Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report 17 75K
2: EX-4.6 Instrument Defining the Rights of Security Holders 5 21K
3: EX-4.7 Instrument Defining the Rights of Security Holders 5 20K
4: EX-4.8 Exhibit 4.8 (28-163) 68 228K
5: EX-10.106 Material Contract 101 301K
6: EX-10.107 Material Contract 81 282K
7: EX-11 Statement re: Computation of Earnings Per Share 2± 10K
8: EX-27 EX-27 Financial Data Schedule 2 8K
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
----------------------------------
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
ENVIROTEST SYSTEMS CORP.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 0-21454 06-0914220
-------- ------- ----------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification Number)
ENVIROTEST TECHNOLOGIES, INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-57384-01, 33-75406-01 36-2680300
-------- ----------- ----------- ----------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification Number)
246 SOBRANTE WAY
SUNNYVALE, CALIFORNIA 94086
---------------------------
(Address of principal executive offices, including zip code, of registrants)
(408) 481-3900
--------------
(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.
Class of Common Stock Outstanding at July 31, 1996
--------------------- ----------------------------
CLASS A COMMON STOCK, $0.01 PAR VALUE 13,204,396 SHARES
CLASS B COMMON STOCK, $0.01 PAR VALUE 1,389,749 SHARES
CLASS C COMMON STOCK, $0.01 PAR VALUE 2,026,111 SHARES
1
ENVIROTEST SYSTEMS CORP.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets:
June 30, 1996 and September 30, 1995 3
Condensed Consolidated Statements of Operations:
three and nine months ended June 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows:
nine months ended June 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 5. OTHER 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
ENVIROTEST SYSTEMS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
[Enlarge/Download Table]
June 30, September 30,
1996 1995
----------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $29,845 $17,079
Short-term investments 1,347
Current portion of settlement due from Commonwealth
of Pennsylvania 40,000 -
Contract receivables, net of allowance for doubtful accounts
of $429 and $354, respectively 9,100 8,208
Prepaid and other current assets 8,313 3,580
Deferred income taxes - 1,376
----------- -------------
Total current assets 87,258 31,590
Restricted cash 25,599 31,497
Property, plant and equipment, net of accumulated
depreciation of $36,260 and $24,739, respectively 189,145 173,507
Settlement due from Commonwealth of Pennsylvania 95,000 -
Assets under capital lease, net 46,356 27,138
Assets held for sale, net 22,549 5,209
Assets subject to settlement - 149,629
Intangible assets, net of accumulated amortization of $18,116
and $15,522, respectively 15,609 17,752
Deferred debt acquisition costs, net of accumulated amortization
of $5,100 and $3,378, respectively 12,894 13,412
Deferred charges, net of accumulated amortization of $6,462
and $3,217, respectively 1,749 3,178
Deferred income taxes - 4,100
Other assets 754 261
----------- -------------
Total assets $496,913 $457,273
----------- -------------
----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,078 $12,742
Accrued interest 9,231 1,499
Current portion of long-term debt 3,649 -
Current portion of capital lease and long-term debt obligation 4,220 1,485
Other current liabilities 27,473 14,094
----------- -------------
Total current liabilities 47,651 29,820
Senior long-term debt, net of discount of $853
and $989, respectively 199,147 199,011
Senior subordinated debt 125,000 125,000
Long-term debt 39,179 -
Capital lease and long-term debt obligation 59,795 62,895
Other long-term liabilities 5,142 2,502
----------- -------------
Total liabilities 475,914 419,228
Commitments and contingencies
Stockholders' equity:
Common stock 166 162
Additional paid-in capital 60,172 60,028
Retained deficit (33,601) (16,446)
Other stockholders' equity (5,738) (5,699)
----------- -------------
Total stockholders' equity 20,999 38,045
----------- -------------
Total liabilities and stockholders' equity $496,913 $457,273
----------- -------------
----------- -------------
The accompanying notes are an integral part of the condensed financial
statements.
