<PAGE> 1
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.ah-11(c) or
Section 240.14a-12
PDG REMEDIATION, INC.
(Name of Registrant as Specified In Its Charter)
PDG REMEDIATION, INC.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ X ] $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or
14a-6(i)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
________________________________________________________________________
2) Aggregate number of securities to which transaction applies:
________________________________________________________________________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:*
________________________________________________________________________
4) Proposed maximum aggregate value of transaction:
________________________________________________________________________
*Set forth the amount on which the filing fee is calculated and state how
it was determined.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
________________________________________________________________________
2) Form, Schedule or Registration Statement No.:
________________________________________________________________________
3) Filing Party:
________________________________________________________________________
4) Date Filed:
________________________________________________________________________
<PAGE> 2
PDG REMEDIATION, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders of PDG Remediation, Inc. (the "Corporation")
will be held at the Harley Hotel, 699 Rodi Road, Pittsburgh, Pennsylvania
15235, on Thursday, August 15, 1996 at 10:00 a.m., Eastern Daylight Time, to
consider and vote upon the following matters:
(a) the election of two (2) directors for a term of three (3) years each;
(b) the approval and adoption of the PDG Remediation, Inc. 1995 Qualified
Incentive Stock Option Plan;
(c) the approval and adoption of the PDG Remediation, Inc. Amended 1994 Stock
Option Plan which amends the Corporation's existing 1994 Stock Option Plan
to increase the number of shares that may be issued under the Plan from
250,000 shares to 350,000 shares and to make certain other administrative
amendments;
(d) the ratification of Ernst & Young LLP as the Corporation's independent
auditors; and
(e) the transaction of such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed June 28, 1996, at the close of business, as
the record date for the purpose of determining the shareholders who are
entitled to receive notice of and to vote at the Annual Meeting.
Shareholders are requested to sign, date and return the enclosed proxy in the
accompanying stamped and addressed envelope.
Rose M. Cercone
Secretary
Monroeville, Pennsylvania
July 8, 1996
<PAGE> 3
PROXY STATEMENT
PDG REMEDIATION, INC.
300 OXFORD DRIVE
MONROEVILLE, PENNSYLVANIA 15146
(412) 856-6100
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD
AUGUST 15, 1996
This Proxy Statement is being furnished to all shareholders of PDG Remediation,
Inc. (the "Corporation") in connection with the solicitation of proxies by its
board of directors (the "Board of Directors") for use at the annual meeting of
the shareholders of the Corporation to be held on August 15, 1996, and any
adjournment or postponement thereof (the "Annual Meeting"), which is being held
for the purpose of considering and voting upon: (a) the election of two (2)
directors for a term of three (3) years; (b) the approval and adoption of the
PDG Remediation, Inc. 1995 Qualified Incentive Stock Option Plan (the "1995
Plan"); (c) the approval and adoption of the PDG Remediation, Inc. Amended 1994
Stock Option Plan (the "Amended 1994 Plan") which amends the existing 1994
Stock Option Plan (the "1994 Plan") to increase the number of shares that may
be issued under the 1994 Plan from 250,000 shares to 350,000 shares and to make
certain other administrative amendments; (d) the ratification of Ernst & Young
LLP as the Corporation's independent auditors; and (e) the transaction of such
other business as may properly come before the meeting or any adjournment
thereof. This Proxy Statement and the accompanying Notice of Annual Meeting of
Shareholders are being sent to the shareholders of the Corporation on or about
July 8, 1996. This Proxy Statement also serves as the Annual Report for the
fiscal year ended January 31, 1996. Copies of this Proxy Statement will be
available at the Annual Meeting of Shareholders.
<PAGE> 4
THE ANNUAL MEETING
This Proxy Statement is being furnished in connection with the solicitation of
proxies by the Board of Directors of PDG Remediation, Inc. (hereinafter called
the "Corporation"), for use at the Annual Meeting of Shareholders of the
Corporation to be held on August 15, 1996 at 10:00 a.m. local time, at the
Harley Hotel, 699 Rodi Road, Pittsburgh, Pennsylvania 15235, and at any
adjournment or postponement thereof, for the purposes set forth in the
accompanying Notice of Annual Meeting of Shareholders. This Proxy Statement
and accompanying Notice of Annual Meeting of Shareholders are being sent to the
shareholders of the Corporation on or about July 8, 1996.
VOTING RIGHT AND PROXY INFORMATION.
The Board of Directors of the Corporation has fixed the close of business on
June 28, 1996 as the record date for the determination of shareholders of the
Corporation entitled to notice of and to vote at the Annual Meeting and any
adjournment or postponement thereof (the "Record Date"). All holders of record
of shares of common stock, par value $0.01, of the Corporation ("Common Stock")
will be entitled to vote at the Annual Meeting on all matters voted upon. On
the Record Date, there were 2,470,320 shares of Common Stock outstanding
entitled to vote held by 14 shareholders of record; however, approximately
1,102,119 shares of Common Stock are believed to be held in street name.
On all matters to be voted upon at the Annual Meeting, the holders of shares of
Common Stock will be entitled to cast one (1) vote per share. The presence, in
person or by properly executed proxy, of the holders of the majority of the
outstanding shares of Common Stock entitled to vote is necessary to constitute
a quorum at the Annual Meeting.
As of June 28, 1996, PDG Environmental, Inc. ("PDGE") controlled approximately
59.5% of the Common Stock. See "Security Ownership of Certain Beneficial Owners
and Management." PDGE has indicated that it intends to vote in favor of each
of the matters to be acted upon at the Annual Meeting. Assuming that PDGE votes
in favor of each of the matters to be acted upon at the Annual Meeting, the
matters will be approved.
All shares of Common Stock which are represented at the Annual Meeting by
properly executed proxies received by the Board of Directors prior to or at the
Annual Meeting and not revoked will be voted at the Annual Meeting and will be
voted in accordance with the instructions indicated on such proxies, including
any instruction directing abstention from voting. If no instructions are
indicated with respect to any shares for which properly executed proxies are
received, such proxies will be voted for the election of the two (2) nominees
for the Board of Directors, for the approval and adoption of the 1995 Plan, for
the approval and adoption of the Amended 1994 Plan and for the ratification of
the independent auditors. Management and the Board of Directors do not know of
any other matters to be brought before the Annual Meeting.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it any time before it is voted. Proxies may be revoked by filing a
written notice of such revocation with the Secretary, PDG Remediation, Inc.,
300 Oxford Drive, Monroeville, Pennsylvania 15146. In addition, a proxy will be
deemed to be revoked if the shareholder either (a) attends and votes at the
Annual Meeting, or (b) executes and delivers to the Secretary a proxy bearing a
later date.
2
<PAGE> 5
Proxies are being solicited by and on behalf of the Board of Directors of the
Corporation. All expenses of this solicitation, including the cost of preparing
and mailing this Proxy Statement, will be borne by the Corporation. In addition
to solicitation by use of the mails, proxies may be solicited by directors,
officers and employees of the Corporation in person or by telephone, telegram
or other means of communication. Such directors, officers and employees will
not be additionally compensated, but may be reimbursed for any out-of-pocket
expenses incurred by them in connection with such solicitation. Proxies will be
tabulated by the Corporation's transfer agent, Continental Stock Transfer &
Trust Company, as they are received and the tabulation will be updated at the
Annual Meeting.
OTHER BUSINESS
Other than the election of the two directors, the approval and adoption of the
1995 Plan, the approval and adoption of the Amended 1994 Plan and the
ratification of the independent auditors, the Board of Directors does not
intend to bring any other matters before the Annual Meeting. However, if any
other matter shall properly come before the Annual Meeting, it is the intention
of the persons named in the enclosed proxy to vote in accordance with their
judgment on such matters.
3
<PAGE> 6
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of June 28, 1996 with respect to
beneficial ownership of the Corporation's Common Stock by: (i) all persons
known to the Corporation to be considered to own beneficially more than five
(5%) percent of the Corporation's Common Stock; (ii) all directors of the
Corporation; and (iii) all of the Corporation's executive officers and
directors as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE OF CLASS
OF BENEFICIAL OF COMMON
NAME OF BENEFICIAL OWNER OWNERSHIP OF STOCK SHARES OWNED(1)
- ------------------------------- ------------------ -------------------
<S> <C> <C>
PDG Environmental, Inc.
300 Oxford Drive
Monroeville, Pennsylvania 15146 1,470,320 59.5%
Anthony J. Pace
981 Madison Avenue, 2nd Floor
New York, New York 10021 146,300 5.9%
Kennedy Capital Management, Inc.
425 N. New Ballas Road, Suite 181
St. Louis, Missouri 63141 183,000 7.4%
John M. Musacchio (2)(3)(4)(5) 113,383 4.6%
John C. Regan (2)(3)(4)(6) 1,480,320 59.9%
David J. D'Appolonia (2)(4) 10,000 *
Edgar Berkey (2)(4)(5) 11,250 *
Richard V. Lee (2)(4) 11,250 *
All directors and officers of
the Corporation as a group
including those named above (8
persons) (4)(6) 1,692,869 68.5%
</TABLE>
(1) Percentage ownership based on 2,470,320 shares of Common Stock.
(2) Director
(3) Officer
(4) Includes 10,000 shares of Common Stock that may be acquired by each of
Messrs. Regan and D'Appolonia and 11,250 shares of Common Stock that may
be acquired by each of Messrs. Berkey and Lee, and 113,333 shares of
Common Stock that may be acquired by
Mr. Musacchio, pursuant to options granted under the Amended 1994 Plan
and the 1995 Plan.
4
<PAGE> 7
(5) Nominee for director.
(6) Includes, in the aggregate, the 1,470,320 shares held by PDG
Environmental, Inc. attributable to Mr. Regan as a director of PDG
Environmental, Inc.
* Indicates less than 1%.
ELECTION OF DIRECTORS
The Board of Directors currently consists of five (5) directors who will, after
their initial term, hold office for a term of three (3) years each. Pursuant to
the By-laws of the Corporation, one (1) director will serve until the 1998
annual meeting, two (2) directors will serve until the 1997 annual meeting, and
two (2) directors are to be elected at this Annual Meeting for a term of three
(3) years. All properly executed proxies received in response to this
solicitation will be voted as specified in the proxy. Unless otherwise
specified in the proxy, it is the intention of the persons named in such
proxies to vote FOR the nominees listed below. If events not now known or
anticipated make either of the nominees unable to serve, the proxies will be
voted in the discretion of the holders thereof or another nominee not named
herein in lieu of those unable to serve, or the size of the Board of Directors
may be reduced.
The following table sets forth information regarding the director nominees of
the Corporation. The nominees are currently serving as directors. The nominees
have consented to serve as directors if elected.
<TABLE>
<CAPTION>
YEAR
NAME, AGE FIRST
PRINCIPAL OCCUPATION ELECTED CERTAIN OTHER INFORMATION
- ---------------------- ------- -------------------------
<S> <C> <C>
NOMINEES TO BE ELECTED
BY THE HOLDERS OF THE
COMMON STOCK
John M. Musacchio (48) 1994 Mr. Musacchio has served in his
President, Chief Operating current positions since July 1994.
Officer and Director Mr. Musacchio served as Vice
President - Technical Services of PDGE from
November 1992 until July 1994. In this
position he was responsible for PDGE's
remediation business. From 1984 until
November 1992, Mr. Musacchio was a partner
at Paul C. Rizzo Associates, Inc., an
environmental consulting firm. During that
period he served as Director, Senior Vice
President and Chief Operating Officer of
that corporation.
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
YEAR
NAME, AGE FIRST
PRINCIPAL OCCUPATION ELECTED CERTAIN OTHER INFORMATION
- ---------------------- ------- -------------------------
<S> <C> <C>
Edgar Berkey (55) 1994 Dr. Berkey has served in his current
President and position as President of Center for
Co-founder of Center Hazardous Materials Research, a
for Hazardous not-for-profit corporation which
Materials Research conducts applied research, training,
(CHMR) education and international technology
projects on government and industrial
problems involving hazardous materials and
waste, since 1988. He has also served as
President of National Environmental
Technology Applications Corporation, a
not-for-profit corporation which
facilitates the commercialization of
environmental technologies developed by the
public and private sectors since 1989.
</TABLE>
DIRECTORS WHOSE TERMS OF OFFICE CONTINUE
The following table sets forth information regarding the Corporation's
incumbent directors, who are not standing for election this year, but who will
continue to serve until their terms expire in 1997 and 1998, are as follows:
<TABLE>
<CAPTION>
YEAR
NAME, AGE FIRST
PRINCIPAL OCCUPATION ELECTED CERTAIN OTHER INFORMATION
- ---------------------- ------- -------------------------
<S> <C> <C>
TERMS EXPIRING IN 1997:
John C. Regan (52) 1994 Mr. Regan is the Chairman of the Board of
Chairman of the Board of Directors of the Corporation. He has served
Directors as Chairman and Chief Executive Officer of
PDGE since December 1990 and as a director
since April 1989. He is the founder of
Project Development Group. Inc., now a
wholly-owned subsidiary of PDGE which
engages in asbestos abatement services and
has served as that company's Chairman and
President since 1984.
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
YEAR
NAME, AGE FIRST
PRINCIPAL OCCUPATION ELECTED CERTAIN OTHER INFORMATION
- ---------------------- ------- -------------------------
<S> <C> <C>
Richard V. Lee (45) 1994 Mr. Lee has served as Vice President of
Vice President of J.A. Jones Environmental Services Company,
J. A. Jones an environmental services company
Environmental Services specializing in general contracting,
Company construction management and environmental
clean-up, since April 1992. Prior thereto,
from May 1988 to March 1992, he was
President of Enviro-Tech Abatement Services
Company, an asbestos abatement company
which was a subsidiary of Jones Group,
Inc., a holding company of a national
construction company, and which is now a
subsidiary of PDGE. Mr. Lee is expected to
resign his position with J. A. Jones
Environmental Services Company in July,
1996.
TERM EXPIRING IN 1998:
David J. D'Appolonia (52) 1994 Mr. D'Appolonia has served as a director of
the Corporation since July 1994. From
December 1990 to April 1996, Mr.
D'Appolonia was Vice Chairman and President
of PDGE.
</TABLE>
During the fiscal year ended January 31, 1996, there were three regular
meetings of the Board of Directors. Each of the incumbent directors attended
at least 75% of the total number of meetings of the Board of Directors, except
for Mr. Lee, who attended 67% of the total number of meetings of the Board of
Directors. Each of the incumbent directors attended at least 75% of the
meetings of the committees of the Board of Directors on which they served
during such fiscal year, except for Mr. Lee.
The Board of Directors has several committees which perform various functions.
The Audit Committee reviews the work of the Corporation's independent auditors
and management to ensure that each is properly discharging its responsibilities
in the area of financial control and reporting. This committee currently
consists of Messrs. Berkey and Lee. The Audit Committee held one meeting
during the fiscal year ended January 31, 1996.
The Nominating Committee recommends prospective nominees for election to the
Board of Directors. This committee currently consists of Messrs. Regan,
D'Appolonia and Musacchio. The Nominating Committee did not hold any meetings
during the fiscal year ended January 31, 1996. The Nominating Committee will
consider nominees recommended by shareholders in accordance with the
Corporation's By-Laws. Any such recommendations are to be submitted to the
Secretary of the Corporation in accordance with the By-Laws.
7
<PAGE> 10
The Compensation Committee is responsible for administering the Corporation's
stock option plans, and its duties include designating the employees eligible
to participate in such plans, the number of options to be granted and the terms
and conditions of each option. The Compensation Committee also reviews the
performance of the Corporation's management and makes recommendations with
respect to the compensation of management. The Compensation Committee consists
of Messrs. Berkey and Lee. The Compensation Committee held two meetings during
the fiscal year ended January 31, 1996.
EXECUTIVE OFFICERS; COMPENSATION
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ----------------- --- ------------------------------------------------
<S> <C> <C>
John C. Regan 52 Chairman of the Board of Directors
John M. Musacchio 48 President and Chief Operating Officer
Rose M. Cercone 38 Treasurer, Chief Financial Officer and Secretary
Marcella Gallick 40 Vice President, Remediation Services -
Mid Atlantic Operations
James Carter 37 Vice President, Remediation Services -
Florida Operations
</TABLE>
Rose M. Cercone, a CPA, has served as Treasurer and Chief Financial Officer of
the Corporation since July 1994 and as Secretary of the Registrant since May
1996. From July 1991 through October 26, 1995, she was Chief Financial Officer
and Controller of PDGE. From April 1991 to June 1991, she was an independent
consultant. Prior thereto, from August 1985 to March 1991, she served
successively as Manager of Financial Reporting and Director of Accounting and
Financial Reporting for National Intergroup, Inc., a diversified holding company
which during that time owned interests in a pharmaceutical distribution company,
an aluminum company, a computer services company, a steel company and a
partnership involved in the gathering and distribution of crude oil and
petroleum products.
Marcella J. Gallick was appointed Vice President, Remediation Services, Mid
Atlantic Operations in July 1994. From February 1993 to July 1994, she was
Manager of Remediation at PDGE. From June 1985 to February 1993, Ms. Gallick
was Principal and Director of Remediation Design for Paul C. Rizzo Associates,
Inc., an environmental consulting firm.
