-----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, WYokbrTLCzEclo9gd64JKbTUEH7LDjnXs+Xg1EiYKI5gdlB+ZgS4+NHx2HY8UqHq zPe0rsUl8X+/IugKlclGJw== 0000950128-98-000710.txt : 19980410 0000950128-98-000710.hdr.sgml : 19980410 ACCESSION NUMBER: 0000950128-98-000710 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980409 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PDG ENVIRONMENTAL INC CENTRAL INDEX KEY: 0000771485 STANDARD INDUSTRIAL CLASSIFICATION: HAZARDOUS WASTE MANAGEMENT [4955] IRS NUMBER: 222677298 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-13667 FILM NUMBER: 98590224 BUSINESS ADDRESS: STREET 1: 300 OXFORD DR STREET 2: N PARK DR & BROWNING RD CITY: MONROEVILLE STATE: PA ZIP: 15146 BUSINESS PHONE: 4128562200 MAIL ADDRESS: STREET 1: 300 OXFORD DRIVE CITY: MONROEVILLE STATE: PA ZIP: 15146 FORMER COMPANY: FORMER CONFORMED NAME: ASBESTEC INDUSTRIES INC DATE OF NAME CHANGE: 19901220 FORMER COMPANY: FORMER CONFORMED NAME: APPLIED INDUSTRIES INC /UT DATE OF NAME CHANGE: 19860223 10-K405 1 PDG ENVIRONMENTAL, INC. 1 (Conformed) SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-13667 PDG ENVIRONMENTAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 22-2677298 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 300 OXFORD DRIVE, MONROEVILLE, PENNSYLVANIA 15146 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 412-856-2200 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.02 PAR VALUE (Title of Class) 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 aggregate market value of the voting stock held by non-affiliates of the registrant was $10,893,812 as of April 2, 1998, computed on the basis of the average of the bid and asked prices on such date. As of April 2, 1998 there were 6,484,412 shares of the registrant's Common Stock outstanding. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders are incorporated by reference into Part III. 2 PART I ITEM 1. BUSINESS (a) DEVELOPMENT OF THE BUSINESS PDG Environmental, Inc., the registrant, is a holding company which, through its wholly-owned operating subsidiaries and a joint venture, is engaged primarily in providing asbestos abatement services to the private and public sectors. Prior to fiscal 1991, the registrant was solely engaged in providing asbestos abatement services. The registrant expanded the scope of its business to include environmental remediation services in fiscal 1991 through the formation of an operating subsidiary in Florida specializing in remediating leaking underground storage tanks ("USTs"). In fiscal 1992, the registrant expanded its underground storage tank remediation business to Pennsylvania. In December 1992, the registrant entered the soil remediation business by purchasing a thermal desorption plant in West Central Florida. The thermal desorption plant was discontinued effective January 31, 1996, and the plant was sold April 25, 1996. On July 20, 1994, PDG Remediation, Inc., now known as ICHOR Corporation, ("ICHOR") was incorporated under the laws of the Commonwealth of Pennsylvania as a wholly-owned subsidiary of the registrant. The registrant's environmental remediation services business was merged into ICHOR effective October 20, 1994 in order to separate this business segment from the registrant's other business segments and facilitate an initial public offering of ICHOR common stock. On February 9, 1995, ICHOR sold 1,000,000 shares of its common stock and 1,000,000 redeemable warrants to purchase an additional 1,000,000 shares of common stock to the public. Of the shares of common stock sold, 600,000 were offered by ICHOR and 400,000 were offered by the registrant, thereby reducing the registrant's ownership in ICHOR to approximately 60%. On July 31, 1996, the registrant entered into a Loan Modification Agreement ("Modification Agreement") with Drummond Financial Corporation ("Drummond") formerly CVD Financial Corporation. Pursuant to the Modification Agreement, Drummond purchased all 1,470,320 shares of ICHOR common stock held by the Corporation for $0.82 per share and the aggregate purchase price of $1,205,662 was utilized to reduce the outstanding balance on the line of credit maintained by the Corporation with Drummond. This resulted in a $203,000 gain on the sale. In December 1997, the Corporation and Philip Environmental Services Corporation ("Philip") formed a limited partnership, PDG/Philip, L.P. ("Venture"). The Corporation is both a general and limited partner of the Venture and holds a 60% ownership share. The Venture is performing a $12 million asbestos abatement contract which is expected to be completed by the end of the second quarter of fiscal 1999. (b) DESCRIPTION OF THE BUSINESS ASBESTOS ABATEMENT CONTRACTING BUSINESS OVERVIEW The registrant, through its wholly-owned subsidiaries and joint venture interest, provides asbestos abatement contracting services to the public and private sectors. The asbestos abatement industry has developed due to increased public awareness in the early 1970's of the health risks associated with asbestos, which was extensively used in building construction. Asbestos, which is a fibrous mineral found in rock formations throughout the world, was used extensively in a wide variety of construction-related products as a fire retardant and insulating material in residential, commercial and industrial properties. During the period from approximately 1910 to 1973, asbestos was commonly used as a construction material in structural steel fireproofing, as thermal insulation on pipes and mechanical equipment and as an acoustical insulation material. Asbestos was also used as a component in a variety of building materials (such as plaster, drywall, mortar and building block) and in caulking, tile adhesives, paint, roofing felts, floor tile and other surfacing materials. In the early 1970's, it became publicly recognized that inhalation or ingestion of asbestos fibers was a direct cause of certain diseases, including asbestosis (a debilitating pulmonary disease), lung cancer, mesothelioma (a cancer of the abdominal and lung lining) and other diseases. In particular, friable asbestos-containing materials ("ACM") were designated as a potential health hazard because these materials can produce microscopic fibers and become airborne when disturbed. -1- 3 The Environmental Protection Agency (the "EPA") first banned the use of asbestos as a construction material in 1973 and the federal government subsequently banned the use of asbestos in other building materials as well. Most structures built before 1973 contain ACM in some form and surveys conducted by the federal government have estimated that 31,000 schools and 733,000 public and commercial buildings contain friable ACM. Also, many more industrial facilities are known to contain asbestos. The asbestos abatement industry grew rapidly in the 1980's due to increasing public awareness and concern over health hazards associated with ACM, legislative action mandating safety standards and requiring abatement in certain circumstances, and economic pressures on building owners seeking to satisfy the requirements of financial institutions, insurers and tenants. It is estimated that the asbestos abatement market grew from approximately $200 million in revenues in 1983 to approximately $4.0 billion in 1990. However, due to the effects of the collapse of the real estate industry and the overall recession in 1991, the asbestos abatement market contracted to approximately $3.5 billion and is expected to remain fairly constant in future years. OPERATIONS Through its operating subsidiaries, the registrant has expertise in all types of asbestos abatement including removal and disposal, enclosure (constructing structures around asbestos-containing area) and encapsulation (spraying asbestos containing materials with an approved sealant). Asbestos abatement is principally performed in commercial buildings, government and institutional buildings, schools and industrial facilities. The registrant's operating subsidiaries provide asbestos abatement services on a project contract basis. Individual projects are competitively bid, although most contracts with private owners are ultimately negotiated. The majority of contracts undertaken are on a fixed price basis. The length of the contracts are typically less than one year; however, larger projects may require two or three years to complete. The registrant closely monitors contracts by assigning responsibility for each contract to a project manager who coordinates the project until its completion. The asbestos abatement process is performed by a qualified labor force in accordance with regulatory requirements, contract specifications and the registrant's written operating procedures manual which describes worker safety and protection procedures, air monitoring protocols and abatement methods. The registrant's asbestos abatement operations have been generally concentrated in the northeastern, mid-atlantic, southeastern and southwestern portions of the United States. The majority of the registrant's national marketing efforts are performed by members of senior management located in the headquarters facility in Monroeville, Pennsylvania. Regional marketing and project operations are also conducted through branch offices located in New York City, New York; Hazleton and Export, Pennsylvania; Atlanta, Georgia; Fort Lauderdale, Florida; Houston, Texas; Phoenix, Arizona and Rock Hill, South Carolina. Since the registrant and its subsidiaries are able to perform asbestos abatement work throughout the year, the business is not considered seasonal in nature. However, it is affected by the timing of large contracts. SUPPLIERS AND CUSTOMERS The registrant purchases the equipment and supplies used in the asbestos abatement business from a number of manufacturers. One of these manufacturers (Aramsco, Inc.) accounted for 31% of the registrant's asbestos abatement purchases in fiscal 1998. The items purchased are made from the vendor's available stock and are not covered by a formalized agreement. The customers of the registrant's asbestos abatement business include both private sector clients and government or publicly funded entities. In fiscal 1998, the registrant estimates that approximately 65% of its operating subsidiaries' revenues were derived from private sector clients, 30% from government contracts and 5% from schools. Due to the nature of the registrant's business, which involves large contracts that are often completed within one year, customers that account for a significant portion of revenue in one year may represent an immaterial portion of revenue in subsequent years. For the year ended January 31, 1998, one customer, the U.S. Army, accounted for 11.4% of the registrant's consolidated revenues for that year. -2- 4 LICENSES The registrant, through its operating subsidiaries, is licensed and/or certified in all jurisdictions where required in order to conduct its operations. In addition, certain management and staff members are licensed and/or certified by various governmental agencies as asbestos abatement supervisors and workers. INSURANCE AND BONDS The registrant and its operating subsidiaries maintain liability insurance for claims arising from its asbestos abatement business. The policy, which provides a $2.0 million limit per claim and in the aggregate, insures against both property damage and bodily injury arising from the asbestos abatement contracting activities of the registrant's operating subsidiaries. The policy is written on an "occurrence" basis which provides coverage for insured risks that occur during the policy period, irrespective of when a claim is made. Higher policy limits of up to $10.0 million are available for individual projects. The registrant also provides worker's compensation insurance, at statutory limits, which covers the employees of the registrant's operating subsidiaries engaged in asbestos removal or encapsulation activities. A substantial number of the registrant's contracts require performance and payment bonds and the registrant maintains a bonding program to satisfy these requirements. COMPETITIVE CONDITIONS The asbestos abatement industry is highly competitive and includes both small firms and large diversified firms, which have the financial, technical and marketing capabilities to compete on a national level. The industry is not dominated by any one firm. The registrant principally competes on the basis of competitive pricing, a reputation for quality and safety, and the ability to obtain the appropriate level of insurance and bonding. REGULATORY MATTERS Numerous regulations at the federal, state and local levels impact the asbestos abatement industry, including the EPA's Clean Air Act and Occupational Safety and Health Administration ("OSHA") requirements. As outlined below, these agencies have mandated procedures for monitoring and handling ACM during abatement projects and the transportation and disposal of ACM following removal. Current EPA regulations establish procedures for controlling the emission of asbestos fibers into the environment during removal, transportation or disposal of ACM. The EPA also has notification requirements before removal operations can begin. Many state authorities and local jurisdictions have implemented similar programs governing removal, handling and disposal of ACM. The EPA instituted the Asbestos Hazard Emergency Response Act of 1986 which requires that schools be inspected for asbestos by accredited personnel. In the event that the inspection program shows evidence of ACM, a maintenance or abatement program must be implemented and the school must conduct continuing operations and maintenance programs including reinspection every three years, training custodial employees in asbestos hazards and furnishing asbestos notifications to parents and building occupants. The transportation of ACM, which has been designated a hazardous material, is governed by the Department of Transportation under the Hazardous Materials Transportation Act of 1975 which has established guidelines for the transportation of ACM. The health and safety of personnel involved in the removal of asbestos is protected by OSHA regulations which specify allowable airborne exposure standards for asbestos workers, engineering and administrative control methods, work area practices, proper supervision, training, medical surveillance and decontamination practices for worker protection. The registrant believes it is in compliance with all of the federal, state and local statutes and regulations which affect its asbestos abatement business. -3- 5 BACKLOG The registrant and its operating subsidiaries had asbestos abatement backlog orders totaling approximately $27.6 million and $14.4 million at January 31, 1998 and 1997, respectively. The backlog at January 31, 1998 consisted of $17.7 million of uncompleted work on fixed fee contracts and an estimated $9.9 million of work on time and materials or unit price contracts. The backlog at January 31, 1997 consisted of $9.2 million of uncompleted work on fixed fee contracts and an estimated $5.2 million of work to be completed on time and materials or unit price contracts. The Company, from time to time, enters into fixed-price subcontracts which tends to reduce the risk to the Company on fixed-price contracts. The backlog represents the portion of contracts which remain to be completed at a given point in time. As these contracts are completed, the backlog will be reduced and a compensating amount of revenue will be recognized. The Company is currently working on virtually all of the contracts in its January 31, 1998 backlog and anticipates that approximately 80% of this backlog will be completed and realized as revenue by January 31, 1999 in accordance with the terms of the applicable contracts between the registrant and the owners of these properties. The remaining 20% is expected to be completed and realized as revenue subsequent to January 31, 1999. Approximately 85% of the backlog existing at January 31, 1997 was completed and recognized as revenue by January 31, 1998 with the remaining 15% expected to be completed and realized as revenue during the year ending January 31, 1999. EMPLOYEES --------- As of January 31, 1998, the registrant employs approximately 80 employees consisting of senior management and staff employees between its headquarters in Monroeville and branch offices located in New York City, Hazleton, Export, Atlanta, Fort Lauderdale, Houston, Phoenix and Rock Hill. The staff employees include accounting, administrative, sales and clerical personnel as well as project managers and field supervisors. The registrant also employs laborers for field operations based upon specific projects; therefore, the precise number varies based upon the outstanding backlog. Approximately 155 laborers and supervisors are employed on a steady basis, with casual labor hired on an as-needed basis to supplement the work force. A portion of the field laborers who provide services to the registrant are represented by a number of different unions. In every case, the Company is a member of a multi-employer plan. Management considers its employee labor relations to be good. ITEM 2. PROPERTIES As of January 31, 1998, the registrant leases certain office space for its executive offices in Monroeville totaling 3,500 square feet. In addition, a combination of warehouse or shop and office space is leased in Houston (3,990 square feet), Atlanta (250 square feet), Hazleton (1,800 square feet), Fort Lauderdale (3,800 square feet), Rock Hill (4,943 square feet), Phoenix (2,400 square feet) and New York City (3,800 square feet). The registrant also owns a 15,000 square foot office/warehouse situated on approximately six (6) acres in Export, Pennsylvania which is subject to a mortgage. ITEM 3. LEGAL PROCEEDINGS On June 30, 1995, an action, caption Klein v. PDG Remediation, Inc., et al., No. CIV-4954 (DAB), was filed in the United States District Court for the Southern District of New York asserting federal securities law claims against the registrant, its directors and certain of its officers, PDGR and the underwriters of the registrant's initial public offering. The Klein action is brought as a purported class action on behalf of the named plaintiff and all persons and entities who purchased PDGR's common stock from February 9, 1995, the effective date of the initial public offering, through May 23, 1995. The plaintiff alleges that the defendants violated Sections 11 and/or 15 of the Securities Act of 1933, as amended, and Section 12(2) of the Securities Exchange Act of 1934, as amended, by issuing or participating in the issuance of the registration statement and prospectus which contained material misstatements or omissions, and that the purported class members purchased shares of Common Stock in reliance on the allegedly false and misleading registration statement and prospectus. Specifically, plaintiff alleges that the defendants knew or should have known that the Florida reimbursement program in which PDGR participates was operating at a deficit and was being revised to eliminate funding of remediation activities for lower priority sites. The plaintiff is seeking certification of the action as a class action and recision of the purchase of shares of common stock by -4- 6 members of the purported class or statutory damages, as well as interest, attorneys' fees and other costs and expenses. The registrant believes that the plaintiff's allegations are without merit or that there are meritorious defenses to the allegation, and intends to defend the action vigorously. On September 1, 1995, an answer was filed on behalf of the registrant, its officers and directors and PDGR 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's counsel 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 motion to dismiss was denied in September 1996. The parties have negotiated a stipulation concerning class certification, and the court has certified a class. The notice of class certification was sent to potential class members in August 1997. The action is still in the discovery stage. Discovery is scheduled to close on July 31, 1998. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The registrant's common stock has traded on the OTC Bulletin Board since September 1996. Prior to that, it was listed for trading on NASDAQ Small Cap (Symbol: PDGE) and the information presented for the following periods reflects the high and low bid information as reported by the OTC Bulletin Board and NASDAQ.
