<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-Q
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file no.
0-017888
SERV-TECH, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-1398757
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5200 CEDAR CREST BOULEVARD
HOUSTON, TEXAS 77087
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 644-9974
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ------
The number of shares of Common Stock issued and outstanding, par value
$0.50 per share, as of August 8, 1996 was 6,701,500.
<PAGE> 2
SERV-TECH, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet
June 30, 1996 (Unaudited) and December 31, 1995....................... 3
Consolidated Statement of Operations (Unaudited)
For the Three Months and Six Months Ended
June 30, 1996 and 1995................................................ 4
Consolidated Statement of Cash Flows (Unaudited)
For the Six Months Ended June 30, 1996 and 1995....................... 5
Notes to Consolidated Financial Statements (Unaudited)................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...... 14
Item 6. Exhibits and Reports on Form 8-K......................... 14
PART III. SIGNATURES............................................... 15
</TABLE>
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<PAGE> 3
SERV-TECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30,December 31,
1996 1995
----------- ------------
ASSETS (unaudited)
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................. $ - $ 287,356
Accounts receivable, net.............................................. 31,417,263 31,941,127
Costs and estimated earnings in excess of billings on
uncompleted contracts............................................... 1,958,757 2,111,396
Inventory............................................................. 2,255,765 1,700,462
Prepaid expenses...................................................... 1,105,657 768,161
Deferred income taxes................................................. 4,241,425 4,345,398
Net current assets from discontinued operations....................... 9,289,150 16,865,749
----------- ------------
Total current assets............................................ 50,268,017 58,019,649
PROPERTY, PLANT AND EQUIPMENT, NET....................................... 27,809,012 29,325,986
INTANGIBLE ASSETS, NET................................................... 14,552,276 14,748,088
OTHER ASSETS............................................................. 2,844,592 1,884,763
DEFERRED INCOME TAXES.................................................... 433,040 -
NET NON-CURRENT ASSETS, DISCONTINUED OPERATIONS.......................... 1,968,702 3,623,219
----------- ------------
Total assets.................................................... $97,875,639 $107,601,705
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................................... $13,712,242 $13,295,347
Accrued liabilities................................................... 14,103,082 13,545,808
Billings in excess of costs and estimated earnings on
uncompleted contracts............................................... 387,084 359,415
Revolving line of credit.............................................. 14,500,000 6,500,000
Income taxes payable..................................................... - 295,865
Other.................................................................... 545,507 207,732
----------- ------------
Total current liabilities............................................. 43,247,915 34,204,167
LONG-TERM DEBT, LESS CURRENT MATURITIES.................................. 15,170,000 15,170,000
DEFERRED INCOME TAXES.................................................... - 4,812,740
MINORITY INTEREST........................................................ 534,456 484,952
CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value; 2,000,000 shares
authorized; no shares issued and outstanding........................ - -
Common stock, par value $.50, authorized 20,000,000
shares; issued and outstanding shares of 6,806,849
and 6,752,671, respectively......................................... 3,403,425 3,376,336
Additional paid-in capital............................................ 43,817,584 43,489,763
Retained earnings (deficit)............................................ (7,185,958) 7,675,586
Treasury stock, at cost, 120,606 and 193,358 shares, respectively...... (961,816) (1,546,857)
Cumulative translation adjustment...................................... (149,967) (64,982)
----------- ------------
Total stockholders' equity....................................... 38,923,268 52,929,846
----------- ------------
Total liabilities and stockholders' equity....................... $97,875,639 $107,601,705
=========== ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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<PAGE> 4
SERV-TECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------- --------------------------------
1996 1995 1996 1995
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Revenues....................................... $ 38,471,348 $ 45,876,770 $ 71,581,267 $ 106,201,050
Costs of services.............................. 30,752,085 37,569,722 56,362,019 87,076,932
------------ ------------ ------------ --------------
Gross profit................................ 7,719,263 8,307,048 15,219,248 19,124,118
Selling, general and administrative
expenses.................................... 11,684,617 7,888,115 18,289,266 16,185,301
------------ ------------ ------------ --------------
