SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED AUGUST 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the
transition period from ____________ to ____________
Commission file number 0-19350
VIROGROUP, INC.
Exact name of Registrant as specified in its charter
FLORIDA 59-1671036
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
428 PINE ISLAND ROAD, SOUTHWEST
CAPE CORAL, FLORIDA 33991
(Address of principal executive offices)
Registrant's telephone number: (941) 574-1919
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
TITLE OF EACH CLASS on which registered
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NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of November 18, 1996 the aggregate market value of the voting stock
of the Registrant held by non-affiliates of the Registrant was $1,117,924.
As of November 18, 1996, the number of outstanding shares of Common
Stock, par value $.01 per share, of the Registrant was 6,361,708.
Information required by Part III is incorporated by reference to
portions of the Registrant's 1997 Proxy Statement for the Annual Meeting of
Shareholders which will be filed with the Securities and Exchange Commission
within 120 days after the close of the 1997 fiscal year.
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PART I
ITEM 1. BUSINESS
ViroGroup, Inc. (the "Company"), provides a wide range of environmental
services to assess and remediate groundwater and soil contamination, to design
and monitor solid and hazardous waste landfills, to protect air quality, to
assure regulatory compliance and to develop groundwater resources. The Company's
strategy is to provide a comprehensive array of services through integrated
utilization of a skilled technical staff consisting of hydrogeologists,
environmental engineers, chemical engineers, chemists, biologists, computer
modelers and others to find optimum solutions to a client's environmental
challenges. The Company's current market focus is centered on North America with
most of its business in the Atlantic and Gulf regions.
BACKGROUND AND ORGANIZATION
The Company's client base is diversified. Its clients range in size
from Fortune 100 corporations to municipalities and local enterprises, including
industrial firms, sales and service companies, service stations, and utilities.
The majority of the Company's revenues are derived from private-sector clients.
The Company's first office was established in Cape Coral, Florida in
1976 and primarily focused on the development, management and protection of
groundwater resources such as drinking water. Subsequently, the Company
broadened its scope of services to include other environmental services.
Primarily in response to anticipated demand for underground petroleum storage
tank site assessments and remediations to be paid by the State of Florida
through its Inland Protection Trust Fund, the Company in fiscal years 1989
through 1992 opened six additional offices in Florida. In March, 1995, the State
suddenly curtailed the program significantly reducing the available work. Mainly
as a result of this curtailment, the Company during fiscal years 1995 and 1996
closed three of these offices. Present Company locations in Florida are Cape
Coral, Jacksonville, Pensacola and Tampa. In addition, during fiscal years 1991
and 1992, the Company opened offices in Texas and Louisiana which were closed
during fiscal years 1995 and 1996.
During fiscal 1992 the Company, in exchange for common stock and cash,
acquired a company which mainly provides planning, design and construction
QC/QA, facility permitting and closure, as well as wastewater services to the
solid and hazardous waste management industries. Through this acquisition, the
Company acquired locations in California, New York and South Carolina. The New
York and California offices were closed in fiscal 1994 and 1996, respectively.
During fiscal 1993 the Company acquired an environmental and
remediation services company located in Nashville, Tennessee, from a Laidlaw
Inc. (Laidlaw) affiliate in exchange for 600,000 shares of the Company's Series
A Preferred Stock. On the same date the Company
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sold to another Laidlaw affiliate an additional 200,000 shares of Series A
Preferred Stock for $2,000,000 in cash. In June 1995 these entities surrendered
these holdings for conversion into 50% of the Company's common equity which
Laidlaw agreed to hold for at least two years. This resulted in issuing to a
Laidlaw affiliate 3,180,854 of the Company's $0.01 par value common shares,
bringing the total number of Common Shares issued and outstanding to 6,361,708.
In addition, the agreement included the following provisions:
/bullet/ Should Laidlaw sell or transfer the Common Stock received
under this agreement at any time between two and six years after
issuance, holders of other outstanding Common Shares will be granted
the right to participate in any such transaction on the same basis,
terms and conditions.
/bullet/ ViroGroup's Board of Directors was reduced from nine members to seven,
three of whom are to be nominated by the holders of the Common Stock
issued under the agreement.
/bullet/ Commencing with the issuance of the Common Stock and for a three-year
period thereafter, Laidlaw agreed to extend to ViroGroup a $3.0 million
line of credit subordinated to and bearing the same interest rate as
the Company's existing bank credit line. Any amount outstanding at the
end of the three-year revolving credit period will be paid in equal
quarterly installments during the following three-year period.
Furthermore, Laidlaw waived unpaid preferred stock dividends totalling
$180,445. As a result of this preferred stock conversion and waiver, the Company
is no longer obligated to pay an annual preferred stock dividend of $560,000.
(Reference is made to Note 6(a) to the Notes to the Consolidated Financial
Statements.)
Laidlaw affiliates are the Company's largest clients, accounting for
approximately 20 per cent of the Company's 1996 consolidated gross revenues.
Laidlaw, Inc. is listed on the New York Stock Exchange. Ontario, Canada-based
Laidlaw, Inc. is North America's third largest solid waste management company,
second-largest hazardous waste management company and largest school bus
operator. Laidlaw's fiscal 1996 revenues exceeded US $2.5 billion. In September
1996, Laidlaw announced it had agreed to sell its solid waste management
business. The Company cannot presently assess the impact on the Company, if any,
of this announced ownership change. During 1996 the Company's gross revenues
derived from Laidlaw's solid waste operations were immaterial.
The Company is organized into two broad service divisions. These
service divisions are Environmental Consulting and Engineering Services, and
Hydrogeological and Water Resources Services. Through this organization, each
office taps into the Company's full resources regardless of geographical
location, thus contributing to optimizing the solutions to our clients' diverse
environmental challenges. This merger of the Company's talent is designed to
maximize staff utilization while reducing overhead costs. All Company locations
use the name of ViroGroup as their identity.
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The Company's common stock is listed with the Nasdaq SmallCap System.
At August 31, 1996 the Company had 104 employees of whom 83 were
technical and 20 of whom had advanced degrees.
The Company's principal executive offices are located at 428 Pine
Island Road, S.W., Cape Coral, Florida 33991, and its telephone number is (941)
574-1919. Unless otherwise indicated, references herein to specific years
correspond to the Company's fiscal years ending August 31.
ENVIRONMENTAL CONSULTING AND ENGINEERING SERVICES
The Company provides professional services in the following areas:
remediation design, construction and management, contamination assessment, risk
assessment, underground storage tank management, transactional environmental
audits, operational environmental audits, air quality management, and wastewater
management and regulatory assistance, as well as hazardous and solid/liquid
waste management consulting services, industrial hygiene services and other
services. New services added in fiscal 1996 include bio-remediation and
environmental data management. Environmental, Consulting and Engineering
services comprised approximately 84% of the Company's 1996 consolidated gross
revenues.
BIO-REMEDIATION SERVICES. During fiscal 1996 the Company added a new
cutting-edge bio-remediation technology to its line of services known as the
immobilized microbe bio-reactor system. This technology is a biological
treatment process which is a simple, efficient and effective method for treating
entrenched organic contamination in both soil and groundwater. It has distinct
performance benefits over many traditional bio-remediation technologies and can
offer lower cost, efficient remediation for large area contamination.
ENVIRONMENTAL DATA MANAGEMENT SERVICES (EMS). During fiscal 1996 the
Company added state-of-the-art database design services to help our clients
efficiently manage their compliance programs. Environmental compliance can be
extremely time-consuming and complex. The Company's EMS staff works with our
clients to evaluate their needs for compliance by designing a database which
easily and timely generates automatic tracking, specification calculations and
compliance reports. This modular system allows its clients to select modules
among air permitting, NPDES, EPCRA, permit tracking, and health and safety, as
well as specific client customized modules. Such flexibility allows the Company
to easily tailor these applications to our clients' needs and budget.
REMEDIATION DESIGN, CONSTRUCTION AND MANAGEMENT. ViroGroup provides
comprehensive remediation services to correct groundwater and soil
contamination. Services provided include remediation plan development, design
and installation of treatment and recovery systems, hydrogeological studies,
bio-remediation, vapor extraction, RCRA closures, Treatment, Storage and
Disposal (TSD) facilities closure, soil/water removal and treatment programs, as
well as
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long-term monitoring and maintenance programs, including monitoring well design
and construction, and above-ground tank installation.
The Company provides complete underground storage tank (UST) assessment
and remediation services. Among the services provided are site assessments,
hydrogeological studies, remediation plan development, tank removal, replacement
tank system design and installation, soil and water removal, treatment system
design and installation, as well as systems monitoring and maintenance.
CONTAMINATION ASSESSMENT. The Company provides comprehensive
definitions of and solutions for contamination problems. The principal sources
of contamination that the Company addresses are: leaking underground storage
tanks, spills of hazardous waste and improper disposition of solid and hazardous
waste. The Company assigns trained personnel with thorough knowledge of
environmental, health and safety regulations to all contamination assessment
projects.
RISK ASSESSMENT. The Company performs risk assessments for industrial
sites to evaluate the potential danger to the health and safety of individuals,
as well as the impact on the environment at and near the site. The risk
assessment report also predicts the ultimate fate and disposition of any
contaminants. The risk assessment provides an assessment of potential harm,
predicts who might be affected and proposes and monitors corrective action. At
times, the Company performs risk assessments to determine the consequences of
deferring remediation while continuing to monitor the problem.
TRANSACTIONAL ENVIRONMENTAL AUDITS. The Company performs transactional
environmental audits in connection with real property transactions, foreclosures
and loans secured by real property. Such audits assess environmental risks and
estimate remediation needs and costs. In 1980, Congress passed the Comprehensive
Environmental Response, Compensation and Liability Act, which generally provides
that owners, operators and purchasers of properties contaminated with toxic or
hazardous substances may be liable for the cost of clean-up and also may be
exposed to third-party liability actions. The demand for environmental audits
was increased by the 1986 Superfund Amendment and Reauthorization Act, which
created an innocent purchaser defense known as the "due diligence" test.
The Company has developed an internal system of classification with
scopes of service for various levels of environmental audits. Types of audits
performed range from data review and site visits to cases of increased
complexity requiring site testing of groundwater, surface water, soils and air
for asbestos, radon and other harmful substances. If an audit identifies
contamination, an "assessment" of the site follows to determine the extent and
significance of the contamination.
OPERATIONAL ENVIRONMENTAL AUDITS. Operational environmental audits are
performed at industrial, commercial and governmental facilities to provide an
analysis of a client's environmental compliance status, to suggest ways to
minimize hazardous waste and reduce costs
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and to recommend corrective action, if appropriate. The Company performs these
services to help clients comply with environmental and work place laws and
regulations, including air emissions, wastewater and groundwater discharges,
hazardous and solid wastes, polychlorinated biphenyls, asbestos, pesticides, oil
spill control, underground storage tanks, drinking water, contingency planning,
OSHA, worker right-to-know, and SARA Title III (community right-to-know). This
complex body of environmental laws and regulations has substantially reduced a
company's ability to comply without assistance by outside specialists.
The Company offers specialized follow-on services to address needs
identified during the audit. Chemical and process engineers work with regulatory
specialists to develop waste minimization programs. Permit deficiencies are
evaluated and corrective action programs including training are implemented.
AIR QUALITY MANAGEMENT. The Clean Air Act Amendments of 1990 have
increased the demand for the Company's air quality services. Such services
include: emissions reduction studies, atmospheric dispersion modeling,
air-quality control system design and assistance in obtaining permits. Title V
permitting and associated process engineering services are provided to a variety
of industrial sectors.
The Company's professionals provide enforcement representation,
negotiation of financial settlements and consent orders and expert witness
services to address air quality issues during administrative and judicial
proceedings.
INDUSTRIAL HYGIENE SERVICES. Among the services provided by ViroGroup
are OSHA compliance and training, confined space programs, hazard communication,
hearing conservation and noise monitoring, respiratory protection, safety
audits, worker protective equipment, fire protection and employee monitoring.
SOLID AND HAZARDOUS WASTE MANAGEMENT SERVICES. These services include
planning, design and construction services, facility permitting, permit
modifications and construction quality control inspections. Solid waste services
are almost exclusively offered to the private sector while wastewater services
are mainly offered to county and city governments. These services comprised
approximately 29% of the Company's 1996 consolidated gross revenues with sales
to Laidlaw affiliates totaling 69% of this amount.
WASTEWATER AND PROCESS ENGINEERING SERVICES. These services include
wastewater treatment projects that use physical, chemical and biological
processes. Other wastewater management services include, monitoring and
inspection of wastewater management systems and compliance with applicable
provisions of federal, state and local laws and regulations. NPDES and RCRA
(TSD) permit related services are provided as well as wastewater facility, and
collection system planning and design.
OTHER SERVICES. ViroGroup's professionals provide training services for
client management and employees on a variety of environmental issues and
regulations and serve as
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expert witnesses, negotiate financial settlements and consent orders, as well as
serve as representation during enforcement administrative and judicial
proceedings. The Company does not represent any federal, state or local
authorities in enforcement proceedings against private entities.
FLORIDA UNDERGROUND PETROLEUM STORAGE TANK (UST) REIMBURSEMENT PROGRAM.
During fiscal 1994, the Company aggressively expanded its participation in the
State of Florida financed programs to provide environmental services to
evaluate, assess and remediate contaminated underground petroleum storage tank
sites. Through its Inland Protection Trust Fund, the State of Florida reimburses
certain costs to clean up eligible contaminated sites. At August 31, 1994, the
Company's backlog related to this program was approximately $21 million. For
fiscal 1995, this program accounted for 12% of consolidated gross revenue and
21% of Florida operations' gross revenues and the backlog related to this
program was $500,000. For fiscal 1996, this program accounted for 2% of
consolidated gross revenues and 8% of Florida operations' gross revenues and the
backlog related to this program was $0. (Reference is made to Note 9(e) to the
Notes to the Consolidated Financial Statements.)