MARKET PRICE RANGE FISCAL 1998 FISCAL 1997 ----------- ----------- HIGH LOW HIGH LOW ---- --- ---- --- First Quarter $ 0.81 $ 0.42 $ 0.63 $ 0.31 Second Quarter 0.87 0.56 1.00 0.31 Third Quarter 1.12 0.71 0.83 0.31 Fourth Quarter 2.18 1.06 0.47 0.25
At April 2, 1998, the registrant had 2,191 stockholders of record. The registrant has not historically declared or paid dividends with respect to its common stock and has no intention to pay dividends in the foreseeable future. The registrant's ability to pay preferred and common dividends is prohibited due to limitations imposed by the registrant's Series A Preferred Stock which require that dividends must be paid to holders of preferred stock prior to the payment of dividends to holders of common stock. ITEM 6. SELECTED FINANCIAL DATA The following table reflects selected consolidated financial data for the registrant for the five fiscal years ended January 31, 1998. -5- 7
FOR THE YEARS ENDED JANUARY 31, 1998 1997 1996 1995 1994 --------------------------------------------------------------- (THOUSANDS EXCEPT PER SHARE DATA) OPERATING DATA Contract revenues $24,610 $16,183 $16,215 $17,659 $16,310 Gross margin 4,319 2,485 1,442 2,178 1,810 Income (loss) from operations 1,530 (6) (1,567) (591) (1,363) Other income (expense) (168) (178) 920 (423) (302) Income (loss) from continuing operations 1,240 (184) (750) (1,038) (1,651) Income (loss) from discontinued operations - (302) (1,701) 896 206 Net income (loss) 1,240 (486) (2,451) 473 (1,445) COMMON SHARE DATA Net income (loss) from continuing operations per common share: Basic 0.20 (0.04) (0.14) (0.20) (0.67) Diluted 0.17 (0.04) (0.14) (0.20) (0.67) Net income (loss) per common share: Basic 0.20 (0.09) (0.44) 0.08 (0.61) Diluted 0.17 (0.09) (0.44) 0.08 (0.61) Weighted average common shares outstanding 6,060 5,913 5,670 7,157 3,267 BALANCE SHEET DATA Working capital $ 2,794 $ 409 $ 3,110 $ 3,177 $ 3,427 Total assets 10,337 6,165 7,564 9,690 7,904 Long-term obligations 1,768 372 2,766 510 1,735 Total stockholders' equity 2,265 762 1,218 3,609 3,049
The earnings per share amounts prior to fiscal 1998 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, Earnings Per Share. For further discussion of earnings per share and the impact of Statement No. 128, see Note 14 to the Consolidated Financial Statements. The years ended January 31, 1997, 1996, 1995 and 1994 include gain (loss) from discontinued operations of ($0.3 million), ($1.7 million), $0.9 million and $0.2 million respectively; ($0.05), ($0.30), $0.13 and $0.06 per common share respectively. For the year ended January 31, 1996, other income includes a gain of $1.4 million on the sale of 40.5% of its investment in PDGR. The year ended January 31, 1995 includes an extraordinary item related to the early extinguishment of debt totaling $0.6 million ($0.09 per common share). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The registrant, through its operating subsidiaries, provides asbestos abatement services to the public and private sectors. The following paragraphs are intended to highlight key operating trends and developments in the registrant's operations and to identify other factors affecting the Company's consolidated results of operations for the three years ended January 31, 1998. -6- 8 RESULTS OF OPERATIONS YEAR ENDED JANUARY 31, 1998 COMPARED TO YEAR ENDED JANUARY 31, 1997 Consolidated revenues reported by the registrant increased to $24.6 million for the year ended January 31, 1998 (fiscal 1998) compared to $16.2 million for the year ended January 31, 1997 (fiscal 1997). The fiscal 1998 increase was primarily attributable to increased bidding opportunities and contract awards. Contract costs increased to $20.3 million in fiscal 1998 compared to $13.7 million in fiscal 1997 and resulted in reported gross margins of $4.3 million and $2.5 million, respectively in each fiscal year. The higher margins experienced in fiscal 1998 resulted from increased contract revenue and higher project margins. The registrant's selling, general and administrative expenses increased by 12% between the two fiscal years to $2.8 million in fiscal 1998 compared to $2.5 million in fiscal 1997. The increase between the two fiscal years principally related to employee bonuses and the operating costs associated with the two additional branch offices in operation in fiscal 1998. The factors discussed above resulted in the registrant reporting income from operations of $1.5 million in fiscal 1998 compared to loss from operations of $0.01 million in fiscal 1997. Interest expense decreased to $0.2 million from $0.3 million due to decreased average borrowings during fiscal 1998. Interest income increased to $16,000 for the year ended January 31, 1998 compared to $8,000 for the previous fiscal year due to higher invested cash balances at certain periods throughout the year. Other income decreased to $36,000 from $101,000 in 1997 due to a number of non-recurring items included in the fiscal 1997 amounts including proceeds from a casualty loss, rental of excess equipment and the sale of fixed assets. As a result of net operating loss carryforwards for book purposes, there was no federal income tax provision in fiscal 1998. A $20,000 state income tax provision was made. No income tax provision was made in fiscal 1997 due to a net operating loss in fiscal 1997. The loss from discontinued operations in fiscal 1997 was due to the registrant recording its 59.5% ownership share of ICHOR up to July 31, 1996 at which time, the registrant sold its remaining interest in ICHOR to Drummond resulting in a $0.2 million gain. YEAR ENDED JANUARY 31, 1997 COMPARED TO YEAR ENDED JANUARY 31, 1996 During the year ended January 31, 1997, (fiscal 1997) the registrant's consolidated revenues remain unchanged at $16.2 million when compared to the previous fiscal year ended January 31, 1996 (fiscal 1996). The registrant's reported gross margin increased to $2.5 million in fiscal 1997 compared to $1.4 million in fiscal 1996. The increased margin in fiscal 1997 was due to higher margins on work obtained and the effect in fiscal 1996 of a cost overrun on a large contract, an additional provision on a completed contract and extreme competitive pressures which reduced margins. Selling, general and administrative expenses decreased in fiscal 1997 to $2.5 million compared to $3.0 million in fiscal 1996 due to significant cost-saving measures adopted early in fiscal 1997. The cost-savings measures included the closure of two branch offices, the resignation of the President of the registrant, employee layoffs and general cost containment. As a result of the factors discussed above, the registrant reported a loss from operations in fiscal 1997 of $0.01 million compared to a loss from operations of $1.6 million in fiscal 1996. Interest expense decreased to $0.3 million in fiscal 1997 compared to $0.5 million in fiscal 1996 as a result of a significant reduction in both the outstanding balance on the indebtedness to Drummond and the related interest rate. Interest income decreased to $8,000 in fiscal 1997 compared to $24,000 in fiscal 1996 due to the lower invested cash balances during the current year. Other income in fiscal 1997 totaled approximately $101,000 versus $9,000 in fiscal 1996. Significant components of other income were the proceeds from a casualty loss, rental of excess equipment and the sale of fixed assets. During the year ended -7- 9 January 31, 1996, the registrant reported a gain of $1.4 million from the initial public offering of common stock and warrants by ICHOR since the basis of the registrant's investment was lower than the proceeds realized from the initial public offering. As a result of the sale, the registrant's ownership percentage in ICHOR was reduced to 59.5%. As a result of a net operating loss for book purposes, the registrant had no federal tax provision. During fiscal 1996, the registrant recorded a deferred income tax provision of $103,000. The registrant recorded its 59.5% interest in the losses of ICHOR resulting in a $0.5 million and $1.2 million loss from discontinued operations for fiscal 1997 and 1996, respectively. The sale of the remaining ICHOR shares to Drummond on July 31, 1996 resulted in a $0.2 million gain. The $0.5 million loss on disposal in fiscal 1996 represented the registrant's 59.5% share of the loss resulting from the sale of ICHOR's thermal treatment facility in Florida. LIQUIDITY AND CAPITAL RESOURCES FISCAL 1998 During fiscal 1998, the registrant experienced an increase in liquidity of $0.5 million as cash and short-term investments increased from $0.4 million at January 31, 1997 to $0.9 million at January 31, 1998. The increase in liquidity in fiscal 1998 was attributable to cash inflows of $1.0 million from operating activities partially offset by $0.6 million of cash utilized by investing activities. Specifically, cash inflows from operating activities were generated by net income of $1.2 million, depreciation and amortization of $0.4 million, a $1.8 million increase in accounts payable, a $0.3 increase in other current assets, a $0.2 million increase in billings in excess of costs and estimated earnings on uncompleted contracts and a $0.1 million increase in accrued liabilities. Cash outflows related to operating activities included a $3.1 million increase in accounts receivable and a $0.1 million increase in costs and estimated earnings in excess of billings on uncompleted contracts. The increases in accounts receivable and accounts payable are attributable to the significant (52%) increase in revenues from fiscal 1997 to fiscal 1998. The $0.04 million of cash flows from financing activities during fiscal 1998 included $1.8 million of proceeds generated from the issuance of new debt including the refinancing of all Drummond debt ($1.8 million outstanding under a line of credit and a term loan at January 31, 1997) with a $0.4 million mortgage loan with a seven-year term, a $0.5 million five-year equipment loan and a $1.5 million maximum three-year line of credit facility. Additional funds of $0.2 million were generated from the exercise of 470,000 stock options and warrants. These cash flows were wholly offset by the repayment of the aforementioned debt due Drummond which was refinanced and monthly payments on the new debt instruments. The registrant's investing activities of $0.6 million were due to the purchase of property, plant and equipment, including the acquisition of the fixed assets of American Environmental Abatement Corporation located in Phoenix, Arizona. The registrant maintains a $1.5 million revolving line of credit collateralized by eligible accounts receivable with an August 2000 maturity and a $0.5 million equipment note with an August 2002 maturity. At January 31, 1998, there was $917,000 borrowed on the line of credit. Both the revolving line of credit and the equipment note are at an interest rate of prime plus 3.5%. Additionally, the registrant's Export real estate is collateral for a $375,000 seven-year mortgage loan at an interest rate of 9.5% for the first four years of the loan with interest reset at 3.25% above the five-year treasury bill rate for the remaining three-year term of the mortgage loan. The registrant believes that it has adequate liquidity to fund its current and future operations. FISCAL 1997 During fiscal 1997, the registrant experienced an increase in liquidity of $0.1 million as cash and short-term investments increased from $0.3 million at January 31, 1996 to $0.4 million at January 31, 1997. The increase in liquidity in fiscal 1997 was attributable to cash inflows in the amount of $0.2 million from operating activities and $0.1 million from financing activities partially offset by $0.1 million used to fund the purchase of property, plant and equipment. Specifically, cash inflows from operating activities were generated by a decrease in other current assets of $0.6 million, a $0.1 million increase in accrued liabilities, a decrease of $0.5 million in net assets of discontinued operations and $0.4 million of -8- 10 depreciation. Cash outflows related to the accounts receivable balance which increased $0.5 million as a result of the higher revenues during the fourth quarter of fiscal 1997, accounts payable which decreased $0.2 million, an adjustment of $0.2 million due to the gain on the sale of PDGR and $0.5 million as a result of the net loss generated in the period. The $0.12 million from financing activities during fiscal 1997 included $0.29 million advanced under the line of credit offset by $0.17 million of principal repayments made on the Drummond term debt. Additionally, the $1.2 million of proceeds from the sale of PDGR stock to Drummond was a direct offset to reduce borrowings under the line of credit. The registrant's investing activities of $0.1 million during fiscal 1997 were attributable to the purchase of property, plant and equipment. During fiscal 1996, the registrant entered into two agreements guaranteeing ICHOR accounts receivable financed by Sirrom Environmental Funding, LLC ("Sirrom"). At January 31, 1997, the balance guaranteed by the registrant under the two agreements was approximately $3 million. Subsequent to January 31, 1997, ICHOR's customer has made significant payments reducing the amount of the registrant's guarantee to approximately $300,000. It is expected that the remaining outstanding receivables covered by the guarantee will be paid by ICHOR's customer during the first half of Fiscal 1999, eliminating the registrant remaining guarantee. The registrant, from time to time, enters into fixed-price subcontracts which tends to reduce the risk to the Company of fixed-price contracts. PROSPECTIVE INFORMATION The registrant has been named in a purported class action suit involving the purchase by all persons and entities of ICHOR's common stock from February 9, 1995 through May 23, 1995. The action alleges that the defendants violated certain federal securities laws. (See "Item 3 - Legal Proceedings" for a description of this litigation.) The registrant 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 registrant and the other defendants would likely have a material adverse effect on the business and operations of the registrant. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the registrant and its subsidiaries and the report of Ernst & Young LLP are submitted under Item 14 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During the two most recent fiscal years of the registrant, there were no disagreements with the independent auditors on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement would have caused the auditors to make reference to the subject matter of the disagreement or disagreements in connection with their reports. -9- 11 PART III The information called for by Part III (Items #10, 11, 12 and 13) is incorporated herein by references to the registrant's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934. -10- 12 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) AND (2) The following consolidated financial statements and financial statement schedule of the registrant and its subsidiaries are submitted pursuant to the requirements of this section. PAGE ---- Report of Independent Auditors...............................................F-1 Consolidated Balance Sheets as of January 31, 1998 and 1997..................F-2 Consolidated Statements of Operations for the Three Years Ended January 31, 1998...........................................................F-4 Consolidated Statements of Changes in Stockholders' Equity for the Three Years Ended January 31, 1998...............................................F-5 Consolidated Statements of Cash Flows for the Three Years Ended January 31, 1998...........................................................F-6 Notes to Consolidated Financial Statements for the Three Years Ended January 31, 1998.....................................................F-7 Schedule II - Valuation and Qualifying Accounts.............................F-18 All other schedules for PDG Environmental, Inc. and consolidated subsidiaries for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, not applicable, or the required information is shown in the consolidated financial statements or notes thereto. (a) (3) EXHIBITS:
PAGES OF SEQUENTIAL EXHIBIT INDEX NUMBERING SYSTEM ------------- ---------------- 3.1 Certificate of Incorporation of the registrant and all amendments thereto, filed as Exhibit 3.1 to the registrant's Annual Report on Form 10-K for the year ended September 30, 1990, is incorporated herein by reference. 3.2 Certificate of Amendment to the Certificate of Incorporation of the registrant, approved by stockholders on June 25, 1991, filed as Exhibit 3(a) to the registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1991, is incorporated herein by reference. 3.3 Amended and Restated By-laws of the registrant, filed as Exhibit 4.2 to the registrant's registration statement on Form S-8 of securities under the PDG Environmental, Inc. Amended and Restated Incentive Stock Option Plan as of June 25, 1991, are incorporated herein by reference. 3.4 Agreement of Limited Partnership of PDG/Philip, L.P. dated December 1997 between PDG, Inc., PDG Environmental, Inc. and Philip Environmental Services Corporation.