Operating income (loss)..................... (3,965,354) 418,933 (3,070,018) 2,938,817
Other income (expense):
Interest expense............................ (527,704) (501,833) (1,070,268) (914,395)
Interest income............................. 39,926 12,375 50,730 40,059
Other, net................................ (34,825) 44,025 (24,727) 113,342
------------ ------------ ------------ --------------
(522,603) (445,433) (1,044,265) (760,994)
------------ ------------ ------------ --------------
Minority interest.............................. (14,532) (55,891) (49,504) (369,279)
Equity in earnings of affiliates............... - - - (24,331)
------------ ------------ ------------ --------------
Pre-tax earnings (loss) from continuing
operations................................ (4,502,489) (82,391) (4,163,787) 1,784,213
Income tax benefit (expense)................... 1,175,000 (4,000) 1,036,000 (911,000)
------------ ------------ ------------ --------------
Net income (loss) from continuing operations... (3,327,489) (86,391) (3,127,787) 873,213
Income (loss) from discontinued operations,
net of income taxes........................ (6,178,334) 752,679 (7,407,208) 1,310,397
Estimated loss on disposal of discontinued
operations, net of tax benefit............. (4,326,546) - (4,326,546) -
------------ ------------ ------------ --------------
Net income (loss).............................. (13,832,369) 666,288 (14,861,541) 2,183,610
============ ============ ============ ==============
Earnings (loss) per share from continuing
operations................................ (0.50) (0.01) (0.47) 0.13
Earnings (loss) per share from discontinued
operations................................ (1.57) 0.11 (1.76) 0.19
------------ ------------ ------------ --------------
Net income (loss) per share.................... (2.07) 0.10 (2.23) 0.32
============ ============ ============ ==============
Weighted average common shares outstanding 6,672,561 6,734,343 6,650,039 6,726,574
============ ============ ============ ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE> 5
SERV-TECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the six months ended June 30, 1996 and 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations....................... $(3,127,787) $ 873,213
Adjustments:
Depreciation and amortization.................................... 3,030,054 3,133,559
Provision for losses on accounts and notes receivable............ 48,775 382,648
Deferred income taxes............................................ (1,036,000) (532,542)
Non-cash charges................................................. 1,387,207 -
Equity in losses of affiliates................................... - 24,331
Minority interest................................................ 49,504 369,279
Other............................................................ 94,609 96,781
----------- -----------
446,362 4,347,269
Change in assets and liabilities, net of effect from
acquisitions of businesses:
Accounts receivable............................................ 475,089 (6,838,688)
Net change in costs, estimated earnings and billings on
uncompleted contracts........................................ 180,308 176,677
Inventory...................................................... (555,303) (758,065)
Prepaid expenses and other current assets...................... (337,495) 268,227
Other assets................................................... (959,829) (707,052)
Accounts payable............................................... 416,895 3,969,572
Accrued liabilities............................................ 355,710 (265,775)
----------- -----------
Net cash provided by operating activities.................... 21,737 192,165
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................... (1,085,853) (1,423,125)
Payments to discontinued operations................................ (7,100,000) (4,400,000)
Investments in and advances to affiliates.......................... - (290,263)
Acquisition of businesses, net of cash acquired.................... - (625,514)
Intangible assets.................................................. (328,957) (67,530)
Proceeds from disposition of property, plant and
equipment ....................................................... - 140,000
----------- -----------
Net cash used in investing activities........................ (8,514,810) (6,666,432)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt..................................... 13,746,450 13,000,000
Principal payments of debt......................................... (5,550,733) (7,827,472)
----------- -----------
Net cash provided by financing activities.................... 8,205,717 5,172,528
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. (287,356) (1,301,739)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...................... 287,356 1,301,739
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................ $ - $ -
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE> 6
SERV-TECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
-----------------
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of
Serv-Tech, Inc., and its majority-owned subsidiaries ("Company"). The unaudited
consolidated financial statements have been prepared consistent with the
accounting policies reflected in the consolidated financial statements included
in the Company's Form 10-K filed with the Securities and Exchange Commission
for the year ended December 31, 1995, and should be read in conjunction
therewith.
