
of $2,170 and $1,878, respectively 14,880 15,172
Goodwill, net of accumulated amortization
of $813 and $714, respectively 14,854 14,953
Investment in unconsolidated affiliate 1,561 1,561
Other assets 4,000 4,038
---------------- -----------------
TOTAL ASSETS $ 98,803 $ 96,734
================ =================
</TABLE>
See accompanying notes to consolidated financial statements
3
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SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
---------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and subcontracts payable $ 26,475 $ 22,597
Accrued expenses and other liabilities:
Compensation and related fringes 4,845 5,486
Severance and office closures 1,271 1,688
Other 8,319 10,486
Billings on long-term contracts in excess of
costs and estimated earnings 45 57
Current maturities of long-term debt and
short-term borrowings 2,968 2,866
----------------- ----------------
Total current liabilities 43,923 43,180
Long-term debt 26,265 24,881
Other long-term liabilities 7,627 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 6,564 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; 6,160,882 and 5,850,015 shares
issued and outstanding, respectively 61 61
Additional paid in capital 17,407 17,379
Deferred compensation (404) (404)
(Accumulated deficit) (17,148) (16,825)
----------------- ----------------
Total common stockholders' (deficit) equity (84) 211
----------------- ----------------
TOTAL LIABILITIES, REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS EQUITY $ 98,803 $ 96,734
================ ================
</TABLE>
See accompanying notes to consolidated financial statements
4
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SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
------------------------------------
1996 1995
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<S> <C> <C>
Revenues $ 44,772 $ 46,758
Cost of revenues 40,127 40,876
------------- --------------
Gross profit 4,645 5,882
Selling, general and administrative expenses 2,953 3,849
Amortization of intangible assets, goodwill and
deferred financing fees 506 488
Special items --- 393
------------- --------------
Income from operations 1,186 1,152
Interest expense (1,262) (1,154)
------------- --------------
(Loss) income before share in earnings of
unconsolidated affiliate, income taxes and
extraordinary charge (76) (2)
Share in (loss) earnings of unconsolidated affiliate 500
------------- --------------
(Loss) income before income taxes and
extraordinary charge (76) 498
Income tax expense 25 ---
------------- --------------
(Loss) income before extraordinary charge (101) 498
Extraordinary charge on debt refinancing 25 (1,395)
------------- --------------
Net loss (101) (897)
Dividends and accretion Redeemable Preferred Stock (222) (137)
------------- --------------
Net loss applicable to common stock $ (323) $ (1,034)
============= ==============
Weighted average number of common and common
equivalent shares outstanding 6,138,446 5,882,823
============= ==============
Income (loss) per common and common equivalent share:
(Loss) income before extraordinary charge $ (0.02) $ .09
Extraordinary charge --- (0.24)
------------- --------------
Net loss (0.02) (0.15)
============= ==============
Net loss applicable to common stock $ (0.05) $ (0.18)
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements
5
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SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------------------
1996 1995
------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
(Loss) income before extraordinary charge $ (323) $ 498
Adjustments to reconcile net (loss) income to cash provided
by (used in) operating activities:
Depreciation and amortization 1,164 1,135
(Gain) loss on disposal of equipment (143) (333)
Share in earnings of affiliate --- (500)
Deferred interest 696
Compensation expense 28
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable (772) 3,524
Costs and estimated earnings on long-term
contracts in excess of billings (2,643) 633
Prepaid expenses and other current assets 160 (891)
Other assets (77) 484
Accounts and subcontracts payable 3,878 (3,871)
Accrued expenses and other liabilities (2,529) (2,176)
Billings on long-term contracts in excess of costs
and estimated earnings (12) 89
Other long-term liabilities (177) (523)
Other net (662) (137)
------------- -------------
Net cash used in operating activities (1,412) (2,068)
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
6
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SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
---------------------------------
1996 1995
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<S> <C> <C>
INVESTING ACTIVITIES
Capital expenditures $ (72) $ (453)
Advances from affiliates --- ---
Proceeds from sale of fixed assets 143 553
--------- ----------
Net cash provided by investing activities 71 100
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 1,861 1,576
Proceeds from term loan 6,500
Retirement of term loan (3,400)
Repayments on term loan (406) (295)
Borrowings from conversion of Senior Note 193
Payment of financing fees (1,096)
Payment of early debt extinguishment penalty (287)
Repayments of debt (251) (34)
Proceeds from exercise of stock options 14
Repurchase of Redeemable Preferred Stock (34) (177)
Dividends paid on Redeemable Preferred Stock (95)
Other 41
--------- ----------
Net cash provided by financing activities 1,170 2,052
--------- ----------
Net (decrease) increase in cash (171) 84
Cash at beginning of period 625 510
--------- ----------
Cash at end of period $ 454 $ 594
========= ==========
Supplemental Cash Flow Information:
Issuance of Stock for Bonus Compensation $ 28 $ 47
Issuance of stock for Defined Contribution Plan --- $ 107
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE> 8
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
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 months ended December 31, 1996 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").
