<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 March 31, 1997
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 May 8, 1997 was 6,861,999.
<PAGE> 2
SERV-TECH, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page(s)
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet
March 31, 1997 (Unaudited) and December 31, 1996........................ 3
Consolidated Statement of Operations (Unaudited)
For the Three Months Ended March 31, 1997 and 1996...................... 4
Consolidated Statement of Cash Flows (Unaudited)
For the Three Months Ended March 31, 1997 and 1996...................... 5
Notes to Consolidated Financial Statements (Unaudited).................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...........................12
PART III. SIGNATURES.................................................13
</TABLE>
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<PAGE> 3
SERV-TECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 2,837,299 $ 4,532,622
Accounts receivable, net ..................................... 45,378,919 23,402,942
Costs and estimated earnings in excess of billings on
uncompleted contracts ...................................... 1,138,816 1,479,518
Inventory .................................................... 2,006,432 2,026,359
Prepaid expenses ............................................. 651,653 839,969
Deferred income taxes ........................................ 3,496,448 3,246,448
Net current assets from discontinued operations .............. 1,934,318 378,326
------------- -------------
Total current assets .................................... 57,443,885 35,906,184
PROPERTY, PLANT AND EQUIPMENT, NET ............................... 24,627,960 26,275,026
INTANGIBLE ASSETS, NET ........................................... 14,248,999 14,189,083
OTHER ASSETS ..................................................... 2,303,204 2,230,681
NET NON-CURRENT ASSETS, DISCONTINUED OPERATIONS .................. 1,860,745 1,714,503
------------- -------------
Total assets ............................................ $ 100,484,793 $ 80,315,477
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................. $ 12,056,610 $ 7,497,878
Accrued liabilities .......................................... 15,849,007 12,672,252
Billings in excess of costs and estimated earnings on
uncompleted contracts ...................................... 1,053,810 390,897
Revolving line of credit ..................................... 14,161,462 5,559,169
Current maturities of long-term debt ............................. 1,650,881 1,587,269
------------- -------------
Total current liabilities .................................... 44,771,770 27,707,465
LONG-TERM DEBT, LESS CURRENT MATURITIES .......................... 13,835,000 13,835,000
DEFERRED INCOME TAXES ............................................ 2,298,668 954,317
MINORITY INTEREST ................................................ 663,041 586,905
CONTINGENCIES (Note 4)
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 6,869,709
and 6,873,709, respectively ................................ 3,434,855 3,436,855
Additional paid-in capital ................................... 43,322,804 43,346,804
Retained deficit ............................................. (7,657,224) (9,457,021)
Treasury stock, at cost, 7,710 and 13,774 shares, respectively (31,530) (50,343)
Cumulative translation adjustment ............................ (152,591) (44,505)
------------- -------------
Total stockholders' equity .............................. 38,916,314 37,231,790
------------- -------------
Total liabilities and stockholders' equity .............. $ 100,484,793 $ 80,315,477
============= =============
</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
for the three months ended March 31, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Revenues ................................................... $ 70,110,008 $ 33,313,490
Costs of services .......................................... 56,504,800 25,813,508
------------ ------------
Gross profit ........................................... 13,605,208 7,499,982
Selling, general and administrative expenses ............... 9,713,481 6,602,755
------------ ------------
Operating income ....................................... 3,891,727 897,227
Other income (expense):
Interest expense ....................................... (707,764) (533,693)
Interest income ........................................ 56,402 --
Other, net ............................................. (7,432) 10,140
------------ ------------
(658,794) (523,553)
------------ ------------
Minority interest .......................................... (76,136) (34,972)
------------ ------------
Pre-tax earnings from continuing operations ................ 3,156,797 338,702
Income tax expense ......................................... 1,357,000 139,000
------------ ------------
Net income from continuing operations ...................... 1,799,797 199,702
Loss from discontinued operations, net of income tax
benefit.................................................. -- (1,228,874)
------------ ------------
Net income (loss) .......................................... $ 1,799,797 $ (1,029,172)
============ ============
Earnings per share from continuing operations .............. $ 0.25 $ 0.03
Loss per share from discontinued operations ................ -- (0.19)
------------ ------------
Net income (loss) per share ................................ $ 0.25 $ (0.16)
============ ============
Weighted average common shares outstanding ................. 7,198,967 6,627,517