Primarily due to an estimated unfunded $450 million backlog and annual
tax revenues of only $100 million, in March 1995 new legislation directed the
Florida Department of Environmental Protection to cease processing, with certain
limited exceptions, applications for reimbursement of costs to clean up UST
sites eligible for state funds. The impact of this new law on the industry in
Florida was substantial, requiring major reductions in employment levels and
requiring firms that operate under the Florida program to finance activities
pending a lengthened reimbursement process. Partially as a result of this
program change, as well as to improve customer service and staff utilization,
two Florida offices were closed in fiscal 1995 and one office in fiscal 1996,
and personnel were reduced in other Florida offices. (Reference is made to Note
1(g) to the Notes to the Consolidated Financial Statements.)
Prior to this new law, payments from the State were normally received
within twelve months of application submission. Based upon this 1995 legislation
it then appeared it could take up to five years to receive payment for
previously completed work. As a result, in the consolidated balance sheet at
August 31, 1995 the Company reclassified $2.05 million (net of discount of
$727,000) due from the State from current assets to non-current assets and are
included in Amounts Due from State Agency in the accompanying consolidated
balance sheet. (Reference is made to Note 9(e) in the Notes to the Consolidated
Financial Statements). The discount of $727,000 reduced 1995 gross revenues and
reflected the fact the related long-term amounts were non-interest bearing. This
discount was to be accreted to interest income over the estimated two to five
year payment period of the related principal amounts.
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In May, 1996 a new law (The 1996 Act) was passed which implemented
significant changes to the reimbursement program and addressed the estimated
$450 million backlog of unpaid claims. This 1996 Act provides for the
elimination of the reimbursement program effective August 1, 1996 and for all
reimbursement applications to be submitted by December 31, 1996. Also, The 1996
Act creates a non-profit public benefit corporation, which is expected to be
operational by the Spring of 1997, to finance the unpaid backlog. This
non-profit corporation is charged with financing the estimated unpaid $450
million backlog with certificates of indebtedness. Payment of claims will be on
a first-come, first-served methodology based on application filing date and an
assumed annual funding rate of $100 million. Claims paid will be subject to a
3.5% annual discount in consideration for the anticipated accelerated payment as
compared to the previous expected period of 4 to 5 years. The Company estimates
it will not receive significant payments from this program until the fourth
quarter of fiscal 1997 continuing to the second quarter of fiscal 1998.
Due to the State's cancellation of the 1995 law and other prior law
relating to the program, and the provisions of The 1996 Act, the discounts
recorded in fiscal 1995 will not be accreted to interest income. However, these
previously recorded discounts approximate the valuation allowance required on
these amounts to reflect the state mandated discount and potential denied cost.
As of August 31, 1996 the Company had approximately $3.7 million in amounts due
from the state including $3.1 million in applications to be filed prior to
December 31, 1996. Total amounts subject to state denied costs and discounts,
including amounts already filed, at August 31, 1996 were approximately $3.9
million. The Company has provided a valuation allowance for the expected state
mandated discounts and denied costs. At August 31, 1996 these allowances total
$931,665 with $889,937 applied as a valuation allowance to the Amounts Due from
State Agency resulting in a net amount of $2,812,737 as shown as the Amounts Due
from State Agency in the accompanying consolidated balance sheet at August 31,
1996 and $41,728 which is included as an accrued liability in the consolidated
balance sheet at August 31, 1996 to reflect the Company's liability to pay
discounts and denied costs on amounts financed by third-parties.
Of the approximately $3.1 million in unfiled reimbursement applications
at August 31, 1996, the Company expects to finance about $2.9 million with
third-parties whereby the Company will receive the cash from the financing
entity upon application filing thus not waiting the expected one year to be paid
by the State. The cost of borrowing from these third-parties is less than the
cost of borrowing through the Company's revolving credit line. (Reference is
made to Note 9(e) to the Notes to the Consolidated Financial Statements.)
During fiscal 1996 this program generated approximately $335,000 in
gross revenues and about $17,000 was charged against gross revenues to provide
for the denied cost.
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HYDROGEOLOGICAL AND WATER RESOURCES SERVICES
The Company provides professional services for water supply
development, injection well design and water resource planning. These services
include computer modeling to assess surface water influences as well as
groundwater changes. Computer modeling services result in site-condition
analysis ranging from contaminant plume migration to regional wellfield impacts.
Groundwater resource management services are provided primarily in the
southeastern United States and the Caribbean. These services comprise
approximately 16% of the Company's 1996 consolidated gross revenues.
WATER SUPPLY. The Company assists in the development of groundwater
supplies for municipal, agricultural and industrial uses. The Company performs
subsurface investigations and upgrades existing systems with cost-effective
solutions to water quality or well construction problems. The Company estimates
the potential yield of an aquifer and recommends the most efficient well design
to maximize yield while minimizing impact, assesses water quantity and quality
and supervises the wellfield construction.
Identification of an acceptable source of water can be time consuming
and expensive in coastal and island hydrogeologic environments. Withdrawals from
an aquifer can induce the movement of poorer quality water into the production
wells, causing failure of the system. In response to these problems, the
Company's professionals conduct research in the hydrodynamics of the fresh/salt
water interface and model withdrawal scenarios to maximize both water production
and protection of potable water resources. The Company specializes in saltwater
intrusion, including identifying, quantifying and controlling the problem.
The Company believes that reverse osmosis desalination will become
increasingly important in developing water supply systems for municipal and
industrial clients. The Company designs and develops wellfields to supply such
systems.
The Company has special expertise in predicting the long-term effects
on water quality of various levels of production from such wellfields through
the use of three dimensional computer modeled simulations. The Company
originated as a groundwater supply engineering firm and has more than fifteen
years' experience with groundwater wellfields. A number of the Company's
professionals have degrees in hydrogeology and have published articles on the
subject in scientific and technical publications.
WATER RESOURCE PLANNING. The Company assists municipalities, water
management districts and industrial clients in developing water resource
management plans to alleviate water shortages caused by drought conditions,
declining water levels, groundwater contamination or saltwater intrusion. The
Company's professionals provide specialized regional exploration for new
groundwater resources and develop alternative water sources, including reuse of
residential and industrial wastewater, storage and recovery of excess freshwater
runoff and treatment of salt water by reverse osmosis.
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In connection with its groundwater resource management services, the
Company provides both surface and groundwater monitoring, including location and
installation of wells, sampling, chain of custody requirements, analytical work
and analysis of results. The Company's water monitoring services assist its
clients in maintaining regulatory compliance and improving their process flow
while recycling water, conserving resources and upgrading treatment plants.
INJECTION WELL TECHNOLOGY. Injecting fluids into underground formations
containing nonpotable groundwater is called deep-well injection. Treated
wastewater or reverse osmosis concentrate water are commonly injected into
deeper aquifers containing poorer quality saline water. Also, treated freshwater
is injected into aquifers during periods of abundant supply for recovery during
peak demand periods. Injection-well technology is used where the receiving
aquifer is capable of accepting the injected fluids without endangering any
underground source of drinking water. The Company's work includes design of the
wells, preparation for construction permits, preparation of technical data,
construction, inspection, installation and injection testing.
CLIENTS
Almost all of the clients that retain the Company to provide
environmental services are private-sector clients ranging from Fortune 100
corporations to local enterprises, including industrial, sales and service
companies and service stations. Almost all of the clients that retain the
Company to provide groundwater resource management services, which principally
relate to public water supply development, are public and private utilities and
governmental water supply systems. The Company does not provide services to
governmental units in connection with regulatory enforcement actions against
private companies.
During fiscal 1996, the Company's 10 largest clients, in the aggregate,
accounted for approximately 51% of consolidated gross revenues. Laidlaw
affiliates are the Company's largest client which during fiscal year 1996
accounted for approximately 20% of consolidated gross revenues. The loss of
Laidlaw as a customer would have a material adverse effect on the Company. No
other customer accounted for more than 10% of consolidated gross revenues.
MARKETING
The Company's marketing efforts focus on developing new clients
including national accounts, as well as generating new business from existing
clients. The Company believes its corporate marketing program teamed with
localized marketing by the professional consulting staff is the most effective
method of selling its services. The Company relies on direct sales calls as a
primary means of marketing. Other marketing activities include presentations by
senior staff personnel to civic and professional associations, attendance or
presentations at seminars and publication of articles in professional journals.
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PRICING AND R&D
The Company typically charges its clients for the services of its
employees on an hourly basis, as well as for equipment, materials and
subcontracted services used in connection with its projects. For certain
projects, services are provided on a fixed-fee basis. The business of the
Company is not seasonal and all of the materials and third-party services used
in performing the Company's services are readily available.
Approximately 80% of the Company's 1996 business consisted of "time and
materials" contracts under which the Company charges an hourly or daily rate
plus its costs and expenses. The remainder were "fixed-fee" contracts under
which the Company charges a fixed amount agreed to in advance by the client and
the Company. The Company has not experienced any material financial detriment as
a result of its fixed-fee contracts. In all material instances, these contracts
involve types of services with which the Company has substantial experience and
therefore can consistently predict the personnel time and costs required, such
as routine environmental audits and water supply wellfield designs. Services
involving significant variable costs, such as site remediation, are not
undertaken on a fixed-fee basis. The Company does not incur research and
development expenses.
BACKLOG
As of September 30, 1996, the Company's backlog was approximately
$2,000,000, compared to approximately $8,000,000 as of September 30, 1995, and
$28,036,000 as of October 31, 1994. Of the 1994 backlog approximately $21
million was related to the State of Florida's UST program. Due to the
curtailment of the program in 1995, the State of Florida backlog at September
30, 1995, was approximately $500,000 and $0 at September 30, 1996. Management
does not believe backlog is a meaningful indication of future revenues. The
Company's backlog is not seasonal.
COMPETITION
The market for the Company's services is highly competitive. The
Company competes with many other firms, ranging from small, local firms to
large, national firms having substantially greater financial, and marketing
resources than the Company. The Company competes primarily on the basis of
quality of service and expertise. Other competitive factors include geographic
location, price and availability of personnel.
ENVIRONMENTAL LEGISLATION
The Company provides a wide range of environmental services with its
scientific capabilities, including studies of ground and surface waters, soils,
air quality, underground storage tanks, wastewater management, solid waste
management and other areas requiring environmental services. Consequently, the
Company must be knowledgeable of and responsive
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to an increasing number of frequently overlapping federal, state and local laws
and regulations governing the protection of the environment.
INSURANCE AND LIABILITY
It has been both a Company policy, and a requirement of many clients,
for the Company to carry insurance for the services it performs. The Company
maintains professional liability and contractor's pollution liability insurance
in the amount of $5,000,000. The Company's general liability insurance is in the
amount of $2,000,000, but this policy excludes environmental claims. Aggressive
enforcement of RCRA and Superfund Act regulations and legal decisions adverse to
insurance carriers involving pollution damage may make it difficult for the
Company and others in its industry to obtain adequate liability insurance in the
future. In addition, the professional liability insurance policy is available
only on a claims made basis, so that the insured is only covered if it maintains
coverage. Thus, there is the risk that the Company will find itself required to
maintain costly policies to cover past occurrences or instead to obtain
expensive "tail liability" policies that provide coverage for all claims made
while the policy is in force, even if the events giving rise to such claims
occurred prior to obtaining such coverage. While the Company believes it
operates safely and prudently, there are various exclusions under its insurance
policies and there can be no assurance that all possible liabilities that may be
incurred by the Company are covered by its insurance or that the dollar amount
of such liabilities will not exceed the Company's policy limits.
EMPLOYEES
On August 31, 1996, the Company had 104 employees. On August 31, 1995,
the Company had 181 employees, and on August 31, 1994, the Company had 285
employees. Over 80% of the Company's staff have technical or advanced degrees.
The Company's professional staff includes hydrogeologists, environmental
engineers, chemical engineers, chemists, geologists, computer modelers and
others.
The Company's ability to retain and expand its staff of qualified
professionals will be an important factor in determining the Company's future
success. None of the Company's employees is represented by a union. The Company
considers its employee relations to be good.
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ITEM 2. PROPERTIES
The Company leases the following facilities:
APPROXIMATE EXPIRATION
LOCATION USED FOR SQUARE FOOTAGE DATE
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Cape Coral, Florida Corporate 13,100 2002
Headquarters and
Operations Office
Tampa, Florida Operations Office 2,216 1997
Jacksonville, Florida Operations Office 5,079 2000
Pensacola, Florida Operations Office 3,229 1997
Lexington,
South Carolina Operations Office 13,000 1997
Nashville, Tennessee Operations Office 13,100 1998
The Company believes that its existing facilities are adequate to meet
current requirements and that suitable additional or substitute space will be
available as needed to accommodate any expansion of operations and for
additional offices.
ITEM 3. LEGAL PROCEEDINGS
In February, 1996 a civil action was filed in the Circuit Court of the
Second Judicial Circuit in and for Leon County, Florida, against the Company as
a Third-Party Defendant. The Complaint against the Company as an environmental
contractor alleges breach of contract, breach of implied warranty, environmental
malpractice, common law indemnification, statutory contribution and common law
contribution. This Third-Party Complaint was filed by a Client in response to a
Complaint filed by the Department of Environmental Protection (DEP) State of
Florida which alleges overpayments made by the DEP to the Client due to
purported fraud with regard to the Client's submission of an environmental
reimbursement application. The amount sought by the DEP against the Client is
$240,000, exclusive of interest and costs.
The Client has asserted various factual and legal defenses in response
to the DEP's Complaint, including, but not limited to, a viable statute of
limitations defense. Based on the viability of such defenses, the Client's and
the Company's agreement to jointly cooperate in defending what the Company and
the Client believe to be an unfounded claim from the DEP, the Client and the
Company entered into an agreement in May, 1996. Pursuant to the agreement in
consideration of the Client dismissing its Third-Party Complaint against the
Company without prejudice, all claims and defenses between the Client and the
Company have been tolled for an unspecified period of time with a reciprocal
right to terminate the agreement upon ten (10) days written notice provided by
either party. The Third-Party Complaint against the Company was dismissed,
without prejudice on May 30, 1996. Based on the foregoing, this matter will most
- 12 -
<PAGE>
likely stay in abeyance until a final determination is made by the Court on
DEP's claims against the Client.
