<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 September 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 November 8, 1996 was 6,810,198.
<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
September 30, 1996 (Unaudited) and December 31, 1995 . . . . . . 3
Consolidated Statement of Operations (Unaudited)
For the Three Months and Nine Months Ended
September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows (Unaudited)
For the Nine Months Ended September 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 6. Exhibits and Reports on Form 8-K . . . . . . . . . 15
PART III. SIGNATURES . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
-2-
<PAGE> 3
SERV-TECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 6,935,127 $ 287,356
Accounts receivable, net .................................................. 31,367,567 31,941,127
Costs and estimated earnings in excess of billings on
uncompleted contracts .................................................... 1,107,565 2,111,396
Inventory ................................................................. 2,214,434 1,700,462
Prepaid expenses .......................................................... 990,787 768,161
Deferred income taxes ..................................................... 3,519,607 4,345,398
Net current assets from discontinued operations ........................... 7,335,120 16,865,749
------------- -------------
Total current assets .................................................. 53,470,207 58,019,649
PROPERTY, PLANT AND EQUIPMENT, NET ........................................... 26,656,756 29,325,986
INTANGIBLE ASSETS, NET ....................................................... 14,330,365 14,748,088
OTHER ASSETS ................................................................. 3,091,440 1,884,763
NET NON-CURRENT ASSETS, DISCONTINUED OPERATIONS .............................. 1,395,135 3,623,219
------------- -------------
Total assets .......................................................... $ 98,943,903 $ 107,601,705
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................................... $ 11,599,766 $ 13,295,347
Accrued liabilities ....................................................... 13,439,033 13,545,808
Billings in excess of costs and estimated earnings on
uncompleted contracts ................................................... 512,753 359,415
Revolving line of credit .................................................. 14,500,000 6,500,000
Income taxes payable ......................................................... -- 295,865
Other ........................................................................ 629,347 207,732
------------- -------------
Total current liabilities ................................................. 40,680,899 34,204,167
LONG-TERM DEBT, LESS CURRENT MATURITIES ...................................... 15,170,000 15,170,000
DEFERRED INCOME TAXES ........................................................ -- 4,812,740
MINORITY INTEREST ............................................................ 554,000 484,952
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 6,873,949
and 6,752,671, respectively ............................................. 3,436,975 3,376,336
Additional paid-in capital ................................................ 43,980,442 43,489,763
Retained earnings (deficit) ............................................... (4,012,219) 7,675,586
Treasury stock, at cost, 86,614 and 193,358 shares, respectively .......... (633,745) (1,546,857)
Cumulative translation adjustment ......................................... (232,449) (64,982)
------------- -------------
Total stockholders' equity .......................................... 42,539,004 52,929,846
------------- -------------
Total liabilities and stockholders' equity .......................... $ 98,943,903 $ 107,601,705
============= =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-3-
<PAGE> 4
SERV-TECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues ................................... $ 34,375,133 $ 30,016,825 $ 106,159,971 $ 136,217,875
Costs of services .......................... 27,179,532 23,968,757 83,745,125 111,045,689
------------- ------------- ------------- -------------
Gross profit ............................ 7,195,601 6,048,068 22,414,846 25,172,186
Selling, general and administrative
expenses ................................ 8,252,656 8,291,920 26,540,028 24,477,221
------------- ------------- ------------- -------------
Operating income (loss) ................. (1,057,055) (2,243,852) (4,125,182) 694,965
Other income (expense):
Interest expense ........................ (584,226) (454,676) (1,632,930) (1,369,071)
Interest income ......................... 21,936 2,118 49,169 42,177
Other, net .............................. 5,868,628 36,965 5,843,943 150,307
------------- ------------- ------------- -------------
5,306,338 (415,593) 4,260,182 (1,176,587)
------------- ------------- ------------- -------------
Minority interest .......................... (19,544) (18,092) (69,048) (387,371)
Equity in earnings of affiliates ........... -- -- -- (24,331)
------------- ------------- ------------- -------------
Pre-tax earnings (loss) from continuing
operations ................................ 4,229,739 (2,677,537) 65,952 (893,324)
Income tax benefit (expense) ............... (1,056,000) 1,100,000 (20,000) 189,000
