<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
ENVIROTEST SYSTEMS CORP.
DELAWARE 1-13241 06-0914220
-------- ------- ----------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification Number)
ENVIROTEST TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-2680300
-------- ----------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
246 SOBRANTE WAY
SUNNYVALE, CALIFORNIA 94086-4807
(Address of principal executive offices, including zip code, of
registrants)
(408) 774-6300
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrants (1) have 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 registrants were required to file such reports), and (2)
have been subject to such filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock December 31, 1997
--------------------- -----------------
Class A Common Stock, $0.01 par value 8,832,581 shares
Class B Common Stock, $0.01 par value 1,249,749 shares
Class C Common Stock, $0.01 par value 2,026,111 shares
1
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ENVIROTEST SYSTEMS CORP.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets:
December 31, 1997 and September 30, 1997 3
Condensed Consolidated Statements of Operations:
three months ended December 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows:
three months ended December 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
------------ -------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $16,536 $18,685
Available-for-sale securities 51,643 40,955
Contract receivables, net 9,203 11,789
Prepaid and other current assets 6,504 5,911
-------- --------
Total current assets 83,886 77,340
Restricted cash 19,865 19,567
Property, plant, and equipment, net 188,061 188,342
Assets held under capital lease, net 44,217 44,564
Assets held for sale, net 16,094 21,482
Other assets 27,382 28,438
-------- --------
Total assets $379,505 $379,733
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $2,795 $3,697
Accrued expenses and other current liabilities 35,952 23,575
Current portion of long-term debt and capital
lease obligations 8,400 10,184
Income taxes payable 224 338
-------- --------
Total current liabilities 47,371 37,794
Senior debt, net 274,264 274,531
Long-term debt, net 24,464 33,175
Other long-term liabilities and capital lease
obligations 57,186 58,609
-------- --------
Total liabilities 403,285 404,109
Stockholders' deficit:
Common stock 165 165
Additional paid-in capital 60,140 60,140
Treasury stock, at cost (29,003) (29,003)
Cumulative currency translation adjustment 4 43
Unrealized loss on available-for-sale securities - (8)
Accumulated deficit (49,508) (50,135)
-------- --------
(18,202) (18,798)
Predecessor carry-over basis (5,578) (5,578)
-------- --------
Total stockholders' deficit (23,780) (24,376)
-------- --------
Total liabilities and stockholders' deficit $379,505 $379,733
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
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ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1996
------- --------
<S> <C> <C>
(Unaudited)
Contract revenue $36,937 $31,179
Costs of revenue 23,956 24,604
------- -------
Gross profit 12,981 6,575
Operating costs and expenses:
Selling, general and administrative 4,108 4,294
Amortization 597 672
------- -------
Income from operations 8,276 1,609
Other expense (income):
Interest expense 8,811 9,548
Interest income (1,194) (1,685)
Other 32 (80)
------- -------
Income (loss) before income taxes 627 (6,174)
Income tax - -
------- -------
Net Income (loss) $627 ($6,174)
------- -------
------- -------
Net Income (loss) per share, basic $0.05 ($0.37)
------- -------
Net Income (loss) per share, dilutive $0.05 ($0.37)
------- -------
Basic earnings per share:
Weighted average shares 12,108 16,620
Effect of dilutive securities:
Common stock equivalents 1,561 -
------- -------
Diluted earnings per share 13,669 16,620
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
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ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1996
-------- --------
<S> <C> <C>
(Unaudited)
Cash flows from operating activities: 21,055 6,853
--------- --------
Cash flows from investing activities:
Maturities (Purchases) of available-for-sale
securities, net (10,688) 7,991
Purchases of property, plant and equipment (5,432) (3,638)
Proceeds from sales of property, plant and equipment 5,388 -
--------- --------
Net cash provided by (used in) investing activities (10,732) 4,353
--------- --------
Cash flows from financing activities:
Proceeds from sale of Pennsylvania receivable - 79,405
Repayment of long term debt and capital leases (12,130) (2,110)
Capitalization of loan fees - (190)
Decrease (increase) in restricted cash (298) 1,997
--------- --------
Net cash provided by (used in) financing activities (12,428) 79,102
--------- --------
Effect of exchange rate on cash (44) 5
--------- --------
Net increase (decrease) in cash (2,149) 90,313
Cash and cash equivalents, beginning of period 18,685 53,104
--------- --------
Cash and cash equivalents, end of period $16,536 $143,417
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
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ENVIROTEST SYSTEMS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by Envirotest Systems Corp. (the "Company"), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
The accompanying condensed consolidated financial statements should be
read in conjunction with the Company's audited consolidated financial
statements and related footnotes included in the Company's Annual Report on
Form 10-K for the year ended September 30, 1997, filed with the Securities and
Exchange Commission.
Operating results for the interim periods shown in this report are not
necessarily indicative of the results to be expected for any other interim
period or the full fiscal year.
2. AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities primarily consist of corporate commercial
paper and certificates of deposit with original maturities beyond three months
and less than twelve months. These investments are carried at an amortized cost
that approximates fair value.
3. PENNSYLVANIA SETTLEMENT
On December 11, 1996, the Company sold its right to receive the two
remaining installment payments totaling $80.0 million (the "Receivables
Assets") in principal amount due under a settlement agreement with the
Commonwealth of Pennsylvania (the "Settlement Agreement") for approximately
$79.4 million.
