-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P4Hrfn+a1jBZWk+ocg4hp9uj9UlrZWhiZqrdYH+WXIQ/cBYGnojRVHbsmnGsnrET tc+h2T5+7SthHZDZ9iNwOg== 0000950144-98-008424.txt : 19980716 0000950144-98-008424.hdr.sgml : 19980716 ACCESSION NUMBER: 0000950144-98-008424 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980715 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIROGROUP INC CENTRAL INDEX KEY: 0000875044 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 591671036 STATE OF INCORPORATION: FL FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19350 FILM NUMBER: 98666699 BUSINESS ADDRESS: STREET 1: 5217 LINBAR DRIVE STREET 2: SUITE 309 CITY: NASHVILLE STATE: TN ZIP: 37211 BUSINESS PHONE: 6158320081 MAIL ADDRESS: STREET 1: 5217 LINBAR DRIVE STREET 2: SUITE 309 CITY: NASHVILLE STATE: TN ZIP: 37211 FORMER COMPANY: FORMER CONFORMED NAME: MISSIMER & ASSOCIATES INC DATE OF NAME CHANGE: 19600201 10-Q 1 VIROGROUP, INC. FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 1998 ------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from __________ to _________ Commission File No. 0-19350 ------- ViroGroup, Inc. (Exact name of registrant as specified in its charter) Florida 59-1671036 ------------------------------ ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5217 Linbar Drive, Suite 309 Nashville, TN 37211 37211 - --------------------------------------- ---------- (Address of principle executive office) (zip code) Registrant's telephone number including area code: (615) 832-0081 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---------- --------- The number of shares outstanding of the registrant's common stock, $.01 Par Value, as of May 31, 1998 was 795,188. Page 1 of 21 2 VIROGROUP, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q QUARTER ENDED MAY 31, 1998
Page ---- Part I- Financial Information Consolidated Balance Sheets May 31, 1998 and August 31, 1997.................................................................................3 Consolidated Statements of Operations Three Months Ended May 31, 1998 and May 31, 1997.....................................................................................................4 Consolidated Statements of Operations Nine Months Ended May 31, 1998 and May 31, 1997.....................................................................................................5 Consolidated Statements of Cash Flows Nine Months Ended May 31, 1998 and May 31, 1997.....................................................................................................6 Notes to Consolidated Financial Statements........................................................................7 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................................13 Part II - Other Information......................................................................................19 Signature Page...................................................................................................20
Page 2 of 21 3 VIROGROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS May 31, 1998 AND AUGUST 31, 1997
May 31, August 31, 1998 1997 ------------ ------------ (Unaudited) ASSETS CURRENT ASSETS: Restricted cash ........................................ $ 306,493 $ 596,408 Accounts receivable, net of allowance for doubtful accounts of $294,785 and $310,258, respectively ...... 1,429,928 1,727,152 Unbilled accounts receivable ........................... 106,910 254,235 Prepaid income taxes ................................... 4,376 4,376 Prepaid expenses and other ............................. 29,735 113,871 ------------ ------------ Total current assets ............................. 1,877,442 2,696,042 AMOUNTS DUE FROM STATE AGENCY, net .......................... 323,159 512,927 PROPERTY AND EQUIPMENT, net ................................. 247,893 340,869 OTHER ASSETS ................................................ 17,734 14,131 ------------ ------------ Total assets ...................................... $ 2,466,227 $ 3,563,969 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ....................................... $ 468,719 $ 374,703 Accrued liabilities .................................... 1,360,485 1,540,017 Notes payable .......................................... 1,301,447 1,160,944 Other current liabilities .............................. 52,882 323,007 ------------ ------------ Total current liabilities ......................... $ 3,183,532 $ 3,398,671 ------------ ------------ SHAREHOLDERS' EQUITY: Common stock, $.01 par value, 50,000,000 shares authorized, 795,188 issued and outstanding ........... 7,952 7,952 Additional paid-in capital ............................. 18,333,533 18,333,533 Accumulated deficit .................................... (19,058,791) (18,176,187) ------------ ------------ Total shareholders' equity (deficit) .............. (717,305) 165,298 ------------ ------------ Total liabilities and shareholders' equity ........ $ 2,466,227 $ 3,563,969 ============ ============
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. Page 3 of 21 4 VIROGROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MAY 31, 1998 AND MAY 31, 1997 (Unaudited)
