<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---------- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1998
-----------------
- ---------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File No. 0-19350
-------
ViroGroup, Inc.
(Exact name of registrant as specified in its charter)
Florida 59-1671036
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5217 Linbar Drive, Suite 309
Nashville, TN 37211 37211
------------------------------------- --------
(Address of principle executive office) (zip code)
Registrant's telephone number including area code: (615) 832-0081
--------------
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
------- -------
The number of shares outstanding of the registrant's common stock, $.01 Par
Value, as of February 28, 1998 was 795,188.
Page 1 of 21
<PAGE> 2
VIROGROUP, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
QUARTER ENDED FEBRUARY 28, 1998
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I- Financial Information
Consolidated Balance Sheets
February 28, 1998 and August 31, 1997....................................3
Consolidated Statements of Operations
Three Months Ended February 28, 1998 and
February 28, 1997........................................................4
Consolidated Statements of Operations
Six Months Ended February 28, 1998 and
February 28, 1997........................................................5
Consolidated Statements of Cash Flows
Six Months Ended February 28, 1998 and
February 28, 1997........................................................6
Notes to Consolidated Financial Statements................................7
Management's Discussion and Analysis of
Financial Condition and Results of Operations..........................13
Part II - Other Information..............................................17
Signature Page...........................................................18
</TABLE>
Page 2 of 21
<PAGE> 3
VIROGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 1998 AND AUGUST 31, 1997
<TABLE>
<CAPTION>
February 28, 1998 August 31, 1997
----------------- ---------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Restricted cash ........................................ $ 592,917 $ 596,408
Accounts receivable, net of allowance for doubtful
accounts of $311,286 and $310,258, respectively ...... 1,345,677 1,727,152
Unbilled accounts receivable ........................... 226,320 254,235
Prepaid income taxes ................................... 4,376 4,376
Prepaid expenses and other ............................. 81,268 113,871
------------ ------------
Total current assets ............................. 2,250,558 2,696,042
AMOUNTS DUE FROM STATE AGENCY, net .......................... 531,661 512,927
PROPERTY AND EQUIPMENT, net ................................. 276,155 340,869
OTHER ASSETS ................................................ 1,676 14,131
------------ ------------
Total assets ...................................... $ 3,060,049 $ 3,563,969
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................... $ 230,866 $ 374,703
Accrued liabilities .................................... 1,477,861 1,540,017
Notes payable .......................................... 1,580,146 1,160,944
Other current liabilities .............................. 80,677 323,007
------------ ------------
Total current liabilities ......................... $ 3,369,550 $ 3,398,671
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares
authorized, 795,214 issued and outstanding ........... 7,952 7,952
Additional paid-in capital ............................. 18,333,533 18,333,533
Accumulated deficit .................................... (18,650,985) (18,176,187)
------------ ------------
Total shareholders' equity (deficit) .............. (309,500) 165,298
------------ ------------
Total liabilities and shareholders' equity ........ $ 3,060,049 $ 3,563,969
============ ============
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these balance sheets.
Page 3 of 21
<PAGE> 4
VIROGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
GROSS REVENUES ................................................. $ 1,138,705 $ 1,476,247
COST OF GROSS REVENUES ......................................... 727,018 1,128,012
----------- -----------
Gross profit .............................................. 411,687 348,235
SELLING, GENERAL & ADMINISTRATIVE EXPENSES,
Including rentals to former shareholder of 15,500 in 1998 and
$46,500 in 1997 ........................................... 772,771 1,095,584
----------- -----------
Loss from operations ........................................... (361,084) (747,349)
OTHER INCOME (EXPENSE):
Interest expense, net ..................................... (24,575) (61,837)
Other, net ................................................ 54,378 21,550
----------- -----------
Loss before income taxes .................................. (331,281) (787,636)
PROVISION FOR INCOME TAXES ..................................... -- --
----------- -----------
Net loss .................................................. $ (331,281) $ (787,636)
=========== ===========
NET LOSS PER SHARE COMMON SHARE ................................ $ (0.42) $ (0.99)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ..................... 795,188 795,188
=========== ===========
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these statements.