The transaction was effected through a sale of the Receivables Assets from
Envirotest Partners ("Partners"), a Pennsylvania general partnership owned by
Envirotest and Envirotest Technologies, Inc., to a newly formed wholly owned
subsidiary of the Company, ES Funding Corp. ("Funding"). Funding, in turn,
transferred the Receivables Assets to an affiliate of a Pennsylvania bank.
Funding and Partners provided certain representations in connection with the
transaction, including representations as to enforceability of the Settlement
Agreement against the Commonwealth, and agreed to repurchase the Receivables
Assets if Partners fails to comply with its obligations under the Settlement
Agreement.
The Settlement Agreement requires the Company to use its best efforts to
dispose of the assets it acquired to perform vehicle emissions testing services
in Pennsylvania. If the net proceeds received by the Company from the sale of
the assets is less than $55.0 million, Pennsylvania is obligated to pay the
Company fifty percent of the difference up to $11.0 million plus interest at 6%
from December 15, 1995 no later than July 31, 1998. The amount of this
contingent payment was reduced from $15.0 million in an amendment to the
Settlement Agreement that permitted the Company to complete the sale of the
Receivable Assets. Should the net proceeds from the sale of the real estate
and other program related assets exceed $55.0 million, the Company is obligated
to pay the Commonwealth 75% of the amount by which the net proceeds exceeds
$55.0 million. Based upon the experience with recent sales of these assets and
the sufficiency of reserves, the Company is of the opinion that upon final
disposition of properties no additional loss will be recognized.
6
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4. LEGAL PROCEEDINGS
STATE OF CONNECTICUT V. ENVIROTEST SYSTEMS CORP. Under the new contract
(the "Contract") entered into with the Company in April 1994, the State
unilaterally decided to continue the old testing procedure and phase in the
enhanced testing required by the new contract. Additionally, the Company was
unable to build two test facilities, one due to the State's inability to
provide the land the Contract required and the other due to the inability to
obtain zoning. As a result, the Company and the State of Connecticut were in
dispute concerning various financial issues related to the performance by each
of their respective obligations under the Contract. The State contended that
performance of the existing test, as distinct from the I/M240 procedure
specified in the Contract, resulted in substantial savings to Envirotest.
Envirotest complained to the State about additional costs incurred by
Envirotest when the State unilaterally changed the test requirements under the
Contract. In February 1996, the State issued a decision with respect to the
dispute pursuant to the Contract. The Commissioner's administrative decision
awarded a minimum of $2.4 million to the State which continues to accrue
damages until the facilities are built. The Company received the facsimile of
the State's letter on February 9, 1996 and it received the certified copy of
the letter on February 12, 1996. The Company, pursuant to the Contract, filed
a demand for arbitration on March 11, 1996. The Company's demand for
arbitration sought a declaration that the Company owed no money to the State
and to further hold that the State owed Envirotest an unspecified amount of
damages. On May 1, 1996, the State filed a lawsuit in State Superior Court in
Hartford to enjoin the arbitration. The issue at dispute in the lawsuit is
whether the thirty-day period within which to file for arbitration commences
upon receipt of the decision by facsimile as the State contends, or upon
receipt of a certified letter as the Company contends. The Court has
scheduled a trial to hear this issue for April 8, 1998. The Company believes
that it has valid defenses against the claims made by the State.
GANZCORP INVESTMENTS, INC. V. ENVIROTEST SYSTEMS CORP. On September 26,
1995 Ganzcorp Investments, Inc. d/b/a/ Mustang Dynamometer filed suit against
Envirotest in U.S. District Court for the Northern District of Ohio. The suit
alleged breach of contract and asked for damages in excess of $10.0 million.
The suit was voluntarily dismissed on December 22, 1995 so that the parties
could focus on settlement negotiations. No settlement was reached, and on
October 8, 1997, the case was re-filed by Ganzcorp. The dispute relates to a
1993 agreement between the parties for the supply of chassis dynamometers by
Ganzcorp to the Company for its emission testing programs in Ohio,
Connecticut, and Pennsylvania. When the Company's testing program with the
State of Pennsylvania was canceled, the Company terminated its contract with
Ganzcorp. That contract with Ganzcorp contained a "termination for
convenience" clause under which Ganzcorp would be allowed to make a claim for
certain costs incurred but such claim would be substantially below its stated
claim of more than $10.0 million. Additionally, the Company has counterclaims
against Ganzcorp for breach of contract and warranty obligations which it
believes to be in excess of $7.9 million. On January 28, 1998, the Court
granted the parties' Joint Motion for Stay Pending Professional Mediation, to
permit the parties to attempt to settle their dispute through mediation
before proceeding with the litigation. The Company believes that any judgment
against the Company will not have a material adverse effect on its financial
condition.
