<PAGE> 1
(conformed)
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 JULY 31, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
------------ --------------
COMMISSION FILE NUMBER 33-82092
PDG REMEDIATION, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1741849
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
300 OXFORD DRIVE, MONROEVILLE, PENNSYLVANIA 15146
(Address of principal executive offices) (Zip Code)
412-856-6100
(Registrant's telephone number, including area code)
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
--- ---
As of September 6, 1996, there were 2,470,320 shares of the registrant's common
stock outstanding.
<PAGE> 2
PDG REMEDIATION, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Consolidated Financial Statements and Notes to Consolidated Financial Statements
(a) Condensed Consolidated Balance Sheets as of July 31, 1996 (unaudited) and January 31, 1996 3
(b) Consolidated Statements of Operations for the Three Months Ended July 31, 1996 and
1995 (unaudited) 4
(c) Consolidated Statements of Operations for the Six Months Ended July 31, 1996 and 1995
(unaudited) 5
(d) Consolidated Statements of Cash Flows for the Six Months Ended July 31, 1996 and 1995
(unaudited) 6
(e) Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
PDG REMEDIATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1996 1996*
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 304,000 $ 362,000
Cash held in escrow 820,000 968,000
Accounts receivable - net 509,000 1,626,000
Costs and estimated earnings in excess of billings on
uncompleted contracts 2,338,000 2,320,000
Receivable from parent 4,000 --
Other current assets 260,000 137,000
---------- ----------
TOTAL CURRENT ASSETS 4,235,000 5,413,000
PROPERTY, PLANT AND EQUIPMENT 714,000 617,000
Less: accumulated depreciation (510,000) (437,000)
---------- ----------
204,000 180,000
OTHER ASSETS 20,000 21,000
---------- ----------
TOTAL ASSETS $4,459,000 $5,614,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 919,000 $1,052,000
Insurance company accrual 454,000 1,284,000
Accrued liabilities 611,000 491,000
Billings in excess of costs and estimated earnings
on uncompleted contracts 12,000 8,000
Accrued income taxes 8,000 48,000
Payable to parent - 117,000
Accrued loss on sale of discontinued operation 121,000 140,000
Current portion of long-term debt 24,000 16,000
---------- ----------
TOTAL CURRENT LIABILITIES 2,149,000 3,156,000
INSURANCE COMPANY ACCRUAL 681,000 --
LONG-TERM DEBT 40,000 20,000
STOCKHOLDERS' EQUITY
Common stock 25,000 25,000
Additional paid-in capital 4,768,000 4,768,000
Retained earnings (deficit) (3,204,000) (2,355,000)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 1,589,000 2,438,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,459,000 $5,614,000
========== ==========
</TABLE>
*Derived from audited financial statements.
See accompanying notes to consolidated financial statements.
3
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PDG REMEDIATION, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JULY 31,
------------------------------
1996 1995
----------- ----------
<S> <C> <C>
CONTRACT REVENUES $1,216,000 $ 915,000
CONTRACT COSTS 909,000 614,000
---------- ----------
Gross margin 307,000 301,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 621,000 540,000
---------- ----------
Loss from operations (314,000) (239,000)
OTHER INCOME (EXPENSE):
Interest expense (111,000) (98,000)
Interest income 1,000 5,000
----------- ----------
(110,000) (93,000)
---------- ----------
Loss from continuing operations before income taxes (424,000) (332,000)
INCOME TAX PROVISION -- --
---------- ----------
LOSS FROM CONTINUING OPERATIONS (424,000) (332,000)
DISCONTINUED OPERATION:
Loss from operation of GeoLogic -- (329,000)
---------- ----------
NET LOSS $ (424,000) $ (661,000)
========== ==========
NET LOSS PER COMMON SHARE:
Loss from continuing operations $(0.17) $(0.14)
Discontinued operation -- (0.13)
---------- ----------
Net loss per common share $(0.17) $(0.27)
========== ==========
AVERAGE COMMON SHARES OUTSTANDING 2,470,000 2,470,000
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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PDG REMEDIATION, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JULY 31,
------------------------------
1996 1995
---------- ----------
<S> <C> <C>
CONTRACT REVENUES $2,509,000 $2,933,000
CONTRACT COSTS 1,937,000 1,918,000
---------- ----------
Gross margin 572,000 1,015,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,216,000 1,087,000
---------- ----------
Loss from operations (644,000) (72,000)
OTHER INCOME (EXPENSE):
Interest expense (212,000) (212,000)
Interest income 5,000 11,000
Other income 2,000 --
---------- ----------
(205,000) (201,000)
---------- ----------
Loss from continuing operations before income taxes (849,000) (273,000)
INCOME TAX PROVISION -- --
---------- ----------
LOSS FROM CONTINUING OPERATIONS (849,000) (273,000)
DISCONTINUED OPERATION:
Loss from operation of GeoLogic -- (475,000)
---------- ----------
NET LOSS $(849,000) $ (748,000)
========== ==========
NET LOSS PER COMMON SHARE:
Loss from continuing operations $(0.34) $(0.11)
Discontinued operation -- (0.20)
---------- ----------
Net loss per common share $(0.34) $(0.31)
========== ==========
AVERAGE COMMON SHARES OUTSTANDING 2,470,000 2,440,000