============ ============
</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 three months ended March 31, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................................... $ 1,799,797 $ (1,029,172)
Adjustments to reconcile net income (loss) to net cash provided by
continuing operations:
Loss from discontinued operations ........................................ -- 1,228,874
Depreciation and amortization ............................................ 1,441,564 1,493,226
Provision for losses on accounts and notes receivable .................... 735,958 (153,503)
Deferred income taxes .................................................... 1,094,351 (147,980)
Minority interest ........................................................ 76,136 34,972
------------ ------------
5,147,806 1,426,417
Change in assets and liabilities:
Accounts receivable ...................................................... (22,711,935) (2,278,536)
Net change in costs, estimated earnings and billings on uncompleted
contracts .............................................................. 1,003,615 442,138
Inventory ................................................................ 19,927 (124,822)
Prepaid expenses and other current assets ................................ 188,316 (307,570)
Other assets ............................................................. (29,259) (316,968)
Accounts payable ......................................................... 4,558,732 (380,696)
Accrued liabilities ...................................................... 3,176,755 2,744,730
Income tax payable ....................................................... -- (295,865)
------------ ------------
Net cash provided by (used in) operating activities of continuing
operations ........................................................... (8,646,043) 908,828
Net cash provided by (used in) discontinued operations ................... (926,572) 3,777,004
------------ ------------
Net cash provided by (used in) operating activities .................. (9,572,615) 4,685,832
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ....................................................... (182,287) (825,597)
Investing activities related to discontinued operations .................... 51,394 (3,805,065)
Intangible assets .......................................................... (255,768) 51,452
------------ ------------
Net cash used in investing activities ................................ (386,661) (4,579,210)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt ............................................. 55,268,596 4,810,245
Principal payments of debt ................................................. (46,602,689) (2,045,415)
Financing costs ............................................................ (126,504) --
Financing activities of discontinued operations ............................ (275,450) --
------------ ------------
Net cash provided by financing activities ............................ 8,263,953 2,764,830
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... (1,695,323) 2,871,452
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............................... 4,532,622 287,356
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 2,837,299 $ 3,158,808
============ ============
</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, 1996, 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 March 31, 1997, and the consolidated results of its
operations and cash flows for the three months ended March 31, 1997 and 1996.
Interim results are not necessarily indicative of results for a full year.
Certain reclassifications have been made to conform to current year
presentation with no effect on earnings.
2. DEBT
In November 1996, the Company 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 $26.5 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 9.78%) or prime plus 1.0% (currently
equal to 9.50%). Borrowings under the Revolver are collateralized by
substantially all assets of the Company. At March 31, 1997, working capital
borrowings of $14.2 million were outstanding under the Revolver. As of April
30, 1997, borrowings under the Revolver had been reduced to $4.4 million.
Additionally, at March 31, 1997, the Company had irrevocable letters of credit
of $4.5 million outstanding, leaving total availability under the Revolver, at
$7.8 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.
-6-
<PAGE> 7
3. BUSINESS SEGMENTS
Summarized financial information by business segment is set forth
below (dollars in thousands):
Three months ended March 31,
<TABLE>
<CAPTION>
Environmental
Specialty & Performance Corporate
1997 Services SECO Chemicals & Other Consolidated
- ---- -------- ---- --------- ------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $53,336 $12,486 $ 5,171 $ (883) $ 70,110
Operating income 4,941 663 277 (1,989) 3,892
1996
- ----
Revenues $19,414 $11,889 $ 3,910 $ (1,900) $ 33,313
Operating income 1,465 1,063 (167) (1,464) 897
</TABLE>
4. 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 March 31, 1997, the Company had irrevocable letters of credit
outstanding of approximately $16.4 million. The letters of credit were issued
primarily to (i) guarantee certain of the Company's insurance programs
amounting to $4.5 million, (ii) $3.6 million to support the unrecovered portion
of the Finchaa project advance payment and (iii) to support job performance
guarantees on the Finchaa Sugar Mill Project amounting to $8.3 million (see
Note 7).
5. 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 common 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.