R.W. GRANGER & SONS, INC. V. ENVIROTEST SYSTEMS CORP. Granger alleges a
breach of contract by the Company arising out of the retrofitting of 19
testing stations and the construction of seven new testing stations in
Connecticut. The project began in 1994 and was completed in 1995. In
September 1996, when Envirotest and Granger could not reach agreement on the
amounts due and owing, Granger submitted a Demand for Arbitration with the
regional office of the American Arbitration Association located in East
Hartford, Connecticut. Granger's claim for compensation has fluctuated in
amount since 1995. Granger's most recent demand was approximately $2.0
million. On October 29, 1997, the first arbitration hearing commenced and on
that date, Granger filed a motion with the arbitration board to amend its
demand for arbitration to include a claim under the Connecticut Unfair Trade
Practices Act ("CUTPA"). Liability under that Act would expose the Company to
both punitive damages and attorney's fees. On November 5, 1997, the Company
filed a motion with the arbitration board in opposition to Granger's motion
to amend its demand for arbitration. On November 6, 1997, the Company also
filed an application for injunctive relief in State Superior Court in
Hartford to enjoin Granger from amending its demand for arbitration. On
November 13, 1997, Granger removed its motion to amend its demand for
arbitration. On December 29, 1997, Granger filed a complaint in State
Superior Court in the Judicial District of Hartford/New Britain at New
Britain which alleges that the Company's failure to pay sums allegedly due
and owing under the contract reference above is an unfair trade practice
under the CUTPA. The arbitration hearings have continued on various dates
with the final arbitration hearings scheduled for March or April of 1998.
The Company believes that it has valid defenses against the claims made by
Granger, and it further believes that any judgment against the Company will
not have a material adverse effect on its financial condition.
DORE V. ENVIROTEST SYSTEMS, CORP. On March 5, 1997, Timothy Dore filed a
class action suit against the Company in the Denver District Court. Dore seeks
to assert claims on behalf of the class of all
7
<PAGE>
persons who, from January 2, 1995, to the present, paid to have a vehicle
tested in the Company's metro Denver facilities. In his Amended Complaint,
Dore alleges that Envirotest breached its contractual obligations to the
class and negligently performed emission testing. The suit does not identify
the monetary amount sought. On June 30, 1997, the Company filed a Motion to
Dismiss the Amended Complaint. Dore cross-moved for summary judgment. On
November 22, 1997, the court granted the Company's Motion to Dismiss the
Amended Complaint. On January 6, 1998, Dore filed a Notice of Appeal in the
State of Colorado Court of Appeals with respect to the trial court's order
dismissing the Amended Complaint.
In addition to the above, the Company is a party to various other legal
proceedings and claims in the ordinary course of business. Although the claims
cannot be estimated, in the opinion of management the resolution of these
matters will not have a material adverse effect on the Company's consolidated
financial position and results of operations.
8
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ENVIROTEST SYSTEMS CORP.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company conducts its current operations directly and through its
principal wholly owned subsidiaries, Envirotest Technologies, Inc. ("ETI"),
Envirotest Illinois, Inc. ("EII"), Envirotest Wisconsin, Inc. and Systems
Control, Inc., a Washington corporation ("SC-WA"). The Company's British
Columbia, Canada operations are conducted through a British Columbia
partnership, Envirotest Canada, which is wholly-owned by the Company (through
its subsidiaries).
Certain sections of this Form 10-Q, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations", contain various
forward looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, which represent the Company's expectations or beliefs
concerning future events. The Company cautions that these statements are
further qualified by important factors that could cause actual results to
differ materially from those in the forward looking statements. Such factors
include, without limitation, general economic conditions, pending legislation
and the cyclical nature of the vehicle emission testing industry. The forward
looking statements include, without limitation, the amounts of reserves
recognized, the amount of revenue that will be generated under a contract, the
total capital expenditure requirement of a program, statements regarding the
commencement of operations for a particular test site or of a particular
program, the number of annual tests, the types of I/M testing programs to be
adopted by states, regulatory and market changes, the growth in markets in
which the Company operates, the areas of potential growth that the Company has
identified, the value of contracts, renewals of contracts, amount spent in
enhancements and other maintenance capital expenditures, expected realizations
of backlog, the success of the remote sensing technology and its utilization in
the future, ultimate outcome of pending litigation and the Company's success in
foreign jurisdictions.
RESULTS OF OPERATIONS
Contract revenues increased to $36.9 million in fiscal first quarter 1998
from $31.2 million in fiscal first quarter 1997, an increase of $5.7 million or
18.5%. This increase is primarily attributable to additional revenues of $3.7
million generated by new or extended emissions and safety programs in Illinois,
Indiana and Connecticut and other net increase of $1.9 million from other
factors, including increased paid test volume and contractual fee increases.
Gross profit increased to $13.0 million in fiscal first quarter 1998 from
$6.6 million in fiscal first quarter 1997, an increase of $6.4 million, or
97.4%. As a percentage of contract revenues, gross profit increased to 35.1%
in fiscal first quarter 1998 from 21.1% in fiscal first quarter 1997, an
absolute increase of 14.0%. This increase was primarily attributable to
contribution from new or extended programs and increased paid tests. Also,
margins improved from continued improvements in operational efficiencies and
the reduction in the deferred charge amortization.
Selling, general and administrative ("SG&A") expenses were $4.1 million in
fiscal first quarter 1998 as compared to $4.3 million in fiscal first quarter
1997, a decrease of $0.2 million. As a precentage of contract revenues, SG&A
expenses decreased to 11.1% in fiscal first quarter 1998 from 13.8% in fiscal
first quarter 1997, an absolute decrease of 2.7%. This decrease as a
percentage of contract revenues is due to increase in contract revenues as
discussed above without associated increase in the SG&A expenses.
Income from operations increased to $8.3 million in fiscal first quarter
1998 from $1.6 million in fiscal first quarter 1997, an increase of $6.7
million. Income from operations as a percentage of contract
9
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revenues increased to 22.4% in fiscal first quarter 1998 from 5.2% in fiscal
first quarter 1997, an absolute increase of 17.2%. This increase is primarily
attributable to increases in revenue, improvements in gross profit margins,
and reduction in SG&A and amortization expenses.