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PAGES OF SEQUENTIAL EXHIBIT INDEX NUMBERING SYSTEM ------------- ---------------- 4.1 Certificate of the Powers, Designation, Preferences, and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions of the Series A, 9.00% Cumulative Convertible Preferred Stock, filed as Exhibit H with the registrant's preliminary proxy materials on July 23, 1990 (File No. 0-13667), is incorporated herein by reference. 4.2 Certificate of Amendment of Certificate of the Powers, Designation, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations, or Restrictions of the Series A 9% Cumulative Convertible Preferred Stock (par value $0.01 per share), filed as Exhibit 4(a) to the registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1993, is incorporated herein by reference. 4.3 Certificate of Powers, Designation, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions of the Series B, 4.00% Cumulative, Convertible Preferred Stock, filed as Exhibit 4.2 to the registrant's registration on Form S-3 on March 17, 1993, is incorporated herein by reference. 4.4 Share Purchase Agreement, dated as of December 23, 1992, between the registrant and Conversion Industries, Inc., filed as Exhibit (i) to the registrant's Current Report on Form 8-K dated December 23, 1992, is incorporated herein by reference. 4.5 Security Agreement dated August 19, 1997 between Finova Capital Corporation and PDG Environmental, Inc., PDG, Inc., Project Development Group, Inc. and Enviro-Tech Abatement Services Co., filed as Exhibit 4(a) of the PDG Environmental, Inc. Quarterly Report on Form 10-QSB for the quarter ended July 31, 1997, is incorporated herein by reference. 10.1 Indemnity Agreement dated as of the first day of July 1990 by and among Project Development Group, Inc. and John C. and Eleanor Regan, filed as Exhibit 10.1 to the registrant's Annual Report on Form 10-K for the year ended September 30, 1990, is incorporated herein by reference. 10.2 Assumption Agreement entered into as of the fourteenth day of December 1990 among Project Development Group, Inc., and John C. and Eleanor Regan, filed as Exhibit 10.2 to the registrant's Annual Report on Form 10-K for the year ended September 30, 1990, is incorporated herein by reference. 10.3 PDG Environmental, Inc. Amended and Restated Incentive Stock Option Plan as of June 25, 1991, filed as Exhibit 10.3 to the registrant's Annual Report on Form 10-K for the year ended January 31, 1992, is incorporated herein by reference. 10.4 PDG Environmental, Inc. 1990 Stock Option Plan for Employee Directors, filed as Exhibit 10.4 to the registrant's Annual Report on Form 10-K for the year ended January 31, 1992, is incorporated herein by reference.
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PAGES OF SEQUENTIAL EXHIBIT INDEX NUMBERING SYSTEM ------------- ---------------- 10.5 PDG Environmental, Inc. 1990 Stock Option Plan for Non-Employee Directors, filed as Exhibit 10.5 to the registrant's Annual Report on Form 10-K for the year ended January 31, 1992, is incorporated herein by reference. 10.6 Demand note between the registrant and John C. Regan, filed as Exhibit 10.4 to the registrant's Annual Report on Form 10-K for the transition period from October 1, 1990 to January 31, 1991, is incorporated herein by reference. 10.7 Demand note between the registrant and Dulcia Maire, filed as Exhibit 10.6 to the registrant's Annual Report on Form 10-K for the transition period from October 1, 1990 to January 31, 1991, is incorporated herein by reference. 10.8 Letter agreement between the registrant and Messrs. Sorenson and Bendis, filed as Exhibit 10.7 to the registrant's Annual Report on Form 10-K for the transition period from October 1, 1990 to January 31, 1991, is incorporated herein by reference. 10.9 Stock Purchase Agreement dated as of March 31, 1992 by and between PDG Environmental, Inc. and Jones Group, Inc., filed as Exhibit 10.10 to the registrant's Annual Report on Form 10-K for the year ended January 31, 1992, is incorporated herein by reference. 10.10 Asset Purchase Agreement dated as of October 13, 1992, among PDG Environmental, Inc., Resource Recovery of America, Inc., and International Recovery Corp., filed as Exhibit (i) to the registrant's Current Report on Form 8-K dated December 31, 1992, is incorporated herein by reference. 10.11 Professional Consulting Agreement dated June 14, 1996 between Len Turano and PDG Environmental, Inc. filed as Exhibit 10(a) of the PDG Environmental, Inc. Quarterly Report on Form 10-Q for the quarter ended July 31, 1996, is incorporated herein by reference. 10.12 Security Agreement dated August 19, 1997 between Finova Capital Corporation and PDG Environmental, Inc., PDG, Inc., Project Development Group, Inc. and Enviro-Tech Abatement Services Co. filed as Exhibit 4(a) of the PDG Environmental, Inc. Quarterly Report on Form 10-QSB for the quarter ended July 31, 1997, is incorporated herein by reference (as it appears at 4.5). 21 List of subsidiaries of the registrant. 23 Consent of independent auditors. 24 Power of attorney of directors. 27 Financial data schedule.
(b) REPORTS ON FORM 8-K The registrant did not file any Current Reports on Form 8-K during the three months ended January 31, 1998. -13- 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 ENVIRONMENTAL, INC. /s/ JOHN C. REGAN --------------------------------------------------- John C. Regan, Chairman and Chief Executive Officer Date: April 8, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ JOHN C. REGAN April 8, 1998 - ------------------------------------------------- John C. Regan Chairman and Chief Executive Officer (Principal Executive Officer and Director) Richard A. Bendis, Director By /s/ JOHN C. REGAN ---------------------------------------- John C. Regan, Attorney-in-Fact April 8, 1998 Edgar Berkey, Director By /s/ JOHN C. REGAN ---------------------------------------- John C. Regan, Attorney-in-Fact April 8, 1998 Edwin J. Kilpela, Director By /s/ JOHN C. REGAN ---------------------------------------- John C. Regan, Attorney-in-Fact April 8, 1998 -14- 16 PDG ENVIRONMENTAL, INC. ANNUAL REPORT ON FORM 10-K ITEMS 8, 14(a)(1) AND (2) FINANCIAL STATEMENTS & SCHEDULES -15- 17 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders PDG Environmental, Inc. We have audited the accompanying consolidated balance sheets of PDG Environmental, Inc. (the "Corporation") as of January 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended January 31, 1998. Our audits also included the financial statement schedule listed in the index at Item 14(a). 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 Environmental, Inc. at January 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 31, 1998, 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 26, 1998 F-1 18 CONSOLIDATED BALANCE SHEETS PDG ENVIRONMENTAL, INC.
JANUARY 31, 1998 1997 --------------------------- ASSETS CURRENT ASSETS Cash and short-term investments $ 892,000 $ 429,000 Accounts receivable, less allowance of $48,000 and $47,000 in 1998 and 1997, respectively 6,751,000 3,708,000 Costs and estimated earnings in excess of billings on uncompleted contracts 725,000 614,000 Inventories 202,000 182,000 Notes receivable from officers 132,000 132,000 Prepaid income taxes 165,000 182,000 Other current assets 129,000 193,000 ----------- ---------- TOTAL CURRENT ASSETS 8,996,000 5,440,000 PROPERTY, PLANT AND EQUIPMENT Land 42,000 42,000 Leasehold improvements 55,000 55,000 Furniture and fixtures 136,000 130,000 Vehicles 470,000 361,000 Equipment 3,455,000 3,015,000 Buildings 369,000 369,000 ----------- ---------- 4,527,000 3,972,000 Less: accumulated depreciation 3,558,000 3,284,000 ----------- ---------- 969,000 688,000 OTHER ASSETS 372,000 37,000 ----------- ---------- TOTAL ASSETS $10,337,000 $6,165,000 =========== ==========
See accompanying notes to consolidated financial statements. F-2 19 CONSOLIDATED BALANCE SHEETS PDG ENVIRONMENTAL, INC.
JANUARY 31, 1998 1997 --------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 3,746,000 $1,699,000 Billings in excess of costs and estimated earnings on uncompleted contracts 842,000 635,000 Accrued liabilities 1,416,000 1,212,000 Current portion of long-term debt 198,000 1,485,000 ----------- ---------- TOTAL CURRENT LIABILITIES 6,202,000 5,031,000 OTHER LONG-TERM LIABILITIES 140,000 -- LONG-TERM DEBT 1,628,000 372,000 MINORITY INTEREST 102,000 -- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Cumulative convertible Series A preferred stock, (2%) $0.01 par value, 5,000,000 shares authorized and 167,338 and 185,925 issued and outstanding shares at January 31, 1998 and 1997, respectively (liquidation preference of $1,673,380 and $1,859,250 respectively) 400,000 444,000 Common stock, $0.02 par value, 30,000,000 shares authorized and 6,474,412 shares and 5,923,868 shares issued and outstanding at January 31, 1998 and 1997, respectively 130,000 118,000 Paid-in capital 4,571,000 4,260,000 ----------- ---------- 5,101,000 4,378,000 (Deficit) retained earnings (2,836,000) (4,060,000) ----------- ---------- TOTAL STOCKHOLDERS' EQUITY 2,265,000 762,000 ----------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,337,000 $6,165,000 =========== ==========
See accompanying notes to consolidated financial statements. F-3 20 CONSOLIDATED STATEMENTS OF OPERATIONS PDG ENVIRONMENTAL, INC.
FOR THE YEARS ENDED JANUARY 31, 1998 1997 1996 ----------------------------------------------------- CONTRACT REVENUES $24,610,000 $16,183,000 $16,215,000 CONTRACT COSTS 20,291,000 13,698,000 14,773,000 ----------- ----------- ----------- GROSS MARGIN 4,319,000 2,485,000 1,442,000 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,789,000 2,491,000 3,009,000 ----------- ----------- ----------- INCOME (LOSS) FROM OPERATIONS 1,530,000 (6,000) (1,567,000) OTHER INCOME (EXPENSE): Gain on sale of PDG Remediation, Inc. Common Stock - - 1,354,000 Interest expense (220,000) (287,000) (467,000) Interest income 16,000 8,000 24,000 Other income 36,000 101,000 9,000 ----------- ----------- ----------- (168,000) (178,000) 920,000 ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS 1,362,000 (184,000) (647,000) INCOME TAX PROVISION (20,000) - (103,000) MINORITY INTEREST (102,000) - - ----------- ----------- ----------- INCOME LOSS BEFORE DISCONTINUED OPERATION 1,240,000 (184,000) (750,000) DISCONTINUED OPERATION: Income (loss) from operation - (505,000) (1,201,000) Gain (loss) on disposal - 203,000 (500,000) ----------- ----------- ----------- - (302,000) (1,701,000) ----------- ----------- ----------- NET INCOME (LOSS) $ 1,240,000 $ (486,000) $(2,451,000) =========== =========== =========== UNDECLARED PREFERRED STOCK DIVIDEND REQUIREMENTS $ - $ 37,000 $ 45,000 =========== =========== =========== EARNINGS (LOSS) PER COMMON SHARE - BASIC: Income (loss) before extraordinary item and discontinued operation $ 0.20 $ (0.04) $ (0.14) Discontinued operation - (0.05) (0.30) ----------- ----------- ----------- Net income (loss) per share $ 0.20 $ (0.09) $ (0.44) =========== =========== =========== EARNINGS (LOSS) PER COMMON SHARE - DILUTIVE Income (loss) before discontinued operations $ 0.17 $ (0.04) $ (0.14) Discontinued Operations - (0.05) (0.30) ----------- ----------- ----------- Net income (loss) per share $ 0.17 $ (0.09) $ (0.44) =========== =========== =========== AVERAGE COMMON SHARES OUTSTANDING 6,060,000 5,913,000 5,670,000 AVERAGE DILUTIVE COMMON STOCK EQUIVALENTS OUTSTANDING 1,160,000 59,000 36,000 ----------- ----------- ----------- AVERAGE COMMON SHARES AND DILUTIVE COMMON EQUIVALENTS OUTSTANDING 7,220,000 5,972,000 5,706,000 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-4 21 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY PDG ENVIRONMENTAL, INC.
