<PAGE> 1
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_________________ TO _________________.
COMMISSION FILE NUMBER 0-25890
__________________
REPUBLIC ENVIRONMENTAL SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
__________________
DELAWARE 22-2769024
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
16 SENTRY PARK WEST
1787 SENTRY PARKWAY WEST, SUITE 400
BLUE BELL, PENNSYLVANIA 19422
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (215) 283-4900
__________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $0.01 Par Value, 10,856,278 shares outstanding as of
August 2, 1996
=============================================================================
<PAGE> 2
REPUBLIC ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995 . . . . . . . . . . . . . . 2
Consolidated Statements of Operations for the three and six months ended
June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the six months ended
June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . 7
PART II - Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
1
<PAGE> 3
REPUBLIC ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1996 1995
--------------- ---------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 2,442 $ 3,255
Accounts receivable, less allowance for doubtful accounts of
$1,036 and $1,031, respectively . . . . . . . . . . . . . . . . 6,184 7,614
Other current assets . . . . . . . . . . . . . . . . . . . . . . . 1,625 1,445
-------- --------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . 10,251 12,314
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . 20,322 19,469
Goodwill, net of accumulated amortization of $1,326 and $1,187, 8,984 9,109
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 868 858
-------- --------
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,425 $ 41,750
======== ========
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . .
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,516 $ 2,568
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . 1,991 2,825
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . 403 193
Current maturities of long-term debt and capitalized lease 423 507
obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,759 1,999
Current portion of accrued environmental costs . . . . . . . . . . 60 56
-------- --------
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . 7,152 8,148
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . 454 618
Long-term debt and capitalized lease obligations, net of current maturities 1,810 1,790
Accrued environmental costs, net of current portion . . . . . . . . . . . 2,437 2,344
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 257 257
-------- --------
Minority interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,110 13,157
-------- --------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . .
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share;
20,000,000 shares 109 114
authorized, 10,855,238 and 11,366,432 shares issued, respectively 27,479 27,653
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 531 778
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 196 193
Cumulative translation adjustment . . . . . . . . . . . . . . . . - (145)
-------- --------
Treasury stock, 102,000 shares, at cost . . . . . . . . . . . . . 28,315 28,593
-------- --------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . $ 40,425 $ 41,750
======== ========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . .
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
REPUBLIC ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,825 $ 13,017 $ 15,796 $ 25,165
Expenses:
Cost of operations . . . . . . . . . . . . . . . . . . . . . . . . 5,806 9,364 11,849 18,123
Selling, general and administrative . . . . . . . . . . . . . . . . 2,284 2,526 4,656 5,092
-------- -------- -------- --------
Operating income (loss) . . . . . . . . . . . . . . . . . (265) 1,127 (709) 1,950
Other (income) expense:
Interest and other income . . . . . . . . . . . . . . . . . . . . . (313) (53) (426) (118)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . 18 72 110 154
-------- -------- -------- --------
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . 30 1,108 (393) 1,914
Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . 11 410 (146) 708
-------- -------- -------- --------
Net (loss) income . . . . . . . . . . . . . . . . . . . . 19 $ 698 $ (247) $ 1,206
-------- ======== ======== ========
Earnings per common and common equivalent share. . . . . . . . . . . $ - $ 0.06 $ (0.02) $ 0.11
======== ======== ======== ========
Weighted average common and common equivalent shares . . . . . . . . 11,325 10,790 11,150 10,850
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
REPUBLIC ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income . . . . . . . . . . . . . . . . . . $ (247) $ 1,206
Adjustments to reconcile net (loss) income
to net cash provided by operations:
Depreciation and amortization . . . . . . . . . . . 1,078 1,184
Provision for doubtful accounts . . . . . . . . . . 98 424
Provision for accrued environmental costs . . . . . 148 204
Loss (gain) on the sale of equipment . . . . . . . (64) (20)
Changes in assets and liabilities -