------------- ------------- ------------- -------------
Net income (loss) from continuing
operations ................................ 3,173,739 (1,577,537) 45,952 (704,324)
Income (loss) from discontinued operations,
net of income taxes ....................... -- 263,459 (7,407,208) 1,573,857
Estimated loss on disposal of discontinued
operations, net of tax benefit ............ -- -- (4,326,546) --
------------- ------------- ------------- -------------
Net income (loss) .......................... 3,173,739 (1,314,078) (11,687,802) 869,533
============= ============= ============= =============
Earnings (loss) per share from continuing
operations ................................ 0.47 (0.23) 0 .01 (0.10)
Earnings (loss) per share from discontinued
operations ................................ -- 0 .04 (1.76) 0.23
------------- ------------- ------------- -------------
Net income (loss) per share ................ 0.47 (0.19) (1.75) 0.13
============= ============= ============= =============
Weighted average common shares outstanding . 6,731,255 6,849,065 6,677,308 6,772,660
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-4-
<PAGE> 5
SERV-TECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the nine months ended September 30, 1996 and 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations ................. $ 45,952 $ (704,324)
Adjustments:
Depreciation and amortization ............................. 4,440,445 5,078,574
Provision for losses on accounts and notes receivable ..... (113,994) 758,069
Deferred income taxes ..................................... -- (847,294)
Non-cash charges .......................................... 1,387,207 --
Equity in losses of affiliates ............................ -- 24,331
Minority interest ......................................... 69,048 387,371
Other ..................................................... (22,883) (78,964)
------------ ------------
5,805,775 4,617,763
Change in assets and liabilities, net of effect from
acquisitions of businesses:
Accounts receivable ................................... 687,554 (6,989,659)
Net change in costs, estimated earnings and billings on
uncompleted contracts ................................ 1,157,169 1,372,955
Inventory ............................................. (513,972) 40,891
Prepaid expenses and other current assets ............. (222,626) 173,897
Other assets .......................................... (1,206,677) (229,776)
Accounts payable ...................................... (1,695,581) 2,515,330
Accrued liabilities ................................... (106,775) 2,333,894
------------ ------------
Net cash provided by operating activities ........... 3,904,867 3,835,295
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ......................................... (1,663,702) (3,711,975)
Payments to discontinued operations .......................... (4,700,000) (3,400,000)
Investments in and advances to affiliates .................... -- (58,629)
Acquisition of businesses, net of cash acquired .............. -- (625,514)
Intangible assets ............................................ (370,553) (104,299)
Proceeds from disposition of property, plant and
equipment ................................................. 1,339,535 --
------------ ------------
Net cash used in investing activities ............... (5,394,720) (7,900,417)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt ............................... 13,831,874 16,500,000
Principal payments of debt ................................... (5,694,250) (12,606,274)
------------ ------------
Net cash provided by financing activities ........... 8,137,624 3,893,726
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............ 6,647,771 (171,396)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................ 287,356 1,301,739
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 6,935,127 $ 1,130,343
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-5-
<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 September 30, 1996, and the consolidated results of its
operations and cash flows for the three and nine months ended September 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 nine months ended September 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 EPC
operations provided a full range of engineering consultation and project
management services primarily to the refining, petrochemical and food
processing industries. The discontinued EPC operations consisted of, (i)
several domestic EPC projects (which have now been completed), (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 (which has been closed and remaining assets are in process of
being sold) and (iv) engineering operations in Lake Charles and New Orleans,
Louisiana (which have been sold).
The net loss from discontinued operations of $7.4 million (net of
income tax benefit of $2.8 million), or $1.11 per share, for the nine months
ended September 30, 1996, 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 Factory project. Excluding the effects of this
charge, the net loss from discontinued operations was $3.7 million, or $0.56
per share for the nine months ended September 30, 1996 compared to net income
of $1.6 million (net of income tax expense of $0.8 million), or $0.23 per share
for the corresponding period of 1995.