In May 1996, the Company settled all its remaining claims deriving from
Sunshine Jr. Stores, Inc. bankruptcy in 1992. These claims totaling
approximately $270,000 and included in accounts receivable in the accompanying
balance sheet at August 31, 1995, were settled for approximately $237,000
resulting in a charge to the allowance for doubtful accounts in fiscal 1996 of
approximately $33,000. In addition, the parties agreed to mutually cooperate to
ensure the timely filing of mutually incurred cost in related claim applications
to be reimbursed by the State of Florida UST program.
In August 1993, a civil action was filed in Hamblen County Chancery
Court of the Third District of Tennessee against the Company and Galen of
Tennessee, Inc., seeking compensatory and punitive damages of approximately
$1,140,000 in regards to an asbestos abatement project. In December 1993, the
Court dismissed the lawsuit. The parties are now compelled to submit to
arbitration in the maximum amount of $140,000. The plaintiff has not made any
demand for arbitration. The Company believes that this action is without merit
and intends to vigorously defend itself.
The Company is not subject to any other material legal proceedings.
From time to time, the Company is involved in other routine litigations, claims
and assessments incidental to its business. The Company does not believe that
the ultimate resolution of any of the above described matters would have a
material adverse impact on the accompanying consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
- 13 -
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITIES AND RELATED SHAREHOLDER
MATTERS
The Company's common stock is listed on the Nasdaq SmallCap System. The
number of holders of record of common stock of the Company as of October 18,
1996 was 77. The Company believes that there are over 350 beneficial owners of
its common stock.
The Company has not paid any cash dividends on its common stock and
does not intend to pay any cash dividends in the foreseeable future.
The high and low closing prices of the Company's common stock for each
quarter of the two most recent fiscal years, 1996 and 1995, respectively, are as
follows:
FISCAL YEAR FIRST SECOND THIRD FOURTH
----------- ------- -------- ------- --------
1996
----
High 1 3/16 7/8 1 3/4
Low 1/2 1/2 1/2 5/16
FISCAL YEAR FIRST SECOND THIRD FOURTH
------------ ------- -------- -------- --------
1995
----
High 2 2 1/8 1 7/8 1 1/8
Low 1 1/2 3/4 3/4
Stock price data reflects inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions. The closing
price of the Company's common stock, as reported on the Nasdaq SmallCap System,
on November 19, 1996 was $7/16.
- 14 -
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FOR THE YEARS ENDED AUGUST 31,
INCOME STATEMENT DATA: 1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Gross revenues $ 19,187,118 $ 26,956,682 $ 26,272,211 $ 21,478,007 $ 13,986,538
Cost of gross revenues 11,499,529 18,118,165 17,090,139 15,927,619 9,420,106
------------ ------------ ------------ ------------ ------------
Gross profit 7,687,589 8,838,517 9,182,072 5,550,388 4,566,432
Operating expenses (1)(2) 5,797,526 22,013,274 8,732,094 8,287,922 5,764,563
------------ ------------ ------------ ------------ ------------
Income (loss) from operations before
income taxes and cumulative effect of a
change in accounting principle 1,890,063 (13,174,757) 449,978 (2,737,534) (1,198,131)
Other income (expense), net(5) 112,951 (94,281) (65,857) 6,888 (177,514)
------------ ------------ ------------ ------------ ------------
Income (loss) from operations before
income taxes and cumulative effect of a
change in accounting principle 2,003,014 (13,269,038) 384,121 (2,730,646) (1,375,645)
Income taxes (benefit) 799,000 (468,000) (176,259) (143,909) --
------------ ------------ ------------ ------------ ------------
Income (loss) before cumulative effect
of a change in accounting principle 1,204,014 (12,801,038) 560,380 (2,586,737) (1,375,645)
Cumulative effect on prior years of
changing the method of accounting for
income taxes (3) -- -- 52,546 -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 1,204,014 $(12,801,038) $ 612,926 $ (2,586,737) $ (1,375,645)
============ ============ ============ ============ ============
Net income (loss) per common share:
Operations $ .48 $ (4.11) $ -- $ (.41) $ (.22)
Effect of accounting change -- -- .02 -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) per share (4) $ .48 $ (4.11) $ .02 $ (.41) $ (.22)
============ ============ ============ ============ ============
Weighted average number of shares
outstanding 2,525,256 3,180,488 3,180,854 6,361,708 6,361,708
============ ============ ============ ============ ============
BALANCE SHEET DATA:
Current assets $ 7,417,647 $ 10,663,724 $ 10,518,359 $ 6,340,770 $ 4,524,526
Total assets 17,190,668 12,678,319 12,136,255 9,410,953 7,916,270
Short-term debt 1,671,833 140,869 79,325 37,125 9,447
Long-term debt 171,229 118,881 38,234 107,486 0
Shareholders' equity 12,344,383 7,276,966 7,329,892 4,433,659 3,058,014
<FN>
- -------------------------
(1) Includes amortization of goodwill of $72,883 for the year ended August 31,
1992, and $11,851,575 for the year ended August 31, 1993.
(2) Includes restructuring charges of $470,000 for the year ended August 31,
1993, $47,305 for the year ended August 31, 1994, and $326,190 for the year
ended August 31, 1995, and $326,428 for the year ended August 31, 1996.
(3) The effect of the adoption as of September 1, 1993 of SFAS 109, Accounting
for Income Taxes. (See Note 3 to Notes to the Consolidated Financial
Statements).
(4) Calculated after the deduction of preferred stock dividends of $272,329 for
the year ended August 31, 1993 and $560,000 for the year ended August 31,
1994. For all years presented primary earnings (loss) per share and fully
diluted earnings (loss) per share were the same except for fiscal year 1995.
(See Note 1 (h) to Notes to the Consolidated Statements).
(5) For the year ended August 31, 1995 includes a $150,168 gain on a favorable
contract settlement.
</FN>
</TABLE>
- 15 -
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents, as a percentage of gross revenues, certain
selected financial data for the Company for the periods indicated:
FOR THE YEARS ENDED AUGUST 31,
1994 1995 1996
----- ----- -----
Gross revenues 100.0% 100.0% 100.0%
Cost of gross revenues 65.0 74.2 67.3
----- ----- -----
Gross profit 35.0 25.8 32.7
Operating expenses 33.3 38.6 41.2
----- ----- -----
Income (loss) from operations 1.7 (12.8) (8.5)
Other income (expense), net (.3) .0 (1.3)
Income taxes (benefit) (.7) (.7) .0
----- ----- -----
Income (loss) before cumulative effect
of a change in accounting principle 2.1 (12.1) (9.8)
Cumulative effect on prior years of
changing the method of accounting .2 .0 .0
for income taxes ----- ----- -----
Net income (loss) 2.3 (12.1) (9.8)
====== ====== ======
FISCAL 1996 VS. FISCAL 1995
Gross revenues for fiscal 1996 decreased by $7,491,469 or 35% to
$13,986,538 when compared to fiscal 1995. The Environmental Consulting and
Engineering Services Division (Enviro) had a decrease of $8,197,688 or 41%,
while Hydrogeological and Water Resources Services Division (Hydro) increased by
$706,219 or 52%. The Enviro division has personnel located in each of the
Company's offices while Hydro division personnel are located in the Cape Coral,
Florida office.
DIVISION GROSS REVENUES
-------- ---------------------------------
% OF
INCREASE
1995 1996 (DECREASE)
---- ---- ----------
Enviro Florida $ 9,118,674 $ 4,175,484 (54)
Enviro South Carolina/California 6,142,300 4,566,138 (26)
Enviro Tennessee/New Orleans 4,863,967 3,185,631 (35)
------------ ------------
TOTAL ENVIRO DIVISION 20,124,941 11,927,253 (41)
Hydro Division 1,353,066 2,059,285 52
------------ ------------
TOTAL VIROGROUP, INC. $ 21,478,007 $ 13,986,538 (35)%
============ ============
- 16 -
<PAGE>
The Enviro division gross revenues generated from Florida operations, which
mainly provides underground petroleum storage tank (UST) site assessments and
remediation services, environmental audits and risk assessments had a decrease
in gross revenues of $4.9 million or 54%. A majority of this decrease is related
to the curtailment and other aspects of the Florida UST cost reimbursement
program which occurred in March, 1995 and was terminated in May, 1996. This
program accounted for approximately 12% of fiscal 1995 consolidated gross
revenues or $2.6 million and approximately $335,000 or 2% of fiscal 1996
consolidated gross revenues. Because of this gross revenue decrease and other
factors, the Company during the third quarter of fiscal 1996 closed the Miami
office and reduced personnel in other Florida offices. The Miami office
contributed about $349,000 and $1.9 million to fiscal 1996 and 1995 gross
revenues, respectively, while Florida offices closed in fiscal 1995 contributed
about $1.6 million to fiscal 1995 gross revenues.
To expand the Company's gross revenue potential, the Company during fiscal
1996 began offering two state-of-the-art services. One of these services is
bio-remediation which is headed by a recognized PhD operating out of the Tampa,
Florida office while the other is environmental data management (EMS) services
headed by well-experienced computer system design personnel operating out of the
Jacksonville, Florida office. The Company believes this new investment in highly
skilled personnel will give it a competitive advantage by offering cost
efficient, value-added, state-of-the-art services to remediate large petroleum
contaminated sites and to effectively manage environmental compliance.
The Enviro division gross revenues generated by the South
Carolina/California operations decreased by approximately $1.6 million or 26%.
This operation primarily provides waste management, engineering and remediation
services. The decrease in gross revenues is mainly due from a decrease in gross
revenues from Laidlaw facilities located in both California and South Carolina.
This decrease was mainly attributable to completion of landfill design and
construction projects for the California facilities and a continuing reduction
in projects associated with the South Carolina facility. In fiscal 1996, the
California office generated $363,000 in gross revenues while for fiscal 1995 it
generated $1.4 million. Due to this decrease, the California office was closed
at the beginning of the fourth quarter of fiscal 1996. A decrease in work at the
South Carolina landfill facility was mainly responsible for approximately
$600,000 of the decrease in gross revenue for fiscal 1996. The work at the South
Carolina facility accounted for approximately 50% of the South Carolina
operations gross revenues and 19% of consolidated gross revenues for fiscal
1996. Because of this decrease, staff of the South Carolina office was reduced
during the fourth quarter of fiscal 1996.
The Enviro division gross revenues generated by Tennessee operations
decreased by approximately $1.7 million or 35%. This operation primarily
provides remediation, engineering, risks assessments and environmental audits.
This decrease is partially comprised of a $600,000 decrease in New Orleans
office operations which contributed approximately $900,000 and $290,000 in gross
revenues for fiscal 1995 and 1996, respectively. Due to this decrease, the New
Orleans office was closed at the beginning of the fiscal 1996 fourth quarter.
The balance of the decrease of $700,000 is mainly due to a decrease in remedial
work as well as price
- 17 -
<PAGE>
completion and general economic conditions. Because of this decrease, the staff
of the Tennessee office was reduced during the fourth quarter. Laidlaw
affiliates comprised approximately 5% of the Tennessee operations 1996 gross
revenues compared to 10% for fiscal 1995.
Hydrogeological and Water Resources Services (Hydro) division gross
revenues increased by $706,219 or 52% when compared to fiscal 1995. This
increase is primarily due to a large injection well and well field assessment
projects in South Florida which are expected to continue through the second
quarter of fiscal year 1997. One customer accounted for 60% of Hydro division
fiscal 1996 gross revenues.
The gross profit as a percentage of gross revenues increased from 25.8% in
fiscal 1995 to 32.7% in fiscal 1996. This increase is a combination of improved
margins in fiscal 1996 due to increased utilization of Company personnel
resulting in professional fees comprising a larger component of gross revenues
compared to fiscal 1995 and the one-time charges to fiscal 1995 gross revenues
to record the discount on the receivables due from the State of Florida relating
to the curtailment of the UST program. The profit margin on the utilization of
Company personnel is higher than on the use of contractors to generate fees.
Operating expenses (selling, general and administrative expenses) decreased in
fiscal 1996 by approximately $2.5 million or 32% to $5,438,135 as compared to
$7,961,732 in fiscal 1995. This decrease is the result of the office closure and
personnel downsizing combined with increased staff utilization and improved cost
controls. In addition, primarily due to the cessation of the Florida UST
program, combined with a decline in landfill related projects and general
economic conditions, the Company charged to expense in fiscal 1996 approximately
$326,000 in restructuring expenses for employee severance pay, office closing
and rent expenses, as well as other related expenses. The Company embarked on a
cost control program which includes, among other things, a salary reduction
program for senior management, and a salary freeze for all personnel.
Interest expense increased by approximately $28,000 to $180,884 in fiscal
1996 from $152,588 in fiscal 1995 due to an increase in average amounts
borrowed. Other, net income decreased to $3,370 in fiscal 1996 from $150,168 in
fiscal 1995 primarily due to the inclusion in fiscal 1995 of a favorable
settlement of claim on a disputed contract.
The benefit for income taxes decreased to zero for fiscal 1996 because the
Company has used all of its tax loss carryback benefit. Although the Company has
substantial tax benefit to carry forward to future years, it cannot presently
recognize this benefit in the current year due to the uncertainty of future
taxable income.
The net loss for fiscal 1996 decreased by $1,211,092 to $1,375,645. The
fully diluted loss per common share is $.22 compared to a loss of $.41 per share
for fiscal 1995 for a 47% decrease in the net loss. These decreases in the net
loss and net loss per share are primarily attributable to improved gross margins
and reduced operating expenses offset by a decrease in gross revenues and the
benefit for income taxes combined with an increase in other expenses.
- 18 -
<PAGE>
ViroGroup's common shares are listed on the Nasdaq SmallCap Market. In
September, 1996 the Company was notified by Nasdaq to be eligible for continued
listing all securities must maintain a minimum bid price of $1.00 per share or
as an alternative, if the bid price is less than $1.00, maintain capital and
surplus of $2,000,000 and a market value of the public float of $1,000,000. The
Company does not meet this criteria. On November 18, the Company's Board of
Directors approved for submission to a vote of the common shareholders at its
1997 Annual Shareholders Meeting a proposal to effectuate a one-for-eight
reverse common stock split as a result of which shareholders of the Company will
receive one share of common stock for each eight shares of common stock owned on
the record date of November 29, 1996. The Company has no assurance that the
reverse split will result in the Company's compliance with Nasdaq's listing
requirements.