Accounts receivable . . . . . . . . . . . . . . . 1,337 1,404
Prepaid expenses and other assets . . . . . . . . (354) (537)
Accounts payable and accrued liabilities . . . . (1,015) (378)
Income taxes payable . . . . . . . . . . . . . . 4 144
Due to Republic Industries, Inc. . . . . . . . . - 762
Other liabilities . . . . . . . . . . . . . . . . (192) (1,367)
---------- --------
Net cash provided by operations . . . . . . 793 3,026
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital additions . . . . . . . . . . . . . . . . . (1,704) (2,201)
Proceeds from the sale of equipment . . . . . . . . . 119 41
---------- --------
Net cash used in investing activities . . . (1,585) (2,160)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options . . . . . . . . . . . . . 872 -
Capital contributions from Republic Industries, Inc. - 2,191
Repayment of borrowings from Republic Industries, Inc. - (501)
Cash received from Stout-capital contribution . . . 74 2,454
Purchase of treasury stock . . . . . . . . . . . . . (895) (141)
Payments of long-term debt and notes payable . . . . (440) (3,044)
Proceeds from long-term debt and notes payable . . . 368 319
---------- --------
Net cash (used) provided in financing activities (21) 1,278
--------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . . . (813) 2,144
CASH AND CASH EQUIVALENTS:
Beginning of period . . . . . . . . . . . . . . . . . 3,255 1,433
---------- --------
End of period . . . . . . . . . . . . . . . . . . . . $ 2,442 $ 3,577
========== ========
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest . . . . . . . . . . . . . . . . . . . . . . $ 110 $ 152
Income taxes . . . . . . . . . . . . . . . . . . . . $ 89 $ 65
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment purchases of $0 and $536 were financed in the six months ended June
30, 1996 and 1995, respectively by borrowings and capitalized lease
obligations.
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
REPUBLIC ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements at June 30, 1996
include the accounts of Republic Environmental Systems, Inc. and its
subsidiaries ("RESI"), the successor to the business of Stout Environmental,
Inc. ("Stout"), a Delaware corporation, acquired by Republic Industries, Inc.
("RII"), formerly Republic Waste Industries, Inc. in March 1992, as well as the
accounts of Republic Environmental Systems Ltd. ("RESL") (formerly known as
Great Lakes Environmental Group Ltd.), the former Canadian hazardous waste
services subsidiary of RII, which was acquired by RII in July 1991 and was
contributed to RESI as of the Distribution Date (collectively, the "Company").
One of RESI's subsidiaries, Republic Environmental Systems (Cleveland) (RES
(Cleveland)), Inc. (formerly known as Evergreen Environmental Group, Inc.), was
acquired by RII in September 1991, in a transaction separate from the Stout
acquisition and was contributed to RESI in May 1993. The accounts of RESI and
all its majority owned subsidiaries are included in the accompanying
consolidated financial statements. All significant intercompany transactions
have been eliminated.
The consolidated financial statements of RESI and its subsidiaries included
herein have been prepared by RESI, 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 RESI, the
accompanying statements reflect all adjustments necessary to present fairly the
financial position, results of operations and cash flows for those periods
indicated, and contain adequate disclosure to make the information presented
not misleading. Such adjustments are of a normal, recurring nature unless
otherwise disclosed in the notes to consolidated financial statements. It is
suggested that these consolidated condensed financial statements be read in
conjunction with the financial statements and notes thereto included in RESI's
latest annual report on Form 10-K.
Results of operations for any six month period are not necessarily indicative
of the results of operations for a full year.
2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
The computation of weighted average common and common equivalent shares used in
the calculation of earnings per share for the three and six months ended June
30, 1996 is shown below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1996 June 30, 1996
-------------- ----------------
<S> <C> <C>
Common shares outstanding, net of treasury shares . . . . $ 10,855 10,855
Effect of stock options and warrants assumed exercisable 497 299
Effect of using weighted average common shares outstanding
during the period . . . . . . . . . . . . . . . . . . . . (27) (4)
---------- -----------
Weighted average common and common equivalent shares . . $ 11,325 $ 11,150
========== ===========
</TABLE>
On June 7, 1996 the Board of Directors declared a two-for-one split of RESI's
common stock, $.01 par value per share ("Common Stock"), in the form of a 100%
stock dividend, payable June 30, 1996, to holders of record on June 14, 1996.
Accordingly, all prior year share and per share information contained in this
Report reflects the stock split.
The difference between shares for primary and fully diluted earnings per common
and common equivalent share was not dilutive for the periods presented.