PREFERRED (DEFICIT) TOTAL STOCK COMMON PAID-IN RETAINED STOCKHOLDERS' SERIES A STOCK CAPITAL EARNINGS EQUITY -------- ----- ------- -------- ------ BALANCE AT JANUARY 31, 1995 562,000 109,000 3,866,000 (928,000) 3,609,000 Conversion of 49,047 shares of cumulative convertible 2% preferred stock into 204,902 shares of common stock (118,000) 4,000 134,000 (20,000) - Issuance of 1,000,000 warrants by PDGR 60,000 60,000 Issuance of 280,071 shares of common stock to reflect declaration of 1/3 of the common stock rights 5,000 170,000 (175,000) - Net loss (2,451,000) (2,451,000) ---------- ---------- ---------- ------------ ---------- BALANCE AT JANUARY 31, 1996 444,000 118,000 4,230,000 (3,574,000) 1,218,000 Issuance of 150,000 warrants 24,000 24,000 Issuance of 15,000 shares 6,000 6,000 Net loss (486,000) (486,000) ---------- ---------- ---------- ------------ ---------- BALANCE AT JANUARY 31, 1997 444,000 118,000 4,260,000 (4,060,000) 762,000 Conversion of 18,587 shares of cumulative convertible 2% preferred stock into 80,544 shares of common stock (44,000) 2,000 58,000 (16,000) - Issuance of 150,000 warrants 71,000 71,000 Issuance of 170,000 shares under Employee Incentive Stock Option Plan 4,000 57,000 61,000 Exercise of stock warrants for 300,000 shares of common stock 6,000 125,000 131,000 Net Income 1,240,000 1,240,000 ---------- ---------- ---------- ------------ ---------- BALANCE AT JANUARY 31, 1998 $ 400,000 $ 130,000 $4,571,000 $(2,836,000) $2,265,000 ========== ========== =========== ============ ==========
See accompanying notes to consolidated financial statements. F-5 22 CONSOLIDATED STATEMENTS OF CASH FLOWS PDG ENVIRONMENTAL, INC.
FOR THE YEARS ENDED JANUARY 31, 1998 1997 1996 --------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $1,240,000 $ (486,000) $(2,451,000) ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH PROVIDED (USED) BY OPERATING ACTIVITIES: Depreciation and amortization 389,000 367,000 525,000 Minority interest 102,000 - - Gain on sale of PDG Remediation, Inc. common stock - (203,000) (1,354,000) Other 64,000 3,000 (33,000) CHANGES IN CURRENT ASSETS AND LIABILITIES OTHER THAN CASH: Accounts receivable (3,091,000) (490,000) 147,000 Costs and estimated earnings in excess of billings on uncompleted contracts (111,000) 56,000 163,000 Inventories (20,000) (1,000) 35,000 Prepaid income taxes 17,000 1,000 110,000 Other current assets 324,000 612,000 142,000 Accounts payable 1,764,000 (241,000) (413,000) Billings in excess of costs and estimated earnings on uncompleted contracts 207,000 28,000 (4,000) Net assets of discontinued operations - 489,000 2,171,000 Accrued liabilities 134,000 95,000 158,000 Other (7,000) (63,000) 25,000 ---------- ---------- ---------- TOTAL ADJUSTMENTS (783,000) 486,000 2,534,000 ---------- ---------- ---------- CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,012,000 167,000 (779,000) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (593,000) (135,000) (346,000) Proceeds from sale of property, plant and equipment 1,000 3,000 - ---------- ---------- ---------- NET CASH USED BY INVESTING ACTIVITIES (592,000) (132,000) (346,000) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt 1,758,000 286,000 20,000 Proceeds from exercise of stock options and warrants 192,000 - - Proceeds on sale of PDG Remediation, Inc. common stock - 1,206,000 1,435,000 Principal payments on debt (1,907,000) (1,371,000) (730,000) ---------- ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 43,000 121,000 725,000 ---------- ---------- ---------- Net increase (decrease) in cash and short-term investments 463,000 156,000 (400,000) Cash and short-term investments, beginning of year 429,000 273,000 673,000 ---------- ---------- ---------- CASH AND SHORT-TERM INVESTMENTS, END OF YEAR $ 892,000 $ 429,000 $ 273,000 ========== ========== ==========
See accompanying notes to consolidated financial statements. F-6 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PDG ENVIRONMENTAL, INC. FOR THE THREE YEARS ENDED JANUARY 31, 1998 NOTE 1 - BASIS OF PRESENTATION BUSINESS ACTIVITIES PDG Environmental, Inc. (the "Corporation") is engaged in providing asbestos abatement services to the public and private sectors. Asbestos abatement services are generally performed under the terms of fixed price contracts or time and materials contracts with a duration of less than one year, although larger projects may require two or three years to complete. Effective July 20, 1994, the Corporation formed a new subsidiary, PDG Remediation, Inc., now known as ICHOR Corporation ("PDGR"). The Corporation's environmental remediation services business was merged into PDGR effective October 20, 1994. PDGR operated as a wholly-owned subsidiary of the Corporation until February 9, 1995, at which time, the Corporation sold approximately 40.5% of its interest in PDGR to the public. The sale consisted of 1,000,000 shares of PDGR common stock (at $5.00 per share) and 1,000,000 redeemable warrants to purchase an additional 1,000,000 shares of PDGR common stock (at $0.10 per warrant). The Corporation sold 400,000 of its PDGR common shares as part of the offering and received net proceeds of approximately $1,400,000. PDGR sold 600,000 newly issued common shares plus 1,000,000 redeemable warrants and received net proceeds of approximately $2,300,000. The Corporation recognized a pre-tax gain of $1,354,000 on the transaction. 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 9, 2000. On July 31, 1996, the Corporation entered into a Loan Modification Agreement ("Modification Agreement") with Drummond Financial Corporation ("Drummond") formerly CVD Financial Corporation. Pursuant to the Modification Agreement, Drummond purchased all 1,470,320 shares of PDGR common stock held by the Corporation for $0.82 per share and the aggregate purchase price of $1,205,662 was utilized to reduce the outstanding balance on the line of credit maintained by the Corporation with Drummond. This resulted in a $203,000 gain on the sale. In December 1997, the Corporation and Philip Environmental Services Corporation ("Philip") formed a limited partnership, PDG/Philip, L.P. ("Venture"). The Corporation is both a general and limited partner of the Venture and holds a 60% ownership share. The Venture is performing a $12 million asbestos abatement contract which is expected to be completed by the end of the second quarter of fiscal 1999. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES FINANCIAL PRESENTATION: The preparation of financial statements in accordance 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. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the Corporation's wholly-owned subsidiaries. The results of the Venture, in which the Corporation holds a 60% interest, are also consolidated since the Corporation is the majority owner of the Venture and exercises day-to-day operating control. Philip's portion of the Venture is reflected as minority interest. F-7 24 The accounts of PDGR in which the Corporation maintained, until July 31, 1996, a 59.5% ownership interest subsequent to the initial public offering of PDGR's common stock and warrants as described above, are reflected as a discontinued operation. All significant intercompany transactions are eliminated in consolidation. REVENUES AND COST RECOGNITION: Revenues for asbestos abatement 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). Contract costs include direct labor and material costs and those indirect costs related to contract performance, such as indirect labor, 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 in which 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 consist principally of currency on hand, demand deposits at commercial banks, and liquid investment funds having a maturity of three months or less at the time of purchase. At January 31, 1997, cash and short-term investments included two certificates of deposit totaling $75,000, which secure underlying letters of credit and cash held in escrow totaling $75,000. The certificates of deposit were released during fiscal 1998. INVENTORIES: Inventories consisting of materials and supplies used in the completion of contracts is stated at the lower of cost (on a first-in, first-out basis) or market. 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. INCOME TAXES: Earnings on construction contracts, for income tax purposes, are determined using the percentage-of-completion method of accounting. Deferred income taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted laws and rates. EARNINGS PER SHARE: In 1997, the Financial Accounting Standards Board issued Statement ("SFAS") No. 128, Earnings per Share. SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. NOTE 3 - DISCONTINUED OPERATION On May 1, 1996, the Corporation made the decision to divest its remaining 59.5% interest in PDGR. The loss from discontinued operations in the Statement of Consolidated Operations represents the Corporation's 59.5% portion of PDGR's loss during fiscal 1997 and 1996. No corporate interest expense has been allocated for the discontinued operations of PDGE. F-8 25 During the six-month period ending July 31, 1996, PDGR had revenues of $2.5 million. Revenues of PDGR were $4.8 million in fiscal year 1996. See Note 7 for a discussion of the sale of PDGR. The Corporation accounted for GeoLogic Recovery Systems ("Geologic"), a subsidiary of PDGR, 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 consolidated financial statements. The Corporation recorded a loss on the disposition of GeoLogic of $0.5 million in fiscal 1996 net of minority interest. NOTE 4 - ACCOUNTS RECEIVABLE Accounts receivable at January 31, 1998 and 1997 include $397,000 and $220,000, respectively, of retainage receivables. For the year ended January 31, 1998, one customer, the U.S. Army, accounted for 11.4% of the Corporation's consolidated revenues for that year. For the year ended January 31, 1997, no single customer contributed to 10% or more of the Corporation's consolidated revenues. 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 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Details related to contract activity are as follows: JANUARY 31, 1998 1997 ------------------------- Revenues earned on uncompleted contracts $18,428,000 $8,968,000 Less: billings to date 18,545,000 8,989,000 ----------- ------------- Net Over Billings $ (117,000) $ (21,000) =========== ========== Included in the accompanying consolidated balance sheets under the following captions: JANUARY 31, 1998 1997 ----------------------- Costs and estimated earnings in excess of billings on uncompleted contracts $ 725,000 $ 614,000 Billings in excess of costs and estimated earnings on uncompleted contracts (842,000) (635,000) ---------- --------- Net Over Billings $(117,000) $ (21,000) ========== ========= Costs and estimated earnings in excess of billings on uncompleted contracts at January 31, 1997 include approximately $470,000 related to contracts where the customers are disputing the related scope. The majority of this amount was received by the Company during the fiscal year ending January 31, 1998. F-9 26 NOTE 6 - ACCRUED LIABILITIES Accrued liabilities are as follows:
JANUARY 31, 1998 1997 ----------------------- Worker's compensation $ 430,000 $ 524,000 Wages 260,000 - Withheld and accrued taxes 235,000 226,000 Accrued fringe benefits 273,000 181,000 Accrued insurance 4,000 113,000 Other 214,000 168,000 ---------- ------- Total Accrued Liabilities $1,416,000 $1,212,000 ========== ==========
NOTE 7 - LONG-TERM DEBT Long-term debt of the Corporation less amounts due within one year is as follows:
JANUARY 31, 1998 1997 ----------------------- Term loan due in monthly installments of $6,129 including interest at 9.5% due in May 2005 $ 350,000 $ - Term loan due in monthly installments of $14,000, plus interest at 3% above the prime rate, due in August 1997 - 330,000 Equipment note due in monthly installments of $8,333 plus interest at 3.5% above the prime rate, due in August 2002 467,000 - Revolving line of credit expiring on August 24, 2000 and bearing interest at 3.5% above the prime rate 917,000 - Revolving line of credit maturing on August 1, 1997 and bearing interest at 3% above the prime rate - 1,500,000 Other 92,000 27,000 --------- ---------- 1,826,000 1,857,000 Less amount due within one year 198,000 1,485,000 --------- ---------- $1,628,000 $ 372,000 ========== ==========
On August 25, 1997, the Corporation closed on a new $2.0 million credit facility consisting of a $1.5 million three-year revolving line of credit and a $0.5 million five-year equipment note. The line of credit and the equipment note are at an interest rate of prime plus 3.5%. (At January 31, 1998, prime was 8.5%). The line of credit is collateralized by accounts receivable. Under the terms of the revolving credit agreement, the Company is required to reduce borrowings as the accounts receivable are collected. Since those accounts receivable are replaced with new accounts receivable and it is the Company's intent to maintain at least the same level of borrowings, the outstanding balance is reflected as long term. Additionally, the Chief Executive Officer of the Corporation provided a limited personal guarantee for the credit facility. F-10 27 The proceeds of the aforementioned financing fully satisfied the remaining outstanding balance on the Drummond Financial Corporation ("Drummond") line of credit (described in the following paragraph) and provided working capital for the Corporation. As of January 31, 1998, the balance on the line of credit was $917,000. Prior to obtaining the credit facility, the Corporation had a $1,500,000 line of credit facility which expired on August 1, 1997 and a $330,000 term loan which expired on August 1, 1997 with Drummond. All borrowings under the Drummond Agreement bore interest at a bank rate (as defined) plus 3%. Borrowings under the Drummond Agreement were limited to 85% of the receivables borrowing base. The principal balance of the term loan amortized over a five-year period and was secured by the fixed assets and a mortgage on certain property of the Corporation. On July 31, 1996, the Corporation entered into a Loan Modification Agreement ("Modification Agreement") with Drummond. Pursuant to the Modification Agreement, Drummond purchased all 1,470,320 shares of PDGR common stock held by the Corporation for $0.82 per share and the aggregate purchase price of $1,205,662 was utilized to reduce the outstanding balance on the line of credit maintained by the Corporation with Drummond. This resulted in a $203,000 gain on the sale ($0.03 per share). After application of the proceeds, the debt under the line of credit was reduced to $1,214,332 at July 31, 1996, and the maximum allowable borrowings under the line of credit were capped at $1,500,000. The maturity date of the line of credit and term loan agreements was extended until August 1, 1997. The proceeds on the sale of PDG Remediation, Inc. common stock of $1,206,000 for the year ended January 31, 1997 were not received in the form of cash, but rather were a direct offset to the debt owed Drummond Financial Corporation. On May 27, 1997, the Corporation closed on a $375,000 loan from a financial institution to refinance the $330,000 term loan payable to Drummond maturing on August 1, 1997. The new loan has a seven-year term at a 9.5% interest rate fixed for the first four years of the loan. The interest rate will then be readjusted to the current five year treasury bill rate plus 3.25% for the remaining three-year term of the loan. The majority of the Corporation's property and equipment are pledged as security for the above obligations. During fiscal 1996, the Corporation entered into two agreements guaranteeing ICHOR accounts receivable financed by Sirrom Environmental Funding, LLC ("Sirrom"). At January 31, 1997, the balance guaranteed by the Corporation under the two agreements was approximately $3 million. Subsequent to January 31, 1997, ICHOR's customer has made significant payments reducing the amount of the Corporation's guarantee to approximately $300,000. It is expected that the remaining outstanding receivables covered by the guarantee will be paid by ICHOR's customer during the first half of fiscal 1999, eliminating the Corporation's remaining guarantee. Maturity requirements on long-term debt aggregate $198,000 in fiscal 1999, $172,000 in fiscal 2000, $1,078,000 in fiscal 2001, $156,000 in fiscal 2002, $129,000 in fiscal 2003 and $93,000 thereafter. The Corporation paid approximately $223,000, $328,000 and $528,000 for interest costs during the years ended January 31, 1998, 1997 and 1996, respectively. NOTE 8 - INCOME TAXES The Corporation provides for income taxes under the liability method as required by SFAS No. 109. At January 31, 1998, the Corporation has net operating loss carryforwards of approximately $7,726,000 for income tax purposes which expire in years 1999 through 2011. For financial reporting purposes, a valuation allowance of approximately $2,967,000 has been recognized to offset the deferred tax asset related to those carryforwards and to other deferred tax assets. When realized, the tax benefit of these net operating loss carryforwards will be applied to reduce income tax expense. These loss carryforwards are subject to various restrictions based on future operations of the group. The valuation allowance decreased by approximately $418,000 during the year ended January 31, 1998. The decrease was primarily due to the current year increase in taxable temporary differences and an adjustment to correct the amount of available net operating loss carryforwards. 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, 1998 and 1997 are as follows: F-11 28