James H. Carter was appointed as Vice President, Remediation Services, Florida
Operations in July 1994. From February 1991 to July 1994, he was Branch Office
Manager of PDGE's Port Canaveral, Florida office. From August 1987 to February
1991, Mr. Carter was Hydrogeologist/Territory Manager for Groundwater
Technology, Inc.
The following table sets forth information with respect to the President and
Chief Operating Officer concerning the compensation of such officer for each of
the Corporation's last three completed years. No other Executive Officer
received an annual salary and bonus over $100,000 for any of the three years
reported.
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<PAGE> 11
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
Annual Compensation AWARDS PAYOUTS
- ------------------- ------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Other Annual Restricted Underlying All Other
Name and Salary Bonus Compensation Stock Options LTIP Compensation
Principal Position Year(1) ($) ($) ($) Award(s) ($) SARs(#) Payouts ($) ($)
- ------------------- ----- ------- ----- ------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John M. Musacchio 1996 115,842 _____ _____ _____ 100,000(2) _____ _____
President and COO 1995 115,842 _____ _____ _____ _____ _____ _____
1994 122,421 _____ _____ _____ 20,000(3) _____ _____
</TABLE>
(1) Represents fiscal year ended January 31.
(2) 100,000 options were granted under the 1995 Plan, subject to shareholder
approval at the 1996 Annual Meeting. These options will vest immediately
upon such shareholder approval.
(3) 13,333 options are fully vested. The remaining options vest one-half on
July 21, 1996 and one-half on July 21, 1997.
OPTIONS GRANTED
The following table show the options under the 1994 Plan and the 1995 Plan that
have been granted to the President and Chief Operating Officer.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of
Stock Price
Appreciation for
Individual Grants Option Term
----------------- ------------------------------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted # Fiscal Year ($/Share) Date 5% ($) 10% ($)
- --------------------- ------------ ------------ ----------- ------------ -------------------- --------
<S> <C> <C> <C> <C> <C> <C>
John M. Musacchio (1) 100,000 58% 0.75 12/13/05 $47,200 $19,500
</TABLE>
(1) These options granted under the 1995 Plan will become exercisable
immediately upon shareholder approval of the 1995 Plan.
The following table sets forth information with respect to the President and
Chief Operating Officer concerning the exercise of options during the last
fiscal year and unexercised options held as of the end of the fiscal year.
9
<PAGE> 12
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Value of Unexercised
Number of Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End ($)(A)
Shares Acquired on Exercisable/ Exercisable/
Name Exercise (#) Value Realized ($) Unexercisable Unexercisable
- ----------------- ------------------ ------------------ --------------------- --------------------
<S> <C> <C> <C> <C>
John M. Musacchio ___ ___ 13,333/106,667 5,000/40,000
</TABLE>
(1) 10,000 options were exercisable effective February 9, 1995 and 3,333 were
exercisable effective July 21, 1995. The 100,000 options granted under
the 1995 Plan become exercisable immediately upon shareholder approval of
the 1995 Plan. The remaining 6,667 options vest one half (1/2) each year
commencing July 21, 1996.
COMPENSATION OF DIRECTORS
The outside directors of the Corporation receive $500 for each meeting they
attend plus reimbursement for their actual expenses incurred in attending such
meetings. In addition, the Corporation has established the 1994 Plan which
provides for the grants of options to employee and non-employee directors.
Pursuant to the 1994 Plan, each non-employee director is automatically granted
an option to purchase 10,000 shares upon becoming a director. Commencing with
the Corporation's annual meeting of shareholders in 1995, each director who has
served for at least 12 months will automatically be granted an additional
option to purchase 1,250 shares on the fifth business day following the
Corporation's annual meeting of shareholders. Options granted to non-employee
directors are exercisable immediately upon grant and for a period of five years
thereafter. No non-employee director may be awarded more than 15,000 options.
Options granted to non-employee directors have a per share exercise price equal
to at least the fair market value of a share of the Corporation's Common Stock
at the time the option is granted. Options granted to non-employee directors
terminate five years from grant or three months from the date of the director's
termination of service on the Board, unless the termination is due to the
director's disability, retirement or death, in which event the exercise period
is extended to one year, but not beyond the original maximum term of the
option. During the fiscal year ended January 31, 1996, Messrs. Berkey and Lee
were each granted options to purchase 1,250 shares of the Corporation's Common
Stock.
Employee directors are not compensated in their role as directors.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS.
The Corporation has entered into an Employment Agreement ("the Agreement"),
dated November 30, 1995, with John M. Musacchio, President and Chief Operating
Officer. Under the Agreement, Mr. Musacchio is to receive an annual salary of
$120,000 or such greater amount as determined by the Board of Directors. In
addition, Mr. Musacchio is entitled to participate in bonuses and/or incentive
compensation as determined and awarded at the discretion of the Compensation
Committee of the Board of Directors. Mr. Musacchio is also entitled to
participate in the Corporation's present or future benefit plans, insurance
plans and other benefits generally applicable to the Corporation's executives.
10
<PAGE> 13
The Corporation may terminate the employment of Mr. Musacchio at any time prior
to a "change in control," as defined in the Agreement, in which event the
Agreement is automatically terminated and Mr. Musacchio is entitled to
severance in an amount equal to one year of his annual salary in effect as of
the date of termination. Within three years after a "change in control," if the
Corporation terminates Mr. Musacchio's employment without cause, or if his
position or offices with the Corporation are changed or if Mr. Musacchio's
salary or benefits are reduced from the level set forth in the Agreement, Mr.
Musacchio shall be entitled to resign within six months of any of these events.
In any such event, his resignation will be treated as a termination by the
Corporation, and he will be entitled to severance equal to two years annual
salary.
Mr. Musacchio may terminate the Agreement provided he gives the Corporation
written notice of his intent to terminate at least six months before his
anticipated termination date. During the term of the Agreement and for two
years after his retirement, and during any time which Mr. Musacchio is
receiving an annual salary from the Corporation after the Agreement has been
terminated, Mr. Musacchio may not directly or indirectly engage or participate,
as defined in the Agreement, in any business which is substantially competitive
with any business then actively conducted by the Corporation.
TEN-YEAR OPTION/SAR REPRICINGS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (f) (g)
Number of
Securities Market Price of Exercise Price at Length of Original
Underlying Stock at Time of Time of Repricing Option Term
Options/SARs Repricing or or Remaining at Date
Repriced or Amendment Amendment New Exercise of Repricing or
Name Date Amended (#) ($) ($) Price ($) Amendment
- ----------------- -------- ------------ ---------------- ----------------- ------------ --------------------
John M. Musacchio
President and COO 12/13/95 20,000 0.75 5.00 0.75 3 years, 7 months
</TABLE>
BOARD COMPENSATION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION AND REPRICING OF OPTIONS/SARS
The Corporation's approach to executive compensation is designed to enable it
to recruit, retain and motivate executives to achieve the Corporation's
performance objectives and to increase shareholder value. The Corporation
currently determines executive compensation using a number of different
criteria. Each executive officer's individual performance and area of
responsibility is evaluated on an annual basis in relation to base salary,
comparative compensation surveys which include benefits and the Corporation's
long-term incentive compensation plans.
Performance management reviews are conducted periodically for all employees of
the Corporation and executive officers. Individual goals are established at
that time, incorporating the overall strategic plans and objectives of the
Corporation. The performance review focuses on an executive officer's specific
area of responsibility, accomplishments and contributions as they relate to
both personal performance and the Corporation's overall performance.
11
<PAGE> 14
The basic benefits offered to executive officers, which include participation
in the Corporation's 401k Plan, group health insurance, group term life
insurance and disability insurance, are the same as those provided to other
employees of the Corporation. Additionally, certain executive officers are
provided with automobile allowances and club memberships which are used for
both business and personal purposes.
Executive officers of the Corporation are eligible to participate in the
Corporation's 1994 Plan. The Compensation Committee approves periodic grants
of options to executive officers under the 1994 Plan as part of the performance
review process.
On May 24, 1995, the Compensation Committee requested the use of an
incentive-driven option vesting schedule for executive officers and the related
grant of 30,000 options to certain executive officers. These options vest if
the stock price reaches $3.82 or more for a 30-day period beginning January 31,
1996. If the price does not meet this criteria, the options do not vest and
are returned to the Plan for future grants.
On December 13, 1995, the Compensation Committee approved the adoption of the
1995 Plan and the grant of options to purchase 150,000 shares of the
Corporation's Common Stock at a exercise price of $0.75 per share to certain
executive officers, subject to approval by shareholders at their next annual
meeting. The Compensation Committee adopted the 1995 Plan to provide executive
officers with the opportunity to buy and maintain an equity interest in the
Corporation, thereby creating an incentive for executive officers to maximize
shareholder value and participate in the appreciation of the value of the
Corporation's Common Stock.
In addition, on December 13, 1995, the Compensation Committee of the
Corporation's Board of Directors recognized that the exercise prices with
respect to options held by employees, consultants and non-employee directors
under the 1994 Amended Stock Option Plan were substantially above the fair
market value of the Corporations's Common Stock. Accordingly, the Compensation
Committee voted to reprice 142,500 of the Corporation's outstanding options to
an exercise price of $0.75 per share, the fair market value of the
Corporation's Common Stock on December 13, 1995, from the existing exercise
prices ranging from $1.34 per share to $5.00 per share. The term and the
vesting provisions associated with the repriced options were not changed. The
Compensation Committee determined that the repricing of the options was in the
best interests of the shareholders of the Corporation in order to provide
incentives to the optionholders to improve the Corporation's overall
performance and thereby increase shareholder value.
The compensation of the Corporation's Chief Operating Officer, John Musacchio,
continues to be maintained at the level which was established when he was an
employee of PDGE. Mr. Musacchio received 10,000 options upon becoming a
Director of the Corporation; 10,000 options in a periodic grant of options to
employees on July 21, 1994; and 15,000 options on May 24, 1995 which are
incentive-based and only vest if certain goals are achieved.
12
<PAGE> 15
The only compensation issues which the Compensation Committee considered during
the fiscal year ended January 31, 1996 were the adoption of the 1995 Plan for
executive officers and the grant of 150,000 options to executive officers,
subject to shareholder approval of the 1995 Plan, and the repricing of existing
options under the Amended 1994 Plan. The Compensation Committee granted
100,000 options under the 1995 Plan to Mr. Musacchio as part of his annual
performance review.
This report has been approved by all members of the Compensation Committee.
Respectfully submitted,
Edgar Berkey, Chairman
Richard V. Lee
PERFORMANCE GRAPH
The graph on the next page compares the value of the Common Stock to the NASDAQ
market index and an industry index representing peer issuers. Each of the total
cumulative total returns presented assumes a $100.00 investment on February 9,
1995, the date of the Corporation's initial public offering. and reinvestment
of dividends. The industry index of peer issuers is comprised of the following
securities: EA Engineering Science & Technology; EMCON; Groundwater
Technology, Inc.; GZA Geoenvironmental Technologies, Inc.; Handex Corp.;
International Technology Corp.; OHM Corp.; Omega Environmental, Inc.; Sevenson
Environmental; and Roy F. Weston.
COMPARE CUMULATIVE TOTAL RETURN
AMONG PDG REMEDIATION, INC.,
NASDAQ MARKET INDEX AND PEER ISSUERS
CHART 1
COMPARISON OF CUMULATIVE TOTAL RETURN
OF COMPANY, PEER GROUP AND BROAD MARKET
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
COMPANY 02/09/95 04/30/95 07/31/95 10/31/95 01/31/96
<S> <C> <C> <C> <C> <C>
PDG REMEDIATION INC 100.00 55.56 31.94 19.44 27.78
PEER GROUP 100.00 102.76 109.63 96.89 85.80
BROAD MARKET 100.00 111.12 125.33 127.51 128.12
</TABLE>
THE PEER GROUP CHOSEN WAS:
Customer Selected Stock List
THE BROAD MARKET INDEX CHOSEN WAS:
NASDAQ MARKET INDEX
THE PEER GROUP IS MADE UP OF THE FOLLOWING SECURITIES:
EA ENGINEERING SCI & TEC
EMCON
FLUOR DANTEL/GTI INC
GZA GEOENVIRON TECH
HANDEX CORP
INTERNAT TECHNOLOGY CORP
OHM CORP
OMEGA ENVIRON INC
SEVENSON ENVIRONMENTAL
WESTON, ROY F. INC CL A
13
<PAGE> 16
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AGREEMENTS WITH AFFILIATED PARTIES
TRANSACTIONS WITH JONES
The Corporation has established an alliance with J. A. Jones Environmental
Services Company ("Jones") pursuant to which the Corporation serves as a
subcontractor to Jones with respect to a certain contract for remedial action
work for the U.S. Navy. The contract is expected to result in yearly total
revenues of $15 million per year for up to five years with the Corporation's
portion of such revenues to amount to $2 million to $5 million for each of
these years. In addition, the Corporation is hopeful of pursuing other similar
contracts with Jones in the future. Richard V. Lee, a director of the
Corporation, is a Vice President of Jones.
MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to the terms of a certain management and administrative services
agreement, dated as of October 19, 1994, between the Corporation and PDGE (the
"Management Services Agreement"), PDGE agreed to provide certain direct and
indirect services to the Corporation. The agreement has an initial term
beginning on October 19, 1994 and expired on December 31, 1994 and is
automatically renewable for successive one month terms unless either party
gives the other timely notice of cancellation. The agreement provides that PDGE
will provide certain executive personnel, office space, utilities, office
equipment and other services to the Corporation. The Corporation will pay PDGE
either on a fixed fee basis, on an allocation basis or on a direct
reimbursement basis, depending upon the nature of the service. Upon the
termination of the Management Services Agreement, the Corporation will have to
either hire new employees to perform those services or contract with third
parties to do so. Management of the Corporation believes that the Management
Services Agreement is on terms at least as favorable to the Corporation as
terms that could have been negotiated with independent third parties. However,
due to the conflict of interest created by the relationship between the
Corporation and PDGE, including the conflict created by the sharing of certain
employees, the Management Services Agreement cannot be performed on an arm's
length basis. During the fiscal year ended January 31, 1996, the Corporation
paid PDGE a total of $30,000 for services performed under the Management
Services Agreement. In the future, the Corporation does not anticipate
extensive use of the services of PDGE pursuant to the Management Services
Agreement.
FUTURE TRANSACTIONS
Any future transactions between the Corporation and an affiliate of the
Corporation will be made or entered into on terms at least as favorable to the
Corporation as could be attained from unaffiliated independent third parties.
All such transactions must be approved by a majority of the independent outside
members of the Corporation's Board of Directors who do not have an interest in
the transactions.
14
<PAGE> 17
1995 QUALIFIED INCENTIVE STOCK OPTION PLAN
On December 13, 1995, the Board of Directors adopted, subject to shareholder
approval, the 1995 Qualified Incentive Stock Option Plan. The purpose of the
1995 Plan is to afford an incentive to key managerial employees of the
Corporation and its parent and subsidiaries to acquire proprietary interest in
the Corporation so that the Corporation can attract and retain such key
employees. The 1995 Plan provides for the issuance to eligible key employees
of options to purchase up to an aggregate of 150,000 shares of the
Corporation's Common Stock. The following is a brief summary of the proposed
1995 Plan. The complete text is attached as Appendix A, and reference is made
to such Appendix for a complete statement of the provisions of the 1995 Plan.
Options shall be granted under the 1995 Plan only to persons who, at the time
of the grant are key managerial employees of the Corporation. The term "key
managerial employee" is defined in the 1995 Plan as any employee of the
Corporation who is responsible for the management of the Corporation or its
parent or subsidiaries. The Corporation's Compensation Committee shall have
the authority to determine from time to time the key managerial employees to
whom options shall be granted and the number of shares subject to each option.
The option price shall be fixed by the Compensation Committee at the time of
the grant of such option but shall not be less than 100% of the market value of
the Common Stock of the Corporation at the time the option was granted. The
options shall vest from time to time as determined by the Committee at the time
of the grant; however, in no event shall an option be exercisable after ten
(10) years from the date of grant.
If an optionee's employment with the Corporation or its parent or subsidiaries
is terminated for any reason whatsoever (including his or her death or
disability), all options granted to him or her pursuant to the 1995 Plan and
all of his or her rights thereunder shall wholly and completely terminate: (1)
at the time that the optionee's employment is terminated, if termination occurs
within one year following the date of grant for any reason other than death,
disability or change of control (as defined in the 1995 Plan); (2) at the time
that the optionee's employment is terminated if his or her employment is
terminated because he or she was discharged for fraud, theft or embezzlement
against the Corporation or for gross failure to perform his or her duties or
for a conflict of interest; (3) at the expiration date of three months after
the optionee's employment is terminated, if such employment is terminated for
any reason other than his or her death or the reasons other than those
specified in clauses (1) and (2) above. Options granted pursuant to the 1995
Plan are not transferable by the optionee other than by will or by the laws of
descent and distribution.
