<PAGE> 1
(conformed)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
____________ TO ____________
COMMISSION FILE NUMBER 33-82092
PDG REMEDIATION, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1741849
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
300 OXFORD DRIVE, MONROEVILLE, PENNSYLVANIA 15146
(Address of principal executive offices) (Zip Code)
412-856-6100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of May 31, 1996, there were 2,470,320 shares of the registrant's common
stock outstanding.
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PDG REMEDIATION, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Consolidated Financial Statements and Notes to Consolidated Financial Statements
(a) Condensed Consolidated Balance Sheets as of April 30, 1996 (unaudited) and January 31,
1996 3
(b) Consolidated Statements of Operations for the Three Months Ended April 30, 1996 and
1995 (unaudited) 4
(c) Consolidated Statements of Cash Flows for the Three Months Ended April 30, 1996 and
1995 (unaudited) 5
(d) Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
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PART I. FINANCIAL INFORMATION
PDG REMEDIATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1996 1996*
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 404,000 $ 362,000
Cash held in escrow 838,000 968,000
Accounts receivable - net 852,000 1,626,000
Costs and estimated earnings in excess of billings on
uncompleted contracts 2,494,000 2,320,000
Other current assets 148,000 137,000
------------- --------------
TOTAL CURRENT ASSETS 4,736,000 5,413,000
PROPERTY, PLANT AND EQUIPMENT 664,000 617,000
Less: accumulated depreciation (474,000) (437,000)
------------- --------------
190,000 180,000
OTHER ASSETS 21,000 21,000
------------- --------------
TOTAL ASSETS $ 4,947,000 $ 5,614,000
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 814,000 $ 1,052,000
Insurance company accrual 1,284,000 1,284,000
Accrued liabilities 567,000 491,000
Billings in excess of costs and estimated earnings
on uncompleted contracts 28,000 8,000
Accrued income taxes 27,000 48,000
Payable to parent 3,000 117,000
Accrued loss on sale of discontinued operation 140,000 140,000
Current portion of long-term debt 25,000 16,000
------------- --------------
TOTAL CURRENT LIABILITIES 2,888,000 3,156,000
LONG-TERM DEBT 46,000 20,000
STOCKHOLDERS' EQUITY
Common stock 25,000 25,000
Additional paid-in capital 4,768,000 4,768,000
Retained earnings (deficit) (2,780,000) (2,355,000)
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 2,013,000 2,438,000
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,947,000 $ 5,614,000
============= ==============
</TABLE>
*DERIVED FROM AUDITED FINANCIAL STATEMENTS.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
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PDG REMEDIATION, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED APRIL 30,
----------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
CONTRACT REVENUES $ 1,293,000 $ 2,018,000
CONTRACT COSTS 1,028,000 1,304,000
------------- -------------
Gross margin 265,000 714,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 595,000 547,000
------------- -------------
(Loss) income from operations (330,000) 167,000
OTHER INCOME (EXPENSE):
Interest expense (101,000) (114,000)
Interest income 4,000 6,000
Other income 2,000 -
------------- -------------
(95,000) (108,000)
------------- -------------
(Loss) income from continuing operations before income taxes (425,000) 59,000
INCOME TAX PROVISION - -
------------- -------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (425,000) 59,000
DISCONTINUED OPERATION:
Loss from operation of GeoLogic - (146,000)
-------------- -------------
NET LOSS $ (425,000) $ (87,000)
============= =============
NET (LOSS) INCOME PER COMMON SHARE:
(Loss) income from continuing operations $ (0.17) $ 0.02
Discontinued operation - (0.06)
-------------- -------------
Net loss per common share $ (0.17) $ (0.04)
============= =============
AVERAGE COMMON SHARES OUTSTANDING 2,470,000 2,410,000
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
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PDG REMEDIATION, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED APRIL 30,
---------------------------------
1996 1995
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (425,000) $ (87,000)
ADJUSTMENTS TO RECONCILE NET
LOSS TO CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Depreciation and amortization 57,000 40,000