Page 4 of 21
<PAGE> 5
VIROGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
GROSS REVENUES ............................................................. $ 2,688,583 $ 4,170,756
COST OF GROSS REVENUES ..................................................... 1,686,020 3,038,311
----------- -----------
Gross profit .......................................................... 1,002,563 1,132,445
SELLING, GENERAL & ADMINISTRATIVE EXPENSES,
Including rentals to related party of $62,000 in 1998 and $93,000 in 1997 1,492,323 2,201,645
----------- -----------
Loss from operations ....................................................... (489,760) (1,069,200)
OTHER INCOME (EXPENSE):
Interest expense, net ................................................. (50,758) (104,411)
Other, net ............................................................ 65,720 54,836
----------- -----------
Loss before income taxes .............................................. (474,798) (1,118,775)
PROVISION FOR INCOME TAXES ................................................. -- 8
----------- -----------
Net loss .............................................................. $ (474,798) $(1,118,783)
=========== ===========
NET LOSS PER SHARE COMMON SHARE ............................................ $ (0.60) $ (1.41)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ................................. 795,188 795,188
=========== ===========
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these statements.
Page 5 of 21
<PAGE> 6
VIROGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $ (474,798) $(1,118,783)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Depreciation and amortization ............................ 86,096 167,751
Provision for bad debts .................................. 26,592 42,571
(Gain) loss on disposition of property and equipment ..... (60,562) (16,958)
Restructuring charge ..................................... (226,452) 0
Changes in assets and liabilities:
Decrease (increase) in--
Accounts receivable and amounts due from state agency 336,149 1,527,740
Unbilled accounts receivable ........................ 27,915 278,453
Prepaid income taxes ................................ 0 5,156
Prepaid expenses and other assets ................... 45,058 1,622,272
Increase (decrease) in--
Accounts payable .................................... (143,838) (712,021)
Accrued liabilities ................................. (78,033) 629,608
----------- -----------
Total adjustments ................................. 12,925 3,544,572
----------- -----------
Net cash provided by (used in) operating activities ...... (461,874) 2,425,789
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ......................... (47,425) (82,262)
Proceeds from sale of property and equipment ................ 86,605 25,062
----------- -----------
Net cash provided by (used in) investing activities ...... 39,180 (61,200)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable ................................. 2,349,701 3,320,914
Repayment of notes payable .................................. (1,930,498) (5,812,342)
Repayment of capitalized lease obligations .................. 0 (6,662)
----------- -----------
Net cash provided by (used in) financing activities ...... 419,202 (2,498,090)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................. (3,491) (133,501)
CASH AND CASH EQUIVALENTS, beginning of period ................... 596,408 191,001
----------- -----------
CASH AND CASH EQUIVALENTS, end of period ......................... $ 592,917 $ 57,500
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid ............................................... $ 59,524 $ 110,276
=========== ===========
Income taxes paid ........................................... $ 0 $ 8
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
Page 6 of 21
<PAGE> 7
VIROGROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
(UNAUDITED)
(1) Basis of Presentation
The consolidated balance sheet as of August 31, 1997, which has been derived
from audited statements, and the unaudited interim consolidated financial
statements included herein, have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although the Company believes
that the disclosures made are adequate to make the information presented not
misleading.
In the opinion of the Company, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of the Company as
of February 28, 1998 and the results of operations and cash flows for the
three-month and six-month periods ended February 28, 1998 and February 28, 1997.
The accounting policies followed for quarterly financial reporting purposes are
the same as those disclosed in the Company's audited financial statements
contained in its Annual Report on Form 10-K for the year ended August 31, 1997,
as filed with the Securities and Exchange Commission.
(2) Going Concern
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities through the ordinary course of business.
The Company has incurred losses for the past three years beginning with fiscal
year ended August 31, 1995 and has been dependent upon Laidlaw, Inc. to
guarantee the Company's bank line of credit. In accordance with the preferred
stock conversion agreement, effective June 26, 1998, any amounts borrowed from
Laidlaw will convert to a three year term loan payable to Laidlaw with quarterly
amortization payments due. If operation losses continue, the Company may not be
able to generate sufficient cash flow to service the term debt or to fund
operations.
Page 7 of 21
<PAGE> 8
The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amounts and
classification of liabilities that might result if the Company is unable to
continue as a going concern.
Management is aware of the possibility of not being able to continue as a going
concern and has implemented the following actions in its fiscal 1998 business
plan in an effort to maintain the Company's continuity as a going concern:
(a) Implementation of aggressive cost containment procedures.
