<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 MARCH 31, 1998
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 (I.R.S. 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.
<TABLE>
<CAPTION>
Outstanding at
Class of Common Stock March 31, 1998
--------------------- --------------
<S> <C>
Class A Common Stock, $0.01 par value 8,839,164 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
</TABLE>
1
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ENVIROTEST SYSTEMS CORP.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets:
March 31, 1998 and September 30, 1997 3
Condensed Consolidated Statements of Operations:
three and six months ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows:
six months ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,953 $ 18,685
Available-for-sale securities 32,327 40,955
Contract receivables, net 12,229 11,789
Prepaid and other current assets 6,318 5,911
------------ ------------
Total current assets 75,827 77,340
Restricted cash 18,868 19,567
Property, plant, and equipment, net 190,607 188,342
Assets held under capital lease, net 43,933 44,564
Assets held for sale, net 15,162 21,482
Other assets 26,500 28,438
------------ ------------
Total assets $ 370,897 $ 379,733
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $2,315 $3,697
Accrued expenses and other current liabilities 26,890 23,575
Current portion of long-term debt and capital
lease obligations 8,715 10,184
Income taxes payable 415 338
------------ ------------
Total current liabilities 38,335 37,794
Senior debt, net 274,297 274,531
Long-term debt, net 23,595 33,175
Other long-term liabilities and capital lease
obligations, net 55,313 58,609
------------ ------------
Total liabilities 391,540 404,109
------------ ------------
Stockholders' deficit:
Common stock 166 165
Additional paid-in capital 60,163 60,140
Treasury stock, at cost (29,003) (29,003)
Cumulative currency translation adjustment 3 43
Unrealized gain (loss) on available-for-sale
securities 6 (8)
Accumulated deficit (51,978) (55,713)
------------ ------------
Total stockholders' deficit (20,643) (24,376)
------------ ------------
Total liabilities and stockholders'
deficit $ 370,897 $ 379,733
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------- -------------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Contract revenue $40,632 $33,715 $77,569 $64,894
Costs of revenue 25,202 25,825 49,158 50,429
---------- ---------- ---------- ----------
Gross Profit 15,430 7,890 28,411 14,465
Operating costs and expenses:
Selling, general and administrative 4,641 4,984 8,749 9,278
Amortization 594 669 1,191 1,341
---------- ---------- ---------- ----------
Income from operations 10,195 2,237 18,471 3,846
Other expense (income):
Interest expense 8,418 10,294 17,229 19,842
Interest income (1,347) (2,505) (2,541) (4,190)
Other 16 175 48 95
---------- ---------- ---------- ----------
Income (loss) before income taxes 3,108 (5,727) 3,735 (11,901)
Income tax - - - -
---------- ---------- ---------- ----------
Net Income (loss) $3,108 ($5,727) $3,735 ($11,901)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net Income (loss) per share, basic $0.26 ($0.34) $0.31 ($0.72)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net Income (loss) per share, diluted $0.22 ($0.34) $0.27 ($0.72)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares
outstanding 12,113 16,620 12,111 16,620
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares
outstanding and common equivalent
shares outstanding 14,299 16,620 13,958 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>
Six Months Ended
March 31,
---------------------
1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities: $ 18,596 $ 1,894
--------- ---------
Cash flows from investing activities:
Maturities of available-for-sale securities, net 8,628 7,991
Proceeds from sales of property, plant and equipment 6,320 -
Purchases of property, plant and equipment (13,891) (4,468)
--------- ---------
Net cash provided by investing activities 1,057 3,523
--------- ---------
Cash flows from financing activities:
Proceeds from sale of Pennsylvania receivable - 79,405
Repayment of long term debt and capital leases (14,049) (4,076)
Capitalization of loan fees - (201)
Decrease in restricted cash 699 2,173
--------- ---------
Net cash provided by (used in) financing activities (13,350) 77,301
--------- ---------
Effect of exchange rate on cash (35) 5
--------- ---------
Net increase in cash and cash equivalents 6,268 82,723
Cash and cash equivalents, beginning of period 18,685 53,104
--------- ---------
Cash and cash equivalents, end of period $ 24,953 $135,827
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
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.
Certain amounts in the consolidated financial statements have been
reclassified to conform with the current period's presentation. The
reclassification had no impact on previously reported net loss or stockholders'
equity.
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. NET INCOME (LOSS) PER SHARE
Effective December 31, 1997, the Company adopted Financial Accounting
Standards Board No. 128 "Earnings Per Share" (EPS) and accordingly all prior
periods have been restated. Basic EPS is computed as net income (loss) divided
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur from common shares
issuable through stock options, warrants and other convertible securities.
Common equivalent shares are excluded from the computation of net loss per share
if their effect is anti-dilutive.
6
<PAGE>
The following is a reconciliation of the numerator- net income/(loss) and the
denominator- number of shares, used in the basic and diluted EPS calculation
(amounts in thousands except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------------------------------------------------------------
Basic: 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (loss) $ 3,108 $ (5,727) $ 3,735 $(11,901)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares
outstanding
12,113 16,620 12,111 16,620
Basic EPS $ 0.26 $ (0.34) $ 0.31 $ (0.72)
-------- -------- -------- --------
-------- -------- -------- --------
Diluted:
Weighted average common shares
outstanding 12,113 16,620 12,111 16,620
Stock option common equivalents 2,186 - 1,847 -
Weighted average common shares
outstanding and common equivalent
shares outstanding 14,299 16,620 13,958 16,620
-------- -------- -------- --------
-------- -------- -------- --------
Diluted EPS $ 0.22 $ (0.34) $ 0.27 $ (0.72)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Common equivalent shares of 646,000 and 660,000 for the three months and six
months ended March 31, 1997, respectively were excluded from the shares used
to calculate diluted EPS as their effect is anti-dilutive.
In September 1997, the Company purchased 4,388,091 shares of its Class A Common
Stock, par value $0.01 per share, at a price of $4.50 per share pursuant to its
"Dutch" auction tender offer.
7
<PAGE>
4. LEGAL PROCEEDINGS
On May 8, 1998, the Company and the State of Connecticut entered into an
agreement (the "Agreement") settling the State's claims against the Company.
The Agreement modifies the terms of the Company's existing vehicle inspection
and safety inspection contracts with the State to provide among other things,
for the Company to add five emissions inspection lanes to its existing
network in lieu of constructing an additional station as required under the
existing contracts. The Company previously disclosed that it had filed a
demand for arbitration in response to a decision by the Commissioner of the
Department of Motor Vehicles in February 1996 that the Company realized cost
savings of $2.4 million, plus interest until paid, in connection with certain
changes under the Company's contract to perform vehicle emissions testing
services.
On October 8, 1997, Ganzcorp Investments, Inc., d/b/a Mustang
Dynamometer, filed suit against Envirotest in U.S. District Court for the
Northern District of Ohio alleging breach of contract in connection with
Envirotest's termination of its contract to supply the Company with chassis
dynamometers and alleging damages in excess of $10 million. The Company
filed an answer and counterclaim on October 28, 1997, denying the material
allegations of the complaint principally on the grounds that the contract
contained a clause permitting termination for convenience by Envirotest and
asserting counterclaims in the amount of $7.9 million. On February 28, 1998,
the parties entered into a Mediation Agreement providing for, among other
things, a mediation conference on July 28, 1998. The Company intends to
vigorously defend Ganzcorp's claims. The Company believes that any judgment
against the Company will not have a material adverse effect on its financial
position and results of operations.
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. Subsidiaries of the Company 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 the obligations under the
Settlement Agreement are not complied with. This 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. 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 the properties, no additional loss
will be recognized.
R.W. Granger & Sons filed a Demand for Arbitration in the East Hartford,
Connecticut, office of the American Arbitration Association in September 1996
alleging breach of contract and failure to pay amounts due Granger in connection
with the construction of certain of the
8
<PAGE>
Company's testing facilities in the State of Connecticut. On December 29,
1997, Granger filed a complaint in State Superior Court in the Judicial
District of Hartford/New Britain at New Britain alleging that the Company's
failure to pay amounts due to Granger is an unfair trade practice under the
Connecticut Unfair Trade Practices Act. Granger is claiming damages of
approximately $2.0 million. A decision in the arbitration is not expected
before June 1998. The Company intends to vigorously defend Granger's claims.
The Company believes that any judgment against the Company will not have a
material adverse effect on its financial position and results of operations.
On November 22, 1997, the Denver District Court granted the Company's
Motion to Dismiss a class action complaint filed by Timothy Dore on behalf of
all persons who paid to have a vehicle tested in the Company's metro Denver
facilities from January 2, 1995 to present. The complaint alleged breach of
contractual obligation to the class and the negligent performance of emissions
testing under the Company's contract with the State of Colorado. On January 6,
1998, Dore filed an appeal in the State of Colorado Court of Appeals from the
trial court's order of dismissal. The Company intends to vigorously defend Mr.