The number of shares of Common Stock which may have been granted under the 1995
Plan are subject to adjustment in certain events, including recapitalization,
reclassification, split-up or combination of shares. In the event of a merger,
consolidation, reorganization, dissolution or liquidation of the Corporation
pursuant to which the Corporation will not be the surviving entity or pursuant
to which the Corporation will become a wholly owned subsidiary of another
entity, or in the event of a proposed sale of substantially all of the assets of
the Corporation (each of such transactions is referred to as a "change of
control"), all options granted under the 1995 Plan shall terminate as of the
date to be fixed by the Board of Directors of the Corporation; provided that not
less than 30 days written notice of the date so fixed shall be given to each
optionee and the optionee shall have the right during such 30-day period to
exercise his or her options, including any options which have not otherwise
vested.
15
<PAGE> 18
It is intended that options granted pursuant to the 1995 Plan will be
"incentive stock options" as defined in Section 422 of the Internal Revenue
Code of 1986, as amended. In general, an optionee will not recognize income at
the time of the grant of options under the 1995 Plan or at the time that he or
she exercises any such options, unless the individual disposes of the Common
Stock underlying such options within two years of the grant of the option or
one year of the exercise of the option (an "Early Disposition"). Absent an
Early Disposition, the optionee will recognize capital gains upon the
disposition of the Common Stock for an amount in excess of the exercise price
of the option, but the Corporation will not be able to take any deduction for
the options granted pursuant to the 1995 Plan. In addition, the optionee will
have to report an adjustment for alternative minimum tax purposes. That
adjustment may cause the individual to owe alternative minimum tax (a 26 to 28
percent tax) in the year the option is exercised. However, if an Early
Disposition occurs, then the optionee will recognize ordinary income for the
difference between the sale price of the stock and the exercise price of the
option, but will not have any alternative minimum tax adjustment. In the event
of an Early Disposition, the Corporation will receive a corresponding tax
deduction.
The 1995 Plan was created as a mechanism to take advantage of the tax
provisions applicable to an incentive stock option plan. Specifically, certain
key members of management, particularly John Musacchio, have a desire to have
an enhanced stake in the Corporation but wish to avoid taxation on such shares
until such time, if ever, that they desire to sell shares of the Corporation.
The Compensation Committee has, subject to shareholder approval, granted all
150,000 shares reserved for grant pursuant to the 1995 Plan as of December 13,
1995 with vesting to be immediate upon shareholder approval.
Unless otherwise specified in the proxy, it is the intention of the persons
named in such proxies to vote FOR the approval of the 1995 Plan.
1994 AMENDED STOCK OPTION PLAN
Effective July 21, 1994 the Corporation adopted the 1994 Plan, which was at that
time approved by the Corporation's sole shareholder. The purpose of the 1994
Plan is to encourage stock ownership in the Corporation by selected employees,
consultants and non-employee directors of the Corporation, to provide such
persons with additional incentive to remain with the Corporation and increase
their efforts on its behalf and to provide a means by which the Corporation may
attract, retain and motivate outstanding employees, consultants and non-employee
directors. As originally adopted, the 1994 Plan reserved an aggregate of
250,000 shares of the Corporation's Common Stock for issuance upon exercise of
options granted pursuant to the 1994 Plan. On December 13, 1995, the Board of
Directors, subject to shareholder approval, approved the Amended 1994 Plan. The
most significant amendment to the 1994 Plan is the proposed increase in the
number of shares available under such plan from 250,000 shares to 350,000
shares. The Board of Directors of the Corporation believes that such increase
is necessary in order to have a sufficient number of shares available for
issuance upon exercise of options granted to attract employees to the
Corporation. This is particularly true if the Corporation is successful in
consummating acquisitions which increase the number of employees of the
Corporation. Other amendments to the 1994 Plan are generally administrative in
nature and include, among other things, an extension of the time in which stock
options may be exercisable from five years from date of grant, as provided in
the 1994 Plan, to ten years from date of grant, as provided in the Amended 1994
Plan. In addition, the Amended 1994 Plan clarifies the time period in which
consultants and non-employee directors may exercise options after their
association with the Corporation has ended. A complete text of the 1994 Plan is
attached as Appendix B and reference is made to such Appendix for a complete
statement of the provisions of the Amended 1994 Plan. The following is a brief
summary of the proposed Amended 1994 Plan.
16
<PAGE> 19
All present and future employees, consultants and non-employee directors of the
Corporation and the Corporation's subsidiaries and parents are eligible to
receive grants of options under the Amended 1994 Plan. An aggregate of 350,000
shares of the Corporation's Common Stock may be issued upon exercise of options
pursuant to the Amended 1994 Plan. The plan is administered by the
Corporation's Compensation Committee, which must be comprised of at least two
non-employee members of the Board of Directors.
Grants to purchase 1,250 shares of the Common Stock of the Corporation are made
automatically to each non-employee director who has served as such for at least
twelve consecutive months on the fifth business day following the day of each
annual meeting of the shareholders of the Corporation without further action of
the Board of Directors of the Compensation Committee, provided that the number
of shares for which options may be granted to any single non-employee director
pursuant to the Amended 1994 Plan shall not exceed 15,000. The price of a
share of Common Stock subject to option to non-employee directors shall be the
fair market value of such share on the date of the grant of such option. If
the service of a grantee as a non-employee director of the Corporation is
terminated due to such director's death, the representative of the optionee
shall have one year after the date of the non-employee director's death to
exercise all options of the deceased grantee that he or she did not exercise at
the time of his or her death. If the service of a grantee as director of the
Corporation is terminated for any other reason, the grantee shall have the
right to exercise any or all of the options which the non-employee director had
not exercised at the time of his or her termination of service until the
expiration date of such options.
The Compensation Committee, in its sole discretion, shall from time to time
determine whether employees or consultants of the Corporation or any subsidiary
or parent of the Corporation shall be entitled to grants of options pursuant to
the Amended 1994 Plan. The price of shares of Common Stock subject to option
shall be set by the Compensation Committee at the time the option is granted but
in no event shall such price be less than fair market value of such shares on
the date of such grant. No option granted to an employee of the Corporation or
any subsidiary or parent of the Corporation shall be exercisable for a period of
one year from the date of grant. Thereafter, such options shall be exercisable
in such installments as set forth in the applicable stock option agreement as
the Compensation Committee in its sole discretion may determine. Grants made to
consultants of the Corporation or any parent or subsidiary of the Corporation
shall be exercisable in such installments as set forth in the applicable option
agreement as the Compensation Committee in its sole discretion shall determine.
If the service of a grantee as an employee of the Corporation or any parent or
subsidiary of the Corporation is terminated due to such grantee's disability,
retirement approved by the Corporation or death of the grantee, the grantee or
the grantee's legal representative, as the case may be, shall have the right,
within one year after the date of disability, retirement or death, to exercise
all or any part of the options which the disabled, retired or deceased grantee
could have exercised at the time of the grantee's disability, retirement or
death, as the case may be. If the service of a grantee as an employee of the
Corporation or any parent or subsidiary of the Corporation is terminated for
any reason other than disability, retirement approved by the Corporation or
death, the grantee shall have the right within three months after the date of
termination of employment, to exercise the options that have vested as of the
date the grantee's employment is terminated. Options may be exercised by
consultants of the Corporation or any parent or subsidiary of the Corporation
pursuant to the terms of the applicable option agreement with respect to such
options regardless of whether the consultant remains associated with the
Corporation or any parent or subsidiary of the Corporation for any time after
the grant of the option. At the death of a consultant, the grantee's legal
representative shall have the right, within one year after the date of death of
the consultant, to exercise all or any part of the options which the deceased
grantee had not exercised at the time of the grantee's death.
17
<PAGE> 20
The Amended 1994 Plan is intended to be a "non-qualified plan," meaning it is
not qualified as an incentive stock option plan pursuant to Section 422 of the
Internal Revenue Code of 1986, as amended. As such, grantees are generally
taxed for federal income tax purposes at the time that they exercise an option
at the difference between the exercise price and the fair market value of the
Corporation's Common Stock on the date of exercise. The Corporation would
normally be entitled to a corresponding deduction at such time. Grantees would
receive a basis for federal income tax purposes in the Common Stock received
upon exercise of the stock options equal to the fair market value of the Common
Stock on the date of such exercise.
RATIFICATION OF INDEPENDENT AUDITORS
Ernst & Young LLP served as independent auditors for the Corporation for the
fiscal year ended January 31, 1996. The Board of Directors has selected Ernst &
Young LLP as its independent auditors for the fiscal year ending January 31,
1997 and is asking the shareholders to ratify that selection. Representatives of
Ernst & Young LLP will be present at the Annual Meeting. It is not expected that
such representatives will make a statement at the meeting, but they will have an
opportunity to make a statement if they so desire and will be available to
respond to appropriate questions from shareholders.
SHAREHOLDERS' PROPOSALS FOR 1997 ANNUAL MEETING
Any proposal intended to be presented to shareholders at the 1997 Annual
Meeting of Shareholders must be received by the Corporation for inclusion in
the proxy statement for such annual meeting by March 12, 1997.
FINANCIAL INFORMATION
The following information constitutes a part of the Annual Report of the
Corporation for the fiscal year ended January 31, 1996:
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Corporation's Common Stock and redeemable common stock purchase warrants
("Redeemable Warrants") are listed for trading on NASDAQ (symbols: "PDGS" and
"PDGSW") and the information presented for the following periods in fiscal year
1996 reflects the high and low bid information as reported by NASDAQ.
18
<PAGE> 21
<TABLE>
<CAPTION>
Market Price Range
High Low
------ ---------
<S> <C> <C>
Common Stock
First Quarter(1) $4.750 $2.250
Second Quarter $2.500 $1.000
Third Quarter $1.250 $0.500
Fourth Quarter $1.125 $0.625
Redeemable Warrants
First Quarter(1) $0.940 $0.250
Second Quarter $0.375 $0.156
Third Quarter $0.156 $0.063
Fourth Quarter $0.094 $0.031
</TABLE>
(1) From February 9, 1995, the date of the Corporation's initial public
offering, through April 30, 1995.
At June 28, 1996, the Corporation had approximately 14 shareholders of record;
however, approximately 1,102,119 shares of Common Stock are believed to be held
in street name.
DIVIDENDS
The Corporation has not historically declared or paid dividends with respect to
its Common Stock and has no intention to pay dividends in the foreseeable
future.
SELECTED FINANCIAL DATA
The following table reflects selected consolidated financial data for the
Corporation for the five fiscal years ended January 31, 1996. The operations
of the Corporation have been restated for the fiscal years ended January 31,
1995, 1994, 1993 and 1992 to reflect the Corporation's former subsidiary,
GeoLogic Recovery Systems ("GeoLogic") as a discontinued operation.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
1996 1995 1994 1993 1992
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Contract revenues $4,779 $9,361 $5,346 $3,758 $2,470
Gross margin 1,386 2,568 1,791 1,125 815
(Loss) income from
operations (858) 614 3 124 242
Other (expense) income (392) (499) (229) (83) 58
Net (loss) income (2,858) 896 206 57 275
COMMON SHARE DATA
Net (loss) income per
common share $(1.16) $0.48 $0.11 $0.03 $0.15
Weighted average
common shares outstanding 2,456 1,870 1,870 1,870 1,870
BALANCE SHEET DATA
Working capital $2,257 $6,296 $3,406 $2,376 $1,187
Total assets 5,614 10,824 6,045 6,926 2,519
Long-term obligations 20 3,579 1,588 2 7
Total stockholders'
equity 2,438 2,995 2,239 2,551 1,244
</TABLE>
19
<PAGE> 22
The year ended January 31, 1995 includes an extraordinary item related to the
early extinguishment of debt totaling $222,000 ($0.12 per common share).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The Corporation provides remediation services to assist its clients in
complying with environmental laws and regulations, including those concerning
leaking underground storage tanks and closure of contaminated industrial
facilities. The Corporation's services are provided to commercial, industrial
and governmental clients through offices in Monroeville, Pennsylvania and
Melbourne, Florida. The Corporation also operated a thermal treatment
facility, through its GeoLogic subsidiary, for the removal of petroleum
contaminants from soil. Although the facility was sold on April 25, 1996, the
effective date of the sale was January 31, 1996 and, therefore, the operations
of the thermal treatment facility have been reflected as a discontinued
operation as of that date.
The Corporation operated as a wholly-owned subsidiary of PDGE until February 9,
1995, at which time 1,000,000 shares of the Corporation's Common Stock and
1,000,000 Redeemable Warrants were sold to the public at a price of $5.00 per
share of Common Stock and $0.10 per Redeemable Warrant. The Corporation sold
600,000 newly issued shares of Common Stock and 1,000,000 Redeemable Warrants
and PDGE sold 400,000 of the shares of the Corporation's Common Stock. On
March 17, 1995, the underwriters of the initial public offering exercised their
option to purchase an additional 150,000 redeemable warrants from the
Corporation.
The following information is intended to highlight the key trends and
developments in the Corporation's operations and to identify other factors
affecting the Corporation's consolidated results of operations for the three
years ended January 31, 1996.
RESULTS OF OPERATIONS
YEAR ENDED JANUARY 31, 1996 COMPARED TO JANUARY 31, 1995
During the year ended January 31, 1996 (fiscal 1996), the Corporation's contract
revenues decreased by approximately 49% to $4.8 million compared to $9.4 million
reported for the year ended January 31, 1995 (fiscal 1995). The Corporation
experienced a significant reduction of approximately 63% in contract revenues
during fiscal 1996 at its Florida remediation service operation due to the
changes in a Florida state-funded site rehabilitation program (the "EDI
Program") providing for the remediation of contaminated sites related to the
storage of petroleum and petroleum products, which substantially decreased the
Corporation's available backlog of sites upon which it was able to continue to
perform work. Contract revenues at the Corporation's Pennsylvania remediation
service operation increased by approximately 34% in fiscal 1996 compared to
fiscal 1995 and helped to partially offset the reduction experienced at the
Florida remediation service operation. The increase in contract revenues within
the Pennsylvania remediation service operation is principally due to higher
volume under the Navy subcontract with Jones.
20
<PAGE> 23
The Corporation's gross margin decreased to $1.4 million in fiscal 1996
compared to $2.6 million in fiscal 1995 which is attributable to the
significantly lower contract revenues at the Florida remediation service
operation as a result of the EDI Program changes. Gross margins as a
percentage of contract revenues at the Corporation's Florida remediation
service operation increased in fiscal 1996 compared to fiscal 1995. The
Corporation's reported gross margin at its Pennsylvania remediation service
operation in fiscal 1996 decreased on higher contract revenues principally due
to lower margins on certain fixed price contract jobs.
Selling, general and administrative expenses increased to $2.3 million in
fiscal 1996 versus $2.0 million in fiscal 1995. Although the Corporation
implemented cost reductions at its Florida remediation service operation, which
included closing the Tallahassee office, staff reductions at its Melbourne
office and the reallocation of a portion of its workforce to the Corporation's
Pennsylvania remediation service operation, these reductions were more than
offset by increased marketing and bidding activity in an effort to replace the
revenues lost as a result of the EDI Program changes. The Pennsylvania
remediation service operation also experienced an increase in selling, general
and administrative expenses in fiscal 1996 compared to fiscal 1995 associated
with increased bidding activity. Selling, general and administrative expenses
associated with the Corporation's corporate office remained constant when
comparing fiscal 1996 and fiscal 1995.
The Corporation reported a loss from operations of $0.9 million in the year
ended January 31, 1996 as a result of the factors described above compared to
income from operations of $0.6 million in the year ended January 31, 1995.
Interest expense decreased to $0.4 million in fiscal 1996 compared to $0.5
million in fiscal 1995. The Corporation's interest expense in fiscal 1995
included $0.09 million related to the amortization of the estimated fair market
value of warrants. Although the Corporation's average interest rates were
significantly lower in fiscal 1996 compared to fiscal 1995 (11.5% versus
14.7%), the average outstanding borrowings were fairly constant when comparing
the two periods. In addition, the Corporation was required to pay ongoing
interest expense on certain receivables which were funded by a third party.
Interest income reported by the Corporation totaled $0.01 million in fiscal
1996 due to implementation of a separate cash management system during the
current fiscal year versus the prior fiscal year.
21
<PAGE> 24
Since the Corporation reported a loss for financial reporting purposes in
fiscal 1996, no income taxes have been provided. The Corporation reported an
income tax provision from continuing operations of $0.03 million during fiscal
1995.
In connection with the sale of the thermal treatment facility of its
subsidiary, GeoLogic, the Corporation has reflected the operations of this
entity as discontinued for fiscal 1996 and the prior two fiscal years. The
loss associated with the operation of this facility totaled $0.77 million in
fiscal 1996 compared with income from discontinued operations of $0.59 million
in fiscal 1995. The significant loss from operations related to the
Corporation's thermal treatment facility in fiscal 1996 is the direct result of
the substantial reduction in volume processed at the facility combined with a
significantly lower price realized per ton processed which the Corporation
feels is indirectly attributable to the EDI Program changes and the
corresponding impact of these changes on the thermal treatment market in the
State of Florida. The overall change in the thermal treatment market in the
State of Florida prompted the Corporation to sell the thermal treatment
facility. The Corporation also recorded a loss on the disposition of the
thermal treatment facility of $0.84 million in fiscal 1996.