(b) Increase in profitability by placing increased emphasis on products and
services which are in high demand and which carry a higher profit margin
than traditional services.
(c) Closing of small, non-profitable offices and disposing of assets which
are not needed.
(d) Restructuring all locations to more properly meet the immediate needs
of each location.
(e) Centralizing controls for operations and for administrative functions,
such as accounting, credit management and contract administration.
If this business plan is not successful, the Company may not be able to continue
as a going concern and the Company's recent history has shown an inability to
meet its business plan projections.
(3) One-for-Eight Reserve Stock Split
On January 23, 1997, the Company implemented a one-for-eight reverse stock split
of the Company's common stock. The effect of the reverse split upon holders of
the Company's common stock, is that the total number of shares of the Company's
common stock held by each shareholder was automatically converted into that
number of whole shares of common stock equal to the number of shares of common
stock owned immediately prior to the reverse split divided by eight, adjusted
for any fractional shares.
The Company has an authorized capitalization of 50,000,000 shares of common
stock, par value $.01 per share. The authorized capital stock of the Company was
not reduced or otherwise affected by the reverse split. As of January 23, 1997,
the Company had 6,361,708 shares of common stock issued and outstanding. The
aggregate number of shares of common stock issued and outstanding following the
Page 8 of 21
<PAGE> 9
reverse split is 795,188. All common shares and per share amounts have been
adjusted to give retroactive effect of the reverse split.
The reverse split was effectuated as an attempt to enable the Company to remain
in compliance with the listing criteria of the Nasdaq SmallCap Market; however,
the Company's stock was delisted as of December 30, 1997.
(4) Loss Per Share
Loss per share is calculated by dividing net loss attributed to common
shareholders by the weighted average number of common shares and common share
equivalents outstanding during the periods. Common share equivalents are not
considered for periods in which there is a loss, since their impact would be
anti-dilutive. Primary and fully diluted loss per share amounts are the same for
all periods presented.
(5) 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 reimbursed
certain costs to clean up eligible contaminated sites. Primarily due to an
estimated unfunded $450 million backlog and annual tax revenue allocation 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.
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. The 1996 Act provided for the elimination of the
reimbursement program effective August 1, 1996 and required all reimbursement
applications to be submitted by December 31, 1996. Also, the 1996 Act created a
non-profit public benefit corporation, which became operational during the Fall
of 1997, to finance the unpaid backlog. This non-profit corporation is charged
with financing the estimated backlog of 9,500 claims totaling over $556 million.
Payment of claims will be on a first-come, first-served methodology based on
application filing date and an assumed annual allocation rate of $100 million.
Claims paid will be subject to a 3.5% annual discount in consideration of the
anticipated accelerated payment as compared to the previously expected period of
4 to 5 years. Payment of the initial portion of the claims (approximately $213
million) was made in March, 1998. Based on information received from the State
of Florida, additional payments
Page 9 of 21
<PAGE> 10
will be made periodically as additional claims packages are reviewed; however,
no assurances can be given that a specific payment timetable will be maintained.
The Company in prior fiscal years recorded valuation allowances on the amounts
due to reflect the State mandated discount and potential denied costs. At August
31, 1997 these allowances totaled $913,918, of which $166,623 was applied as a
valuation allowance to the Amounts Due from State Agency, resulting in a net
amount of $512,927 shown in the accompanying consolidated balance sheet. The
remaining $747,295 is included as an accrued liability to reflect the Company's
potential liability to pay discounts and denied costs on receivables sold to
third-parties.
At February 28, 1998, these allowances totaled $784,444, of which $166,623 was
applied as a valuation allowance to the Amounts Due from State Agency, resulting
in a net of $531,661 shown in the accompanying consolidated balance sheet. The
remaining $617,821 is included as an accrued liability to reflect the Company's
potential liability to pay discounts and denied costs on receivables sold to
third parties.
Approximately $3.1 million in reimbursement applications had been sold to third
party entities at August 31, 1997. The Company used third party funding to avoid
the long payout period by the State. In addition to selling the previously
mentioned claims, the Company filed approximately $703,000 of claims directly
with the State.
Specifically, the Company entered into several arrangements to sell
substantially all the claims filed with the State for reimbursement. These
arrangements required the Company to pay a 3 - 4% prepaid fee at the time the
buyers paid the Company.