Provision for losses on accounts receivable 12,000 80,000
Other - (2,000)
CHANGES IN ASSETS AND LIABILITIES
OTHER THAN CASH:
Cash held in escrow 130,000 (16,000)
Accounts receivable 762,000 245,000
Costs and estimated earnings in excess of billings
on uncompleted contracts (174,000) (427,000)
Other current assets (31,000) (75,000)
Net assets of discontinued operation - (836,000)
Accounts payable (238,000) 41,000
Billings in excess of costs and estimated earnings
on uncompleted contracts 20,000 (80,000)
Accrued liabilities 76,000 187,000
Payable to parent, net (114,000) 137,000
Accrued income taxes payable (21,000) 1,000
------------- --------------
TOTAL ADJUSTMENTS 479,000 (705,000)
------------- --------------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES 54,000 (792,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (47,000) (42,000)
------------- --------------
NET CASH USED BY INVESTING ACTIVITIES (47,000) (42,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on common shares sold in initial public offering - 2,151,000
Proceeds on warrants sold - 100,000
Proceeds from debt 40,000 3,676,000
Principal payments on debt (5,000) (4,652,000)
------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 35,000 1,275,000
------------- --------------
Net Increase in Cash and Short-Term Investments 42,000 441,000
Cash and Short-Term Investments, Beginning of Period 362,000 7,000
------------- --------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 404,000 $ 448,000
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
5
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PDG REMEDIATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED APRIL 30, 1996
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying financial statements of PDG Remediation, Inc. (the
"Corporation") are unaudited. However, in the opinion of management, they
include all adjustments necessary for a fair presentation of financial
position, results of operations and cash flows. All adjustments made during the
three months ended April 30, 1996 were of a normal, recurring nature.
Additional information is contained in the Annual Report on Form 10-K of the
Corporation for the year ended January 31, 1996, as amended by Form 10-K/A
dated May 30, 1996, and should be read in conjunction with this quarterly
report.
Certain reclassifications have been made to the prior year financial statements
to conform with the current year presentation.
NOTE 2 -- BUSINESS ACTIVITIES
EDI PROGRAM
The Corporation has historically performed a substantial amount of work under a
Florida state funded site rehabilitation program, known as the "EDI Program,"
which provided for the remediation of contaminated sites related to the storage
of petroleum and petroleum products. During the Corporation's fiscal year ended
January 31, 1996, the EDI Program was substantially modified to establish a
protocol for continued work on sites based on their priority ranking and a
pre-approval process for both the scope and the cost of work for petroleum
clean up program tasks. The revised Florida state funded site rehabilitation
program is known as the "Pre-Approval Program."
As a result of the changes in the EDI Program, the Corporation experienced a
material adverse change in its operations during the last three quarters of
fiscal 1996 and in the first quarter of fiscal 1997, which included substantial
reductions in contract revenues and significant operating losses since the
number of sites in the Corporation's backlog immediately eligible for continued
reimbursement were significantly reduced. Further, volume at the Corporation's
thermal treatment facility, GeoLogic Recovery Systems ("GeoLogic"), was
significantly affected by the EDI Program changes and, accordingly, the
Corporation sold this facility on April 25, 1996. The effective date of the
sale of GeoLogic was January 31, 1996.
The Corporation has responded to the impact of the EDI Program changes on its
operations through reductions in staff and other overhead costs, the
reallocation of a portion of its workforce to cover existing backlog at its
Pennsylvania remediation service operation, the discontinuance of its thermal
treatment facility, increased marketing efforts focused on obtaining
remediation service contracts for high priority sites eligible for
reimbursement under the Pre-Approval Program, and the identification of
potential acquisitions to replace the revenues lost.