Nasdaq has recently proposed amendments to its listing criteria increasing
certain threshold listing requirements. The Company is unable to determine at
this time whether it will be able to satisfy these new criteria should they be
implemented.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used net cash of $1,188,220 during
fiscal 1996 mainly attributable to the net loss combined with a reduction in
accounts payable and accrued expenses. The reduction in accounts payable
primarily results from the reduction in gross revenues together with the payment
of amounts due to vendors and subcontractors on reimbursement claims filed with
the State of Florida. Vendor and subcontractor payments related to claims to be
filed during the first quarter of fiscal 1997 are estimated to be $150,000. The
accrued liabilities decrease is mainly due from the decrease in gross revenues,
the Company's downsizing and the payment of restructuring costs. This cash usage
was partially offset by partial liquidation of accounts and unbilled accounts
receivable which is attributable to the reduction in gross revenues as well as
the filing of reimbursement claims. Also, depreciation, the provision for bad
debts, and the amortization of prepaid expenses provided significant cash.
Financing activities provided net cash in excess of purchases of property
and equipment of $7,868 from the sale of property and equipment resulting from
the Company's downsizing. Cash requirements were primarily met by additional
borrowings of approximately $1.44 million under the Company's bank line of
credit, collections on accounts receivable and trade credit.
Working capital at August 31, 1996 decreased by approximately $1.80 millon
as compared to the same date of the prior year. This decrease is mainly due to
the reduction in accounts and unbilled receivables resulting from the reduction
in gross revenues combined with a transfer of approximately $763,000 in amounts
due from the State of Florida from current assets to non-current assets.
Amounts due from a state agency are amounts due from the Company's
participation in the State of Florida's UST reimbursement program. (Reference is
made to Note 9(e) in the Notes to the Consolidated Financial Statements)
Although these amounts are shown in the consolidated
- 19 -
<PAGE>
financial statements as a non-current asset due to uncertainty related to the
exact date of payment, the State of Florida has indicated they expect to pay
these amounts starting during the Company's fourth quarter of fiscal 1997 and
continuing through to the second quarter of fiscal 1998.
The collection period from invoice date to payment date of accounts
receivable at August 31, 1996 was 88 days compared to 71 days in fiscal 1995 and
104 days in 1994. This increase is primarily a function of gross revenues
declining at a rate greater than the collections of accounts receivable.
Total current liabilities balance at August 31, 1996 did not materially
change as compared to the same date of the prior year. Long-term debt decreased
by approximately $107,000 due to the payment of amounts borrowed under the
revolving reimbursement facility to finance State of Florida UST projects and on
capital leases.
The Company's $3.0 million bank line of credit matures on January 20, 1997.
This borrowing is secured by a $3.0 million letter of credit which was caused to
be issued by a Laidlaw affiliate and expires February 20, 1997. The interest
rate on the line of credit is prime 8.25% at August 31, 1997) less .25%.
Substantially all the Company's assets secure this obligation to Laidlaw in the
event of a draw upon the letter of credit. At the letter's expiration, Laidlaw
has stated it intends to comply with the terms of the preferred stock conversion
agreement of June 26, 1995 (Reference is made to Note 5 in the Notes to the
Consolidated Financial Statements) whereby an affiliate will make available to
the Company for a three-year period from June 26, 1995 up to $3.0 million in
financing with advances thereunder carrying an interest rate equal to that
available to the Company from alternative sources with the principal and
interest to be paid in equal quarterly installments over a three-year period
commencing with the line of credit expiration, or in lieu thereof, cause to be
issued under similar terms as the present letter, a new letter of credit of up
to $3.0 million to secure the Company's borrowings. (Reference is made to Note 4
in the Notes to the Consolidated Financial Statement)
The financing of the Company's eligible amounts due from the State of
Florida bear interest at 3 - 4% for the first nine months from the borrowing
date and .6875% per month thereafter. (Reference is made to Note 9(e) in the
Notes to the Consolidated Financial Statements) No assurance can be given that
inflation or the prime rate will not significantly fluctuate, either of which
could adversely affect the Company. Inflation has not significantly affected the
Company's financial position or operations. Management anticipates capital
expenditure requirements for fiscal 1997 will be approximately $50,000 for
equipment.
FISCAL 1995 VS. FISCAL 1994
Gross revenues for fiscal 1995 decreased by $4,794,204 or 18% to
$21,478,007 when compared to fiscal 1994. The Environmental Consulting and
Engineering Services Division (Enviro) had a decrease of $4,001,776 or 20% to
$20,124,941, while the Hydrogeological and Water Resources Services Division
(Hydro) had an increase of $207,572 or 18%. The Enviro
- 20 -
<PAGE>
<TABLE>
<CAPTION>
division has personnel assigned to each of the Company's offices while the Hydro
division personnel operate out of the Cape Coral, Florida location. Results by
operational area are:
DIVISION GROSS REVENUES
-------- --------------
% OF
INCREASE
1994 1995 (DECREASE)
---------- ----------- ----------
<S> <C> <C> <C>
Enviro Florida (formerly Florida $11,890,814 $ 9,118,674 (23)
Division)
Enviro South Carolina/California 7,684,117 6,142,300 (20)
(formerly ETE)
Enviro Tennessee/New Orleans (formerly 5,551,786 4,833,967 (13)
---------- ----------
Environics)
TOTAL ENVIRO DIVISION 25,126,717 20,124,941 (20)
----------- ---------
Hydro (formerly Florida Division) 1,145,494 1,353,066 18
----------- ---------
TOTAL VIROGROUP, INC. $ 26,272,211 $21,478,007 (18%)
============ ==========
</TABLE>
The Enviro division gross revenues generated from Florida operations
which mainly provides underground storage tank (UST) site assessments and
remediation services, environmental audits and risk assessments had a decrease
in gross revenues of $2.77 million or 23% from the prior year. This decrease is
almost exclusively related to the curtailment and other aspects of the Florida
UST cost reimbursement program which occurred in March 1995. This decrease in
gross revenues includes a reduction of $727,000 for a discount on now classified
receivables due from the State of Florida, even though about $500,000 of this
discount relates to gross revenues derived in prior years. (Reference is made to
Notes 1(g) and 9(e) in the Notes to the Consolidated Financial Statements). In
addition, due to the change in the expected payment period relative to the
recourse provision of the Company's credit line to finance program receivables
(Reference is made to Note 5 in the Notes to the Consolidated Financial
Statement) gross revenues were reduced by amounts financed of $99,437 which is
recorded as a note payable in the accompanying Consolidated Balance Sheet at
August 31, 1995. Also, gross revenues were reduced by $115,000 to provide for
potential cost denials under the Florida UST program. The Florida UST program
contributed approximately 21% of Florida operations gross revenues, and
approximately 12% to Company consolidated gross revenues in fiscal 1995.
Because of this gross revenue decrease, and other factors, the Company,
during the third and fourth quarters of fiscal year 1995, consolidated its Palm
Beach Gardens office with the Miami office and its Orlando office with the Tampa
office and has reduced personnel in other Florida located offices. However, to
broaden client services and Company skills, new
- 21 -
<PAGE>
management was hired during the fourth quarter to lead the Tampa and Miami
offices. (Reference is made to Note 1(g) in the Notes to the Consolidated
Financial Statements.)
The Enviro division gross revenues generated by the South
Carolina/California operations decreased by $1.54 million or 20% from the prior
year. These operations primarily provide waste management, engineering and
remediation services. About $1.17 million of the decrease was due to a decline
in gross revenues from the Company's and waste management services largest
client, Laidlaw Environmental Services, Inc. (Laidlaw). This decrease in Laidlaw
related gross revenue, consists of a decrease of $1.64 million in services
primarily performed at the Pinewood, South Carolina facility combined with an
increase of $.47 million in services performed at a California facility.
It is the Company's understanding the decrease in work at the Pinewood
facility primarily relates to a reduction in capital expenditures by Laidlaw, as
well as issues with the State of South Carolina which the Company understands
have been satisfactorily resolved. However, the Company cannot predict if or
when gross revenues from this operation will return to prior year levels. The
increase in gross revenues generated from the California facility related to
landfill design and construction projects which were substantially completed by
the second quarter of 1995. The balance of the decrease is mainly attributable
to price competition, as well as general economic conditions.
Laidlaw's Pinewood facility accounts for 54% of the Company's gross
revenues from operations in South Carolina while Laidlaw business represented
86% of the gross revenues from the Company's California operations. Laidlaw
comprised 59% of the Company's waste management services gross revenues and 21%
of consolidated gross revenues for fiscal 1995.
The Company's Environmental services division gross revenues generated
by operations located in Tennessee which primarily provides remediation,
environmental engineering, environmental risk assessments and environmental
audit services had a $.72 million or 13% decrease in gross revenues when
compared to fiscal 1994. This decrease is mainly due to price competition and
general economic conditions. Laidlaw affiliates accounted for approximately 10%
of the Tennessee operations' gross revenues.
Hydrogeological and Water Resources Services division gross revenues
increased by $207,572 or 18% when compared to fiscal 1994. This increase is
primarily due to a large injection well project which commenced during the
fourth quarter and is expected to continue through the second quarter of FY
1996. One customer accounted for 38% of Hydro 1995 gross revenues.
Gross profit as a percentage of gross revenues declined from 34.9% in
fiscal 1994 to 25.8% in fiscal 1995. Approximately 56% of this decrease in gross
profit percentage is caused by the reduction in gross revenues resulting from
the curtailment of the Florida UST program, combined with one-time charges to
costs of gross revenues to write-down assets connected with this curtailment.
Approximately 30% of the change was primarily caused by the increase in
- 22 -
<PAGE>
subcontracted work as a percentage of gross revenue due to an increase in
remediation work at virtually all operations. Subcontracted work carries gross
profit margins substantially less than professional services gross revenue
generated by Company professionals. The balance of the change of 14% is mainly
attributable to price competition on waste management and hydrogeological
services, as well as a decrease in professional staff utilization. Staff
utilization has been addressed through the restructuring program discussed in
Note 1(g) in the Notes to the Consolidated Financial Statements, a new marketing
program and a new organizational structure.
Operating expenses (selling, general and administrative expenses)
decreased in fiscal 1995 by over $723,000 or 8.3% to $7.96 million compared to
$8.68 million in 1994. This decrease was achieved despite a charge to expense in
fiscal 1995 of approximately $265,000 for prior year's gross revenues which
reflected the partial disallowance of a Company claim in a client's bankruptcy
proceedings. (Reference is made to Note 9(f) in the Notes to the Consolidated
Financial Statements). In addition, primarily due to the curtailment of the
Florida UST program, the Company charged to expense in fiscal 1995 approximately
$326,000 in restructuring expenses to provide for severance pay, office closing
and rent expenses, and other related expenses. The Company has embarked on a
cost control program which includes, among other things, a salary reduction
program for senior management, and a salary freeze for all employees.
Interest expense for fiscal 1995 was comparable to fiscal 1994
reflecting lower average amounts borrowed with a higher average interest rate.
Other income, net, increased by $91,296 in fiscal 1995 when compared to fiscal
1994. This increase is mainly due to a favorable settlement of a claim related
to collection on a disputed contract.
The income tax benefit of $143,909 and $176,259 for fiscal 1995 and
1994, respectively, represents the net effect of tax losses generated or
recognized in those respective fiscal years.
Net loss for fiscal 1995 was $2,586,737 compared to net income for
fiscal 1994 of $612,926 for a decrease of $3,199,663. This decrease includes a
one-time credit to earnings in fiscal 1994 of $52,546 to reflect the impact of
the change in accounting method for income taxes caused by the adoption at the
beginning of fiscal 1994 of FASB 109, Accounting for Income Taxes. The balance
of the decrease is due to the reduction in gross revenues and the one time
charges to cost of revenues and operating expenses, as well as the economic
conditions previously discussed.
Fully diluted loss per share for fiscal 1995 was $.41 while for fiscal
1994 fully diluted earnings per share was $.02. For fiscal 1995 the per share
amounts were based on weighted average shares outstanding of 6,361,708 while for
fiscal 1994 it is based on 3,180,854 shares and the deduction from net income of
$560,000 for preferred stock dividends. (Reference is made to Note 1(h) in the
Notes to the Consolidated Financial Statements).
- 23 -
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this Item is listed on page F-1 and is
incorporated herein by reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
- 24 -
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants................. F-2
Consolidated Balance Sheets........................................ F-3
Consolidated Statements of Income (Loss)........................... F-4
Consolidated Statements of Shareholders' Equity.................... F-5
Consolidated Statements of Cash Flows.............................. F-6
Notes to Consolidated Financial Statements......................... F-8
Schedule:
Report of Independent Certified Public Accountants................. F-22
Schedule II - Valuation and Qualifying Accounts.................... F-23
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of ViroGroup, Inc.:
We have audited the accompanying consolidated balance sheets of ViroGroup,
Inc. (a Florida corporation) and subsidiaries as of August 31, 1995 and 1996,
and the related consolidated statements of income (loss), shareholders' equity
and cash flows for each of the three years in the period ended August 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ViroGroup, Inc. and
subsidiaries as of August 31, 1995 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
October 17, 1996
(except with respect to the matter
discussed in Note 6(a), as to which
the date is November 18, 1996).