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
PDG REMEDIATION, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JULY 31,
------------------------------
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (849,000) $ (748,000)
ADJUSTMENTS TO RECONCILE NET
LOSS TO CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Depreciation and amortization 112,000 87,000
Provision for losses on accounts receivable 20,000 105,000
Other 11,000 (1,000)
CHANGES IN ASSETS AND LIABILITIES
OTHER THAN CASH:
Cash held in escrow 148,000 (131,000)
Accounts receivable 1,097,000 1,456,000
Costs and estimated earnings in excess of billings
on uncompleted contracts (18,000) 571,000
Other current assets (80,000) (98,000)
Net assets of discontinued operation -- (201,000)
Accounts payable (133,000) (37,000)
Billings in excess of costs and estimated earnings
on uncompleted contracts 4,000 (127,000)
Accrued income taxes payable (40,000) (1,000)
Accrued liabilities (121,000) 132,000
Payable to parent, net (121,000) 155,000
Accrued loss on sale of discontinued operation (19,000) --
---------- ----------
TOTAL ADJUSTMENTS 860,000 1,910,000
---------- ----------
CASH PROVIDED BY OPERATING ACTIVITIES 11,000 1,162,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (97,000) (53,000)
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (97,000) (53,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on common shares sold in initial public offering -- 2,151,000
Proceeds on warrants sold -- 100,000
Proceeds from debt 40,000 3,676,000
Principal payments on debt (12,000) (6,417,000)
---------- ----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 28,000 (490,000)
---------- ----------
Net (Decrease) Increase in Cash and Short-Term Investments (58,000) 619,000
Cash and Short-Term Investments, Beginning of Period 362,000 7,000
---------- ----------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 304,000 $ 626,000
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
PDG REMEDIATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JULY 31, 1996
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements of PDG Remediation, Inc. (the
"Corporation") are unaudited. However, in the opinion of management, they
include all adjustments necessary for a fair presentation of financial
position, results of operations and cash flows. All adjustments made during the
three and six months ended July 31, 1996, were of a normal, recurring nature.
The amounts presented for the three and six months ended July 31, 1996, are not
necessarily indicative of results of operations for a full year. Additional
information is contained in the Annual Report on Form 10-K of the Corporation
for the year ended January 31, 1996, as amended by Form 10-K/A dated May 30,
1996, and should be read in conjunction with this quarterly report.
Certain reclassifications have been made to the prior year financial statements
to conform with the current year presentation.
NOTE 2 - BUSINESS ACTIVITIES
FLORIDA OPERATIONS
The Corporation has historically performed a substantial amount of work under a
Florida state funded site rehabilitation program, known as the "EDI Program,"
which provided for the remediation of contaminated sites related to the storage
of petroleum and petroleum products. During the Corporation's fiscal year ended
January 31, 1996, the EDI Program was substantially modified to establish a
protocol for continued work on sites based on their priority ranking and a
pre-approval process for both the scope and the cost of work for petroleum clean
up program tasks. The revised Florida state funded site rehabilitation program
is known as the "Pre-Approval Program."
As a result of the changes in the EDI Program, the Corporation experienced a
material adverse change in its operations during the last three quarters of
fiscal 1996 and in the first six months of fiscal 1997, which included
substantial reductions in contract revenues and significant operating losses
since the number of sites in the Corporation's backlog immediately eligible for
continued reimbursement were significantly reduced. Further, volume at the
Corporation's thermal treatment facility, GeoLogic Recovery Systems
("GeoLogic"), was significantly affected by the EDI Program changes and,
accordingly, the Corporation sold this facility on April 25, 1996. The
effective date of the sale of GeoLogic was January 31, 1996.
The Corporation reacted to the impact of these EDI Program changes on its
operations through the implementation of cost reductions and increased
marketing efforts at its Florida remediation service operation; planned growth
within its Pennsylvania remediation service operation; and the identification
of acquisitions to replace the revenues lost.
Although the Corporation has made some progress toward the replacement of these
revenues by increasing its backlog of high priority sites eligible under the
Pre-Approval Program, delays by the State of Florida have prevented the
Corporation from commencing work on these sites. As a result of ongoing losses
at the Corporation's Florida operation, in August 1996, the Corporation made a
decision to exit the remediation market in Florida. The Corporation intends, to
the extent possible, to sell the existing assets of this operation or, if that
is not feasible, to close the operation by no later than November 30, 1996.