Additionally, in conjunction with the decision to discontinue the EPC
operations, during the second quarter of 1996, 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.
-6-
<PAGE> 7
Net current assets from discontinued operations at September 30, 1996
consisted primarily of (i) working capital associated with the Finchaa project
and the consulting engineering practice of F.C. Schaffer and Associates and
(ii) residual EPC related receivables in the process of being collected. Net
non-current assets from discontinued operations consisted of property and
equipment and a note payable of $1.4 million.
Revenues generated by the discontinued EPC operations for the three
months ended September 30, 1996 were $13.9 million, which included $9.6 million
related to the Finchaa Sugar Factory Project. For the nine months ended
September 30, 1996, the discontinued EPC operations generated $66.4 million in
revenue, which included $37.1 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 warranty and
training 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 September 30, 1996, such letters of credit totaled $6.8 million to
support the unrecovered portion of the advance payment and $8.4 million to
support project performance guarantees, see Note 3. 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 September 30, 1996, the Finchaa project was approximately 75%
complete.
3. DEBT
The Company has recently reached agreement with its lenders regarding
the restructuring of its debt facilities including the: (i) $15.0 million
long-term notes held by four insurance companies (the "Notes"), (ii) revolving
line of credit with two banks (the "Revolver"), and (iii) the letters of credit
supporting performance and advance payment amounts related to the Finchaa Sugar
Factory project totaling $15.2 million at September 30, 1996 (the "Finchaa
LOC").
Under the new agreements, the Notes accrue interest at a rate of
10.50% with 0.25% incremental increases each quarter beginning January 1, 1998,
through December 31, 1998 (rate caps at 11.50% through maturity). The Notes are
collateralized by substantially all assets of the Company. Monthly principal
payments of $208,333 are payable beginning July 1997, through the June 2003
maturity date.
The Revolver permits borrowings up to $23.5 million until June 30,
1997, when the amount reduces to $19.5 million, until its scheduled December
31, 1997 maturity. Interest is payable monthly at a rate equivalent to either
eurodollar plus 4.09% (currently equal to 9.03%) or prime plus 1.0% (currently
equal to 9.25%). Borrowings under the Revolver are collateralized by
substantially all assets of the Company. At September 30, 1996, working capital
borrowings of $14.5 million were outstanding under the Revolver. Additionally,
the Company has irrevocable letters of credit of $5.0 million outstanding,
leaving total availability under the Revolver, at $4.0 million. Borrowings under
the Revolver are also subject to a borrowing base computation, which is limited
primarily to 75% of eligible accounts receivable, as defined.
The Notes, Revolver and Finchaa LOC agreements contain covenants,
which require, among others, that the Company maintain: (i) minimum
consolidated net worth, (ii) minimum cash flow (defined as earnings before
interest, taxes, depreciation and amortization), and (iii) minimum fixed charge
coverage. Additionally, the Company is limited in its debt-to-capitalization
ratio as well as capital expenditures. Draws, if any, under the Finchaa LOC
would represent loans, which would be secured by substantially all assets of
the Company.
-7-
<PAGE> 8
4. BUSINESS SEGMENTS
Summarized financial information by business segment is set forth
below (dollars in thousands):
Three months ended September 30,
<TABLE>
<CAPTION>
Environmental
Specialty & Performance Corporate
1996 Services SECO Chemicals & Other Consolidated
- ---- -------- --------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $16,662 $13,570 $4,541 $ (398) $34,375
Operating income (544) 1,035 4 (1,552) (1,057)
1995
- ----
Revenues $15,690 $14,366 $4,906 $(4,945) $30,017
Operating income (2,494) 1,398 110 (1,258) (2,244)
</TABLE>
Nine months ended September 30,
<TABLE>
<CAPTION>
Environmental
Specialty & Performance Corporate
1996 Services SECO Chemicals & Other Consolidated
- ---- -------- --------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $56,606 $39,642 $12,641 $(2,729) $106,160
Operating income (248)(a) 3,225 (909)(b) (6,193)(c) (4,125)
1995
- ----
Revenues $94,504 $37,445 $13,003 $(8,734) $136,218
Operating income 2,023 2,557 214 (4,099) 695
</TABLE>
(a) Includes a $1.4 million second quarter pre-tax charge for the impairment of
certain obsolete equipment and the write-off of an uncollectible
receivable.