Dore's claims. The Company believes that any judgment obtained against the
Company will not have a material adverse effect on its financial position and
results of operations.
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.
9
<PAGE>
ENVIROTEST SYSTEMS CORP. AND SUBSIDIARIES
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Envirotest is the leading provider of vehicle emissions inspection and
maintenance programs in the $1.05 billion U.S. vehicle emissions testing
market. The market has traditionally consisted of two types of programs:
centralized test-only programs where emissions tests are conducted by private
contractors or government agencies, and decentralized programs where tests
are performed by gas stations and garages. The Company is the most
experienced operator in the $250 million centralized market segment, where it
has tested more than 150 million vehicles since its inception. The Company
is implementing a strategy to penetrate the $800 million decentralized market
segment through (i) strategic alliances with retail gasoline distribution
companies and other companies with strong brand identity, and (ii)
commercialization of its proprietary remote sensing technology, which can
unobtrusively measure the emissions of up to 4,000 moving vehicles per hour.
The Company has also established a presence, in conjunction with strategic
local partners, to participate in the expanding international market for
vehicle testing services.
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 Envirotest
Systems Corp., a Washington corporation ("ESC-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.
10
<PAGE>
RECENT DEVELOPMENTS
On November 18, 1997, the Company entered into an agreement with the City
of New York to conduct a pilot testing program using its remote sensing
technology in New York City. The three-week program will be conducted during
May 1998 and will gather emissions data on vehicles entering the city.
On December 30, 1997 and January 23, 1998, the Company entered into
agreements for the lease of eight remote sensing units in Taiwan. The
agreements provide for four units each to be leased to two Taiwanese
companies for the purpose of collecting fleet emissions data under their
contracts with the Taiwanese government. The data will be used to determine
the technology's most appropriate role in future pollution abatement programs
in the cities of Taipei and Kaohsiung and their surrounding areas. The value
of the six-month leases and related engineering services to be provided by
the Company is expected to total $850,000 in revenues.
On April 13, 1998, the Company entered into an agreement with the Atlantic
Richfield Company ("ARCO") to operate up to 80 test-only emissions stations in
the Southern California counties of Los Angeles, Orange, Riverside, San
Bernardino, San Diego and Ventura. Envirotest will operate the stations under
ARCO's "SMOGPROS Test-Only" trademark. The Company expects to open the initial
40-station network in ten-station increments, with the first stations opening by
July 1998. Additional increments of ten stations are expected to open every 60
- - 90 days thereafter. The agreement has an initial term of ten years and an
option for Envirotest to extend for an additional five years.
On April 22, 1998, the Company entered into an agreement with the State of
Minnesota to extend its contract with the State for one year to June 30, 1999.
The Company conducts approximately one million tests each year in Minnesota, and
generated revenue of approximately $7.0 million in fiscal 1997.
On May 1, 1998, the Company exercised its right to extend its contracts
with the State of Tennessee and the Metropolitan Government of Nashville and
Davidson County to June 30, 2001. The Company performs approximately 730,000
paid tests each year in Tennessee, and generated revenue of approximately
$3.6 million in fiscal 1997.
RESULTS OF OPERATIONS
Contract revenues increased to $40.6 million in fiscal second quarter 1998
from $33.7 million in fiscal second quarter 1997, an increase of $6.9 million or
20.5%. For the six months ended March 31, 1998, contract revenues were $77.6
million, an increase of $12.7 million, or 19.5%, over contract revenues of $64.9
million for the corresponding period in fiscal 1997. The increase in contract
revenues in fiscal second quarter 1998 as compared to fiscal second quarter 1997
was attributable to several factors including the extended contract in Illinois,
increased paid test volume, and contractual fee increases.
The increase in contract revenues of $12.7 million for the six months ended
March 31, 1998 over the same period in the prior fiscal year resulted primarily
from the factors discussed above and new emissions and safety contracts in
Indiana and Connecticut, respectively.
Gross profit increased to $15.4 million in fiscal second quarter 1998 from
$7.9 million in fiscal second quarter 1997, an increase of $7.5 million, or
95.6%. As a percentage of contract revenues, gross profit increased to 38.0% in
fiscal second quarter 1998 from 23.4% in fiscal second quarter 1997, an absolute
increase of 14.6%. These increases were primarily attributable to increased
revenues and continued improvements in operational efficiencies.
11
<PAGE>
For the six months ended March 31, 1998, gross profit increased to $28.4
million from $14.5 million for the corresponding period in fiscal 1997, an
increase of $13.9 million or 96.4%. As a percentage of contract revenues, gross
profit increased to 36.6% from 22.3% in the corresponding period in fiscal 1997,
an absolute increase of 14.3%. These increases were attributable to the same
factors as for the fiscal second quarter discussed above, and the reduction in
the deferred charge amortization.
Selling, general and administrative ("SG&A") expenses decreased to $4.6
million in fiscal second quarter 1998 from $5.0 million in fiscal second quarter
1997, a decrease of $0.4 million or 6.9%. As a percentage of contract revenues,
SG&A expenses decreased to 11.4% in fiscal second quarter 1998 from 14.8% in
fiscal second quarter 1997, an absolute decrease of 3.4%. For the six months
ended March 31, 1998, SG&A decreased to $8.7 million from $9.3 million for the
corresponding period in fiscal 1997, a decrease of $0.6 million or 5.7%. As a
percentage of contract revenues, SG&A expenses decreased to 11.3% for the six
months ended March 31, 1998 from 14.3% for the corresponding period in 1997, an
absolute decrease of 3.0%. The decrease as a percentage of contract revenue in
both fiscal first and second quarter 1998 is due to increases in contract
revenues as discussed above without associated increases in the SG&A expenses.
Income from operations increased to $10.2 million in fiscal second quarter
1998 from $2.2 million in fiscal second quarter 1997, an increase of $8.0
million. Income from operations as a percentage of contract revenues increased
to 25.1% in fiscal second quarter 1998 from 6.6% in fiscal second quarter 1997,
an absolute increase of 18.5%. For the six months ended March 31, 1998 income
from operations increased to $18.5 million from $3.8 million. Income from
operations as a percentage of contract revenues increased to 23.8% in the six
months ended March 31, 1998 from 5.9% in the six months ended March 31, 1997, an
absolute increase of 17.9%. The increase for the second fiscal quarter 1998 and
six months ended March 31, 1998 is primarily attributable to increases in
revenue, improvements in gross profit margins, and reductions in SG&A and
amortization expenses.
Interest expense decreased to $8.4 million in fiscal second quarter 1998
from $10.3 million in fiscal second quarter 1997, a decrease of $1.9 million.
For the six months ended March 31, 1998, interest expense decreased to $17.2
million from $19.8 million in the corresponding period of the prior year, a
decrease of $2.6 million. This decrease in interest expense primarily resulted
from the repurchase of $50 million aggregate principal amount of the Company's
91/8% Senior Notes completed in September 1997 and prepayment of debt associated
with a project financing.
Interest income decreased to $1.3 million in fiscal second quarter 1998
from $2.5 million in fiscal second quarter of 1997, a decrease of $1.2 million.
For the six months ended March 31, 1998, interest income decreased to $2.5
million compared to $4.2 million in the corresponding period of the prior year.
The decrease in interest income was primarily attributable to the lower levels
of interest bearing investments resulting from the application of cash in
connection with the Company's debt repurchase and stock buyback for $79.0
million completed in September 1997.
There was no income tax provision on the pretax income in the fiscal second
quarter 1998 or the six months ended March 31, 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 for the
fiscal second quarter 1997 and the six months ended March 31, 1997 as a result
of recording a valuation allowance to fully reserve the net deferred tax asset.
12
<PAGE>
Net income was $3.1 million in fiscal second quarter 1998 compared to a net
loss of $5.7 million in fiscal second quarter 1997, an increase of $8.8 million.
For the six months ended March 31, 1998, net income was $3.7 million compared to
a net loss of $11.9 million for the corresponding period in fiscal 1997, an
increase of $15.6 million.
LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS
Cash and cash equivalents, available-for-sale securities and restricted
cash decreased to $76.1 million at March 31, 1998 from $79.2 million at
September 30, 1997. The decrease of $3.1 million was primarily a result of the
repayment of debt obligations and capital lease payments of $14.0 million,
included in cash used in financing activities and construction progress payments
of $7.6 million, net of assets sales of $6.3 million, included in cash used in
investing activities, offset by approximately $18.6 million in cash provided by
operations.
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 March 31, 1998 consist of capital
expenditure requirements to complete the implementation of the Illinois program
estimated at $12.3 million, net of the $34.1 million in payments from the state.
During the remainder of fiscal 1998, the Company intends to spend approximately
$7.0 million in a new business initiative, program 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.
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
13
<PAGE>
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.