F-2
<PAGE>
<TABLE>
<CAPTION>
VIROGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1995 AND 1996
ASSETS 1995 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................... $ 104,793 $ 191,001
Accounts receivable, net of allowance for doubtful
accounts of $635,561 in 1995 and $502,551 in 1996...... 4,165,103 3,384,426
Unbilled accounts receivable............................ 1,683,764 717,946
Prepaid income taxes.................................... 155,800 26,840
Prepaid expenses and other.............................. 231,310 204,313
----------- -----------
Total current assets................................ 6,340,770 4,524,526
AMOUNTS DUE FROM STATE AGENCY, net.......................... 2,050,074 2,812,737
PROPERTY AND EQUIPMENT, net................................. 948,679 543,746
OTHER ASSETS................................................ 71,430 35,261
----------- -----------
$ 9,410,953 $ 7,916,270
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................ $ 1,450,985 $ 1,160,354
Accrued liabilities..................................... 2,291,993 1,197,026
Current maturities of long-term debt.................... 9,791 --
Current maturities of capitalized lease obligations..... 27,334 9,447
Notes payable........................................... 1,089,705 2,491,429
----------- -----------
Total current liabilities........................... 4,869,808 4,858,256
----------- -----------
LONG-TERM DEBT, net of current maturities................... 99,437 --
CAPITALIZED LEASE OBLIGATIONS, net of current maturities.... 8,049 --
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 50,000,000 shares
authorized, 0 shares of
Series A Preferred Stock issued and outstanding,
at August 31, 1995 and
1996, respectively..................................... -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 6,361,708 issued and
outstanding at August 31, 1995 and 1996, respectively.. 63,618 63,618
Additional paid-in capital.............................. 18,277,867 18,277,867
Accumulated deficit..................................... (13,907,826) (15,283,471)
----------- -----------
Total shareholders' equity.......................... 4,433,659 3,058,014
----------- -----------
$ 9,410,953 $ 7,916,270
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE>
<TABLE>
<CAPTION>
VIROGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED AUGUST 31, 1994, 1995 AND 1996
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
GROSS REVENUES.................................. $26,272,211 $21,478,007 $13,986,538
COST OF GROSS REVENUES.......................... 17,090,139 15,927,619 9,420,106
----------- ----------- -----------
Gross Profit................................ 9,182,072 5,550,388 4,566,432
OPERATING EXPENSES
Selling, general and administrative
expenses, including rentals to related
party of $186,000 in 1994, 1995
and 1996, respectively................... 8,684,789 7,961,732 5,438,135
Restructuring charge........................ 47,305 326,190 326,428
----------- ----------- -----------
Income (loss) from operations............... 449,978 (2,737,534) (1,198,131)
OTHER INCOME (EXPENSE):
Interest expense............................ (150,036) (152,588) (180,884)
Interest income............................. 25,307 9,308 --
Other, net.................................. 58,872 150,168 3,370
----------- ----------- -----------
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle..................... 384,121 (2,730,646) (1,375,645)
BENEFIT FOR INCOME TAXES........................ 176,259 143,909 --
----------- ----------- -----------
Income (loss) before cumulative effect of
a change in accounting principle......... 560,380 (2,586,737) (1,375,645)
CUMULATIVE EFFECT ON PRIOR YEARS OF CHANGING
THE METHOD OF ACCOUNTING FOR INCOME TAXES 52,546 -- --
----------- ----------- -----------
Net income (loss)........................... $ 612,926 $(2,586,737) $(1,375,645)
=========== =========== ===========
NET EARNINGS (LOSS) PER COMMON SHARE: (Note 1(h))
Income (loss) before cumulative effect of
accounting change........................ $ -- $ .51 $ (.22)
Effect of accounting change................. .02 -- --
----------- ----------- -----------
Net earnings (loss) per common share -
Primary.................................. $ .02 $ .51 $ (.22)
=========== =========== ===========
Net earnings (loss) per common share -
Fully diluted............................ $ .02 $ (.41) $ (.22)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - Primary....................... 3,180,854 3,764,737 6,361,708
=========== =========== ===========
Fully diluted ................ 3,180,854 6,361,708 6,361,708
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
VIROGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31, 1994, 1995 AND 1996
PREFERRED STOCK COMMON STOCK
------------------- ------------------- ADDITIONAL
NUMBER OF NUMBER OF PAID-IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT)
--------- ------- --------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31, 1993....................... 800,000 $ 8,000 3,180,854 $31,809 $18,150,727 $(10,913,570)
Net income for the year........................ -- -- -- -- -- 612,926
Dividends on preferred stock................... -- -- -- -- -- (560,000)
--------- ------- --------- ------- ----------- ------------
BALANCE, August 31, 1994....................... 800,000 8,000 3,180,854 31,809 18,150,727 (10,860,644)
Conversion of preferred stock into common
stock (Note 6)............................. (800,000) (8,000) 3,180,854 31,809 127,140 --
Net loss for the year.......................... -- -- -- -- -- (2,586,737)
Dividends on preferred stock................... -- -- -- -- -- (460,445)
--------- ------- --------- ------- ----------- ------------
BALANCE, August 31, 1995....................... -- -- 6,361,708 63,618 18,277,867 (13,907,826)
Net loss for the year.......................... -- -- -- -- -- (1,375,645)
--------- ------- --------- ------- ----------- ------------
BALANCE, August 31, 1996....................... -- $ -- 6,361,708 $63,618 $18,277,867 $(15,283,471)
========= ======= ========= ======= =========== ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
VIROGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 1994, 1995 AND 1996
1994 1995 1996
------------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................... $ 612,926 $(2,586,737) $(1,375,645)
------------- ----------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities-
Depreciation and amortization.......... 552,423 617,822 387,687
Provision for bad debts................ 92,407 539,746 48,008
Restructuring charge................... 47,305 326,190 326,428
Loss on disposition of property and
equipment............................. 4,263 34,950 9,378
Cumulative effect of change in accounting
principle............................. (52,546) -- --
Discount on long-term receivables...... -- 726,308 16,745
Changes in assets and liabilities
Decrease (increase) in-
Accounts receivable and AMOUNTS due from
state agency.......................... (36,446) 793,304 187,561
Unbilled accounts receivable........... (544,423) (228,225) 731,518
Prepaid expenses and other assets...... 823,536 318,107 192,126
Increase (decrease) in-
Accounts payable....................... (446,151) (273,024) (290,631)
Accrued liabilities.................... (805,831) 82,568 (1,421,395)
Deferred income taxes.................. 17,856 (17,856) --
------------- ----------- -----------
Total adjustments...................... (347,607) 2,919,890 187,425
------------- ----------- -----------
Net cash provided by (used in)
operating activities.................. 265,319 333,153 (1,188,220)
------------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........ (270,831) (121,433) (41,415)
Proceeds from sale of property and equipment 16,466 22,850 49,283
------------- ----------- -----------
Net cash provided by (used in)
investing activities.................. (254,365) (98,583) 7,868
------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from current notes payable........ $16,426,775 $14,847,778 $ 9,448,098
Repayment of notes payable................. (15,640,207) (14,821,775) (8,046,374)
Repayment of long-term debt................ (67,111) (15,243) (109,228)
Repayment of capitalized lease obligations (75,080) (57,142) (25,936)
Cash paid to issue common stock............ -- (29,497) --
Proceeds from long-term notes payable...... -- 99,437 --
Payment of preferred stock dividends....... (560,000) (280,000) --
------------- ----------- -----------
Net cash provided by (used in)
financing activities................. 84,377 (256,442) 1,266,560
------------- ----------- -----------
</TABLE>
(Continued)
F-6
<PAGE>
<TABLE>
<CAPTION>
VIROGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 1994, 1995 AND 1996
(Continued)
1994 1995 1996
--------- ---------- ----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 95,331 (21,872) 86,208
CASH AND CASH EQUIVALENTS,
Beginning of year.......................... 31,334 126,665 104,793
--------- ---------- ----------
CASH AND CASH EQUIVALENTS,
End of year ............................... $ 126,665 $ 104,793 $ 191,001
========= ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for-
Income taxes............................. $ 122,900 $ 12,586 $ 15,840
========= ========== ==========
Interest ................................ $ 138,209 $ 88,667 $ 164,345
========= ========== ==========
</TABLE>
As described in Note 6(a), in 1995 all the outstanding shares of Series A
Preferred Stock were converted into common stock, resulting in the issuance of
an additional 3,180,854 common shares.
The accompanying notes to consolidated financial statements are
an integral part of these statements.
F-7
<PAGE>
VIROGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1994, 1995 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Principles of Consolidation-
The accompanying consolidated financial statements include the accounts
of ViroGroup, Inc. (the Company) and its wholly owned subsidiaries. All
intercompany balances and transactions are eliminated in consolidation.
(b) Business-
Primarily within the southeastern region of the United States, the
Company provides a wide range of environmental services to assess and remediate
groundwater and soil contamination, to design and monitor solid waste landfills,
to protect air quality, to assure regulatory compliance and to develop
groundwater resources.
(c) Property and Equipment-
Property and equipment is stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are provided on a
straight-line basis over the following estimated useful lives:
Office furniture and equipment 5 to 7 years
Technical equipment 5 years
Vehicles 3 to 5 years
Leasehold improvements 5 years
(d) Income Taxes-
The Company and its wholly owned subsidiaries file consolidated federal
and state income tax returns. With the beginning of fiscal year 1994, September
1, 1993, the Company adopted the new standard for accounting for income taxes,
Statement of Financial Accounting Standards No. 109 (SFAS No. 109). Prior to
this date, deferred taxes were computed in accordance with APB Opinion No. 11,
"Accounting for Income Taxes," which computed deferred amounts based upon timing
differences in recognition of income and expense for financial reporting and for
income tax purposes. Effective with the adoption of SFAS No. 109, the Company
applies an asset and liability approach to compute deferred tax assets and
liabilities with respect to the expected future tax consequence of events
recognized in the consolidated financial statements and tax returns. As
permitted under SFAS No. 109, the Company has elected not to restate prior
periods' consolidated financial statements, and therefore, has recorded the
cumulative effect on prior years of changing the method of accounting for income
taxes in the accompanying statement of income for the year ended August 31,
1994.
Deferred income taxes, net of valuation allowances, are recorded due to
temporary differences between financial statement and income tax reporting,
principally related to accelerated depreciation methods used for income tax
reporting purposes and expenses which will be deductible in future periods when
paid or realized.
F-8
<PAGE>
VIROGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AUGUST 31, 1994, 1995 AND 1996
(e) Cash Equivalents-
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
(f) Revenues and Expenses-
Revenues and expenses are recognized as services are provided and the
related costs are incurred. Unbilled revenues are recognized as earned on the
percentage of completion method. Extent of progress toward completion is
measured based on actual labor and other costs incurred. Billings are made on a
periodic basis as arranged. Customers generally arrange with the Company to
provide professional services under either fixed fee or "time and materials"
contracts. Occasionally, the amount of unbilled revenues, when combined with
previously billed revenues, may exceed the original fixed fee or "not to exceed"
limit specified in the contract. The Company evaluates such contracts on a
case-by-case basis and estimates unbilled revenues to the extent that the
Company deems ultimate billing and collection probable. Any differences between
these estimates and the amounts ultimately billed and collected are recognized
as an adjustment to revenues in the period in which these differences become
known.
(g) Restructuring Charge-
Primarily due to the May, 1996 law enacted relating to Florida UST
Program (Reference is made to Note 9(e)) and a continued decline in forecasted
landfill design work, as well as general market conditions, the Company in May,
1996 implemented the third phase of its restructuring program.
In May, 1996 the Company closed under-performing offices in Bakersfield,
California, New Orleans, Louisiana and Miami, Florida, and downsized the staff
by 38. These actions resulted in a one-time restructuring charge to Operating
Expenses totaling $326,428. Of this amount, approximately $234,000 is for
employee severance pay while approximately $92,000 is primarily for lease
expenses as well as other associated expenses of the closed offices. The
restructuring charges remaining to be paid and included in accrued liabilities
in the accompanying consolidated balance sheet at August 31, 1996 is $174,072.
This balance is estimated to be paid as follows: $144,072 in fiscal 1997 and
$30,000 in fiscal 1998.
The Company believes the balance of the accrued restructuring charges at
August 31, 1996 of $174,072 is adequate to absorb the remaining estimated
charges.
Primarily due to the curtailment of the Florida UST program (Reference
is made to Note 9(e)) in March, 1995, the Company in April 1995, embarked on a
restructuring plan which was charged to Operating Expenses. Among other things,
this restructuring plan encompassed consolidating the Palm Beach Gardens,
Florida office into the Miami,Florida operations and the Orlando, Florida office
into the Tampa, Florida operations, as well as closing the Houston, Texas
office. These offices were closed during the third and fourth quarters of fiscal
year 1995. The plan comprised a staffing reduction of 41 people. During fiscal
year 1995, the Company accrued a provision of $326,190 for the estimated cost of
this reorganization plan which was charged to Operating expenses. Of this
amount, $183,190 was to provide for employee severance pay, $133,000 was to
provide for rent on closed offices and $10,000 was to provide for other related
expenses.
F-9
<PAGE>
VIROGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AUGUST 31, 1994, 1995 AND 1996
The balance of the accrued restructuring charge included in accrued liabilities
listed in the accompanying consolidated balance sheet at August 31, 1995 is
$257,146.
(h) Earnings (loss) Per Share-
Earnings (loss) per share is calculated by dividing net income (loss)
attributed to common shareholders (net income less applicable preferred stock
dividends) by the weighted average number of common shares and common share
equivalents outstanding during the period. Preferred stock dividend requirements
were $560,000, $460,445 and $0 for fiscal years 1994, 1995 and 1996,
respectively. Common share equivalents are calculated using the "treasury stock
method" and include the number of shares issuable on exercise of outstanding
options and warrants (only if the exercise prices are below the average quoted
market prices of the Company's common stock) less the number of shares that
could have been purchased with the proceeds from the exercise of the options and
warrants, based on the average quoted market price of the Company's common stock
during the periods. Common stock equivalents are not considered for periods in
which there is a loss, as their impact would be anti-dilutive. Primary and fully
diluted earnings (loss) per share are the same for fiscal years 1994 and 1996,
while due to the preferred stock conversion and the resulting issuance of
additional shares of common stock (Reference is made to Note 6 (a)), primary
earnings and fully diluted loss per share (using the "if converted method") are
different in fiscal year 1995 and were calculated as follows:
PRIMARY EARNINGS PER SHARE:
Net loss for the year ended
August 31, 1995 $(2,586,737)
Preferred stock dividend
requirements to June 26, 1995 (460,445)
Add gain on conversion of
preferred stock (Note 6(a)) 4,970,096
-----------
Net income attributable to
common shareholders $ 1,992,914
===========
Divided by weighted average
shares outstanding 3,764,737
===========
Primary Earnings Per Share $ .51
===========
FULLY DILUTED LOSS PER SHARE:
Net loss for the year ended
August 31, 1995 $(2,586,737)
===========
Divided by weighted average
shares outstanding 6,361,708
===========
Fully Diluted Loss Per Share $ (.41)
==========
(i) Fair Value of Financial Instruments-
The carrying amount of accounts receivable, unbilled accounts
receivable, amounts due from state agency, long-term debt and notes payable are
recorded at cost or adjusted cost which approximates fair value as of August 31,
1996.