YEAR ENDED JANUARY 31, 1995 COMPARED TO JANUARY 31, 1994
The Corporation's contract revenues increased by approximately 75% to $9.4
million in fiscal 1995 compared to $5.4 million for the year ended January 31,
1994 (fiscal 1994). The significant increase in contract revenues in fiscal
1995 principally resulted from significant internal growth at the Corporation's
Florida remediation service operation related to work performed under the EDI
Program and, to a lesser degree, an increase in contract revenues associated
with the Pennsylvania remediation service operation due to a combination of
internal growth and the full effect of an acquisition.
Gross margins reported by the Corporation in fiscal 1995 increased to $2.6
million compared to $1.8 million in fiscal 1994. The Corporation's increased
gross margins in fiscal 1995 were a direct result of the significantly higher
contract revenues at the Florida remediation service operation. However, when
comparing gross margins as a percentage of contract revenues between the two
fiscal years at the Florida remediation service operation, they actually
experienced a decline due to a change in the mix of business in fiscal 1995 to
include a higher subcontractor component. Gross margins also declined in
fiscal 1995 compared to fiscal 1994 at the Pennsylvania remediation service
operation due to lower margins experienced on certain jobs.
The Corporation's selling, general and administrative expenses increased in
fiscal 1995 to $2.0 million compared to $1.8 million in fiscal 1994. The
majority of the increase in fiscal 1995 was associated with the growth at the
Florida remediation service operation. The Pennsylvania remediation service
operation also experienced a slight increase in selling, general and
administrative expenses in fiscal 1995 to accommodate the higher sales levels.
Interest expense in fiscal 1995 increased sharply to $0.5 million compared to
$0.2 million in fiscal 1994. The significant increase in fiscal 1995 interest
expense is due to a significant increase in the average interest rate (14.7% in
fiscal 1995 versus 8.7% in fiscal 1994) combined with an increase in the
average borrowings outstanding ($2.3 million in fiscal 1995 versus $1.5 million
in fiscal 1994). Interest expense in fiscal 1995 also included $0.09 million
associated with the amortization of the estimated fair market value of warrants
compared to $0.02 million in fiscal 1994.
22
<PAGE> 25
The Corporation recorded an income tax provision related to continuing
operations of $0.03 million in fiscal 1995 which principally related to state
income taxes, computed on a separate company basis since the Corporation was a
wholly-owned subsidiary of PDGE during this period.
The discontinued operations of the Corporation's thermal treatment facility
totaled $0.59 million in fiscal 1995 and $0.43 million in fiscal 1994. During
fiscal 1995, the Corporation's thermal treatment facility benefitted from
increased volume compared to the previous fiscal year. In fiscal 1994, the
thermal treatment facility was negatively impacted by a physical inventory
adjustment of $0.1 million.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's cash and short-term investment balance increased by $0.35
million in fiscal 1996 to $0.36 million compared to a decrease of $0.1 million
in fiscal 1995. The increase in cash flows during fiscal 1996 is attributable
to cash flows provided by operating activities of $2.3 million which were
partially offset by cash flows used by financing activities of $1.9 million and
cash flows used to fund investing activities of $0.1 million.
Cash flows provided by operating activities of $2.3 million included a $3.3
million decrease in accounts receivable and a $2.1 million reduction in costs
and estimated earnings in excess of billings on uncompleted contracts. Both of
these reductions are the result of changes in the EDI Program which enabled the
Corporation to bill certain outstanding work combined with collections on
outstanding EDI receivables. The Corporation also experienced an increase in
cash flows related to accrued liabilities of $0.2 million, which is principally
attributable to accrued interest, legal and accounting fees, a loss associated
with the disposal of GeoLogic of $0.84 million, a $0.39 million provision for
losses on accounts receivable, principally related to EDI receivables, and $0.24
million of depreciation and amortization. These cash flows were offset in part
by cash outflows from operating activities of $2.9 million related to the net
loss in fiscal 1995, a $0.8 million increase in cash held in escrow related to
the funding provisions of agreements with Sirrom Environmental Funding, LLC (the
"Sirrom Agreements"), a decrease in the payable to parent of $0.5 million
related to the intercompany balance with PDGE which was settled at the time of
the Corporation's initial public offering, an increase in prepaid expenses of
$0.1 million pertaining to certain insurance costs and costs associated with the
execution of the Sirrom Agreements, a $0.1 million decrease in billings in
excess of costs and estimated earnings on uncompleted contracts due to the
timing of revenue recognition on contract activity, and a $0.2 million change in
the net assets of the discontinued operation, GeoLogic.
The Corporation's cash outflows associated with financing activities in fiscal
1996 included $7.8 million of principal payments on debt, the majority of which
related to the lines of credit with CVD Financial Corporation and Barnett Bank.
The Corporation's cash inflows from financing activities consisted of $2.25
million from the sale of the Corporation's Common Stock and Redeemable Warrants
in the initial public offering, and $3.7 million from refinancing the
Corporation's existing indebtedness to CVD Financial Corporation with Barnett
Bank in February 1995.
23
<PAGE> 26
Cash outflows from investing activities of the Corporation totaled $0.06
million for fiscal 1996 and related to the purchase of property, plant and
equipment.
The Corporation experienced a decrease in cash and short-term investments of
$0.1 million in fiscal 1995 which included $2.9 million of cash outflows used
by operating activities, the majority of which were funded by cash provided by
financing activities of $2.8 million. The cash used by the Corporation to fund
operating activities of $2.9 million included increases of $3.2 million in
accounts receivable and $2.0 million in costs and estimated earnings in excess
of billings on uncompleted contracts attributable to the increased sales levels
experienced by the Corporation in fiscal 1995 and the preparation of and
payments on receivables invoices. Cash outflows from operating activities also
included an increase of $0.15 million in cash held in escrow pertaining to the
funding of certain receivables, $0.2 million from an extraordinary item
associated with the early extinguishment of debt, payments on income taxes of
$0.05 million, and decreases in other assets of $0.1 million. These cash
outflows pertaining to operating activities were partially funded by cash
inflows from operating activities which included $0.9 million generated by net
income in fiscal 1995, $0.2 million from depreciation and amortization, $0.2
million associated with the provision for losses on accounts receivable,
principally on EDI receivables, an $0.8 million decrease in the receivable from
parent due to repayments, a $0.5 million increase in accounts payable from the
registrant's higher sales levels and the timing of payments, a $0.1 million
increase in accrued liabilities due to the timing of certain payments and $0.1
million from other non-cash adjustments.
In fiscal 1995, the Corporation's cash inflows from financing activities of
$2.8 million consisted of proceeds from borrowings under existing lines of
credit of $3.7 million, offset by principal payments on debt of $0.9 million.
The Corporation's investing activities in fiscal 1995 included $0.1 million of
proceeds from the sale of property, plant and equipment which was used to
purchase a like amount of property, plant and equipment.
The Corporation's cash and short-term investment balance decreased by $0.1
million in fiscal 1994 to $0.1 million at January 31, 1994. This decrease is
the result of $1.2 million of cash flows used to fund financing activities and
$0.2 million of cash flows used by investing activities for the purchase of
property, plant and equipment. With respect to financing activities, the
Corporation repaid $3.1 million on existing indebtedness and borrowed $1.9
million under lines of credit. The Corporation funded these cash outflows
associated with financing and investing activities with cash provided by
operating activities of $1.3 million. Cash provided by operating activities
included a $1.8 million reduction in accounts receivable due to payments on EDI
receivables, a $1.4 million decrease in the receivable from parent due to
payments and a $1.0 million dividend, a $0.3 million increase in accounts
payable due to higher sales levels, $0.2 million provided by net income
generated in fiscal 1994, $0.3 million generated by depreciation and
amortization and a provision for losses on accounts receivable, and a $0.1
million increase in accrued liabilities related to timing of payments. The
Corporation also experienced cash outflows from operating activities which
included a $1.4 million reduction in costs and estimated earnings in excess of
billings on uncompleted contracts due to the timing of invoice preparation under
the EDI Program, a $1.3 million increase in the net assets of the discontinued
operation, GeoLogic, due to capital improvements and an increase in receivables,
and $0.1 million of cash flows used to fund other asset and liability operating
activity.
24
<PAGE> 27
The Corporation's backlog is expected to result in contract revenues of
approximately $4.0 million to $6.0 million in fiscal 1997. The changes in the
EDI Program have had a significant and detrimental impact on the Corporation's
operations in fiscal 1996. The Corporation's operations were adversely
affected in the first quarter of fiscal 1997 and the Corporation anticipates
that its operations will continue to be adversely affected in the second
quarter of fiscal 1997 by delays associated with the revised Florida
state-funded site rehabilitation program (the "Pre-Approval Program"), which
have prevented the Corporation from commencing work on high priority sites.
The Corporation continues its efforts to replace revenues which have been lost
due to changes in the EDI Program through increased marketing efforts.
During fiscal 1996, the Corporation repaid $3.5 million of borrowings under a
$5.0 million credit agreement with Barnett Bank. The Corporation currently
maintains an agreement with Sirrom Environmental Funding, LLC ("Sirrom") 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, future costs, and a commitment fee of 2% of the total funding
provided. The Corporation and PDGE are guarantors on the Sirrom Agreement. As
of January 31, 1996, PDGES had been advanced approximately $1.9 million under
the Sirrom Agreement.
The Corporation's liquidity has recently improved due to the repayment under
the Barnett Bank line of credit in December 1995. Although the Corporation
continues to have limited funds available to meet its ongoing working capital
requirements, the Corporation believes that the proceeds generated by the
Sirrom Agreement combined with cash generated from operations should enable the
Corporation to meet its ongoing liquidity requirements in fiscal 1997. The
Corporation also intends to pursue other financing arrangements in fiscal 1997
in order to meet its ongoing working capital requirements. The Corporation
will continue to closely monitor its liquidity requirements on a short-term
basis and will be prepared to implement further measures to conserve cash as
required.
PROSPECTIVE INFORMATION
During fiscal 1996, the Corporation's operations were materially adversely
affected by the changes in the EDI Program because a substantial portion of the
Corporation's historical revenues have been generated both directly and
indirectly under the EDI Program. The Corporation has responded to the
financial impact of these EDI Program changes through implementation of cost
reductions, the discontinuance of its thermal treatment facility, increased
marketing efforts to actively participate under the Pre-Approval Program, and
identification of potential acquisitions to replace the revenues lost.
The Corporation has increased its backlog of high priority sites eligible under
the Pre-Approval Program in recent months; however, delays associated with the
Pre-Approval Program have prevented the Corporation from commencing work on
these high priority sites. In the first quarter of fiscal year 1997, the
Florida remediation service operation continued to generate a loss as a
consequence of these delays and the Corporation took further steps in the form
of staff reductions and reduced leased space to minimize costs. The Corporation
believes that its operations will continue to be adversely affected in the
second quarter of fiscal year 1997 as a result of these delays.
25
<PAGE> 28
In a further effort to replace these lost revenues, the Corporation has entered
into a letter of intent to acquire Spatco Environmental, Inc. ("SEI"), an
environmental remediation service company based in Charlotte, North Carolina
which generated annual revenues of approximately $11.7 million and an EBIT of
($47,000) in the fiscal year ended December 31, 1995, in exchange for shares of
the Corporation's Common and Preferred Stock. Although the consummation of the
transaction is subject to a number of conditions, including the negotiation
and execution of a definitive agreement and the replacement of certain
financing currently outstanding with respect to SEI, the parties expect the
transaction to close during the Corporation's second or third quarter of fiscal
1997.
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 and also authorizes clean-up
in advance of a site's priority ranking on a limited basis to facilitate
property transactions or public works projects pursuant to a Pre-Approval
Advance Clean-Up provision. 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.
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. In addition, it is anticipated that the satisfaction
of the backlog by the FDEP will result in an increase in the annual allocation
of new work from the FDEP, thus accelerating the Corporation's ability to
access its backlog of higher priority sites.
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 impact of the discounting on its results of operations and
financial condition.
The Corporation is 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.
PDGES, a wholly-owned subsidiary of the Corporation, is currently involved in
litigation with International Surplus Lines Insurance Company, Inc. ("ISLIC")
as a result of insurance advances made to PDGES by ISLIC. A judgment rendered
against PDGES would have a detrimental impact on the Corporation's future cash
flow.
The Corporation has also been named in a purported class action suit involving
the purchase by all persons and entities of the registrant'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.
26
<PAGE> 29
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
PDG Remediation, Inc.
We have audited the accompanying consolidated balance sheets of PDG
Remediation, Inc. (the "Corporation") as of January 31, 1996 and 1995, and the
related consolidated statements of operations, stockholder's equity, and cash
flows for each of the three years in the period ended January 31, 1996. Our
audits also included the accompanying financial statement schedule. These
financial statements and schedule are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PDG
Remediation, Inc. at January 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended January 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
March 8, 1996, except for Note 3, as
to which the date is April 25, 1996
27
<PAGE> 30
CONSOLIDATED BALANCE SHEETS
PDG REMEDIATION, INC.
<TABLE>
<CAPTION>
JANUARY 31,
1996 1995
-----------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 362,000 $ 7,000
Cash held in escrow 968,000 151,000
Accounts receivable, less allowance of $724,000
and $307,000 in 1996 and 1995, respectively 1,626,000 5,287,000
Costs and estimated earnings in excess
of billings on uncompleted contracts 2,320,000 4,383,000
Prepaid expenses 137,000 56,000
Receivable from parent - 225,000
Net assets of discontinued operation - 437,000
---------- -----------
TOTAL CURRENT ASSETS 5,413,000 10,546,000
PROPERTY, PLANT AND EQUIPMENT
Leasehold improvements 11,000 20,000
Furniture and fixtures 40,000 33,000
Vehicles 127,000 117,000
Equipment 439,000 377,000
---------- -----------
617,000 547,000
Less: accumulated depreciation and amortization (437,000) (290,000)
---------- -----------
180,000 257,000
OTHER ASSETS 21,000 21,000
---------- -----------
TOTAL ASSETS $5,614,000 $10,824,000
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 31
CONSOLIDATED BALANCE SHEETS
PDG REMEDIATION, INC.
<TABLE>
<CAPTION>
JANUARY 31,
1996 1995
------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $1,052,000 $1,012,000
Insurance company accrual 1,284,000 1,284,000
Short-term borrowings - 1,445,000
Billings in excess of costs and estimated earnings on
uncompleted contracts 8,000 134,000
Accrued income taxes 48,000 70,000
Accrued liabilities 491,000 285,000
Payable to parent 117,000 -
Accrued loss on sale of discontinued operation 140,000 -
Current portion of long-term debt 16,000 20,000
---------- -----------
TOTAL CURRENT LIABILITIES 3,156,000 4,250,000
LONG-TERM DEBT 20,000 3,579,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, none issued and outstanding - -
Common stock, $0.01 par value, 30,000,000 shares
authorized, 2,470,000 shares and 1,870,000 shares
issued and outstanding at January 31, 1996 and 1995 25,000 19,000
Paid-in capital 4,768,000 2,473,000
---------- -----------
4,793,000 2,492,000
Retained earnings (deficit) (2,355,000) 503,000
---------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,438,000 2,995,000
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,614,000 $10,824,000
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 32
CONSOLIDATED STATEMENTS OF OPERATIONS
PDG REMEDIATION, INC.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
CONTRACT REVENUES $ 4,779,000 $9,361,000 $5,346,000
CONTRACT COSTS 3,393,000 6,793,000 3,555,000
----------- ---------- ----------
GROSS MARGIN 1,386,000 2,568,000 1,791,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,244,000 1,954,000 1,788,000
----------- ---------- ----------
(LOSS) INCOME FROM OPERATIONS (858,000) 614,000 3,000
OTHER INCOME (EXPENSE):
Interest expense:
Interest on financial obligations (406,000) (418,000) (216,000)
Amortization of estimated fair market
value of warrants - (94,000) (23,000)
Interest income 13,000 - 5,000
Other income 1,000 13,000 5,000
----------- ---------- ----------
(392,000) (499,000) (229,000)
----------- ---------- ----------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND EXTRAORDINARY ITEM (1,250,000) 115,000 (226,000)
INCOME TAX PROVISION - 31,000 -
----------- ---------- ----------
(LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEM (1,250,000) 84,000 (226,000)
DISCONTINUED OPERATION:
(Loss) income from operation of
GeoLogic (less applicable income taxes of
$159,000 in 1995 and $35,000 in 1994) (768,000) 590,000 432,000
Loss on disposal of GeoLogic (840,000) - -
----------- ---------- ----------
(1,608,000) 590,000 432,000
----------- ---------- ----------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM (2,858,000) 674,000 206,000
EXTRAORDINARY ITEM - 222,000 -
----------- ---------- ----------
NET (LOSS) INCOME $(2,858,000) $ 896,000 $ 206,000
=========== ========== ==========
NET (LOSS) INCOME PER COMMON SHARE:
Income from continuing operations before
extraordinary item $ (0.51) $ 0.04 $ (0.12)
Discontinued operation (0.65) 0.32 0.23
Extraordinary item - 0.12 -
----------- ---------- ----------
Net (loss) income per share $ (1.16) $ 0.48 $ 0.11
=========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING 2,456,000 1,870,000 1,870,000
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 33
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PDG REMEDIATION, INC.