(b) Includes a $0.7 million pre-tax second quarter charge for the write-off of
certain tank cleaning equipment that will not be utilized in the future
operations of the Company.
(c) Includes a second quarter 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 September 30, 1996, the Company had irrevocable letters of credit
outstanding of approximately $22.8 million. The letters of credit were issued
primarily to (i) guarantee certain of the Company's insurance programs
amounting to $5.0 million, (ii) support Finchaa Sugar Mill Project procurement
amounting to $2.6 million, (iii) $6.8 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 nine months ended September 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.
-8-
<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 nine months
ended September 30, 1995.
7. RELATED PARTY TRANSACTION/TREASURY STOCK
In August 1995, Richard W. Krajicek retired as Chairman of the
Company. Mr. Krajicek was subsequently retained by the Company under a five
year consulting agreement. Mr. Krajicek, along with certain family members,
owned 815,491 shares of Company common stock. The Company has agreed to pay Mr.
Krajicek an amount equal to the shortfall, if any, between the average sales
price and $8.00 per share for up to 203,873 shares sold per year commencing on
November 9, 1995, and ending on November 9, 1999 (the "Krajicek Agreement").
The average sales price, related to stock sold, shall be computed in arrears at
the end of each twelve month period and shall be based on the highest priced
203,873 shares (or portion thereof) sold during such period.
On October 1, 1995, the Company purchased 203,873 shares of Serv-Tech
stock from Mr. Krajicek at the then fair market price of $8.00 per share or a
total of $1.6 million, leaving 611,618 shares subject to the Krajicek
Agreement.
The Company has reached agreement with Mr. Krajicek to defer the cash
obligation due for the period from November 9, 1996, to November 8, 1997, that
would be due under the Krajicek Agreement. The deferral would be in the form of
a promissory note, due with interest. Based upon the current level of the
Serv-Tech stock price, Mr. Krajicek would be due approximately $1.0 million, if
the stock were sold pursuant to the terms of the Krajicek Agreement.
8. STEWART & STEVENSON SETTLEMENT
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. In
September 1996, after payment of attorney's fees and a payment to the Company's
founder, Richard W. Krajicek, the Company received and recorded a $5.8 million
net settlement ($3.9 million on an after-tax basis, or $0.57 per share).
9. TERMINATION OF MERGER DISCUSSIONS
On September 30, 1996, the Company terminated merger negotiations with
HydroChem Industrial Services, Inc. ("HydroChem") of Houston. The parties were
not able to reach final mutually-agreeable terms and conditions. In conjunction
with the termination of merger talks with HydroChem, the Company has engaged
the investment banking firm of Simmons & Company International to assist in
exploring strategic alternatives to enhance shareholder value.
-9-
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
For the three months ended September 30, 1996, the Company recorded
net earnings from continuing operations of $3.2 million, or $0.47 per share.
Included in the third quarter 1996 earnings is $5.8 million ($3.9 million on an
after- tax basis), or $0.57 per share, of net proceeds from the Stewart &
Stevenson settlement (see Note 8 of the Notes to the Consolidated Financial
Statements). Excluding the effect of the Stewart & Stevenson award the Company
generated a net loss from continuing operations of $0.7 million, or $0.10 per
share, for the third quarter of 1996 versus a net loss of $1.6 million, or
$0.23 per share, for the corresponding quarter of 1995.
