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 SEPTEMBER 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
----------------------
INTERNATIONAL ALLIANCE SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------------
DELAWARE 22-2769024
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
10055 SWEET VALLEY DRIVE
VALLEY VIEW, OH 44125
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (216) 447-9000
----------------------
REPUBLIC ENVIRONMENTAL SYSTEMS, INC.
(FORMER NAME AND ADDRESS, IF CHANGED SINCE LAST REPORT)
-----------------------
1787 SENTRY PARKWAY WEST
BUILDING 16, SUITE 400
BLUE BELL, PA 19422
----------------------
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, 29,812,618 shares outstanding as of
November 8, 1996
2
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I - Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995 . . . . . . . . . . . 2
Consolidated Statements of Operations for the three and nine months ended
September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the nine months ended
September 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 . . . . . . . 8
PART II - Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2
3
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,432 $ 3,255
Accounts receivable, less allowance for doubtful accounts of
$686 and $1,031, respectively. . . . . . . . . . . . . . . . . . . . . . . 7,160 7,614
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,397 1,445
---------- -----------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . 9,989 12,314
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,525 19,469
Goodwill, net of accumulated amortization of $1,390 and $1,187, respectively . . . 8,720 9,109
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,063 858
---------- -----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,297 $ 41,750
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,144 $ 2,568
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,032 2,825
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278 193
Current maturities of long-term debt and capitalized lease obligations . . . 401 507
Current portion of accrued environmental costs. . . . . . . . . . . . . . . . 1,907 1,999
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 56
---------- -----------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . 7,822 8,148
Long-term debt and capitalized lease obligations, net of current maturities . . . 369 618
Accrued environmental costs, net of current portion . . . . . . . . . . . . . . . 1,483 1,790
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,218 2,344
Minority interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 257
---------- -----------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,892 13,157
---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share; 20,000,000 shares
authorized, 10,858,158 and 11,366,432 shares issued, respectively . . . . . 109 114
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . 27,557 27,653
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542 778
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . 197 193
Treasury stock, 102,000 shares, at cost . . . . . . . . . . . . . . . . . . . - (145)
---------- -----------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . 28,405 28,593
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . $ 40,297 $ 41,750
========== ===========
The accompanying notes are an integral part of these financial statements.
3
4
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1996 1995 1996 1995
------- ------- ------- -------
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,467 $10,156 $24,263 $35,321
Expenses:
Cost of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,567 6,954 18,416 25,077
Selling, general and administrative. . . . . . . . . . . . . . . . . . . 2,209 2,173 6,865 7,265
------- ------- ------- -------
Operating income (loss) . . . . . . . . . . . . . . . . . . . . (309) 1,029 (1,018) 2,979
Other (income) expense:
Interest and other income. . . . . . . . . . . . . . . . . . . . . . . . (348) (36) (774) (154)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 30 132 184
------- ------- ------- -------
Income (loss) before income taxes. . . . . . . . . . . . . . . . . . . . . 17 1,035 (376) 2,949
Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . 6 383 (140) 1,091
------- ------- ------- -------
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . $ 11 $ 652 $ (236) $ 1,858
======= ======= ======= =======
Earnings per common and common equivalent share. . . . . . . . . . . . . . $ - $ 0.06 $ (0.02) $ 0.17
======= ======= ======= =======
Weighted average common and common equivalent shares . . . . . . . . . . . 11,530 11,180 10,860 11,060
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
4
5
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended September 30,
