10-Q 1 j0456101e10vq.txt PDG ENVIRONMENTAL, INC 10-Q (conformed) SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER 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.) 1386 BEULAH ROAD, BUILDING 801 PITTSBURGH, PENNSYLVANIA 15235 (Address of principal executive offices) (Zip Code) 412-243-3200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ---- Indicated by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No X ------ -------- As of December 9, 2003, there were 9,372,330 shares of the registrant's common stock outstanding. PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES INDEX

PART I. FINANCIAL INFORMATION PAGE PAGE Item 1. Consolidated Financial Statements and Notes to Consolidated Financial Statements (a) Condensed Consolidated Balance Sheets as of October 31, 2003 (unaudited) and January 31, 2003 3 (b) Consolidated Statements of Operations for the Three Months Ended October 31, 2003 and 2002 (unaudited) 4 (c) Consolidated Statements of Operations for the Nine Months Ended October 31, 2003 and 2002 (unaudited) 5 (d) Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2003 and 2002 (unaudited) 6 (e) Notes to Consolidated Financial Statements (unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 Item 4. Controls and Procedures 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 3. Defaults Upon Senior Securities 14 Item 6. Exhibits and Reports on Form 8-K 14 Signature and Certification 15

2 PART I. FINANCIAL INFORMATION PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

OCTOBER 31, JANUARY 31, 2003 2003* --------------- ------------- ASSETS (UNAUDITED) CURRENT ASSETS Cash and short-term investments $ 10,000 $ 38,000 Accounts receivable - net 9,231,000 9,271,000 Costs and estimated earnings in excess of billings on uncompleted contracts 3,510,000 3,412,000 Inventory 545,000 484,000 Other current assets 600,000 388,000 --------------- ------------- TOTAL CURRENT ASSETS 13,896,000 13,593,000 PROPERTY, PLANT AND EQUIPMENT 7,739,000 7,497,000 Less: accumulated depreciation (6,718,000) (6,238,000) --------------- ------------- 1,021,000 1,259,000 GOODWILL 433,000 433,000 OTHER ASSETS 292,000 325,000 --------------- ------------- TOTAL ASSETS $ 15,642,000 $ 15,610,000 =============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 3,248,000 $ 3,519,000 Billings in excess of costs and estimated earnings on uncompleted contracts 1,227,000 1,070,000 Current portion of long-term debt 412,000 467,000 Accrued liabilities 992,000 1,400,000 --------------- ------------- TOTAL CURRENT LIABILITIES 5,879,000 6,456,000 LONG-TERM DEBT 5,050,000 4,922,000 MINORITY INTEREST (25,000) (12,000) STOCKHOLDERS' EQUITY Cumulative convertible 2% preferred stock 14,000 14,000 Common stock 189,000 189,000 Additional paid-in capital 8,110,000 8,110,000 Deferred compensation (11,000) (26,000) (Deficit) retained earnings (3,526,000) (4,005,000) Less treasury stock (38,000) (38,000) --------------- ------------- TOTAL STOCKHOLDERS' EQUITY 4,738,000 4,244,000 --------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,642,000 $ 15,610,000 =============== =============

*Derived from audited financial statements. See accompanying notes to consolidated financial statements. 3 PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