Because the State did not pay the funding entities by September 30, 1997, the
Company began paying indemnification costs at a rate of 0.6875% in October 1997.
Under the agreement with the funders, the monthly rate increases such that if
the applications are not paid by the State prior to the 20th month after
funding, the Company will have paid indemnification costs at the rate of 0.6875%
for 18 months. If the applications are not paid within 20 months, the Company
must indemnify the funders at the rate which would have otherwise been received
by the funders from the State program if interest were being paid by the State.
These indemnification costs are being charged against the reserve account at the
present time. In the event the State does not meet the projected payment
schedule beginning in the first quarter of calendar year 1998, the reserves will
not be adequate to absorb all of the indemnification costs.
As a result of the payments made by the State of Florida in March, 1998, the
Company's exposure for indemnification costs, discounts, and disallowed costs
will
Page 10 of 21
<PAGE> 11
be reduced. As of April 13, 1998, the Company is unable to estimate that
reduced exposure.
In addition, the Company has placed 13% of the amounts sold 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 accrues
to the Company's benefit and is recorded as interest income in the period
earned. The escrow balance at February 28, 1998 and August 31, 1997 was $592,917
and $596,408, respectively, and is included in restricted cash on the
accompanying Consolidated Balance Sheet.
The Company filed all amounts due from the State prior to the state mandated
filing deadline of December 31, 1996.
(6) Notes Payable
Notes payable at February 28, 1998 and August 31, 1997, 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 (8.50% at February
28, 1998) less .25%. Laidlaw, Inc. (Laidlaw) 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, caused a
letter of credit to be issued to collateralize the $3.0 million line of credit.
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 June
26, 1998 and the letter of credit expires July 26, 1998. Laidlaw has stated it
will comply with the terms of the preferred stock conversion agreement at the
letter's expiration, and an affiliate will make available to the Company for a
three-year period from June 26, 1998 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 the three-year period commencing with the line
of credit expiration.
(7) Restructuring Charge
Primarily due to the May 1996 law relating to the Florida UST Program and a
continued decline in forecasted landfill design work, as well as general market
conditions, the company closed two non-profitable satellite offices in Tampa,
Florida and Jacksonville, Florida and reduced the size of its Lexington, South
Carolina office by approximately one-third. A restructuring charge of $237,755
was included in the August 31, 1997 Consolidated Statement of Operations. These
restructuring charges consisted primarily of employee severance and rent expense
and the $237,755 is included in Accrued liabilities on the August 31, 1997
consolidated balance sheet.
Page 11 of 21
<PAGE> 12
For the six month period ended February 28, 1998, $197,047 had been charged
against the accrual primarily for employee severance pay and lease expenses on
closed offices. The Company believes the balance of $40,708 in the accrual
account at February 28, 1998 is adequate to absorb the remaining estimated
costs.
(8) Segment Information
The Company operates in one industry segment, as contemplated by Financial
Accounting Standards Board Statement No. 14. International Comfort Products and
Laidlaw and its affiliates each accounted for approximately 19% of consolidated
revenues for the six months ended February 28, 1998. Amounts due from these
clients total $386,611 and are included in Accounts receivable, net in the
accompanying consolidated balance sheet for February 28, 1998. A Laidlaw
affiliate owns 50% of the Company's outstanding common stock and three officers
of Laidlaw affiliates are Directors of the Company.
(9) Legal
The Company has been notified by the Environmental Protection Agency, through a
General Notice Letter that the Company is a potentially liable party at the
Florida Petroleum Reprocessors Site in Davie, Florida. However, at this time, no
estimate of the potential liability can be calculated due to the limited amount
of information available. This type of liability is an insurable risk and the
Company's insurance carrier has been notified; however, no formal claim has been
filed at this time. The insurance policy has a deductible of $250,000.
Management is of the opinion that Company liability will be minimal, if any.
(10) Proposed Acquisition
On April 3, 1998, the Company received a proposed letter of intent from Laidlaw
Environmental Services, Inc. offering to purchase the non-Laidlaw-owned shares
of ViroGroup, Inc. for the purpose of merging ViroGroup into Laidlaw, with
ViroGroup surviving as a wholly-owned subsidiary of Laidlaw.
ViroGroup has formed a special committee of the independent members of the Board
of Directors to evaluate the offer. The special committee has engaged an
investment banking firm to assist them in the evaluation.