--------------------------------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income. . . . . . . . . . . . . . . . . . . . $ (236) $ 1,858
Adjustments to reconcile net (loss) income
to net cash provided by operations:
Gain on buy back of preferred shares . . . . . . . . (204) -
Depreciation and amortization . . . . . . . . . . . . 1,633 1,780
Provision for doubtful accounts . . . . . . . . . . . 123 492
Provision for accrued environmental costs . . . . . . 247 277
Loss (gain) on the sale of equipment . . . . . . . . 32 (63)
Changes in assets and liabilities-
Accounts receivable . . . . . . . . . . . . . . . . 672 1,027
Prepaid expenses and other assets . . . . . . . . . (204) (247)
Accounts payable and accrued liabilities . . . . . (387) (2,139)
Income taxes payable. . . . . . . . . . . . . . . . 6 250
Due to Republic Industries, Inc. . . . . . . . . . - 762
Other liabilities . . . . . . . . . . . . . . . . . (507) (1,638)
---------- ---------
Net cash provided by operations . . . . . . . 1,175 2,359
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital additions . . . . . . . . . . . . . . . . . . . (2,585) (2,715)
Merger cost with Alliance Companies . . . . . . . . . . (461) -
Proceeds from the sale of equipment . . . . . . . . . . 210 91
---------- ---------
Net cash used in investing activities . . . . (2,836) (2,624)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options . . . . . . . . . . . . . . 887 1,213
Capital contributions from Republic Industries, Inc.. . - 2,191
Repayment of borrowings from Republic Industries, Inc.. - (501)
Cash received from Stout-capital contribution . . . . . 149 2,454
Purchase of treasury stock. . . . . . . . . . . . . . . (895) (141)
Payments of long-term debt and notes payable . . . . . (700) (3,880)
Proceeds from long-term debt and notes payable . . . . 397 826
---------- ---------
Net cash (used) provided in financing
activities. . . . . . . . . . . . . . . . (162) 2,162
---------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . . . . (1,823) 1,897
CASH AND CASH EQUIVALENTS:
Beginning of period . . . . . . . . . . . . . . . . . . 3,255 1,433
---------- ---------
End of period . . . . . . . . . . . . . . . . . . . . . $ 1,432 $ 3,330
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest. . . . . . . . . . . . . . . . . . . . . . . . $ 132 $ 182
Income taxes. . . . . . . . . . . . . . . . . . . . . . $ 139 $ 99
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment purchases of $0 and $536 were financed in the nine months ended
September 30, 1996 and 1995, respectively, by borrowings and capitalized lease
obligations.
The accompanying notes are an integral part of these financial statements.
5
6
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
On October 18, 1996, International Alliance Services, Inc. (formerly known as
Republic Environmental Systems, Inc., "the Company") completed the mergers of
two of the Company's wholly-owned subsidiaries into Century Surety Company
("CSC" and, together with its subsidiaries, the "CSC Group") and Commercial
Surety Agency, Inc., d/b/a Century Surety Underwriters ("CSU" and together with
CSC, the "Alliance Companies"). As a result, the Alliance companies became
wholly-owned subsidiaries of the Company. The mergers with the Alliance
Companies has no financial impact on the September 30, 1996 accompanying
unaudited financial statements of the Company since the transaction was
completed subsequent to September 30, 1996.
Contemporaneously with the consummation of this transaction, the Certificate of
Incorporation of the Company was amended to change the name of the Company from
Republic Environmental Systems, Inc. to International Alliance Services, Inc.
and increase the number of authorized shares of common stock, $.01 par value per
share ("Common Stock"), of the Company from 20,000,000 to 100,000,000. The
Company is the successor to the business of Stout Environmental, Inc. ("Stout"),
a Delaware corporation acquired by Republic Industries, Inc. (formerly known as
Republic Waste Industries, Inc., "RII") in March 1992, as well as the accounts
of Republic Environmental Systems Ltd. (formerly known as Great Lakes
Environmental Group Ltd., "RESL"), the former Canadian hazardous waste services
subsidiary of RII, which was acquired by RII in July 1991 and was contributed to
the Company as of the date of the Spin-off (defined herein). One of the
Company's subsidiaries, Republic Environmental Systems (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 the Company in May 1993. The accounts of the Company and all of
its majority-owned subsidiaries are included in the accompanying consolidated
financial statements. All significant intercompany transactions have been
eliminated.
The consolidated financial statements of the Company and its subsidiaries
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
the Company, 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 the Company's annual report on Form 10-K for the year
ended December 31, 1995.