In management's opinion, the unaudited consolidated financial
statements include all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation of the Company's consolidated
financial position at June 30, 1996, and the consolidated results of its
operations and cash flows for the three and six months ended June 30, 1996 and
1995. Interim results are not necessarily indicative of results for a full
year.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of: ("SFAS 121"). This
statement requires that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever events or
changes indicate the carrying amount of an asset may not be recoverable. The
adoption of SFAS 121 had no effect on the consolidated financial statements for
the three and six months ended June 30, 1996.
Certain reclassifications have been made to conform to current year
presentation with no effect on earnings.
2. DISCONTINUED OPERATIONS
In July 1996, the Company announced its intent to discontinue its
engineering, procurement and construction ("EPC") operations. The discontinued
EPC operations consist of, (i) several domestic EPC projects near completion,
(ii) F.C. Schaffer and Associates which includes the Finchaa Sugar Factory
project as well as a consulting engineering practice, (iii) a construction
company in Orange, Texas and (iv) engineering operations in Lake Charles and
New Orleans, Louisiana.
The EPC operations provide a full range of engineering consultation
and project management services primarily to the refining, petrochemical and
food processing industries. The Company's plan for divestiture from the EPC
business includes run-off of existing projects and the sale of certain
divisions and/or operations.
The net loss from discontinued operations of $6.2 million (net of
income tax benefit of $2.1 million), or $0.92 per share, and $7.4 million (net
of income tax benefit of $2.8 million), or $1.11 per share, for the three and
six months ended June 30, 1996, respectively, included a $3.7 million, or $0.55
per share second quarter charge for the write-down of the profitability on
several domestic EPC projects and the Finchaa Sugar Mill project. Excluding the
effects of this charge, the second quarter 1996 net loss was $2.5 million, or
$0.37 per share, compared to $0.8 million (net of income tax expense of $0.4
million), or $0.11 per share, net income in the second quarter of 1995. Without
this $3.7 million charge, the net loss from discontinued operations was $3.7
million, or $0.56 per share, for the first half of 1996 compared to net income
of $1.3 million (net of income tax expense of $0.7 million), or $0.19 per share
for the corresponding period of 1995.
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<PAGE> 7
Additionally, in conjunction with the decision to discontinue the EPC
operations, the Company recorded a $4.3 million, or $0.65 per share, estimated
loss on disposal of the EPC operations for the estimated loss on sale and
disposal of certain EPC divisions and the related write-off of goodwill. The
estimated loss on disposal of the EPC operations includes a $0.3 million, or
$0.05 per share, estimated losses during phase-out period.
Net current assets from discontinued operations consist primarily of
Finchaa project cash and working capital of the remaining EPC operations. Net
non-current assets from discontinued operations consist of property and
equipment and a note payable of $1.7 million.
Revenues generated by the discontinued EPC operations for the three
months ended June 30, 1996 were $22.5 million, which included $11.5 million
related to the Finchaa Sugar Factory Project. For the first half of 1996, the
discontinued EPC operations generated $52.5 million in revenue, which included
$27.5 million related to Finchaa.
Finchaa Sugar Factory Project
During the first quarter of 1995, F. C. Schaffer & Associates
("Schaffer"), a subsidiary of the Company, secured an $83 million contract to
engineer, design, procure and construct a 4,000 metric ton cane-per-day sugar
factory and 45,000 liter-per-day ethanol plant in Finchaa, Ethiopia. The
project, which is financed by the African Development Bank, is expected to be
completed in the latter part of 1997 followed by a twelve month training and
warranty period. In conjunction with the effectiveness of the contract, the
Company received an advance payment equal to 20% of the contract value. The
Company has issued letters of credit to support performance and the 20% advance
payment. At June 30, 1996, such letters of credit totaled $9.5 million to
support the unrecorded portion of the advance payment and $8.4 million to
support project performance guarantees. Contractual payment amounts to
Schaffer are supported by a revolving letter of credit to be issued by the
Ethiopian government via the African Development Bank.
As of June 30, 1996, the Finchaa project was approximately 70% complete.