5
<PAGE> 7
REPUBLIC ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. TREASURY STOCK
In April 1995, the RESI Board of Directors authorized RESI to repurchase up to
500,000 shares or 4.6% of RESI Common Stock during 1995 as deemed appropriate
by management and authorized an additional repurchase of 500,000 shares or 4.6%
of RESI Common Stock in February 1996. The repurchasing of shares was intended
to achieve a more favorable balance between the market supply of the shares and
expected market demand, as well as establish stability in the trading market
for RESI shares. Repurchases were effected at prevailing market prices from
time to time on the open market prior to the negotiation of the proposed merger
(see: Note 4). The last repurchase was effected by RESI on March 4, 1996 and
as of such date RESI had repurchased approximately 695,842 shares of RESI
Common Stock for an aggregate cost of approximately $1,040,000. On May 9,
1996, the RESI Board of Directors authorized the retirement of the 695,842
shares of RESI Common Stock.
4. PROPOSED MERGERS AND STOCK PURCHASE AGREEMENTS
RESI has entered into an Agreement and Plan of Merger, dated as of May 19, 1996
pursuant to which RESI has agreed to issue 14,760,000 shares of its Common
Stock (the "Merger Shares"), warrants to purchase an aggregate of 4,200,000
additional shares of RESI's Common Stock (the "Merger Warrants") at exercise
prices ranging from $2.625 to $3,875 per share and a promissory note in the
principal amount of $4,000,000 in consideration for all of the outstanding
common stock of Century Surety Company ("CSC") and Commercial Surety Agency,
Inc. d/b/a Century Surety Underwriters ("CSU" and, together with CSA, the
"Alliance Companies") each a wholly-owned subsidiary of Alliance Holding
Corporation ("Alliance"); CSC and CSU will become wholly-owned subsidiaries of
RESI upon consummation of the mergers (such transactions are hereinafter
referred to collectively as the "Mergers"). In addition, the Company has
agreed to issue and sell to (I) H. Wayne Huizenga 2,000,000 shares of RESI
Common Stock (the "Stock Issuance Shares") and warrants to purchase 6,000,000
shares of RESI Common Stock (the "Stock Issuance Warrants") at exercise prices
ranging from $2.625 to $3.875 per share for an aggregate purchase price of
$5,250,000 and (ii) MGD Holdings, Ltd., a Bermuda corporation controlled by
Michael G. DeGroote, Chairman of the Company of RESI ("MGD Holdings"), and its
assigns 2,000,000 shares of RESI Common Stock and warrants to purchase
6,000,000 shares of RESI Common Stock at exercise prices ranging from $2.625 to
$3.875 per share for an aggregate purchase price of $5,250,000 (such
transactions are hereinafter referred to collectively as the "Stock
Issuances"). The consummation of the mergers and the Stock Issuances is
subject to receiving stockholder and regulatory approvals and other customary
closing conditions.
As of July 31, 1996, Mr. DeGroote, through MGD Holdings, beneficially owned
5,536,000 shares of RESI Common Stock, representing approximately 49.5% of the
outstanding shares of RESI Common Stock. Upon consummation of the Combination,
assuming the exercise of all of the Merger Warrants and Stock Issuance Warrants
in full at such time (but not the exercise of any other outstanding options or
warrants), and giving effect to the issuance of the Merger Shares and the Stock
Issuance Shares, Alliance and Mr. DeGroote (through MGD Holdings) will
beneficially own approximately 41.4% and 29.3%, respectively, of the
outstanding shares of RESI Common Stock. In addition, contemporaneously with
the consummation of the Combination, MGD Holdings will enter into a voting
agreement with Alliance (the "Voting Agreement") pursuant to which MGD
Holdings, for a period of two years commencing as of the date thereof, will
agree to vote all shares of RESI Common Stock held by it from time to time in
accordance with the recommendation of the management of Alliance. Accordingly,
Alliance will have the ability to control the outcome of matters submitted to a
vote of the RESI stockholders, including the election of directors.
In addition to the foregoing, upon consummation of the Combination, one present
member of the RESI Board of Directors, Mr. Michael J. Occhionero, will resign
and the RESI Board of Directors will be enlarged to seven members. At such
time, Messrs. Edward F. Feighan, Craig L. Stout and Harve A. Ferrill will be
nominated by Alliance and elected to the RESI Board of Directors and Mr.