Although the Corporation has increased its backlog of high priority sites
eligible under the Pre-Approval Program in recent months, delays associated
with the Pre-Approval Program have prevented the Corporation from commencing
work on these high priority sites. As a result of these delays, the Corporation
generated a loss in the quarter ended April 30, 1996 and expects that its
operations will continue to be adversely affected in the second 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 ("PAC") 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
6
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be based upon the accelerated date the Florida Department of Environmental
Protection ("FDEP") anticipates settling a reimbursement application, compared
to the original date a reimbursement application was scheduled to be settled.
The Corporation estimates that the acceleration of payments by the FDEP on
reimbursement applications under the EDI Program will include the early release
of cash, which is currently being held in escrow to cover future interest costs
and potential disallowances on reimbursement applications, and the termination
of interest obligations. 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.
Until the FDEP establishes a schedule of anticipated payment dates, the
Corporation will not be able to determine the impact of discounting on its
operating results. However, the Corporation may be required to record an
adjustment to reflect the negative impact of the discounting on its results of
operations and financial condition.
The Corporation 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.
POTENTIAL ACQUISITION
During March 1996, the Corporation entered into a letter of intent to acquire
SPATCO Environmental, Inc. ("SEI"), an environmental remediation services
company located in the southeastern United States, from its sole shareholder,
Vigour Holding & Finance b v, in exchange for shares of the Corporation's
common stock and preferred stock. For the fiscal year ended December 31, 1995,
SEI generated revenues of approximately $11.7 million and a loss before
interest and taxes of $47,000. SEI's results of operations for the fiscal year
ended December 31, 1995 included the effects of a management fee of $493,000
which was paid to an affiliate of SEI. The Corporation intends to provide
similar services to SEI upon completion of the purchase which the Corporation
anticipates will result in significant cost savings compared to the current
management fee.
The Corporation believes that the effect of this acquisition will be to replace
and expand the Corporation's revenues which were severely depressed by the
changes in the EDI Program in the fiscal year ended January 31, 1996. 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. It is currently
anticipated that the transaction will close during the second or third quarter
of fiscal 1997.
NOTE 3 - DISCONTINUED OPERATION
On April 25, 1996, the Corporation sold its interest in GeoLogic to Specialty
Environmental, Inc., effective as of January 31, 1996, in exchange for the
assumption by Specialty Environmental, Inc. of all of the obligations and
liabilities of GeoLogic. Concurrently, the Corporation entered into a Surrender
and Release Agreement, effective as of January 31, 1996, with respect to an
equipment lease associated with the facility in exchange for a $0.22 million
payment.
The operations of GeoLogic have been reflected as discontinued in the
accompanying financial statements. Net sales of GeoLogic were $0.6 million for
the three months ended April 30, 1995.
NOTE 4 - FEDERAL INCOME TAXES
The Corporation recognized a loss for financial reporting purposes during the
three months ended April 30, 1996; therefore, no income tax provision has been
recognized in this period. The Corporation did not recognize an income tax
provision for the three months ended April 30, 1995 based upon its anticipated
effective tax rate for the full year.
Income taxes paid by the Corporation for the three months ended April 30, 1996
and 1995 totaled approximately $1,000 and $2,000, respectively.
NOTE 5 - LINE OF CREDIT
PDG Environmental Services, Inc. ("PDGES"), a wholly-owned subsidiary of the
Corporation, currently maintains a Master Funding and Indemnification Agreement
with Sirrom Environmental Funding, LLC (the "Sirrom Agreement")
7
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which provides $4.0 million of funding relative to unbilled amounts under the
EDI Program through August 21, 1997. The Sirrom Agreement enables the
Corporation to fund amounts billed under the EDI Program at the prime rate of
interest, as defined, plus 3%. The Corporation is advanced 100% of amounts
billed under the EDI Program, but is required to deposit 34% into an escrow
account to cover potential disallowances, future interest costs, and a
commitment fee of 2% of the total funding provided. In connection with the
execution of the Sirrom Agreement, the Corporation also issued Sirrom
Environmental Funding, LLC a warrant to purchase 100,000 shares of the
Corporation's common stock at an exercise price of $1.37 per share. The warrant
expires on January 31, 1999 and the Corporation has recorded $50,000 as the
estimated fair market value of the warrant.