F-10
<PAGE>
VIROGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AUGUST 31, 1994, 1995 AND 1996
(j) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at August 31, 1995 and
1996:
1995 1996
----------- -----------
Office furniture and equipment $ 1,373,308 $ 1,246,158
Technical equipment 729,176 722,452
Vehicles 551,310 395,946
Leasehold improvements 196,311 184,701
----------- -----------
2,850,105 2,549,257
Less Accumulated depreciation and
amortization (1,901,426) (2,005,511)
----------- -----------
$ 948,679 $ 543,746
=========== ===========
Property and equipment under capitalized lease obligations (Reference is
made to Note 5) included in property and equipment consisted of the following at
August 31, 1995 and 1996:
1995 1996
---------- ----------
Capitalized cost $ 192,556 $ 51,784
Less Accumulated depreciation and
amortization (123,665) (39,718)
---------- ----------
$ 68,891 $ 12,066
========== ==========
(3) INCOME TAXES:
With the beginning of fiscal year 1994, September 1, 1993, the Company
adopted the new standard for accounting for income taxes, SFAS No. 109.
(Reference is made to Note 1(d)).
The components of the net deferred tax asset (liability) as of August
31, 1995 and 1996 are as follows:
DEFERRED TAX ASSET (LIABILITY)
------------------------------
CURRENT: 1995 1996
---------- ------------
Allowance for bad debts $ 256,083 $ 181,252
LONG-TERM:
Excess of tax over book depreciation (166,173) (121,283)
Accrued restructuring charge 57,317 63,271
Discount on accounts receivable 246,945 246,945
State net operating loss carryforwards 246,270 268,524
Federal net operating loss carryforwards 314,275 746,374
Less valuation allowance (954,717) (1,385,083)
----------- ------------
$ -- $ --
=========== ============
F-11
<PAGE>
VIROGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AUGUST 31, 1994, 1995 AND 1996
The Company has provided a valuation allowance against 100% of the
deferred tax asset that results from federal and state net operating loss
carryforwards due to the lack of availability of federal and state taxable
income within the carryback period, if any, available under the federal and
state tax laws and the inability to determine the likelihood that future federal
and state taxable income will be sufficient to utilize the deferred tax asset.
State net operating loss carryforwards of approximately $4,751,000 expire
between 1998 and 2009. Federal net operating loss carryforwards of approximately
$2,195,000 expire in 2001.
As of September 1, 1993 (the date of adoption of SFAS No. 109), the
Company recorded a deferred tax asset and corresponding valuation allowance due
to uncertainties surrounding the availability of taxable income within the
carryback period under the tax laws and the likelihood that future taxable
income would be sufficient to utilize the deferred tax asset. Subsequent to the
filing of its federal and state income tax returns for the year ended August 31,
1993, including the carryback of losses to prior years, and determination of the
results of operations for the year ended August 31, 1994, a substantial portion
of the deferred tax assets for which the valuation allowance was provided were
realized. As indicated below, the deferred provision for income taxes for the
year ended August 31, 1994, includes a reversal of a portion of the valuation
allowance established as of September 1, 1993.
A reconciliation of the statutory federal income tax rate and the
effective tax rates as a percentage of pre-tax income (loss) are as follows for
the years ended August 31, 1994, 1995, and 1996:
1994 1995 1996
------ ------ -----
Statutory rate 34.0% (34.0)% (34.0)%
Establishment (reversal) of valuation
allowance (83.1) 14.3 30.7
Limitation on realization of loss
carryforwards -- 13.5 --
Nondeductible expenses 3.2 .9 3.3
----- ----- -----
Effective rate (45.9)% (5.3)% 0.0%
===== ===== =====
The components of the benefit for income taxes consisted of the
following for the years ended August 31, 1994, 1995, and 1996:
1994 1995 1996
--------- -------- ------
Current:
Federal $(194,115) $(126,053) $ --
State -- -- --
--------- --------- ------
(194,115) (126,053) --
Deferred 17,856 (17,856) --
--------- --------- ------
$(176,259) $(143,909) $ --
========= ========= ======
(4) NOTES PAYABLE:
Notes payable at August 31, 1996, consisted of advances against a $3.0
million line of credit. Under this line of credit, the Company may borrow up to
$3.0 million at an interest rate of prime (8.25% at August 31, 1996) less .25%.
F-12
<PAGE>
VIROGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AUGUST 31, 1994, 1995 AND 1996
Laidlaw, Inc., in lieu of its commitment to provide up to $3.0 million in debt
financing to the Company pursuant to the terms of the preferred stock conversion
agreement of June 26, 1995 (Reference is made to Note 6(a)), caused a letter of
credit to be issued to collateralize the $3.0 million note. Substantially all of
the Company's assets secure this obligation to Laidlaw in the event of a draw
upon the letter of credit. The line of credit expires January 20, 1997 and the
letter of credit expires February 20, 1997. At the letter's expiration, Laidlaw
has stated it will comply with the terms of the preferred stock conversion
agreement whereby an affiliate will make available to the Company for a
three-year period from June 26, 1995 up to $3.0 million in financing with
advances thereunder carrying an interest rate equal to that available to the
Company from alternative sources with the principal and interest to be paid in
equal quarterly installments over a three-year period commencing with the line
of credit expiration, or in lieu thereof, cause to be issued under similar terms
as the present letter, a new letter of credit of up to $3.0 million to secure
the Company's borrowings.
Notes payable at August 31, 1995, consisted of advances against a $4.0
million line of credit. Advances under this line of credit were collateralized
by substantially all of the Company's assets and bore an interest rate of prime
(8.75% at August 31, 1995) plus 1.5%. The line of credit expired February 20,
1996.
(5) LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS:
Long-term debt (net of current portion) at August 31, 1995 consisted of
amounts financed under the Company's revolving credit facility to finance the
amounts due from the State of Florida UST Program. This $2.0 million facility
expired January 31, 1996 and was not renewed due to availability of lower cost
alternative financing (Reference is made to Note 9(e)). As of August 31, 1996
the Company has no liabilities, contingent or otherwise, relative to amounts
financed through this facility.
Capitalized lease obligations at August 31, 1995 and 1996, consisted of
various lease agreements maturing in fiscal 1997, repayable in aggregate monthly
lease payments of $1,158, discounted at interest rates ranging between 6% and
11% per annum.
These capitalized lease obligations will be repaid as follows:
FISCAL YEAR ENDING MINIMUM ANNUAL
AUGUST 31 LEASE PAYMENTS
------------------ --------------
1997 $ 9,842
Less amount representing interest (395)
-------
Total $ 9,447
=======
(6) SHAREHOLDERS' EQUITY:
(a) Common and Preferred Stock-
In March 1993, the Company amended its Articles of Incorporation to
create a Series A Preferred Stock. The Series A Preferred Stock had a stated
liquidation value of $10 per share and required redemption on March 5, 2003, in
F-13
<PAGE>
VIROGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AUGUST 31, 1994, 1995 AND 1996
either cash or common stock, at the Company's option. The shares bore cumulative
per share dividends of $.70 per year, payable quarterly. The Preferred
Stockholders had the right to elect two directors to the Company's Board of
Directors, and the right to elect a majority of the directors in the event that
payment of the Preferred Stock dividends was in default for two quarters. In
addition, the prior consent of the Preferred Stockholders was required, among
other things, in order for the Company to repurchase any shares of common stock
or to pay any dividends on its common stock in excess of 20% of the Company's
net income for the preceding four fiscal year quarters.
On March 5, 1993, the Company sold 200,000 shares of Series A Preferred
Stock to Bryson Industrial Services, Inc., a wholly owned subsidiary of Laidlaw
Environmental Services, Inc., a wholly owned subsidiary of Laidlaw, Inc. for
$2,000,000. The Company agreed with Bryson to use the cash proceeds for future
acquisitions.
On March 5, 1993, the Company acquired Environics, a Tennessee
corporation, by merger of Environics into a wholly owned subsidiary of the
Company. Upon effectiveness of the merger, OSCO, the sole shareholder of
Environics, received 600,000 shares of the Company's Series A Preferred Stock,
which were valued by the Company and OSCO at $10.00 per share. OSCO is also a
wholly owned subsidiary of Laidlaw Environmental Services, Inc., a wholly owned
subsidiary of Laidlaw, Inc.
On June 26, 1995, all holders of the 800,000 shares of Series A
Preferred Stock agreed to amend the conversion rate and surrender their holdings
for conversion into 50% of the Company's common equity which would be held for
at least two years. This resulted in the issuance to a Laidlaw affiliate of
3,180,854 shares of the Company's $.01 par value common stock. Also, the
agreement, among other things, canceled the previous preferred shareholder
rights provisions and provides should Laidlaw sell or transfer the common stock
received under the agreement at any time between two and six years after
issuance, shareholders of other outstanding common shares will be granted the
right to participate in any such transaction on the same basis, terms and
conditions. Further, Laidlaw waived accrued but unpaid dividends at June 26,
1995, of $180,445.
Due to the amended conversion rate, for earnings per share calculation
purposes, the Company realized in fiscal 1995 an equity gain on the conversion
totaling $4,970,096. This gain was calculated as the difference between the
carrying value of the preferred stock ($8,000,000) plus accrued dividends and
the quoted market value of the common stock issued upon conversion, less
issuance cost.
On November 18, 1996 the Company's Board of Directors approved for
submission to the vote of the common shareholders at the Company's 1997 Annual
Shareholders' Meeting the proposal to effectuate a one-for-eight reverse common
stock split.
(b) Options and Warrants-
In May 1991, the Company's Board of Directors adopted the 1991 Long-Term
Incentive Plan (the "Incentive Plan") which permits the granting of stock
options, stock appreciation rights and other awards. The Board has reserved
300,000 shares of unissued common stock under the Incentive Plan. The Incentive
F-14
<PAGE>
VIROGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AUGUST 31, 1994, 1995 AND 1996
Plan is administered by the Compensation Committee of the Board of Directors
which is authorized to determine, from time to time, the term, exercise price,
settlement terms, forfeiture provisions and other terms and conditions of each
of the types of awards. The following table sets forth the status of the
Incentive Plan at August 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF NUMBER
NUMBER OF SHARES OF OF SHARES
EXERCISE SHARES OF COMMON OF COMMON SHARES
PRICE COMMON STOCK STOCK STOCK OUT-
DATE OF GRANT PER SHARE GRANTED EXERCISED FORFEITED STANDING
- ------------- --------- ------------ --------- ---------- --------
<S> <C> <C> <C> <C> <C>
December 1991 $7.00 154,250 (850) (143,050) 10,350
June 1992 9.00 49,000 (42,000) 7,000
March 1993 8.75 80,500 (48,000) 32,500
August 1993 4.00 2,000 2,000
December 1993 2.50 48,000 (48,000) 0
October 1994 1.75 10,000 10,000
November 1994 1.50 35,000 35,000
July 1995 1.00 2,500 (2,500) 0
July 1995 .94 2,500 (2,500) 0
January 1996 .56 54,000 54,000
------- ------- -------- -------
Balance
August 31, 437,750 (850) (286,050) 150,850
1996 ======= ==== ======== =======
</TABLE>
Except for the options granted in January, 1996 and November, 1994 the
options are exercisable at the rate of 20% per annum, beginning on the first
anniversary of the date of grant and expire on the earlier of the employee's
termination date or ten years from grant date. Forfeited shares are available
for regranting.
In January 1996, the Company's Chief Executive Officer and Chief
Operating Officer were granted options to purchase 30,000 and 24,000 shares of
common stock, respectively, at $.56 per share, the fair market value on the date
of grant. These options are exercisable immediately and remain exercisable until
the termination date of 5 years from the date of grant.
On November 1, 1994, the Company's Chief Executive Officer was granted
an option to purchase 35,000 shares of common stock at $1.50 per share, the fair
market value on the date of grant. These options become exercisable at the rate
of 12 2/3% per annum beginning on the first anniversary of the date of grant.
The options expire 10 years from the date of grant.
In February, 1995 the Company adopted the Non-Employee Director Stock
Option Plan providing for the purchase of up to 60,000 shares of the Company's
common stock by non-employee members of the Board of Directors. The plan
provides for the grant of an option to purchase of up to 1,500 common shares
annually per director at the fair market price per share on the grant date, and
is exercisable six months following the grant date. To the extent not earlier
exercised, the option terminates the earlier of three months after the date the
optionee ceases to serve as a director, one year after the date the optionee
ceases to be a director by reason of death, optionee ceases to be a director by
F-15
<PAGE>
VIROGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AUGUST 31, 1994, 1995 AND 1996
reason of removal for cause or five years from the date of grant. As of August
31, 1996 there are options to purchase 9,000 common shares outstanding and no
options had been exercised. The exercise prices for these shares are $.56 and
$1.48 per share for 4,500 shares each. The three directors nominated by Laidlaw
have waived their participation in this program.
In December, 1994, the Company granted to a former Chairman of the
Board, an option to purchase 5,000 common shares at a purchase price per share
of $1.48, the fair market value on the grant date. The option was fully
exercisable as of the grant date. To the extent not earlier exercised, the
option terminates ten years from the grant date.
In February 1994, the Company entered into a Revolving Reimbursement
Facility with a limited liability corporation whereby the corporation will
provide up to a maximum of $2,000,000 in customer financing. (Reference is made
to Note 5). Relative to this agreement the Company granted the corporation a
warrant to purchase 60,000 shares of voting common stock which can be exercised
at any time and in any amount to January 31, 1999 at a price of $3.58 per share,
the fair market value on the date of grant. As of August 31, 1996, no purchases
relative to this warrant were made.