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.
8
<PAGE> 9
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.
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 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 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 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
9
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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.
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 in the
accompanying balance sheets.
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. 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 has filed a motion
for summary judgment and is vigorously defending the matter. No provision for
loss, if any, has been recorded in the accompanying balance sheets.
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.
10
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SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-------------------------------
1996 1995
---------- ------------
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of Revenues 89.6 87.4
---------- ------------
Gross profit (loss) 10.4 12.6
Selling, general and administrative expenses 6.6 8.2
Amortization of intangible assets, goodwill and
deferred financing fees 1.1 1.0
Special items --- 0.9
---------- ------------
Income from operations 2.7 2.5
Interest expense 2.8 2.5
---------- ------------
(Loss) income before share in earnings of
unconsolidated affiliate, income taxes and
extraordinary charge (0.1) ---
Share in (losses) earnings of unconsolidated affiliate --- 1.1
---------- ------------
(Loss) income before income taxes and
extraordinary charge (0.1) 1.1
Income tax expense (0.1) ---
---------- ------------
(Loss) income before extraordinary charge (0.2) 1.1
Extraordinary charge on debt refinancing --- (3.0)
---------- ------------
Net (loss) income (0.2)% (1.9)%
========== ============
</TABLE>
12
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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. 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 DECEMBER 31, 1996 AND 1995
Revenues for the quarter ended December 31, 1996 were $44.8 million
compared with $46.8 million for the same quarter in 1995, a decrease of $2.0
million or 4.3 percent. Decreased engineering services revenues caused by
general market conditions were partially offset by higher remediation services
revenues.
Gross profit for the quarter ended December 31, 1996 was $4.7 million or
10.4 percent of revenues compared with $5.9 million or 12.6 percent of revenues
for the quarter ended December 31, 1995, a decrease of approximately $1.2
million. The decrease in gross profit and the percentage return is due
primarily to the aforementioned reduction in engineering services revenues
which contain a higher gross profit than construction or remediation services
contracts. 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 quarter ended
December 31, 1996 were $3.0 million or 6.6 percent of revenues, compared with
$3.8 million or 8.2 percent of revenues for the same quarter last 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.
Amortization of intangible assets, goodwill and deferred financing fees
for the quarter ended December 31, 1996 was $506,000, compared to $488,000 for
the same period in the prior fiscal year.
Special items were $393,000 for the three months ended December 31, 1995
and included severance and relocation costs in connection with additional
office closings and consolidations. No special items were recorded in the
quarter ended December 31, 1996.
Interest expense for the quarter ended December 31, 1996 was $1.3 million
compared with $1.2 million for the same quarter in 1995. 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
quarter ended December 31, 1995 was $500,000. No activity was conducted by the
joint venture during the current fiscal year quarter.