Page 12 of 21
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT DEVEOPMENTS
Recent Developments
On April 3, 1998, the Company received a proposed letter of intent from Laidlaw
Environmental Services, Inc. offering to purchase the non-Laidlaw-owned shares
of ViroGroup, Inc. for the purpose of merging ViroGroup into Laidlaw, with
ViroGroup surviving as a wholly-owned subsidiary of Laidlaw.
ViroGroup has formed a special committee of the independent members of the Board
of Directors to evaluate the offer. The special committee has engaged an
investment banking firm to assist them in the evaluation.
Results of Operations
Comparison of three months ended February 28, 1998 and February 28, 1997. Gross
revenues decreased to $1,138,705 for the three months ended February 28, 1998
compared to $1,476,248 for the same period of fiscal year 1997, as indicated in
the table below.
<TABLE>
<CAPTION>
Gross Revenues for the
Three Months Ended
% Increase
Division February 28, 1998 February 29, 1997 (Decrease)
-------- ----------------- ----------------- ----------
<S> <C> <C> <C>
Enviro Florida $ 357,439 $ 402,197 (11)
Enviro South Carolina 300,139 404,390 (26)
Enviro Tenn 281,557 514,713 (45)
---------- ----------
TOTAL ENVIRO DIVISION 939,135 1,321,299 (29)
HYDRO DIVISION 199,571 154,949 (29)
---------- ----------
TOTAL VIROGROUP, INC. $1,138,705 $1,476,248 (23)
========== ==========
</TABLE>
The primary reasons for the decrease in gross revenues in each of the Company's
divisions are as follows:
The majority of the decrease in the South Carolina operations of $104,251 was
due to a decrease in landfill design work in South Carolina. The Tennessee gross
revenues decrease of $233,156 was due to having two large projects in progress
last
Page 13 of 21
<PAGE> 14
fiscal year which have not been replaced in the current year and an overall
reduction in volume for remedial projects.
Cost of gross revenues is 63.8% of revenues for the three months ended February
28, 1998, compared to 76.4%for the three months ended February 28, 1997. This
improvement primarily results from the Environmental Management Systems (EMS)
work being done. Even though the volume of EMS work was not as great as had been
projected, the margins on those revenues are higher than on the traditional work
done by the Company and have a positive impact on the overall gross margin.
Selling, general, and administrative expenses for the three months ended
February 28, 1998 decreased by $322,813 to $772,771, as compared to $1,095,584
for the same period of the prior year. The majority of this improvement is due
to staff downsizing and reductions in overhead expenses.
Net interest expense decreased due to charging accrued UST indemnification
expenses against the reserve instead of to the interest expense account.
The net loss for the three months ended February 28, 1998 was $331,281 compared
to a net loss of $787,636 for the same period of the prior year. This
improvement is primarily the result of an increase in gross margins and the
decrease in overhead costs.
Comparison of six months ended February 28, 1998 and February 28, 1997. Gross
revenues decreased by 36% to $2,688,583 for the six months ended February 28,
1998 compared to $4,170,756 for the same period of fiscal year 1997. This
decrease in gross revenues results from the changes in gross revenues in each of
the Company's two divisions, Environmental (Enviro) and Hydrogeological (Hydro),
as follows:
<TABLE>
<CAPTION>
Gross Revenues for the
Six Months Ended
% Increase
Division February 28, 1998 February 28, 1997 (Decrease)
-------- ----------------- ----------------- ----------
<S> <C> <C> <C>
Enviro Florida $ 805,534 $1,009,890 (20)
Enviro South Carolina 706,719 1,183,912 (40)
Enviro Tenn 810,131 1,571,448 (48)
---------- ----------
TOTAL ENVIRO DIVISION 2,322,384 3,765,250 (38)
HYDRO DIVISION 366,200 405,506 (10)
---------- ----------
TOTAL VIROGROUP, INC. $2,688,583 $4,170,756 (36)
========== ==========
</TABLE>
Page 14 of 21
<PAGE> 15
Florida Enviro operations had a decrease in gross revenues of $204,356 from the
prior year. This decrease primarily results from the closure of the two small,
unprofitable offices located in Jacksonville and Tampa, in the fourth quarter of
fiscal 1997. The $477,193 decrease in gross revenues from the South Carolina
operations is primarily due to a decrease in landfill design work in South
Carolina. The decrease of $761,317 in Tennessee revenues is primarily due to
revenues generated by two large remediation projects which were in progress
during the first and second quarters of last year, which have not been replaced
in the current year. In general, the overall volume of work in the Remedial
Division is down in fiscal 1998.