YEAR 2000 COMPLIANCE
Like many companies, the Company is reliant on technology to deliver
services to its customers. During 1998, the Company will utilize internal and
external resources to identify, correct or reprogram and test its computer
systems for year 2000 compliance. The "Year 2000" problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have date sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. The Company expects to replace some systems and modify others as part of
this process. Based on preliminary assessments at this time, the Company does
not expect to incur significant operating expenses or be required to invest
heavily in computer system improvements in order to be year 2000 compliant.
However, there can be no assurance that the systems of other companies on which
the Company's operations rely will also be converted in a timely manner, or that
any such failure to convert by another company will not have adverse effect on
the Company's operations.
14
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ENVIROTEST SYSTEMS CORP.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 8, 1998, the Company and the State of Connecticut entered into an
agreement (the "Agreement") settling the State's claims against the Company.
The Agreement modifies the terms of the Company's existing vehicle inspection
and safety inspection contracts with the State to provide among other things,
for the Company to add five emissions inspection lanes to its existing
network in lieu of constructing an additional station as required under the
existing contracts. The Company previously disclosed that it had filed a
demand for arbitration in response to a decision by the Commissioner of the
Department of Motor Vehicles in February 1996 that the Company realized cost
savings of $2.4 million, plus interest until paid, in connection with certain
changes under the Company's contract to perform vehicle emissions testing
services.
On October 8, 1997, Ganzcorp Investments, Inc., d/b/a Mustang
Dynamometer, filed suit against Envirotest in U.S. District Court for the
Northern District of Ohio alleging breach of contract in connection with
Envirotest's termination of its contract to supply the Company with chassis
dynamometers and alleging damages in excess of $10 million. The Company
filed an answer and counterclaim on October 28, 1997, denying the material
allegations of the complaint principally on the grounds that the contract
contained a clause permitting termination for convenience by Envirotest and
asserting counterclaims in the amount of $7.9 million. On February 28, 1998,
the parties entered into a Mediation Agreement providing for, among other
things, a mediation conference on July 28, 1998. The Company intends to
vigorously defend Ganzcorp's claims. The Company believes that any judgment
against the Company will not have a material adverse effect on its financial
position and results of operations.
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. Subsidiaries of the Company 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 the obligations under the
Settlement Agreement are not complied with. This 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. 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 the properties, no additional loss
will be recognized.
R.W. Granger & Sons filed a Demand for Arbitration in the East Hartford,
Connecticut, office of the American Arbitration Association in September 1996
alleging breach of contract and failure to pay amounts due Granger in
connection with the construction of certain of the Company's testing
facilities in the State of Connecticut. On December 29, 1997, Granger filed
a complaint in State Superior Court in the Judicial District of Hartford/New
Britain at New Britain alleging that the Company's failure to pay amounts due
to Granger is an unfair trade practice under the Connecticut Unfair Trade
Practices Act. Granger is claiming damages of approximately $2.0 million. A
decision in the arbitration is not expected before June 1998. The Company
intends to vigorously defend Granger's claims. The Company believes that any
judgment against the Company will not have a material adverse effect on its
financial position and results of operations.
On November 22, 1997, the Denver District Court granted the Company's
Motion to Dismiss a class action complaint filed by Timothy Dore on behalf of
all persons who paid to have a vehicle tested in the Company's metro Denver
facilities from January 2, 1995 to present. The complaint alleged breach of
contractual obligation to the class and the negligent
15
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performance of emissions testing under the Company's contract with the State
of Colorado. On January 6, 1998, Dore filed an appeal in the State of
Colorado Court of Appeals from the trial court's order of dismissal. The
Company intends to vigorously defend Mr. Dore's claims. The Company believes
that any judgment obtained against the Company will not have a material
adverse effect on its financial position and results of operations.
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.
16
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Employment Agreements
---------------------
(10.120) Employment Agreement made as of the 1st day of March, 1998, by
and between Mark Thomas and Envirotest Systems Corp.
(10.121) Amendment of the Separation, Release and Waiver Agreement,
dated as of September 30, 1997, by and between C. Michael
Alston and Envirotest Systems Corp., made as of the 20th day
of April, 1998
(10.122) Amendment of the Employment Agreement by and between Raj G.
Modi and Envirotest Systems Corp. dated January 1, 1996, made
as of the 21st day of April, 1998
Material Contracts
------------------
(10.123) Amendment Number Six to the General Conditions of the Contract
for the Establishment and Operation of Motor Vehicle
Inspection/Maintenance Program for the State of Minnesota
Pollution Control Agency between Envirotest Technologies, Inc.
and the Minnesota Pollution Control Agency dated April 22, 1998
(10.124) Letter from Metropolitan Government of Nashville and Davidson
County to Envirotest Systems Corp. dated April 1, 1998
(10.125) Letter from Envirotest Systems Corp. to the Bureau of
Environmental Services, Metropolitan Health Department of the
Metropolitan Government of Nashville and Davidson County dated
May 1, 1998
(10.126) Amendment 4 to Contract No. RV-5-00575-5-00 Between the State
of Tennessee, Department of Environment and Conservation and
Envirotest Systems Corp. dated as of May 5, 1998
(27) Financial Data Schedule
(b) Reports on Form 8-K
1. The Company filed a report on Form 8-K on May 7, 1998, reporting that
the Company is exploring strategic alternatives to maximize shareholder
value.
17
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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: May 13, 1998 /s/ F. Robert Miller
--------------------------------------------
F. Robert Miller
President and Chief Executive Officer
Date: May 13, 1998 /s/ Raj Modi
--------------------------------------------
Raj Modi
Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
(Principal Financial Officer)
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ENVIROTEST SYSTEMS CORP.
EXHIBIT INDEX
EXHIBIT
NUMBER:
Employment Agreements
- ---------------------
(10.120) Employment Agreement made as of the 1st day of March, 1998, by and
between Mark Thomas and Envirotest Systems Corp.
(10.121) Amendment of the Separation, Release and Waiver Agreement, dated as
of September 30, 1997, by and between C. Michael Alston and
Envirotest Systems Corp., made as of the 20th day of April, 1998
(10.122) Amendment of the Employment Agreement by and between Raj G. Modi and
Envirotest Systems Corp. dated January 1, 1996, made as of the 21st
day of April, 1998
Material Contracts
- ------------------
(10.123) Amendment Number Six to the General Conditions of the Contract for
the Establishment and Operation of Motor Vehicle
Inspection/Maintenance Program for the State of Minnesota Pollution
Control Agency between Envirotest Technologies, Inc. and the
Minnesota Pollution Control Agency dated April 22, 1998
(10.124) Letter from Metropolitan Government of Nashville and Davidson County
to Envirotest Systems Corp. dated April 1, 1998
(10.125) Letter from Envirotest Systems Corp. to the Bureau of Environmental
Services, Metropolitan Health Department of the Metropolitan
Government of Nashville and Davidson County dated May 1, 1998
(10.126) Amendment 4 to Contract No. RV-5-00575-5-00 Between the State of
Tennessee, Department of Environment and Conservation and Envirotest
Systems Corp. dated as of May 5, 1998
(27) Financial Data Schedule
19
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of March, 1998, by and between
ENVIROTEST SYSTEMS CORP., a Delaware corporation (the "Company"), and MARK
THOMAS (the "Executive").
WITNESSETH:
WHEREAS, the Company wishes to employ the Executive and the
Executive wishes to accept such employment upon the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, receipt of which is hereby acknowledged, the parties
hereto agree as follows:
1. EMPLOYMENT
The Company agrees to employ the Executive during the Term
specified in paragraph 2, and the Executive agrees to accept such employment,
upon the terms and conditions hereinafter set forth.
2. TERM
Subject to Sections 6 and 8 below and the other terms and
conditions of this Agreement, the Executive's employment by the Company shall
be for a term commencing on the date hereof and expiring on the close of
business on April 30, 2000 (the "Initial Term"); provided, however, the term
of the Executive's employment by the Company shall continue for an indefinite
period thereafter unless and until either party shall give to the other at
least 30 days advance written notice of expiration of the term (a "Notice of
Termination") (the Initial Term and the period, if any, thereafter, during
which the Executive's employment shall continue are collectively referred to
as the "Term"). The effective date of the termination of the Executive's
employment with the Company, regardless of the reason therefor, is referred
<PAGE>
to in this Agreement as the "Date of Termination".
3. DUTIES AND RESPONSIBILITIES
(a) During the Term, the Executive shall serve as Executive Vice
President, Chief Development Officer, of the Company. The Executive shall
report directly to the Chairman of the Company (the "Chairman").
(b) The Executive shall perform such duties and responsibilities as
directed by the Chairman, relating to the Company's significant mergers,
acquisitions, dispositions, joint ventures, all significant development
related projects and opportunities and all significant matters relating to
the Company's capital allocations for projects and developments
(collectively, "Development Matters"). After consulting with the Chairman,
the Executive shall present all Development Matters to the Board of Directors
of the Company (the "Board").
(c) The Executive agrees that he will (i) exercise his ability and
skill to promote the best interests of the Company; (ii) carry out his duties
in a competent and professional manner; and (iii) work with other employees
of the Company and its subsidiaries in a competent and professional manner.