ENVIROTEST SYSTEMS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
[Enlarge/Download Table]
Three Nine
Months Ended Months Ended
June 30, June 30,
1996 1995 1996 1995
--------- --------- --------- ---------
(Unaudited)
Contract revenues $32,556 $29,066 $90,764 $75,960
Costs of services 25,140 20,933 75,244 51,049
--------- --------- --------- ---------
Gross profit 7,416 8,133 15,520 24,911
Selling, general and administrative expenses 5,172 7,458 15,621 18,745
Consolidation expense - - 1,850 -
Amortization expense 872 1,032 2,756 2,985
Gain on Pennsylvania settlement - - (15,307) -
--------- --------- --------- ---------
Income (loss) from operations 1,372 (357) 10,600 3,181
Other expense (income):
Interest expense 10,182 4,193 28,574 14,005
Other 4 (10) 12 67
Interest income (2,477) (605) (6,312) (3,866)
Minority interest - 15 - 275
--------- --------- --------- ---------
Income (loss) before income taxes (6,337) (3,950) (11,674) (7,300)
Income tax expense (benefit) (1,541) 5,490 (2,843)
--------- --------- --------- ---------
Net income (loss) $(6,337) $(2,409) $(17,164) $(4,457)
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings (loss) per common and common
equivalent share $(0.38) $(0.15) $(1.04) $(0.28)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares and
common equivalent shares 16,620 16,134 16,530 16,026
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings (loss) per common share - assuming
full dilution $(0.38) $(0.15) $(1.04) $(0.28)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares and common
equivalent shares 16,620 16,134 16,530 16,026
--------- --------- --------- ---------
--------- --------- --------- ---------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
ENVIROTEST SYSTEMS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
[Enlarge/Download Table]
Nine Months Ended
June 30,
1996 1995
--------- ---------
(Unaudited)
Cash flows from operating activities $ 19,066 $ (3,189)
--------- ---------
Cash flows from investing activities:
Maturity of short-term investments 1,347 21,799
Payment for purchase of Systems Control, Inc.,
net of cash acquired (1,056) -
Proceeds from sale of property, plant and equipment 1,696 1,221
Purchases of property, plant, equipment and assets
under capital lease (42,845) (177,542)
Purchases of intangible assets - (250)
--------- ---------
Net cash used in investing activities (40,858) (154,772)
Cash flows from financing activities:
Proceeds from borrowings of long-term debt 31,345 -
Proceeds from capital lease and long-term debt
obligations - 64,380
Proceeds deposited in restricted accounts - (56,574)
Repayment of long-term debt (1,637) -
Decrease in restricted cash 5,898 -
Repayment of obligations under capital lease (365) (4,751)
Capitalization of loan fees (855) (2,629)
Other 148 50
--------- ---------
Net cash provided by (used in) financing activities 34,534 476
Effect of exchange rate on cash 24 71
--------- ---------
Net increase (decrease) in cash and cash equivalents 12,766 (157,414)
Cash and cash equivalents, beginning of period 17,079 180,215
--------- ---------
Cash and cash equivalents, end of period $ 29,845 $ 22,801
--------- ---------
--------- ---------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
ENVIROTEST SYSTEMS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have
been prepared by 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, 1995, filed with the Securities and Exchange
Commission.
Operating results for the interim periods shown in this report are not
necessarily indicative of the results to be expected for the full fiscal year.
2. DEFERRED CHARGES
The Company incurs significant expenses associated with bringing new
emissions testing programs into operation, including staff recruiting and
training, public information and similar pre-operating costs. These expenses
are deferred and amortized over a twelve month period beginning with the
commencement of the emissions program. At June 30, 1996, the Company had
incurred and deferred approximately $1.7 million, net of accumulated
amortization, of such expenses relating to the Indiana, Ohio and Wisconsin
emissions programs. The Company expects that its results of operations during
any fiscal period that includes the commencement of a program will be adversely
impacted by this accelerated amortization.
3. PENNSYLVANIA SETTLEMENT
The Company, the Commonwealth of Pennsylvania and the Pennsylvania
Department of Transportation entered into a General Release and Settlement
Agreement, dated December 15, 1995 (the "Settlement Agreement"), settling the
claims of the Company under its contract dated November 1993 to implement and
operate the Pennsylvania vehicle emissions testing program which was suspended
by action of the Pennsylvania General Assembly.