Richard C. Rochon will be nominated by Alliance upon the recommendation of Mr.
Huizenga and elected to the RESI Board of Directors. Mr. DeGroote will
continue to serve as Chairman of the Board of RESI. Mr. Joseph E. LoConti,
currently a director of RESI, is the Chairman of the Board, President and
controlling shareholder of Alliance. After the consummation of the
Combination, Mr. LoConti
6
<PAGE> 8
will serve as Vice Chairman and a director of RESI. Consequently, Messrs.
LoConti, Feighan, Stout and Ferrill to be nominated by Alliance will comprise
four of the seven members of the RESI Board and, if they vote together, will
have the ability to control most actions submitted to a vote of the RESI Board
of Directors.
On June 10, 1996 the Board of Directors of RESI unanimously approved the
adoption of amendments to Certificate of Incorporation, upon consummation of
the combination, which will change the name of RESI to International Alliance
Services, Inc. and to increase the number of authorized shares of RESI Common
Stock from 20,000,000 to 100,000,000. Such amendments are conditioned upon the
closing of the mergers and stock issuances.
On July 16, 1996, CSU announced it had entered into an agreement to acquire
Environmental & Commercial Insurance Agency, Inc. ("ECI"), a small, privately
held insurance agency based in Columbus, Ohio, for $1.0 million and 192,500
shares of RESI Common Stock. The acquisition is subject to consummation of the
Mergers and Stock Issuances as well as regulatory approval and execution of
definitive agreements with ECI.
On July 25, 1996, the Alliance Companies announced that they had entered into
agreements with Gulf Insurance Company ("Gulf"), a subsidiary of the Travelers
Inc. and Midwest Indemnity Corporation of Skokie, Illinois ("Midwest"). CSC
and Gulf will pool their current non-standard contract and other surety
business (the "combined business"), by means of various quota share and
reinsurance arrangements, CSU will act as exclusive underwriter for the
combined business. The CSC component of the combined business is approximately
$5 million of surety bonds and is managed by CSU, The Gulf component of the
combined business, currently approximately $30 million of surety bonds, is now
managed by Midwest. CSU will also acquire $5.125 million of the obligations of
Midwest, secured by the assets of Midwest (the "Obligations"). The Obligations
include monies owed to Gulf which are estimated to be between $3.0 million and
$3.6 million at closing. Midwest will enter into a production agreement with
CSU to perform selected underwriting functions, as determined by CSU, and
produce business through its approximately 100 agents and subagents throughout
the United States. Further, CSU will obtain an exclusive option to purchase
the assets of Midwest for $5.1 million in cash and cancellation of the
Obligations. The agreements with Gulf and Midwest are subject to completion of
the Mergers and the Stock Issuances as well as execution of definitive
agreements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percentage
relationship which certain captioned items in RESI's Consolidated Statements of
Operations bear to total revenue and other pertinent data:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of operations . . . . . . . . . . . . . . . . . . . 74.2 71.9 75.0 72.0
Selling, general and administrative expenses . . . . . . 29.2 19.4 29.5 20.2
----------- ----------- ----------- -----------
Operating (loss) income . . . . . . . . . . . . . . . . .
(3.4%) 8.7% (4.5%) 7.8%
========== ========== ========== ======
</TABLE>
7
<PAGE> 9
Revenue
Revenue for the second quarter of 1996 decreased $5.2 million to $7.8
million from $13.0 million in the second quarter of 1995. This decrease is
primarily a result of several significant remediation projects which were to
begin during the quarter but were delayed due to administrative and regulatory
issues. Also, the decreased demand within the hazardous waste industry due, in
part, to continuing efforts by generators of hazardous waste to implement waste
minimization programs and the shipment of waste by such generators directly to
the ultimate disposal location, contributed to the decrease in revenues. The
decrease in demand resulted in a decrease in volumes of waste serviced as well
as a reduction in prices charged by RESI and consequently, lower margins.