Interest expense decreased to $8.8 million in fiscal first quarter 1998
from $9.5 million in fiscal first quarter 1997, a decrease of $0.7 million.
The decrease in interest expense primarily resulted from the repurchase of
$50.0 million aggregate principal amount of the Company's 9 1/8% Senior Notes
completed in September 1997.
Interest income decreased to $1.2 million in fiscal first quarter 1998
from $1.7 million in fiscal first quarter of 1997, a decrease of $0.5 million.
The decrease in interest income was primarily attributable to the lower levels
of interest bearing investments resulting from the Company's debt repurchase
and stock buyback for $79.0 million completed in September 1997.
There was no income tax provision made on the pretax income in the fiscal
first quarter 1998 as the Company utilized the net operating losses for which a
valuation allowance was recorded in prior periods. Similarly there was no
income tax credit on the pretax loss in the fiscal first quarter 1997 as a
result of recording a valuation allowance to fully reserve the net deferred tax
asset.
Net income was $0.6 million in fiscal first quarter 1998 compared to a net
loss of $6.2 million in fiscal first quarter 1997, an increase of $6.8 million.
LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS
Cash and cash equivalents, available-for-sale securities and restricted
cash increased to $88.0 million at December 31, 1997 from $79.2 million at
September 30, 1997. The increase of $8.8 million was primarily a result of
approximately $21.1 million in cash provided by operations, including $13.5
million of customer advances, offset by the repayment of debt obligations of
$12.1 million.
The Company's primary uses of cash are the funding of the Company's
capital expenditure requirements, payments on capital and operating leases,
principal and interest payments, and other working capital needs. The
Company's capital and operating leases currently require minimum lease payments
of approximately $15.0 million in fiscal year 1998, decreasing to approximately
$10.6 million in the year 2000 and further decreasing thereafter as certain
leases are scheduled to expire.
The Company's capital expenditures include maintenance capital
expenditures for existing facilities, and development and construction
expenditures for new emissions facilities. The Company's development and
construction capital expenditures are dependent on the number of contracts it
is awarded, and are only incurred after the contract has been signed. After
signing a contract, the Company may incur significant development and
construction expenditures, which the Company expects to finance with existing
cash resources, internally generated funds, additional borrowings and
alternative financing sources, including leasing alternatives. It generally
takes one to two years after a contract has been signed for a program to begin
operations and generate revenues, depending on the size of the program.
The Company's principal commitments at December 31, 1997 consist of
capital expenditure requirements for the completion of implementation of the
Illinois program estimated at $25.4 million, net of the $34.5 million in
payments from the state. During fiscal 1998, the Company intends to spend
approximately $3.1 million in enhancements and other maintenance capital
expenditures.
The Company believes that its existing cash resources, cash generated from
operations and alternative financing sources, including leasing alternatives,
will be sufficient to complete implementation of the Illinois program and to
meet its liquidity requirements for the foreseeable future.
10
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This Statement establishes standards for reporting and displaying comprehensive
income and its components in the consolidated financial statements. It does
not, however, require a specific format for the statement, but requires the
Company to display an amount representing total comprehensive income for the
period in that financial statement. This Statement is effective for the
Company's 1999 fiscal year.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Statement establishes standards for
how public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to shareholders. This Statement is effective for the Company's
1999 fiscal year. The Company does not believe it currently has any separately
reportable segments.
11
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ENVIROTEST SYSTEMS CORP.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
STATE OF CONNECTICUT V. ENVIROTEST SYSTEMS CORP. Under the new contract
(the "Contract") entered into with the Company in April 1994, the State
unilaterally decided to continue the old testing procedure and phase in the
enhanced testing required by the new contract. Additionally, the Company was
unable to build two test facilities, one due to the State's inability to
provide the land the Contract required and the other due to the inability to
obtain zoning. As a result, the Company and the State of Connecticut were in
dispute concerning various financial issues related to the performance by each
of their respective obligations under the Contract. The State contended that
performance of the existing test, as distinct from the I/M240 procedure
specified in the Contract, resulted in substantial savings to Envirotest.
Envirotest complained to the State about additional costs incurred by
Envirotest when the State unilaterally changed the test requirements under the
Contract. In February 1996, the State issued a decision with respect to the
dispute pursuant to the Contract. The Commissioner's administrative decision
awarded a minimum of $2.4 million to the State which continues to accrue
damages until the facilities are built. The Company received the facsimile of
the State's letter on February 9, 1996 and it received the certified copy of
the letter on February 12, 1996. The Company, pursuant to the Contract, filed
a demand for arbitration on March 11, 1996. The Company's demand for
arbitration sought a declaration that the Company owed no money to the State
and to further hold that the State owed Envirotest an unspecified amount of
damages. On May 1, 1996, the State filed a lawsuit in State Superior Court in
Hartford to enjoin the arbitration. The issue at dispute in the lawsuit is
whether the thirty-day period within which to file for arbitration commences
upon receipt of the decision by facsimile as the State contends, or upon
receipt of a certified letter as the Company contends. The Court has
scheduled a trial to hear this issue for April 8, 1998. The Company believes
that it has valid defenses against the claims made by the State.
GANZCORP INVESTMENTS, INC. V. ENVIROTEST SYSTEMS CORP. On September 26,
1995 Ganzcorp Investments, Inc. d/b/a/ Mustang Dynamometer filed suit against
Envirotest in U.S. District Court for the Northern District of Ohio. The suit
alleged breach of contract and asked for damages in excess of $10.0 million.