The state of Florida passed legislation at the end of May 1996 that includes
measures to satisfy the existing obligations to fund the backlog under the EDI
Program. The legislation requires clean-ups to continue on the basis of
priority rankings under the Pre-Approval Program. The legislation provides for
the State of Florida to fund the existing backlog through the issuance of
bonds, thereby enabling reimbursement applications submitted under the EDI
Program to be paid on an accelerated basis. However, in exchange for this
accelerated payment, reimbursement applications will be paid at a discount
effective January 1, 1997. The annual discount rate to be used is 3.5%, and
the present value
7
<PAGE> 8
of an application will be based upon the accelerated date the Florida
Department of Environmental Protection ("FDEP") anticipates settling a
reimbursement application, compared to the original date a reimbursement
application was scheduled to be settled.
The Corporation estimates that the acceleration of payments by the FDEP on
reimbursement applications under the EDI Program will include the early release
of cash, which is currently being held in escrow to cover future interest costs
and potential disallowances on reimbursement applications, and the termination
of interest obligations during the second quarter of calendar year 1997.
Until the FDEP establishes a schedule of anticipated payment dates, the
Corporation will not be able to determine the impact of discounting on its
operating results. However, the Corporation may be required to record an
adjustment to reflect the negative impact of the discounting on its results of
operations and financial condition.
The Corporation was required to complete all field work under the existing EDI
Program by no later than July 31, 1996, and the FDEP must be invoiced for this
work by no later than December 31, 1996.
POTENTIAL ACQUISITION
During March 1996, the Corporation entered into a letter of intent to acquire
SPATCO Environmental, Inc. ("SEI"), an environmental remediation services
company located in the southeastern United States, from its sole shareholder,
Vigour Holding & Finance b v, in exchange for shares of the Corporation's
common stock and preferred stock. For the fiscal year ended December 31, 1995,
SEI generated revenues of approximately $11.7 million and a loss before
interest and taxes of $47,000. SEI's results of operations for the fiscal year
ended December 31, 1995 included the effects of a management fee for services
rendered of $493,000 which was paid to an affiliate of SEI. The Corporation
intends to provide similar services to SEI upon completion of the purchase
which the Corporation anticipates will result in cost savings compared to the
current management fee.
The Corporation believes that the effect of this acquisition will be to replace
and expand the Corporation's revenues which were severely depressed by the
changes in the EDI Program in the fiscal year ended January 31, 1996. On August
21, 1996, the Corporation entered into a definitive agreement to acquire SEI.
The closing of the transaction is subject to the replacement of certain
financing currently outstanding with respect to SEI. It is anticipated that the
transaction will close during the third quarter of fiscal 1997.
NOTE 3 - DISCONTINUED OPERATION
On April 25, 1996, the Corporation sold its interest in GeoLogic to Specialty
Environmental, Inc., effective as of January 31, 1996, in exchange for the
assumption by Specialty Environmental, Inc. of all of the obligations and
liabilities of GeoLogic. Concurrently, the Corporation entered into a Surrender
and Release Agreement, effective as of January 31, 1996, with respect to an
equipment lease associated with the facility in exchange for a $0.22 million
payment.
The operations of GeoLogic have been reflected as discontinued in the
accompanying financial statements. Net sales of GeoLogic were $0.1 million and
$0.7 million for the three and six months ended July 31, 1995, respectively.
NOTE 4 - FEDERAL INCOME TAXES
The Corporation recognized a loss for financial reporting purposes during the
six months ended July 31, 1996 and 1995; therefore, no income tax provision has
been recognized.
Income taxes paid by the Corporation for the six months ended July 31, 1996 and
1995 totaled approximately $2,000 and $4,000, respectively.
8
<PAGE> 9
NOTE 5 - LINE OF CREDIT
PDG Environmental Services, Inc. ("PDGES"), a wholly-owned subsidiary of the
Corporation, currently maintains a Master Funding and Indemnification Agreement
with Sirrom Environmental Funding, LLC (the "Sirrom Agreement") which provides
$4.0 million of funding relative to unbilled amounts under the EDI Program
through August 21, 1997. The Sirrom Agreement enables the Corporation to fund
amounts billed under the EDI Program at the prime rate of interest, as defined,
plus 3%. The Corporation is advanced 100% of amounts billed under the EDI
Program, but is required to deposit 34% into an escrow account to cover
potential disallowances, future interest costs, and a commitment fee of 2% of
the total funding provided. In connection with the execution of the Sirrom
Agreement, the Corporation also issued Sirrom Environmental Funding, LLC a
warrant to purchase 100,000 shares of the Corporation's common stock at an
exercise price of $1.37 per share. The warrant expires on January 31, 1999 and
the Corporation has recorded $50,000 as the estimated fair market value of the
warrant.