JANUARY 31, 1998 1997 --------------------------------- Deferred tax liabilities: Tax over book depreciation $ 83,000 $ 103,000 Deferred tax assets: Accounts receivable allowance 164,000 147,000 Workers compensation reserve 183,000 215,000 Other 76,000 29,000 Net operating loss carryforwards 2,627,000 3,097,000 ---------- ---------- Total deferred tax assets 3,050,000 3,488,000 Valuation allowance for deferred tax assets 2,967,000 3,385,000 ---------- ---------- Net deferred tax assets 83,000 103,000 ---------- ---------- Net deferred tax liabilities $ - $ - ========== ==========
Significant components of the provision for income taxes are as follows:
FOR THE YEARS ENDED JANUARY 31, 1998 1997 1996 ---------------------------------------------- Current: Federal $ - $ - $ - State 20,000 - - ------- --------- -------- Total current 20,000 - - Deferred: Federal - - 103,000 State - - - ------- --------- -------- Total deferred - - 103,000 ------- --------- -------- Total income tax provision $20,000 $ - $103,000 ======= ========= ========
The reconciliation of income tax computed at the federal statutory rates to income tax expense is as follows:
FOR THE YEARS ENDED JANUARY 31, 1998 1997 1996 ------------------------------------------- Tax at statutory rate $ 425,000 $ (63,000) $(220,000) State income taxes, net of federal tax benefit 13,000 - - Limitation on utilization of net operating loss (418,000) 63,000 220,000 Goodwill - - - Other - - 103,000 -------- --------- --------- $ 20,000 $ - $ 103,000 ======== ========= =========
F-12 29 The Corporation paid approximately $12,000, $8,000 and $64,000 for federal and state income taxes during the years ended January 31, 1998, 1997 and 1996, respectively. NOTE 9 - NOTES RECEIVABLE - OFFICERS At January 31, 1998 and 1997, the Corporation had approximately $132,000 in notes receivable from its officers in the form of personal loans. A breakdown of the notes receivable balance at January 31, 1998 by officer is as follows: John C. Regan, Chairman -$95,000; Dulcia Maire, Secretary -$30,000 and Lawrence Horvat, Vice President -$7,000. These loans are evidenced by demand notes and bear interest at the rate of 6% per annum. NOTE 10 - COMPENSATION PLANS The Corporation has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Corporation maintains a qualified incentive stock option plan (the "Plan") which provides for the grant of incentive options to purchase an aggregate of up to 1,550,000 shares of the common stock of the Corporation to certain officers and employees of the Corporation and its subsidiaries. All options granted have 10-year terms. Options to purchase 350,000 shares of the Corporation's common stock at an exercise price of $0.79 per share were granted under the Plan effective August 19, 1997 issuable related to fiscal 1999. Vesting of one-half of the stock options is contingent upon the individual offices, and in the case of the executive office, the Corporation, meeting pre-established financial goals for the fiscal year. Vesting of the remaining one-half of the stock options will be based upon a number of discretionary items. If the financial goals are not achieved, the options do not vest. All unvested options are returned to the plan for future grants. Options to purchase 1,075,000 and 190,000 shares of the Corporation's common stock at an exercise price of $0.36 per share were granted under the Plan effective June 17, 1996 and November 1, 1996, respectively, with 520,000 shares and 765,000 shares issuable related to fiscal 1997 and 1998, respectively. Vesting of 50% of the respective year's options is contingent upon the individual offices, and in the case of the executive office, the Corporation, meeting pre-established financial goals for the respective fiscal year. If the financial goals are exceeded by 25%, the remaining 50% of the options for the respective fiscal year vest. If financial goals are not achieved, the options do not vest and are returned to the plan for future grants. Options granted in fiscal 1996 and prior years had three-year vesting conditioned upon continued employment with the Corporation. The following table summarizes information with respect to the Plan for the three years ended January 31, 1998. OPTION NUMBER OF PRICE RANGE SHARES PER SHARE ---------- ------------- OUTSTANDING AT JANUARY 31, 1995 264,000 $0.60 - $2.94 Granted 11,000 $0.75 Cancelled - Reusable (46,998) $1.63 - $2.94 --------- OUTSTANDING AT JANUARY 31, 1996 228,002 $0.60 - $2.94 Granted 1,285,000 $0.36 Cancelled - Reusable (253,335) $0.36 - $2.94 --------- OUTSTANDING AT JANUARY 31, 1997 1,259,667 $0.36 - $1.91 Granted 492,666 $0.66 - $0.83 Cancelled - Reusable (120,000) $0.36 - $0.66 F-13 30 Exercised (170,000) $0.36 --------- OUTSTANDING AT JANUARY 31, 1998 1,462,333 $0.36 - $1.91 ========= EXERCISABLE AT JANUARY 31, 1998 1,070,666 $0.36 - $1.91 ========= Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for fiscal 1998 and 1997: risk-free interest rate of 7%; dividend yield of 0%; volatility factors of the expected market price of the Company's common stock of 0.85 and 1.43 in fiscal 1998 and 1997, respectively; and a weighted-average expected life of the option of 7 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows: FISCAL FISCAL 98 97 -- -- Pro forma net income (loss) $70,000 $(557,000) Pro forma earnings per share (basic and dilutive) $ 0.01 $ (0.10) No proforma presentation is presented for fiscal 1996 since the effect is immaterial. Cancellations in fiscal 1996 include 33,497 options relinquished by employees receiving options for ICHOR stock. The following table summarizes information with respect to non-qualified stock options for the three years ended January 31, 1998. OPTION NUMBER OF PRICE RANGE SHARES PER SHARE ---------------------------- OUTSTANDING AT JANUARY 31, 1995 26,250 $0.60 - $6.00 Expired (3,125) $6.00 ------ OUTSTANDING AT JANUARY 31, 1996 23,125 $0.60 - $6.00 Expired (3,125) $6.00 ------ OUTSTANDING AT JANUARY 31, 1997 20,000 $0.60 ====== No Activity - - OUTSTANDING AT JANUARY 31, 1998 20,000 $0.60 ====== EXERCISABLE AT JANUARY 31, 1998 20,000 $0.60 ====== F-14 31 The Corporation also maintains the 1990 Stock Option Plan for Employee Directors (the "Employee Directors Plan") which provides for the grant of options to purchase an aggregate of up to 250,000 shares of the Corporation's common stock. Options to purchase 50,000 shares of the Corporation's common stock at an exercise price of $0.60 per share have been granted under the Employee Director Plan. At January 31, 1998, all of the options granted under the Employee Directors Plan were exercisable. The 1990 Stock Option Plan for Non-Employee Directors (the "Non-Employee Directors Plan") provides for the grant of options to purchase an aggregate of up to 350,000 shares of the Corporation's common stock. Options to purchase 202,212 shares of the Corporation's common stock at prices ranging from $0.36 per share to $0.79 per share have been granted under the Non-Employee Directors Plan. At January 31, 1998, options to purchase 132,212 shares of the Corporation's common stock granted under the Non-Employee Directors Plan were exercisable. No pro forma information is presented relative to the non-qualified stock option plan, the Employee Director Plan or the Non-Employee Directors Plan as the effect is either immaterial or non-existent. Effective November 1, 1994, the Corporation established the PDG Environmental Retirement Savings Plan (the "Retirement Savings Plan") under Section 401(k) of the Internal Revenue Code. 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; the match is to be determined annually by the Corporation's Board of Directors. Corporation contributions are 100% vested after seven years of service. There were no contributions made by the Corporation in the years ended January 31, 1998 and 1997. NOTE 11 - STOCK WARRANTS At January 31, 1998 and 1997, the Corporation had approximately 894,660 and 1,105,000, respectively, of fully vested warrants outstanding. The exercise price of the warrants range from $0.50 per share to $2.50 per share and the expiration dates range from fiscal 1999 through fiscal 2001. The majority of these warrants were issued in conjunction with debt financings obtained by the Corporation. During fiscal 1998, 150,000 warrants with an exercise price of $0.375 per share and 150,000 warrants with an exercise price of $0.50 per share were exercised for 300,000 shares of the Corporation's common stock. NOTE 12 - PREFERRED STOCK At the Corporation's Annual Meeting of Stockholders held on July 23, 1993, the following matters were approved by a majority of the Corporation's preferred and common stockholders which affected the Corporation's Series A Preferred stock and common stock: a reduction in the Series A Preferred Stock dividend rate from 9% to 2% and the cancellation of the accrued but unpaid dividends and the special voting rights associated with such preferred stock in the event of a certain accumulation of accrued but unpaid dividends thereon; and a recapitalization of the Corporation in order to effect a one for two reverse stock split (the "Recapitalization"). In exchange for the forfeiture of the accrued but undeclared and unpaid dividends, the holders of the Series A Preferred Stock were granted a common stock right which, if and when declared by the Board of Directors, will grant to the holders of such common stock rights shares of the common stock of the Corporation. At the May 23, 1995 Board of Directors meeting, the issuance of one third of the shares (280,071 common shares) covered by the aforementioned right was approved. At January 31, 1998 and 1997, there were 560,143 common stock rights outstanding. The Recapitalization was contingent upon the Corporation's listing on the American Stock Exchange. The Corporation made a decision not to currently pursue such a listing; therefore, the Recapitalization was indefinitely postponed. On October 20, 1997 and November 1, 1995, 18,587 and 49,047 shares, respectively, of the Corporation's Series A Preferred Stock and cumulative dividends in arrears were converted into 80,544 and 204,902 shares, respectively, of Common Stock. At January 31, 1998, there were 167,338 shares of the Corporation's Series A Preferred Stock outstanding. Cumulative dividends in arrears on the Series A Preferred Stock were approximately $149,000 at January 31, 1998. The Series A Preferred Stock is convertible into four shares of the Corporation's common stock at the option of the preferred stockholder. However, if at the time of conversion the Corporation is in arrears on the payment of dividends on such preferred stock, the holder is entitled to receive additional shares of the Corporation's common stock at the conversion price of $2.50 per share, upon conversion, equivalent to the cumulative dividends in arrears. The Series A Preferred Stock is callable at the Corporation's option at a cash price per share of $11.00 plus any accrued and unpaid dividends until the F-15 32 redemption date. The conversion rate on the Series A Preferred Stock is subject to adjustment as a result of certain changes in the Corporation's capital structure or distributions to common stockholders (except for cash dividends permissible under law). NOTE 13 - NET INCOME (LOSS) PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per share:
FOR THE YEARS ENDED JANUARY 31, 1998 1997 1996 --------------------------------------------------- NUMERATOR: Income (loss) before discontinued operations $1,240,000 (184,000) (750,000) Preferred stock dividends (33,000) (37,000) (37,000) ---------- ----------- ---------- Numerator for basic earnings per share--income available to common stockholders 1,207,000 (221,000) (787,000) Effect of dilutive securities: Preferred stock dividends 33,000 - - ---------- ----------- ---------- Numerator for diluted earnings per share--income available to common stock after assumed conversions 1,240,000 (221,000) (787,000) ---------- ----------- ---------- DENOMINATOR: Denominator for basic earnings per share--weighted average 6,060,000 5,913,000 5,670,000 shares Effect of dilutive securities: Employee stock options 397,000 26,000 36,000 Warrants 34,000 33,000 - Convertible preferred stock 729,000 - - ---------- ----------- ---------- Dilutive potential common shares 1,160,000 59,000 36,000 ---------- ----------- ---------- Denominator for diluted earnings per share--adjusted weighted-average shares and assumed conversions 7,220,000 5,972,000 5,706,000 ========== =========== ========== BASIC EARNINGS PER SHARE $ 0.20 $ (0.04) $ (0.14) ========== =========== ========== DILUTED EARNINGS PER SHARE $ 0.17 $ (0.04) $ (0.14) ========== =========== ==========
NOTE 14 - COMMITMENTS AND CONTINGENCIES The Corporation leases certain facilities and equipment under non-cancelable operating leases. Rental expense under operating leases aggregated $221,000, $217,000 and $279,000 for the years ended January 31, 1998, 1997 and 1996, respectively. Minimum rental payments under these leases with initial or remaining terms of one year or more at January 31, 1998 aggregated $451,000 and payments due during the next five fiscal years are as follows: 1999 - $200,000; 2000 - $152,000; 2001 - $86,000; and 2002 - $11,000 and 2003 - $2,000. The registrant has been named defendant in a purported class action involving the purchase by all persons and entities who purchased PDGR'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 of 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 registrant believes that the plaintiff's allegations are without merit or that there are meritorious defenses to the allegation, and intends to defend the action vigorously. 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's counsel 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 F-16 33 support of the motion. The motion to dismiss was denied in September 1996. The parties have negotiated a stipulation concerning class certification, and the court has certified a class. The notice of certification was sent to potential class members in August 1997. The action is still in the discovery stage. Discovery is scheduled to close on July 31, 1998. NOTE 15 - QUARTERLY RESULTS (UNAUDITED) The Company had the following results by quarter:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER YEAR ------- ------- ------- ------- ---- YEAR ENDING JANUARY 31, 1998 Revenues $4,489,000 $5,310,000 $6,204,000 $8,607,000 $24,610,000 Gross margin 829,000 901,000 1,096,000 1,493,000 4,319,000 Net income 158,000 266,000 359,000 457,000 1,240,000 Earnings per share Basic $ 0.03 $ 0.04 $ 0.06 $ 0.07 $ 0.20 Diluted $ 0.02 $ 0.04 $ 0.05 $ 0.06 $ 0.17 YEAR ENDING JANUARY 31, 1997 Revenues $3,810,000 $3,715,000 $4,023,000 $4,635,000 $16,183,000 Gross margin 321,000 513,000 718,000 933,000 2,485,000 Net income (loss) before discontinued operations (426,000) (88,000) 51,000 279,000 (184,000) Net income (loss) (679,000) (128,000) 42,000 279,000 (486,000) Earnings per share before discontinued operations Basic (0.07) (0.02) 0.01 0.05 (0.04) Diluted (0.07) (0.02) 0.01 0.04 (0.04) Earnings per share Basic $ (0.12) $ (0.02) $ 0.01 $ 0.05 $ (0.09) Diluted $ (0.12) $ (0.02) $ 0.01 $ 0.04 $ (0.09)
The fiscal 1997 and first three quarters of fiscal 1998 earnings per share amounts have been restated to comply with SFAS No. 128, Earnings per Share. NOTE 16 - IMPACT OF YEAR 2000 (UNAUDITED) The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. The Company has not completed a formal assessment of the Year 2000 issue; however, the Company does not have any significant system interfaces with outside vendors or customers which, in the opinion of management, are vulnerable to those third parties' failure to remediate their own Year 2000 issues. There are no internal computer systems which present a Year 2000 issue. While management cannot reasonably estimate the cost that may be necessary to address Year 2000 issues related to its outside vendors or customers, in the opinion of management, such cost will not have an adverse material effect on the results of operations. F-17 34 PDG ENVIRONMENTAL, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
BALANCE AT ADDITIONS BALANCE BEGINNING CHARGED AT CLOSE OF YEAR TO INCOME DEDUCTIONS(1) OF YEAR ------- --------- ------------- ------- 1998 Allowance for doubtful accounts $ 47,000 $48,000 $ 47,000 $48,000 ======== ======= ======== ======= 1997 Allowance for doubtful accounts $ 44,000 $ 3,000 $ - $47,000 ======== ======= ======== ======= 1996 Allowance for doubtful accounts $317,000 $15,000 $288,000 $44,000 ======== ======= ======== =======