1998 1997 ----------- ----------- GROSS REVENUES .................................................. $ 1,128,367 $ 1,512,789 COST OF GROSS REVENUES .......................................... 831,859 1,066,891 ----------- ----------- Gross profit ............................................... 296,508 445,898 SELLING, GENERAL & ADMINISTRATIVE EXPENSES, Including rentals to former shareholder of $15,500 in 1998 and $46,500 in 1997 ............................................ 684,429 1,045,136 ----------- ----------- Loss from operations ............................................ (387,921) (599,238) OTHER INCOME (EXPENSE): Interest expense, net ...................................... (23,598) (42,971) Other, net ................................................. 2,569 15,948 ----------- ----------- Loss before income taxes ................................... (408,950) (626,261) PROVISION FOR INCOME TAXES ...................................... -- 793 ----------- ----------- Net loss ................................................... $ (408,950) $ (627,054) =========== =========== NET LOSS PER SHARE COMMON SHARE ................................. $ (0.51) $ (0.79) =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ...................... 795,188 795,188 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements. Page 4 of 21 5 VIROGROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS NINE MONTHS ENDED MAY 31, 1998 AND MAY 31, 1997 (Unaudited)
1998 1997 ----------- ----------- GROSS REVENUES ............................................................. $ 3,816,950 $ 5,683,545 COST OF GROSS REVENUES ..................................................... 2,517,879 4,105,204 ----------- ----------- Gross profit .......................................................... 1,299,071 1,578,341 SELLING, GENERAL & ADMINISTRATIVE EXPENSES, Including rentals to related party of $62,000 in 1998 and $93,000 in 1997 2,176,752 3,246,780 ----------- ----------- Loss from operations ....................................................... (877,681) (1,668,439) OTHER INCOME (EXPENSE): Interest expense, net ................................................. (74,356) (153,257) Other, net ............................................................ 68,290 76,648 ----------- ----------- Loss before income taxes .............................................. (883,747) (1,745,048) PROVISION FOR INCOME TAXES ................................................. -- 802 ----------- ----------- Net loss .............................................................. $ (883,747) $(1,745,850) =========== =========== NET LOSS PER SHARE COMMON SHARE ............................................ $ (1.11) $ (2.20) =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ................................. 795,188 795,188 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements. Page 5 of 21 6 VIROGROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED MAY 31, 1998 AND 1997 (Unaudited)
1998 1997 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss .................................................... $ (883,747) $(1,745,850) ----------- ----------- Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation and amortization ............................ 117,313 237,780 Provision for bad debts .................................. 38,642 56,420 (Gain) loss on disposition of property and equipment ..... (57,517) (22,415) Restructuring charge ..................................... (236,058) (92,837) Relocation Charge ........................................ (34,066) 42,000 Changes in assets and liabilities: Decrease (increase) in-- Accounts receivable and amounts due from state agency 448,350 1,719,015 Unbilled accounts receivable ........................ 147,325 164,368 Prepaid income taxes ................................ 0 8,469 Prepaid expenses and other assets ................... 81,677 2,318,238 Increase (decrease) in-- Accounts payable .................................... 94,015 (818,419) Accrued liabilities ................................. (179,532) 643,949 ----------- ----------- Total adjustments ................................. 706,974 4,256,568 ----------- ----------- Net cash provided by (used in) operating activities ...... (463,598) 2,510,718 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ......................... (56,569) (98,603) Proceeds from sale of property and equipment ................ 89,749 32,385 ----------- ----------- Net cash provided by (used in) investing activities ...... 33,180 (66,218) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable ................................. 3,506,818 4,591,790 Repayment of notes payable .................................. (3,366,315) (6,540,449) Repayment of capitalized lease obligations .................. 0 (8,955) ----------- ----------- Net cash provided by (used in) financing activities ...... 140,503 (1,957,614) ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................. (289,915) 486,886 CASH AND CASH EQUIVALENTS, beginning of period ................... 