The Settlement Agreement requires the Commonwealth to pay the Company
$145 million in four installments with interest at the rate of 6.0% accruing
from December 15, 1995. The first installment of $25,000,000 was paid on
December 29, 1995 and the second installment of $40,000,000 plus $4,223,000 in
accrued interest was paid on July 31, 1996. The last two installments of
$40,000,000, plus interest, are due on July 31, 1997 and 1998. In addition, the
Commonwealth is obligated to pay the Company (in July 1998) 50% of the amount by
which the net proceeds from the sale of the assets (as defined by the Settlement
Agreement) are less than
6
$55 million up to a maximum of $15 million plus interest at 6% from December 15,
1995. Should the net proceeds from the sale of the real estate and other
program related assets exceed $55 million, the Company is obligated to pay the
Commonwealth 75% of the amount by which the net proceeds exceed $55 million.
4. LONG-TERM DEBT
On December 29, 1995, the Company's wholly owned subsidiary,
Envirotest Wisconsin, Inc., issued $17,000,000 principal amount of notes (the
"Notes"). The Notes bear interest at the rate of 7.53% per annum with monthly
payments, including interest, beginning at approximately $230,000 and increasing
to approximately $340,000 with maturity on November 30, 2002. The Notes are
collateralized by all assets utilized in the Wisconsin program.
In January 1996, the Company acquired Systems Control, Inc., a
Washington corporation (SCI-WA), the operator of the centralized emissions
testing program in the State of Washington. (See Note 5 below.) At the time of
the acquisition, SCI-WA had debt outstanding under its credit agreement. As of
June 30, 1996, the outstanding balance is $12.1 million and bears interest at
various rates with an effective rate of 8.64% at June 30 and is collateralized
by all real property of the vehicle emissions program in the State of
Washington. This agreement requires monthly payments of $243,450 (adjusted
annually for changes in interest rates) with a balloon payment at maturity on
December 31, 1999 of $4.5 million. This credit agreement requires a cash
collateral amount of $0.6 million as of June 30, 1996 and through maturity and
requires certain covenants related to tangible net worth, capital ratio, cash
flow ratio and distributions of SCI-WA be maintained.
In June 1996, the Company issued $14.3 million principal amount of
notes for the Indiana program. The notes bear interest at the rate of 7.82 %
per annum with quarterly payments, including interest of approximately $550,000
and mature in 2006. Interest will be paid beginning September 1996 with
principal payments beginning June 1997. The notes are collateralized by all
assets utilized in the Indiana program.
5. BUSINESS ACQUISITION
In January 1996, the Company purchased from Systems Control, Inc.
("SCI") the stock of SCI-WA, a Washington company and operator of the State of
Washington centralized emissions testing program, all intellectual property of
SCI and an option to purchase the stock or assets of SCI's Indiana subsidiary.
The option was exercised in June 1996, and the Company acquired the contract
with the State of Indiana to operate its centralized vehicle emissions testing
contract and the related assets. The results of operations of SCI have been
consolidated as of the respective dates of acquisition.
7
The purchase cost of $4.7 million (including $1.5 million paid for the
assets of SCI's Indiana subsidiary) has been allocated as follows:
(millions)
Current assets $ 2.5
Fixed assets 17.0
Intellectual property 0.6
Other noncurrent assets 0.4
Current liabilities (2.5)
Long term debt (11.3)
Other noncurrent liabilities (2.0)
---------
Total $ 4.7
---------
---------
6. CONSOLIDATION EXPENSE
The Company recorded a consolidation expense in March 1996 of $1.9
million representing the costs associated with the closure of the Phoenix
corporate headquarters and other restructuring costs. In addition, the Company
recorded an expense of $1.5 million (included with selling, general and
administrative expense) representing the estimated cost of relocating employees
to the new corporate headquarters in Sunnyvale, California.
7. INCOME TAXES
The deferred tax asset of $16.4 million has been fully reserved as of
June 30, 1996. For the three month period ended June 30, 1996, the Company
increased the valuation allowance from $14.2 million to $16.4 million. The
amount of the deferred tax asset considered realizable, however, could change in
the near term if estimates of future taxable income are revised.