The Corporation and PDGE are guarantors on the Sirrom Agreement. As of April
30, 1996, the Corporation was advanced approximately $2.1 million under the
Sirrom Agreement. The Corporation has provided an indemnification to Sirrom
Environmental Funding, LLC for any amounts advanced to the Corporation under
the current Sirrom Agreement and under a previous agreement which are not
reimbursed under the EDI Program in the amount of $2.8 million.
The Corporation paid interest costs totaling approximately $87,000 and $238,000
during the three months ended April 30, 1996 and 1995, respectively.
NOTE 6 - NET LOSS PER SHARE
Primary earnings per share are calculated by dividing the net loss by the
weighted average of common shares outstanding since the Corporation's common
stock was sold to the public effective February 9, 1995.
Stock options and warrants have not been reflected as exercised for purposes of
computing the primary loss per share for the three months ended April 30, 1996
and 1995, since the exercise of such options and warrants would be
anti-dilutive.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
PDGES is currently involved in litigation with International Surplus Lines
Insurance Company ("ISLIC") as a result of insurance advances made to PDGES by
ISLIC as described in further detail in Item 1. Legal Proceedings contained in
Part II located elsewhere herein. A judgment rendered against PDGES would have
a detrimental impact on the Corporation's future cash flow.
As discussed in further detail in Item 3. Legal Proceedings contained in the
Corporation's Annual Report on Form 10-K for the year ended January 31, 1996,
as amended by Form 10-K/A dated May 30, 1996, the Corporation has been named as
a defendant in a purported class action lawsuit involving the purchase by all
persons and entities of the Corporation's common stock from February 9, 1995,
through May 23, 1995. The action alleges that the defendants violated certain
federal securities laws.
The Corporation believes that the allegations are without merit or that there
are meritorious defenses to the allegations, and intends to defend the action
vigorously. If however, the plaintiff is successful in its claims, a judgment
rendered against the Corporation and the other defendants would likely have a
material adverse effect on the business and operations of the Corporation.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1996 AND 1995
The Corporation's contract revenues during the three months ended April 30,
1996 decreased by approximately 36% to $1.3 million from $2.0 million reported
for the three months ended April 30, 1995. The significant reduction in
contract revenues in the current quarter is due to changes in the EDI Program
in late March 1995, under which the majority of the Corporation's Florida
remediation service operation revenues have historically been generated. The
Corporation experienced an 84% decline in revenues at its Florida remediation
service operation in the current three months, which was offset in part by a
220% increase in revenues at its Pennsylvania remediation service operation.
The Corporation's gross margin also decreased significantly in the three months
ended April 30, 1996 to $0.3 million compared to $0.7 million in the same three
month period of the prior fiscal year. The Corporation's Florida remediation
service operation experienced an 85% reduction in gross margin in the current
quarter due to the changes in the EDI Program in late March 1995 under which a
substantial portion of this operations historical revenues were generated.
Although the Corporation responded to these changes by accumulating a backlog
of sites under the new Pre-Approval Program in Florida and seeking private
remediation contracts, the work which the state of Florida has permitted to be
performed under the Pre-Approval Program has been limited. Further, access to
work in the private remediation market in Florida has been extremely
competitive. The Corporation responded to the significant reduction in gross
margin at its Florida remediation service operation by further staff reductions
at this location in late March 1996 and will continue to evaluate the prospects
for this operation on an ongoing basis. Gross margins reported at the
Corporation's Pennsylvania remediation service operation during the three
months ended April 30, 1996 increased by 64% due to favorable margins under a
large contract.