Results of operations for any nine 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 nine months ended
September 30, 1996 is shown below (in thousands):
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
Common shares outstanding, net of treasury shares . . . . . . . . . 10,858 10,858
Effect of stock options and warrants assumed exercisable. . . . . . 671
Effect of using weighted average common shares outstanding
during the period . . . . . . . . . . . . . . . . . . . . . . . . 1 2
------ ------
Weighted average common and common equivalent shares. . . . . . . . 11,530 10,860
====== ======
6
7
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On June 7, 1996 the Board of Directors declared a two-for-one split of the
Company's 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.
3. TREASURY STOCK
In April 1995, the Company's Board of Directors authorized the repurchase by
the Company of up to 500,000 shares or 4.6% of the Company's Common Stock
during 1995 as deemed appropriate by management and authorized an additional
repurchase of 500,000 shares or 4.6% of the Company's 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 the Company's 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 the Company on March 4, 1996 and as of such
date the Company had repurchased approximately 695,842 shares of the Company's
Common Stock for an aggregate cost of approximately $1,040,000. On May 9,
1996, the Company's Board of Directors authorized the retirement of the 695,842
shares of the Company's Common Stock.
4. ACQUISITION OF MINORITY INTEREST
Effective August 30, 1996, the Company completed the purchase of its minority
interest consisting of 360,000 shares of redeemable convertible participating
preferred stock of RESL. The amount paid for the shares was not significant.
5. INTEREST AND OTHER INCOME
The primary components for the nine months ended September 30, 1996 include
interest received from various tax refunds and an investment and interest
income earned on short-term investments.
6. MERGERS AND STOCK PURCHASE AGREEMENTS
On October 18, 1996 ("Date of Merger") the Company issued 14,760,000 shares of
its Common Stock (the "Merger Shares"), warrants to purchase an aggregate of
4,200,000 additional shares of the Company'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 CSC and CSU, each a wholly-owned subsidiary
of Alliance Holding Corporation ("Alliance"), pursuant to an Agreement and Plan
of Merger dated as of May 19, 1996 among the Company, two wholly-owned,
newly-created subsidiaries of the Company, CSC, CSU and Alliance (such
transactions are hereinafter referred to collectively as the "Mergers"). As a
result of the Mergers, CSC and CSU became wholly-owned subsidiaries of the
Company. In addition, the Company issued and sold to (i) H. Wayne Huizenga
2,000,000 shares of the Company's Common Stock (the "Huizenga Shares") and
warrants to purchase an additional 6,000,000 shares of the Company's Common
Stock (the "Huizenga 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 ("MGD Holdings"), and his assigns 2,000,000 shares of
the Company's Common Stock (the "MGD Shares" and, together with the Huizenga
Shares, the Stock Issuance Shares") and warrants to purchase an additional
6,000,000 shares of the Company's Common Stock (the "MGD Warrants" and together
with the Huizenga Warrants, 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 (such transactions are hereinafter referred to collectively as the
"Stock Issuances").
7
8
As of September 30, 1996, Mr. DeGroote, through MGD Holdings, beneficially
owned 5,536,000 shares of the Company's Common Stock. As a result of the
Combination (defined herein), Alliance and MGD Holdings, own 26,076,000 shares
or 78.6% of the outstanding shares of Common Stock. Such shares include
7,116,000 shares owned of record by MGD Holdings, the beneficial owner of
13,136,000 or 36.9% of the outstanding shares of Common Stock, for which
Alliance shares voting power under a voting agreement dated October 18, 1996
(the "Voting Agreement"), between Alliance and MGD Holdings. Pursuant to the
Voting Agreement, MGD Holdings, for a period of two years from the date
thereof, has agreed to vote all shares of Common Stock held by MGD Holdings
from time to time in accordance with the recommendations of the management of
Alliance. Accordingly, Alliance has the capability to determine
the outcome of any vote of the Company's stockholders during this period.
Further, four of the seven members of the Board of Directors were
nominated by Alliance. Accordingly, Alliance has effective control of the
Company's Board of Directors.