The Corporation and PDGE are guarantors on the Sirrom Agreement. As of July 31,
1996, the Corporation was advanced approximately $2.3 million under the Sirrom
Agreement. The Corporation has provided an indemnification to Sirrom
Environmental Funding, LLC for any amounts advanced to the Corporation under
the current Sirrom Agreement and under a previous agreement which are not
reimbursed under the EDI Program in the amount of $3.0 million.
The Corporation paid interest costs totaling approximately $233,000 and
$362,000 during the six months ended July 31, 1996 and 1995, respectively.
NOTE 6 - NET LOSS PER SHARE
Primary earnings per share are calculated by dividing the net loss by the
weighted average of common shares outstanding since the Corporation's common
stock was sold to the public effective February 9, 1995.
Stock options and warrants have not been reflected as exercised for purposes of
computing the primary loss per share for the three and six months ended July
31, 1996 and 1995, respectively, since the exercise of such options and
warrants would be anti-dilutive.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
As discussed in further detail in Item 1. Legal Proceedings contained in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended April 30,
1996, PDGES was involved in litigation with International Surplus Lines
Insurance, Inc. ("ISLIC") as a result of insurance advances made to PDGES by
ISLIC. PDGES and ISLIC have recently arrived at an agreement in principle to
settle this matter. PDGES has agreed to pay a total of $1,135,000 in equal
monthly payments of $37,883.33 over a 30-month period. No interest will be
applied. The parties filed a Joint Stipulation for Dismissal of the matter in
the U.S. District Court for the Middle District of Florida and are currently
executing the terms of a settlement and mutual release, including
indemnification of PDGES. At July 31, 1996, the Corporation had recorded
$1,135,000 as the amount owed to ISLIC.
As discussed in further detail in Item 3. Legal Proceedings contained in the
Corporation's Annual Report on Form 10-K for the year ended January 31, 1996,
as amended by Form 10-K/A dated May 30, 1996, the Corporation, certain of its
officers and directors, and the underwriters of the initial public offering
have been named as defendants in a purported class action lawsuit involving the
purchase by all persons and entities of the Corporation's common stock from
February 9, 1995, through May 23, 1995. The action alleges that the defendants
violated certain federal securities laws.
The Corporation believes that the allegations are without merit or that there
are meritorious defenses to the allegations, and intends to defend the action
vigorously. If however, the plaintiff is successful in its claims, a judgment
rendered against the Corporation and the other defendants would likely have a
material adverse effect on the business and operations of the Corporation.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1996 AND 1995
Contract revenues as reported by the Corporation increased significantly during
the three months ended July 31, 1996 to $1.2 million compared to $0.9 million
in the three months ended July 31, 1995 which represented a total increase of
33% when comparing the respective three month periods. The increase in contract
revenues in the current three month period is due to a substantial increase in
contract revenues of 149% at the Corporation's Pennsylvania remediation service
operation which more than offset the 47% decline in contract revenues at the
Corporation's Florida remediation service operation, which has continued to be
adversely affected by changes in the EDI Program in late March 1995.
The Corporation's gross margin during each of the three month periods ended
July 31, 1996 and 1995 remained constant at $0.3 million. The Corporation's
Pennsylvania remediation service operation increased by 186% when comparing the
quarter ended July 31, 1996 to the quarter ended July 31, 1995 due to favorable
margins experienced under a large contract. The overall improvement in margins
at the Pennsylvania remediation service operation were offset by the 66%
reduction in gross margin experienced in the current quarter at the Florida
remediation service operation due to the changes in the EDI Program in late
March 1995. Although the Corporation responded to these changes by accumulating
a backlog of sites under the new Pre-Approval Program and by actively pursuing
private remediation contracts, the Corporation has been hampered by its
inability to perform work on sites under the Pre-Approval Program due to
priority limitations imposed by the state of Florida and by extreme competitive
conditions in the market for private remediation work in the state. Further,
the Corporation instituted staff reductions in March 1996 at this operation
and, in August 1996, made a decision to exit the remediation market in Florida,
as discussed further under "Prospective Information."