Selling, general and administrative expenses increased slightly to $0.59
million in the first quarter of the current fiscal year compared to $0.55
million in the first quarter of the prior fiscal year. The increase in the
current quarter is the result of higher legal costs associated with litigation
involving the Corporation. In addition, selling, general and administrative
expenses at the Corporation's Florida remediation service operation remained
high in the three months ended April 30, 1996 in relation to the significantly
lower revenue levels due to higher indirect labor costs associated with
marketing and proposal efforts. The Corporation has taken steps to reduce
selling, general and administrative costs at its Florida remediation service
operation through staff reductions and reductions in other overhead expenses.
Selling, general and administrative expenses at the Corporation's Pennsylvania
remediation service operation actually declined as a percentage of contract
revenues in the current three month period compared to the prior year three
month period due to an increase in billable labor.
The factors described above resulted in the Corporation reporting a loss from
operations of $0.33 million for the three months ended April 30, 1996 compared
to income from operations of $0.17 million for the three months ended April 30,
1995.
During the quarter ended April 30, 1996, interest expense decreased slightly to
$0.10 million compared to $0.11 million for the quarter ended April 30, 1995.
Although the Corporation's long-term debt has decreased when comparing the two
quarters, the Corporation continues to recognize interest expense on work
performed under the EDI Program which has been funded through Sirrom
Environmental Funding, LLC and another contractor.
The Corporation recognized a small amount of interest income in the three
months ended April 30, 1996 and 1995 on invested cash balances.
Due to a loss for financial reporting purposes during the three months ended
April 30, 1996, the Corporation has not provided for any income taxes during
the period. For the three months ended April 30, 1995, the Corporation did not
recognize any income tax provision based upon its anticipated full year
effective income tax rate.
The Corporation recognized a loss associated with its discontinued thermal
treatment services facility, GeoLogic, of $0.15 million for the first quarter
of the prior fiscal year. GeoLogic was sold on April 25, 1996 and the
Corporation
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reflected it as a discontinued operation effective January 31, 1996. GeoLogic
reported a loss in the three months ended April 30, 1995 due to lower volume
and a lower sales price realized for soil processed at the facility which the
Corporation feels was indirectly attributable to the EDI Program changes.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's liquidity decreased slightly during the three months ended
April 30, 1996 as cash and short-term investments decreased to $0.40 million
compared to $0.45 million in the three months ended April 30, 1995. The
Corporation's cash and short-term investment balance at April 30, 1995 included
a $0.25 million treasury bill which served as collateral for an outstanding
line of credit.
The increase in cash and short-term investments in the current three month
period is the result of cash provided by operating activities of $0.05 million
and cash provided by financing activities of $0.03 million, offset by cash used
by investing activities of $0.05 million. Cash provided by operating activities
during the three months ended April 30, 1996 included a decrease in accounts
receivable of $0.76 million due to cash collections on EDI receivables, a
decrease of $0.13 million in cash held in escrow due to the payments made to
cover the interest costs and the commitment fee under the Sirrom Agreement, an
increase in accrued liabilities of $0.08 million related to the timing of
payments, and $0.07 million related to depreciation and amortization and the
provision for losses on accounts receivable. These cash inflows generated by
operating activities were partially offset by cash outflows related to the net
loss for the three months of $0.4 million, a reduction in accounts payable of
$0.2 million which principally related to a payment associated with the sale of
GeoLogic, payments to PDGE for services provided of $0.1 million, an increase in
costs and estimated earnings in excess of billings on uncompleted contracts of
$0.2 million due to the timing of contract activity, and $0.05 million of other
miscellaneous cash outflows.
The cash inflows associated with financing activities of $0.03 million in the
three months ended April 30, 1996 related to net proceeds generated from
borrowings. Cash outflows of $0.05 million in the current quarter were used to
fund financing activities for the purchase of property, plant and equipment.