FOR THE THREE MONTHS ENDED OCTOBER 31, ----------------------------- 2003 2002 ----------- ----------- CONTRACT REVENUE $ 9,414,000 $ 9,157,000 CONTRACT COSTS 7,639,000 7,575,000 ----------- ----------- Gross margin 1,775,000 1,582,000 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,589,000 1,486,000 ----------- ----------- Income from operations 186,000 96,000 OTHER INCOME (EXPENSE): Interest expense (84,000) (93,000) Gain on sale of fixed assets and inventory - 48,000 Interest and other income 8,000 12,000 ----------- ----------- (76,000) (33,000) ----------- ----------- Income before minority interest and income taxes 110,000 63,000 INCOME TAX PROVISION (14,000) - MINORITY INTEREST 10,000 43,000 ----------- ----------- NET INCOME $ 106,000 $ 106,000 =========== =========== PER SHARE OF COMMON STOCK: BASIC $ 0.01 $ 0.01 =========== =========== DILUTIVE $ 0.01 $ 0.01 =========== =========== AVERAGE COMMON SHARE EQUIVALENTS OUTSTANDING 9,372,000 9,372,000 AVERAGE DILUTIVE COMMON SHARE EQUIVALENTS OUTSTANDING 255,000 29,000 ----------- ----------- AVERAGE COMMON SHARES AND DILUTIVE COMMON EQUIVALENTS OUTSTANDING FOR EARNINGS PER SHARE CALCULATION 9,627,000 9,401,000 =========== ===========

See accompanying notes to consolidated financial statements. 4 PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

FOR THE NINE MONTHS ENDED OCTOBER 31, -------------------------------- 2003 2002 ------------ ------------ CONTRACT REVENUE $ 27,252,000 $ 32,285,000 CONTRACT COSTS 22,163,000 28,225,000 ------------ ------------ Gross margin 5,089,000 4,060,000 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,332,000 3,870,000 ------------ ------------ Income from operations 757,000 190,000 OTHER INCOME (EXPENSE): Interest expense (271,000) (294,000) Gain on sale of St. Louis operation and other fixed assets and inventory -- 321,000 Interest and other income 43,000 46,000 ------------ ------------ (228,000) 73,000 ------------ ------------ Income before minority interest and income taxes 529,000 263,000 INCOME TAX PROVISION (62,000) (16,000) MINORITY INTEREST 12,000 49,000 ------------ ------------ NET INCOME $ 479,000 $ 296,000 ============ ============ PER SHARE OF COMMON STOCK: BASIC $ 0.05 $ 0.03 ============ ============ DILUTIVE $ 0.05 $ 0.03 ============ ============ AVERAGE COMMON SHARE EQUIVALENTS OUTSTANDING 9,372,000 9,372,000 AVERAGE DILUTIVE COMMON SHARE EQUIVALENTS OUTSTANDING 114,000 151,000 ------------ ------------ AVERAGE COMMON SHARES AND DILUTIVE COMMON EQUIVALENTS OUTSTANDING FOR EARNINGS PER SHARE CALCULATION 9,486,000 9,523,000 ============ ============

See accompanying notes to consolidated financial statements. 5 PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED OCTOBER 31, ----------------------------- 2003 2002 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 479,000 $ 296,000 ADJUSTMENTS TO RECONCILE NET INCOME TO CASH: Depreciation and amortization 668,000 782,000 Contingent acquisition consideration - (219,000) Stock based compensation 15,000 15,000 Gain on sale of St. Louis operation and other fixed assets and inventory - (321,000) Minority interest (12,000) (49,000) CHANGES IN ASSETS AND LIABILITIES OTHER THAN CASH: Accounts receivable 40,000 2,934,000 Costs and estimated earnings in excess of billings on uncompleted contracts (98,000) 130,000 Inventory (61,000) (125,000) Other current assets 81,000 434,000 Accounts payable (564,000) (2,698,000) Billings in excess of costs and estimated earnings on uncompleted contracts 157,000 (872,000) Accrued liabilities (274,000) (375,000) ----------- ----------- (719,000) (572,000) ----------- ----------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 431,000 (68,000) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (291,000) (254,000) Acquisition of businesses (234,000) (24,000) Other venture's capitalization of joint venture - 30,000 Proceeds from sale of St. Louis operation and other fixed assets and inventory - 490,000 Decrease (Increase) in other assets (7,000) (2,000) ----------- ----------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (532,000) 240,000 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt 400,000 - Exercise of stock options - 2,000 Principal payments on debt (327,000) (496,000) ----------- ----------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 73,000 (494,000) ----------- ----------- Net Increase (Decrease) in Cash and Short-Term Investments (28,000) (322,000) Cash and Short-Term Investments, Beginning of Period 38,000 373,000 ----------- ----------- CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 10,000 $ 51,000 =========== ===========