4. COMPENSATION
(a) As compensation for his services hereunder, during the Term
the Company shall pay the Executive in accordance with its normal payroll
practices, direct salary compensation at the annual rate of $250,000;
provided, however, the then annual rate of direct salary compensation may be
increased (but not decreased) by or under the authority of the Compensation
Committee of the Board in accordance with the then salary review policy of
the Company.
2
<PAGE>
(b) Upon the consummation of a sale of the Company which
constitutes a Change in Control (as defined in paragraph 4(d) below), the
Company shall pay to the Executive a special bonus (the "Special Bonus") in
an amount equal to $550,000 plus the product of $100,000 times the amount, if
any, by which the exercise price of the stock options granted to the
Executive under paragraph 4(c) below exceeds $7.
(c) The Company hereby agrees that within 15 days of the date of
this Agreement, the Board will grant to the Executive an option to purchase
shares of the Class A Common Stock of the Company (the "Option") with the
following terms or those which are more favorable to the Executive: (i) the
Option will consist of 100,000 shares of the Class A Common Stock of the
Company; (ii) the Option will vest and immediately become exercisable on the
first anniversary of the date the Option is granted; (iii) notwithstanding
the preceding clause (ii), the Option shall vest and immediately become
exercisable in the event of (x) a "Change in Control" (as defined below) or
(y) the termination of the Executive's employment with the Company for any
reason other than in connection with a "For Cause Termination" (as defined in
paragraph 6(a) below) or a "Voluntary Termination" (as defined in paragraph
6(e) below); (iv) the Option will have an exercise price equal to the fair
market value of the Class A Common Stock on the date of grant; and (v) the
Option shall have a ten-year exercise period. The Executive will also be
eligible to receive grants of options under the Company's Stock Option Plan
at the discretion of the Compensation Committee of the Board.
(d) For purposes of this Agreement, "Change in Control" means the
occurrence of any one of the following events:
(i) any sale, transfer or other conveyance (other than to
the Company or a wholly-owned subsidiary of the Company), whether direct
or indirect, on a
3
<PAGE>
consolidated basis, in one transaction or a series of related
transactions, of (A) all or substantially all of the assets of the Company
or (B) the capital stock of the Company if, immediately after such
transaction(s), any "person" or "group" (as such terms are defined
below) becomes the "beneficial owner" (as defined below), directly or
indirectly, of more than 33% of the "Voting Stock" (as defined below)
then outstanding entitled to vote in the election of directors,
managers, or trustees of the transferee;
(ii) any "person" or "group" is or becomes the "beneficial
owner," directly or indirectly, of more than 33% of the Voting Stock
then outstanding; or
(iii) during any period of 24 consecutive months, individuals
who at the beginning of such period constituted the Board (together with
any new directors whose election by such Board or whose nomination for
election by the shareholders of the Company was approved by a vote of a
majority of the directors then still in the office who were either
directors at the beginning of such period or whose election or
nomination for election was previously so approved), cease for any
reason to constitute a majority of the Board then in office.
For purposes of this paragraph 4(d), (i) the terms "person" or "group" shall
have the meanings used for purposes of Rules 13d and 13d-5 of the Securities
Exchange Act of 1934 (the "Exchange Act"), whether or not applicable,
provided that no "Excluded Person" (as defined below) and no person or group
controlled by any Excluded Person shall be deemed to be a "person" or
"group"; (ii) the term "beneficial owner" shall have the meaning used in
Rules 13d-3 and 13d-5 under the Exchange Act, whether or not applicable,
except that a person shall be deemed to have "beneficial ownership" of all
shares that any such person has the right to acquire, whether such right is
exercisable immediately or only after the passage
4
<PAGE>
of time or upon the occurrence of certain events; (iii) "Voting Stock" means
the capital stock of the Company (i.e., the Class A Common Stock and the
Class B Common Stock of the Company, taken as a whole); and (iv) "Excluded
Person" means any beneficial holder of 5% or more of any class of common
stock of the Company outstanding immediately prior to the consummation of the
initial underwritten public offering by the Company of 3,400,000 shares of
the Company's Class A Common Stock in April 1993.
5. EMPLOYEE BENEFITS AND PERQUISITES
During the Term, the Company will provide to the Executive the
following benefits and perquisites:
(a) The Executive shall be a participant in all benefit programs
provided for the Company's management executives of like classification,
including, but not limited to, insurance, retirement, tax-deferred plans,
health and other benefit plans (including the Medical Reimbursement Program)
for which he qualifies.
(b) The Executive shall be entitled to receive fringe benefits and
perquisites (other than the above-mentioned employee benefit plans and
programs) in the aggregate substantially equivalent to those provided to the
Company's management executives of like classification, including, without
limitation, vacation time and reasonable sick leave.
(c) The Company will not require the Executive to relocate from
his current residence in Concord, Massachusetts. The Company agrees to pay or
to reimburse the Executive for all
5
<PAGE>
expenses incurred in connection with the Executive's travel from his
residence in Concord, Massachusetts to the Company's various offices.
6. TERMINATION
(a) The Company, by direction of the Board or the Chairman, shall
be entitled to terminate the Term and to discharge the Executive for "cause"
effective upon the giving of written notice from the Board to the Executive
describing in detail the alleged grounds. The term "cause" shall be limited
to the following grounds:
(i) The Executive's demonstrably willful failure or refusal
(without reasonable justification therefor) in bad faith to
perform his duties for the Company, or material specific
resolutions and mandates of the Board and directives of the
Chairman which are consistent with the Executive's duties and
responsibilities as set forth in paragraph 3 above other than by
reason of his disability (as defined in paragraph 8 below), in
each case if such failure or refusal is not cured within 30
calendar days after written notice thereof to the Executive by the
Company;
(ii) The Executive's willful breach of the terms and
conditions contained in paragraph 9 below;
(iii) The Executive's willful engaging in conduct that
materially injures the Company or could reasonably be expected to
materially injure the Company, monetarily or otherwise, including,
but not limited to, the willful commission of any act of fraud,
theft or dishonesty against the Company, if such conduct is not
cured (if capable of being cured) within 30 calendar days after
written notice thereof to the Executive by the Company; or
(iv) Conviction of the Executive in a court of law of, or the
Executive's entering a plea of guilty or no contest to, any felony
or any crime
6
<PAGE>
involving moral turpitude, dishonesty or theft.
The Company shall pay the Executive his salary compensation and any unused
accrued vacation only through, and any unpaid reimbursable expenses
outstanding as of, the Date of Termination upon the termination of the
employment of the Executive with the Company pursuant to this paragraph (a
"For Cause Termination"). The Executive or his beneficiaries shall be
entitled to all benefits, if any, that had accrued to the Executive under the
plans and programs described in paragraphs 5(b) and (c) above, or any other
applicable plans and programs in which he participated as an employee of the
Company, through the Date of Termination in the manner and in accordance with
the terms of such plans and programs. In the event that the Executive is
purportedly terminated for cause and a court, arbitration panel or other
tribunal having jurisdiction determines that "cause" as defined herein was
not present, then such purported termination for cause shall be deemed a
termination for "good reason" pursuant to paragraph 6(b) and the Executive's
rights and remedies will be governed by paragraph 6(c) below.
(b) The Executive shall be entitled to terminate this Agreement and
the Term hereunder for "good reason" effective upon the giving of written
notice to the Company. The term "good reason" shall be limited to the
following actions taken without the Executive's prior written consent:
(i) A "Change in Control" (as defined in paragraph 4(d)
above);
(ii) The failure by the Company to consummate a sale
transaction with a third party, which sale transaction constitutes
a Change in Control, prior to March 31, 1999;
(iii) A decision by the Board to cease to proceed with the
Company's current strategy to enter into a sale transaction with a
third party, such decision to be deemed made if the Company fails,
for any period of 120 or more
7
<PAGE>
consecutive calendar days during the Term, to retain investment
bankers, in connection with the Company's sale efforts;
(iv) A default by the Company of a material term of this
Agreement, which default remains uncured for a period of 10 days
after written notice of such default from the Executive to the
Company;
(v) A reduction in the Executive's then current base salary
or reduction of any employee benefit or perquisite enjoyed by him;
(vi) A failure by the Board to grant the Executive the Option
in accordance with paragraph 4(c) above;
(vi) The failure to appoint or re-appoint the Executive to
the position described in paragraph 3 above or the removal of him
from any such position; or
(vii) A diminution in the Executive's position, authority,
duties or responsibilities or the assignment to the Executive of
duties which are inconsistent in any respect with his position
(including status, offices, titles and reporting requirements),
authority, duties or responsibilities, if such diminution is not
cured (if capable of being cured) within 10 business days of notice
to the Company by the Executive.