Cost of gross revenues have improved from 73% of revenues for the first half of
fiscal 1997 to 63% of revenues for the first half of fiscal 1998. That
improvement is the result of (1) the EMS work, which has a higher profit margin
than the traditional work done by the Company, and (2) operation improvements in
the Hydro Division and in the smaller, more efficient operations in South
Carolina.
Selling, general and administrative expenses decreased by $709,321. This
decrease was mainly accomplished through the reduction of under-utilized staff,
office closures and management cost controls.
Net interest expense decreased by $53,653 primarily due to charging the UST
indemnification accrual against the reserve instead of expensing it. Other
income increased by $10,884 mainly due to sale of idle equipment in fiscal 1998.
The Company has not provided a provision for income taxes due to the current
quarter's net loss and has not recorded any tax benefit. It has provided a 100%
valuation allowance of the deferred tax asset that results from federal and
state net operating loss carry forwards due to the lack of availability of
federal and state taxable income within the carryback period, available under
the federal and state tax laws as well as the inability to determine the
likelihood that future federal and state taxable income will be sufficient to
utilize the deferred tax asset.
The net loss for the six months ended February 28, 1998 decreased by $643,985
compared to the prior year. This net loss for the first half of fiscal 1998 is
primarily attributable to the lower-than-projected revenues; however, the
decrease in the loss between years results from the improvement in gross margins
and the decrease in overhead costs.
Liquidity and Capital Resources as of February 28, 1998
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets, and liquidation of liabilities through the ordinary course of business.
The Company has incurred losses for the past three years beginning with fiscal
year ended August 31,
Page 15 of 21
<PAGE> 16
1995 and has been dependent upon Laidlaw, Inc. to guarantee the Company's bank
line of credit. In accordance with the preferred stock conversion agreement,
effective June 26, 1998, any amounts borrowed from Laidlaw will convert to a
three-year term loan payable to Laidlaw with quarterly amortization payments
due. If operating losses continue, the Company may not be able to generate
sufficient cash flow to service the term debt or to fund oeprations. See
Footnote 2 in Notes to Consolidated Financial Statements for additional details.
The Company's operating activities used net cash of $461,874 for the six months
ended February 28, 1998. That was primarily the result of the net loss of
$474,798 for the period.
Working capital, including Amounts Due from State Agency decreased by $397,624.
The decrease in working capital is mainly due to the decrease in regular and
unbilled receivables ($409,000) partially offset by the decrease in the accrued
restructuring costs ($226,000). The decrease in revenues and more consistent
follow up in receivables collections are mainly responsible for the lower
receivables.
Investing activities provided $39,180 from proceeds from sale of equipment in
excess of new equipment purchases.
Financing activities provided cash in the amount of $419,202 which was the net
increase in notes payable.
Inflation has not significantly affected the Company's financial position or
operations. Borrowings under the $3,000,000 line of credit bear interest at
prime less .25%. The prime rate at February 28, 1998 was 8.5%. No assurance can
be given that inflation or the prime rate will not significantly fluctuate,
either of which could adversely affect the Company's results of operations.
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 reimbursed
certain costs to clean up eligible contaminated sites. Primarily due to an
estimated unfunded $450 million backlog and annual tax revenue allocation 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.
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. The 1996 Act provided for the elimination of the
reimbursement program effective August 1, 1996 and required all reimbursement
applications to be submitted by December 31, 1996. Also, the 1996 Act created a
Page 16 of 21
<PAGE> 17
non-profit public benefit corporation, which became operational during the Fall
of 1997, to finance the unpaid backlog. This non-profit corporation is charged
with financing the estimated backlog of 9,500 claims totaling over $556 million.
Payment of claims will be on a first-come, first-served methodology based on
application filing date and an assumed annual allocation rate of $100 million.
Claims paid will be subject to a 3.5% annual discount in consideration of the
anticipated accelerated payment as compared to the previously expected period of
4 to 5 years. Payment of the initial portion of the claims (approximately $213
million) was made in March, 1998. Based on information received from the State
of Florida, additional payments will be made periodically as additional claims
packages are reviewed; however, no assurances can be given that a specific
payment timetable will be maintained.