See accompanying notes to consolidated financial statements. 6 PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED OCTOBER 31, 2003 (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION The consolidated financial statements include PDG Environmental, Inc. (the "Corporation") and its wholly-owned subsidiaries. In the quarter ending April 30, 2002, the Corporation formed IAQ Training Institute ("IAQ venture") a 50/50 joint venture to provide training in mold awareness and remediation. The accompanying consolidated financial statements of the Corporation are unaudited. However, in the opinion of management, they include all adjustments necessary for a fair presentation of financial position, results of operations and cash flows. All adjustments made during the three month and nine month periods ended October 31, 2003 were of a normal, recurring nature. The amounts presented for the three month and nine month periods ended October 31, 2003 are not necessarily indicative of results of operations for a full year. Additional information is contained in the Annual Report on Form 10-K of the Corporation for the year ended January 31, 2003 dated March 28, 2003 and in the Quarterly Reports on Form 10-Q of the Corporation for the quarter ended April 30, 2003 dated June 12, 2003 and for the quarter ended July 31, 2003 dated September 12, 2003, which should be read in conjunction with this quarterly report. NOTE 2 - FEDERAL INCOME TAXES No federal income tax has been provided for the three and nine months ended October 31, 2003 due to the existence of unused net operating loss carryforwards. A state income tax provision was made in the current and prior year periods due to income in the current and prior years. Income taxes paid by the Corporation for the nine months ended October 31, 2003 and 2002 totaled approximately $27,000 and $65,000, respectively. NOTE 3 - LINE OF CREDIT On August 3, 2000, the Corporation closed on a $4.7 million credit facility with Sky Bank, an Ohio banking association, consisting of a 3-year $3 million revolving line of credit, a 5-year $1 million equipment note, a 15-year $0.4 million mortgage and a 5-year $0.3 million commitment for future equipment financing. The financing repaid all of the Company's existing debt. The line of credit, equipment note and commitment for future equipment financing are at an interest rate of prime plus 1% with financial covenant incentives which may reduce the interest rate to either prime plus 1/2% or prime. The mortgage is at an interest rate of 9.15% fixed for three years and is then adjusted to 2.75% above the 3-year Treasury Index every three years. The Chief Executive Officer of the Corporation provided a limited personal guarantee for the credit facility. In November 2000, Sky Bank approved a $1.5 million increase in the line of credit to $4.5 million to fund the acquisition of Tri-State Restorations, Inc. ("Tri-State"), an asbestos abatement and demolition company in California. Additionally, Sky Bank increased the commitment for future equipment financing by $0.3 million to $0.6 million. In April 2001 and June 2001, the Company borrowed $273,000 and $283,000, respectively, against the commitment for future equipment financing to fund the fixed asset portion of the Tri-State acquisition and to fund other equipment purchases. In August 2001, the remaining $44,000 was borrowed against the commitment for future equipment financing to fund equipment purchases. The acquisition of Tri-State closed on June 1, 2001. In December 2002 Sky Bank extended the maturity date of the Company's line of credit until June 1, 2004. On February 28, 2003 Sky Bank increased the line of credit by $600,000 to $5.1 million for a four-month period ending on July 1, 2003 at which time the availability would be reduced to $4.5 million. 7 In July 2003 Sky Bank approved a permanent $500,000 increase to the Company's line of credit to $5 million and extended the maturity date until June 6, 2005. On October 31, 2003, the balance on the line of credit was $4,350,000 with an unused availability of $650,000. The Corporation paid interest costs totaling approximately $277,000 and $292,000 during the nine months ended October 31, 2003 and 2002, respectively. NOTE 4 - PREFERRED STOCK Cumulative dividends in arrears on the Corporation's 2% Series A Preferred Stock were approximately $12,000 at October 31, 2003. At October 31, 2003, there were 6,000 shares of Series A Preferred Stock outstanding. Each share of Series A Preferred Stock is convertible into four shares of the Corporation's common stock at the option of the preferred stockholder in addition to common shares for accrued but unpaid dividends. The conversion rate on the Series A Preferred Stock is also 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 5 - NET EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:

FOR THE THREE MONTHS ENDED OCTOBER 31, 2003 2002 ---------- ---------- NUMERATOR: Net Income $ 106,000 $ 106,000 Preferred stock dividends - - ---------- ---------- Numerator for basic earnings per share--income available to common stockholders 106,000 106,000 Effect of dilutive securities: Preferred stock dividends - - ---------- ---------- Numerator for diluted earnings per share--income available to common stock after assumed conversions $ 106,000 $ 106,000 ========== ========== DENOMINATOR: Denominator for basic earnings per share--weighted average shares 9,372,000 9,372,000 Effect of dilutive securities: Convertible Preferred Stock 29,000 28,000 Employee Stock Options 226,000 1,000 ---------- ---------- 255,000 29,000 ---------- ---------- Denominator for diluted earnings per share--adjusted weighted-average shares and assumed conversions 9,627,000 9,401,000 ========== ========== BASIC EARNINGS PER SHARE $ 0.01 $ 0.01 ========== ========== DILUTED EARNINGS PER SHARE $ 0.01 $ 0.01 ========== ==========

8

FOR THE NINE MONTHS ENDED OCTOBER 31, 2003 2002 ----------- ----------- NUMERATOR: Net Income $ 479,000 $ 296,000 Preferred stock dividends (1,000) (1,000) ----------- ----------- Numerator for basic earnings per share--income available to common stockholders 478,000 295,000 Effect of dilutive securities: Preferred stock dividends 1,000 1,000 ----------- ----------- Numerator for diluted earnings per share--income available to common stock after assumed conversions $ 479,000 $ 296,000 =========== =========== DENOMINATOR: Denominator for basic earnings per share--weighted average shares 9,372,000 9,372,000 Effect of dilutive securities: Convertible Preferred Stock 29,000 28,000 Employee Stock Options 85,000 123,000 ----------- ----------- 114,000 151,000 ----------- ----------- Denominator for diluted earnings per share--adjusted weighted-average shares and assumed conversions 9,486,000 9,523,000 =========== =========== BASIC EARNINGS PER SHARE $ 0.05 $ 0.03 =========== =========== DILUTED EARNINGS PER SHARE $ 0.05 $ 0.03 =========== ===========

NOTE 6 - STOCK OPTIONS The Company accounts for its stock-based compensation plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. 9

FOR THE THREE MONTHS ENDED OCTOBER 31, 2003 2002 ------------------ ------------------ Net income, as reported $ 106,000 $ 106,000 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards net of related tax effects (13,000) (28,000) ------------------ ------------------ Pro forma net income $ 93,000 $ 78,000 ================== ================== Earnings per share: Basic-as reported $ 0.01 $ 0.01 ================== ================== Basic-pro forma $ 0.01 $ 0.01 ================== ================== Diluted-as reported $ 0.01 $ 0.01 ================== ================== Diluted-pro forma $ 0.01 $ 0.01 ================== ==================

FOR THE NINE MONTHS ENDED OCTOBER 31, 2003 2002 ------------------ ------------------ Net income, as reported $ 479,000 $ 296,000 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards net of related tax effects (41,000) (84,000) ------------------ ------------------ Pro forma net income $ 438,000 $ 212,000 ================== ================== Earnings per share: Basic-as reported $ 0.05 $ 0.03 ================== ================== Basic-pro forma $ 0.05 $ 0.02 ================== ================== Diluted-as reported $ 0.05 $ 0.03 ================== ================== Diluted-pro forma $ 0.05 $ 0.02 ================== ==================