Selling, general and administrative expenses increased to $0.62 million in the
three months ended July 31, 1996 compared to $0.54 million in the same three
month period of the prior fiscal year. Selling, general and administrative
expenses at the Corporation's Florida remediation service operation continued
to remain high in the current three month period in relation to the
significantly lower revenue levels due to higher indirect labor costs
associated with efforts to obtain new work. The Corporation has made ongoing
efforts to contain these costs through staff reductions and reductions in other
overhead expenses; however, in August 1996 a decision was made by the
Corporation to exit the remediation market in Florida. At the Corporation's
Pennsylvania remediation service operation, selling, general and administrative
expenses declined as a percentage of contract revenues in the three months
ended July 31, 1996 compared to the same three month period of the prior fiscal
year due to higher billable labor. Selling, general and administrative expenses
associated with the corporate office were higher in the current three month
period principally as a result of legal and accounting costs associated with
certain litigation involving the Corporation and certain insurance costs.
As a result of the factors described above, the Corporation reported a loss
from operations of $0.31 million for the three months ended July 31, 1996
compared to a loss from operations of $0.24 million for the three months ended
July 31, 1995.
Interest expense reported by the Corporation increased slightly to $0.11
million in the second quarter of fiscal 1997 versus $0.10 million in the second
quarter of the prior fiscal year principally due to higher interest rates
associated with work which was performed under the EDI Program and has been
funded through Sirrom Environmental Funding, LLC ("Sirrom"). In spite of the
fact that the Corporation's long-term debt has decreased when comparing the two
quarters, the Corporation continues to recognize interest expense on work
performed under the EDI Program which has been funded through Sirrom and
another contractor.
Since the Corporation recorded a loss for financial reporting purposes during
each of the three month periods ended July 31, 1996 and 1995, and based upon
its anticipated full year effective income tax rate in each of these fiscal
years, no income taxes have been provided during these periods.
10
<PAGE> 11
During the three months ended July 31, 1995, the Corporation recognized a loss
from its discontinued thermal treatment services facility, GeoLogic, of $0.33
million due to the shutdown of the facility for the majority of the period.
GeoLogic was sold on April 25, 1996 and the Corporation reflected it as a
discontinued operation effective January 31, 1996.
SIX MONTHS ENDED JULY 31, 1996 AND 1995
During the six months ended July 31, 1996, the Corporation's contract revenues
decreased by approximately 14.5% to $2.5 million compared to $2.9 million
reported in the same six month period of the prior fiscal year. The reduction
in contract revenues in the current six month period is due to a 75% decline in
revenues at the Corporation's Florida remediation service operation due to the
changes in the EDI Program in late March 1995. A substantial portion of the
Corporation's contract revenues were generated under this program in prior
fiscal years. The significant decline in revenues which the Corporation
experienced at its Florida remediation service operation was offset in part by
a 183% increase in revenues at its Pennsylvania remediation service operation,
principally due to increased revenues under a large federal contract.
The Corporation's gross margin decreased significantly in the six months ended
July 31, 1996 to $0.57 million versus $1.0 million in the six months ended July
31, 1995. The majority of the decrease related to an 80% reduction in gross
margin at the Corporation's Florida remediation service operation due to the
changes in the EDI Program. The Corporation has been actively engaged in
replacing the revenues lost by the changes in the EDI Program by accumulating a
backlog of sites under the new Pre-Approval Program in Florida and identifying
private remediation work; however, the Corporation has been unable to perform
significant work on its backlog of sites under the Pre-Approval Program due to
priority limitations imposed by the state of Florida and the market for private
work has been extremely competitive. Gross margins at the Corporation's
Pennsylvania remediation service operation increased by 117% when comparing the
six months ended July 31, 1996 and 1995 due to favorable margins under a large
contract which helped to partially offset the negative margins experienced at
the Florida remediation service operation.
Selling, general and administrative increased to $1.2 million in the six months
ended July 31, 1996 versus $1.1 million in the six months ended July 31, 1995.
The increase in the current six months is principally due to higher legal and
accounting costs associated with certain litigation involving the Corporation
and certain insurance costs. In addition, selling, general and administrative
expenses at the Corporation's Florida remediation service operation continued
to remain high during the current six month period in spite of significantly
lower revenue levels as a result of an increase in indirect labor costs
associated with marketing and proposal efforts to replace lost revenues. The
Corporation's Pennsylvania remediation service operation experienced a decline
in selling, general and administrative expenses as a percentage of contract
revenues in the current six month period compared to the prior year's six month
period as billable labor at this operation increased.
As a result of the factors described above, the Corporation reported a loss
from operations of $0.6 million for the six months ended July 31, 1996 versus a
loss from operations of $0.07 million for the same six month period of the
prior fiscal year.
Interest expense remained constant at $0.2 million when comparing the two six
month periods. Although the Corporation's long-term debt decreased when
comparing the two six month periods, the Corporation continues to recognize
interest expense on work performed under the EDI Program which has been funded
through Sirrom and another contractor.
The Corporation recognized a small amount of interest income in each of the six
month periods on invested cash balances.