13
<PAGE> 14
In the quarter ended December 31, 1996, the Company provided for income
taxes of $25,000 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 three months ended December 31, 1995 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"),
Reidel 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"). The credit facility (the "Chase
Facility") consists of a $6.5 million term loan and a $27 million revolving
line of credit (the "Revolver"). The calculation of the borrowing base for the
Chase Facility is based on eligible accounts receivable, as defined in the
credit Loan Agreement. The Chase Facility includes a $5.0 million unbilled
account subline providing that unbilled receivables, subject to limitations,
are included in the calculation of the borrowing base. Changes in the
borrowing base occur as a result of the magnitude and timing of the Company's
billings and collections for services.
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 three months
ended December 31, 1996, operating activities used net cash of approximately
$1.4 million, primarily due to an increase in costs in excess of billings.
Investing activities provided approximately $71,000 in net cash principally
from the sale of assets. Financing activities provided net cash of $1.2
million primarily from borrowings on the Chase Facility. 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.
14
<PAGE> 15
As of December 31, 1996, long term debt, including current maturities of
$3.0 million, was approximately $43.7 million, the components of which were
borrowings of $23.7 million under the Revolver and $4.1 million of the term
loan, $14.5 million of Subordinated Notes (as defined below) and $1.4 million
of other notes and capital leases.
The Company and its Senior Lenders executed the Fourth Amendment, Waiver
and Consent (the "Fourth Amendment") effective as of January 14, 1997. 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 interest rates by one-half
percent, 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 Chase Facility through October 18, 1998 and required the Company to
engage a financial consultant recommended by its Senior Lenders to advise the
Company on financial matters.
Subsequent to the execution of the Fourth Amendment, the Company
determine 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 of 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 Company also executed a Third Amendment to the Amended and Restated
Note Purchase Agreement (the "Amended Agreement") effective as of January 13,
1977 by and among the Company and 399 Venture Partners, Inc. which amendment
defers the interest which will accrue and become due on November 21, 1997 and
May 21, 1998 on the Convertible Subordinated Notes and Senior Subordinated
Notes (the "Subordinated Notes"). The Amended Agreement also authorizes
permitted lien status respecting the Company's settlement agreement obligation
to the PRP Group of up to $2.5 million and provides for the issuance of
additional notes (maturing on November 21, 2004) in lieu of all deferred
interest payments. The effect as of December 31, 1996 of this Third Amendment
was to reclassify approximately $700,000 of accrued interest expenses to
long-term debt under the 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 Notes.
The Company has attempted to improve cash flow and improve working
capital through cost reduction measures and improved billing and collection
procedures. The Company is also pursuing identified capital investment and
merger opportunities, as well as the divestiture of a portion of its business.
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. 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 and long-term debt subject to the approval of the Senior
Lenders. Accordingly, management believes operating results and cash flows
will improve to a sufficient level in fiscal 1997 to allow the Company to meet
its amended financial covenants
15
<PAGE> 16
in the Loan Agreement, to meet its obligations to its various unsecured
creditors and the holders of its Redeemable Preferred Stock, and enable the
Company to continue as a going concern. However, in the event the Company fails
to improve the management of its working capital or conclude a capital
investment, merger or divestiture transaction on a timely basis, its liquidity
and financial position may be materially adversely impacted.
BACKLOG
As of December 31, 1996, the Company had a contract backlog of orders of
approximately $107 million compared with approximately $107 million and $106
million at September 30, 1996 and December 31, 1995, respectively. The value
of unfunded or indefinite delivery order contracts ("IDO") was approximately
$134 million as of December 31, 1996 compared with approximately $140 million
and $147 million at September 30, 1996 and December 31, 1995, respectively.
The combined contract backlog as of December 31, 1996 was approximately $242
million compared with approximately $247 million and $253 million at September
30, 1996 and December 31, 1995, respectively. 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 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 work by June 30, 1997. The ERCS Region 5 contract has been
renewed through September 1997, the final option year.
Revenues from EPA contracts for the three months ended December 31,
1996 were approximately $12.1 million.