The suit was voluntarily dismissed on December 22, 1995 so that the parties
could focus on settlement negotiations. No settlement was reached, and on
October 8, 1997, the case was re-filed by Ganzcorp. The dispute relates to a
1993 agreement between the parties for the supply of chassis dynamometers by
Ganzcorp to the Company for its emission testing programs in Ohio,
Connecticut, and Pennsylvania. When the Company's testing program with the
State of Pennsylvania was canceled, the Company terminated its contract with
Ganzcorp. That contract with Ganzcorp contained a "termination for
convenience" clause under which Ganzcorp would be allowed to make a claim for
certain costs incurred but such claim would be substantially below its stated
claim of more than $10.0 million. Additionally, the Company has counterclaims
against Ganzcorp for breach of contract and warranty obligations which it
believes to be in excess of $7.9 million. On January 28, 1998, the Court
granted the parties' Joint Motion for Stay Pending Professional Mediation, to
permit the parties to attempt to settle their dispute through mediation
before proceeding with the litigation. The Company believes that any judgment
against the Company will not have a material adverse effect on its financial
condition.
R.W. GRANGER & SONS, INC. V. ENVIROTEST SYSTEMS CORP. Granger alleges a
breach of contract by the Company arising out of the retrofitting of 19 testing
stations and the construction of seven new testing stations in Connecticut. The
project began in 1994 and was completed in 1995. In September 1996, when
Envirotest and Granger could not reach agreement on the amounts due and owing,
Granger submitted a Demand for Arbitration with the regional office of the
American Arbitration Association located in East Hartford, Connecticut.
Granger's claim for compensation has fluctuated in amount since 1995. Granger's
most recent demand was approximately $2.0 million. On October 29, 1997, the
first arbitration hearing commenced and on that date, Granger filed a motion
with the arbitration board to amend its demand for arbitration to include a
claim under the Connecticut Unfair Trade Practices Act ("CUTPA"). Liability
under that Act would expose the Company to both punitive damages and attorney's
fees. On November 5, 1997, the Company filed a motion with the arbitration
board in opposition to Granger's motion to amend its demand for arbitration.
On November 6, 1997, the Company also filed an application for injunctive
relief in State Superior Court in Hartford to enjoin Granger from amending
its demand for arbitration. On November 13, 1997, Granger removed its motion
to amend its demand for arbitration. On December 29, 1997, Granger filed a
complaint in State Superior Court in the Judicial District of Hartford/New
Britain at New Britain which alleges that the Company's failure to pay sums
allegedly due and owing under the contract reference above is an unfair trade
practice under the CUTPA. The arbitration hearings have continued on various
dates with the final arbitration hearings scheduled for March or April of
1998. The Company believes that it has valid defenses against the claims
made by Granger, and it further believes that any judgment against the Company
will not have a material adverse effect on its financial condition.
DORE V. ENVIROTEST SYSTEMS, CORP. On March 5, 1997, Timothy Dore filed a
class action suit against the Company in the Denver District Court. Dore seeks
to assert claims on behalf of the class of all
12
<PAGE>
persons who, from January 2, 1995, to the present, paid to have a vehicle
tested in the Company's metro Denver facilities. In his Amended Complaint,
Dore alleges that Envirotest breached its contractual obligations to the
class and negligently performed emission testing. The suit does not identify
the monetary amount sought. On June 30, 1997, the Company filed a Motion to
Dismiss the Amended Complaint. Dore cross-moved for summary judgment. On
November 22, 1997, the court granted the Company's Motion to Dismiss the
Amended Complaint. On January 6, 1998, Dore filed a Notice of Appeal in the
State of Colorado Court of Appeals with respect to the trial court's order
dismissing the Amended Complaint.
In addition to the above, the Company is a party to various other legal
proceedings and claims in the ordinary course of business. Although the claims
cannot be estimated, in the opinion of management the resolution of these
matters will not have a material adverse effect on the Company's consolidated
financial position and results of operations.
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10.119) Separation, Release and Waiver Agreement made of the 30th day
of September, 1997 by and between C. Michael Alston and Envirotest
Systems Corp.
(11) Statement of Computation of Income (Loss) Per Share
(27) Financial Data Schedule
(b) Reports on Form 8-K
1. The Company filed a report on Form 8-K on October 31, 1997,
reporting that $88,332,000 aggregate principal amount of its
9 1/8% Senior Notes due 2001 were validly tendered in its
debt tender offer.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused their report to be signed on their behalf by the
undersigned thereunto duly authorized.
ENVIROTEST SYSTEMS CORP.
----------------------------
(Registrant)
ENVIROTEST TECHNOLOGIES, INC.
----------------------------
(Registrant)
Date: February 10, 1998 /s/ F. Robert Miller
----------------------------------------
F. Robert Miller
President and Chief Executive Officer
Date: February 10, 1998 /s/ Raj Modi
----------------------------------------
Raj Modi
Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
(Principal Financial Officer)
15
<PAGE>
ENVIROTEST SYSTEMS CORP.
EXHIBIT INDEX
EXHIBIT
NUMBER:
- -------
(10.119) Separation, Release and Waiver Agreement made
of the 30th day of September, 1997 by and between
C. Michael Alston and Envirotest Systems Corp.
(11) Statement of Computation of Per Share Earnings
(27) Financial Data Schedule
16
<PAGE>
EXHIBIT 10.119
SEPARATION, RELEASE AND WAIVER AGREEMENT
This Separation, Release and Waiver Agreement ("Agreement") made as of
the 30th day of September, 1997 (the "Effective Date"), by and between C.