3. DEBT
At June 30, 1996, the Company maintained a revolving line of credit
agreement with two banks (the "Revolving Note"). The Revolving Note provides
for borrowings up to $35.0 million. Interest is payable monthly, at rates not
exceeding the bank's prime rate. The Company's weighted average borrowing rate
at June 30, 1996, was 7.4375%. The Revolving Note contains certain covenants
which require, among other things, that the Company maintain (i) minimum
consolidated tangible net worth, (ii) minimum consolidated net worth, (iii)
funded debt coverage ratio, and (iv) fixed charge coverage ratio. The Revolving
Note is not collateralized and the Company pays a commitment fee of .25% on the
unused portion. In addition, the Revolving Note contains certain restrictions
on the level of borrowings (borrowing base computation) and payment of
dividends. At June 30, 1996, working capital borrowings of $14.5 million were
outstanding under the Revolving Note. The revolving line of credit expires
September 30, 1996. The Company is currently in negotiation to renew and
extend the revolving line of credit.
At June 30, 1996, the Company had outstanding, against the Revolving
Note, irrevocable letters of credit amounting to approximately $5.6 million.
The letters of credit were issued to guarantee certain of the Company's
insurance programs and bid bonds.
-7-
<PAGE> 8
4. BUSINESS SEGMENTS
Summarized financial information by business segment is set forth
below (dollars in thousands):
Three months ended June 30,
<TABLE>
<CAPTION>
Environmental
Specialty & Performance Corporate
1996 Services SECO Chemicals & Other Consolidated
- ---- -------- ---- --------- ------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 20,975 $ 14,182 $ 4,157 $ (843) $ 38,471
Operating income (1,144)(a) 1,126 (744) (3,203)(n) (3,965)
1995
- ----
Revenues $ 33,325 $ 12,274 $ 4,043 $ (3,765) $ 45,877
Operating income 1,138 795 (229) (1,285) 419
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30,
Environmental
Specialty & Performance Corporate
1996 Services SECO Chemicals & Other Consolidated
- ---- -------- ---- --------- ------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 39,945 $ 26,071 $ 8,100 $ (2,535) $ 71,581
Operating income 296(a) 2,189 (912) (4,643)(b) (3,070)
1995
- ----
Revenues $ 78,814 $ 23,079 $ 8,098 $ (3,790) $ 106,201
Operating income 4,387 1,158 104 (2,710) 2,939
</TABLE>
(a) Includes a $1.4 million pre-tax charge for the impairment of certain
obsolete equipment and the write-off of an uncollectible receivable.
(b) Includes a pre-tax charge of $1.3 million primarily related to severance
costs, consulting and professional fees.
5. CONTINGENCIES
The Company is involved in various claims and disputes incidental to its
business. The Company believes that the disposition of all such claims and
disputes, individually or in the aggregate, should not have a material adverse
effect upon the Company's financial position, results of operations or cash
flows.
At June 30, 1996, the Company had irrevocable letters of credit
outstanding of approximately $26.2 million. The letters of credit were issued
primarily to (i) guarantee certain of the Company's insurance programs amounting
to $5.6 million, (ii) support Finchaa Sugar Mill Project procurement amounting
to $2.7 million, (iii) $9.5 million to support the unrecovered portion of the
Finchaa project advance payment and (iv) to support job performance guarantees
on the Finchaa Sugar Mill Project amounting to $8.4 million (see Note 2).
6. SUPPLEMENTAL CASH FLOW INFORMATION
Components of cash used for acquisitions as reflected in the
consolidated statements of cash flows for the six months ended June 30, 1995
are summarized as follows:
<TABLE>
<S> <C>
Fair value of current assets, net of cash acquired................ $ 623,917
Fair value of noncurrent assets, excluding intangibles............ 342,895
Intangibles*...................................................... 523,216
Minority interest*................................................ 600,000
Liabilities assumed............................................... (1,472,514)
------------
$ 625,514
============
</TABLE>
*Net of $1.5 million in non-cash consideration.