(c) In the event of the termination of the Executive's employment
for any reason whatsoever other than a For Cause Termination or a Voluntary
Termination including without limitation (i) the expiration of the Term, (ii)
"good reason"; (iii) the Executive's disability (as defined in paragraph 8
below) or (iv) the death of the Executive, as severance compensation, the
Executive shall be entitled to receive from the Company a lump sum payment
equal to the greater of (x) one times the Executive's annual base salary or
(y) the Executive's base salary for the remainder of the Initial Term (in
either case, the "Severance
8
<PAGE>
Payment") The Severance Payment will become due and payable on the Date of
Termination. In addition, the Executive or his beneficiaries shall be
entitled to continued participation on the same basis (including without
limitation, cost contributions) as the other employees of the Company in all
medical, dental, hospitalization, disability and life insurance coverage (the
"Continued Plans") in which the Executive was participating on the Date of
Termination (as such Continued Plans are from time to time in effect at the
Company) through the two-year anniversary of the Date of Termination
provided, (1) that if the Executive or his beneficiaries are precluded from
continuing his participation in any Continued Plan, the Executive or his
beneficiaries shall be provided with the after-tax economic equivalent of
the benefits provided under the Continued Plan in which the Executive or his
beneficiaries are unable to participate, for the period specified above, and
(2) payment of such after-tax economic equivalent shall be made quarterly in
advance. In connection with a termination of the Executive's employment with
the Company other than a For Cause Termination or a Voluntary Termination,
except as provided in this paragraph 6(c), (x) the Company's obligation to
make the Severance Payment and otherwise to perform its obligations hereunder
shall not be affected by any set-off, counterclaim, recoupment, defense or
other claim, right or action which the Company may have against the Executive
or others and (y) the Executive shall be under no obligation to mitigate his
damages or to seek other employment and if the Executive obtains other
employment any compensation earned by the Executive therefrom shall not
reduce the Company's obligations under this paragraph 6(c).
(d) It is understood and agreed that the Severance Payment is in
the nature of a severance payment and considered to be reasonable by the
Company and is not in the nature of a penalty.
(e) The Company shall pay the Executive his salary compensation
and any unused accrued vacation only through, and any unpaid reimbursable
expenses outstanding as of, the Date of Termination upon the voluntary
termination by the Executive of his
9
<PAGE>
employment with the Company other that pursuant to a termination under
paragraphs 2 or 6(b) above or paragraph 7 below (a "Voluntary Termination").
The Executive or his beneficiaries shall be entitled to all benefits, if any,
that had accrued to the Executive under the plans and programs described in
paragraphs 5(b) and (c) above, or any other applicable plans and programs in
which he participated as an employee of the Company, through the Date of
Termination in the manner and in accordance with the terms of such plans and
programs.
7. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY
(a) Anything in this Agreement to the contrary notwithstanding, if
it shall be determined that any amounts paid to the Executive by the Company
hereunder (each a "Subject Payment") would be subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code"), and such excise tax, the "Excise Tax"), then the Executive shall
be entitled to receive from the Company an additional payment (the "Gross-Up
Payment") in an amount such that the net amount of the Subject Payment and
Gross-Up Payment retained by the Executive, after the calculation and
deduction of all Excise Taxes (including any interest or penalties imposed
with respect to such taxes) on the Subject Payment and all federal, state and
local income tax, employment tax and Excise Tax (including any interest or
penalties imposed with respect to such taxes) on the Gross-Up Payment
provided for in this paragraph 7(a), shall be equal to the Subject Payment.
(b) Subject to the provisions of paragraph 7(c) below, all
determinations required to be made under this paragraph 7, including whether
and when the Gross-Up Payment is required and the amount of such Gross-Up
Payment, and the assumptions to be utilized in arriving at such
determinations shall be made by an independent auditor (the "Auditor")
jointly selected by the Company and the Executive which shall provide
detailed supporting calculations both to the Company and the Executive within
15 business days of
10
<PAGE>
the receipt of notice from the Executive that there has been a Subject
Payment, or such earlier time as is requested by the Company. All fees and
expenses of the Auditor shall be borne solely by the Company. Any Gross-Up
Payment shall be paid by the Company to the Executive within five days of the
receipt of the Auditor's determination. Any determination by the Auditor
shall be binding upon the Company and the Executive. As a result of
uncertainty in the application of Section 4999 of the Code at the time of the
initial determination by the Auditor hereunder, it is possible that the
Gross-Up Payment made will have been an amount less than the Company should
have paid pursuant to this paragraph 7(b) (the "Underpayment"). In the event
that the Company exhausts its remedies pursuant to paragraph 7(c) below and
the Executive thereafter is required to make a payment of any Excise Tax, the
Auditor shall determine the amount of the Underpayment and any such
Underpayment shall be promptly paid by the Company to or for the benefit of
the Executive.
(c) The Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such notification shall be
given as soon as practicable after the Executive is informed in writing of
such claim and shall apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid. The Executive shall not pay
such claim prior to the expiration of the 30-day period following the date on
which he gives such notice to the Company (or such shorter period ending on
the date that any payment of taxes, interest and/or penalties with respect to
such claim is due). If the Company notifies the Executive in writing prior to
the expiration of such period that it desires to contest such claim, the
Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim;
11
<PAGE>
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company;
(iii) cooperate with the Company in good faith in order to
effectively contest such claim, and
(iv) permit the Company to participate in any proceedings relating
to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify the Executive for and hold the
Executive harmless from, on an after-tax basis, any Excise Tax or income tax
(including interest and penalties with respect thereto) imposed as a result
of such representation and payment of all related costs and expenses. Without
limiting the foregoing provisions of this paragraph 7(c), the Company shall
control all proceedings taken in connection with such contest and, at its
sole option, may pursue or forgo any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect of
such claim and may, at its sole option, either direct the Executive to pay
the tax claimed and sue for a refund or contest the claim in any permissible
manner, and the Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts, as the Company shall determine; provided,
however, that if the Company directs the Executive to pay such claim and sue
for a refund, the Company shall advance the amount of such payment to the
Executive, on an interest-free basis, and shall indemnify the Executive for
and hold the Executive harmless from, on an after-tax basis, any Excise Tax
or income tax (including interest or penalties with respect thereto) imposed
with respect to such advance or with respect to any imputed income with
respect to such advance; and further
12
<PAGE>
provided that any extension of the statute of limitations relating to the
payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of the contest shall be
limited to issues with respect to which a Gross-Up Payment would be payable
hereunder and the Executive shall be entitled to settle or contest, as the
case may be, any other issue raised by the Internal Revenue Service or any
other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced
by the Company pursuant to paragraph 7(c) above, the Executive becomes
entitled to receive any refund with respect to such claim, the Executive
shall (subject to the Company's complying with the requirements of paragraph
7(c) above) promptly pay to the Company the amount of such refund (together
with any interest paid or credited thereon after taxes applicable thereto).
If, after the receipt by the Executive of an amount advanced by the Company
pursuant to paragraph 7(c) above, a determination is made that the Executive
shall not be entitled to any refund with respect to such claim and the
Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required
to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
8. DISABILITY; DEATH
In the event the Executive shall be unable to perform his duties
hereunder by virtue of illness or physical or mental incapacity or disability
(from any cause or causes whatsoever) in substantially the manner and to the
extent required hereunder prior to the commencement of such disability (all
such causes being herein referred to as "disability") and the Executive shall
fail to perform such duties for a period of 180 consecutive days or an
aggregate of more than 210 days in any twelve-month period during the Term,
the Company shall have the right to terminate the Executive's employment
hereunder as at the end of any
13
<PAGE>
calendar month during the continuance of such disability upon at least 60
days' prior written notice to him. In the event of the Executive's death, the
Date of Termination shall be the date of such death.
9. NONCOMPETITION; PROTECTION OF CONFIDENTIAL INFORMATION
(a) During the Term and for a period of one year thereafter, the
Executive shall not, directly or indirectly, without the prior written
consent of the Company, provide consultation services or otherwise provide
services to (whether as an employee or a consultant, with or without pay),
own, manage, operate, join, control, participate in, or be connected with (as
a stockholder, partner, or otherwise), any business, individual, partner,
firm or corporation in the business of providing vehicle emissions testing
services or services directly related thereto or in any other business that
comprised a material portion of the Company's business during the Term;
provided, however, that the "beneficial ownership" by the Executive, either
individually or as a member of a "group" (as such terms are used in Section
13(d) of the Exchange Act and Regulation 13D under the Exchange Act), of not
more than five percent (5%) of the voting stock of any publicly held
corporation shall not alone constitute a violation of this Agreement.
(b) The Executive agrees that he will not at any time (whether
during the Term or after termination of this Agreement), disclose to anyone
any confidential information or trade secret of the Company, or any client of
the Company, or utilize such confidential information or trade secret for his
own benefit, or for the benefit of third parties. The term "confidential
information or trade secret" does not include information which (i) becomes
generally available to the public other than by breach of this provision or
(ii) the Executive learns from a third party who is not under an obligation
of confidence to the Company. In the event that the Executive becomes legally
required to disclose any confidential information or trade secret, he will
provide the Company with prompt notice thereof so that the Company may seek a
protective order or other appropriate remedy and/or waive compliance with the
provisions of this paragraph 9(b) to permit a particular disclosure.