596,408 191,001 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period ......................... $ 306,493 $ 677,887 =========== =========== SUPPLEMENTAL DISCLOSURES: Interest paid ............................................... $ 86,098 $ 153,257 =========== =========== Income taxes paid ........................................... $ 0 $ 8 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements. Page 6 of 21 7 VIROGROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (UNAUDITED) (1) Basis of Presentation The consolidated balance sheet as of August 31, 1997, which has been derived from audited statements, and the unaudited interim consolidated financial statements included herein, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of May 31, 1998 and the results of operations and cash flows for the three-month and nine-month periods ended May 31, 1998 and May 31, 1997. The accounting policies followed for quarterly financial reporting purposes are the same as those disclosed in the Company's audited financial statements contained in its Annual Report on Form 10-K for the year ended August 31, 1997, as filed with the Securities and Exchange Commission. (2) Going Concern The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities through the ordinary course of business. The Company has incurred losses for the past three years beginning with fiscal year ended August 31, 1995 and has been dependent upon Laidlaw, Inc. or one of its affiliates to guarantee the Company's bank line of credit. In accordance with the preferred stock conversion agreement of June 26, 1995, any amounts borrowed from Laidlaw on June 26, 1998 will convert to a three year term loan with quarterly amortization payments. However, rather than loaning funds directly to the Company, Laidlaw extended its Letter of Credit guarantee of the Company's bank line of credit through August 30,1998, at which time amounts borrowed will be converted to a three year term. Page 7 of 21 8 If operation losses continue, the Company may not be able to generate sufficient cash flow to service the term debt or to fund operations. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that might result if the Company is unable to continue as a going concern. Management is aware of the possibility of not being able to continue as a going concern and has implemented the following actions in its fiscal 1998 business plan in an effort to maintain the Company's continuity as a going concern: (a) Implementation of cost containment procedures. (b) Increasing focus on profitability by placing increased emphasis on products and services which are in high demand and which carry a higher profit margin than traditional services. (c) Closing of small, non-profitable offices and disposing of assets which are not needed. (d) Restructuring all locations to more properly meet the immediate needs of each location. (e) Centralizing controls for operations and for administrative functions, such as accounting, credit management and contract administration. If this business plan is not successful, the Company may not be able to continue as a going concern. The Company's recent history has shown an inability to meet its business plan projections. (3) One-for-Eight Reverse Stock Split On January 23, 1997, the Company implemented a one-for-eight reverse stock split of the Company's common stock. The effect of the reverse split upon holders of the Company's common stock, is that the total number of shares of the Company's common stock held by each shareholder was automatically converted into that number of whole shares of common stock equal to the number of shares of common stock owned immediately prior to the reverse split divided by eight, adjusted for any fractional shares. The Company has an authorized capitalization of 50,000,000 shares of common stock, par value $.01 per share. The authorized capital stock of the Company was not reduced or otherwise affected by the reverse split. As of January 23, 1997, the Page 8 of 21 9 Company had 6,361,708 shares of common stock issued and outstanding. The aggregate number of shares of common stock issued and outstanding following the reverse split is 795,188. All common shares and per share amounts have been adjusted to give retroactive effect of the reverse split. The reverse split was effectuated as an attempt to enable the Company to remain in compliance with the listing criteria of the Nasdaq SmallCap Market; however, the Company's stock was delisted as of December 30, 1997. (4) Loss Per Share Loss per share is calculated by dividing net loss attributed to common shareholders by the weighted average number of common shares and common share equivalents outstanding during the periods. Common share equivalents are not considered for periods in which there is a loss, since their impact would be anti-dilutive. Primary and fully diluted loss per share amounts are the same for all periods presented. (5) Florida Underground Petroleum Storage Tank (UST) Reimbursement Program, Amounts Due from State Agency and the Concentration of Credit Risk. During fiscal 1994, the Company aggressively expanded its participation in the State of Florida financed programs to provide environmental services to evaluate, assess and remediate contaminated underground petroleum storage tank sites. Through its Inland Protection Trust Fund, the State of Florida reimbursed certain costs to clean up eligible contaminated sites. Primarily