Michael Alston, having an address at 9706 Mill Race Estates Drive, Vienna, VA
22182 ("Alston"), and ENVIROTEST SYSTEMS CORP., a Delaware corporation, with
principal offices at 246 Sobrante Way, Sunnyvale, California, 94086, all
affiliates and parents, including but not limited to, ENVIROTEST
TECHNOLOGIES, INC. (hereinafter collectively referred to as the "Company").
WHEREAS, Alston desires to provide for his separation from the Company
over a period not to exceed one year.
NOW THEREFORE, in consideration of the mutual promises of each party to
the other, it is hereby agreed as follows:
1. In consideration of the execution of this Agreement, and the release
and waiver contained in Paragraph 3 herein, the Company agrees that:
a. Prior to July 31, 1998 or sooner by further agreement of the
parties (the "Separation Date"), Company will pay to Alston
salary at the annual rate of two hundred twenty thousand five
hundred dollars ($220,500.00) payable biweekly in accordance
with the Company's customary payroll for so long as Alston
shall remain in the employ of the Company, provided that
Alston shall have fully complied with the provisions of
Section 2. b. hereof. The Company will deduct taxes and make
other deductions required for wages by state and federal law.
b. On the Separation Date, the Company will pay Alston for earned
and unused accrued vacation time in accordance with current
Company policy; provided that no change in Company policy
shall reduce the amount of accrued and unused vacation payable
to Alston on the Effective Date.
c. Alston and his dependents will receive family medical, dental,
disability and life insurance coverage and executive medical
reimbursement identical to those provided by the Company to
its vice presidents, at Company expense, through the
Separation Date. Pursuant to the Consolidated Omnibus Budget
Reconciliation Act of 1985, from and after the Separation
Date, Alston will continue to be eligible for coverage under
the Company's group medical, dental and life plans for as long
as
<PAGE>
Separation Agreement
C. Michael Alston Page 2
permitted by applicable law, but he will be personally
responsible for the payment of all premiums due under such
plans. Alston may at any time convert his group medical and
dental benefits to an individual policy. The Company will
provide Alston with all necessary forms to convert such
policies and will give Alston notice of the amount necessary
to continue premiums on the group medical plans and notice of
his option to convert the plans into individual plans.
d. In the event of Alston's death prior to the Separation Date,
all remaining compensation and benefits described in
paragraphs 1.a. and 1.b. will be provided to Alston's wife,
Brenda Cole-Alston, if she survives him. If not, all payment
obligations under those paragraphs will be made to Alston's
estate.
e. Alston has vested one hundred percent (100%) under the
Envirotest Systems Corp. 401(k) Savings Plan Account and his
rights under the account will be left intact subject to the
terms of the Plan.
f. Pursuant to action taken by the Compensation Committee of the
Board of Directors of the Company, Alston has been granted
incentive stock options to purchase 141,000 shares of Class A
Common Stock of Envirotest Systems Corp. under the Envirotest
Systems Corp. Stock Option Plan. Of the 141,000 shares subject
to option, 86,000 shares are subject to a Stock Option
Agreement dated July 26, 1995 (the "July Agreement"), and
55,000 shares are subject to a Stock Option Agreement dated
October 24, 1996 (the "October Agreement"). Each of the July
Agreement and the October Agreement and all Options covered by
each such Agreement that have not been exercised shall
terminate ten years from its respective Date of Grant. Under
the July Agreement, options to purchase 57,333 shares have
become exercisable and options to purchase an additional
28,667 shares will become exercisable on July 26, 1998.
Under the October Agreement, options to purchase 18,333 shares
will become exercisable on October 24, 1997. The Company,
following all required action of the Compensation Committee of
the Company, hereby agrees that each of paragraph 4. (b) of the
July Agreement and paragraph 3. (b) of the October Agreement
is hereby deleted in its entirety. Alston hereby agrees that
options to purchase an aggregate of 36,667 shares which become
exercisable in equal installments on October 24, 1998 and
October 24, 1999, under the October
<PAGE>
Separation Agreement
C. Michael Alston Page 3
Agreement, are hereby canceled. The Company hereby represents
and covenants that except as modified by this paragraph each
of the July Agreement and October Agreement is valid and
enforceable against the Company in accordance with its terms.
2. a. Except as specifically provided in this Paragraph 2, the
Employment Agreement between Envirotest Systems Corp. and Alston dated
January 1, 1996 (the "Employment Agreement") and all amendments thereto are
terminated as of the close of business on the Effective Date. Alston also
hereby resigns his positions as Vice President and General Counsel of
Envirotest Systems Corp. and all other offices or employment he may hold or
have with the Company, effective on the Effective Date. The Company and
Alston specifically agree, however, that all of the provisions of Paragraph 9
of the Employment Agreement remain in full force and effect.
b. Alston agrees that for a period of one (1) year from and after
Separation Date, he shall not, without the prior written approval of the
Company, directly or indirectly through any other person, firm or
corporation, engage or participate or make any financial investment in, or
become employed by or render advisory or other services to or for any person,
firm or corporation, or in connection with, any business enterprise which is,
directly or indirectly, in competition with any business operation or
activity in which the Company or any of its subsidiaries is currently
engaged. Nothing herein contained, however, shall restrict Alston from making
any investments in any company the stock of which is listed on a national
securities exchange or actively traded in the over-the-counter market, so
long as such investment does not give Alston the right to control or
influence the policy decisions of any business or enterprise which is,
directly or indirectly, in competition with any business operation or
activity in which the Company or any of its subsidiaries is currently engaged.