For the nine months ended September 30, 1996, the Company recorded net
income from continuing operations of $0.1 million, or $0.01 per share. Included
in the year-to-date 1996 amounts are (i) a $3.5 million ($2.3 million on an
after-tax basis), or $0.35 per share, second quarter charge for the impairment
of certain equipment that will no longer be utilized in the future operations
of the Company, the write-off of an uncollectible receivable, and severance
related costs; and (ii) the $5.8 million net proceeds from the Stewart &
Stevenson award, discussed above. Excluding the effects of these two items, the
Company generated a net loss from continuing operations for the nine months
ended September 30, 1996, of $1.5 million, or $0.23 per share, compared to a
net loss of $0.7 million, or $0.10 per share, for the corresponding nine month
period of 1995.
Consolidated revenues from continuing operations for the third quarter
of 1996 of $34.4 million, were $4.4 million, or 14.5%, higher than the third
quarter of 1995. Consolidated revenues for the nine months ended September 30,
1996 were $106.2 million, a decrease of $30.0 million, or 22.1%, from the nine
months ended September 30, 1995. The decrease in year-to-date revenues 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. 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 20.2% for the third quarter of 1995 to 20.9% for the third
quarter of 1996, and from 18.5% for the nine months ended September 30, 1995 to
21.1% for the corresponding period 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
third quarter of 1996 is consistent with the third quarter of 1995 overhead
expenses of $8.3 million. Consolidated selling, general and administrative
expenses for the nine months ended September 30, 1996 of $26.5 million included
a pre-tax second quarter 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, year-to-date 1996 overhead expenses were $23.0
million, a decrease of $1.5 million, or 5.8%, over the corresponding nine month
period of 1995. The decrease in year-to-date overhead expenses is consistent
with the decrease in level of revenues.
Interest expense for the three and nine months ended September 30,
1996, increased $0.1 million, or 28.5%, and $0.3 million, or 19.3%,
respectively. The increase is due to increased borrowings during 1996 under the
Company's revolving line of credit.
-10-
<PAGE> 11
Minority interest for the nine months ended September 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 1996, have caused the decrease in
minority interest.
SPECIALTY SERVICES
Specialty Services generated revenues of $16.7 million for the third
quarter of 1996, an increase of $1.0 million, or 6.2%, over the third quarter
of 1995. The third quarter is historically a low revenue quarter for Specialty
Services, due to the lack of refinery turnarounds during the summer months when
the demand for gasoline is high. However, Specialty Services performed more in
plant routine maintenance during the third quarter of 1996 versus 1995,
accounting for the increase in revenues for the quarter.
For the nine months ended September 30, 1996, Specialty Services
revenues amounted to $56.6 million, a decrease of $37.9 million, or 40.1%, over
the same period of 1995. The decreased year-to-date 1996 revenues 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 during the year.
Additionally, it appears that the slow turnaround maintenance market
experienced by the Company for the first three quarters of 1996 may extend
through the end of this year, thereby reducing revenues for Specialty Services
during the fourth quarter, which is historically a large revenue quarter for
the Company.
The operating loss for the third quarter of 1996 of $0.5 million is a
$2.0 million improvement over the $2.5 million operating loss for the third
quarter of 1996. The improved results are due to higher revenues, improved
project management and performance and reduced overhead expenses.
The year-to-date 1996 operating loss of $0.2 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 $1.2 million in operating income, a decrease of $0.8
million, from $2.0 million for the nine months ended September 30, 1995. The
decrease is consistent with the reduced levels of turnaround maintenance
revenue as discussed above, offset partially by improved job level profit
margins and reduced overhead expenses.
SECO
SECO revenues decreased from $14.4 million for the third quarter of
1995 to $13.6 million for the third quarter of 1996 representing an decrease of
$0.8 million, or 5.6%. Year-to-date 1996 revenues increased $2.2 million, or
5.9%, over the same nine month period of 1995, to $39.6 million. The increase
resulted primarily from increased electrical and instrumentation installations
on deepwater production platforms. Revenues for the nine months ended September
30, 1996 included $7.7 million from the Shell Mars and Shell Ram/Powell
platforms compared to $5.6 million generated from the Shell Mars platform
during the first three quarters of 1995. In October 1996, SECO was awarded a
contract for work on the deck module fabrication of the Shell URSA tension leg
platform, on which work is scheduled to begin immediately and is currently
scheduled for completion in July 1998.