due to an estimated unfunded $450 million backlog and annual tax revenue allocation of only $100 million, in March 1995 new legislation directed the Florida Department of Environmental Protection to cease processing, with certain limited exceptions, applications for reimbursement of costs to clean up UST sites eligible for state funds. In May, 1996 a new law (the "1996 Act") was passed which implemented significant changes to the reimbursement program and addressed the estimated $450 million backlog of unpaid claims. The 1996 Act provided for the elimination of the reimbursement program effective August 1, 1996 and required all reimbursement applications to be submitted by December 31, 1996. Also, the 1996 Act created a non-profit public benefit corporation, which became operational during the Fall of 1997, to finance the unpaid backlog. This non-profit corporation was charged with financing the estimated backlog of 9,500 claims totaling over $556 million. Payment of claims is on a first-come, first-served methodology based on application filing date and an assumed annual allocation rate of $100 million. Claims paid are subject to a 3.5% annual discount in consideration of the anticipated accelerated payment as compared to the previously expected period of 4 to 5 years. Payment of the initial portion of the claims (approximately $213 million) was made in March, 1998. A Page 9 of 21 10 smaller payment was made by the State of Florida in May, 1998. Based on information received from the State of Florida, additional payments will be made periodically as additional claims packages are reviewed; however, no assurances can be given that a specific payment timetable will be maintained. The Company in prior fiscal years recorded valuation allowances on the amounts due to reflect the State mandated discount and potential denied costs. At August 31, 1997 these allowances totaled $913,918, of which $166,623 was applied as a valuation allowance to the Amounts Due from State Agency, resulting in a net amount of $512,927 shown in the accompanying consolidated balance sheet. The remaining $747,295 is included as an accrued liability to reflect the Company's potential liability to pay discounts and denied costs on receivables sold to third-parties. At May 31, 1998, these allowances totaled $687,712, of which $108,700 was applied as a valuation allowance to the Amounts Due from State Agency, resulting in a net of $323,159 shown in the accompanying consolidated balance sheet. The remaining $579,012 is included as an accrued liability to reflect the Company's potential liability to pay discounts and denied costs on receivables sold to third parties. Approximately $3.1 million in reimbursement applications had been sold to third party entities at August 31, 1997. The Company used third party funding to avoid the long payout period by the State. As of May 31, 1998, approximately $2,000,000 of those reimbursement applications had been paid leaving an unreimbursed balance of approximately $1,100,000. In addition to selling the previously mentioned claims, the Company filed approximately $703,000 of claims directly with the State. Specifically, the Company entered into several arrangements to sell substantially all the claims filed with the State for reimbursement. These arrangements required the Company to pay a 3 - 4% prepaid fee at the time the buyers paid the Company. Because the State did not pay the funding entities by September 30, 1997, the Company began paying indemnification costs at a rate of 0.6875% in October 1997. Under the agreement with the funders, the monthly rate increases such that if the applications are not paid by the State prior to the 20th month after funding, the Company will have paid indemnification costs at the rate of 0.6875% for 18 months. If the applications are not paid within 20 months, the Company must indemnify the funders at the rate which would have otherwise been received by the funders from the State program if interest were being paid by the State. These indemnification costs are being charged against the reserve account at the present time. In the event the State does not meet the projected payment schedule beginning in the first quarter Page 10 of 21 11 of calendar year 1998, the reserves will not be adequate to absorb all of the indemnification costs. Although payments made by the State of Florida in March and May, 1998, reduced the Company's exposure for indemnification costs, discounts, and disallowed costs, as of July 10, 1998, the Company is unable to estimate that reduced exposure. In addition, the Company has placed 13% of the amounts sold in an interest bearing escrow account to provide for potential state denied costs and state mandated interest discount. The interest earned on the escrowed amounts accrues to the Company's benefit and is recorded as interest income in the period earned. The escrow balance at May 31, 1998 and August 31, 1997 was $306,493 and $596,408, respectively, and is included in restricted cash on the accompanying Consolidated Balance Sheet. The Company filed all amounts due from the State prior to the state mandated filing deadline of December 31, 1996. (6) Notes Payable Notes payable at May 31, 1998 and