In connection with its initial public offering completed in December
1991, the Company sold, for nominal consideration, warrants to its underwriters
to purchase 120,000 shares of common stock, exercisable beginning in December
1992, at exercise prices that increase annually and range between $8.40 and
$14.00, expiring in December 1996. As of August 31, 1996, no purchases relative
to these warrants had been made.
In December 1991, the Company issued a warrant to its public relations
firm as compensation for future services. The warrant expires on December 27,
1996 and grants the right to purchase 25,000 shares at $8.00 per share and
25,000 additional shares at $7.00 per share, the market value of the Company's
common stock on the date of grant. As of August 31, 1996, no purchases relative
to these warrants were made.
Total shares reserved for issuance under the options and warrants
referred to above aggregated 594,150 as of August 31, 1996. All options and
warrants outstanding as of August 31, 1996 were 394,850.
(7) RELATED-PARTY TRANSACTIONS:
ETE (now known as ViroGroup of South Carolina, Inc.), a wholly owned
subsidiary of the Company, leases property from an entity controlled by certain
of its former shareholders. The lease expires in November 1997 and contains two
one-year renewal options. Total rentals earned by this related-party lessor
amounted to $186,000 during each of the years ended August 31, 1994, 1995 and
1996. (See Note 9(f) for other related party transactions.)
(8) EMPLOYEE BENEFIT PLANS:
The Company has a defined contribution profit sharing plan for the
benefit of its eligible employees. Eligibility is determined by specified
minimum periods of service and attainment of minimum age requirements. The
employer contribution is determined annually by the Board of Directors and
involves no
F-16
<PAGE>
VIROGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AUGUST 31, 1994, 1995 AND 1996
unfunded past service costs. No contributions were authorized by the Board of
Directors for the years ended August 31, 1994, 1995 and 1996.
Employees can also contribute, to the plan on a tax-deferred or non-tax
deferred basis, specified percentages of their compensation as defined. The
Company will match the employee contributions up to 2% of total compensation.
Employee contributions become fully vested immediately. Employer contributions
vest at the rate of 20% per annum, beginning after the first year of service (as
defined), so that an employee becomes fully vested after six full years of
service. Forfeitures of nonvested employer contributions are utilized to reduce
required employer contributions and expenses. Contributions to the plan charged
to expense amounted to $81,313, $134,704 and $49,925 during the years ended
August 31, 1994, 1995 and 1996, respectively.
(9) COMMITMENTS AND CONTINGENCIES:
(a) Operating leases-
The Company leases facilities and equipment from related (Reference is
made to Note 7) and unrelated parties under operating leases expiring between
1997 and 2001. Minimum annual lease payments are as follows:
MINIMUM ANNUAL LEASE PAYMENTS
-----------------------------
FISCAL YEAR RELATED UNRELATED
ENDING AUGUST 31, PARTIES PARTIES
----------------- -------- ----------
1997 $186,000 $431,052
1998 31,000 368,003
1999 -- 266,234
2000 -- 251,887
2001 -- 195,237
2002 -- 76,047
-------- ----------
$217,000 $1,588,460
======== ==========
Rent expense under all operating leases (Reference is made to Note 7)
amounted to $1,053,652, $986,700 and $679,036 during the years ended August 31,
1994, 1995 and 1996, respectively.
(b) Potential liability for environmental contamination -
The Company's environmental services present risks of substantial
liability for environmental contamination. Certain of the Company's remediation
activities also entail risks of personal injury and property damage. Although
the potential liability of the Company is significant, no material claim has
ever been asserted against the Company, and the Company is not aware of any
basis for such a claim. Therefore, no liability for any such claims is reflected
in the accompanying consolidated financial statements.
F-17
<PAGE>
VIROGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AUGUST 31, 1994, 1995 AND 1996
(c) Insurance-
Since July 1993, the Company has maintained certain professional
liability insurance policies with an insurance carrier. To the best of the
Company's knowledge, there are no outstanding professional liability claims.
(d) Litigation, claims and assessments-
In February, 1996 a civil action was filed in the Circuit Court of the
Second Judicial Circuit in and for Leon County, Florida, against the Company as
a Third-Party Defendant. The Complaint against the Company as an environmental
contractor alleges breach of contract, breach of implied warranty, environmental
malpractice, common law indemnification, statutory contribution and common law
contribution. This Third-Party Complaint was filed by a Client in response to a
Complaint filed by the Department of Environmental Protection (DEP) State of
Florida which alleges overpayments made by the DEP to the Client due to
purported fraud with regard to the Client's submission of an environmental
reimbursement application. The amount sought by the DEP against the Client is
$240,000, exclusive of interest and costs.
The Client has asserted various factual and legal defenses in response
to the DEP's Complaint, including, but not limited to, a viable statute of
limitations defense. Based on the viability of such defenses, the Client's and
the Company's agreement to jointly cooperate in defending what the Company and
the Client believe to be an unfounded claim from the DEP, the Client and the
Company entered into an agreement in May, 1996. Pursuant to the agreement in
consideration of the Client dismissing its Third-Party Complaint against the
Company without prejudice, all claims and defenses between the Client and the
Company have been tolled for an unspecified period of time with a reciprocal
right to terminate the agreement upon ten (10) days written notice provided by
either party. The Third-Party Complaint against the Company was dismissed,
without prejudice on May 30, 1996. Based on the foregoing, this matter will most
likely stay in abeyance until a final determination is made by the Court on
DEP's claims against the Client.
In May 1996, the Company settled all its remaining claims deriving from
Sunshine Jr. Stores, Inc. bankruptcy in 1992. These claims totaling
approximately $270,000 and included in accounts receivable in the accompanying
balance sheet at August 31, 1995, were settled for approximately $237,000
resulting in a charge to the allowance for doubtful accounts in fiscal 1996 of
approximately $33,000. In addition, the parties agreed to mutually cooperate to
ensure the timely filing of mutually incurred cost in related claim applications
to be reimbursed by the State of Florida UST program.
In August 1993, a civil action was filed in Hamblen County Chancery
Court of the Third District of Tennessee against the Company and Galen of
Tennessee, Inc., seeking compensatory and punitive damages of approximately
$1,140,000 in regards to an asbestos abatement project. In December 1993, the
Court dismissed the lawsuit. The parties are now compelled to submit to
arbitration in the maximum amount of $140,000. The plaintiff has not made any
demand for arbitration. The Company believes that this action is without merit
and intends to vigorously defend itself.
The Company is not subject to any other material legal proceedings.
From time to time, the Company is involved in other routine litigation, claims
and
F-18
<PAGE>
VIROGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AUGUST 31, 1994, 1995 AND 1996
assessments incidental to its business. The Company does not believe that the
ultimate resolution of any of the above described matters would have a material
adverse impact on the accompanying consolidated financial statements.
(e) Florida Underground Petroleum Storage Tank (UST) Reimbursement
Program, Amounts Due from State Agency and the Concentration of Credit Risk.
During fiscal 1994, the Company aggressively expanded its participation
in the State of Florida financed programs to provide environmental services to
evaluate, assess and remediate contaminated underground petroleum storage tank
sites. Through its Inland Protection Trust Fund, the State of Florida reimburses
certain costs to clean up eligible contaminated sites. At August 31, 1994, the
Company's backlog related to this program was approximately $21 million. For
fiscal 1995, this program accounted for 12% of consolidated gross revenues and
21% of Florida operations' gross revenues, and the backlog was $500,000. For
fiscal 1996, this program accounted for 2% of consolidated revenues and 8% of
Florida operations' gross revenues and the backlog was $0.
Primarily due to an estimated unfunded $450 million backlog and annual
tax revenues of only $100 million, in March 1995 new legislation directed the
Florida Department of Environmental Protection to cease processing, with certain
limited exceptions, applications for reimbursement of costs to clean up UST
sites eligible for state funds. The impact of this new law on the industry in
Florida was substantial, requiring major reductions in employment levels and
requiring firms that operate under the Florida program to finance activities
pending a lengthened reimbursement process. Partially as a result of this
program change, as well as to improve customer service and staff utilization,
two Florida offices were closed in fiscal 1995 and one office in fiscal 1996, as
well as personnel reductions occurred in other Florida offices. (Reference is
made to Note 1(g).)
Prior to this new law, payments from the State were normally received
within twelve months of application submission. Based upon the 1995 legislation
it then appeared it could take up to five years to receive payment for
previously completed work. As a result, in the consolidated balance sheet at
August 31, 1995 the Company reclassified $2.05 million (net of discount of
$727,000) due from the State from current assets to non-current assets and are
included as Amounts Due from State Agency, net in the accompanying consolidated
balance sheet. The discount of $727,000 reduced 1995 gross revenues and
reflected the fact the related long-term receivables were then non-interest
bearing. This discount was to be accreted to interest income over the estimated
two to five year payment period of the related amounts.
In May, 1996 a new law (The 1996 Act) was passed which implemented
significant changes to the reimbursement program and addressed the estimated
$450 million backlog of unpaid claims. This 1996 Act provides for the
elimination of the reimbursement program effective August 1, 1996 and requires
all reimbursement applications to be submitted by December 31, 1996. Also, The
1996 Act creates a non-profit public benefit corporation, which is expected to
be operational by the Spring of 1997, to finance the unpaid backlog. This
non-profit corporation is charged with financing the estimated unpaid $450
million backlog with certificates of indebtedness. Payment of claims will be on
a first-come, first-served methodology based on application filing date and an
assumed annual funding rate of $100 million. Claims paid will be subject to a
3.5% annual discount in consideration for the anticipated accelerated payment as
compared to the previously expected period of 4 to 5 years. The Company
estimates the State will
F-19
<PAGE>
VIROGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AUGUST 31, 1994, 1995 AND 1996
not make significant payments under the program until the fourth quarter of
fiscal 1997 to the second quarter of fiscal 1998.
Due to the State's cancellation of the 1995 law and other prior law
relating to the program, and the provisions of The 1996 Act, the discounts
recorded in fiscal 1995 will not be accreted to interest income. However, these
previously recorded discounts approximate the valuation allowance required on
these amounts to reflect the state mandated discount and potential denied cost.
As of August 31, 1996 the Company had approximately $3.7 million in amounts due
from the state including $3.1 million in applications to be filed prior to
December 31, 1996. Total amounts subject to state denied costs and discounts,
including amounts already filed, at August 31, 1996 were approximately $3.9
million. The Company has provided a valuation allowance for the expected state
mandated discounts and denied costs. At August 31, 1996 the allowances total
$931,665 with $889,937 applied as a valuation allowance to the amounts due
resulting in a net amount of $2,812,737 shown as the Amounts Due from State
Agency, net in the accompanying consolidated balance sheet at August 31, 1996
and $41,728 which is included as an accrued liability in this consolidated
balance sheet at August 31, 1996 to reflect the Company's liability to pay
discounts and denied costs on receivables financed by third-parties. The Company
expects the State to pay these amounts within the next 16 months. During fiscal
1996 this program generated approximately $335,000 in gross revenues and about
$17,000 was charged against gross revenues to provide for the denied cost.
Company backlog related to this program at August 31, 1996 was $0.
Of the approximately $3.1 million in unfiled reimbursement applications
at August 31, 1996, the Company expects to finance approximately $2.9 million
with third-parties meaning the Company will receive the cash from the financing
entity upon application filing thus not waiting the expected one year to 16
months to be paid by the State. The cost of borrowing from these third-parties
is less than the cost of borrowing through the Company's revolving credit line.
Specifically, the Company has entered into several arrangements to
finance substantially all the claims to be filed with the State for
reimbursements. Generally, these arrangements require the Company to pay a 3 - 4
% prepaid interest fee at the time the financing entity pays the Company. This
is a non-refundable fee to cover administrative costs and interest costs for up
to the first nine months. If the State has not paid the financing entity within
the first nine months, the interest costs are .6875% per month for each month,
thereafter. In addition, the Company must place 13% of the amounts financed in
an interest bearing escrow account to provide for potential state denied costs
and state mandated interest discount. The interest earned on the escrowed
amounts accrue to the Company's benefit and will be recorded as interest income
in the period earned. The Company expects it could have as much as a $232,000
liability to the financing entity in excess of the amounts escrowed. The Company
expects to have sufficient funds to pay this unfunded liability.
At August 31, 1996, the Company has financed approximately $199,000 of
the amounts due from the State agency, and has recorded in prepaid and other
assets in the accompanying consolidated balance sheet escrowed amounts of
$15,722. The interest portion of these amounts will be amortized to interest
expense over the next nine months.
F-20
<PAGE>
VIROGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AUGUST 31, 1994, 1995 AND 1996
In an improbable worst-case scenario where the State of Florida
terminates the program without paying any amounts due, the Company as of August
31, 1996 would have to write-off net amounts due of approximately $2,812,737 and
reimburse amounts previously financed of approximately $199,000.
(f) Segment information-
The Company operates in one industry segment, as contemplated by
Financial Accounting Standards Board Statement No. 14. Laidlaw and its
affiliates accounted for approximately 22%, 21% and 20% of consolidated gross
revenues for the years ended August 31, 1994, 1995, and 1996, respectively.
Included in accounts receivable, net in the accompanying consolidated balance
sheets as of August 31, 1995 and 1996 are amounts due from Laidlaw and its
affiliates of $1,144,208 and $432,700, respectively. A Laidlaw affiliate owns
50% of the Company's outstanding common stock and three officers of Laidlaw
affiliates became Directors of the Company on August 28, 1995. From March 5,
1993 to August 27, 1995 two officers of Laidlaw affiliates were directors.
Consolidated gross revenues included 12% and 2% for the years ended
August 31, 1995 and 1996, respectively, related directly or indirectly from the
Florida UST program. Amounts due from the State of Florida UST program and
included in Amounts Due from State Agency, net in the accompanying consolidated
balance sheet at August 31, 1995 and 1996 are $2,050,074 and $2,812,737
respectively.