Revenue for the six months ended June 30, 1996 decreased $9.4 million to $15.8
million from $25.2 million for the same period in 1995. This decrease is
attributable to the severe winter conditions experienced in the first three
months of 1996 and the industry factors experienced during the second quarter
as expressed above. In addition, revenue for the six months ended June 30,
1996 was adversely affected by the delay in the granting of certain permit
extensions and revisions at RESI's Cleveland Ohio treatment, storage and
disposal facility ("TSD facility") that were anticipated to coincide with the
closure of RESI's Dayton Ohio TSD facility in the fourth quarter of 1995.
During June 1996 the Ohio Environmental Protection Agency ("OEPA") approved the
expansion of the types of waste managed by RESI's TSD facility located in
Cleveland Ohio. The remaining permit revisions are still under review by OEPA.
Management expects final approval of the remaining permit revisions throughout
the reminder of 1996. Failure to obtain the remaining permit revisions could
continue to have a negative impact on revenues.
Cost of Operations
Cost of operations decreased $3.6 million, or 38.3%, to $5.8 million in the
second quarter of 1996 from $9.4 million in the second quarter of 1995;
however, as a percentage of revenue these costs increased from 74.2% to 71.9%
for the second quarter of each 1996 and 1995, respectively. Cost of operations
decreased 34.8% to $11.8 million for the six months ended June 30, 1996 as
compared with $18.1 million in the same six month period for 1995. This
increase is primarily due to the lower margins resulting from the reduction in
prices and the significant portion of fixed costs associated with RESI's
operations.
Selling, general and administrative expenses decreased by 8.0% to $2.3 million
in the quarter ended June 30, 1996 from $2.5 million in the same period in
1995. As a percentage of revenue these costs were approximately 29.2% for the
three months ended June 30, 1996 and 19.4% for the same period in 1995. For
the six months ended June 30, 1996 Selling, General and Administrative Expenses
decreased by 7.8% to $4.7 million as compared to $5.1 million for the first six
months of 1995. The decrease for each period is a result of the Company's
continued efforts to improve efficiencies and reduce costs. As a percentage of
revenue these costs were approximately 29.5% and 20.2%, respectively. The
increase as a percentage to revenue for each period in 1996 is the result of
the decrease in revenues.
Interest Expense
Interest expense decreased to $18,000 in the quarter ended June 30, 1996 from
$72,000 in the same period in 1995. This is due to the Company's repayment of
debt of its Canadian subsidiaries during second quarter of 1995.
Interest Income
Interest income increased significantly to $313,000 in the three months ended
June 30, 1996 from $53,000 in the same period in 1995. This increase is a
result of interest income of $260,000 earned from a federal income tax refund.
Income Taxes
The Company recorded an income tax provision of $11,000 the three months ended
June 30, 1996 and an income tax benefit of $146,000 for the six months ended
June 30, 1996, reflecting an effective tax rate of approximately 37.0%. The
Company's income tax provision in the same period for 1995 was $410,000 and
$708,000 respectively, reflecting an effective tax rate of approximately 37.0%.
8
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
The Company made capital expenditures of $1.7 million in the first six months
of 1996 which included expenditures to upgrade existing waste treatment,
storage and disposal ("TSD") facilities and fixed assets for normal
replacement, compliance with regulations and market development. The Company
anticipates that it may make up to approximately $0.7 million in capital
expenditures during the remainder of 1996 to upgrade existing TSD facilities
and comply with current and proposed regulations. The Company considers its
financial resources to be adequate to fund its remaining capital expenditures
for 1996.
In May 1995, the Company secured a $6.0 million credit facility with a United
States commercial bank to provide the Company with additional liquidity and
working capital. This facility provides for borrowings at the prime lending
rate plus 0.5% or adjusted LIBOR rate plus 2.5%, which would be 8.75% and 7.95%
at June 30, 1996 respectively, and will mature in 1998. Up to $4.5 million of
the credit facility is available for the issuance of standby letters of credit.
At June 30, 1996 the Company had issued $2.2 million in standby letters of
credit and had no cash borrowing under the credit facility. The credit
facility contains various affirmative and negative covenants which, among other
things, restrict the payment of dividends and require the maintenance of
certain financial ratios. Borrowings under the credit facility are secured by
substantially all of the Company's U.S. based assets.