The previously announced agreement with Midwest Indemnity Corporation of
Skokie, Illinois, on July 25, 1996, is in the process of being renegotiated
from an option-to-purchase to an acquisition of the assets of Midwest
Indemnity. This transaction, expected to close during the fourth quarter, will
create a partnership between the Company and Gulf Insurance Company and
transform the Company's existing contact surety business from a regional to a
national program in all 50 states.
On November 6, 1996 the Company completed its previously announced agreement to
acquire Environmental and Commercial Insurance Agency, Inc. ("ECI"), a small,
privately held insurance agency based in Columbus, Ohio, for $1,000,000 and
192,500 shares of the Company's Common Stock. ECI markets, through over 100
independent agents, property and casualty insurance and surety bonds to
environmental remediation contractors, landfill operators, consultants, and
other small and medium-sized companies specializing in environmental businesses
throughout the United States. Written premiums in 1995 totaled in excess of
$14 million, including $4.25 million of insurance sold on behalf of the CSC
Group.
Also on November 6, 1996 the Company announced it has entered into an agreement
to acquire all of the outstanding shares of SMR & Co. of Cleveland, Ohio in
exchange for 600,000 shares of Common Stock and warrants to purchase an
additional 900,000 shares of Common Stock at $10.375 per share over three
years. This transaction is subject to execution of definitive agreements and
customary conditions to closing.
SMR and Co. is primarily a consulting services company in the areas of tax
planning, tax return preparation and compliance, computer consulting, employee
benefit program design and administration, and human resource management. When
the transaction closes, the Company will become a wholly-owned subsidiary of the
Company, and will be renamed SMR & Co. Business Services.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a diversified services company which, acting through its
subsidiaries, provides specialty insurance services and waste and environmental
services. In October 1996, the Company acquired the CSC Group, which includes
three insurance companies, and CSU, an insurance agency which markets surety
bonds. Through the Company's insurance subsidiaries, the Company provides
specialty insurance and bonding to small- and medium-sized commercial
enterprises in over forty states throughout the United States.
The waste services the Company provides include hazardous and non-hazardous
waste treatment, storage and transportation services, disposal services and a
broad range of related environmental services including engineering, consulting
and analysis, remediation, groundwater/wastewater and other technical services.
The Company currently operates seven hazardous and non-hazardous waste
treatment, storage and disposal facilities ("TSD facilities") located in the
United States and Canada. These TSD facilities are serviced by the Company's
integrated trucking operations. The Company does not own any hazardous waste
disposal sites.
The Company was formed as a Delaware corporation in 1987 under the name Stout
Environmental, Inc. In 1992, the Company was acquired by RII. In April 1995,
RII effected a spin-off of its hazardous waste operations through a
distribution of the Common Stock of the Company to the stockholders of record
of RII (the "Spin-off"). Pursuant to the Spin-off, the RII stockholders
received one share of the Company's Common Stock for every five shares of RII
common stock. Approximately 10,800,000 shares of the Common Stock
8
9
of the Company were distributed to RII stockholders. In October 1996, the
Company diversified into specialty insurance and bonding and changed its name
to International Alliance Services, Inc. from Republic Environmental Systems,
Inc. The Company's Common Stock trades on the Nasdaq National Market under the
trading symbol "IASI."