14
<PAGE>
In the event that such protective order or other remedy is not obtained, or
that the Company waives compliance with the provisions of this paragraph 9(b)
to permit a particular disclosure, the Executive will furnish only that
portion of the confidential information or trade secret which he is legally
required to disclose and will cooperate with the Company's efforts to obtain
a protective order or other reliable assurance that confidential treatment
will be accorded the confidential information or trade secret.
(c) The Executive acknowledges that the services to be rendered by
him are of a special, unique and extraordinary character and, in connection
with such services, he will have access to confidential information vital to
the Company's business. By reason of this, the Executive consents and agrees
that if he violates any of the provisions of this Agreement with respect to
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
or other tribunal of competent jurisdiction for an injunction restraining the
Executive from committing or continuing any such violation of this Agreement,
and the Executive shall not object to any such application.
10. ENFORCEABILITY
The failure of any party at any time to require performance by
another party of any provision hereunder shall in no way affect the right of
that party thereafter to enforce the same, nor shall it affect any other
party's right to enforce the same, or to enforce any of the other provisions
in this Agreement; nor shall the waiver by any party of the breach of any
provision hereof be taken or held to be a waiver of any subsequent breach of
such provision or as a waiver of the provision itself.
11. ASSIGNMENT
This Agreement is a personal contract and the Executive's rights
and obligations hereunder may not be sold, transferred, assigned, pledged or
hypothecated by the
15
<PAGE>
Executive. The rights and obligations of the Company hereunder shall be
binding upon and run in favor of the successors and assigns of the Company.
12. RESOLUTION OF DISPUTES
Subject to the Company's right to seek injunctive relief under
paragraph 9(c) above, any disputes arising under or in connection with this
Agreement shall be resolved by binding arbitration under either the auspices
of either the American Arbitration Association or JAMS/Endispute as agreed to
by the parties. The resolution of any dispute hereunder shall occur in New
York City. Judgment upon the award rendered by the arbitrator(s) may be
entered in any court having jurisdiction thereof. During the dispute, each
party will bear his or its own attorneys' fees and expenses in connection
with any such arbitration and each party will pay one-half of any costs
associated with the arbitration proceedings; provided, however, upon a final
award of the arbitrator(s), the parties acknowledge and agree that the
arbitrator(s) shall direct the non-prevailing party to reimburse the
prevailing party for all of his or its attorneys' fees and expenses in
connection with any such arbitration.
13. MODIFICATION
This Agreement may not be orally canceled, changed, modified or
amended, and no cancellation, change, modification or amendment shall be
effective or binding, unless in writing and signed by the parties to this
Agreement.
14. SEVERABILITY
In the event any provision or portion of this Agreement is
determined to be invalid or unenforceable for any reason, in whole or in
part, the remaining provisions of this Agreement shall nevertheless be
binding upon the parties with the same effect as though the invalid or
unenforceable part had been severed and deleted.
15. NOTICES
16
<PAGE>
Any notice, request, instruction or other document to be given
hereunder by any party hereto to another party shall be in writing and shall
be deemed effective (a) upon personal delivery, if delivered by hand, or (b)
three days after the date of deposit in the mails, postage prepaid if mailed
by certified or registered mail, or (c) on the next business day, if sent by
facsimile transmission or prepaid overnight courier service, and in each
case, addressed as follows:
IF TO THE EXECUTIVE:
Mark Thomas
840-1 Old Road to Nine Acre Corner
Concord, MA 01742
Fax: (617) 371-0798
WITH A COPY TO:
Davis & Gilbert
1740 Broadway
New York, NY 10019
Attention: Michael C. Lasky, Esq.
Fax: (212) 468-4888
IF TO THE COMPANY:
Envirotest Systems Corp.
6903 Rockledge Drive
Suite 214
Bethesda, MD 20817
Attention: Chairman
Fax: (301) 530-9538
Any party may change the address to which notices are to be sent by giving
notice of such change of address to the other party in the manner herein
provided for giving notice.
16. APPLICABLE LAW
This Agreement shall be governed by and construed in accordance
with the
17
<PAGE>
laws of the State of New York without application of conflict of law
provisions applicable herein.
17. NO CONFLICT
Each of the parties hereto represents and warrants that he is not
subject to any agreement, instrument, order, judgment or decree of any kind,
or any other restrictive agreement of any character, which would prevent him
or it from entering into this Agreement or which would be breached by him or
it upon his or its performance of his or its duties pursuant to this
Agreement.
18. ENTIRE AGREEMENT
This Agreement represents the entire agreement between the Company
and the Executive with respect to the subject matter hereof.
19. BOARD APPROVAL
The parties hereto hereby agree that the effectiveness of this
Agreement shall be subject to the approval of the Board.
20. EXPENSES
All attorneys' fees and disbursements, not to exceed $8,000 in the
aggregate, incurred by the Executive in connection with the preparation,
negotiation and execution of this Agreement, shall be borne by the Company.
21. HEADINGS
The headings contained in this Agreement are for reference purposes
only, and shall not affect the meaning or interpretation of this Agreement.
18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
ENVIROTEST SYSTEMS CORP.
By: /s/ Chester C. Davenport
--------------------------------
Name: Chester C. Davenport
Title: Chairman
/s/ Mark Thomas
------------------------------------
Mark Thomas
19
<PAGE>
ENVIROTEST SYSTEMS CORP.
April 20, 1998
C. Michael Alston, Esq.
9706 Mill Race Estates Drive
Vienna, Virginia 22182
Dear Mr. Alston:
This letter sets forth your employment arrangement with Envirotest
Systems Corp. (the "Company"), and amends that certain Separation, Release
and Waiver Agreement (the "Separation Agreement"), dated as of September 30,
1997, by and between you, the Company and its affiliates and parents. You
shall serve as corporate counsel for the Company with the salary and other
benefits specified in paragraphs 1(a)-(e) and 5 of that certain Separation
Agreement. For purposes of this letter, the "Separation Date" means the
date your current employment with the Company terminates.
You acknowledge that the Company has granted you an option to purchase
36,667 shares of the Company's Class A Common Stock, par value $0.01 per
share (the "Stock") at the exercise price of $6.750 per share pursuant to a
grant letter dated February 12, 1998 and attached hereto. The Company has
taken all action required of the Company to authorize the grant of such
option and the execution and sending of such grant letter.
In the event of a Change of Control (as defined in such grant letter),
or, if earlier, upon your termination of your employment for any reason
(alternatively, the "Trigger Date"), the Company shall (i) pay you, cash lump
sum in the amount equal to $123,751.13 and (ii) provide you with the salary
and benefits specified in the first paragraph of this letter for the
twelve-month period commencing on the date of such Change of Control Trigger
Date.
<PAGE>
Please acknowledge that this letter sets forth our understanding of your
employment arrangements by signing below.
ENVIROTEST SYSTEMS CORP.
/s/ Chester C. Davenport
--------------------------
By:
Name:
Title:
ACKNOWLEDGED AND AGREED TO
/s/ C. Michael Alston
---------------------------
C. Michael Alston
<PAGE>
AMENDMENT
AMENDMENT, of the employment agreement by and between ENVIROTEST SYSTEMS
CORP., a Delaware corporation (the "Company") and RAJ G. MODI, (the
"Employee") dated January 1, 1996 (the "Agreement"), made as of the 21st day
of April, 1998.
WITNESSETH:
WHEREAS, the Company and the Employee entered into the Agreement on January
1, 1996; and
WHEREAS, the Company and the Employee mutually agree to amend certain terms
and conditions of the Agreement.
NOW, THEREFORE, the parties hereby agree to amend the Agreement effective as
of the date this Amendment is entered into, as follows:
1. Section 1(b) of the Agreement shall be amended to read in its
entirety as follows:
"The employment of the Employee by the Company hereunder shall commence
as of the date hereof and, unless sooner terminated in the manner herein
provided, shall terminate on the fourth anniversary hereof (the "Term")."
2. Section 8(b) of the Agreement shall be amended to read in its
entirety as follows:
"If (i) the Company terminates the employment of the Employee during the
Term other than for "cause" (as defined in Paragraph 8(a) of this
Agreement), or (ii) during the Term there is a change of control of the
Company and the successor entity (or purchaser) does not accept an
assignment of this Agreement, or (iii) the terms of the Employee's
employment are materially adversely changed or duties or
responsibilities are materially diminished, following a change of
control or otherwise (including, by way of example and not by
limitation, by reason of the Employee ceasing to be a Vice President and
Chief Financial Officer of the Company), or (iv) a change of control
occurs, as a result of which the Company ceases to have any
publicly-traded equity securities, whereupon, in the case of clauses
(ii), (iii) and (iv), the Employee shall have the right to consider his
employment hereunder to have been terminated by the Company by giving
written notice to
<PAGE>
the Company within 10 business days after the date on which the Employee
believes that such adverse change has occurred, the action(s)
constituting such adverse change or diminution, and the fact that he is
terminating this Agreement pursuant to this Paragraph 8(b)(iii), then
(A) the Company shall retain Employee and Employee agrees to serve as a
consultant to the Company for the longer of the remainder of the Term or
twenty-four (24) months ("Consulting Period"); (B) the Employee's
Options shall vest as set forth in Section 4(b) above; and (C) the
Employee shall be entitled to continue to receive (1) on the same
schedule as was in existence prior to such termination payment of his
base salary and all other benefits to which he is entitled for the
Consulting Period and (2) the pro rata portion of any bonus earned by
the Employee for the final year in which the termination occurred."