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<PAGE> 9
In May 1995, the Company acquired an additional 20% of the
outstanding common stock of its specialty welding subsidiary, ST Piping, Inc.,
from the minority shareholders of that company for $600,000 cash and 180,000
shares of Company common stock. Also, in April 1995, the Company acquired the
remaining 70% of an equity affiliate, Hill Technical Services, Inc. The
issuance of 197,500 shares of Company common stock with a fair market value of
approximately $1.5 million issued in connection with these acquisitions, has
been excluded from the consolidated statement of cash flows for the six months
ended June 30, 1995.
7. MERGER
In April 1996, the Company announced the signing of a letter of intent
to merge with HydroChem Industrial Services, Inc. ("HydroChem") of Houston.
The transaction would be tax-free for shareholders of both companies. The
letter of intent calls for both parties to negotiate and finalize a definitive
merger agreement. Consummation of the merger will be subject to approval by
the Board of Directors and shareholders of each company, and upon usual and
customary conditions, including regulatory approval.
8. SUBSEQUENT EVENT
On July 25, 1996, the Company received a $30.0 million verdict by a
Houston, Texas jury on a retrial against Stewart & Stevenson Services, Inc.
("Stewart & Stevenson") for breach of an agreement that contained confidential
information and trade secrets. Before the trial, the parties entered into a
settlement agreement by which Stewart & Stevenson waived its right of appeal of
the trial-court judgment in the case and guaranteed a minimum recovery of
$250,000 in exchange for a $20.0 million cap on any recovery by the Company.
Stewart & Stevenson has annouced that it will ask the trial court to set aside
the verdict. While it is unlikely that the judge will grant such relief to
Stewart & Stevenson, neither party may appeal the trial court's final decision.
Stewart & Stevenson's obligation to the Company will be triggered under the
pre-trial agreement upon entry of the judgment by the trial court, which is
expected in the near future.
After payment of attorney's fees and payment to the Company's founder,
Richard W. Krajicek, the Company's recovery would be approximately $6.0
million, if the trial judge enters a judgment, as expected, on the jury award.
This jury award is not reflected in the consolidated financial statements as of
or for the period ending June 30, 1996.
This lawsuit was previously tried in June 1992, and the Company was
then awarded a $17.5 million judgment by a Houston, Texas trial court. In
April 1994, the 14th Court of Appeals of the State of Texas reversed the
judgment, which had been obtained in the previous lawsuit against Stewart &
Stevenson and remanded the case for the present retrial.
-9-
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Continuing Operations
The net loss from continuing operations of $3.3 million, or $0.50 per
share, and $3.1 million, or $0.47 per share, for the three and six months ended
June 30, 1996, respectively, included a $2.3 million, or $0.35 per share second
quarter charge for the impairment of certain obsolete equipment, the write-off
of an uncollectible receivable and severance related costs. Excluding the
effects of this charge, the second quarter 1996 net loss was $1.0 million, or
$0.15 per share, compared to an $0.1 million, or $0.01 per share, net loss in
the second quarter of 1995. Without this $2.3 million charge, the Company's net
loss from continuing operations was $0.8 million, or $0.13 per share, for the
first half of 1996 compared to net income of $0.9 million, or $0.13 per share,
for the corresponding period of 1995.
Consolidated revenues from continuing operations for the second
quarter of 1996 of $38.5 million, were $7.4 million, or 16.1%, lower than the
second quarter of 1995. Consolidated revenues for the first half of 1996 were
$71.6 million, a decrease of $34.6 million, or 32.6%, over the six months ended
June 30, 1995. The decrease is attributable primarily to lower levels of
activity in the specialty turnaround maintenance business, Specialty Services,
resulting from delays in scheduled maintenance at refinery facilities which
were experiencing improved margins. The decrease in Specialty Services revenue
was partially offset by increased revenue from SECO Industries ("SECO"), the
electrical and instrumentation services subsidiary.
Consolidated gross profit margins as a percentage of revenues
increased from 18.1% for the second quarter of 1995 to 20.1% for the second
quarter of 1996, and from 18.0% for the six months ended June 30, 1995 to 21.3%
for the first half of 1996. The increase in 1996 gross profit margins is due
primarily to improved Specialty Services project management and performance.