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 determination could impact the Company's ability to
complete current contracts and compete for future federal government work.
The EPA procurements of future similar services is referred to as
Emergency Response and Remediation Services (ERRS). On July 12, 1996, the
Company received notice that its proposal did not qualify for the competitive
range for proposals in the EPA ERRS-West contract comprising of Regions 6, 8
and 9. Subsequently the Company has submitted proposals in competition for
award of future ERRS contracts covering Regions 3, 4 and 7. 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.
16
<PAGE> 17
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.
17
<PAGE> 18
SMITH TECHNOLOGY CORPORATION
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
CANONIE ENVIRONMENTAL SERVICES CORP. VS. NL INDUSTRIES, INC., ET AL.
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 to arbitration 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 $17.0 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.
The Company and the PRP Group have 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 of approximately $8.9 million consisting of an
obligation to the PRP Group of $4.5 million, the write-off of $1.5 million of
accounts receivable, $2.5 million of equipment, and $400,000 of related legal
and consulting fees in the fourth quarter. The Company also incurred
approximately $800,000 in legal and consulting fees in previous quarters of the
fiscal year resulting in a total charge of approximately $9.7 million (see Note
15 of Notes to Consolidated Financial Statements). Plant equipment relating to
the project was awarded to the Company and is being removed from the site for
sale. The
18
<PAGE> 19
settlement agreement provides that any proceeds from the sale of the equipment
be applied to payment of the settlement.
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.
19
<PAGE> 20
ITEM 3. DEFAULTS ON SENIOR SECURITIES
The Company has not made timely payment of dividends accruing on the
Redeemable Preferred Stock. A portion of the third quarter and fourth quarter
fiscal 1996 preferred stock dividend payment due on September 30 and December
31, 1996 has been paid. These unpaid dividends are approximately $101,000 at
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 Preferred stockholders and
has made payments through February 15, 1997 which has reduced the arrearage to
$54,000. The payment of quarterly dividends is prohibited by the Chase Facility
while an event of default exists. The Fourth Amendment included a consent of
the Senior Lenders to make the third and fourth quarter dividend payments.
ITEM 5. OTHER INFORMATION
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 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.
20
<PAGE> 21
SMITH TECHNOLOGY CORPORATON
(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:
$ 625 $ 686
Cash...............................................................................
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)....................................... 3,275 2,287
Prepaid expenses and other current assets..................................... 3,445 3,203
--------- ----------
Total current assets...................................................... 48,138 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....................................................................... $ 96,734 $ 114,594
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 22
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 ................................................................................. 10,486 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.............................................................. 43,180 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.................................................... (16,825) 3,082
----------- ----------
Total common stockholders' equity.............................................. 211 20,289
----------- ----------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY $ 96,734 $ 114,594
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR SEVEN MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, YEARS ENDED FEBRUARY 28,
1996 1995 1995 1994
(unauditied)
<S> <C> <C> <C> <C>
Revenues (Notes 3 and 15)........................................ $ 165,632 $ 105,290 $ 104,738 $ 59,461
Cost of revenues................................................. 152,535 91,932 89,922 56,020
--------- --------- ---------- --------
Gross profit................................................ 13,097 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.................................... 2,831 4,021 (6,576)
(14,889)
Interest expense................................................. 4,417 2,225 1,229 412
--------- --------- ---------- --------
(Loss) income before share in earnings of unconsolidated
affiliate, income tax and extraordinary item................ (19,306) 606 2,792 (6,988)
Share in earnings (losses) of unconsolidated affiliates (Note 5):
375 (173) 539 (221)
Operating........................................................
Investment write-off (Note 15)................................... --- --- --- (2,655)
--------- --------- ---------- --------
(Loss) income before taxes and extraordinary item................ (18,931) 433 3,331 (9,864)
Income tax (benefit) expense (Note 10)........................... ( 419) 87 558 135
--------- --------- ---------- --------
(Loss) income before extraordinary item.......................... (18,512) 346 2,773 (9,999)
f
Extraordinary item on debt refinancing (Note 6)................. (1,395) --- --- ---
--------- --------- ---------- --------
Net (loss) (19,907) 346 2,773 (9,999)
income......................................................