3. By signing this Agreement, and accepting the consideration
specified above, Alston knowingly and voluntarily agrees as follows:
a. Alston hereby waives, releases and forever discharges the
Company, its shareholders, officers, directors, agents,
employees, and all affiliates of the foregoing personally as
individuals and as shareholders, officers, directors, agents,
employees, and affiliates, and their successors and assigns
(severally and collectively "Releasees") from, and covenants
not to sue or charge them individually, jointly or severally,
on, any and all claims or causes of action arising out of his
employment by the Company, under any local, state, or federal
law or regulation, including without limitation, those arising
under the Age Discrimination in Employment Act of
<PAGE>
Separation Agreement
C. Michael Alston Page 4
1967 (ADEA); Title VII of the Civil Rights Act of 1964, as
amended; the Older Workers Protection Act of 1990; the Labor
Management Relation Act; and the California Civil Rights Act,
or under common law tort or contract theory, whether in law or
equity, known or unknown, asserted or unasserted, suspected or
unsuspected, which Alston, or his heirs, has, ever had, or now
has against Releasees. The Company waives, releases and forever
discharges Alston, his spouse and his heirs (severally and
collectively the "Alston Releasees") from, and covenants not
to sue or charge the Alston Releasees on any and all claims or
causes of action arising out of Alston's employment by the
Company pursuant to the Employment Agreement, under any local,
state or federal law or regulations or any common law tort or
contract theory, whether in law or equity, known or unknown,
asserted or unasserted, suspected or unsuspected, which the
Company, or its successors, has, ever had, or now has against
the Alston Releasees. Alston represents and acknowledges that
he has been provided a reasonable opportunity to consult with
an attorney regarding the nature and effect of this Release
and Waiver, and has been advised to do so by the Company.
b. Alston understands and agrees that following the Separation
Date no other payments or compensation are due him except as
described in this Agreement. Effective no later than the
Separation Date, Alston will not be an officer or employee of
the Company.
c. Alston agrees and acknowledges that he has received all share
certificates and stock option agreements due him, and that he
will not receive an additional grant of stock options for
services rendered during the Company's 1997 or 1998 fiscal
years or otherwise.
d. Alston agrees, that in order to provide a smooth transition,
Alston shall fully brief Company employees, designated by the
Company, on all matters handled by Alston in his capacity as
an officer and employee of the Company. At the request of the
Company Alston shall from time to time respond to questions on
such matters by the designated employees of the Company.
e. Prior to the Separation Date, Alston agrees faithfully and to
the best of his ability to perform such reasonable duties and
special projects as shall be assigned to him from time to time
by the Chairman, and the Executive Vice President and Chief
Operating
<PAGE>
Separation Agreement
C. Michael Alston Page 5
Officer of the Company, including but not limited to (i)
completion of the equitable adjustment settlement in British
Columbia, and (ii) participation in proposal preparation in
support of the Company's marketing effort. Alston's obligations
under this paragraph shall terminate upon the earlier of the
Separation Date and a Change of Control (as such term is
defined in the October Agreement) of the Company, whereupon
all cash payments due to Alston under paragraphs 1.a. and 1.b.
shall become due and payable immediately.
4. In consideration of this Agreement and to induce the Company to
enter into such Agreement, Alston hereby makes the following representations
to and agreements with the Company:
a. Except as required by legal proceeding, Alston agrees that he
will not make any statements or disclose any information which
in the Company's reasonable judgment are inimical to the
interest of the Company or are derogatory about the Company,
its management, directors, products, or services.
b. Alston will not disclose or cause or allow to be disclosed any
of the terms, conditions, amounts or any other details of this
Agreement; PROVIDED, HOWEVER, that nothing shall preclude
Alston from making such disclosure as may be required by
applicable law or as may be necessary in the course of
prosecuting or defending litigation concerning this Agreement;
and PROVIDED FURTHER that nothing shall preclude Alston from
fully disclosing to the preparer of this tax returns the
nature and source of his taxable income, nor from fully
disclosing to his attorney the terms of this Agreement as
provided in Paragraph 4(a) above. Notwithstanding the
foregoing, this paragraph shall no longer be applicable
following the Company's public disclosure of the terms of this
Agreement.
5. Alston shall continue to be entitled to the use of his Company car
and other Company equipment presently in Alston's possession, and the Company
will continue to pay all lease, insurance and maintenance costs thereon,
through the Separation Date. Upon the written request of Alston delivered on
or prior to the Separation Date, the Company will assign and Alston will
assume lease payments and expenses including insurance, for Alston's Company
car, subsequent to the Separation Date. Alston will return all other Company
property including the Company car, if applicable, presently in his
possession no later than the Separation Date.
<PAGE>
Separation Agreement
C. Michael Alston Page 6
6. Alston represents and acknowledges that in executing this Agreement,
he does not rely and has not relied upon any representation or statement not
set forth herein made by any of the Company's employees, agents,
representatives, or attorneys with regard to the subject matter, basis or
effect of this Agreement or otherwise.
7. The obligations of the parties hereto are severable and divisible;
and, in the event any consideration flowing from Alston or the Company as
described herein is determined to be unlawful or unenforceable, the remainder
of this Agreement shall be enforceable.