Operating income was $1.0 million for the third quarter of 1996, a
decrease of $0.4 million, or 26.0%, over the corresponding quarter of 1995, due
primarily to the lower level of revenue in the 1996 third quarter, as discussed
above. Operating income was $3.2 million for the nine months ended September
30, 1996 an increase of $0.6 million, or 23.1%, over the first three quarters
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.
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<PAGE> 12
ENVIRONMENTAL AND PERFORMANCE CHEMICALS
Environmental and Performance Chemical revenues in 1996 have decreased
slightly ($0.4 million for both the third quarter 1996 and nine months ended
September 30, 1996) from the level of revenues generated in 1995. However,
operating income has decreased due to increased research and development
expenditures related to the development of the new paper-strengthening
technology, Mastiffsm.
The operating loss of $0.9 million for the nine months ended September
30, 1996 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 second quarter charge, operating
income decreased $0.4 million, from $0.2 million for the nine months ended
September 30, 1995 to a $0.2 million operating loss for the first three
quarters of 1996. This decrease is consistent with increased research and
development expenditures related to Mastiffsm during 1996.
CORPORATE & OTHER
The operating loss for the three months ended September 30, 1996 was
$1.6 million compared to $1.3 million for the third quarter of 1995. The
year-to-date 1996 operating loss of $6.2 million includes 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 nine
months ended September 30, 1996 was $4.9 million versus $4.1 million for the
corresponding nine month period of 1995.
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 EPC operations provided a
full range of engineering consultation and project management services
primarily to the refining, petrochemical and food processing industries. The
discontinued EPC operations consisted of, (i) several domestic EPC projects
(which have now been completed), (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 (which has been closed
and remaining assets are in process of being sold) and (iv) engineering
operations in Lake Charles and New Orleans, Louisiana (which have been sold).
The net loss from discontinued operations of $7.4 million (net of
income tax benefit of $2.8 million), or $1.11 per share, for the nine months
ended September 30, 1996, 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 Factory project. Excluding the effects of this
charge, the net loss from discontinued operations was $3.7 million, or $0.56
per share for the nine months ended September 30, 1996 compared to net income
of $1.6 million (net of income tax expense of $0.8 million), or $0.23 per share
for the corresponding period of 1995.
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 at September 30, 1996
consisted primarily of (i) working capital associated with the Finchaa project
and the consulting engineering practice of F.C. Schaffer and Associates and
(ii) residual EPC related receivables in the process of being collected. Net
non-current assets from discontinued operations consisted of property and
equipment and a note payable of $1.4 million.
-12-
<PAGE> 13
Revenues generated by the discontinued EPC operations for the three
months ended September 30, 1996 were $13.9 million, which included $9.6 million
related to the Finchaa Sugar Factory Project. For the nine months ended
September 30, 1996, the discontinued EPC operations generated $66.4 million in
revenue, which included $37.1 million related to Finchaa.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures for the nine months ended September 30, 1996,
excluding acquisitions, were approximately $1.7 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
$0.3 million.
At September 30, 1996, the Company's working capital totaled
approximately $12.8 million ($27.3 million excluding the revolving line of
credit).
The Company has recently reached agreement with its lenders regarding
the restructuring of its debt facilities including the: (i) $15.0 million
long-term notes held by four insurance companies (the "Notes"), (ii) revolving
line of credit with two banks (the "Revolver"), and (iii) the letters of credit
supporting performance and advance payment amounts related to the Finchaa Sugar
Factory project totaling $15.2 million at September 30, 1996 (the "Finchaa
LOC").
Under the new agreements, the Notes accrue interest at a rate of
10.50% with 0.25% incremental increases each quarter beginning January 1, 1998,
through December 31, 1998 (rate caps at 11.50% through maturity). The Notes are
collateralized by substantially all assets of the Company. Monthly principal
payments of $208,333 are payable beginning July 1997, through the June 2003
maturity date.