Dividends and accretion on Redeemable
Preferred Stock 587 334 218 ---
--------- --------- ---------- --------
Net (loss) income applicable to Common Stock..................... $ (20,494) $ 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............................ $ (3.19) $ 0.00 $ 0.44 $ (1.75)
========== ========== ========== =========
(Loss) earnings per common and common
equivalent share............................................ $ (3.43) $ 0.00 $ 0.44 $ (1.75)
========== ========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
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 20, 1995............................ 5,850,015 58 17,149 --- 3,082 20,289
Net loss .................... (19,907) (19,907)
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) $(16,825) $ 211
========= ======== ======== ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 25
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR SEVEN MONTHS YEAR ENDED
ENDED ENDED FEBRUARY 28,
SEPTEMBER 30, SEPTEMBER 30, ------------------------------
1996 1995 1995 1994
-------------- --------------- ----------- --------------
(unaudited)
<S> <C> <C> <C> <C>
Operating Activities:
Net (loss) income..................................... $ (19,907) $ 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........... (988) (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........... 2,344 (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........................................... --- 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.
25
<PAGE> 26
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR SEVEN MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, YEARS ENDED FEBRUARY 28,
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.
26
<PAGE> 27
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
27
<PAGE> 28
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
28
<PAGE> 29
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.
29
<PAGE> 30
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.
30
<PAGE> 31
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.
31
<PAGE> 32
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
32
<PAGE> 33
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
33
<PAGE> 34
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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....................................... 1,846 9,787
--------- ---------
12,984 92,565
Less applicable progress billings................................ 9,766 91,529
--------- ---------
Total............................................................ $ 3,218 $ 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........................................ $ 3,275 $ 2,287
Billings on long term contracts in excess of costs
and estimated earnings................................................. (57) (1,251)
-------- --------
Total........................................................................ $ 3,218 $ 1,036
======== ========
</TABLE>
34
<PAGE> 35
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>
35
<PAGE> 36
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.
36
<PAGE> 37
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.
37
<PAGE> 38
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>
38
<PAGE> 39
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
39
<PAGE> 40
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
40
<PAGE> 41
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>
41
<PAGE> 42
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)
42
<PAGE> 43
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.
43
<PAGE> 44
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 YEAR ENDED FEBRUARY 28,
SEPTEMBER 30, SEPTEMBER 30, ----------------------------
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
44
<PAGE> 45
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
consecutive time, the rate of dividends shall increase to 10 percent per annum
per share. When all accrued 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.
45
<PAGE> 46
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.
46
<PAGE> 47
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.
47
<PAGE> 48
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.
48
<PAGE> 49
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
49
<PAGE> 50
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
50
<PAGE> 51
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.
51
<PAGE> 52
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................................................ $ 165,632 $ 166,257 $ 43,771
Cost of revenues........................................ 152,535 145,723 38,006
------------- ------------ -------------
Gross profit........................................ 13,097 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........................... (14,889) 5,279 1,573
Interest expense........................................ 4,417 3,413 41
------------- ------------ -------------
Income before share in earnings of unconsolidated
affiliate and income tax ........................... (19,306) 1,866 1,532
Share in earnings of unconsolidated affiliates.......... 375 103 263
============= ============ =============
(Loss) income before taxes and extraordinary item....... (18,931) 1,969 1,795
Income tax (benefit) expense............................ (419) 310 335
------------- ------------ -------------
(Loss) income before extraordinary item................. (18,512) 1,659 1,460
Extraordinary charge on debt refinancing................ (1,395) --- ---
------------- ------------ -------------
Net (loss) income....................................... (19,907) 1,659 1,460
Dividends and accretion on redeemable Preferred Stock... 587 552 ---
------------- ------------ -------------
Net (loss) income applicable to Common Stock............ $ (20,494) $ 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................................................ $ (3.19) $ .19 $ .25
============= ============ =============
(Loss) earnings per common and common equivalent
share............................................... $ (3.43) $ .19 $ .25
============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
52
<PAGE> 53
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET
(WRITE-OFFS)
BALANCE AT CHARGED RECOVERIES BALANCE AT
BEGINNING OTHER TO CHARGED AGAINST END OF
OF PERIOD RESERVES EXPENSE 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.