August 31, 1997, consisted of advances against a $3.0 million line of credit. Under this line of credit, the Company may borrow up to $3.0 million at an interest rate of prime (8.50% at May 31, 1998) less .25%. Laidlaw, Inc. (Laidlaw) in lieu of its commitment to provide up to $3.0 million in debt financing to the Company pursuant to the terms of the preferred stock conversion agreement of June 26, 1995, caused a letter of credit to be issued to collateralize the $3.0 million line of credit. Substantially all of the Company's assets secure this obligation to Laidlaw in the event of a draw upon the letter of credit. As of June 26, 1998, the letter of credit was reduced from $3,000,000 to $1,700,000 and its termination date was extended. The line of credit now expires August 30, 1998 and the letter of credit expires September 30, 1998. Laidlaw has stated it will comply with the terms of the preferred stock conversion agreement at the letter's expiration, and an affiliate will make available to the Company for a three-year period up to $1.7 million in financing with advances thereunder carrying an interest rate equal to that available to the Company from alternative sources with the principal and interest to be paid in equal quarterly installments over the three-year period commencing with the line of credit expiration. (7) Restructuring Charge Primarily due to the May 1996 law relating to the Florida UST Program and a continued decline in forecasted landfill design work, as well as general market conditions, the company closed two non-profitable satellite offices in Tampa, Florida Page 11 of 21 12 and Jacksonville, Florida and reduced the size of its Lexington, South Carolina office by approximately one-third. A restructuring charge of $237,755 was included in the August 31, 1997 Consolidated Statement of Operations. These restructuring charges consisted primarily of employee severance and rent expense and the $237,755 is included in Accrued liabilities on the August 31, 1997 consolidated balance sheet. For the nine month period ended May 31, 1998, $206,653 had been charged against the accrual primarily for employee severance pay and lease expenses on closed offices. The Company believes the balance of $31,102 in the accrual account at May 31, 1998 is adequate to absorb the remaining estimated costs. (8) Segment Information The Company operates in one industry segment, as contemplated by Financial Accounting Standards Board Statement No. 14. International Comfort Products accounted for approximately 15% and Laidlaw and its affiliates accounted for approximately 18% of consolidated revenues for the nine months ended May 31, 1998. Amounts due from these clients total $270,422 and are included in Accounts receivable, net in the accompanying consolidated balance sheet for May 31, 1998. A Laidlaw affiliate owns 50% of the Company's outstanding common stock and three officers of Laidlaw affiliates are Directors of the Company. (9) Legal The Company has been notified by the Environmental Protection Agency, through a General Notice Letter that the Company is a potentially liable party at the Florida Petroleum Reprocessors Site in Davie, Florida. However, at this time, no estimate of the potential liability can be calculated due to the limited amount of information available. This type of liability is an insurable risk and the Company's insurance carrier has been notified; however, no formal claim has been filed at this time. The insurance policy has a deductible of $250,000. Management is of the opinion that Company liability will be minimal, if any. The Company has been sued by Housing Authority of the City of Miami Beach claiming damages on a project that was completed in 1994. The potential liability for this suit is approximately $85,000.00. Management is of the opinion that the Company will have minimal liability, if any, and intends to vigorously defend itself against the claim. (10) Proposed Merger On June 23, 1998, the Company and Laidlaw Environmental Services, Inc. signed a merger agreement whereby Laidlaw Environmental Services will acquire all non- Laidlaw owned shares of the Company for $0.75 per share. This agreement is subject to approval of the Securities and Exchange Commission and the Company shareholders. Page 12 of 21 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENTS Recent Developments On June 23, 1998, the Company and Laidlaw Environmental Services, Inc. signed a merger agreement whereby Laidlaw Environmental Services will acquire all non- Laidlaw owned shares of the Company for $0.75 per share. This agreement is subject to approval of the Securities and Exchange Commission and the Company shareholders. On June 30, 1998, the Company filed a Certification and Notice of Termination of Registration on Form 15, deregistering its common stock under the Securities Exchange Act of 1934, as amended. The Form 15 is subject to a ninety day review period by the Securities and Exchange Commission. Results of Operations Comparison of three months ended May 31, 1998 and May 31, 1997. Gross revenues decreased to $1,128,366 for the three months ended May 31, 1998 compared to $1,512,789 for the same period of fiscal year 1997, as indicated in the table below.