Consolidated selling, general and administrative expenses for the
second quarter of 1996 of $11.7 million included a pre-tax charge of $3.5
million for the impairment of certain equipment, the write-off of an
uncollectible receivable and severance related costs. Excluding this charge,
second quarter overhead expenses were $8.2 million, an increase of $0.3
million, or 4.0%, over the second quarter of 1995. For the six months ended
June 30, 1996, consolidated selling, general and administrative expenses,
excluding the $3.5 million second quarter charge, were $14.8 million, a
decrease of $1.4 million, or 8.5%, over the same period of 1995. The decrease
in overhead expenses is consistent with the decrease in revenues.
Interest expense for the six months ended June 30, 1996, increased
$0.2 million, or 17.0% to $1.1 million. The increase is due to increased
borrowings during 1996 under the Company's line of credit.
Minority interest for the six months ended June 30, 1996 decreased
$0.3 million to $0.1 million. In May 1995, the Company acquired an additional
20% of the outstanding common stock of ST Piping, Inc., our specialty welding
subsidiary, from the minority shareholders of that company. Prior to the
acquisition the Company owned 70%. The reduced level of minority ownership in
ST Piping coupled with its reduced level of earnings in 1996 as compared to
1995, due to the lower levels of activity in the specialty turnaround
maintenance business during the first half of 1996, have caused the decrease in
minority interest.
Specialty Services
Specialty Services generated revenues of $21.0 million for the second
quarter of 1996, a decrease of $12.4 million, or 37.1%, over the second quarter
of 1995. For the six months ended June 30, 1996, Specialty Services revenues
amounted to $39.9 million, a decrease of $38.9 million, or 49.3%, over the same
period of 1995. As noted above the decreased revenues in 1996 are attributable
to the lower levels of business activity throughout the turnaround maintenance
business, resulting from delays in scheduled maintenance at refinery facilities
which were experiencing improved margins.
The operating loss for the second quarter of 1996 of $1.1 million
included a $1.4 million pre-tax charge for the impairment of certain obsolete
equipment and the write-off of an uncollectible receivable. Excluding this
charge, Specialty Services generated $0.3 million in operating income, a
decrease of $0.8 million, from $1.1 million in the second quarter of 1995.
Operating income for the first half of 1996, excluding the second quarter
charge of $1.4 million totaled $1.7 million, a decrease of $2.6 million from
the comparable period of 1995. The decrease is consistent with the reduced
levels of turnaround maintenance revenue as discussed above.
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<PAGE> 11
SECO
SECO revenues increased from $12.3 million for the second quarter of
1995 to $14.2 million for the second quarter of 1996 representing an increase
of $1.9 million. Revenues increased $3.0 million for the first half of 1996
over the same period of 1995, to $26.1 million. The increase resulted
primarily from increased electrical and instrumentation installations on
deepwater production platforms. Revenues for the six months ended June 30,
1996 included $4.8 million generated from the Shell Mars and Shell Ram/Powell
platforms compared to $2.8 million generated from the Shell Mars platform
during the first half of 1995.
Operating income was $1.1 million for the second quarter of 1996, an
increase of $0.3 million over the corresponding quarter of 1995. Operating
income was $2.2 million for the first half of 1996 an increase of $1.0 million
over the first half of 1995. The increase is due to the increased revenue
levels noted above coupled with decreased levels of selling, general and
administrative expenses in 1996 as compared to 1995. Overhead expenses in 1995
included additional costs incurred in an effort to expand SECO's services into
the international market.
Environmental And Performance Chemicals
Environmental and Performance Chemical revenues in 1996 are consistent
with the level of revenues generated in 1995. The second quarter operating loss
of $0.7 million includes a pre-tax charge of $0.7 million for the write-off of
certain tank cleaning equipment that will not be utilized in the future
operations of the Company. Excluding the effects of this charge, operating
income increased slightly in the second quarter of 1996 to break-even from a
$0.2 million operating loss in the second quarter of 1995. For the six months
ended June 30, 1996, excluding the effects of the second quarter charge,
operating income decreased $0.3 million to a $0.2 million operating loss. This
decrease is consistent with increased research and development expenditures
related to the development of the new paper-strengthening technology, Mastiffsm.
Corporate & Other
The operating loss for the three and six months ended June 30, 1996 of
$3.2 million and $4.6 million, respectively, include a pre-tax charge of $1.3
million primarily related to severance costs, consulting and professional fees.