/s/ Chester C. Davenport
----------------------------------------
ENVIROTEST SYSTEMS CORP.
/s/ Raj G. Modi
----------------------------------------
RAJ G. MODI
Dated: of April, 1998
<PAGE>
AMENDMENT NUMBER SIX TO THE
GENERAL CONDITIONS OF THE
CONTRACT FOR THE ESTABLISHMENT AND OPERATION
OF MOTOR VEHICLE INSPECTION/MAINTENANCE
PROGRAM FOR THE STATE OF MINNESOTA
POLLUTION CONTROL AGENCY
This Amendment Number Six is made to the Contract entered into between
the State of Minnesota, acting through its Pollution Control Agency,
hereafter referred to as the "State," and Envirotest Technologies, Inc.,
doing business in Minnesota as Envirotest Technologies, Inc., hereafter
referred to as the "Contractor." Additions are underlined; deletions are
shown in over-strike type.
WHEREAS, the State and Contractor entered into the Contract on July 18,
1990, for the design, construction, equipment, establishment, maintenance and
operation of public inspection stations for the motor vehicle inspection and
maintenance program for the Twin Cities Metropolitan Area, hereafter referred
to as the "I/M Program;"
WHEREAS, the Contract required the Contractor to construct and operate
vehicle emission testing stations at locations throughout the Twin Cities
Metropolitan Area;
WHEREAS, the Contract has been amended five times, on June 17, 1991,
May 15, 1992, September 30, 1993, September 6, 1995, and October 31, 1995,
and as amended is in effect today;
WHEREAS, the statute governing the I/M Program, Minn Stat.
Sections 116.60 - 65, was amended by the 1995 Minnesota Legislature in 1995
Minn. Laws ch. 204, hereafter referred to as the "1995 Legislation."
WHEREAS, the 1995 Legislation instructed the commissioner of the
Pollution Control Agency to "take all reasonable steps to enable the state,
by July 1, 1998, to comply with the federal Clean Air Act without having to
continue the motor vehicle emission inspection program;"
WHEREAS, the Pollution Control Agency has submitted to the U.S.
Environmental Protection Agency (EPA) a request to redesignate the Twin
Cities Metropolitan Area to attainment of the national ambient air quality
standard for carbon monoxide;
<PAGE>
WHEREAS, the State's redesignation request seeks U.S. EPA approval of a
maintenance plan that would not require, for purposes of the federal Clean
Air Act, continuation of the motor vehicle emission inspection program;
WHEREAS, at the time of entering into this Amendment Six, the Pollution
Control Agency believes that the I/M Program is needed for another year,
until July 30, 1999, in order to comply with the federal Clean Air Act while
the U.S. EPA considers the State's redesignation request.
WHEREAS, Minn. Stat. Section 116.62, subd. 3(b) provides that this
contract may exceed a five year term; and
WHEREAS, the Contractor wishes to continue to perform vehicle testing
for the I/M Program.
NOW THEREFORE, the State and Contractor agree to amend the July 18,
1990, Contract as follows:
1. Section IX.B., Term, of the General Conditions of the Contract is
amended to read as follows:
This contract shall remain in effect from its effective date until July
30, 1999. If the State extends the network startup date under Section
IV.E, the State shall also extend the term of the contract until seven
(7) years from the new startup date of the vehicle inspection network.
In the event that this contract is terminated prior to July 30, 1999 or
expires on July 30, 1999, the requirements of Sections IV.H., VI.E.4.,
VII.A., VII.B., VII.E., VIII, IX.D., IX.E., IX.F, and IX.G shall remain
in effect. Sections V.B and V.C shall remain in effect for six (6) years
after expiration or termination of this contract, or until any judicial
or administrative action involving the work performed by the Contractor
under this contract commenced prior to expiration of the six (6) year
period is resolved, including all appeals, whichever occurs last.
2
<PAGE>
2. Section II.A., Consideration, of the General Conditions of the
Contract is amended to read as follows:
The State shall pay the contractor, until November 1, 1995, for
all activities conducted pursuant to this contract, $7.07 for each fee
bearing inspection, each fee bearing reinspection and each fee bearing
elective inspection performed on or after the Extension/Exemption
Startup Date and for which the State has been paid by the citizen who
obtained the inspection. On and after November 1, 1995, and until June
30, 1996, the State shall pay the Contractor, for all activities
conducted pursuant to this contract, $8.00 for each fee bearing
inspection, each fee bearing reinspection and each fee bearing elective
inspection performed by the Contractor and for which the State has been
paid by the citizen who obtained the inspection. After June 30, 1996,
and until June 30, 1997, the State shall pay the Contractor, for all
activities conducted pursuant to this contract, $7.28 for each fee
bearing inspection, each fee bearing reinspection and each fee bearing
elective inspection performed by the Contractor and for which the State
has been paid by the citizen who obtained the inspection. After June 30,
1997 and until June 30, 1999, the State shall pay the Contractor, for
all activities conducted pursuant to this contract, a To-Be-Determined
Amount ("TBDA") for each fee bearing inspection, each fee bearing
reinspection and each fee bearing elective inspection performed by the
Contractor and for which the State has been paid by the citizen who
obtained the inspection. The State, on the effective date of Amendment
Five, estimates that the TBDA will be approximately $7.00 for the year
between July 1, 1997 and June 30, 1998, but the exact amount of the TBDA
shall be determined as provided by the following sentence. The TBDA
shall not exceed $8.00 and shall be determined each year by the State
after review of testing revenues and the vehicle emission inspection
account balance through the end of the State's Fiscal Year (i.e. June
30, 1997 for the first year and June 30, 1998 for the second year the
TBDA is determined), and
3
<PAGE>
projected revenues and MPCA and Department administrative costs through
the end of all State and Contractor activities under the I/M Program, so
that the amount of revenues allocated for the year beginning July 1,
1997 and the year beginning July 1, 1998 to the Contractor through the
TBDA will assure that all MPCA and Department administrative costs plus
a contingency of $15,000 are allowed for in the vehicle emission
inspection account. The annual TBDA shall be determined by the State by
August 15, 1997 and by August 15, 1998. These fees are, in the event of
termination of the I/M Program by legislation prior to June 30, 1998,
subject to adjustment as provided in the next paragraph, and are the
Contractor's sole compensation for all activities conducted pursuant to
this contract, except as may be provided in Section IX.C.
If the legislature terminates the I/M Program prior to June 30,
1998, and the Contractor has received more than an average of $7.35,
between July 1, 1995, and the date testing ends, per fee bearing
inspection, fee bearing reinspection and fee bearing elective inspection
performed by the Contractor, and for which the State has been paid the
citizen who obtained the inspection, then the amounts specified in the
preceding paragraph due the Contractor will be reduced by the State, and
as necessary reimbursed to the State by the Contractor (except as may be
provided in Section IX.C.) within sixty (60) days of the State's written
request, so that by the end of testing the Contractor will have been
provided with an average of $7.35 per fee bearing inspection, fee
bearing reinspection and fee bearing elective inspection performed by
the Contractor, and for which the State has been paid by the citizen who
obtained inspection, between July 1, 1995 and the date testing ends.
A fee-bearing inspection is the initial inspection and, if the
vehicle fails the initial inspection, the number of reinspections of a
subject vehicle during one annual registration period covered by the
initial fee assessed pursuant to Minn. Rules 7023.1105, subp. 2(A). A
fee bearing reinspection is each subsequent reinspection of a subject
vehicle during one annual registration period for which an
4
<PAGE>
additional fee is assessed under the Minn. Rules pt. 7023.1105, subp.
2(A). A fee bearing elective inspection is any single inspection of a
subject or nonsubject vehicle approved in advance by the State and
conducted pursuant to Minn. Rules 7023.1105, subp. 2(B). The State
agrees that, pursuant to Minn. Rules pt. 7023.1105, it will set the
inspection fee at an amount not less than the amounts specified in the
first paragraph, and that if its administrative costs exceed the
difference between the inspection fee collected from citizens and the
amounts specified in the first paragraph due the Contractor, the excess
State administrative costs will not reduce the amount paid to the
Contractor under Section II.
The State shall not pay the Contractor for inspections conducted by
the Contractor for which the State has not been paid by the citizen who
obtained the inspection. The State shall not pay the Contractor for
inspections conducted before the network start-up date.