Due to the recognition of a loss for financial reporting purposes and based
upon the Corporation's anticipated full year effective income tax rate, the
Corporation has not provided for any income taxes during the six months ended
July 31, 1996 and 1995.
11
<PAGE> 12
The Corporation recognized a loss of $0.47 million in the six months ended July
31, 1996 associated with its thermal treatment services facility, GeoLogic,
which was discontinued effective January 31, 1996 and sold on April 25, 1996.
The losses experienced at GeoLogic resulted from reduced volume and prices at
the facility which the Corporation believes was indirectly attributable to the
EDI Program changes and the shutdown of the facility for the majority of the
second quarter of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended July 31, 1996, the Corporation's liquidity
decreased by $0.06 million as cash and short-term investments totaled $0.30
million at July 31, 1996 compared to $0.36 million at January 31, 1996.
The decrease in cash and short-term investments in the current six month period
is attributable to cash used to fund investing activities of $0.1 million,
which was offset in part by cash provided by financing activities of $0.03
million and cash provided by operating activities of $0.01 million.
Cash provided by operating activities in the current six month period of $0.01
million included a $1.1 million reduction in accounts receivable due to
collections on receivables under the EDI Program, a $0.1 million decrease in
cash held in escrow due to the payments made to cover interest costs and
expenses under the Sirrom Agreement and settlements pursuant to another escrow
agreement, and $0.1 million related to depreciation and amortization, the
provision for losses on accounts receivable, and other miscellaneous cash
inflows. The cash inflows generated by operating activities were almost fully
offset by cash outflows related to the net loss for the current six months of
$0.85 million, a reduction in accounts payable of $0.1 million which
principally related to a payment associated with the sale of GeoLogic, a
decrease in accrued liabilities of $0.1 million related to the timing of
payments, an increase in other current assets of $0.1 million principally
related to prepaid insurance, payments to PDGE of $0.1 million as settlement of
the intercompany balance, and $0.1 million of other miscellaneous cash
outflows.
Cash outflows associated with investing activities of $0.1 million in the
current six month period related to the purchase of property, plant and
equipment. Cash inflows from financing activities of $0.03 million included
$0.04 million of proceeds from new indebtedness offset by principal payments on
existing indebtedness.
During the six months ended July 31, 1995, the Corporation's liquidity
increased significantly as cash and short-term investments increased by $0.6
million due to cash inflows provided by operating activities of $1.2 million,
offset in part by cash used by financing activities of $0.5 million and cash
outflows used to fund investing activities of $0.1 million.
The Corporation's cash inflows provided by operating activities of $1.2 million
for the six months ended July 31, 1995 included a decrease in accounts
receivable of $1.5 million and a $0.6 million reduction in costs and estimated
earnings in excess of billings on uncompleted contracts; both of these
reductions related to the changes in the EDI Program which enabled the
Corporation to bill certain outstanding work. Other cash inflows from operating
activities in the six months ended July 31, 1995 included an increase in
accrued liabilities of $0.1 million related to the timing of certain payments,
an increase in the payable to parent of $0.2 million related to the settlement
of the intercompany balance associated with the sale of 40.5% of the
Corporation to the public, and $0.2 million related to depreciation and
amortization and the provision for losses on accounts receivable. The
Corporation's cash outflows associated with operating activities in the six
months ended July 31, 1995, which partially offset the positive cash inflows,
principally included $0.7 million related to the net loss reported in the
period, a $0.1 million increase in other current assets associated with prepaid
insurance, a $0.2 million increase in the net assets of the discontinued
operation, GeoLogic, a $0.1 million increase in cash held in escrow due to
funding work performed under the EDI Program, and a $0.1 million decrease in
billings in excess of costs and estimated earnings on uncompleted contracts due
to the timing of certain contract activity.
Cash outflows associated with the Corporation's financing activities in the six
months ended July 31, 1995 included $6.4 million of principal payments on debt
which related to repayments under existing lines of credit. The cash outflows
associated with financing activities were partially offset by cash inflows of
$2.25 million related to proceeds from the initial public offering of the
Corporation's common stock and warrants, and $3.7 million related to
refinancing of indebtedness under lines of credit.
12
<PAGE> 13
Cash outflows of $0.05 million during the six month period ended July 31, 1995
related to the purchase of property, plant and equipment.
At July 31, 1996, the Corporation's backlog is expected to result in contract
revenues of approximately $2.0 million to $3.0 million for the remaining six
months of fiscal 1997 which has been adjusted to reflect the Corporation's
decision to exit the remediation business in Florida as discussed in the
paragraphs which follow.