<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON PAID-IN EARNINGS STOCKHOLDERS'
STOCK CAPITAL (DEFICIT) EQUITY
------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 31, 1993 $19,000 $2,131,000 $ 401,000 $ 2,551,000
Net income 206,000 206,000
Dividend payable to parent (1,000,000) (1,000,000)
Capitalization of intercompany debt
with parent 200,000 200,000
Estimated fair market value of 375,000 warrants 282,000 282,000
------- ---------- ---------- -----------
BALANCE AT JANUARY 31, 1994 19,000 2,613,000 (393,000) 2,239,000
Net income 896,000 896,000
Revaluation of fair market value of
375,000 warrants (140,000) (140,000)
------- ---------- ----------- -----------
BALANCE AT JANUARY 31, 1995 19,000 2,473,000 503,000 2,995,000
Net loss (2,858,000) (2,858,000)
Common shares sold in initial public offering 6,000 2,145,000 2,151,000
Warrants sold in initial public offering 100,000 100,000
Issuance of 100,000 warrants 50,000 50,000
------- ---------- ----------- -----------
BALANCE AT JANUARY 31, 1996 $25,000 $4,768,000 $(2,355,000) $ 2,438,000
======= ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 34
CONSOLIDATED STATEMENTS OF CASH FLOWS
PDG REMEDIATION, INC.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(2,858,000) $ 896,000 $ 206,000
ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME
TO CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Provision for loss on disposal of discontinued operation 840,000 - -
Depreciation and amortization 239,000 224,000 189,000
Provision for losses on accounts receivable 387,000 225,000 75,000
Extraordinary item - (166,000) -
Other (8,000) 96,000 23,000
CHANGES IN CURRENT ASSETS AND LIABILITIES OTHER THAN CASH:
Cash held in escrow (817,000) (151,000) -
Accounts receivable 3,279,000 (3,235,000) 1,768,000
Costs and estimated earnings in excess of billings on
uncompleted contracts 2,063,000 (2,010,000) (1,357,000)
Inventories - 6,000 (1,000)
Receivable from parent, net (541,000) 758,000 1,394,000
Prepaid expenses (142,000) (40,000) (44,000)
Prepaid income taxes - 5,000 25,000
Accounts payable 23,000 475,000 254,000
Billings in excess of costs and estimated earnings on
uncompleted contracts (126,000) 46,000 (15,000)
Net assets of discontinued operation (263,000) (36,000) (1,282,000)
Accrued liabilities 224,000 53,000 47,000
Accrued income taxes payable (22,000) (46,000) -
Other (3,000) (9,000) (6,000)
----------- ----------- -----------
TOTAL ADJUSTMENTS 5,133,000 (3,805,000) 1,070,000
----------- ----------- -----------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES 2,275,000 (2,909,000) 1,276,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (58,000) (134,000) (188,000)
Proceeds from sale of property, plant and equipment - 116,000 2,000
----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (58,000) (18,000) (186,000)
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 3,676,000 3,688,000 1,946,000
Principal payments on debt (7,789,000) (862,000) (3,132,000)
----------- ----------- -----------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (1,862,000) 2,826,000 (1,186,000)
----------- ----------- -----------
Net increase (decrease) in cash and short-term investments 355,000 (101,000) (96,000)
Cash and short-term investments, beginning of year 7,000 108,000 204,000
----------- ----------- -----------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR $ 362,000 $ 7,000 $ 108,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PDG REMEDIATION, INC.
FOR THE THREE YEARS ENDED JANUARY 31, 1996
NOTE 1 - BASIS OF PRESENTATION
HISTORICAL FORMATION
PDG Remediation, Inc. (the "Corporation") was formed on July 20, 1994 to effect
the merger of one corporation and two partnerships of PDG Environmental, Inc.
("PDGE") into the Corporation. The Corporation operated as a wholly-owned
subsidiary of PDGE until February 9, 1995 at which time 1,000,000 shares of the
Corporation's common stock and 1,000,000 warrants were sold to the public at a
price of $5.00 per share of common stock and $0.10 per redeemable warrant. The
Corporation sold 600,000 newly issued common shares and 1,000,000 redeemable
warrants and received net proceeds of approximately $2.3 million. PDGE sold
400,000 shares of the Corporation's common stock. The redeemable warrants
entitle the holder to purchase one share of common stock at an exercise price
of $6.00 per share. The redeemable warrants may be exercised at any time and
expire on February 8, 2000.
On March 17, 1995, the underwriters on the offering exercised their option to
purchase an additional 150,000 redeemable warrants from the Corporation which
resulted in net proceeds to the Corporation of approximately $13,000.
As a result of the initial public offering, PDGE's ownership interest in the
Corporation was reduced from 100% to 59.5% effective February 9, 1995. PDGE
continues to own 59.5% of the Corporation's common stock.
BUSINESS ACTIVITIES
The Corporation is primarily engaged in providing environmental remediation
services to the public and private sectors.
The Corporation provides remediation services to assist its clients in
complying with environmental laws and regulations, such as those concerning
leaking underground storage tanks and contaminated industrial facilities. The
underground storage tank and hazardous materials remediation services are
generally performed under the terms of cost-plus and time-and-materials
contracts with a duration of one to three years and can be terminated by either
party upon 30 days notice. The Corporation also operated a facility which
remediated petroleum contaminated soil utilizing a thermal desorption process.
On April 25, 1996, the Corporation sold its interest in this facility. The
Corporation has classified the operations of this facility as discontinued in
the accompanying financial statements (see also Note 3).
The Corporation has historically performed a substantial amount of work under a
Florida state funded site rehabilitation program (the "EDI Program") which
provides for the remediation of contaminated sites related to the storage of
petroleum and petroleum products. The EDI Program has undergone substantial
modification during the fiscal year ended January 31, 1996 (fiscal 1996) due to
an imbalance in the Inland Protection Trust Fund between reimbursement
application expenditures for work performed under the EDI Program and revenues
generated for the EDI Program, as well as a concern that the majority of the
site rehabilitation work was being conducted at sites that were not considered
to be high priority in terms of the potential impact on drinking water
supplies.
On March 8, 1995, Florida's Governor Lawton Chiles issued Executive Order 95-2
suspending processing of payment applications under the EDI Program and on
March 16, 1995, the Senate passed a bill establishing 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.
It was anticipated that the Florida legislature would pass final legislation to
amend the EDI Program prior to adjournment in May 1995; however, on May 11,
1995, the legislature adjourned for the year without acting on proposed changes
to the EDI Program or the Inland Protection Trust Fund. As a result of the
legislative inaction, the Corporation has continued to work under the
legislation passed on March 27, 1995.
33
<PAGE> 36
On July 26, 1995, the Florida Department of Environmental Protection ("FDEP")
issued guidance to contractors operating under the EDI Program for requesting
pre-approval from the FDEP prior to commencing work on eligible sites. A
supplement was issued to this guidance on October 11, 1995 which contains
maximum allowable charges for contractors to employ in the pre-approval
process.
The change in the legislation surrounding the EDI Program has had a material
adverse effect on the Corporation's operations during fiscal 1996 since the
number of sites in the Corporation's backlog immediately eligible for continued
reimbursement were significantly reduced. Further, the Corporation's thermal
treatment facility experienced a significant decline in soil shipments during
fiscal 1996 which the Corporation believes is indirectly related to EDI Program
changes which created a slowdown in the entire market for the thermal treatment
of petroleum contaminated soil and intense competitive price pressures.
Additionally, the EDI Program changes have resulted in substantial reductions
in the Corporation's contract revenues creating significant operating losses in
fiscal 1996. The Corporation expects these contract revenue reductions and
operating losses to continue into the first and second quarters of fiscal 1997.
The Corporation has responded to the impact of these revenue reductions through
reductions in staff and other overhead costs, the reallocation of a portion of
its workforce to cover existing backlog at the Corporation's Pennsylvania
remediation service operation and an intense marketing effort focused on
obtaining remediation service contracts for high priority sites eligible for
reimbursement under the revised Florida state funded site rehabilitation
program (the "Pre-Approval Program") and for remediation service contracts
outside the Pre-Approval Program.
While the Corporation has increased its backlog of high priority sites eligible
for participation in the EDI Program during the fourth quarter of fiscal 1996,
the implementation time associated with the pre-approval process by the FDEP has
prevented the Corporation from working on these high priority sites during the
first quarter of fiscal 1997.
The Corporation anticipates that its operations during the first and second
quarters of fiscal 1997 may continue to be adversely affected by the delays
associated with the Pre-Approval Program.
In general, the Corporation anticipates that it will experience lower margins
on work associated with the pre-approval process; however, it believes that
profitable operating margins are still possible provided the Corporation
maintains a sufficient volume of work under the Pre-Approval Program.
The Florida legislature is currently in session and is considering a number of
measures to satisfy the State of Florida's existing obligations to fund the
backlog under the EDI Program. The legislation as currently proposed 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, it is currently proposed that reimbursement applications
will be paid at a discount effective January 1, 1997. The proposed 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.
34
<PAGE> 37
Although the impact of the proposed legislation on the registrant's results of
operations cannot be ultimately determined until a final bill is signed into
law, the registrant believes it may be required to record an additional charge
to reflect the negative impact of the discounting on its results of operations
and financial condition. The registrant is currently unable to determine the
impact of this change on its operations.
The registrant's results of operations and financial condition would also
benefit, on a prospective basis, as a result of the legislation as currently
proposed. The registrant would experience significant reductions in interest
costs associated with the funding of its reimbursement applications under the
EDI Program as a result of an accelerated payment schedule as the Sirrom
Environmental, LLC funding arrangement requires the registrant to recognize
interest expense at the prime rate plus 3%. Further, as a result of a bond
issuance, the registrant believes approximately $100 million per year will be
allocated by the FDEP to support new remediation work under the Pre-Approval
Program which is currently funded at an annual rate of $30 million.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the Corporation's wholly-owned
subsidiaries and a partnership. All significant intercompany transactions are
eliminated in consolidation.
REVENUES AND COST RECOGNITION:
Revenues for environmental remediation services on lump sum contracts are
recognized on the percentage-of-completion method, measured by the relationship
of total cost incurred to total estimated contract costs (cost-to-cost method).
Revenues for environmental remediation services on time-and-materials
contracts are recognized based on estimated multipliers applied to cost
incurred to date. These margins are adjusted to actual as the contract is
completed.
Contract costs include direct labor and material costs and those indirect costs
related to contract performance, such as supplies, tools, depreciation, repairs
and insurance. Selling, general and administrative costs are charged to
expense as incurred. Bidding and proposal costs are also recognized as an
expense in the period that such amounts are incurred. Provisions for estimated
losses on uncompleted contracts are recognized in the period in which such
losses are determined. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions and final contract settlements, may result in revisions to estimated
costs and income, and are recognized in the period in which the revisions are
determined. Profit incentives are included in revenues when their realization
is reasonably assured.
CASH AND SHORT-TERM INVESTMENTS:
Cash and short-term investments consists principally of currency on hand and
demand deposits at commercial banks. During fiscal 1995, two of the entities
which were merged into the Corporation participated in a centralized cash
management system with PDGE.
35
<PAGE> 38
CASH HELD IN ESCROW:
Cash held in escrow represents amounts which are subject to withdrawal
restrictions and principally relate to a funding arrangement with Sirrom
Environmental Funding, LLC (also see Note 7) and work performed as a
subcontractor to certain companies under the EDI Program.
EARNINGS PER SHARE:
Primary loss per common share for fiscal 1996 has been computed based upon 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 fiscal 1996 since the exercise of such options and
warrants would be antidilutive.
The earnings per common share for fiscal 1995 and 1994 have been computed based
upon the weighted average shares outstanding of 1,870,000 which were owned by
PDGE.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost and depreciated over the
estimated useful lives of the assets using the straight-line method.
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior year financial statements
to conform with the current year presentation.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS:
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 3 - DISCONTINUED OPERATION
On April 25, 1996, the Corporation sold its interest in its thermal treatment
facility, GeoLogic Recovery Systems ("GeoLogic"), to Specialized Environmental,
Inc. ("SEI") effective as of January 31, 1996 in exchange for the assumption by
SEI 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 Corporation has accounted for GeoLogic as a discontinued operation as of
January 31, 1996 and, accordingly, its operating results are reported in this
manner in all years presented in the accompanying financial statements. The
Corporation has recorded a loss on the disposition of GeoLogic of $0.84 million
in fiscal 1996 comprised of a write off of the net assets of GeoLogic and a
$0.14 million provision for costs associated with the disposition. Net sales of
GeoLogic were $1.5 million, $3.9 million and $4.0 million in fiscal years 1996,
1995 and 1994, respectively.
NOTE 4 - ACCOUNTS RECEIVABLE
Accounts receivable at January 31, 1996 and 1995 include $4,000 and $3,000,
respectively, of retainage receivables. During the year ended January 31, 1996
revenues equal to approximately 24% of consolidated revenues were attributable
to one customer. For the years ended January 31, 1995 and 1994, no single
customer contributed 10% or more of the Corporation's consolidated revenues.
The Corporation has contracts to provide services involving the remediation of
underground storage tank sites for private customers under the EDI Program.
Receivables under this program at January 31, 1996 and 1995 totaled $2,000,000
and $4,942,000, respectively. During the years ended January 31, 1996, 1995
and 1994, revenues equal to 60.9%, 79.7% and 56.2%, respectively, of
consolidated revenues were attributable to this program (also see Note 2).
Amounts submitted under the EDI Program are subject to state reimbursement
regulations. The Corporation reviews amounts submitted and provides for any
disallowances in its allowance for doubtful accounts.
36
<PAGE> 39
The Corporation performs services as a subcontractor to companies with respect
to work performed under the EDI Program. In certain circumstances, the
Corporation has provided an indemnification for any amounts which are not
reimbursed. At January 31, 1996 and 1995, the Corporation had provided such
indemnifications for $7,011,000 and $3,137,000, respectively, of work performed
pursuant to such subcontractor arrangements. The Corporation has provided for
any potential future losses associated with these indemnifications as part of
its allowance for doubtful accounts.
It is the Corporation's policy not to require collateral with respect to
outstanding receivables. The Corporation continuously reviews the
creditworthiness of customers and, when necessary, requests collateral to
secure the performance of services.
All of the Corporation's outstanding accounts receivable are expected to be
collected within the normal operating cycle of one year.
NOTE 5 - PAYABLE TO PARENT
During fiscal 1996, PDGE provided the Corporation with certain management
services principally related to insurance coverage and the rental of office
space. At January 31, 1996, the Corporation had an outstanding payable of
$0.12 million to PDGE related to these services and the settlement of
intercompany balances subsequent to the initial public offering.
In fiscal years 1995 and 1994, the Corporation provided certain interest
bearing advances to PDGE and its subsidiaries which were repaid based on the
availability of funds and the working capital needs of the Corporation. These
advances accrued interest at the borrowing rate associated with PDGE's separate
lines of credit which aggregated 12.7% and 8.2% in fiscal years 1995 and 1994,
respectively.
In fiscal years 1996, 1995 and 1994, PDGE provided certain accounting and
executive services on the basis of a management services agreement between the
entities. The charge for such services was $51,000 in fiscal 1996, $814,000 in
fiscal 1995 and $901,000 in fiscal 1994. Management believes the management
services agreement was on terms at least as favorable to the Corporation as
terms which could have been negotiated with independent third parties.
NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Details related to contract activity are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
1996 1995
----------------------
<S> <C> <C>
Revenues earned on uncompleted contracts $4,531,000 $6,467,000
Less: billings to date 2,219,000 2,218,000
---------- ----------
Net Under Billings $2,312,000 $4,249,000
========== ==========
</TABLE>
Included in the accompanying consolidated balance sheets under
the following captions:
<TABLE>
<CAPTION>
JANUARY 31,
1996 1995
----------------------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts $2,320,000 $4,383,000
Billings in excess of costs and estimated earnings on
uncompleted contracts 8,000 134,000
---------- ----------
Net Under Billings $2,312,000 $4,249,000
========== ==========
</TABLE>
37
<PAGE> 40
At January 31, 1996 and 1995, net under billings included $2,062,000 and
$4,135,000, respectively, of amounts which will be billed upon the completion
of certain program tasks as defined under the EDI Program.
NOTE 7 - LINES OF CREDIT
On February 8, 1995, the Corporation entered into a $5,000,000 line of credit
with Barnett Bank of Central Florida, N.A. (the "Barnett Agreement").
Borrowings under the Barnett Agreement were limited to 75% of eligible accounts
receivable, as defined, and interest was assessed at the prime rate plus 2%.
As a result of a default of certain covenants under the Barnett Agreement, on
June 14, 1995 the Corporation entered into a forbearance agreement with Barnett
Bank which was further amended on August 8, 1995. Under these forbearance
agreements, the revolving line of credit was terminated and the outstanding
loan balance was converted to a term loan maturing on February 1, 1996. The
Barnett Bank term loan was repaid in full by the Corporation on December 21,
1995.
During the fourth quarter of fiscal 1994 and fiscal 1995, PDG Environmental
Services, Inc. ("PDGES"), a wholly-owned subsidiary of the Corporation,
maintained a $2,500,000 revolving line of credit with CVD Financial Corporation
which was increased to $4,000,000 on September 6, 1994 (the "PDGES Agreement").
Borrowings under the PDGES Agreement were limited to 85% of eligible accounts
receivable and interest was assessed at the prime rate plus 7%.