Excluding this second quarter charge, the operating loss for the three and six
months ended June 30, 1996 was $1.9 million and $3.3 million, respectively.
Discontinued Operations
As discussed in Note 2 of Notes to Consolidated Financial Statements,
in July 1996, the Company announced its intent to discontinue its engineering,
procurement and construction ("EPC") operations. The discontinued EPC
operations consist of, (i) several domestic EPC projects near completion, (ii)
F.C. Schaffer and Associates which includes the Finchaa Sugar Factory project
as well as a consulting engineering practice, (iii) a construction company in
Orange, Texas and (iv) engineering operations in Lake Charles and New Orleans,
Louisiana.
The EPC operations provide a full range of engineering consultation
and project management services primarily to the refining, petrochemical and
food processing industries. The Company's plan for divestiture from the EPC
business includes run-off of existing projects and the sale of certain
divisions and/or operations.
The net loss from discontinued operations of $6.2 million, or $0.92
per share, and $7.4 million, or $1.11 per share, for the three and six months
ended June 30, 1996, respectively, included a $3.7 million, or $0.55 per share
second quarter charge for the write-down of the profitability on several
domestic EPC projects and the Finchaa Sugar Mill project. Excluding the
effects of this charge, the second quarter 1996 net loss was $2.5 million, or
$0.37 per share, compared to $0.8 million, or $0.11 per share, net income in
the second quarter of 1995. Without this
-11-
<PAGE> 12
$3.7 million charge, the net loss from discontinued operations was $3.7 million,
or $0.56 per share, for the first half of 1996 compared to net income of $1.3
million, or $0.19 per share for the corresponding period of 1995. The decrease
in EPC net income is principally due to lower job level profits, decreased
project backlog and increased overhead expenses in 1996 resulting from lower
than anticipated EPC activity.
Additionally, in conjunction with the decision to discontinue the EPC
operations, the Company recorded a $4.3 million, or $0.65 per share, estimated
loss on disposal of the EPC operations for the estimated loss on sale and
disposal of certain EPC divisions and the related write-off of goodwill. The
estimated loss on disposal of the EPC operations includes a $0.3 million, or
$0.05 per share, estimated losses during phase-out period.
Net current assets from discontinued operations consist primarily of
Finchaa project cash and working capital of the remaining EPC operations. Net
non-current assets from discontinued operations consist of property and
equipment and a note payable of $1.7 million.
Revenues generated by the discontinued EPC operations for the three
months ended June 30, 1996 were $22.5 million, which included $11.5 million
related to the Finchaa Sugar Factory Project. For the first half of 1996, the
discontinued EPC operations generated $52.5 million in revenue, which included
$27.5 million related to Finchaa.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures for the first half of 1996, excluding
acquisitions, were approximately $1.0 million. These expenditures were
primarily for the purchase and manufacture of equipment necessary to support
the Company's business activities. Capital expenditures for the remainder of
1996, excluding acquisitions, are expected to be approximately $1.0 million.
At June 30, 1996, the Company's working capital totaled approximately
$7.0 million ($21.5 million excluding the revolving line of credit). The
Company has been able to finance its working capital requirements primarily
through its cash flows from operations and bank borrowings. The Company
maintains a $35.0 million revolving line of credit with two banks which expires
September 30, 1996. At June 30, 1996, $14.5 million was outstanding under the
revolving line of credit. The Company is currently in negotiations to renew and
extend its revolving line of credit. In addition, the Company has $15.0 million
in 8.41% Senior Notes Payable due June 2003. See Note 3 of the Notes to
Consolidated Financial Statements for additional information.
For the six-months-ended June 30, 1996, the company generated cash
from operating activities of $22,000, consisting primarily of a net loss of
$3.1 million and an increase in deferred income taxes of $1.0 million, offset
by depreciation and amortization of $3.3 million, and non-cash charges of $1.4
million. Net cash used in investing activities was $8.5 million for the
six-months-ended June 30, 1996, consisting primarily of capital expenditures of
$1.1 million and payments to discontinued operations of $7.1 million. Net cash
provided from financing activities for the six-month period of $8.2 million
consisted of net borrowings from the company's revolving line of credit.