F-21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of ViroGroup, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of ViroGroup, Inc. and subsidiaries as of
August 31, 1995 and 1996, and for each of the three years in the period ended
August 31, 1996, included in this Form 10-K, and have issued our report thereon
dated October 17, 1996 (except with respect to the matter discussed in Note
6(a), as to which the date is November 18, 1996). Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in the accompanying Index to Consolidated Financial
Statements and Schedule on Page F-1 of this Form 10-K is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Miami, Florida,
October 17, 1996
F-22
<PAGE>
<TABLE>
<CAPTION>
VIROGROUP, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED AUGUST 31, 1994, 1995, AND 1996
FOR THE BALANCE AT CHARGED TO BALANCE AT
YEAR ENDED BEGINNING OF COSTS AND END OF
AUGUST 31, DESCRIPTION PERIOD EXPENSES DEDUCTIONS OTHER PERIOD
---------- ----------- ------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1994 Allowance for Doubtful Accounts $685,247 $ 92,407 $386,545(1) $ -- $391,109
======== ======== ======== ========= ========
1995 Allowance for Doubtful Accounts $391,109 $539,746 $295,294(1) $ -- $635,561
======== ======== ======== ========= ========
Allowance for Discounts and
Denied Costs $ -- $726,308(2) $ -- $ -- $726,308
======== ======== ======== ========= ========
1996 Allowance for Doubtful Accounts $635,561 $ 48,008 $62,721(1) $(118,297)(3) $502,551
======== ======== ======== ========= ========
Allowance for Discounts and
Denied Costs $726,308 $ 16,745(2) $ -- $ 146,884(4) $889,937
======== ======== ======== ========= ========
<FN>
- ------------
(1) Represents net accounts written off.
(2) Represents a reduction in gross revenues.
(3) Represents a transfer to the Allowance for Discounts and Denied Costs.
(4) Represents amounts transferred from Allowance for Doubtful Accounts of
$118,297 plus allowance transferred from unbilled receivables at August 31,
1995 of $48,665 less amount transferred to accrued liabilities of $20,078.
</FN>
</TABLE>
F-23
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
There is incorporated herein by reference the information required by
this Item included in the Company's Proxy Statement for the 1997 Annual Meeting
of Shareholders.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all executive officers of the Company
as of November 1, 1996 are listed below, followed by a brief account of their
business experience during the past five years. Officers are elected annually by
the Board of Directors and serve at the discretion of the Board. There are no
family relationships among these officers nor any arrangements or understandings
between any officer and any other person pursuant to which an officer was
elected. None of these officers has been involved in any court or administrative
proceeding within the past five years adversely reflecting on his or her ability
or integrity.
NAME AGE POSITION
---- --- --------
Sylvester O. Ogden 61 Chairman of the Board, CEO
and President
Charles S. Higgins, Jr. 48 Executive Vice President
Larry K. Holland 48 Executive Vice President
Lloyd E. Horvath 46 Executive Vice President
Thomas H. O'Donnell 46 Executive Vice President
Larry D. Ackerly 50 Vice President and Chief
Financial Officer
Sylvester O. Ogden was appointed Chief Executive Officer and President,
and was elected a Director of the Company, on November 1, 1994 and Chairman in
February, 1995. Prior to joining the Company he was Executive Vice-President of
Occidental Petroleum Company and President/Chief Executive Officer of Island
Creek, a coal mining subsidiary of Occidental from November, 1984 to July, 1993.
He was self employed as a consultant from August, 1993 until joining the
Company.
Charles H. Higgins, Jr., P.E. has been the Executive Vice President and
Chief Operating Officer of the Company since June 1995. From March 1993 until
then he was the Vice President in charge of the Environics division. Prior to
that, he was President of Environics, Inc., a wholly owned affiliate of Laidlaw,
Inc., providing environmental consulting services.
- 25 -
<PAGE>
Larry K. Holland, P.G., has been employed by the Company since 1977 and
has been Vice President since 1987, Executive Vice President since 1993 and
served as a Director from 1977 to February, 1995.
Lloyd E. Horvath, P.E., is a water resources engineer and has been
employed by the Company since 1977. He has been Vice President of the Company
since 1986, Executive Vice President since 1993 and served as a Director from
1977 to February, 1995.
Thomas H. O'Donnell, P.G., is a hydrogeologist and has been employed by
the Company since 1978. He has been Vice President of the Company since 1986,
Executive Vice President since 1993 and served as a Director from 1978 to
February 1995.
Larry D. Ackerly has been Chief Financial Officer of the Company since
May, 1994. From October, 1993 until then he was Vice President MIS and
Accounting of the Company. Prior to that date, he was Vice President - Finance
for Plastex Technologies Inc., a manufacturing company located in the
metro-Atlanta, Georgia area.
ITEM 11. EXECUTIVE COMPENSATION
There is incorporated herein by reference the information required by
this Item included in the Company's Proxy Statement for the 1997 Annual Meeting
of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is incorporated herein by reference the information required by
this Item included in the Company's Proxy Statement for the 1997 Annual Meeting
of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is incorporated herein by reference the information required by
this Item included in the Company's Proxy Statement for the 1997 Annual Meeting
of Shareholders.
- 26 -
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS A PART OF THIS REPORT:
(1) Financial Statements
The financial statements listed in the accompanying Index to
Consolidated Financial Statements and Schedule on page F-1 are
filed as part of this Report.
(2) Financial Statement Schedules
The financial statement schedules listed in the accompanying
Index to Consolidated Financial Statements and Schedule on
page F-1 are filed as part of this Report.
(B) EXHIBITS:
EXHIBIT NUMBER
3.1 Amended and Restated Articles of Incorporation.
3.2 Bylaws. (1)
10.1 Form of Professional Services Agreement. (1)
10.2 Business Lease with O.H.M. Associates, dated as of June 13,
1989, as amended. (1)
10.3 Business Lease with Campbell Enterprises, dated as of
February 19, 1992. (3)
10.4 Business Lease with Lexington Office Investors, dated as of
June 1, 1992. (3)
10.5 Barnett Bank of Lee County, N.A. Asset Based Revolving Line
of Credit, dated as of November 20, 1992. (6)
10.6 Receivables Financing Agreement with The Citizens and
Southern National Bank, dated as of November 25, 1991.
- 27 -
<PAGE>
10.7 1991 Long-Term Incentive Plan, as amended. (4)
10.8 Profit Sharing Plan and Trust. (1)
10.9 Agreement and Plan of Merger with Missimer & Associates of
South Carolina, Inc., ETE, Inc., and Earl M. Williams, Jr.,
dated as of June 12, 1992. (2)
10.10 Employment Agreement between Earl M. Williams, Jr. and ETE,
Inc., dated as of June 12, 1992. (2)
10.11 Confidentiality and Noncompetition Agreement with Earl M.
Williams, Jr., dated as of June 30, 1992. (3)
10.12 Salary Continuation Agreement between Earl M. Williams, Jr.
and ETE, Inc., dated as of February 12, 1986. (3)
10.13 Agreement and Plan of Merger with ViroGroup, Inc., ViroGroup
of Tennessee, Inc., Environics, Inc., and Osco Holdings,
Inc., dated as of March 4, 1993. (5)
10.14 Warrant Agreement with The P.L. Thomas Group, dated December
27, 1991. (3)
10.15 Warrant Agreement with Rauscher Pierce Refsnes, Inc., dated
as of December 30, 1991.(1)
10.16 Severance Agreements dated as of November 13, 1993, October
8, 1993 and October 4, 1993, respectively between ViroGroup,
Inc., and:
a) Richard L. Holzinger
b) Thomas M. Missimer (6)
10.17 Stock Purchase Agreement between ViroGroup, Inc. and Bryson
Industrial Services, Inc., dated as of March 4, 1993. (5)
10.18 Investors' Rights Agreement between ViroGroup, Inc., Osco
Holdings, Inc., and Bryson Industrial Services, Inc., dated
as of March 4, 1993. (5)
10.19 Shareholders Agreement between OSCO Holdings, Inc., Bryson
Industrial Services, Inc., Robert A. Fletcher, Larry K.
Holland, Richard L. Holzinger, Lloyd E. Horvath, Thomas M.
Missimer, Thomas H. O'Donnell and Earl Williams, Jr. dated
as of March 4, 1993. (6)
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<PAGE>
10.20 Release from Shareholders Agreement, dated as of March 4,
1993, between OSCO Holdings, Inc., Bryson Industrial
Services, Inc., Robert A. Fletcher, Larry K. Holland, Lloyd
E. Horvath, Thomas H. O'Donnell, Earl Williams, Jr., and:
a) Richard L. Holzinger
b) Thomas M. Missimer (6)
10.21 Barnett Bank of Lee County, N.D. Asset Based Revolving Line
of Credit Agreement executed on January 20, 1994. (7)
10.22 $2,000,000 Master Funding and Indemnification Agreement
between the Company and Sirrom Resource Funding, L.P. dated
February 1, 1994. (7)
10.23 Petroleum Contamination Site Assessment and Rehabilitation
Contract between the Company and Fina Oil and Chemical
Company dated May 31, 1994. (8)
10.24 Employment Agreement - President and CEO, Sylvester O. Ogden
(9)
10.25 Letter Agreement Regarding Employment Upon a Change in
Control - Chief Financial Officer, Larry D. Ackerly (9)
10.26 Stock Option Agreement - President and CEO, Sylvester O.
Ogden (9)
10.27 Stock Option Agreement - Chief Financial Officer, Larry D.
Ackerly (9)
10.28 Stock Option Agreement - Board Member, Joe K. Blacketer (10)
10.29 Non-Employee Director Stock Option Plan (10)
10.30 Employment Agreement - Chief Financial Officer, Larry D.
Ackerly (10)
10.31 Employment Agreement - Executive Vice President, Lloyd E.
Horvath (10)
10.32 Employment Agreement - Executive Vice President, Thomas
O'Donnell (10)
10.33 Employment Agreement - Executive Vice President, Larry K.
Holland (10)
10.34 Asset Based Revolving Credit Agreement (10)
10.35 Letter Agreement with Laidlaw, Inc. - June 26, 1995 (11)
- 29 -
<PAGE>
10.36 Laidlaw Note and Security Agreement (12)
10.37 Stock Option Agreement - January 15, 1996 - Charles S.
Higgins Jr. (13)
10.38 Loan Agreement - February 20, 1996 - Barnett Bank of Lee
County, N.A. (13)
21. Subsidiaries of the Company (14)
23. Consent of Arthur Andersen LLP (14)
(C) REPORTS ON FORM 8-K:
None
------------
(1) Filed as an exhibit to the Company's Registration Statement
on Form S-1, No. 33-44000, as filed with the Securities and
Exchange Commission on May 21, 1991, and incorporated herein
by reference.
(2) Filed as Exhibit 1 to the Company's Current Report on Form
8-K dated June 30, 1992, and incorporated herein by
reference.
(3) Filed as an exhibit to the Company's Annual Report on Form
10-K, as filed with the Securities and Exchange Commission
on November 29, 1992, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Registration Statement
on Form S-8, No. 33-57614, as filed with the Securities and
Exchange Commission on January 29, 1993, and incorporated
herein by reference.
(5) Filed as Exhibit 2 to the Company's Current Report on Form
8-K dated March 4, 1993, and incorporated herein by
reference.
(6) Filed as an exhibit to the Company's Annual Report on Form
10-K, as filed with the Securities and Exchange Commission
November 19, 1993 and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Form 10-Q for the
quarter ended February 28, 1994 as filed with the Securities
and Exchange Commission on April 14, 1994 and incorporated
herein by reference.
(8) Filed as an exhibit to the Company's Form 10-Q for the
quarter ended May 31, 1994 as filed with the Securities and
Exchange Commission on July 14, 1994 and incorporated herein
by reference.
- 30 -
<PAGE>
(9) Filed as an exhibit to the Company's Form 10-Q for the
quarter ended November 30, 1994 as filed with the Securities
and Exchange Commission on January 13, 1995 and is
incorporated herein by reference.
(10) Filed as an exhibit to the Company's Form 10-Q for the
quarter ended February 28, 1995 as filed with the Securities
and Exchange Commission on April 13, 1995 and incorporated
herein by reference.
(11) Filed as an exhibit to the Company's Form 10-Q for the
quarter ended May 31 1995 as filed with the Securities and
Exchange Commission on July 14, 1995 and incorporated herein
by reference.
(12) Filed as an exhibit to the Company's Form 10-K for the year
ended August 31, 1995 as filed with the Securities Exchange
Commission on November 27, 1995 and incorporated herein by
reference.
(13) Filed as an exhibit to the Company's Form 10-Q for the
quarter ended February 28, 1996 as filed with the Securities
Exchange Commission on April 12, 1996 and incorporated
herein by reference.
(14) Filed herewith.
- 31 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VIROGROUP, INC.
/s/ SYLVESTER O. OGDEN
---------------------------------
Sylvester O. Ogden, Chairman, CEO
and President
Dated: November 18, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE AND CAPACITY DATE
---------------------- ----
By: /s/ LARRY D. ACKERLY November 18, 1996
---------------------------------
Larry D. Ackerly, Vice President
and Chief Financial Officer
By: /s/ November , 1996
---------------------------------
Ivan R. Cairns, Director
By: /s/ A. DENNY ELLERMAN November 18, 1996
---------------------------------
A. Denny Ellerman, Director
By: November , 1996
---------------------------------
Rick L. McEwen, Director
By: /s/ DONNA C. PETERMAN November 18, 1996
---------------------------------
Donna C. Peterman, Director
By: /s/ JAMES L. WAREHAM November 18, 1996
---------------------------------
James L. Wareham, Director
By: /s/ KENNETH W. WINGER November 18, 1996
---------------------------------
Kenneth W. Winger
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
NAME JURISDICTION
- ---- ------------
ViroGroup of Georgia, Inc. Georgia
ViroGroup of Louisiana, Inc. Louisiana
ViroGroup of Texas, Inc. Texas
ViroGroup of Tennessee, Inc. Tennessee
ViroGroup of South Carolina, Inc. South Carolina
ViroGroup of California, Inc. California
ViroGroup of New York, Inc. New York
ViroGroup of Virginia, Inc. Virginia
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into the Company's
previously filed registration statements on Form S-8 (File Nos. 33-57614 and 33-
90254).
ARTHUR ANDERSEN LLP
Miami, Florida,
November 27, 1996