8. Neither the negotiation nor the execution of this Agreement shall
constitute an acknowledgment or admission of any kind by the Company that it,
or any of the Releasees, jointly or severally, has violated any federal,
state or local law or regulation, or breached any common law or other
obligation or duty to Alston.
9. Except as otherwise provided in Paragraph 13 of this Agreement, any
dispute arising between the Company and Alston with respect to the
performance or interpretation of this Agreement shall be submitted to
arbitration in San Francisco, California, for resolution in accordance with
the rules of the American Arbitration Association, modified to provide that
the decision by the arbitrators shall be binding on the parties, shall be
furnished in writing, separately and specifically stating the findings of
fact and conclusions of law on which the decision is based, and shall be
rendered within ninety (90) days following impanelment of the arbitrators.
The cost of arbitration will initially be borne by the party requesting
arbitration. Following a decision by the arbitrators, the cost of arbitration
will be divided as directed by the arbitrators.
10. This Agreement shall be subject to and governed by the laws of the
State of California.
11. The terms and conditions contained herein constitute the entire
agreement between the parties and supersede all previous communications,
either oral or written, between the parties with respect to the subject matter
of this Agreement, and no agreement or understanding varying or extending the
same shall be binding upon either party unless in writing and signed by or on
behalf of such party.
12. Alston acknowledges that the services rendered by him to the
Company were of a special, unique and extraordinary character and, in
connection with such services, he has had access to confidential information
vital to the Company's business. By reason of this, Alston consents and
agrees that if he violates any of the provisions of this Agreement with
respect to non-competition or non-solicitation, or confidentiality, the
Company would sustain irreparable harm and, therefore, in addition to any
other remedies which the Company may have under this Agreement or otherwise,
the Company shall be entitled to apply to any court of competent jurisdiction
for equitable
<PAGE>
Separation Agreement
C. Michael Alston Page 7
relief, including without limitation an injunction restraining Alston from
committing or continuing any such violation of this Agreement, and Alston
shall not object to any such application. In addition, the Company may elect
to seek other remedies relating to breaches of Sections 2(a) or 2(b), in any
court of competent jurisdiction in lieu of arbitration of such claims.
13. Alston states that he has read the foregoing Agreement, fully
understands its content and effect, and without duress or coercion, knowingly
and voluntarily assents to its terms. He agrees that he has been given a
fair, reasonable and sufficient time to fully consider all terms.
14. This Agreement may be executed in two or more counterparts, each
of which shall be considered an original, but all of which taken together
shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed or caused to be
executed this Agreement as of the day and year first above written.
ENVIROTEST SYSTEMS CORP.
By /s/ Richard Webb
------------------------------------
Its EVP & COO
------------------------------------
ENVIROTEST TECHNOLOGIES, INC.
By /s/ Richard Webb
------------------------------------
Its EVP & COO
------------------------------------
/s/ C. Michael Alston
---------------------------------------
C. Michael Alston
<PAGE>
Separation Agreement
C. Michael Alston Page 8
Brenda Cole-Alston, as wife of C. Michael Alston, hereby acknowledges
that she has read the foregoing agreement and agrees to be bound by its terms.
/s/ Brenda Cole-Alston
---------------------------------------
Brenda Cole-Alston
Dated: ________________________
<PAGE>
ENVIROTEST SYSTEMS CORP.
EXHIBIT 11 - STATEMENT OF COMPUTATION OF INCOME (LOSS) PER SHARE
(Amounts in thousands, except per share amounts)
Income (Loss) per share is computed using the weighted average number of shares
outstanding plus incremental shares issuable upon exercise of outstanding
options using the treasury stock method.
Three
Months Ended
December 31,
1997 1996
------- -------
BASIC:
Net Income (Loss) $ 627 $(6,174)
------- -------
------- -------
INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE
Weighted average number of shares outstanding 12,108 16,620
------- -------
Income (Loss) per common and common
equivalent share $ 0.05 $ (0.37)
------- -------
------- -------
DILUTIVE:
INCOME (LOSS) PER COMMON SHARE--
ASSUMING DILUTION
Weighted average number of shares outstanding 12,108 16,620
Net effect of dilutive stock options based on
the treasury method using the average
market price of common stock 1,561 --
------- -------
Common stock and common stock equivalents 13,669 16,620
------- -------
------- -------
Income (Loss) per common and common
equivalent share $ 0.05 $ (0.37)
------- -------
------- -------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM ENVIROTEST SYSTEMS
CORP. FORM 10-Q FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1997
<CASH> 16,536
<SECURITIES> 51,643
<RECEIVABLES> 10,400
<ALLOWANCES> 1,197
<INVENTORY> 0
<CURRENT-ASSETS> 83,886
<PP&E> 232,278
<DEPRECIATION> 67,503
<TOTAL-ASSETS> 379,505
<CURRENT-LIABILITIES> 47,371
<BONDS> 359,324
0
0
<COMMON> 165
<OTHER-SE> (18,037)
<TOTAL-LIABILITY-AND-EQUITY> 379,505
<SALES> 36,937
<TOTAL-REVENUES> 36,937
<CGS> 23,956
<TOTAL-COSTS> 23,956
<OTHER-EXPENSES> 4,737
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,811
<INCOME-PRETAX> 627
<INCOME-TAX> 0
<INCOME-CONTINUING> 627
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 627
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