Throughout the majority of fiscal 1994, the Corporation maintained a $2,000,000
revolving demand line of credit. Borrowings under this line of credit were
limited to 75% of eligible accounts receivable and interest accrued at 2% above
the bank's prime rate.
Summary information concerning the Corporation's line of credit agreements
during the years ended January 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
JANUARY 31,
1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
Borrowings outstanding at end of year $ - $3,526,000 $ 665,000
Maximum borrowing permitted 5,000,000 3,700,000 2,500,000
Average amount outstanding 2,253,000 2,270,000 1,470,000
Maximum amount outstanding 3,676,000 3,526,000 1,781,000
Year end interest rates - 15.50% 13.00%
Average interest rates 11.53% 14.70% 8.69%
</TABLE>
On January 27, 1995, PDGES entered into a Master Funding and Indemnification
Agreement with Sirrom Environmental Funding, LLC, (the "Sirrom Agreement")
which provides $750,000 of funding in connection with clean-up activities under
the EDI Program. The Sirrom Agreement expires on January 27, 1997 and enables
the Corporation to fund the amounts which the Corporation bills under the EDI
Program at the prime rate of interest, as defined, plus 2%. The Corporation is
advanced 100% of amounts billed, and is required to deposit 10% into an escrow
account to cover potential disallowances. The Corporation and PDGE are
guarantors on the Sirrom Agreement. As of January 31, 1996, the Corporation
was advanced approximately $747,000 under the Sirrom Agreement.
On August 21, 1995, PDGES entered into a second Master Funding and
Indemnification Agreement with Sirrom Environmental Funding, LLC (the "Second
Sirrom Agreement"), which provides $4,000,000 of funding relative to unbilled
amounts under the EDI Program. The Second Sirrom Agreement, which expires on
August 21, 1997, enables the Corporation to fund amounts billed under the EDI
Program at the prime rate of interest, as defined, plus 3%. Although the
Corporation is advanced 100% of amounts billed, it 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. The Corporation also
issued a warrant to purchase 100,000 shares of the Corporation's common stock
to Sirrom Environmental Funding, LLC at an exercise price of $1.37 per share in
conjunction with the execution of the Second Sirrom Agreement. The warrant
expires on January 31, 1999. The Corporation has recorded $50,000 as the
estimated fair market value of the warrant. The Corporation and PDGE are
guarantors on the Second Sirrom Agreement. As of January 31, 1996, the
Corporation was advanced approximately $1,868,000 under the Second Sirrom
Agreement.
38
<PAGE> 41
During the fiscal year ended January 31, 1995, the Corporation recorded its
proportionate share of PDGE's revolving credit agreements based upon its
separate borrowing base calculation. At January 31, 1995, the Corporation's
proportionate interest in the PDGE combined $3,600,000 of revolving credit,
reflected as short-term borrowings in the accompanying financial statements,
was $1,445,000 bearing interest at a bank rate (as defined) plus 7%.
PDGE assessed the Corporation interest on its proportionate share of the
borrowings in accordance with the interest rate permitted under the underlying
revolving credit agreement. The interest rate charged to the Corporation
during fiscal 1995 ranged from a bank rate plus 2% to a bank rate plus 7%. The
Corporation also maintained an $80,000 letter of credit under a PDGE revolving
credit agreement at January 31, 1995. The Corporation's average borrowings
under the PDGE revolving credit agreements during fiscal 1995 totaled $895,000
at an average interest rate of 12.70%.
Effective June 30, 1994, the existing PDGE lender sold its interest in a
revolving credit agreement and an outstanding mortgage to CVD Financial
Corporation for a purchase price of 70% of the aggregate outstanding principal
balance. CVD Financial Corporation afforded PDGE forgiveness of indebtedness
in the amount of $789,000. The Corporation has recorded its proportionate
interest in this extraordinary gain in the amount of $222,000, net of an income
tax provision of $60,000.
At January 31, 1994, the Corporation's proportionate interest in the PDGE
$3,000,000 revolving credit agreement was $1,171,000.
NOTE 8 - ACCRUED LIABILITIES
Accrued liabilities are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
1996 1995
------------------
<S> <C> <C>
Wages $107,000 $123,000
Withheld and accrued taxes 56,000 9,000
Accrued commitment fees 47,000 -
Accrued insurance 20,000 6,000
Accrued worker's compensation insurance 52,000 16,000
Accrued royalties 2,000 20,000
Accrued interest 80,000 47,000
Accrued legal 35,000 16,000
Other 92,000 48,000
-------- --------
Total Accrued Liabilities $491,000 $285,000
======== ========
</TABLE>
NOTE 9 - LONG-TERM DEBT
Long-term debt of the Corporation less amounts due within one year is as
follows:
<TABLE>
<CAPTION>
1996 1995
------- ----------
<S> <C> <C>
Revolving line of credit in the amount of $3,700,000 bearing interest at
7% above the prime rate, net of discount; paid in February 1995. $ - $3,526,000
Proportionate interest in PDGE term loan in the amount of
$690,000 at January 31, 1995, with interest at 7% above the prime rate,
paid in February 1995. - 21,000
Other notes payable with interest rates ranging from 6.75% to 11.5%
with various maturities. 36,000 52,000
------- ----------
36,000 3,599,000
Less amount due within one year 16,000 20,000
------- ----------
$20,000 $3,579,000
======= ==========
</TABLE>
39
<PAGE> 42
Maturity requirements on long-term debt aggregate $16,000 in fiscal 1997,
$12,000 in fiscal 1998, and $8,000 in fiscal 1999.
The Corporation paid approximately $643,000, $767,000 and $524,000 for interest
costs during the years ended January 31, 1996, 1995 and 1994, respectively.
NOTE 10 - INCOME TAXES
The Corporation provides income taxes under the liability method as required by
FAS 109. In fiscal 1995 and 1994, the Corporation joined in the filing of a
consolidated federal return with PDGE; however, income taxes have been provided
in the accompanying financial statements as if the Corporation filed separate
returns. The Corporation generally files separate state tax returns.
The Corporation has net operating loss carryforwards of approximately
$2,800,000 at January 31, 1996. For financial reporting purposes, a valuation
allowance of approximately $1,003,000 was recognized at January 31, 1996 to
offset the deferred tax asset related to these carryforwards and other deferred
tax assets. The valuation allowance increased during fiscal 1996 due to the
uncertainty of utilizing current year operating losses in future years.
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The significant components of
the Corporation's deferred tax liabilities and assets as of January 31, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
1996 1995
---------------------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ 414,000 $320,000
Other - 27,000
------------ --------
Total deferred tax liabilities 414,000 347,000
Deferred tax assets:
Accounts receivable reserve 284,000 120,000
Net operating loss carryforwards 1,046,000 53,000
Other 87,000 -
------------ --------
Total deferred tax assets 1,417,000 173,000
Valuation allowance for deferred tax assets (1,003,000) -
------------ --------
Net deferred tax assets 414,000 173,000
------------ --------
Net deferred tax liabilities $ - $174,000
============ ========
</TABLE>
The deferred tax liability at January 31, 1995 is included as a component of
the net assets of the discontinued operation.
40
<PAGE> 43
Significant components of the provision for income taxes on continuing
operations are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
1996 1995 1994
---------------------------------
<S> <C> <C> <C>
Current:
Federal $ - $ 8,000 $ -
State - 23,000 -
-------- ------- --------
Total income tax provision $ - $31,000 $ -
======== ======= ========
</TABLE>
The reconciliation of income tax computed at the federal statutory rates to
income tax expense is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
Tax at statutory rate $(425,000) $39,000 $(77,000)
State income taxes, net of federal tax benefit - 15,000 -
Limitation (benefit) of net operating loss utilization 423,000 (24,000) 76,000
Other 2,000 1,000 1,000
--------- ------- --------
$ - $31,000 $ -
========= ======= ========
</TABLE>
The Corporation paid approximately $22,000, $9,000, and $22,000 for state
income taxes during the years ended January 31, 1996, 1995 and 1994,
respectively.
NOTE 11 - COMPENSATION PLANS
The Corporation maintains a stock option plan which provides for the issuance
of up to 250,000 shares of the Corporation's common stock to employees,
consultants and non-employee directors. Options to purchase 137,500 shares of
the Corporation's common stock were granted on July 21, 1994 at an option price
of $5.00 per share, of which options to purchase 93,500 shares were fully
vested. The remaining options vest one third each year following the date of
grant. In February 1995, the Corporation's employees who received vested
options under the plan were required to relinquish a like number of options
under the PDGE stock option plan.
Options to purchase an additional 15,000 shares of the Corporation's common
stock were granted on May 23, 1995 at an exercise price of $1.91 per share and
options to purchase 5,000 shares of the Corporation's common stock were granted
on December 13, 1995 at an exercise price of $0.75 per share. These options
vest one third each year following the date of grant.
On October 2, 1995, pursuant to the terms of the stock option plan, 2,500
shares of the Corporation's common stock were granted to the Corporation's
non-employee directors at an exercise price of $1.34 per share. These options
vested on the date of grant.
41
<PAGE> 44
On December 13, 1995, the Compensation Committee of the Corporation's Board of
Directors voted to reprice 142,500 of the Corporation's outstanding options
priced at $1.34, $1.91 and $5.00 per share to $0.75 per share and approved the
adoption of a plan and the grant of options to purchase 150,000 shares of the
Corporation's common stock at a price of $0.75 per share to certain officers
subject to approval by stockholders at the next annual meeting.
The following table summarizes information with respect to the stock option
plan.
<TABLE>
<CAPTION>
Option
Number of Price Range
Shares Per Share
--------- -------------
<S> <C> <C>
Outstanding at January 31, 1994 - -
Granted 137,500 $5.00
-------- -------------
Outstanding at January 31, 1995 137,500 $5.00
Granted 22,500 $0.75 - $1.91
Cancelled - Reusable (12,500) $5.00
-------- -------------
Outstanding at January 31, 1996 147,500 $0.75
======== =============
Exercisable at January 31, 1996 100,832 $0.75
======== =============
Reserved for future grants
at January 31, 1996 102,500 -
======== =============
</TABLE>
Effective November 1, 1994, PDGE established the PDG Environmental Retirement
Savings Plan (the "Retirement Savings Plan") under Section 401(k) of the
Internal Revenue Code. The Corporation is a participating employer under the
Retirement Savings Plan. Substantially all full time employees with at least
one year of service, except for certain bargaining unit employees, are eligible
to participate in the Retirement Savings Plan. Employees may contribute to the
Retirement Savings Plan up to 15% of their eligible compensation. Under the
terms of the Retirement Savings Plan, the Corporation may match up to 6% of
compensation; to be determined annually by the Corporation's Board of
Directors. The Corporation's contributions are 100% vested after seven years
of service. There were no contributions made by the Corporation during fiscal
1996 and 1995.
NOTE 12 - COMMON STOCK
At January 31, 1996, the Corporation has reserved 250,000 shares of its common
stock for issuance under its stock option plan and 1,150,000 shares of its
common stock for issuance upon the exercise of the Corporation's redeemable
warrants. The Corporation has also reserved 100,000 shares of common stock for
issuance to Sirrom Environmental Funding, LLC pursuant to its warrant.
42
<PAGE> 45
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Corporation leases certain facilities and equipment under non-cancelable
operating leases. Rental expense under operating leases aggregated $ 286,000,
$210,000 and $160,000 for the years ended January 31, 1996, 1995 and 1994,
respectively. Minimum rental payments under these leases with initial or
remaining terms of one year or more at January 31, 1996 aggregated $840,000 and
payments due during the next five fiscal years are as follows: 1997 - $212,000;
1998 - $191,000; 1999 - $173,000; 2000 - $149,000 and 2001 - $11,000.
On or about November 10, 1994, International Surplus Lines Insurance Co.
("ISLIC"), filed a complaint against PDGES to recover certain refunds claimed
to be owed by PDGES to ISLIC as a result of insurance advances made to PDGES on
behalf of two of ISLIC's insured customers. ISLIC claims that PDGES was paid
for its work by both ISLIC and the Florida Department of Environmental
Resources under a state administered clean-up program. ISLIC contends that
PDGES must reimburse ISLIC for the specific items ISLIC paid which were also
paid for by the State of Florida. However, ISLIC has never specified the items
for which it has requested reimbursements. PDGES contests the amount and the
timing of such reimbursements. ISLIC claims that, pursuant to its agreement
with its two insured, ISLIC paid PDGES $1,744,993 for clean-up costs and that
PDGES reimbursed ISLIC $412,000 for a net advance of $1,334,993. According to
the records of PDGES, ISLIC actually paid only $1,346,220, which PDGES recorded
as a current liability when it was received. Without a breakdown of costs from
ISLIC identifying which clean-up costs were paid for by ISLIC, PDGES cannot
determine the specific amount of ISLIC's claim. At January 31, 1996, PDGES has
$1,284,000 recorded as an advance from ISLIC.
On December 19, 1994, PDGES filed an Answer and Counter-claims to the complaint
in which PDGES vigorously contests the allegations in the complaint. The
counterclaim is for an amount in excess of $2,517,215, and this amount
continues to increase. The basis of the counterclaim is that PDGES has
continued to clean up sites covered by the ISLIC insurance. The counterclaim
is based upon the legal theories of breach of contract, bad faith (insurance),
unjust enrichment, promissory estoppel and implied contract.
PDGES and ISLIC met in March 1996 to explore settlement options; however, to
date the parties have been unable to reach a settlement. Discovery with
respect to the matter is scheduled to be completed on May 3, 1996 and the trial
is expected to commence on August 5, 1996.
The Corporation has been named as a defendant in a purported class action
involving the purchase by all person and entities who purchased the
Corporation's common stock from February 9, 1995, the effective date of the
initial public offering, through May 23, 1995. The plaintiff is seeking
certification of the action as a class action and recision for the purchase of
shares of common stock by members of the purported class or statutory damages,
as well as interest, attorneys' fees and other costs and expenses. The
Corporation believes that the plaintiff's allegation are without merit or that
there are meritorious defenses to the allegation, and intends to defend the
action vigorously.
43
<PAGE> 46
On September 1, 1995, an answer was filed on behalf of the Corporation, its
officers and directors which generally denied the plaintiff's claims. By
letter dated December 5, 1995, the plaintiff requested a pre-motion conference
on a motion for class certification. By letter dated December 6, 1995, the
underwriter defendants requested a pre-motion conference on a motion to dismiss
the complaint. In December 1995, the underwriter defendants filed a notice of
motion to dismiss and a memorandum of law in support of the motion. The court
has not yet acted on the motion.
The parties have begun initial discovery with respect to the action.
NOTE 14 - SUBSEQUENT EVENT
During March 1996, the Corporation entered into a letter of intent to acquire
SPATCO Environmental, Inc. ("SPATCO"), an environmental remediation service
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. SPATCO generated revenues of approximately $12,000,000 in 1995.
The effect of this acquisition will be to replace and expand some of the
Corporation's revenues which were severely depressed by the changes in fiscal
1996 under the EDI Program.
The consummation of the transaction is subject to a number of conditions,
including the negotiation and execution of a definitive agreement. The parties
expect the transaction to close within 75 days from the execution of the letter
of intent.
44
<PAGE> 47
PDG REMEDIATION, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED
JANUARY 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Balance at Additions Balance
beginning charged at close
of year to income Deductions of year
---------- --------- ---------- --------
<S> <C> <C> <C> <C>
1996
Allowance for doubtful accounts $307,000 $387,000 $(30,000)(1) $724,000
======== ======== ======== ========
1995
Allowance for doubtful accounts $183,000 $225,000 $101,000(1) $307,000
======== ======== ======== ========
1994
Allowance for doubtful accounts $108,000 $ 75,000 $ - $183,000
======== ======== ======== ========
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
45
<PAGE> 48
APPENDIX A
PDG REMEDIATION, INC.
1995 QUALIFIED INCENTIVE STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
This 1995 Qualified Incentive Stock Plan ("Plan") is intended to afford an
incentive to key managerial employees of PDG REMEDIATION, INC. (the "Company")
and its parent and subsidiaries to acquire a proprietary interest in the
Company and to enable the Company to attract and retain such key employees.
For purposes of this Plan, the Company's "parent" or "subsidiaries," if any,
shall include any corporation which is a "parent corporation" or a "subsidiary
corporation" within the meaning of Sections 425(e) and (f) of the Internal
Revenue Code of 1986, as hereafter amended (the "Code"). Options granted
pursuant to the Plan shall be "incentive stock options" as defined in Section
422 of the Code.
2. THE STOCK
Except as provided in Section 6, the number of shares of stock which may be
optioned and sold under the Plan is One Hundred Fifty Thousand (150,000) shares
of Common Stock, $.01 par value, of the Company (the "Shares"). If options
granted under this Plan shall expire or terminate for any reason without having
been exercised in full, the unpurchased Shares subject hereto shall again be
available for the granting of options under this Plan. Shares which are the
subject of options to purchase may be made available from authorized and
unissued stock or from treasury stock.
3. ELIGIBILITY
An option shall be granted only to a person who at the time of the grant
is a key managerial employee of the Company or its parent or a subsidiary of
the Company. A key managerial employee to whom an option has been granted
shall hereinafter sometimes be referred to as an "Optionee." The term "key
managerial employee" shall mean an employee (including officers), who has
responsibility for the management of the Company or its parent or subsidiaries.