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percentage
relationship which certain captioned items in the Company's Consolidated
Statements of Operations bear to total revenue and other pertinent data:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
1996 1995 1996 1995
-------- --------- --------- ---------
STATEMENTS OF OPERATIONS DATA:
Revenue. . . . . . . . . . . . . . . . . . . . . . . . 100.0 % 100.0% 100.0 % 100.0%
Cost of operations . . . . . . . . . . . . . . . . . . 77.6 68.5 75.9 71.0
Selling, general and administrative expenses . . . . . 26.1 21.4 28.3 20.6
----- ----- ----- -----
Operating (loss) income. . . . . . . . . . . . . . . . (3.7)% 10.1% (4.2)% 8.4%
===== ===== ===== =====
Revenue
Revenue for the third quarter of 1996 decreased $1.7 million to $8.5 million
from $10.2 million in the third quarter of 1995. This decrease is a result of a
continued decrease in 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, contributing to a decrease in revenues. The
combination of waste minimization programs and severe competition has had a
negative impact on both revenue and margins, especially with respect to the
Company's Ohio operations. Revenue for the nine months ended September 30, 1996
decreased $11.0 million to $24.3 million from $35.3 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
expressed above. The decrease in revenue is primarily a result of the decrease
in revenue experienced by the Company's Ohio operations. For the nine months
ended September 30, 1996 revenue for the Ohio operations decreased by $7.3
million to $3.4 million as compared to $10.7 million for the same period in
1995. This adverse impact was primarily due to the continued delay in the
granting of certain permit renewals and revisions which have limited the waste
processing and operatin volume capabilities within the Company's Ohio regional
operations that were anticipated to coincide with the closure of the Dayton,
Ohio TSD facility in the fourth quarter of 1995.
Cost of Operations
Cost of operations decreased $0.4 million, or 6.0%, to $6.6 million in the
third quarter of 1996 from $7.0 million in the third quarter of 1995; however,
as a percentage of revenue these costs increased to 77.6% from 68.5% for the
third quarter of each 1996 and 1995, respectively. This increase is primarily
due to the lower margins resulting from the reduction in prices and the
significant portion of fixed costs associated with the Company's operations.
As discussed above, due to the delay in granting of certain permit renewals and
revisions at our Ohio operations, the adverse impact on operations and high
fixed costs associated with the Ohio operations has rendered them unprofitable
for 1996. Cost of operations decreased 26.6% to $18.4 million for the nine
months ended September 30, 1996 as compared with $25.1 million in the same nine
month period for 1995.
Selling, general and administrative expenses were $2.2 million for the three
months ended September 30, 1996 and 1995. As a percentage of revenue these
costs were approximately 26.1% for the three months ended September 30, 1996
and 21.4% for the same period in 1995. For the nine months ended September 30,
1996 selling, general and administrative expenses decreased by 5.5% to $6.9
million as compared to $7.3 million for the first nine 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 28.3% and
9
10
20.6%, 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 $22,000 in the quarter ended September 30, 1996
from $30,000 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 and Other Income
Interest and other income increased significantly to $348,000 in the three
months ended September 30, 1996 from $36,000 in the same period in 1995. This
is attributable to the income of $204,000 recognized on the payback of minority
interest consisting of 360,000 shares of redeemable convertible participating
preferred stock of RESL.
Income Taxes
The Company recorded an income tax provision of $6,000 the three months ended
September 30, 1996 and an income tax benefit of $140,000 for the nine months
ended September 30, 1996, reflecting an effective tax rate of approximately
37%. The Company's income tax provision in the same period for 1995 was
$383,000 and $1,091,000 respectively, reflecting an effective tax rate of
approximately 37.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company made capital expenditures of $2.6 million in the first nine months
of 1996 which included expenditures to upgrade existing TSD facilities and
fixed assets for normal replacement, compliance with regulations and market
development. The Company anticipates that it may make up to approximately $0.5
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 8.0%
at September 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 September 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.
On October 18, 1996 the Company completed the Mergers and Stock Issuances.
In connection therewith, the Company issued a promissory note in the principal
amount of $4,000,000 with an interest rate at three month LIBOR, which would
be 5.53% at October 18, 1996. The outstanding principal amount under the
promissory note was $3,607,638 as of November 1, 1996. Principal payments
are due under the promissory note in ten quarterly installments of $400,000,
together with accrued and unpaid interest, until December 15, 1998, when the
entire outstanding principal amount of the promissory note, together with all
accrued and unpaid interest, is due and payable.