The total obligation of the State for all compensation and
reimbursements to Contractor shall not exceed the funds appropriated to
the I/M Program in the vehicle emission inspection account. Minn. Stat.
Section 116.65, subd. 1 establishes a vehicle emission inspection account
which consists of the revenues listed in Minn. Stat. Section 116.65,
subd. 2, including the proceeds of the vehicle inspection fee. Minn. Stat.
Section 116.65 provides that the vehicle emission inspection account is
appropriated to the Agency by the legislature, and may be used only to
pay the Contractor for vehicles inspected and MPCA and Department
administrative costs for the I/M Program. The Contractor understands and
agrees, however, that the vehicle emission inspection account will not
contain substantial funds until the commencement of vehicle inspection
and the collection of fees from motorists for vehicle inspection, and
that the vehicle emission inspection account will be regularly depleted
after that point to pay the Contractor for vehicles inspected and to pay
State administrative costs to conduct the I/M Program. Contractor also
understands and agrees that, in the unlikely event that the
5
<PAGE>
legislature ceases to appropriate funds for the I/M Program, the
legislature may not authorize sufficient funds to pay the Contractor's
costs.
3. Section 1.25, Rulemaking, of the General Conditions of the Contract,
which was added in Amendment Five, is deleted.
4. This Amendment Six is effective when it is signed by the Commissioner
of Administration.
5. All other terms and conditions of the Contract remain in full force
and effect, except as specifically amended above.
6. This Amendment Six may be executed in counterparts. All persons by
their signatures below affirm they have authority to execute this amendment
on behalf of the parties they represent.
ENVIROTEST TECHNOLOGIES, INC. MINNESOTA POLLUTION CONTROL AGENCY
By: /s/ Chester Davenport By: /s/ Elaine Johnson
-------------------------------- --------------------------------
Name (print): Chester Davenport Elaine Johnson
---------------------- Manager, Administrative Services
Title: Chairman Division
-----------------------------
Date: 4/18/98 Date: 4/22/98
------------------------------ ------------------------------
By: AS TO FORM AND EXECUTION BY
-------------------------------- THE ATTORNEY GENERAL
Name (print):
----------------------
Title:
-----------------------------
Date: By: /s/ Ann M. Seha
------------------------------ -------------------------------
Ann M. Seha
Assistant Attorney General
Date: 4/22/98
-----------------------------
AS TO ENCUMBRANCE BY THE
COMMISSIONER OF ADMINISTRATION MINNESOTA POLLUTION CONTROL AGENCY
By: /s/ Gerald T. Joyce By: /s/ Roger K. Volk
------------------------------- -------------------------------
Gerald T. Joyce Name (print): Roger K. Volk
Contract Administrator ---------------------
Title: Accts Payable Supv
----------------------------
Date: 4/22/98 Date: 4/22/98
----------------------------- -----------------------------
<PAGE>
legislature ceases to appropriate funds for the I/M Program, the
legislature may not authorize sufficient funds to pay the Contractor's
costs.
3. Section 1.25, Rulemaking, of the General Conditions of the Contract,
which was added in Amendment Five, is deleted.
4. This Amendment Six is effective when it is signed by the Commissioner
of Administration.
5. All other terms and conditions of the Contract remain in full force
and effect, except as specifically amended above.
6. This Amendment Six may be executed in counterparts. All persons by
their signatures below affirm they have authority to execute this amendment
on behalf of the parties they represent.
ENVIROTEST TECHNOLOGIES, INC. MINNESOTA POLLUTION CONTROL AGENCY
By: By:
-------------------------------- --------------------------------
Name (print): Elaine Johnson
---------------------- Manager, Administrative Services
Title: Division
-----------------------------
Date: Date:
------------------------------ ------------------------------
By: /s/ F. R. Miller AS TO FORM AND EXECUTION BY
-------------------------------- THE ATTORNEY GENERAL
Name (print): F. R. Miller
----------------------
Title: CEO
-----------------------------
Date: 4/18/98 By:
------------------------------ -------------------------------
Ann M. Seha
Assistant Attorney General
Date:
-----------------------------
AS TO ENCUMBRANCE BY THE
COMMISSIONER OF ADMINISTRATION MINNESOTA POLLUTION CONTROL AGENCY
By: By:
------------------------------- -------------------------------
Gerald T. Joyce Name (print):
Contract Administrator ---------------------
Title:
----------------------------
Date: Date:
----------------------------- -----------------------------
6
<PAGE>
[LETTERHEAD]
April 1, 1998
Mr. Steve Kircher, Program Manager
Envirotest Systems Corporation
1619 Elm Hill Pike, Suite A
Nashville, TN 37210
Dear Mr. Kricher:
The Metropolitan Government of Nashville and Davidson County, Tennessee is
hereby notifying Envirotest Systems Corporation of its intent to continue
operation of the vehicle inspection and maintenance program in Nashville and
Davidson County, Tennessee through June 30, 2001.
If you have any question or require any further assistance, please contact
Mr. Harry Dugan of my staff at 340-5656.
Very truly yours,
/s/ G. Brent Hager
G. Brent Hager, Ph.D., P.E., Director
Bureau of Environmental Services
GBH/jk
cc: Harry Dugan
Director, Vehicle Inspection
<PAGE>
[LOGO] [LETTERHEAD]
May 1, 1998
G. Brent Hager, Ph.D., P.E., Director
Bureau of Environmental Services
Metropolitan Health Department
311 23rd Avenue, North
Nashville, Tn 37203
RE: Vehicle Inspection and Maintenance Program -
Contract No. L-90-5140 - as amended
Dear Dr. Hager:
This letter responds to your letter of April 1, 1998 in which notice was
given of the intention of the Metropolitan Government of Nashville and
Davidson County, Tennessee, to continue operation of the vehicle inspection
and maintenance program through June 30, 2001.
This letter serves as Envirotest Systems Corp.'s exercise of its right
of first refusal and agreement to extension of the above-referenced contract
through June 30, 2001 on the same terms and conditions as presently exist
including the term and conditions contained in the letter agreement dated
January 9, 1996.
We look forward to a continuing successful relationship with the
Metropolitan Government and your office.
Sincerely,
/s/ Chester C. Davenport
Chester C. Davenport
<PAGE>
AMENDMENT 4
TO CONTRACT NO. RV-5-00575-5-00
BETWEEN THE STATE OF TENNESSEE
DEPARTMENT OF THE ENVIRONMENT AND CONSERVATION
AND
ENVIROTEST SYSTEMS CORP.
This Contract by and between the State of Tennessee Department of Environment
and Conservation, hereunder referred to as the State, and Envirotest Systems
Corp, hereafter referred to as the Contractor, is hereby amended as follows:
1. Delete the following Section 42 in its entirety:
"SECTION 42. TERM. The term of this Contract shall commence on
May 16, 1994, and shall extend through December 31, 1998. The State shall have
no obligation for services rendered by the Contractor which are not performed
within the specified period."
and insert the following in its place:
"SECTION 42. TERM. The term of this Contract shall commence on May
16, 1994, and shall extend through June 30, 2001. The State shall have no
obligation for services rendered by the Contractor which are not performed
within the specified period."
The other terms and conditions of this contract not amended hereby shall
remain in full force and effect.
IN WITNESS WHEREOF:
ENVIROTEST SYSTEMS CORPORATION:
/s/ Chester C. Davenport DATE: May 1, 1998
- -------------------------------- ---------------
Chester C. Davenport, Chairman
DEPARTMENT OF ENVIRONMENT AND CONSERVATION:
/s/ Milton H. Hamilton, Jr. DATE: 5/4/98
- -------------------------------------- ---------------
Milton H. Hamilton, Jr., Commissioner
APPROVED: DEPARTMENT OF FINANCE AND ADMINISTRATION:
/s/ John D. Ferguson DATE: May 04 1998
- -------------------------------------------------- ---------------
John D. Ferguson, Commissioner
COMPTROLLER OF THE TREASURY:
/s/ WR Snodgrass DATE: 5-5-98
- -------------------------------------------------- ---------------
William R. Snodgrass, Comptroller of the Treasury
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ENVIROTEST SYSTEMS CORP. FORM 10-Q FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 24,953
<SECURITIES> 32,321
<RECEIVABLES> 13,120
<ALLOWANCES> 891
<INVENTORY> 0
<CURRENT-ASSETS> 75,827
<PP&E> 306,058
<DEPRECIATION> 71,518
<TOTAL-ASSETS> 370,897
<CURRENT-LIABILITIES> 38,335
<BONDS> 357,405
0
0
<COMMON> 166
<OTHER-SE> (20,809)
<TOTAL-LIABILITY-AND-EQUITY> 370,897
<SALES> 77,569
<TOTAL-REVENUES> 77,569
<CGS> 49,158
<TOTAL-COSTS> 49,158
<OTHER-EXPENSES> 48
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,229
<INCOME-PRETAX> 3,735
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,735
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,735
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.27
</TABLE>