The Revolver permits borrowings up to $23.5 million until June 30,
1997, when the amount reduces to $19.5 million, until its scheduled December 31,
1997 maturity. Interest is payable monthly at a rate equivalent to either
eurodollar plus 4.09% (currently equal to 9.03%) or prime plus 1.0% (currently
equal to 9.25%). Borrowings under the Revolver are collateralized by
substantially all assets of the Company. At September 30, 1996, working capital
borrowings of $14.5 million were outstanding under the Revolver. Additionally,
the Company has irrevocable letters of credit of $5.0 million outstanding,
leaving total availability under the Revolver, at $4.0 million. Borrowings under
the Revolver are also subject to a borrowing base computation, which is limited
primarily to 75% of eligible accounts receivable, as defined.
The Notes, Revolver and Finchaa LOC agreements contain covenants, which
require, among others, that the Company maintain: (i) minimum consolidated net
worth, (ii) minimum cash flow (defined as earnings before interest, taxes,
depreciation and amortization), and (iii) minimum fixed charge coverage.
Additionally, the Company is limited in its debt-to-capitalization ratio as
well as capital expenditures. Draws, if any, under the Finchaa LOC would
represent loans, which would be secured by substantially all assets of the
Company.
For the nine months ended September 30, 1996, the Company generated
cash from operating activities of $3.9 million, consisting primarily of net
income of $0.1 million, depreciation and amortization of $4.4 million, and
non-cash charges of $1.4 million, offset partially by changes in working
capital accounts. Net cash used in investing activities was $5.4 million for
the nine months ended September 30, 1996, consisting primarily of capital
expenditures of $1.7 million and payments to discontinued operations of $4.7
million, offset partially by $1.3 million in cash proceeds from the sale
property and equipment. Net cash provided from financing activities for the six
month period of $8.1 million consisted of net borrowings from the Company's
revolving line of credit.
-13-
<PAGE> 14
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 September 30,
1996, such letters of credit totaled $6.8 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
$2.6 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 75% complete at September 30, 1996, is
expected to be self-funding and, therefore, should not require working capital
support other than payments received from the project owner.
Cash from operations together with existing cash and credit facilities
is expected to be sufficient to fund operations and working capital needs of
the Company.
At September 30, 1996, the Company had a net operating loss for tax
purposes of approximately $4.0 million, $2.0 million of which is available for
refund against prior year taxes paid while the remaining $2.0 million will be
available to reduce future tax payments.
-14-
<PAGE> 15
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated September
30, 1996, with the Securities and Exchange Commission in
connection with the announcement of the termination of merger
discussions with HydroChem Industrial Services, Inc. of
Houston, Texas.
-15-
<PAGE> 16
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 David P. Tusa
-----------------------------------------------
David P. Tusa
Sr. Vice President,
Finance and Administration
Date November 13, 1996
-----------------------------------------------
By Dale W. Wilhelm
-----------------------------------------------
Dale W. Wilhelm
Corporate Controller
Date November 13, 1996
-----------------------------------------------
-16-
<PAGE> 17
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF SERV-TECH, INC. AND SUBSIDIARIES AS OF
SEPTEMBER 30, 1996, AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 32,378,480
<ALLOWANCES> (1,010,913)
<INVENTORY> 2,214,434
<CURRENT-ASSETS> 53,470,207
<PP&E> 45,993,761
<DEPRECIATION> (19,337,005)
<TOTAL-ASSETS> 98,943,903
<CURRENT-LIABILITIES> 40,680,899
<BONDS> 15,170,000
0
0
<COMMON> 3,436,975
<OTHER-SE> 39,102,029
<TOTAL-LIABILITY-AND-EQUITY> 98,943,903
<SALES> 106,159,971
<TOTAL-REVENUES> 106,159,971
<CGS> 0
<TOTAL-COSTS> 83,745,125
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,632,930
<INCOME-PRETAX> 65,952
<INCOME-TAX> (20,000)
<INCOME-CONTINUING> 45,952
<DISCONTINUED> (11,733,754)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,687,802)
<EPS-PRIMARY> (1.75)
<EPS-DILUTED> 0
</TABLE>