Gross Revenues for the Three Months Ended % Increase Division May 31, 1998 May 31, 1997 (Decrease) -------- ------------ ------------ ---------- Enviro Florida ...... $ 444,748 $ 398,003 (12) Enviro South Carolina 323,154 445,765 (28) Enviro Tenn ......... 123,686 468,097 (74) ---------- ---------- TOTAL ENVIRO DIVISION 891,588 1,311,865 (32) HYDRO DIVISION ...... 236,778 200,924 (18) ---------- ---------- TOTAL VIROGROUP, INC $1,128,366 $1,512,789 (25) ========== ==========
The primary reasons for the decreases in gross revenues are as follows: The majority of the decrease in the South Carolina operations of $122,611 was due to a decrease in landfill design work in South Carolina. The Tennessee gross revenues decrease of $344,411 was due to having two large projects in progress last Page 13 of 21 14 fiscal year which have not been replaced in the current year and an overall reduction in volume for remedial projects. Cost of gross revenues is 73.7% of revenues for the three months ended May 31, 1998, compared to 70.5% for the three months ended May 31, 1997. This change primarily results from decreased gross revenues and significant industry competition for the current year. Selling, general, and administrative expenses for the three months ended May 31, 1998 decreased by $360,707 to $684,429, as compared to $1,045,136 for the same period of the prior year. The majority of this improvement is due to staff downsizing and reductions in overhead expenses. Net interest expense decreased due to charging accrued UST indemnification expenses against the reserve instead of to the interest expense account. The net loss for the three months ended May 31, 1998 was $408,950 compared to a net loss of $627,054 for the same period of the prior year. This improvement is primarily the result of the decrease in overhead costs. Comparison of nine months ended May 31, 1998 and May 31, 1997. Gross revenues decreased by 33% to $3,816,950 for the nine months ended May 31, 1998 compared to $5,683,545 for the same period of fiscal year 1997. This decrease in gross revenues results from the decrease in gross revenues in the Company's Environmental (Enviro) division, as shown in the following table:
Gross Revenues for the Nine Months Ended % Increase Division May 31, 1998 May 31, 1997 (Decrease) -------- ------------ ------------ ---------- Enviro Florida ........... $1,250,282 $1,407,895 (11) Enviro South Carolina..... 1,029,873 1,629,676 (37) Enviro Tenn .............. 933,817 2,039,543 (54) ---------- ---------- TOTAL ENVIRO DIVISION..... 3,213,972 5,077,114 (37) HYDRO DIVISION ........... 602,978 606,431 (1) ---------- ---------- TOTAL VIROGROUP, INC...... $3,816,950 $5,683,545 (33) ========== ==========
Florida Enviro operations had a decrease in gross revenues of $157,703 from the prior year. This decrease primarily results from the closure of the two small, unprofitable offices located in Jacksonville and Tampa, in the fourth quarter of fiscal Page 14 of 21 15 1997. The $599,803 decrease in gross revenues from the South Carolina operations is primarily due to a decrease in landfill design work in South Carolina. The decrease of $1,105,726 in Tennessee revenues is primarily due to revenues generated by two large remediation projects which were in progress during the first and second quarters of last year, which have not been replaced in the current year. In general, the overall volume of work in the Remedial Division is down in fiscal 1998. Cost of gross revenues have improved from 72% of revenues for the first nine months of fiscal 1997 to 66% of revenues for the first nine months of fiscal 1998. That improvement is primarily the result of operation improvements in the Hydro Division and in the smaller, more efficient operations in South Carolina. Selling, general and administrative expenses decreased by $1,070,028. This decrease was mainly accomplished through the reduction of under-utilized staff, office closures and management cost controls. Net interest expense decreased by $78,901 primarily due to charging the UST indemnification accrual against the reserve instead of expensing it. The Company has not provided a provision for income taxes due to the current quarter's net loss and has not recorded any tax benefit. It has provided a 100% valuation allowance of the deferred tax asset that results from federal and state net operating loss carry forwards due to the lack of availability of federal and state taxable income within the carryback period, available under the federal and state tax laws as well as the inability to determine the likelihood that future federal and state taxable income will be