53
<PAGE> 54
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
COMPUTATION OF (LOSS) EARNINGS PER SHARE
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED FOR THE YEARS ENDED FEBRUARY 28,
SEPTEMBER 30 SEPTEMBER 30 --------------------------------
1996 1995 1995 1994
--------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
PRIMARY
Weighted average shares of Common Stock outstanding...... 5,978,084 5,847,182 5,732,670 5,700,783
Incremental shares applicable............................ 0 117,068 133,112 ---
--------------- ----------------- -------------- --------------
Weighted average number of common and common equivalent
shares outstanding..................................... 5,978,084 5,964,250 5,865,782 5,700,783
(Loss) Income applicable to Common Stock................. $(20,494,000) $ 12,000 $ 2,555,000 $ (9,999,000)
=============== ================= ============== ==============
(Loss) earnings per common and common stock equivalent... ($3.43) $ 0.00 $ 0.44 $ (1.75)
=============== ================= ============== ==============
</TABLE>
The computation of income (loss) per common and common equivalent share on a
fully diluted basis does not materially differ from the amounts calculated on a
primary basis.
54
<PAGE> 55
SMITH TECHNOLOGY CORPORATION
(FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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., and 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., and Alabama
corporation, Riedel Environmental Services, Inc., and Chase
Manhattan Bank, as Agent for the Lenders, and (iiii) 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.
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
Vice President - Finance
Date: February 14, 1997
56
<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
DECEMBER 31,
--------------------------------------
1996 1995
---------------- ---------------
PRIMARY
<S> <C> <C>
Weighted average shares of common
stock outstanding 6,138,446 5,852,004
Incremental shares applicable to assumed
exercise of stock options --- 30,819
-------------- -----------
Weighted average number of common and
common equivalent shares outstanding 6,138,446 5,882,823
============== ===========
Income (loss) before extraordinary charge $ (101) $ 498
Extraordinary charge --- (1,395)
-------------- -----------
Net (loss) income $ (101) $ (897)
============== ===========
Net (loss) income applicable to common stock $ (323) $ (1,034)
============== ===========
Income (loss) per common and common
equivalent share:
(Loss) income before extraordinary charge $ (0.02) $0.09
Extraordinary charge --- (0.24)
-------------- -----------
Net (loss) income $ (0.02) $ (0.15)
============== ===========
Net (loss) income applicable to common stock $ (0.05) $ (0.18)
============== ===========
</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.
<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 QUARTERLY
PERIOD ENDED DECEMBER 31, 1996 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> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 454
<SECURITIES> 0
<RECEIVABLES> 41,565
<ALLOWANCES> 888
<INVENTORY> 0
<CURRENT-ASSETS> 51,222
<PP&E> 24,526
<DEPRECIATION> 12,240
<TOTAL-ASSETS> 98,803
<CURRENT-LIABILITIES> 43,923
<BONDS> 38,227
6,564
0
<COMMON> 61
<OTHER-SE> (145)
<TOTAL-LIABILITY-AND-EQUITY> 98,803
<SALES> 0
<TOTAL-REVENUES> 44,772
<CGS> 0
<TOTAL-COSTS> 40,127
<OTHER-EXPENSES> 3,459
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,262
<INCOME-PRETAX> (298)
<INCOME-TAX> 25
<INCOME-CONTINUING> (323)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (323)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