The Corporation currently maintains an agreement with Sirrom Environmental
Funding, LLC which provides $4.0 million of funding relative to unbilled
amounts under the EDI Program. The agreement with Sirrom, which expires on
August 21, 1997, enables the Corporation, through its wholly-owned subsidiary
PDGES, to fund amounts billed under the EDI Program at the prime rate of
interest , as defined, plus 3%. The Corporation is advanced 100% of amounts
billed; however, it is required to deposit 34% into an escrow account to cover
potential disallowances and future interest costs. The Corporation and PDGE are
guarantors on the Sirrom Agreement. At July 31, 1996, the Corporation has been
advanced approximately $2.3 million under the Sirrom Agreement.
The Corporation is also in the process of entering into a settlement agreement
with respect to certain litigation involving ISLIC which will require the
Corporation to make monthly payments of approximately $38,000 which will have a
negative impact on the Corporation's future liquidity.
Due to prior and current year operating losses, the Corporation has limited
funds available to meet its ongoing working capital requirements. However, the
Corporation believes that the proceeds generated under the Sirrom Agreement
combined with cash generated from operations should enable it to meet its
ongoing liquidity requirements for the remainder of fiscal 1997. The
Corporation will continue to closely monitor its liquidity requirements on an
ongoing basis and will be prepared to implement further cost reduction measures
to conserve cash as required.
PROSPECTIVE INFORMATION
During the past eighteen months, the Corporation has experienced significant
operating losses, the majority of which are attributable to the changes in the
EDI Program, since a substantial portion of the Corporation's historical
revenues were generated under this program. The Corporation reacted to the
impact of these changes through the implementation of cost reductions and
increased marketing efforts at its Florida remediation service operation,
planned growth within its Pennsylvania remediation service operation, and the
identification of acquisitions to replace the revenues lost.
The Corporation has made some progress toward the replacement of these revenues
by increasing its backlog of high priority sites eligible under the new
Pre-Approval Program in the state of Florida; however, delays under the new
program have prevented the Corporation from commencing work on these high
priority sites. As a result of the ongoing losses which the Corporation has
continued to experience at its Florida remediation service operation, in August
1996, the Corporation made a decision to exit the remediation market in
Florida. The Corporation intends, to the extent possible, to sell the existing
assets of this operation or, if that is not feasible, to close the operation by
no later than November 30, 1996. The Corporation expects to record the
financial effects of this decision within the next two months.
The Corporation also expects to finalize the acquisition of SPATCO
Environmental, Inc. by the end of September 1996 which is expected to result in
a substantial increase in the Corporation's prospective revenues and enable the
Corporation to increase its customer base in certain geographical areas.
In May 1996, the state of Florida passed legislation which included a measure
to satisfy existing obligations to fund the backlog under the EDI Program. The
legislation provides for the state of Florida to fund the existing backlog
through the issuance of bonds, thereby enabling reimbursement applications
submitted under the EDI Program to be paid on an accelerated basis. However, in
exchange for this accelerated payment, reimbursement applications will be paid
at a discount effective January 1, 1997. The annual discount rate to be used is
3.5%, and the present value of an application will be based upon the
accelerated date the FDEP anticipates settling a reimbursement application,
compared to the original date a reimbursement application was scheduled to be
settled.
13
<PAGE> 14
The Corporation estimates that the acceleration of payments by the FDEP on
reimbursement applications under the EDI Program will include the early release
of cash, which is currently being held in escrow to cover future interest costs
and potential disallowances on reimbursement applications, and the termination
of interest obligations during the second quarter of calendar year 1997. The
Corporation was required to complete all field work under the existing EDI
Program by no later than July 31, 1996 and the FDEP must be invoiced for this
work by no later than December 31, 1996.
The Corporation will not be able to determine the impact of discounting on its
operating results until the FDEP establishes a schedule of anticipated payment
dates, however, the Corporation may be required to record an adjustment to
reflect the negative impacting of the discounting on its results of operations
and financial condition.
The Corporation, certain of its officers and directors, and the underwriters of
the initial public offering have been named in a purported class action suit
involving the purchase by all persons and entities of the Corporation's common
stock from February 9, 1995 through May 23, 1995. The action alleges that the
defendants violated certain federal securities laws. The Corporation believes
that the allegations are without merit or that there are meritorious defenses
to the allegations, and intends to defend the action vigorously. If, however,
the plaintiff is successful in its claims, a judgment rendered against the
Corporation and the other defendants would likely have a material adverse
effect on the business and operations of the Corporation.