(1)Uncollectible accounts written off, net of recoveries. F-18 EX-3.4 2 PDG ENVIRONMENTAL, INC. 1 Exhibit 3.4 AGREEMENT OF LIMITED PARTNERSHIP OF PDG/PHILIP, L.P. Agreement of Limited Partnership, effective as of the _________ day of December 1997, by and among PDG, Inc., a Pennsylvania corporation ("PDG") (the "General Partner"), PDG Environmental, Inc., a Delaware corporation ("PDGE") and Philip Environmental Services Corporation, a Missouri corporation ("Philip") (PDGE and Philip are referred to as the "Limited Partner") (the General Partner and the Limited Partners are sometimes referred to herein collectively as the "Partners") (the "Agreement"). W I T N E S S E T H: WHEREAS, the parties hereto desire to form a limited partnership to engage in the business of carrying out the asbestos abatement in the building commonly known as the Transportation and Safety Building (the "Project"). NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I FORMATION OF PARTNERSHIP 1.01. The parties hereby enter into a limited partnership (the "Partnership") under and pursuant to the provisions of the Pennsylvania Revised Uniform Limited Partnership Act, 15 Pa.C.S.A. 2 Section 8501 et seq., as amended ("Act"). The rights and liabilities of the Partners shall be as provided in the Act except as herein otherwise expressly stated. 1.02. The Partnership shall commence as of the effective date of the filing of the Certificate of Limited Partnership with the Secretary of the Commonwealth of Pennsylvania, and shall continue until December 31, 2001 unless sooner terminated under the provisions of Article XI hereof. ARTICLE II DEFINITIONS The following terms shall have the following meanings (except as may be otherwise expressly provided in this Agreement or unless the context otherwise requires). 2.01. "Adjusted Capital Account Deficit" means, with respect to any Partner, the deficit balance, if any, in such Partner's Capital Account as of the end of the relevant fiscal year, after giving effect to the following adjustments: (i) such Capital Account shall be deemed to be increased by any amounts which such Partner is obligated to restore to the Partnership (pursuant to this Agreement or otherwise) under Treasury Regulation section 1.704-l(b)(2)(ii)(c) or is deemed to be obligated to restore pursuant to the second to last sentences of Treasury Regulation sections 1.704-2(g)(1) and 1.704-2(i)(5) (relating to allocations attributable to nonrecourse debt); and -2- 3 (ii) such Capital Account shall be deemed to be decreased by the items described in Treasury Regulation sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6). The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Treasury Regulation section 1.704-1(b)(2)(ii)(d) and shall be interpreted and applied consistently therewith. 2.02. "Capital Account" has the meaning set forth in Section 6.06. 2.03. "Capital Event" means a sale, transfer, conveyance, distribution, exchange, lease, taking, financing, refinancing or disposition of Partnership assets, including in connection with the liquidation of the Partnership, other than any such transaction arising in the ordinary course of business or any distribution made pursuant to Section 7.02 2.04. "Carrying Value" means, with respect to any asset of the Partnership, the asset's adjusted basis as of the relevant date for federal income tax purposes, except as follows: (i) the aggregate Carrying Value of the assets as of the formation of the Partnership pursuant to Section 1.02, after taking into account the events occurring on such date, is equal to the sum of the amounts credited to the Partners' Capital Accounts upon the formation of the Partnership, increased by the amount of any liabilities assumed by the Partnership in connection therewith; (ii) the initial Carrying Value of any asset contributed by a Partner to the Partnership after the formation of the Partnership -3- 4 shall be the gross fair market value of such asset, which shall be equal to the amount credited to such Partner's Capital Account for such contribution (increased by the amount of any liabilities by which the Partnership assumes or takes subject to) as set forth herein or in any amendment or supplement hereto providing for the contribution of such asset (the intent of the Partners is that cash only will be contributed), resulting from or as required by the Project; (iii) the Carrying Values of all Partnership assets shall be adjusted, at the election of the General Partner, to equal its fair market values (determined on a gross basis) as of the following times: (A) the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis capital contribution within the meaning of Treasury Regulation section 1.704-1(b)(2)(iv)(f)(5); (B) the distribution by the Partnership to a Partner of more than a de minimis amount of money or Partnership property as consideration for an interest in the Partnership; and (C) the liquidation of the Partnership within the meaning of Treasury Regulation section 1.704-1(b)(2)(iv)(f)(5)(ii); and (iv) if the Carrying Value of an asset has been determined or adjusted pursuant to subsection (ii) or (iii) above, such Carrying Value shall thereafter be adjusted by the depreciation taken into account with respect to such asset for purposes of computing Profits and Losses and other items allocated pursuant to Article VII. -4- 5 The foregoing definition of Carrying Value is intended to comply with the provisions of Treasury Regulation section 1.704-1(b)(2)(iv) and shall be interpreted and applied consistently therewith. 2.05. "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.06. "Excess Cash" means so much of the Partnership's cash on hand at any time as is determined by the General Partner not to be necessary or required for the continuing conduct of the Partnership's business. In making such determination, any obligations of the Partnership to Partners shall be repaid and any obligations of the Partnership owed to commercial or other lenders, contractors, materialmen, subcontractors and equipment suppliers for the Project shall next be repaid before any Excess Cash shall be deemed available. 2.07. "Fiscal Year" means the calendar year. 2.08. "General Partner" means PDG, Inc., a Pennsylvania corporation. 2.09. "Limited Partners" means the entities whose names are listed on the first page of this Agreement as Limited Partners. 2.10. "Net Loss" means the net loss of the Partnership for federal income tax purposes. 2.11. "Net Profit" means the net income of the Partnership for federal income tax purposes. 2.12. "Partners" means the General Partner and the Limited Partners. -5- 6 2.13. "Partnership Interest" means the entire legal and equitable ownership interest of a Partner in the Partnership at any particular time. 2.14. "Profits and Losses" means, for each year or other applicable period, the Partnership's taxable income or loss for such period determined in accordance with Code section 703(a)(for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code section 703(a)(1) shall be included in taxable income or loss) with the following adjustments: (i) any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profits and Losses pursuant to the definitions herein shall be added to such taxable income or loss; (ii) any expenditures of the Partnership described in Code section 705(a)(2)(B) or treated as such pursuant to Treasury Regulation section 1.704-1(b)(2)(iv)(i) shall be subtracted from such taxable income or loss; (iii) depreciation for financial reporting purposes for such period shall be taken into account in lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss; (iv) gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for federal income tax purposes shall be computed with reference to -6- 7 the Carrying Value of the property disposed of, rather than the adjusted tax basis of such property; (v) if any property is distributed in kind to any Partner, the difference between its fair market value and its Carrying Value at the time of distribution shall be treated as Profit or Loss, as the case may be, recognized by the Partnership; (vi) such taxable income or loss shall not be deemed to include items of income, gain, loss, deduction and Code section 705(a)(2)(B) expenditures allocated pursuant to Sections 7.04(b) (relating to allocations caused by the occurrence of deficit Capital Account balances); and (vii) the amount of any adjustment to the Carrying Value of any Partnership asset pursuant to clause (iii) of the definition of "Carrying Value" herein shall be taken into account as Profit or Loss from the disposition of such asset. 2.15. "Treasury Regulations" means the regulations issued by the United States Treasury Department pursuant to the Code. 2.16. The Partners anticipate that only cash will be contributed by the Partners to the capital of the Partnership. The Partnership's assets will be primarily cash and accounts receivable. All other assets shall remain with the individual Partners and, if used by the Partnership, the Partner that owns such assets shall be paid an amount of rent to be agreed upon by the Partners. -7- 8 ARTICLE III NAME 3.01. The business of the Partnership shall be conducted under the name of PDG/Philip, L.P. ARTICLE IV PRINCIPAL PLACE OF BUSINESS 4.01. The principal office and place of business of the Partnership shall be located at 300 Oxford Drive, Pittsburgh, Pennsylvania 15146, or such other location as the General Partner may from time to time designate. ARTICLE V PURPOSE 5.01. The purpose of the Partnership is to engage in and carryout the asbestos abatement in the building commonly known as the Transportation and Safety Building located in Harrisburg, Pennsylvania. ARTICLE VI CAPITAL CONTRIBUTIONS 6.01. Initial Capital Contributions. Each Limited Partner shall make initial capital contributions to the Partnership as set forth opposite such Limited Partner's name on Schedule A attached hereto and made a part hereof, and, in consideration thereof, shall have the percentage interest in the capital and profits and losses of the Partnership set forth opposite such Limited Partner's name on Schedule A ("Limited Partnership Interests"). -8- 9 The General Partner shall contribute to the initial capital of the Partnership the sum set forth opposite such General Partner's name on Schedule A. The General Partner shall have the percentage interest in the capital and profits and losses of the Partnership set forth opposite The General Partner's name on Schedule A (the "General Partnership Interests"). 6.02. Contributions for Additional Working Capital. In the event the Partnership is in need of additional working capital for the Project that the General Partner reasonably determines, the General Partner and the Limited Partners shall be required to advance additional funds to the Partnership for any such purpose in the percentage set forth opposite such Partner's name on Schedule A. 6.03. No Interest on Capital Contribution. No interest shall be paid by the Partnership or any Partner on the capital contribution of any Partner. 6.04. Return of Capital Contribution. No Partner shall have the right to withdraw or receive any return of such Partner's capital contribution, except as may be specifically provided in this Agreement, and under circumstances requiring a return of any capital contribution, no Partner shall have the right to receive property other than cash, except as may be provided in this Agreement. 6.05. Capital Accounts. A separate capital account shall be maintained for each Partner (each a "Capital Account"), and the amount of each Partner's contributions to the capital of the Partnership shall be credited to its Capital Account. Except as expressly -9- 10 provided for herein, no Partner may withdraw any portion of its Capital Account without the consent of the General Partner, which consent shall not be unreasonably withheld. (b) Capital Account Balances. The initial Capital Account balance of each Partner shall be equal to the amount set forth opposite such partner's name on Schedule A hereto, and such Capital Account shall thereafter be further adjusted with respect to subsequent events as follows: (i) increased by: (A) the aggregate amount of such Partner's cash contributions to the Partnership, (B) the Carrying Value of property contributed by such Partner to the Partnership, net of liabilities secured by such property that the Partnership is considered to assume or take subject to under Code section 752, and (C) Profits, items of income and gain allocated to such Partner pursuant to Section 7.03; and (ii) decreased by: (A) cash distributions to such Partner from the Partnership, (B) the Carrying Value of property distributed in kind to such Partner, net of liabilities secured by such property that such Partner is deemed to assume or take subject to under Code section 752, and (C) Losses and items of loss or deduction allocated to such Partner pursuant to Section 7.03. (c) Intent to Comply with Treasury Regulations. This Section 6.06 and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulation section 1.704-1(b), and shall be interpreted and -10- 11 applied in a manner consistent with such regulation. To the extent such provisions are inconsistent with such regulation or are incomplete with respect thereto, the Capital Accounts of the Partners shall be maintained in accordance with such regulation. 6.07. Partition/Accounting. No Partner shall have the right to demand a partition of the Partnership or an accounting, absent a material breach of this Agreement by another Partner. ARTICLE VII ALLOCATION OF PROFITS AND LOSSES; DISTRIBUTIONS TO PARTNERS 7.00. Introduction. Article VII generally sets forth the rules for allocations to the Partners. Section 7.03 sets forth the allocations of Profits, Losses and similar items, determined in accordance with the Partnership's method of accounting, which is based on federal income tax principles as adjusted by the Partnership allocation rules set forth in Treasury Regulation sections 1.704-l(b) and 1.704-2, rather than in accordance with either generally accepted accounting principles (GAAP) or the method used in filing the Partnership's federal income tax return. Section 7.04 sets forth the manner in which items of income, gain, loss, deduction, credits and basis therefor will be allocated to the Partners for income tax purposes to the extent such items may be allocated differently from the allocations referred to in the preceding sentence. 7.01. Profits and Losses. As of the last day of each Fiscal Year of the Partnership, the Partnership's Net Profit or Net Loss for -11- 12 such Fiscal Year shall be fixed and determined and each Partner's Capital Account shall be increased by such Partner's allocable share of Net Profit and decreased by such Partner's allocable share of Net Loss. 7.02. Distributions. The Partnership may, at the discretion of the General Partner, distribute to the Partners in proportion to their Partnership Interests an amount equal to at least the estimated federal and state income taxes payable by the Partners on or with respect to the taxable income of the Partnership, assuming that each Partner will pay taxes at the highest marginal rate then in effect under the Code and under the laws of the Commonwealth of Pennsylvania, irrespective of where each Partner resides. Such distribution shall be made from time to time prior to the due date of each tax payment required to be made by the Partners resulting in part from the inclusion of the Partnership's taxable income in the gross income of the Partners. Within a reasonable time after the close of each Fiscal Year, the Partnership shall also distribute the Partnership's Excess Cash for such Fiscal Year in accordance with each Partner's Partnership Share. The General Partner is authorized to withhold from such distributions such sums as required under law. Distributions in liquidation of the Partnership or a deemed liquidation pursuant to Code section 708 shall be made in accordance with Article XI. 7.03. Allocations. Section 7.03(a) sets forth the general rules for allocations of Profit, Loss and similar items to the Partners. Section 7.03(b) sets forth various special rules which modify or clarify the general rules of Section 7.03(a). -12- 13 (a) General Rule. (i) Operating Profits and Losses. Profits and Losses of the Partnership, other than Profits and Losses arising in connection with Capital Events, shall be allocated to the Partners in proportion to their respective Partnership Interests, as modified by Section 6.02. (ii) Capital Event Allocations. Profits and Losses of the Partnership with respect to a Capital Event shall be allocated as set forth in this Section 7.03(a)(ii), before taking into account any distributions (including liquidating distributions) occurring in connection therewith. (A) Profits. Profits with respect to a Capital Event shall be allocated as follows: (1) first, to the Partners, if any, having negative balances in their Capital Accounts, in the proportion that the negative balance of each such Partner's negative Capital Account bears to the aggregate negative balances in the Capital Accounts of all Partners, the least amount of such Profits necessary to cause the balances in their Capital Accounts to equal zero; (2) second, so much of the remaining Profit as is necessary to cause the positive balances in the Partners' Capital Accounts (as adjusted to reflect any allocation made pursuant to clause (1) above), to bear the same relationship as their respective Partnership Interests, shall be allocated among the Partners in -13- 14 proportion to the amount of Profit required to be allocated to each Partner to achieve such result; and (3) thereafter, any remaining Profits shall be allocated among the Partners in accordance