sufficient to utilize the deferred tax asset. The net loss for the nine months ended May 31, 1998 decreased by $862,103 compared to the prior year. This net loss for the first nine months of fiscal 1998 is primarily attributable to the lower-than-projected revenues; however, the decrease in the loss between years results from the improvement in gross margins and the decrease in overhead costs. Liquidity and Capital Resources as of May 31, 1998 The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets, and liquidation of liabilities through the ordinary course of business. The Company has incurred losses for the past three years beginning with fiscal year ended August 31, 1995 and has been dependent upon Laidlaw, Inc., or one of its affiliates, to guarantee the Company's bank line of credit. In accordance with the preferred stock conversion agreement of June 26, 1995, any amounts borrowed from Laidlaw on June 26, 1998 will convert to a three-year term loan with quarterly amortization payments. However, rather than loaning funds directly to the Company, Laidlaw extended its Letter of Credit guarantee of the Company's bank line of credit through August 30, Page 15 of 21 16 1998, at which time amounts borrowed will be converted to a three year term. If operating losses continue, the Company may not be able to generate sufficient cash flow to service the term debt or to fund operations. See Footnote 2 in Notes to Consolidated Financial Statements for additional details. The Company's operating activities used net cash of $463,598 for the nine months ended May 31, 1998. Several factors contributed to this use of cash including the net operating loss of $883,747. Working capital, including Amounts Due from State Agency decreased by $793,229. The decrease in working capital is mainly due to the decrease in regular and unbilled receivables and the net decrease in Amounts Due from State Agency ($595,675). The decrease in revenues and the payments received from the Florida Department of Environmental Protection are mainly responsible for the lower receivables, while more consistent follow up in collections is also a contributing factor. Investing activities provided $33,180 from proceeds from sale of equipment in excess of new equipment purchases. Financing activities provided cash in the amount of $140,503 which was the net increase in notes payable. Inflation has not significantly affected the Company's financial position or operations. Borrowings under the line of credit bear interest at prime less .25%. The prime rate at May 31, 1998 was 8.5%. No assurance can be given that inflation or the prime rate will not significantly fluctuate, either of which could adversely affect the Company's results of operations. During fiscal 1994, the Company aggressively expanded its participation in the State of Florida financed programs to provide environmental services to evaluate, assess and remediate contaminated underground petroleum storage tank sites. Through its Inland Protection Trust Fund, the State of Florida reimbursed certain costs to clean up eligible contaminated sites. Primarily due to an estimated unfunded $450 million backlog and annual tax revenue allocation of only $100 million, in March 1995 new legislation directed the Florida Department of Environmental Protection to cease processing, with certain limited exceptions, applications for reimbursement of costs to clean up UST sites eligible for state funds. In May, 1996 a new law (the "1996 Act") was passed which implemented significant changes to the reimbursement program and addressed the estimated $450 million backlog of unpaid claims. The 1996 Act provided for the elimination of the reimbursement program effective August 1, 1996 and required all reimbursement applications to be submitted by December 31, 1996. Also, the 1996 Act created a non-profit public benefit corporation, which became operational during the Fall of 1997, to finance the unpaid backlog. This non-profit corporation was charged with Page 16 of 21 17 financing the estimated backlog of 9,500 claims totaling over $556 million. Payment of claims is on a first-come, first-served methodology based on application filing date and an assumed annual allocation rate of $100 million. Claims paid are subject to a 3.5% annual discount in consideration of the anticipated accelerated payment as compared to the previously expected period of 4 to 5 years. Payment of the initial portion of the claims (approximately $213 million) was made in March, 1998. A smaller payment was made by the State of Florida in May, 1998. Based on information received from the State of Florida, additional