In March 1997, the Company reached an agreement with Mr. Krajicek to
defer, to no earlier than September 30, 1997 unless agreed by the Company, the
cash obligation that may be due, if any, during the period beginning November
9, 1996. Additionally, the cash obligation that may be due, if any, during the
period beginning November 9, 1997 has been deferred to no earlier than February
1, 1998. Based upon the current level of the Serv-Tech stock price ($5.00 per
share as of May 8, 1997), Mr. Krajicek would be due approximately $0.6 million
(associated with the period beginning November 9, 1996), if the stock were sold
pursuant to the terms of the Krajicek Agreement.
-7-
<PAGE> 8
6. PHILIP ENVIRONMENTAL MERGER
On March 5, 1997, the Company entered into a definitive agreement to
merge with Philip Environmental Inc. ("Philip") of Hamilton, Ontario, Canada.
Under the terms of the merger agreement, each share of Company stock will be
exchanged for 0.403 share of Philip stock. Based upon the closing price of
Philip stock on March 5, 1997, each Company share was valued at $6.60 per share,
and based upon the closing price of Philip stock on May 8, 1997, each Company
share was valued at $5.19 per share. The market price for Philip stock will
continue to fluctuate between the date of this report and the consummation of
the acquisition of the Company by Philip. The waiting period applicable to the
transaction under the Hart-Scott-Rodino Antitrust Improvements Act of 1996, as
amended, has terminated. Although, no further regulatory approval is required
before the acquisition of the Company by Philip can be consummated, the
Securities and Exchange Commission is currently reviewing the proposed Proxy and
Registration Statement filed by the Company and Philip on April 24, 1997. The
transaction, however, is subject to shareholder approval and is expected to
close in July 1997.
Philip is a New York Stock Exchange listed, fully integrated, resource
recovery and industrial services company providing metals processing and mill
services, solid and liquid by-products recovery and industrial and remediation
services to all major industry sectors.
7. 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 all remaining assets have been sold)
and (iv) engineering operations in Lake Charles and New Orleans, Louisiana
(which have been sold).
The first quarter 1996 net loss from discontinued operations of $1.2
million (net of income tax benefit of $0.7 million), or $0.19 per share, was due
primarily to the write-down of the profitability on several domestic EPC
projects and increased overhead expenses resulting from lower than anticipated
EPC activity for the quarter.
Net current assets from discontinued operations at March 31, 1997
consisted primarily of working capital associated with the Finchaa project and
the consulting engineering practice of F.C. Schaffer and Associates. Net
non-current assets from discontinued operations consisted of property and
equipment, net of a $0.2 million note payable.
Revenues generated by the discontinued EPC operations for the three
months ended March 31, 1997 and 1996 were $5.1 million and $30.0 million,
respectively. First quarter 1997 and 1996 revenues included $3.9 million and
$16.0 million related to the Finchaa Sugar Factory Project, respectively.
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 March 31, 1997, letters of credit of $3.6 million were outstanding
to support the unrecovered portion of the advance payment and $8.3 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 March 31, 1997, the Finchaa project was approximately 89%
complete.
-8-
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
For the three months ended March 31, 1997, the Company recorded net
earnings from continuing operations of $1.8 million, or $0.25 per share, an
increase of $1.6 million over net earnings of $0.2 million, or $0.03 per share,
for the corresponding quarter of 1996.
Consolidated revenues from continuing operations for the first quarter
of 1997 of $70.1 million, were $36.8 million, or 110.5% higher than the first
quarter of 1996. This increase is mainly attributable to higher levels of
activity in the specialty turnaround maintenance businesses of the Specialty
Services operating group. Specialty Services includes specialty turnaround
maintenance, refractory and welding services. The increased revenue level is a
result of the strong refinery maintenance market as well as scheduling of
maintenance work previously delayed.
Consolidated selling, general and administrative expenses for the
first quarter of 1997 were $9.7 million, a 47.1% increase from the first
quarter of 1996's level of $6.6 million. This increase is consistent with the
increase in the level of activity and revenues for the quarter.
Interest expense for the three months ended March 31, 1997 increased
$0.2 million, or 32.6% over the corresponding period of 1996. The increase is
due to higher borrowings under the Company's revolving line of credit necessary
to fund the increased working capital needs as a result of increased activity.
SPECIALTY SERVICES
Specialty Services generated revenues of $53.3 million for the first
quarter of 1997, an increase of $33.9 million, or 174.7%, over the first
quarter of 1996. As discussed above, the increase in revenue is mainly
attributable to the strong refinery maintenance market as well as scheduling of
maintenance work previously delayed.