Cash flow from operations was $1.0 million in the six months ended June 30,
1996, compared with $3.0 million in the same period in 1995. In the first six
months of 1996 and 1995, the Company made capital expenditures from cash on
hand and operating cash flow. The Company anticipates that in the remainder of
1996, it will continue to fund expenditures from cash on hand and operating
cash flow supplemented by borrowing under its revolving credit facility, as
necessary. Management believes that the Company currently has sufficient cash
and lines of credit to fund current operations and expansion thereof.
INFLATION AND PREVAILING ECONOMIC CONDITIONS
To date, inflation has not had a significant impact on the Company's
operations. The Company has no long-term fixed-price contracts and the Company
believes it will be able to pass through most cost increases resulting from
inflation to its customers. As discussed in Results of Operations above, in
recent years the Company has been adversely affected by changes in the
hazardous waste service sector in the United States and a weak economy in the
Canadian market place and is unable to determine the future impact of a
sustained economic downturn.
FOREIGN CURRENCY TRANSACTIONS
The Company is subject to the effects of Canadian currency fluctuations. The
Company derives less than 20% of its revenues and operating profits from
Canadian sources. There was no material effect on foreign cash balances of
foreign currency translations in the first six months of 1996 and 1995.
ACCOUNTING PRONOUNCEMENTS
The FASB issued SFAS No. 123 "Accounting for Stock Based Compensation" which
will be effective for RESI for year end 1996. This statement allows for either
the adoption of the "fair value" method of accounting for stock based
compensation or the continued use of APB No. 25. The Company has opted to
continue to comply with APB No. 25.
9
<PAGE> 11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 of the Company's Annual Report to
Stockholders on Form 10-K for the fiscal year ended December
31,1995.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on May 9,
1996, the following matters were submitted to a vote of
stockholders:
1. The election of the following individual to the Board
of Directors to serve until the 1999 Annual Meeting
of Stockholders.
<TABLE>
<CAPTION>
Votes For Votes Against Broker Non-Votes
--------- ------------- ----------------
<S> <C> <C> <C>
Douglas R. Gowland 4,168,274 451,501 0
</TABLE>
2. The ratification of the appointment of Arthur
Andersen, LLP as independent auditors for the fiscal
year ending December 31, 1996.
<TABLE>
<CAPTION>
Votes For Votes Against Votes Abstained Broker Non-Votes
--------- ------------- ---------------- ----------------
<S> <C> <C> <C>
4,509,152 7,202 103,421 0
</TABLE>
ITEM 5. OTHER INFORMATION
On June 7, 1996 the Board of Directors declared a two-for-one
stock split of the Company's Common Stock in the form of a
stock dividend payable June 30, 1996 to holders of record on
June 14, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Agreement and plan of merger dated as of May 19, 1996, by and
among RESI, CSC merger subsidiary, CSU merger subsidiary,
Alliance Holding Corp., CSC and CSU (filed as Exhibit 10.1 to
the Company's Report on Form 8-K dated June 10, 1996 and
incorporated herein by reference).
10.2 Stock purchase agreement dated as of May 19, 1996, by and
between RESI and H. Wayne Huizenga (filed as Exhibit 10.2 to
the Company's Report on Form 8-K dated June 10, 1996 and
incorporated herein by reference).
10.3 Stock purchase agreement dated as of May 19, 1996, by and
between RESI and MGD Holdings (filed as Exhibit 10.3 to the
Company's Report on Form 8-K dated June 10, 1996 and
incorporated herein by reference).
(b) REPORTS ON FORM 8-K
During the second quarter of 1996, the Company filed the following
report on Form 8-K:
(I) A Current Report on Form 8-K dated June 10, 1996 was filed
with the Securities and Exchange Commission on June 26, 1996
pursuant to Item 5.
10
<PAGE> 12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant, Republic Environmental Systems, Inc., has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
REPUBLIC ENVIRONMENTAL SYSTEMS, INC.
By: /s/ MICHAEL D. SCHMIDT Michael
---------------------------------------
D. Schmidt
Secretary/Treasurer (As
authorized Officer and
Principal Accounting Officer)
August 2, 1996
11
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<NAME> REPUBLIC ENVIRONMENTAL SYSTEMS, INC.
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<FISCAL-YEAR-END> DEC-31-1996
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