The Committee designated pursuant to Section 8 (the "Committee") shall have
the full authority to determine, from time to time, the key managerial
employees to whom options shall be granted and the number of Shares subject to
each option.
4. OPTION TERMS
(a) Except as otherwise provided herein, the option price shall be fixed
by the Committee at the time of the grant of such option and shall not
be less than 100% of the fair market value of the stock at the time the
option is granted. Notwithstanding the foregoing, if the option is
granted to an individual who at the time the option is granted owns
stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or its parent or
any of its subsidiaries, the option price shall not be less than 110%
of the fair market value of the stock at the time the option is
granted. The Committee shall, in good faith, determine the fair market
value of the stock (without regard to any restrictions other than a
restriction which, by its terms, will never lapse) based upon a
reasonable method of valuation adopted by the Committee, or such other
method as may be permitted by the Code, or regulations or rulings
promulgated thereunder. In no event shall the option price be less
than the par value of the Shares. The Committee will use its
reasonable best efforts to determine the fair market value of the
Shares subject to the option, but neither the Committee nor the Company
will be responsible for the payment of any tax imposed upon the
participants, nor will they reimburse participants for their payment of
any tax so imposed. Neither the Company, the Committee or any member
thereof makes or shall make any representation or warranty to any
participant regarding the Federal or state income tax consequences or
effects of participation in the Plan.
<PAGE> 49
(b) Subject to the provisions and limitations of this Plan, and subject to
applicable securities, tax and other laws and regulations, options may
be granted at such time or times and pursuant to such terms and
conditions as may be determined by the Committee during the period this
Plan is in effect.
(c) Each option shall provide that it may be exercised in such installments
as set forth in the Stock Option Agreement (as hereinafter defined) for
such option, commencing from the date set forth in the Stock Option
Agreement for such option; provided, however, that no option shall be
exercised, in full or in part, after the expiration of ten (10) years
from the date such option is granted. However, if the option is
granted to an individual who at the time the option is granted owns
stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or its parent or
any of its subsidiaries, no such option shall be exercised, in full or
in part, after the expiration of five (5) years from the date such
option is granted. Notwithstanding the foregoing, unless the Committee
in its discretion determines otherwise at or prior to the time the
option is granted, each option shall be exercisable from time to time,
in whole or in part, at any time after one (1) year from the date of
grant and prior to its expiration. Notwithstanding anything to the
contrary contained in this Section 4, the Committee may, in its sole
discretion, accelerate the option exercise period, based upon its
evaluation of an optionee's individual performance.
(d) Shares to be purchased upon the exercise of any option shall be paid
for, in full, in cash or by certified check payable to the order of the
Company (or in certificates of stock issued by the Company, which stock
shall be assigned a fair market value by the Committee in its
reasonable discretion) and delivered to the Company at the time of such
exercise.
(e) Each option granted under the Plan shall be evidenced by an Agreement
between the Company and the employee (a "Stock Option Agreement"). The
Committee shall initially make all decisions as to the form of Stock
Option Agreement to be entered into with each optionee. All forms of
Stock Option Agreement shall contain such provisions, restrictions and
conditions as are not inconsistent with this Plan but need not be
identical. The provisions of this Plan shall be set forth in full, or
incorporated by reference in, each Stock Option Agreement.
(f) For purposes of the Plan, an Optionee's employment shall be deemed to
have terminated at the close of business on the date preceding the
first date on which he or she is no longer, for any reason whatsoever,
employed by the Company or any parent or subsidiary of the Company. If
an Optionee's employment is terminated for any reason whatsoever
(including his or her death), all options granted to him or her
pursuant to the Plan and all of his or her rights thereunder shall
wholly and completely terminate:
i. at the time the Optionee's employment is terminated if
termination occurs within the one (1) year period following the
date of grant for any reason other than death, disability or a
"Change of Control" (as hereinafter defined) of the Company; or
A-2
<PAGE> 50
ii. at the time the Optionee's employment is terminated if his or her
employment is terminated because he or she is discharged for
fraud, theft or embezzlement committed against the Company or any
parent, subsidiary or customer of the Company, for gross failure
to perform his or her duties, or for conflict of interest (other
than legitimate competition); or
iii. at the expiration of a period of three (3) months after the
Optionee's employment is terminated (but in no event later than
the date the option is otherwise due to expire) if the Optionee's
employment is terminated for any other reason than his or her
death, or the reasons specified in subparagraphs (i) and (ii)
above. If the Optionee dies during such three (3) month period,
the executors, administrators, legatees or distributees of the
Optionee's estate shall have the right to exercise such options
during the remainder of such period; or
iv. at the expiration of a period of three (3) months after the
Optionee's employment is terminated (but in no event later than
the date the Option is otherwise due to expire) if the Optionee's
employment is terminated by reason of his or her death in which
case the executors, administrators, legatees or distributees of
the estate of the Optionee shall have the right to exercise any
option which became exercisable prior to the Optionee's death.
In the event an option is exercised by the executors,
administrators, legatees or distributees of the estate of the
Optionee, the Company shall have no obligation to issue Shares
hereunder unless and until the Company is satisfied that the
person (or persons) exercising the Option is the duly appointed
legal representative of the Optionee's estate or the proper
legatee or distributee thereof.
5. NON-TRANSFERABILITY
No option granted hereunder shall be transferable by the Optionee other
than by will or by the laws of descent and distribution, and options shall be
exercisable, during the Optionee's lifetime, only by such Optionee; provided,
however, that in the event an Optionee shall be subject to a legal disability,
his legal representative may exercise an option on his behalf.
6. STOCK DIVIDENDS OR RECAPITALIZATION
In the event of a stock dividend paid in shares of the class of stock
subject to any option outstanding hereunder, or recapitalization,
reclassification, split-up or combination of shares with respect to said class
of stock, the Committee shall make appropriate adjustments to the option price
under such option and to the kind and number of shares as to which such option
is then exercisable, to the end that the Optionee's proportionate interest
shall be maintained as before the occurrence of such event, and in any case an
appropriate adjustment shall also be made in the total number and kind of
event, and in any case an appropriate adjustment shall also be made in the
total number and kind of shares of stock reserved for the future granting of
options under this Plan. Any such adjustment made by the Committee pursuant to
this Plan shall be binding upon the holders of all unexpired options
outstanding hereunder.
A-3
<PAGE> 51
7. MERGER, CONSOLIDATION, REORGANIZATION, LIQUIDATION, ETC.
In the event of the proposed merger, consolidation, reorganization,
dissolution or liquidation of the Company pursuant to which the Company will
not be the surviving entity or pursuant to which the Company will become a
wholly-owned subsidiary of an entity, or in the event of a proposed sale of
substantially all of the assets of the Company (collectively such transactions
are herein referred to as a "Change of Control"), all options granted under the
Plan shall terminate as of the date to be fixed by the Board of Directors;
provided that not less than thirty (30) days written notice of the date so
fixed shall be given to each Optionee and each Optionee shall have the right,
during such thirty (30) day period, to exercise his or her option as to all or
any part of the Shares covered thereby, including Shares to which the Option
would not otherwise be exercisable.
8. ADMINISTRATION OF PLAN
(a) This Plan shall be administered by the Compensation Committee (the
"Committee") appointed by the Board of Directors. The Committee shall
consist of a minimum of 2 and a maximum of 3 members of the Board of
Directors, each of whom shall be a "disinterested person" as defined in
Rule 16b-3 under the Securities Exchange Act of 1934. The Committee
shall, in addition to its other authority and subject to the provisions
of this Plan, have authority in its sole discretion to determine who
are the officers and key employees of the Company or any parent or
subsidiary of the Company eligible to receive options under the Plan;
which officers and key employees shall in fact be granted an option or
options; the number of Shares to be subject to each of the options; the
time or times at which the options shall be granted; subject to Section
4 hereof, the price at which each of the option is exercisable, the
rate of option exercisability; and the duration of the option.
(b) The Committee shall adopt such rules for the conduct of its business
and administration of this Plan as it considers desirable. A majority
of the members of the Committee shall constitute a quorum for all
purposes. The vote or written consent of a majority of the members of
the Committee on a particular matter shall constitute the act of the
Committee on such matter. The Committee shall have the exclusive right
to construe the Plan and the options issued pursuant to it, correct
defects, supply omissions and reconcile inconsistencies to the extent
necessary to effectuate the Plan and the options issued pursuant to it,
and such action shall be final, binding and conclusive upon all parties
concerned. No member of the Committee or the Board of Directors shall
be liable for any act or omission (whether or not negligent) taken or
omitted in good faith, or for the exercise of authority or discretion
granted in connection with this Plan to the Committee or the Board of
Directors, or for the acts or omissions of any other members of the
Committee or the Board of Directors. Subject to the numerical
limitations on Committee membership set forth in Subsection 8(a)
hereof, the Board of Directors may at any time appoint additional
members of the Committee and may at any time remove any member of the
Committee with or without cause. Vacancies in the Committee, however
caused, may be filled by the Board of Directors if it so desires.
A-4
<PAGE> 52
9. EFFECTIVE DATE
This Plan shall become effective upon adoption by the Board of Directors,
subject to the approval by holders of a majority of the Common Shares present
in person or by proxy and entitled to vote at the 1996 Annual Meeting of
Shareholders. Options may be granted under the Plan prior to receipt of such
approval, provided that, in the event such approval is not obtained, the Plan
and all Options granted under the Plan shall be null and void an of no force
and effect.
10. MODIFICATION, AMENDMENT, SUSPENSION AND TERMINATION
Unless sooner terminated, this Plan shall expire ten (10) years from the
date the Plan is adopted by the Board of Directors, or from the date of
shareholder approval, whichever is earlier. The Plan may be altered,
suspended, discontinued or terminated by the Board of Directors at any time,
but no action of the Board of Directors, unless approved by the shareholders,
may increase the maximum number of shares to be offered for sale
or issued under the Plan (except as permitted under Section 6 above), change
the manner of determining the minimum option price or the price of outstanding
options or terms of payments, extend the term of the Plan or the period during
which options may be granted or exercised, or change the description of the
class of persons eligible to receive options under the Plan. Nothing contained
herein shall be construed to permit a termination, modification or amendment
adversely affecting the rights of any Optionee under an existing option
theretofore granted without the consent of such Optionee.
11. GENERAL
(a) Nothing contained in this Plan or any option granted pursuant to this
Plan shall confer upon any employee the right to continue in the employ
of the Company or its parent or subsidiary or any other corporation
affiliated with the Company, or interfere in any way with the rights of
the Company or its parent or subsidiary or any corporation affiliated
with the Company to terminate his or her employment.
(b) Corporate action constituting an offer of stock for sale to any
employee under the terms of the options to be granted hereunder shall
be deemed completed as of the date when the Committee authorizes the
grant of the option to the employee, regardless of when the option is
actually delivered to the employee or acknowledged or agreed to by the
employee.
(c) The provisions of this Plan shall be binding upon and inure to the
benefit of the parties and their respective heirs, executors,
administrators, personal representatives, successors and permitted
assigns.
(d) Wherever used herein, the singular shall be deemed to refer to and
include the plural, and vice versa, where appropriate. Wherever used
herein, the masculine shall be deemed to refer to and include the
feminine and the neuter, and vice versa, where appropriate.
A-5
<PAGE> 53
(e) Nothing contained in this Plan or in any option agreement issued
hereunder shall impose any liability or responsibility on the Company,
the Board of Directors, the Committee or any member of either of the
foregoing to pay, or reimburse any participant for the payment of any
tax arising out of, or on account of the issuance of an option or
options hereunder to any participant, a participant's exercise of any
option used under this Plan or a participant's sale, transfer or other
disposition of any Shares acquired pursuant to the exercise of an
option issued hereunder. Any person receiving an option hereunder
shall expressly acknowledge and agree that such participation is
voluntary and that the participant will be solely responsible for all
taxes to which he or she may be or become subject as a consequence of
such participation.
(f) As a condition to the exercise of any Option, the Company may require
that an employee satisfy, through withholding from other compensation
or otherwise, the full amount of any and all federal, state and local
income and other taxes required to be withheld in connection with such
exercise.
(g) Subject to the overall limitations of Section 2 hereof, the aggregate
fair market value of the stock for which any employee's incentive stock
options become exercisable for the first time in any calendar year
shall not exceed $100,000. For purposes of this paragraph, fair market
value shall be determined as of the time the option with respect to
such stock is granted.
(h) To obtain tax benefits associated with incentive stock options, the
Optionee must make no disposition of shares acquired by exercise of
incentive stock options granted under the Plan within one (1) year from
the date of exercise of any such option or two (2) years from the grant
of such option.
(i) Notwithstanding anything to the contrary contained in the Plan, or any
Stock Option Agreement, the Company shall not be required, upon the
exercise of any option, to issue or deliver any Shares prior to the
completion of an effective Registration Statement with respect to such
Shares pursuant to the Securities Act of 1933, as amended, as well as
registration or other qualification of such Shares under any applicable
state securities law or regulation as the Company shall determine to be
necessary or desirable.
A-6
<PAGE> 54
APPENDIX B
PDG REMEDIATION, INC.
AMENDED 1994 STOCK OPTION PLAN
The purposes of the Amended 1994 Stock Option Plan (the "Plan") are to
encourage stock ownership in PDG Remediation, Inc. (the "Corporation") by
selected employees, consultants and non-employee directors of the Corporation,
to provide such persons with additional incentives to remain with the
Corporation and increase their efforts on its behalf, to provide a means
through which the Corporation may attract, retain and motivate outstanding
employees, consultants and non-employee directors and to remain competitive in
its compensation practices.
1. ADMINISTRATION
The Plan shall be administered by the Compensation Committee appointed by
the Board of Directors of the Corporation (hereinafter referred to as the
"Committee"). The Committee shall consist of not less than two (2)
non-employee members of the Board of Directors. Committee members shall not be
eligible to receive options or awards under the Plan, except for options
automatically granted to non-employee directors as provided in Section 4
hereof. The Committee shall keep records of action taken at its meetings. A
majority of the Committee shall constitute a quorum, and the acts of a majority
of the members present at any meeting at which a quorum is present, or acts
approved in writing by a majority of the Committee, shall be the acts of the
Committee. The term of each Committee member shall
continue until his successor shall be duly appointed by the Board of Directors.
The Committee shall interpret the Plan and prescribe such rules,
regulations and procedures in connection with the operations of the Plan as it
shall deem to be necessary and advisable for the administration of the Plan
consistent with the purposes of the Plan. All questions of interpretation and
application of the Plan, or as to stock options granted under the Plan, shall
be subject to the determination of the Committee, whose determination shall be
final and binding. No discretion concerning decisions regarding the Plan shall
be exercised by any person or entity other than the Committee.
2. SHARES AVAILABLE
Subject to the adjustments provided in Section 5 of this Plan, the
aggregate number of shares of the Corporation's Common Stock, par value $.01
per share ("Common Stock"), which may be issued and as to which grants of stock
options may be made under the Plan shall be Three Hundred Fifty Thousand
(350,000) shares. In the event that an option awarded under this Plan to any
individual expires, or is terminated unexercised, or is forfeited as to any
shares covered thereby, such shares shall thereafter be available for purposes
of the Plan. Options awarded under this Plan may be fulfilled with either
authorized and unissued shares of Common Stock or issued shares of Common
Stock held in the Corporation's treasury.
<PAGE> 55
3. PARTICIPANTS
All present and future employees, consultants and non-employee directors
of the Corporation or any parent or subsidiary of the Corporation are eligible
to receive grants of options under this Plan in accordance with the terms and
conditions hereinafter set forth.
4. GRANT OF STOCK OPTIONS TO NON-EMPLOYEE DIRECTORS
a. Each participant who is a non-employee director of the Corporation
at the effective date of this Plan shall be granted, as of the
effective date of this Plan (subject to the approval of the
stockholders) nonqualified stock options, i.e., options which do
not qualify under Section 422 of the Internal Revenue Code
("Options"), to purchase 10,000 shares of Common Stock. From and
after the effective date of this Plan, each non-employee director
of the Corporation who has not previously received Options pursuant
to the Plan shall automatically and without further action by the
Board be granted Options to purchase 10,000 shares of the Common
Stock of the Corporation upon his election as a director of the
Corporation.
b. On the fifth business day following the day of each annual meeting
of the stockholders of the Corporation, commencing with the
Corporation's annual meeting of shareholders in 1995, each
non-employee director who has served for at least twelve (12)
consecutive months shall automatically and without further action
by the Board or the Committee be granted additional Options to
purchase 1,250 shares of the Common Stock of the Corporation;
provided, however, that the maximum number of shares of Common
Stock which may be granted to any single non-employee director
pursuant to the Plan may not exceed 15,000 and that once any
non-employee director has been granted Options to purchase 15,000
shares of Common Stock under the Plan no additional Options shall
be granted to such non-employee director.
c. The Options granted to non-employee directors under the Plan shall
be subject to the following terms and conditions:
1. The price of the shares of Common Stock subject to Option shall
be the fair market value of such shares on the date such Option
is granted. The fair market value shall be determined as
provided in Section 9a. The Option price will be subject to
adjustment in accordance with the provisions of Section 7.