The operating income for the first quarter of 1997 of $4.9 million is
a $3.4 million improvement over the $1.5 million operating income for the
corresponding quarter of 1996. The improved results are consistent with the
increased levels of turnaround maintenance revenue for the quarter versus the
prior year.
SECO
SECO revenues increased slightly, from $11.9 million for the first
quarter of 1996 to $12.5 million for the first quarter of 1997, representing an
increase of $0.6 million, or 5.0%. Revenues from deepwater drilling platform
installations were $1.7 million for the three months ended March 31, 1997,
compared to $2.2 for the first quarter of 1996. Included in 1997's first
quarter offshore revenues are $0.4 million attributable to the Shell URSA
tension leg platform project, awarded in October, 1996, and currently scheduled
for completion in July 1998.
Operating income was $0.7 million for the first quarter of 1997, a
decrease of $0.4 million, or 37.6%, over the corresponding quarter of 1996, due
primarily to the higher levels of overhead in the 1997 first quarter.
-9-
<PAGE> 10
ENVIRONMENTAL AND PERFORMANCE CHEMICALS
Environmental and Performance Chemical revenues for 1997 increased by
$1.3 million, from $3.9 million for the first quarter of 1996 to $5.2 million
for the first quarter of 1997. This increase is consistent with the increased
level of refinery maintenance experienced in the first quarter of 1997.
Operating income increased $0.5 million, from a loss of $0.2 million
for the three months ended March 31, 1996 to a $0.3 million operating income
for the first three months of 1997. This increase is consistent with increased
revenues for the quarter.
CORPORATE & OTHER
The operating loss for the three months ended March 31, 1997 was $2.0
million compared to $1.5 million operating loss for the first quarter of 1996.
The 1997 operating loss includes approximately $0.5 million of consulting and
merger related expense accruals. (see Note 6 of Notes to Consolidated Financial
Statements). Excluding these expenses, the operating loss for the three months
ended March 31, 1997 was $1.5 million, consistent with 1996 levels.
DISCONTINUED OPERATIONS
As explained in Note 7 of the 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 all remaining assets have been sold)
and (iv) engineering operations in Lake Charles and New Orleans, Louisiana
(which have been sold).
The first quarter 1996 net loss from discontinued operations of $1.2
million (net of income tax benefit of $0.7 million), or $0.19 per share, was due
primarily to the write-down of the profitability on several domestic EPC
projects and increased overhead expenses resulting from lower than anticipated
EPC activity for the quarter.
Revenues generated by the discontinued EPC operations for the three
months ended March 31, 1997 and 1996 were $5.1 million and $30.0 million,
respectively. First quarter 1997 and 1996 revenues included $3.9 million and
$16.0 million related to the Finchaa Sugar Factory Project, respectively.
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 March 31, 1997, letters of credit of $3.6 million were outstanding
to support the unrecovered portion of the advance payment and $8.3 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 March 31, 1997, the Finchaa project was approximately 89%
complete.
-10-
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures for the three months ended March 31, 1997,
excluding acquisitions, were approximately $0.2 million. These expenditures
were primarily for the purchase of operating equipment necessary to support the
Company's business activities. Capital expenditures for the remainder of 1997,
excluding acquisitions, are expected to be approximately $1.3 million.
At March 31, 1997, the Company's working capital totaled approximately
$12.7 million ($26.8 million excluding the revolving line of credit).
In November 1996, 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 $11.9 million at March 31, 1997 (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 $26.5 million until April 30,
1997, decreasing to $23.5 million until June 30, 1997, at which time it
decreases 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 9.78%) or prime plus 1.0% (currently equal to 9.50%).