with their respective Partnership Interests. (B) Losses. Losses with respect to a Capital Event shall be allocated among the Partners as follows: (1) first, the least amount of such Losses necessary to cause the positive balances in the Partners' Capital Accounts to bear the same relationship as their respective Partnership Interests shall be allocated among the Partners in proportion to the amount of Losses required to be allocated to each Partner to achieve such result; and (2) thereafter, any remaining Losses shall be allocated among the Partners in accordance with their respective Partnership Interests. (b) Special Rules. Notwithstanding the general allocation rule set forth in Section 7.03(a), the following special allocation rules shall apply under the circumstances described therein. (A) Change in Regulations. If the Treasury Regulations are hereafter changed or if new Treasury Regulations are hereafter adopted, and such change or new regulations, in the opinion of independent recognized tax counsel for the Partnership, make it necessary to revise the regulatory Allocations or provide further special allocation rules in order to avoid a significant risk that a -14- 15 material portion of any allocation set forth in this Article VII would not be respected for federal income tax purposes, this Agreement shall be amended (with the consent of all Partners, which consent shall not be unreasonably withheld) in such a manner as, in the reasonable opinion of such counsel, is necessary or desirable, taking into account the interests of the Partners as a whole and all other relevant factors, to avoid or reduce significantly such risk to the extent possible without materially changing the amounts distributable to any Partner pursuant to this Agreement. (B) Change in Partners' Interests. If there is a change in any Partner's share of the Partnership's Profits, Losses or other items during any Year, allocations among the Partners shall be made in accordance with their Partnership Interests from time to time during such Year in accordance with Code section 706, as of the end of the preceding month, except that depreciation, amortization and similar items shall be deemed to accrue ratably on a daily basis over the entire Year during which the corresponding asset is owned by the Partnership for the entire Year, and over the portion of a Year after such asset is placed in service by the Partnership if such asset is placed in service during the Year. 7.04. Tax Allocations. (a) Generally. Except as set forth in Section 7.04(b), allocations for tax purposes of items of income, gain, loss and deduction, and credits and basis therefor, shall be made in the same manner as allocations for book purposes as set forth in Section 7.02. -15- 16 Allocations pursuant to this Section 7.04 are solely for purposes of federal, state and local income taxes and shall not affect, or in any way be taken into account in computing, any Partner's Capital Account or share of Profits, Losses, other items or distributions pursuant to any provision of this Agreement. (b) Special Rules. (i) Elimination of Book/Tax Disparities. If any Partnership property has a Carrying Value different than its adjusted tax basis to the Partnership for federal income tax purposes (whether by reason of the contribution of such property to the Partnership, the revaluation of such property hereunder, or otherwise), allocations of taxable income, gain, loss and deduction under this Section 7.04 with respect to such asset shall take account of any variation between the adjusted tax basis of such asset for federal income tax purposes and its Carrying Value in the manner prescribed by Code section 704(c) or the principles set forth in Treasury Regulation section 1.704-l(b)(2)(iv)(g), as the case may be. (ii) Allocation of Items Among Partners. Each item of income, gain, loss, deduction and credit and all other items governed by Code section 702(a) shall be allocated among the Partners in proportion to the allocation of Profits, Losses and other items to such Partners hereunder, provided that any gain recognized from any disposition of a Partnership asset which is treated as ordinary income because it is attributable to the recapture of any depreciation or amortization shall be allocated among the Partners in the same ratio -16- 17 as the prior allocations of Profits, Losses or other items which included such depreciation or amortization, but not in excess of the gain otherwise allocable to each such Partner. (c) Special Allocations Concerning In-Kind Contributions. (i) In accordance with Code Section 704(c) and the Regulations thereunder, income gain, loss and deduction with respect to any property contributed to the capital of the Partnership shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for federal income tax purposes and the Carrying Value of such assets. In the event that the Carrying Value of an asset is adjusted, subsequent allocations of income, gain, loss and deduction with respect to such asset shall also be adjusted. Allocations pursuant to this Section 7.04(c) are solely for purposes of federal, state and local taxes and shall not affect or be taken into account in computing any Partner's Capital Account, share of profit or losses, or distributions pursuant to this Agreement. (ii) As of the date of the capital contribution of an asset and at any subsequent adjustment date, the Partnership shall determine the excess of the Carrying Value over the adjusted tax basis of the asset ("Built-in Gain") or the excess of the adjusted tax basis over the Carrying Value ("Built-in Loss") of each item of property. Upon the disposition of the item of property, the Built-in Gain or the Built-in Loss shall be allocated 100 percent to the contributing Partner. -17- 18 (iii) To the extent that the disparity in Carrying Value and adjusted tax basis causes a Partner to be allocated less depreciation or amortization for tax purposes than it is allocated under Section 7.03, additional items of income shall be allocated to the contributing Partner. In the event of Built-in Loss property, additional items of income shall be allocated to the non-contributing partner to eliminate the disparity between Carrying Value and the adjusted basis of the asset. (iv) If the amount of the difference between Carrying Value and adjusted tax basis constitutes a "small disparity" as that term is used in regulations issued under Code section 704(c), curative allocations shall not be required and the General Partner may disregard the application of Code section 704(c) to such items of property. 7.05. Elections. The General Partner may, in its discretion, elect pursuant to Sections 734, 743 and 754 of the Code to adjust the basis of the Partnership's assets for transfers of a Partnership Interest. ARTICLE VIII BOOKS OF ACCOUNT; ANNUAL ACCOUNTS AND REPORTS 8.01. Books of Account. The General Partner shall prepare or cause to be prepared true, accurate and complete books of account for the Partnership. The books of account shall be kept at the Partnership's principal place of business, and each Partner shall, -18- 19 upon reasonable notice to the General Partner, have the right to inspect the same. 8.02. Accounts and Reports. As of the close of each month of the Partnership, the General Partner shall prepare or cause to be prepared a true, accurate and complete account of the Net Profit or Net Loss for such month and the Partnership's assets and liabilities as of the end of such month. The General Partner shall cause such statements to be furnished to each Partner within ten (10) days after the close of such month, along with a report indicating such Partner's share of the Net Profit or Net Loss of the Partnership for such month and any specially allocated items reported for taxing bodies or other governmental agencies. The form of reports shall be as reasonably requested by any Partner. ARTICLE IX RIGHTS AND DUTIES OF THE PARTNERS 9.01. Powers of General Partner. (a) The General Partner shall have the right and power to manage, direct and control the day-to-day business and affairs of the Partnership, including, but not limited to, the power to: (i) manage and operate the Partnership and its properties, including hiring, supervision and dismissal of Partnership employees, agents and independent contractors; (ii) prepare or cause to be prepared all financial, accounting and other reports of operations which are furnished to the Partners or are required by taxing bodies or other governmental agencies; (iii) negotiate and execute real and personal -19- 20 property leases related to the Project and to the purpose of the Partnership; (iv) render services (either directly or through any affiliate) to the Partnership as set forth herein or pursuant to other written agreements which describe the services and the compensation to be paid therefor; (v) make tax elections which will benefit the Limited Partners; (vi) make distributions from Excess Cash; and (vii) do all things reasonably necessary to supervise the business and affairs of the Partnership. The General Partner is authorized to cause the Partnership to enter into agreements with any Partner or any affiliate thereof for the providing of goods or services to or from the Partnership; provided that any and all such agreements shall be on terms at least as favorable to the Partnership as those obtainable from unrelated parties and that the terms of any such agreements with a value greater than $_______________ are fully disclosed in advance to the Limited Partners. (b) Limitations on Powers of General Partner. (i) Notwithstanding any other provision of the Agreement to the contrary, a unanimous vote of all of the Partners, both Limited and General, shall be required to approve: (i) a change in the Business of the Partnership from that described in Section 5.01; (ii) the sale, exchange, lease, or other transfer of all, or substantially all, of the assets of the Partnership, except that the transfer of a mortgage or a security interest in such assets to secure any indebtedness may be made by the General Partner without the -20- 21 consent of the Limited Partners; (iii) the liquidation or dissolution the Partnership; (iv) the execution of any debt (including a capitalized lease) by the General Partner that would cause the debts of the Partnership to exceed 95 percent of the net Carrying Value of the assets of the Partnership on its books and records; (v) a settlement of any claim against the General Partner; or (vi) a loan of funds to the General Partner. (ii) Except as otherwise provided in this Agreement, any amendment to the Partnership Agreement shall require the written consent of a majority in interest of the Limited Partners. The written consent a Majority in Interest of the Limited Partners also shall be required: (i) to merge or consolidate the Partnership with or into another entity; (ii) to offer or to sell Partnership Interests in the Partnership to persons who are not already Limited Partners; or (iii) to approve a substitute General Partner in place of the existing General Partner or the admission of an additional General Partner. (c) Voting Rights. Unless otherwise specified herein, any and all actions requiring a vote of the Partners shall require approval of the Partners owning the requisite percentage of Partnership Interests. It is expressly provided that any and all voting of the Partners shall be based upon Partnership Interests and not one vote per Partner. 9.02. Reliance on Acts of the General Partner. No financial institution or any other person, firm or corporation dealing with the General Partner shall be required to ascertain whether the General -21- 22 Partner is acting in accordance with this Agreement, but such financial institution or such other person, firm or corporation shall be protected in relying solely upon the deed, transfer or assurance of and the execution of such instrument or instruments by the General Partner. 9.03. Other Activities of Partners. Except as otherwise provided in Sections 9.01 and 12.01, each Partner may, independently or with others, engage in or possess an interest in any other business ventures of every nature or description, including business ventures which may be in competition with the Partnership. 9.04. Reimbursement of Expenses. Each of the Partners shall be entitled to reimbursement of all reasonable, verifiable, direct, out-of-pocket expenses they incurred while providing services for the Partnership (i.e., excluding overhead). A Partner seeking reimbursement shall furnish to the General Partner for its review and approval a written statement itemizing the expenses for which such Partner wishes to obtain reimbursement and setting forth the Partnership purpose for which the expenses were incurred, which written statement shall be retained in the Partnership records. 9.05. Compensation Due the General Partner. Other than the General Partner's share of profits and losses under this Agreement and reimbursement of Partnership expenses, the General Partner shall not be entitled to any other compensation from the Partnership. 9.06. Power of Attorney Granted to General Partner. As related solely to this Partnership, the Project and the purpose -22- 23 thereof, each of the Limited Partners hereby irrevocably constitutes and appoints the General Partner as the Limited Partner's true and lawful attorney in the name, place and stead of such Limited Partner to make, execute, swear to, acknowledge, deliver and file: (a) any certificate or other instruments which may be required to be filed by the Partnership under the laws of the Commonwealth of Pennsylvania or any other state in the United States; (b) any documents, certificates or other instruments, including, but not limited to, any and all amendments and modifications of this Agreement or documents to be filed under subsection (a) of this section as may be required or deemed desirable by the General Partner to effectuate the provisions of any part of this Agreement, and, by way of extension and not in limitation, to do all such other things as shall be necessary to continue and to carry on the business of the Partnership, including, to the extent permitted by law, the power to ratify the execution and delivery of notes or instruments authorizing the confession of judgment against the Partnership; and (c) all documents, certificates or other instruments which may be required to effectuate the dissolution and termination of the Partnership. The power of attorney granted hereby shall not constitute a waiver of, or be used to avoid, the rights of the Limited Partners to (i) approve certain transactions or (ii) be used in any other manner -23- 24 inconsistent with the status of the Partnership as a Limited Partnership. 9.07. Survival of Power of Attorney. It is expressly intended by each of the Limited Partners that the power of attorney provided for in Section 9.06 is coupled with an interest, is irrevocable and shall survive the death, or adjudication of insanity, incompetence, dissolution, or bankruptcy of a Limited Partner or the making of an assignment for the benefit of creditors by any such Limited Partner. The foregoing power of attorney shall survive the delivery of an assignment by a Limited Partner of such Limited Partner's entire interest in the Partnership, except that where an assignee of such entire interest has become a substituted Limited Partner, then the foregoing power of attorney of the assignor Limited Partner shall survive the delivery of such assignment for the sole purpose of enabling the General Partner to execute, acknowledge and file any and all instruments necessary to effectuate such substitution. 9.08. Liability of Limited Partner. No Limited Partner shall be liable for any debt of or claim against the Partnership. No Limited Partner, in his capacity as a Limited Partner, shall take part in the management or control of the Partnership's business, except as permitted by the Act. 9.09. Liability of the General Partner. (a) No General Partner shall be personally liable for the return of all or any part of any Limited Partner's capital -24- 25 contributions to the Partnership. Any such return shall be made solely from the assets of the Partnership. (b) Neither the General Partner nor any affiliate of the General Partner nor any of their respective partners, shareholders, officers, directors, employees or agents shall be liable, in damages or otherwise, to the Partnership or to any of the Limited Partners for any act or omission on its part, except for (i) any act or omission resulting from its own gross negligence, willful misconduct or bad faith, (ii) any breach by a General Partner of its obligations as a fiduciary of the Partnership or (iii) any willful breach by a General Partner of any of the material terms and provisions of this Agreement. The Partnership and the Limited Partners shall indemnify, defend and hold harmless, to the fullest extent permitted by law, the General Partner and its affiliates, partners, shareholders, officers, directors, employees and agents, from and against any claim or liability of any nature whatsoever arising out of or in connection with the assets or business of the Partnership, except where attributable to the gross negligence, willful misconduct or bad faith of such entity or where relating to a breach by the General Partner of its obligations as a fiduciary of the Partnership or to a breach by General Partner of any of the terms and provisions of this Agreement. 