14
<PAGE> 15
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As discussed in further detail in Item 1. Legal Proceedings contained in the
registrant's Quarterly Report on Form 10-Q for the quarter ended April 30,
1996, PDGES was involved in litigation with International Surplus Lines
Insurance, Inc. ("ISLIC") as a result of insurance advances made to PDGES by
ISLIC. PDGES and ISLIC have recently arrived at an agreement in principle to
settle this matter. PDGES has agreed to pay a total of $1,135,000 in equal
monthly payments of $37,883.33 over a 30-month period. No interest will be
applied. The parties filed a Joint Stipulation for Dismissal of the matter in
the U.S. District Court for the Middle District of Florida and are currently
executing the terms of a settlement and mutual release, including
indemnification of PDGES.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the registrant was held on August 15,
1996. Management's nominees for the two director's positions were elected at
such meeting.
A brief description of other matters voted upon at the Annual Meeting and the
number of affirmative and negative votes cast with respect to each such matter
are outlined below:
<TABLE>
<CAPTION>
FOR AGAINST NOT VOTED ABSTAIN
<S> <C> <C> <C> <C> <C>
(1) Ratification of Ernst & Young as the 2,433,054 0 0 1,000
registrant's independent auditors.
(2) Approval and adoption of the PDG 1,570,035 215,250 648,569 200
Remediation, Inc. 1995 Qualified
Incentive Stock Option Plan.
(3) Approval and adoption of the PDG 1,583,635 214,250 635,969 200
Remediation, Inc. Amended 1994
Stock Option Plan.
</TABLE>
ITEM 5. OTHER INFORMATION
On September 4, 1996, PDG Environmental, Inc. ("PDGE"), the majority owner of
the registrant, entered into a binding agreement to sell its 59.5% ownership
interest in the registrant, consisting of 1,470,320 shares of common stock, to
CVD Financial Corporation ("CVD Financial") of Vancouver, Canada, pursuant to
the terms of a Loan Modification Agreement between PDGE and CVD Financial
effective as of July 31, 1996. The closing of the sale is subject to a number
of conditions, including (a) the reincorporation of the registrant as a
Delaware corporation on or before November 1, 1996; (b) the reincorporation of
the registrant resulting in no material liabilities to the registrant; and (c)
not more than five percent (5%) of the shareholders of the registrant
exercising dissenters' rights in connection with the reincorporation.
The agreement between PDGE and CVD Financial also provides that PDGE has the
right, until November 1, 1996, to arrange for the account of CVD Financial a
cash sale of all shares of the registrant's common stock held by CVD Financial
or its affiliates at a minimum price as stipulated in the agreement, provided
that certain conditions are met, including the satisfaction of any indebtedness
or guarantees which CVD Financial has provided to the registrant in the
interim.
The registrant's Board of Directors has also been restructured effective
September 4, 1996, with the resignations of John Regan and David D'Appolonia
and the appointment of four representatives of CVD Financial, Jimmy Lee,
Michael Smith, Roy Zanatta and Leonard Petersen, as members of the Board of
Directors. John Musacchio, the registrant's President and Chief Operating
Officer, and Dr. Edgar Berkey will continue to serve on the registrant's Board
of Directors. The registrant expects to appoint a representative of Vigour
Holding & Finance, b v, current
15
<PAGE> 16
owner of SPATCO Environmental, Inc. ("SEI"), to its Board of Directors upon the
closing of the registrant's previously announced acquisition of SEI, which is
projected to occur within the next thirty days.
On September 4, 1996, the Board of Directors of the registrant voted to change
the registrant's fiscal year end from January 31 to December 31. The registrant
will file the report covering the transition period on Form 10-Q for the new
quarterly period ended September 30, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
EXHIBIT INDEX
EXHIBIT NO. AND DESCRIPTION
PAGES OF SEQUENTIAL
NUMBERING SYSTEM
27 Financial data schedule
(b) REPORTS ON FORM 8-K:
The registrant did not file any reports on Form 8-K during the three
months ended July 31, 1996.
16
<PAGE> 17
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.
PDG REMEDIATION, INC.
By /s/ JOHN MUSACCHIO
---------------------------------------
John M. Musacchio
President and Chief Operating Officer
By /s/ ROSE M. CERCONE
---------------------------------------
Rose M. Cercone
Chief Financial Officer
Date: September 14, 1996
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF JULY 31, 1996 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 31, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000927761
<NAME> PDG REMEDIATION, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JUL-31-1996
<CASH> 304,000
<SECURITIES> 0
<RECEIVABLES> 509,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,235,000
<PP&E> 714,000
<DEPRECIATION> 510,000
<TOTAL-ASSETS> 4,459,000
<CURRENT-LIABILITIES> 2,149,000
<BONDS> 40,000
0
0
<COMMON> 25,000
<OTHER-SE> 1,564,000
<TOTAL-LIABILITY-AND-EQUITY> 4,459,000
<SALES> 2,509,000
<TOTAL-REVENUES> 2,509,000
<CGS> 1,937,000
<TOTAL-COSTS> 1,937,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 212,000
<INCOME-PRETAX> (849,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (849,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (849,000)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