During the three months ended April 30, 1995, the Corporation's liquidity
increased significantly as cash and short-term investments increased by $0.4
million principally due to cash provided from financing activities of $1.3
million, offset by cash outflows associated with investing activities of $0.04
million and cash outflows used to fund operating activities of $0.8 million.
The Corporation's cash flows from financing activities in the three months
ended April 30, 1995 included $2.3 million of proceeds from the initial public
offering of the Corporation's stock and warrants, $3.7 million from the
refinancing of indebtedness in February 1995, and the repayment of indebtedness
of $4.7 million under a line of credit in February 1995.
Cash flows used to fund the Corporation's operating activities totaled $0.8
million for the three months ended April 30, 1995 and included an increase in
net assets of the discontinued operation, GeoLogic, of $0.8 million, an
increase in costs and estimated earnings in excess of billings on uncompleted
contracts of $0.4 million due to additional revenues under the EDI Program, a
$0.1 million increase in other current assets, a $0.1 million reduction in
billings in excess of costs and estimated earnings on uncompleted contracts due
to the timing of contract activity and $0.1 million related to the net loss for
the period. These cash outflows associated with operating activities were
partially offset by cash inflows which included a $0.2 million reduction in
accounts receivable due to cash collections, a $0.2 million increase in accrued
liabilities due to the timing of payments, a $0.1 million increase in the
payable to parent as a result of certain services provided by PDGE, and $0.1
million related to depreciation and amortization and the provision for losses
on accounts receivable.
Cash outflows used to fund investing activities for the three months ended
April 30, 1995 of $0.04 million were for the purchase of property, plant and
equipment.
At April 30, 1996 the Corporation's backlog is expected to result in contract
revenues of approximately $3.0 million to $5.0 million for the remainder of
fiscal 1997. The Corporation anticipates that its Florida remediation service
operation will continue to be adversely affected in the second quarter of
fiscal 1997 by delays associated with the Pre-Approval
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Program which have prevented the Corporation from commencing work on high
priority sites. The Corporation will continue to evaluate the available backlog
of work at its Florida remediation service operation in future quarters.
The Corporation currently maintains an agreement with Sirrom Environmental
Funding, LLC which provides $4.0 million of funding relative to unbilled
amounts under the EDI Program. The agreement with Sirrom, which expires on
August 21, 1997, enables the Corporation, through its wholly-owned subsidiary
PDGES, to fund amounts billed under the EDI Program at the prime rate of
interest, as defined, plus 3%. The Corporation is advanced 100% of amounts
billed; however, it is required to deposit 34% into an escrow account to cover
potential disallowances, future interest costs, and a commitment fee of 2% of
the total funding provided. The Corporation and PDGE are guarantors on the
Sirrom agreement. At April 30, 1996, PDGES has been advanced approximately $2.1
million under the Sirrom agreement.
Due to prior year operating losses and operating losses experienced by the
Corporation in the three months ended April 30, 1996, the Corporation has
limited funds available to meet its ongoing working capital requirements.
However, the Corporation believes that the proceeds generated under the Sirrom
Agreement combined with cash generated from future operations should enable it
to meet its ongoing liquidity requirements for the remainder of fiscal 1997.
The Corporation will continue to closely monitor its liquidity requirements on
an ongoing basis and will be prepared to implement further cost reduction
measures to conserve cash as required.
PROSPECTIVE INFORMATION
Since a substantial portion of the Corporation's historical revenues have been
generated both directly and indirectly under the EDI Program, the Corporation's
operations were materially adversely affected in fiscal 1996 and the first
quarter of fiscal 1997 by changes in the EDI Program. The Corporation has
responded to these changes through the implementation of cost reductions, the
sale of its GeoLogic facility, increased marketing efforts to actively
participate under the new Pre-Approval Program in the state of Florida, and the
identification of potential acquisitions to replace the revenues lost.