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<PAGE> 56
2. The price per share with respect to each Option shall be
payable in full at the time the Option is exercised. Such
price shall be payable in cash or by delivery to the
Corporation of other shares of Common Stock of the Corporation
owned by the grantee. Shares delivered to the Corporation in
payment of the Option price shall be valued at the fair market
value of the Common Stock of the Corporation on the date of the
exercise of the Option. Such value shall be determined in
accordance with Section 9a. Payment of the Option price with
shares of the Common Stock of the Corporation shall not
increase the number of shares of the Common Stock which may be
issued under the Plan.
3. The right of non-employee directors to exercise Options granted
under the Plan shall immediately vest and become fully
exercisable upon the date of grant. No stock Option shall be
exercisable after the expiration of ten (10) years from the
date of grant of the Option.
4. If the service of a grantee as a non-employee director of the
Corporation is terminated due to such director's death, the
grantee's legal representative shall have the right, within one
year after the date of death of the non-employee director (but
not after the expiration date of the Option), to exercise all
or any part of the Options which the deceased grantee had not
exercised at the time of his or her death.
5. If the service of the grantee as director of the Corporation is
terminated for any reason other than the death of the grantee,
the grantee shall have the right to exercise all or any part of
the Options which the grantee had not exercised at the time of
such termination until the expiration date of the Options.
6. The grant of all Options shall be confirmed by a notice
executed on behalf of the Corporation by the Secretary or
Assistant Secretary of the Corporation.
7. With respect to any Option granted under the Plan, the
Committee may, in its sole discretion, impose such other
restrictions, provisions, conditions, or terms as it deems
appropriate, subject to the foregoing provisions of this
Section 4 of the Plan. Any such restrictions, terms,
provisions and conditions shall be set forth in the notice to
which reference is made in subparagraph c. 6 of this Section 4.
5. GRANT OF STOCK OPTIONS TO EMPLOYEES
a. The Committee, in its sole discretion, may from time to time
determine the employees of the Corporation or any parent or
subsidiary of the Corporation to whom Options are to be granted.
B-3
<PAGE> 57
b. Any Options granted under the Plan shall be subject to the
following terms and conditions:
1. Each grantee who is an employee of the Corporation or any
parent or subsidiary of the Corporation shall be required to
enter into an option agreement with the Corporation.
2. The price of shares of Common Stock subject to Option shall be
set by the Committee at the time an Option is granted, but in
no event shall such price be less than the fair market value of
such shares on the date such Option is granted. The fair
market value shall be determined as provided in Section 9a. The
Option price will be subject to adjustment in accordance with
the provisions of Section 7.
3. The price per share with respect to each Option shall be
payable in full at the time the Option is exercised. Such
price shall be payable in cash or by delivery to the
Corporation of other shares of Common Stock of the Corporation
owned by the grantee. Shares delivered to the Corporation in
payment of the Option price shall be valued at the fair market
value of the Common Stock of the Corporation on the date of the
exercise of the Option. Such value shall be determined in
accordance with Section 9a. Payment of the Option price with
shares of the Common Stock of the Corporation shall not
increase the number of shares of the Common Stock which may be
issued under the Plan.
4. No Option granted to an employee of the Corporation or any
parent or subsidiary of the Corporation shall be exercisable
for a period of one (1) year from the date of grant.
Thereafter, such Options shall be exercisable in such
installments as set forth in the applicable option agreement as
the Committee, in its sole discretion, may determine. The
Committee may, in its discretion, accelerate the exercisability
of Options granted to employees. No Option shall be
exercisable after the expiration of ten years from the date of
grant of the Option.
5. If the service of a grantee as an employee of the Corporation
or any parent or subsidiary of the Corporation is terminated
due to such grantee's disability, retirement approved by the
Corporation or death, the grantee or the grantee's legal
representative, as the case may be, shall have the right,
within one year after the date of disability, retirement or
death, as the case may be, of the employee (but not after the
expiration date of the Option), to exercise all or any part of
the Options which the disabled, retired or deceased grantee
could have exercised at the time of the grantee's disability,
retirement or death but which the disabled, retired or deceased
grantee had not exercised at such time. All Options which have
not vested (are not exercisable) as of the date of the
grantee's disability, retirement or death shall be deemed to
have terminated as of the date of such event.
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<PAGE> 58
6. If the service of a grantee as an employee of the Corporation
or any parent or subsidiary of the Corporation is terminated
for any reason other than disability, retirement approved by
the Corporation or death, the grantee shall have the right,
within three (3) months after the date of such termination, to
exercise the Options that have vested as of the date the
grantee's service is terminated. Options that have not vested
on or before the date the grantee's service is terminated shall
be forfeited and terminated immediately upon such termination
of service.
7. The grant of all Options shall be confirmed by a notice
executed on behalf of the Corporation by the Secretary or
Assistant Secretary of the Corporation.
8. With respect to any Option granted under the Plan, the
Committee may, in its sole discretion, impose such other
restrictions, provisions, conditions or terms, as it deems
appropriate, subject to the foregoing provisions of this
Section 5 of the Plan. Any such restrictions, terms,
provisions and conditions shall be set forth in the notice to
which reference is made in Subparagraph c. 8 of this Section
5.
6. GRANT OF STOCK OPTIONS TO CONSULTANTS
a. The Committee, in its sole discretion, may from time to time,
determine the consultants to the Corporation or to any parent or
subsidiary of the Corporation to whom Options are to be granted.
b. Any Options granted under the Plan shall be subject to the
following terms and conditions:
1. Each grantee who is a consultant to the Corporation or any
parent or subsidiary of the Corporation shall be required to
enter into an option agreement with the Corporation.
2. The price of shares of Common Stock subject to Option shall be
set by the Committee at the time the Option is granted, but in
no event shall the price be less than the fair market value of
such shares on the date such Option is granted. The fair
market value shall be determined as provided in Section 9a.
The Option price shall be subject to adjustment in accordance
with the provisions of Section 7.
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<PAGE> 59
3. The price per share with respect to each Option shall be
payable in full at the time the Option is exercised. Such
price shall be payable in cash or by delivery to the
Corporation of other Shares of Common Stock of the Corporation
owned by the grantee. Shares delivered to the Corporation in
payment of the Option price shall be valued at the fair market
value of the Common Stock of the Corporation on the date of the
exercise of the Option. Such value shall be determined in
accordance with Section 9a. Payment of the Option price with
the shares of the Common Stock of the Corporation shall not
increase the number of shares of the Common Stock which may be
issued under the Plan.
4. Options shall be exercisable by consultants to the Corporation
or any parent or subsidiary of the Corporation in such
installments as set forth in the applicable Option Agreement,
as the Committee, in its sole discretion, may determine. The
Committee may, in its discretion, accelerate the exercisability
of options granted to consultants. No Option may be
exercisable after the expiration of ten years from the date of
the Option.
5. Subject to the provisions of Section 6.b.6 following, Options
may be exercised by a consultant to the Corporation or any
parent or subsidiary of the Corporation pursuant to the terms
of the applicable Option Agreement regardless of whether the
consultant remains associated with the Corporation or any
parent or Subsidiary of the Corporation for any time after the
grant of the Option.
6. At the death of a consultant, the grantee's legal
representative shall have the right, within one year after the
date of death of consultant (but not after the expiration date
of the Option) to exercise all, or any part of the Options
which the deceased grantee had not exercised at the time of the
grantee's death. Notwithstanding the forgoing, all Options
which have not been vested as of the date of the grantee's
death shall be deemed to have been terminated as of the date of
such death.
7. The grant of all Options shall be confirmed by a notice
executed on behalf the Corporation by the Secretary or
Assistant Secretary of the Corporation.
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<PAGE> 60
8. With respect to any Option granted under the Plan, the
Committee may, in its sole discretion, impose such other
restrictions, provisions, conditions or terms, as it deems
appropriate, subject to the foregoing provisions of this
Section 6 of the Plan. Any such restrictions, terms,
provisions and conditions shall be set forth in the notice to
which reference is made in subparagraph b.7 of this Section 6.
7. ADJUSTMENT OF SHARES
In the event there is any change in the Common Stock of the Corporation by
reason of any reorganization, recapitalization, stock split, stock dividend or
otherwise, the number or kind of shares subject to any Option and the per share
price or value thereof shall be appropriately adjusted by the Committee.
8. MISCELLANEOUS PROVISIONS
a. Limitations on Exercise. No Options may be exercised at any time
prior to the last to occur of (i) the completion of the
registration of the Corporation as a public company under the
Securities Exchange Act of 1934, as amended and (ii) the
registration of the Plan and the shares of Common Stock to be
issued pursuant to the Plan under the Securities Act of 1933, as
amended.
b. Administrative Procedures. The Committee may establish any
procedures determined to be appropriate by the Committee in
discharging its responsibilities under this Plan.
c. Assignment or Transfer. No grant made under this Plan or any
rights or interests therein shall be assignable or transferable
by a grantee except by will or the laws of descent and
distribution. During the lifetime of a grantee, Options granted
hereunder shall be exercisable only by the grantee or the
grantee's guardian or legal representative.
d. Investment Representation. The Committee may require that grantees
furnish to the Corporation such written representations and
information as the Committee deems appropriate to permit the
Corporation, in light of the existence or nonexistence of an
effective Registration Statement under the Securities Act of 1933,
as amended, to deliver such shares in compliance with the
provisions of that Act.
e. Costs and Expenses. The costs and expenses of administering this
Plan shall be borne by the Corporation and shall not be charged
against any grant nor to any person receiving a grant.
f. Other Incentive Plans. The adoption of this Plan does not amend or
preclude the adoption by appropriate means of any other incentive
plans for employees, directors or consultants.
B-7
<PAGE> 61
g. Binding Effect. The provisions of this Plan shall be binding upon
and inure to the benefit of the parties and their respective heirs,
executors, administrators, personal representatives, successors and
permitted assigns.
9. DEFINITIONS
a. "Fair market value" as it relates to the Corporation's Common Stock
shall be the average of the daily bid and asked prices during the
previous four-week period prior to the date the Option is granted.
In the event that no public market exists for such stock, then the
fair market value thereof shall be determined solely by the
Committee in good faith.
b. "Disability" shall be construed under the appropriate provisions of
the Corporation's disability insurance plan for its employees or,
in the event that no such plan exists, then such term shall be
defined as follows:
"Disability" shall mean any physical or mental impairment
which causes the grantee to be unable to engage in any
gainful activity and which can be expected to end in death
or has lasted or can be expected to last for a continuous
period of twelve months. The final determination of
disability shall be made by the Committee on the basis of
medical opinion.
10. APPROVAL OF STOCKHOLDERS
This Plan is subject to the approval by the holders of a majority of the
shares of the Common Stock of the Corporation entitled to vote at a meeting of
stockholders held within 12 months from the date of the adoption of this Plan
by the Board of Directors of the Corporation. Options may be granted prior to
approval of the Plan by the stockholders but same shall not vest unless and
until the Plan receives such approval.
11. AMENDMENT OF PLAN
The Board of Directors of the Corporation shall have the right to amend,
suspend or terminate this Plan at any time, provided that no amendment shall be
made which (i) shall increase the total number of shares which may be issued
and sold pursuant to Options granted under the Plan, (ii) extends the term of
any Option granted hereunder beyond ten (10) years from the date of its grant,
(iii) increases materially the benefits accruing to participants under the
Plan, or (iv) is required by law to be approved by the Corporation's
stockholders, unless such amendment is made by or with the approval of the
stockholders. No amendment, suspension or termination of this Plan shall alter
or impair any Options previously granted under this Plan, without the consent
of the holder thereof.
12. EFFECTIVE DATE AND TERM OF PLAN
The effective date of this Plan shall be July 21, 1994. This Plan shall
remain in effect until ten years from the date of approval by the Board unless
sooner terminated by the stockholders. No grants may be made under this Plan
subsequent to the date of termination.
B-8
<PAGE> 62
PDG REMEDIATION, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS, AUGUST 15, 1996
The undersigned hereby constitutes and appoints Rose M. Cercone and
Christina L. Goetz, and each of them, with powers of substitution, as
proxies, to vote all of the shares of the Common Stock of the Corporation
registered in the name of the undersigned at the close of business on June
28, 1996, at the Annual Meeting of Shareholders of the Corporation to be
held on August 15, 1996 at 10:00 A.M., EDT at the Harley Hotel, 699 Rodi
Road, Pittsburgh, Pennsylvania 15235, and at any adjournment thereof, upon
the matters described in the Notice of such Annual Meeting and Proxy
Statement dated July 8, 1996, receipt of which is hereby acknowledged, and
upon any other business that may properly come before the Meeting.
The shares represented by this Proxy will be voted as specified
hereon, but if no specification is made, the proxies intend to vote FOR
the election of the nominees listed in the Proxy Statement and FOR
approval of the other proposals described in the Proxy Statement.
<TABLE>
<S> <C> <C>
a. Election of Directors FOR THE NOMINEES LISTED BELOW / / WITHHOLD AUTHORITY / /
(EXCEPT AS MARKED TO THE CONTRARY BELOW) TO VOTE FOR ALL NOMINEES LISTED BELOW
</TABLE>
John M. Musacchio and Edgar Berkey for a term of three years.
--------------------------------------------------------------------------
b. Approval and adoption of the PDG Remediation, Inc. 1995 Qualified
Incentive Stock Option Plan / / FOR / / AGAINST / / ABSTAIN
c. Approval and adoption of the PDG Remediation, Inc. Amended 1994 Stock
Option Plan / / FOR / / AGAINST / / ABSTAIN
d. Ratification of the Independent Auditors
/ / FOR / / AGAINST / / ABSTAIN
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
(continued and to be signed and voted on the reverse side)
Signature(s) must correspond with the name or
names as they appear printed on this Proxy. When
signing as attorney, administrator, executor,
guardian or trustee, please add your full title as
such. If shares are registered in the names of
joint tenants or trustees, each joint tenant or
trustee should sign.
DATED: ...................................., 1996
.................................................
.................................................
Signature(s) of Shareholder(s)
PLEASE DATE, SIGN AND MAIL THIS PROXY IN THE
ENVELOPE PROVIDED. POSTAGE NOT NECESSARY IF
MAILED IN THE UNITED STATES.
<PAGE> 63
To PDG Remediation Shareholders:
In my shareholder letter of last July, I expressed management's concern with
the adverse impacts of unanticipated changes in Florida legislation on our
business; I outlined actions being taken to offset these impacts; and
reasserted management's commitment to our plan for growth and expansion through
dedication and hard work. I am pleased to take this opportunity to update our
shareholders on our progress.
By late summer of last year, it had become apparent that, despite the
Legislature's direction and appropriations, Florida's Department of
Environmental Protection was not going to fund new work at a rate sufficient to
sustain our Florida business, even at our reduced expectations. The Florida
banking community was withdrawing its support of firms continuing to provide
services under the revised program. Remediation activity levels were such that
the market for thermal treatment services was cut by more than 50% and
competitive pressures had reduced market prices by almost half.
In light of this situation, management focused on a strategy to survive the
downturn, restructure our services, improve the balance sheet, and replace the
lost revenue base with the intention of creating a stronger environmental
remediation service company with a broad client base and geographically diverse
service area, well positioned to meet the challenges of a dynamic marketplace.
Surviving the downturn required revenue and profit enhancements from our
Mid-Atlantic Operations and focused receivable collections in all areas of the
business. As of June 1996, the Mid-Atlantic Operations are generating revenues
at a rate double last year. Margins and income from operations have also
improved. Current contracted backlog levels are the highest ever for the
Mid-Atlantic Operation. The enhanced status of this operation is an important
element of our ability to move forward.
Restructuring our services required exiting the thermal treatment services
business. By January 1996, we had identified a buyer and negotiated terms with
our leaseholder. In April 1996, the deal closed with an effective date of
January 31, 1996. The sale of this capital intensive aspect of our services,
which had accounted for a significant portion of last year's losses, was a
major accomplishment, and the disposal of this asset is an important element of
our ability to move forward.
<PAGE> 64
Improving the balance sheet quite simply meant reducing debt such that our
ability to expand through acquisition would be enhanced. By January 1996,
short-term and long-term debt had been reduced from a high of $5.6 million at
March 31, 1995, to less than $100,000.
Finally, just as the loss of revenue base did not come about through internal
attrition, replacing these revenues could not be done in an expedient manner
through internal growth. Acquisition was the most favorable approach to
reestablishing the company to pre-April 1995 levels in an expedient manner.
Management identified an attractive target by the third quarter of last year
and signed a letter of intent in March of this year, with an anticipated
closing by the late second or early third quarter of this year. This
acquisition represents a culmination of management's efforts in each of the
areas previously mentioned. Significant resources are now being committed to
integration and strategic planning efforts. By the end of this fiscal year,
management believes the company will be well positioned to move forward with
sustainable growth.
I believe the adverse conditions which developed shortly after the offering
provided management with an opportunity to demonstrate our ability to manage
through difficult times and focus on enhancing shareholder confidence and
value. Your continued patience is appreciated, and we believe the company, as
it emerges from this current fiscal year, will be an exciting investment, well
positioned for value enhancing growth.
Very truly yours,
John M. Musacchio
President