Borrowings under the Revolver are collateralized by substantially all assets of
the Company. At March 31 1997, working capital borrowings of $14.2 million were
outstanding under the Revolver. As of April 30, 1997, borrowings under the
Revolver had been reduced to $4.4 million. Additionally, at March 31, 1997,
the Company had irrevocable letters of credit of $4.5 million outstanding,
leaving total availability under the Revolver, at $7.8 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 three months ended March 31, 1997, net cash flows used in
operating activities were $9.6 million, consisting primarily of net income of
$1.8 million, and depreciation and amortization of $1.4 million, offset by
changes in working capital accounts of $13.8 million from continuing operations
and cash used by discontinued operations of $0.9 million. The change in working
capital accounts from continuing operations is primarily due to an increase in
accounts receivable of $22.7 million primarily offset by a decrease in costs,
estimated earnings and billings on uncompleted contracts, and increases in
accounts payable and accrued liabilities of $7.3 million. Net cash used in
investing activities was $0.4 million for the three months ended March 31,
1997, consisting primarily of capital expenditures of $0.2 million and an
increase in intangible assets of $0.2 million. Net cash provided from financing
activities for the three month period of $8.3 million consisted primarily of
net borrowings from the Company's revolving line of credit of $8.6 million
offset by a $0.3 million debt payment related to discontinued operations.
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
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<PAGE> 12
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 March 31, 1997, such letters of credit totaled $3.6
million to support the unrecovered portion of the advance payment and $8.3
million to support the project performance guarantees. The project, which was
approximately 89% complete at March 31, 1997, is expected to be self-funding
and, therefore, should not require working capital support other than payments
received from the project owner.
Management believes that existing cash, cash flow from operations, and
existing credit facilities will be sufficient to meet the current ongoing
requirements of the operations of the Company. In addition, the above sources
may be supplemented with other external sources of funds to meet additional
cash requirements, if necessary.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for certain forward-looking statements. This quarterly report contains
statements that are forward-looking. While these statements reflect the
Company's beliefs as of the date of this report, they are subject to
assumptions, uncertainties and risks that could cause actual results to differ
materially and adversely from the results contemplated, forecast or estimated
in the forward-looking statements included in this report. These factors
include, but are not limited to, the following: (i) the ability of the Company
to successfully complete the Finchaa Sugar Factory Project within the
parameters of the current schedule and budget, (ii) the ability of the Company
to generate sufficient quarterly project revenues in light of the effect on the
business of the seasonality and volatile nature of the customers maintenance
needs, (iii) the ability of the Company to fund operations and working capital
needs with current financial resources, and (iv) the ability of the Company to
meet the ongoing covenant requirements of its debt and letters of credit
facilities.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Agreement and Plan of Merger, dated March 5, 1997, by
and among Philip Environmental Inc., an Ontario, Canada
corporation ("Philip"), Taro Aggregate Ltd., an Ontario,
Canada corporation and wholly-owned subsidiary of Philip
("Taro"), ST Acquisition Corporation, a newly-formed
Texas corporation and wholly-owned subsidiary of Taro and
Serv-Tech, Inc. (incorporated by reference from the
registrant's Current Report on Form 8-K, dated March 5,
1997).
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On March 6, 1997, the Company filed a Current Report on
Form 8-K dated March 5, 1997, with the Securities and Exchange
Commission in connection with entering an Agreement and Plan
of Merger with Philip Environmental Inc., an Ontario, Canada
corporation.
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<PAGE> 13
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 May 14, 1997
-------------------------------------------------------
By /s/ Dale W. Wilhelm
---------------------------------------------------------
Dale W. Wilhelm
Corporate Controller
Date May 14, 1997
-------------------------------------------------------
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<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
27.1 FINANCIAL DATA SCHEDULE
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM (A) THE
UNAUDITED FINANCIAL STATEMENTS OF SERV-TECH, INC. AND SUBSIDIARIES AS OF MARCH
31,1 997, AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,837,299
<SECURITIES> 0
<RECEIVABLES> 46,913,217
<ALLOWANCES> (1,534,298)
<INVENTORY> 2,006,432
<CURRENT-ASSETS> 57,443,885
<PP&E> 46,479,875
<DEPRECIATION> (21,851,915)
<TOTAL-ASSETS> 100,484,793
<CURRENT-LIABILITIES> 44,771,770
<BONDS> 13,835,000
0
0
<COMMON> 3,434,855
<OTHER-SE> 35,481,459
<TOTAL-LIABILITY-AND-EQUITY> 100,484,793
<SALES> 70,110,008
<TOTAL-REVENUES> 70,110,008
<CGS> 0
<TOTAL-COSTS> 56,504,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 707,764
<INCOME-PRETAX> 3,156,797
<INCOME-TAX> (1,357,000)
<INCOME-CONTINUING> 1,799,797
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,799,797
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