Although the Corporation has increased its backlog of high priority sites
eligible under the Pre-Approval Program in recent months, delays associated
with the Pre-Approval Program have prevented the Corporation from commencing
work on these high priority sites. The Corporation believes that its operations
will continue to be adversely affected in the second quarter of fiscal 1997 as
a result of these delays. The Corporation will continue to closely monitor the
operating results at its Florida remediation service operation and the
available backlog of work during the second 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.
11
<PAGE> 12
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 is currently involved in litigation with 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 Corporation's common stock from
February 9, 1995 through May 23, 1995. The action alleges that the defendants
violated certain federal securities laws. The Corporation believes that the
allegations are without merit or that there are meritorious defenses to the
allegations, and intends to defend the action vigorously. If, however, the
plaintiff is successful in its claims, a judgment rendered against the
Corporation and the other defendants would likely have a material adverse
effect on the business and operations of the Corporation.
12
<PAGE> 13
PART II-- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
International Surplus Lines Insurance Company vs. PDG Environmental Services,
Inc., in the United States District Court for the Middle District of Florida,
Case No. 94-1101-CV-ORL-19. On or about November 10, 1994, the Plaintiff,
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
Regulations under the EDI 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 reimbursement. 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.
On December 19, 1994, PDGES filed an Answer and Counterclaims 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 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
was completed in May 1996. Motions for summary judgment were filed on behalf of
both PDGES and ISLIC on May 3, 1996, and each party filed a response to the
other party's motion on May 29, 1996. PDGES has made an additional offer of
settlement to ISLIC, but ISLIC has not yet responded. If neither party's
summary judgment motion is granted, or no settlement is reached, trial is
expected to commence on August 5, 1996.
ITEM 5. OTHER INFORMATION
The registrant has historically performed a substantial amount of work under
the EDI Program in the State of Florida. The EDI Program was substantially
modified during the registrant's fiscal year ended January 31, 1996. These
modifications continued to have a material adverse effect on the registrant's
operations in the three months ended April 30, 1996. Further, the Florida
legislature recently passed a bill to satisfy the State of Florida's existing
obligations to fund the backlog under the EDI Program.
The modifications in the EDI Program and the legislative activity are discussed
in further detail in Note 2 to the consolidated financial statements of the
registrant contained in Part I located elsewhere herein.
The registrant has entered into a letter of intent to acquire SPATCO
Environmental, Inc. from its sole shareholder. This potential acquisition is
discussed in greater detail in Note 2 to the consolidated financial statements
of the registrant contained in Part I located elsewhere herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT INDEX
EXHIBIT NO. AND DESCRIPTION
<TABLE>
<CAPTION>
PAGES OF SEQUENTIAL
NUMBERING SYSTEM
<S> <C>
27 Financial data schedule
</TABLE>
(b) Reports on Form 8-K
The registrant did not file any reports on Form 8-K during the three
months ended April 30, 1996.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PDG REMEDIATION, INC.
By /s/ JOHN M. MUSACCHIO
-----------------------------------
John M. Musacchio
President and Chief Operating Officer
By /s/ ROSE M. CERCONE
-----------------------------------
Rose M. Cercone
Chief Financial Officer
Date: June 14, 1996
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF APRIL 30, 1996 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> APR-30-1996
<CASH> 404,000
<SECURITIES> 0
<RECEIVABLES> 852,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,736,000
<PP&E> 664,000
<DEPRECIATION> 474,000
<TOTAL-ASSETS> 4,947,000
<CURRENT-LIABILITIES> 2,888,000
<BONDS> 46,000
<COMMON> 25,000
0
0
<OTHER-SE> 1,988,000
<TOTAL-LIABILITY-AND-EQUITY> 4,947,000
<SALES> 1,293,000
<TOTAL-REVENUES> 1,293,000
<CGS> 1,028,000
<TOTAL-COSTS> 1,028,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101,000
<INCOME-PRETAX> (425,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (425,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (425,000)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