As further discussed in Note 2 of Notes to Consolidated Financial
Statements, the Company secured an $83.0 million contract to engineer, design,
procure and construct a 4,000 metric ton cane-per-day sugar factory and 45,000
liter-per-day ethanol facility in Finchaa, Ethiopia. The project, which is
financed by the African Development Bank, is expected to be completed in the
latter part of 1997. On February 7, 1995, the Company received an advanced
payment equal to 20% of the contract value. The Company issued letters of
credit to support performance and the 20% advance payment. At June 30, 1996,
such letters of credit totaled $9.5 million to support the unrecovered portion
of the advance payment and $8.4 million to support the project performance
guarantees. In addition, the Company has outstanding approximately $2.7 million
in commercial letters of credit to support vendor purchases. Contractual
payments to the Company are supported by a revolving letter of credit issued by
the Ethiopian government via the African Development Bank. The project, which
was approximately 70% complete at June 30, 1996, is expected to be self-funding
and, therefore, should not require working capital support other than payments
received from the project owner.
At June 30, 1996, the Company had a net operating loss for tax
purposes of approximately $5.0 million, $2.0 million of which is available for
refund against prior year taxes paid while the remaining $3.0 million will be
available to reduce future tax payments.
-12-
<PAGE> 13
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At its Annual Meeting of Stockholders on May 23, 1996, the
stockholders voted on the following matters:
1. Approved an amendment to the 1989 Director Stock Option
Plan to increase the number of shares of Common Stock
available for option grants thereunder from the 50,000
shares to 100,000 shares.
Holders of 4,555,766 shares voted for the amendment,
673,730 voted against the amendment, and 80,374 shares
abstained from voting.
2. Elected the following directors to serve until the next
annual meeting and until their successors are elected and
qualify:
<TABLE>
<CAPTION>
For Abstain
--- -------
<S> <C> <C>
Richard L. Daerr 5,277,484 32,386
Robert J. Cresci 5,277,184 32,686
Charles M. Balch, M.D. 5,276,984 32,886
D.D. (Del) Hock 5,277,484 32,386
Mike M. Mustafoglu 5,276,984 32,886
John B. O'Brien 5,277,484 32,386
James M. Piette 5,277,484 32,386
Frank A. Perrone 5,277,484 32,386
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
-14-
<PAGE> 14
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.
SERV-TECH, INC.
By /s/ David P. Tusa
-------------------------------------------------
David P. Tusa
Sr. Vice President,
Finance and Administration
Date August 14, 1996
-----------------------------------------------
By /s/ Dale W. Wilhelm
-------------------------------------------------
Dale W. Wilhelm
Corporate Controller
Date August 14, 1996
-----------------------------------------------
-15-
<PAGE> 15
EXHIBIT INDEX
27 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (A) the
unaudited financial statements of Serv-Tech, Inc. and Subsidiaries as June 30,
1996, and for the six months ended June 30, 1996 and is qualified in its
entirety by reference to such (B) consolidated financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 32,305,622
<ALLOWANCES> (888,359)
<INVENTORY> 2,255,765
<CURRENT-ASSETS> 50,268,017
<PP&E> 47,506,130
<DEPRECIATION> (19,697,118)
<TOTAL-ASSETS> 97,875,639
<CURRENT-LIABILITIES> 43,247,917
<BONDS> 15,170,000
<COMMON> 3,403,425
0
0
<OTHER-SE> 35,519,843
<TOTAL-LIABILITY-AND-EQUITY> 97,875,639
<SALES> 71,581,267
<TOTAL-REVENUES> 71,581,267
<CGS> 0
<TOTAL-COSTS> 56,362,019
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 48,775
<INTEREST-EXPENSE> 1,070,268
<INCOME-PRETAX> (4,163,787)
<INCOME-TAX> (1,036,000)
<INCOME-CONTINUING> (3,127,787)
<DISCONTINUED> (11,733,754)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,861,541)
<EPS-PRIMARY> (2.23)
<EPS-DILUTED> 0
</TABLE>