The infusion of the $10.5 million received by the Company upon consummation
of the Stock Issuances is expected to provide the Company with the ability to
capitalize upon acquisition opportunities that may arise in the insurance or
hazardous waste or related businesses. In addition to the ECI and the SMR &
Co. acquisitions, other acquisitions are possible due to the fact that both the
insurance and hazardous waste industries may be generally characterized as
oversupplied, creating the possibility that some competitors may be motivated
to exit those industries on terms that may be favorable for a capable buyer.
Management intends to finance such acquisitions with the proceeds from the
Stock Issuances as well as Common Stock of the Company. Management believes
that the proceeds from the Stock Issuances as well as its credit facility
should provide the Company with adequate capital to enable it to effect any
anticipated acquisitions in the forseeable future; however additional capital
may be necesssary if the Company wishes to pursue any acquisitions not
currently contemplated.
Cash flow from operations was $1.2 million in the nine months ended September
30, 1996, compared with $2.4 million in the same period in 1995. In the first
nine 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.
10
11
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 nine months of 1996 and 1995.
ACCOUNTING PRONOUNCEMENTS
The FASB issued SFAS No. 123 "Accounting for Stock Based Compensation" which
will be effective for The Company 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.
11
12
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
On August 23, 1996, a total of four stockholders holding an aggregate
of 6,111,096, or approximately 56.2%, of the Company's outstanding
shares of Common Stock, in lieu of a special meeting of stockholders,
consented in writing to (i) the issuance of the Merger Shares and
the Merger Warrants in exchange for the common stock of CSC and
CSU, (ii) the issuance of the Stock Issuance Shares and the Stock
Issuance Warrants, (iii) the 1995 Employee Stock Option Plan and
(iv) the amendments to the Certificate of Incorporation of the
Company to change the name of the Company from Republic
Environmental Systems, Inc. to International Alliance Services,
Inc. and to increase the number of authorized shares of Common
Stock from 20,000,000 to 100,000,000. In connection
therewith, on September 27, 1996, the Company sent an Information
Statement to its stockholders.
ITEM 5. OTHER INFORMATION
The Board of Directors has appointed Mr. Greg Skoda, CPA as Chief
Financial Officer of the Company. Mr. Skoda is one of the
shareholders of SMR & Co. and has been providing accounting and
consulting services to the Century Surety Group for nine years.
Although the Company is not required to include year to date financial
information for the Alliance Companies pursuant to S.E.C. regulations,
the Company has included the following financial data:
Nine Months Ended
September 30,
-----------------------
1996 1995
---- ----
Revenues $ 26,055 $ 22,776
Expenses 22,541 22,247
--------- ----------
Income before income tax 3,514 529
Income tax expense 1,249 140
--------- ----------
Net income $ 2,265 $ 389
========= ==========
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 TO NINE MONTHS
ENDED SEPTEMBER 30, 1995
Revenue increased $3.3 million or 14% for the nine months ended
September 30, 1996 from $22.8 million in 1995 to $26.1 million in 1996
primarily because of a $1.0 million gain on the sale of equity
securities, $1.1 million of income recognized from a contingent
receivable which arose from an earlier acquisition and increased
insurance premium revenue for the companies.
12
13
For the nine month period ended September 30, 1996, total expenses
increased only $294,000 as a result of increases in losses and loss
expenses.
Primarily for the reasons stated above, net income for the nine months
ended September 30, 1996 was approximately $2.3 million as compared to
$0.4 million for the same period in 1995. This represented an
increase of approximately $1.9 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
None.
13
14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, International Alliance Services, Inc. has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL ALLIANCE SERVICES, INC.
By:/s/ MICHAEL D. SCHMIDT
-------------------------------------
Michael D. Schmidt
Assistant Secretary
(As authorized officer and
Principal Accounting Officer)
November 8, 1996
14
5
0000944148
INTERNATIONAL ALLIANCE SERVICES, INC.
1,000
9-MOS
DEC-31-1996
JAN-01-1996
SEP-30-1996
1,432
0
7,864
686
0
9,989
33,702
13,177
40,297
7,152
369
0
0
109
28,296
40,297
24,263
24,263
0
18,416
0
0
132
(376)
(140)
(236)
0
0
0
(236)
0
0