payments will be made periodically as additional claims packages are reviewed; however, no assurances can be given that a specific payment timetable will be maintained. The Company in prior fiscal years recorded valuation allowances on the amounts due to reflect the State mandated discount and potential denied costs. At August 31, 1997 these allowances totaled $913,918, of which $166,623 was applied as a valuation allowance to the Amounts Due from State Agency, resulting in a net amount of $512,927 shown in the accompanying consolidated balance sheet. The remaining $747,295 is included as an accrued liability to reflect the Company's potential liability to pay discounts and denied costs on receivables sold to third-parties. At May 31, 1998, these allowances totaled $687,712, of which $108,700 was applied as a valuation allowance to the Amounts Due from State Agency, resulting in a net of $323,159 shown in the accompanying consolidated balance sheet. The remaining $579,012 is included as an accrued liability to reflect the Company's potential liability to pay discounts and denied costs on receivables sold to third parties. Approximately $3.1 million in reimbursement applications had been sold to third party entities at August 31, 1997. The Company used third party funding to avoid the long payout period by the State. As of May 31, 1998, approximately $2,000,000 of those reimbursement applications had been paid leaving an unreimbursed balance of $1,100,000. In addition to selling the previously mentioned claims, the Company filed approximately $703,000 of claims directly with the State. Specifically, the Company entered into several arrangements to sell substantially all the claims filed with the State for reimbursement. These arrangements required the Company to pay a 3 - 4% prepaid fee at the time the buyers paid the Company. Because the State did not pay the funding entities by September 30, 1997, the Company began paying indemnification costs at a rate of 0.6875% in October 1997. Under the agreement with the funders, the monthly rate increases such that if the applications are not paid by the State prior to the 20th month after funding, the Company will have paid indemnification costs at the rate of 0.6875% for 18 months. If the applications are not paid within 20 months, the Company must indemnify the funders at the rate which would have otherwise been received by the funders from Page 17 of 21 18 the State program if interest were being paid by the State. These indemnification costs are being charged against the reserve account at the present time. In the event the State does not meet the projected payment schedule beginning in the first quarter of calendar year 1998, the reserves will not be adequate to absorb all of the indemnification costs. Although payments made by the State of Florida in March and May, 1998, reduced the Company's exposure for indemnification costs, discounts, and disallowed costs, as of July 10, 1998, the Company is unable to estimate that reduced exposure. In addition, the Company has placed 13% of the amounts sold in an interest bearing escrow account to provide for potential state denied costs and state mandated interest discount. The interest earned on the escrowed amounts accrues to the Company's benefit and is recorded as interest income in the period earned. The escrow balance at May 31, 1998 and August 31, 1997 was $306,493 and $596,408, respectively, and is included in restricted cash on the accompanying Consolidated Balance Sheet. The Company filed all amounts due from the State prior to the state mandated filing deadline of December 31, 1996. Page 18 of 21 19 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORT ON FORM 8-K Form 8-K On July 3, 1998, a report was filed on Form 8-K to report that the registrant had entered into an agreement of Merger, and is incorporated herein by reference. Exhibits 27 Financial Data Schedule Page 19 of 21 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VIROGROUP, INC. Date: July 14, 1998 By: /s/ Charles S. Higgins, Jr. ----------------------------- Charles S. Higgins, Jr., President and Chief Executive Officer Date: July 14, 1998 By: /s/ DeWayne Baskette --------------------- DeWayne Baskette, Vice President and Chief Financial Officer Page 20 of 21 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS AUG-31-1998 SEP-01-1997 MAY-31-1998 306,493 0 1,831,623 294,785 0 1,877,442 1,640,261 1,392,369 2,466,227 3,183,532 0 0 0 7,952 (725,258) 2,466,227 0 3,816,950 0 2,517,879 2,108,462 38,642 74,356 (883,747) 0 (883,747) 0 0 0 (883,747) (1.11) (1.11)
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