9.10. Removal of the General Partner. (a) The Limited Partners, by an affirmative vote of at least two-thirds of all the Limited Partnership Interests, may remove the General Partner; however, such removal may only be made for gross -25- 26 negligence, willful neglect or embezzlement. Written notice of the effective date of such a determination setting forth the effective date of such removal shall be served upon the General Partner so removed and, as of the effective date, shall terminate all the General Partner's rights and powers as the General Partner except as to the ability of the former General Partner to share in the profits, losses and distributions in accordance with its General Partnership Interest. (b) If the Limited Partners shall remove the General Partner, they shall have the power to appoint a Substitute General Partner. Additionally, the Limited Partners shall be entitled to issue to the Substitute General Partner a General Partnership Interest in the Partnership. (c) The terminated General Partner, if the Limited Partners elect to continue the Partnership, shall have its interest in the Partnership purchased by the Substitute General Partner at an arm's length price. 9.11. Limited Partners In-Kind Contributions. PDGE will provide insurance for the Project. Philip will provide a surety bond for the Project, as well as certain supervisory personnel at the Project. Each Partner will indemnify the other for any loss sustained directly or indirectly related to such in-kind contributions. Each Partner shall be responsible for workers compensation insurance and claims for its employees. -26- 27 ARTICLE X TRANSFERS OF PARTNERSHIP SHARES 10.01. Restrictions on Transfers. Except as set forth in this Article X or in section 11.03 hereof, no Limited Partner may sell, transfer or assign part or all of such Limited Partner's Limited Partnership Interest to any person, firm or entity without the written consent of the General Partner and the written consent of a Majority in Interest of the Limited Partners. If the General Partner intends to withdraw from the Partnership, other than under Article XI, it shall give 90 days' written notice to the Limited Partners in advance of withdrawal. 10.02. Absolute Restriction. Notwithstanding any provision of this Agreement to the contrary, the sale or exchange of any Limited Partnership Interest will not be permitted if the interest sought to be sold or exchanged, when added to the total of all other interests sold or exchanged within the period of 12 consecutive months ending with the proposed date of the sale or exchange, results in the termination of the Partnership under Section 708 of the Code or if such termination would materially and adversely affect the Partnership or any Partner. Notwithstanding any provision of this Agreement to the contrary, no transfer shall be permitted that would result in the loss of applicable federal or state securities exemptions relating to the issuance and sale of Limited Partnership Interests. In no event shall any Limited Partnership Interest be transferable within twelve months and one day of the original issuance of such Limited Partnership Interest to such Limited Partner. -27- 28 ARTICLE XI DISSOLUTION AND LIQUIDATION 11.01. Causes of Termination and Dissolution of the Partnership. The Partnership shall be dissolved upon the earliest to occur of the following: (i) upon the bankruptcy or dissolution of a General Partner; (ii) upon the affirmative vote or written consent of the Partners owning at least two-thirds of the Partnership Interests; (iii) by decree of court; (iv) upon the sale of all or substantially all of the assets of the Partnership; or (v) December 31, 2005. 11.02. Liquidation Procedures. Upon dissolution of the Partnership, the assets of the Partnership shall be liquidated in a manner to be determined by the General Partner to be in the best interest of the Partnership, and the resulting cash or property shall be distributed as follows: after payment to its creditors of all expenses of liquidation, debts and all other liabilities of the Partnership in the order of priority as provided by law, all remaining property of the Partnership shall be distributed to the Partners in the following manner and order of priority: (i) Each Partner shall receive the unpaid balance of any loans made by such Partner to the Partnership; and (ii) Each Partner shall receive such Partner's share of the remaining property of the Partnership in proportion to the positive Capital Account balances of that Partner, after adjusting the Capital Accounts for unrealized gain or loss in accordance with Section 7.04(c). -28- 29 11.03. Change in Status of Limited Partner. If any Limited Partner shall be dissolved, be adjudicated bankrupt, insolvent, insane, incompetent, or file any petition in bankruptcy or make an assignment or enter any arrangement for the benefit of creditors, the Partnership shall not terminate but the executor, administrator, guardian or trustee shall become an assignee of such Limited Partner's Limited Partnership Interest. As provided in Article X hereof. The assignee may become a substitute Limited Partner upon the approval of the General Partner, which acceptance or approval may be withheld in the sole discretion of the General Partner. If a Limited Partner shall be liquidated, be dissolved or be declared bankrupt, the Partnership shall not terminate but the executor, administrator or trustee or heir shall be become an assignee and shall become a substitute Limited Partner as soon as the assignee executes an instrument in a form acceptable to the General Partner assuming such obligations of such Limited Partner and adopting the terms of this Agreement, in accordance with the provisions of Article X hereof. 11.04. Reserve. Notwithstanding any provision to the contrary herein, the General Partner or its successor may retain such funds as they reasonably deem necessary as a reserve for any contingent liabilities or obligations of the Partnership, which funds shall, after the passage of a reasonable period of time, be distributed in accordance with the provisions of this Article. 11.05. Final Accounting. Each of the Partners shall be furnished with a statement prepared by the Partnership's accountants which shall set forth the assets and liabilities of the Partnership as -29- 30 of the date of the complete liquidation of the Partnership's assets. Upon compliance by the General Partner (or its successor) with the terms and conditions of this Article XI, the remaining General Partner of the Partnership or liquidating trustee, if any, or, if none, a majority in interest of the Limited Partners shall execute and cause to be filed a Certificate of Cancellation of the Partnership and any and all other documents necessary with respect to termination and cancellation of the Partnership. ARTICLE XII MISCELLANEOUS PROVISIONS 12.01. Confidential Information. Except as otherwise required by law or herein, no Partner (or any related person, firm or entity) shall disclose or use at any time, except in connection with activities on behalf of the Partnership, during the term hereof, any secret or Confidential Information (as hereinafter defined) or knowledge obtained from any other Partner in connection with activities of the Partnership or otherwise developed by the Partnership. Without limiting the generality of the foregoing, the term "Confidential Information" shall include all technology, compositions, contracts, sales or profit figures, the names of and relationships with customers or suppliers and the terms of any contracts to which it is a party. "Confidential Information" does not include: (i) any information which becomes generally available to the public other than as a result of a disclosure by a Partner or employee of the Partnership; (ii) any information that was available to the Partners on a non-confidential basis prior to disclosure by the other; -30- 31 (iii) any information that is required to be disclosed by law or by any court or governmental body; provided, however, that each Partner shall provide the other with reasonable notice prior to disclosure of any such information; and (iv) any information received from a third party not bound by confidentiality obligations to any Limited Partner. 12.02. Amendment of Agreement. This Agreement may be amended only by a subsequent writing executed by all of the Partners. The General Partner shall have the power to amend this Agreement, without the consent of the Limited Partners, to cure ambiguities, correct errors, and comply with Treasury Regulations under the Code, and retain the tax classification of the Partnership as a Partnership; provided however, that such amendment shall not: (i) affect the voting rights of a Limited Partner; (ii) amend Section 12.01, or 12.02; (iii) amend Article IX, Article X, or Article XI; (iv) affect the limited liability of any Limited Partner; or (iv) materially affect the rights of a Partner to share in the cash flow from the Partnership. 12.03. Notices. Any and all notices, reports, requests, demands, and other communications required or permitted to be given by this Agreement or by any rule of law with reference to the business of the Partnership or to this Agreement shall be in writing and shall conclusively be deemed to have been duly given if personally delivered to, or if enclosed in a stamped and sealed envelope and mailed first class by certified mail, return receipt requested, in the United States mails or by overnight courier addressed to, the Partner to which it is authorized to be given to the last known address of such Partner as shown on the books and records of the Partnership. -31- 32 12.04. Governing Law. This Agreement will be governed and construed under and in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to its conflicts of law principles. 12.05. Binding Effect. This Agreement shall inure to the benefit of and shall be binding upon and be enforceable against the parties hereto and their respective successors and permitted assigns. 12.06. Severability. If and to the extent that any court of competent jurisdiction shall determine that any provision of this Agreement is invalid, unlawful or unenforceable, such holding shall in no way affect the validity or enforceability of the remainder of this Agreement. 12.07. Headings and Interpretation. The Section headings contained herein are for convenience only and shall not in any way affect the interpretation or enforceability of any provision of this Agreement. Wherever used in this Agreement, the singular shall include the plural, the plural the singular, and use of any gender will be applicable to all genders. 12.08. Entire Agreement. This Agreement contains the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior oral or written communications or agreements between the parties with respect to the subject matter hereof. 12.09. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute but one document. -32- 33 12.10. The Tax Matters Partner. EBITDA, Inc. shall be the Tax Matters Partner, as defined in the Code, for the Partnership. IN WITNESS WHEREOF, the parties hereto, by their duly authorized representatives, have set their hands and seals as of the day and year first written above with the intention of being legally bound thereby. GENERAL PARTNER: ATTEST: PDG, Inc. /s/ REGIS O'HARA By: /s/ DAVID P. BERESFORD - ------------------------------- --------------------------------- Title: Regis O'Hara Title: David P. Beresford, Vice President -------------------------- ------------------------------------ Assitant Secretary LIMITED PARTNERS: ATTEST: PDG Environmental, Inc. /s/ REGIS O'HARA By: /s/ JOHN C. REGAN - ------------------------------- --------------------------------- Title: Assistant Secretary Title: John C. Regan, Chairman & CEO -------------------------- ------------------------------------ Regis O'Hara ATTEST: Philip Environmental Services Corporation By: /s/ ALEC THOMAS - ------------------------------- --------------------------------- Title: Senior Vice President-Law Title: Executive Vice President -------------------------- ------------------------------------ -33- 34 PDG/Philip, L.P. Schedule A to Agreement of Limited Partnership
Amount of Initial Capital Amount of Contributions Percentag General Partner Contribution Under Section 6.02 Interest --------------- ------------ ----------------- -------- PDG, Inc. $1.00 1.0% 1.0% 300 Oxford Drive Monroeville, PA 15146 Limited Partners ---------------- PDG Environmental, Inc. $59.00 59.0% 59.0% 300 Oxford Drive Monroeville, PA 15146 Philip Environmental $40.00 40.0% 40.0% Services Corporation 2525 McAllister Houston, TX 77092 100.00%
EX-21 3 PDG ENVIRONMENTAL, INC. 1 Exhibit 21 Name of Subsidiary State of Formation - ------------------ ------------------ Project Development Group, Inc. PA PDG, Inc. PA Enviro-Tech Abatement Services Co. NC PDG/Philip, L.P. PA PDG of Delaware, Inc.* DE DPI Energy, Inc.* PA Asbestemps, Inc.* DE Applied Environmental Technology, Inc.* DE Applied Consulting & Technical Services, Inc.* DE * Inactive subsidiaries EX-23 4 PDG ENVIRONMENTAL, INC. 1 Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements pertaining to the PDG Environmental, Inc. Amended and Restated Incentive Stock Option Plan as of June 25, 1991 (Form S-8 No. 33-40698); PDG Environmental, Inc. 1990 Stock Option Plan for Employee Directors (Form S-8 No. 33-40699); PDG Environmental, Inc. 1990 Stock Option Plan for Non- Employee Directors (Form S-8 No. 33-40700) and PDG Environmental, Inc. Consultant Compensation Plan (Form S-8 No. 333- 08673) and in the related Prospectuses of our report dated March 26, 1998, with respect to the consolidated financial statements of PDG Environmental, Inc. included in the Annual Report (Form 10-KSB) for the year ended January 31, 1998. /s/ Ernst & Young, LLP Pittsburgh, Pennsylvania April 3, 1998 EX-24 5 PDG ENVIRONMENTAL, INC. 1 Exhibit 24 Power of Attorney KNOW BY ALL MEN BY THESE PRESENTS, that the undersigned director of PDG ENVIRONMENTAL, INC., a Delaware Corporation, does make, constitute and appoint JOHN C. REGAN, with full power and authority his true and lawful attorney-in-fact and agent, for him and his name, place and stead in any and all capacities, to sign the Annual Report of PDG Environmental, Inc. on Form 10-KSB for the period ended January 31, 1998, and to file such Annual Report, so signed, with all exhibits thereto, with the Securities and Exchange Commission, hereby further granting unto said attorney-in-fact full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person; the undersigned hereby ratifies and confirms all that said attorney and agent, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 2nd day of April, 1998. /s/ EDGAR BERKEY - ---------------------------------------(SEAL) Edgar Berkey, Director 2 Power of Attorney KNOW BY ALL MEN BY THESE PRESENTS, that the undersigned director of PDG ENVIRONMENTAL, INC., a Delaware Corporation, does make, constitute and appoint JOHN C. REGAN, with full power and authority his true and lawful attorney-in-fact and agent, for him and his name, place and stead in any and all capacities, to sign the Annual Report of PDG Environmental, Inc. on Form 10-KSB for the period ended January 31, 1998, and to file such Annual Report, so signed, with all exhibits thereto, with the Securities and Exchange Commission, hereby further granting unto said attorney-in-fact full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person; the undersigned hereby ratifies and confirms all that said attorney and agent, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 2nd day of April, 1998. /s/ EDWIN J. KILPELA - ---------------------------------------(SEAL) Edwin J. Kilpela, Director 3 Power of Attorney KNOW BY ALL MEN BY THESE PRESENTS, that the undersigned director of PDG ENVIRONMENTAL, INC., a Delaware Corporation, does make, constitute and appoint JOHN C. REGAN, with full power and authority his true and lawful attorney-in-fact and agent, for him and his name, place and stead in any and all capacities, to sign the Annual Report of PDG Environmental, Inc. on Form 10-KSB for the period ended January 31, 1998, and to file such Annual Report, so signed, with all exhibits thereto, with the Securities and Exchange Commission, hereby further granting unto said attorney-in-fact full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person; the undersigned hereby ratifies and confirms all that said attorney and agent, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 2nd day of April, 1998. /s/ RICHARD A. BENDIS - ---------------------------------------(SEAL) Richard A. Bendis, Director EX-27 6 PDG ENVIRONMENTAL, INC.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF JANUARY 31, 1998 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 1998 AND IS QULAIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 U.S. DOLLARS YEAR JAN-31-1998 FEB-01-1997 JAN-31-1998 1 892,000 0 6,751,000 48,000 202,000 8,996,000 4,527,000 3,558,000 10,337,000 6,202,000 1,628,000 0 400,000 130,000 1,735,000 10,337,000 24,610,000 24,610,000 20,291,000 20,291,000 0 0 220,000 1,260,000 20,000 1,240,000 0 0 0 1,240,000 0.20 0.17
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