8. LEGAL PROCEEDINGS
The State of Connecticut has made certain claims stating that the
Company owes the State $2.4 million plus accruing amounts for certain cost
savings in the start up of the enhanced testing program in Connecticut. The
Company cannot predict the outcome of this complaint. However, the Company
believes that it has sufficient defense against these claims. (See Part II.,
Item 1 - Legal Proceedings for further discussion.)
8
ENVIROTEST SYSTEMS CORP.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company conducts its current operations directly and through its
principal wholly owned subsidiaries, Envirotest Technologies, Inc. ("ETI"),
Envirotest Wisconsin, Inc. and Systems Control, Inc., a Washington corporation.
The Company's British Columbia, Canada operations are conducted through a
British Columbia partnership, Ebco-Hamilton Partners ("EHP") which is wholly
owned by the Company (through its subsidiaries).
RESULTS OF OPERATIONS
Contract revenues increased to $32.6 million in fiscal third quarter
1996 from $29.1 million in fiscal third quarter 1995, an increase of $3.5
million or 12.0%. For the nine months ended June 30, 1996, contract revenues
were $90.8 million, an increase of $14.8 million, or 19.5%, over contract
revenues of $76.0 million for the corresponding period in fiscal 1995. The
increase in contract revenues in fiscal third quarter 1996 as compared to fiscal
third quarter 1995 is primarily due to additional revenues of approximately $4.4
million generated from new contracts with the State of Ohio and revenues of
approximately $2.4 million from the Washington State program acquired on January
30, 1996. These increases were offset primarily by a decrease in revenues in
the British Columbia program of approximately $1.5 million due to an employee
strike during the period, a decrease in revenues in the Illinois program of
approximately $0.3 million attributable to the reduced test fee under the
January 1996 contract extension, a decrease in revenues of approximately $0.7
million due to the previously disclosed reduction in the Minnesota program test
volume.
The increase in contract revenues for the nine months ended June 30,
1996 resulted from additional revenues of approximately $22.6 million generated
from new or extended contracts with the states of Connecticut, Ohio and Colorado
and the acquisition of the Washington state program. These increases were
offset primarily by the decreases in revenues in the British Columbia, Illinois
and Minnesota programs discussed above and a decrease in revenues of the
Maryland program of $1.6 million which ceased operations as of December 31,
1994.
Gross profit decreased to $7.4 million in fiscal third quarter 1996
from $8.1 million in fiscal third quarter 1995, a decrease of $0.7 million, or
8.6%. As a percentage of contract revenues, gross profit decreased to 22.7% in
fiscal third quarter 1996 from 27.8% in fiscal third quarter 1995, an absolute
decrease of 5.1%. The decrease in gross profit resulted from the employee
strike in the British Columbia program, higher than anticipated costs associated
with the Wisconsin and Ohio programs, decreased revenue in the Minnesota program
discussed above and costs incurred on a remote sensing program without
associated revenues.
For the nine months ended June 30, 1996, gross profit decreased to
$15.5 million from $24.9 million for the corresponding period in fiscal 1995, a
decrease of $9.4 million or 37.8%. As a percentage of contract revenues, gross
profit decreased to 17.1 % from 32.8 % in the
9
corresponding period in fiscal 1995, an absolute decrease of 15.7 %. The
decrease in gross profit resulted from the factors discussed above and the
absence of contributions from the Maryland program.
Selling, general and administrative ("SG&A") expenses decreased to
$5.2 million in fiscal third quarter 1996 from $7.5 million in fiscal third
quarter 1995, a decrease of $2.3 million or 30.7%. As a percentage of
contract revenues, SG&A expenses decreased to 16.0% in fiscal third quarter
1996 from 25.7% in fiscal third quarter 1995, an absolute decrease of 9.7%.
The decrease in SG&A expenses is primarily due to decreased marketing expenses
and the absence of costs associated with seeking a resolution of the
Pennsylvania contractual issues which were incurred during fiscal 1995. In
addition, the decrease in SG&A as a percentage of contract revenues is due to
the increase in contract revenues discussed above.