The Company in prior fiscal years recorded valuation allowances on the amounts
due to reflect the State mandated discount and potential denied costs. At August
31, 1997 these allowances totaled $913,918, of which $166,623 was applied as a
valuation allowance to the Amounts Due from State Agency, resulting in a net
amount of $512,927 shown in the accompanying consolidated balance sheet. The
remaining $747,295 is included as an accrued liability to reflect the Company's
potential liability to pay discounts and denied costs on receivables sold to
third-parties.
At February 28, 1998, these allowances totaled $784,444, of which $166,623 was
applied as a valuation allowance to the Amounts Due from State Agency, resulting
in a net of $531,661 shown in the accompanying consolidated balance sheet. The
remaining $617,821 is included as an accrued liability to reflect the Company's
potential liability to pay discounts and denied costs on receivables sold to
third parties.
Approximately $3.1 million in reimbursement applications had been sold to third
party entities at August 31, 1997. The Company used third party funding to avoid
the long payout period by the State. In addition to selling the previously
mentioned claims, the Company filed approximately $703,000 of claims directly
with the State.
Specifically, the Company entered into several arrangements to sell
substantially all the claims filed with the State for reimbursement. These
arrangements required the Company to pay a 3 - 4% prepaid fee at the time the
buyers paid the Company.
Because the State did not pay the funding entities by September 30, 1997, the
Company began paying indemnification costs at a rate of 0.6875% in October 1997.
Under the agreement with the funders, the monthly rate increases such that if
the applications are not paid by the State prior to the 20th month after
funding, the Company will have paid indemnification costs at the rate of 0.6875%
for 18 months. If the applications are not paid within 20 months, the Company
must indemnify the funders at the rate which would have otherwise been received
by the funders from the State program if interest were being paid by the State.
These indemnification
Page 17 of 21
<PAGE> 18
costs are being charged against the reserve account at the present time. In the
event the State does not meet the projected payment schedule beginning in the
first quarter of calendar year 1998, the reserves will not be adequate to absorb
all of the indemnification costs.
As a result of the payments made by the State of Florida in March, 1998, the
Company's exposure for indemnification costs, discounts, and disallowed costs
will be reduced. As of April 14, 1998, the Company is unable to estimate that
reduced exposure.
In addition, the Company has placed 13% of the amounts sold 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 accrues
to the Company's benefit and is recorded as interest income in the period
earned. The escrow balance at February 28, 1998 and August 31, 1997 was $592,917
and $596,408, respectively, and is included in restricted cash on the
accompanying Consolidated Balance Sheet.
The Company filed all amounts due from the State prior to the state mandated
filing deadline of December 31, 1996.
Page 18 of 21
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
EXHIBIT 27 FINANCIAL DATA SCHEDULE (For SEC Use Only)
Reports on Form 8-K
None
Page 19 of 21
<PAGE> 20
SIGNATURES
Pursuant to the requirements 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.
Date: April 13, 1998 By: /s/ Charles S. Higgins, Jr.
----------------------------------
Charles S. Higgins, Jr., President
and Chief Executive Officer
Date: April 13, 1998 By: /s/ DeWayne Baskette
----------------------------------
DeWayne Baskette, Vice President
and Chief Financial Officer
Page 20 of 21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 592,917
<SECURITIES> 0
<RECEIVABLES> 1,883,283
<ALLOWANCES> 311,286
<INVENTORY> 0
<CURRENT-ASSETS> 2,250,558
<PP&E> 1,546,172
<DEPRECIATION> 1,270,016
<TOTAL-ASSETS> 3,060,049
<CURRENT-LIABILITIES> 3,369,550
<BONDS> 0
0
0
<COMMON> 7,952
<OTHER-SE> (317,452)
<TOTAL-LIABILITY-AND-EQUITY> 3,060,049
<SALES> 0
<TOTAL-REVENUES> 2,688,583
<CGS> 0
<TOTAL-COSTS> 1,686,020
<OTHER-EXPENSES> 1,426,603
<LOSS-PROVISION> 26,592
<INTEREST-EXPENSE> 50,758
<INCOME-PRETAX> (474,798)
<INCOME-TAX> 0
<INCOME-CONTINUING> (474,798)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (474,798)
<EPS-PRIMARY> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