For the nine months ended June 30, 1996, SG&A decreased to $15.6
million from $18.7 million for the corresponding period in fiscal 1995, a
decrease of $3.1 million or 16.6%. As a percentage of contract revenues, SG&A
expenses decreased to 17.2% for the nine months ended June 30, 1996 from 24.6%
for the corresponding period in 1995, an absolute decrease of 7.4%. These
decreases were primarily due to a reduction in marketing expenses and absence of
costs associated with resolution of Pennsylvania contractual issues, offset by
relocation costs of $1.5 million representing the estimated cost of
consolidating the corporate headquarters to Sunnyvale, California.
Consolidation expense was $1.9 million for the nine month period ended
June 30, 1996, primarily representing the costs associated with the closing of
the Phoenix corporate headquarters.
Amortization expense decreased to $0.9 million in fiscal third quarter
1996 from $1.0 million in fiscal third quarter 1995, a decrease of $0.1
million. For the nine months ended June 30, 1996, amortization expense
decreased to $2.8 million from $3.0 million for the corresponding period in
fiscal 1995.
Gain on Pennsylvania settlement for the nine months ended June 30,
1996 was $15.3 million.
There was income from operations of $1.4 million in fiscal third
quarter 1996 compared to loss of $(0.4) million in fiscal third quarter 1995.
For the nine months ended June 30, 1996, income from operations increased to
$10.6 million from $3.2 million in the corresponding period of the prior year.
For the nine months ended June 30, 1996, income from operations as a percentage
of contract revenues increased to 11.7% compared to 4.2% in the corresponding
period of the prior year, an absolute increase of 7.5%. The increase is due to
the gain on Pennsylvania settlement, the decrease in selling, general and
administrative expenses, offset by the reduction in the gross profit and
consolidation expense, as discussed above.
Interest expense increased to $10.2 million in fiscal third quarter
1996 from $4.2 million in fiscal third quarter 1995, an increase of $6.0
million. For the nine months ended June 30, 1996, interest expense increased to
$28.6 million from $14.0 million in the corresponding period of the prior year.
The increase in fiscal third quarter 1996 as compared to fiscal third quarter
1995 is primarily due to a $4.3 million decrease in capitalized interest as
programs under implementation became operational, interest expense on the
capital lease and long-term debt
10
issued in June 1995 to finance the Company's emissions testing network in Ohio,
interest expense on the long-term debt issued in December 1995 to finance the
Company's emissions testing network in Wisconsin and the interest expense on
additional long-term debt assumed in January 1996 as part of the purchase of the
Washington State subsidiary of Systems Control, Inc.
The increase in interest expense for the nine months ended June 30,
1996 is primarily attributable to a $10.6 million decrease in capitalized
interest and interest expense incurred for the Ohio and Wisconsin programs and
the purchase of the Washington State subsidiary of Systems Control, Inc.
discussed above.
Interest income increased to $2.5 million in fiscal third quarter 1996
from $0.6 million in fiscal third quarter of 1995, an increase of $1.9 million.
For the nine months ended June 30, 1996, interest income increased to $6.3
million compared to $3.9 million in the corresponding period of the prior year.
These increases were primarily attributable to the interest income on the funds
due from the Pennsylvania settlement, partially offset by decreased cash and
cash equivalent and short-term investments balances as funds are spent on
construction and equipment for new emissions testing facilities.
There was no income tax benefit on the pretax loss in fiscal third
quarter 1996 compared to an income tax benefit of $1.5 million in fiscal third
quarter 1995 as the Company made an additional valuation allowance of $2.2
million. Income tax expense was $5.5 million for the nine months ended June 30,
1996, compared to income tax benefit of $2.8 million for the corresponding
period of the prior year. The benefit was lower than the combined federal and
state effective tax rate of approximately 39% as a result of recording a
valuation of $9.8 million to fully reserve the deferred tax asset.
Net loss was $(6.3) million in fiscal third quarter 1996 compared to
$(2.4 ) million in fiscal third quarter 1995, an increase of $3.9 million. For
the nine months ended June 30, 1996, net loss was $(17.2) million compared to
$(4.5) million for the corresponding period in fiscal 1995.
LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS
Cash and cash equivalents, short-term investments and restricted cash
increased to $55.4 million at June 30, 1996 from $49.9 million at September 30,
1995. The increase of $5.5 million was primarily a result of the $25.3 million
received from the Commonwealth of Pennsylvania, the proceeds of $17 million from
the bonds issued by the Company's wholly owned subsidiary, Envirotest Wisconsin,
Inc. in December, 1995 and proceeds of $14.3 million from the bonds issued by
the Company in June 1996 for the Indiana program; partially offset by the
expenditure of $41.3 million for property, plant and equipment primarily
relating to the Ohio and Wisconsin programs, cash used in operating activities
of approximately $6.3 million, and the purchase of the Washington State
subsidiary of Systems Control, Inc. (including the assets of SCI's Indiana
subsidiary) for $4.7 million. On July 31, 1996, the Company received an
additional payment of $44.2 million from the Commonwealth of Pennsylvania under
the terms of the Settlement Agreement.
The Company's primary uses of cash are the funding of the Company's
capital expenditure requirements, payments on capital and operating leases,
interest payments and other working capital needs. The Company's capital and
operating leases currently require minimum
11
lease payments of approximately $12.3 million in 1996, increasing to
approximately $14.8 million through 1999 and 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 believes that its existing cash resources, additional
proceeds from the Settlement with the Commonwealth of Pennsylvania, cash
generated from operations and alternative financing sources, including leasing
alternatives, will be sufficient to complete implementation of the Indiana
program and to meet its liquidity requirements for the foreseeable future.
Statement of Financial Accounting Standards No. 123 - Accounting for
Stock-Based Compensation will be effective for the first quarter of the
Company's 1997 fiscal year. This statement introduces a fair-value based method
of accounting for stock-based compensation. It encourages, but does not
require, companies to recognize compensation expense for grants of stock, stock
options and other equity instruments to employees based on the new fair-value
accounting rules. Companies that choose not to adopt the new fair-value
accounting rules will be required to disclose pro forma net income and earnings
per share under the new method. Management has not yet determined which method
it will adopt.
12
ENVIROTEST SYSTEMS CORP.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Proponents of a proposed public initiative ("Proposed Initiative") to
substantially change the enhanced emissions program in Colorado completed
certain of the required procedures to have the Proposed Initiative placed on the
November 1996 ballot. On June 24, 1996, the Colorado Supreme Court blocked the
Proposed Initiative. The Supreme Court reviewed the action taken by the
initiative title setting board in fixing the title, ballot title and submissions
clause, and summary ("Titles and Summary") for the Proposed Initiative. The
Court held that the Titles and Summary did not fairly express the intent and
meaning of the Proposed Initiative, and further held that the fiscal impact
statement was inaccurate. The Supreme Court reversed the action of the board
and remanded the Titles and Summary to the initiative title setting board.
However, Colorado's statutory deadlines for the submission of proposed
initiatives precluded the proponents from placing the proposed initiative on the
November 1996 ballot.
The Company's new contract with the State of Connecticut began January
1, 1995 with enhanced testing scheduled to begin on April 3, 1995. Just prior
to the startup of enhanced testing the State decided to continue the old testing
procedure and phase in the enhanced testing. Additionally, the Company was
unable to build two facilities, one due to the State's inability to provide the
land the contract required and the other due to the inability to obtain zoning.
The State claimed that it was entitled to be paid for the cost savings to the
Company for not having performed the enhanced test and not having built the
facilities. The Company claimed additional costs incurred when the State
unilaterally changed the test. After unsuccessful settlement negotiations, the
Commissioner of Department of Motor Vehicles rendered a decision on February
9, 1996 that the Company owed the State $2.4 million plus other non
quantified amounts for 1995 and additional accruing amounts until the
enhanced test was performed and the facilities built. In accordance with the
contract and to protect its rights, the Company appealed the Commissioner's
decision to binding arbitration at the American Arbitration Association. On
May 1, 1996, prior to the appointment of the arbitrators, the State filed a
complaint in the Superior Court at Hartford to enjoin the arbitration from
going forward claiming that the American Arbitration Association had no power
to administer hearings in this matter. The State has taken no further action
on this matter and no hearing date with regard to the State's complaint has
been scheduled.
On June 24, 1996, Rita Karsai, a former employee in a one test lane
pilot program opened by the Company, filed a complaint in the Sacramento
County Superior Court, case number 96ASO3489, against the Company and three
of its present or former staff employees alleging sexual harassment and
related causes of action. The complaint seeks compensatory and punitive
damages in the total amount of $11 million. The matter has not progressed
sufficiently for the Company to express an opinion respecting the outcome of
this matter.
13
ITEM 5. OTHER
As previously reported, the Company's employees in its British Columbia
program are represented by a labor union under a collective bargaining agreement
that expired on August 31, 1995. Negotiations on a new collective agreement
ended in February 1996 when the employees began a strike. On July 26, 1996, the
program resumed operations after the employees voted to submit the unresolved
issues to binding arbitration and to return to work. The decision by the panel
of arbitrators was issued on August 12, 1996. The Company believes that the
arbitrators' decision represents a fair resolution of the issues to both
sides. The Company will now begin negotiations with Province officials to
obtain compensation under the terms of its contract for the losses
experienced by the Company during the period of the strike.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(4.6) Third Supplemental Indenture dated as of January 30, 1996,
by and among Envirotest Systems Corp., Envirotest
Technologies, Inc., Remote Sensing Technologies, Inc.,
Envirotest Partners, Envirotest Acquisition Co., Systems
Control, Inc., as guarantors, and First Trust National
Association, as trustee, governing the 9 5/8% Senior
Subordinated Notes due 2003 of Envirotest Systems Corp.
(4.7) Second Supplemental Indenture dated as of January 30,
1996, by and among Envirotest Systems Corp., Envirotest
Technologies, Inc., Remote Sensing Technologies, Inc.,
Envirotest Partners, Envirotest Acquisition Co., Systems
Control, Inc., as guarantors, and First Trust National
Association, as trustee, governing the 9 1/8% Senior Notes
due 2001 of Envirotest Systems Corp.
(4.8) Trust Indenture between Indiana Development Finance
Authority and Old National Trust Company, dated June 1,
1996.
(10.106) Agreement between Indiana Department of Environmental
Management and Envirotest Systems Corp. dated June 26, 1996.
(10.107) Loan Agreement between Envirotest Systems Corp. and Indiana
Development Finance Authority, dated June 1, 1996.
(11) Statement of Computation of Per Share Earnings.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended June 30, 1996.
15
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: August 12, 1996 /s/F. Robert Miller
----------------------------------------
F. Robert Miller
President and Chief Executive Officer
Date: August 12, 1996 /s/Raj Modi
----------------------------------------
Raj Modi
Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
(Principal Financial Officer)
16
ENVIROTEST SYSTEMS CORP.
EXHIBIT INDEX
EXHIBIT
NUMBER: PAGE NO.
------- -------
(4.6) Third Supplemental Indenture dated as of January 30, 1996,
by and among Envirotest Systems Corp., Envirotest
Technologies, Inc., Remote Sensing Technologies, Inc.,
Envirotest Partners, Envirotest Acquisition Co., Systems
Control, Inc., as guarantors, and First Trust National
Association, as trustee, governing the 9 5/8% Senior
Subordinated Notes due 2003 of Envirotest Systems Corp.
(4.7) Second Supplemental Indenture dated as of January 30, 1996,
by and among Envirotest Systems Corp., Envirotest
Technologies, Inc., Remote Sensing Technologies, Inc.,
Envirotest Partners, Envirotest Acquisition Co., Systems
Control, Inc., as guarantors, and First Trust National
Association, as trustee, governing the 9 1/8% Senior Notes
due 2001 of Envirotest Systems Corp.
(4.8) Trust Indenture between Indiana Development Finance
Authority and Old National Trust Company, dated June 1,
1996.
(10.106) Agreement between Indiana Department of Environmental
Management and Envirotest Systems Corp. dated June 26, 1996.
(10.107) Loan Agreement between Envirotest Systems Corp. and Indiana
Development Finance Authority, dated June 1, 1996.
(11) Statement of Computation of Per Share Earnings.
(27) Financial Data Schedule.
17
Dates Referenced Herein and Documents Incorporated by Reference
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