NOTE 7 - SALE OF ST. LOUIS OPERATION On July 12, 2002, the Corporation entered into an agreement for the sale of selected assets and assignment of contracts of the St. Louis operation. As consideration for the sale, the Corporation was paid $380,000 in cash. The Corporation recognized a gain of $273,000 from the sale of the St. Louis operation in the second fiscal quarter ending July 31, 2002. In the third fiscal quarter of 2003, the Company sold certain fixed assets and inventory associated with the southeast Texas operation for $110,000 resulting in a gain of $48,000. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The previous discussion and other sections of this Form 10-Q contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and actual actions or results may differ materially from those stated herein. These statements are subject to certain risks, uncertainties and assumptions that are difficult to predict. The Company undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise, unless required by law. Readers should, however, carefully review the risk factors included in other reports or documents filed by the Company from time to time with the Securities and Exchange Commission. RESULTS OF OPERATIONS THREE MONTHS ENDED OCTOBER 31, 2003 AND 2002 During the three months ended October 31, 2003 ("Fiscal 2004"), the Corporation's contract revenues increased to $9.4 million compared to $9.2 million in the three months ended October 31, 2002 ("Fiscal 2003"). The increase was due in part to increased revenues from mold remediation. The Corporation's gross margin increased to $1.78 million in the third quarter of fiscal 2004 compared to $1.58 million in the third quarter of fiscal 2003. The increase in gross margin is due to the significantly higher gross margin percentage in the current fiscal quarter achieved through improved project performance offset in part by negative $149,000 contract/claim adjustments and significantly higher insurance costs. Selling, general and administrative expenses increased to $1.6 million in the current fiscal quarter as compared to $1.5 million in the three months ended October 31, 2002. This increase was due to the provision for contingent acquisition consideration for an acquisition completed in fiscal 2002. No provision was made in the prior year's quarter as the earnings target was not achieved. The Corporation reported income from operations of $0.19 million for the three months ended October 31, 2003 compared to income from operations of $0.10 million for the three months ended October 31, 2002 as a direct result of the factors discussed above. Interest expense decreased to $0.08 million in the current quarter as compared the $0.09 million in the same quarter of a year ago as the effect of decreases in the prime rate of interest to which a majority of the Corporations borrowings are tied which more than offset the increase in borrowings on the line of credit. The prior fiscal period other income included a $0.05 million gain from the sale of certain fixed assets and inventory of the southeast Texas operations. The $0.01 million and $0.043 million add back to income for minority interest in fiscal years 2004 and 2003, respectively, reflects the other venturee's 50% share of the IAQ venture's loss which is reflected throughout the Statement of Operations as the results of the IAQ venture are consolidated. During the quarters ended October 31, 2003 and 2002, the Corporation made no provision for federal income taxes due to the utilization of net operating loss carryforwards for financial reporting purposes. A state income tax provision of $0.01 million was made in the current quarter while no provision was made in the prior fiscal quarter. 11 NINE MONTHS ENDED OCTOBER 31, 2003 AND 2002 During the nine months ended October 31, 2003, the Corporation's contract revenues decreased to $27.3 million compared to $32.3 million in the nine months ended October 31, 2002. The decrease in revenue was attributable to a large project in New York City that had Phase I completed in the second quarter of the prior fiscal period, the exclusion of the St. Louis operation which was sold in the prior fiscal year and the reduction of revenues from southeast Texas operations which were refocused in Fiscal 2003. This revenue decrease was partially offset by increased revenues from mold remediation. The Corporation's gross margin increased to $5.1 million in the first nine months of fiscal 2004 compared to $4.1 million in the first nine months of fiscal 2003. The increase in gross margin is due to the significantly higher gross margin percentage in the current fiscal year due to a change in the revenue mix to more mold remediation projects and $0.6 million of negative contract adjustments in the first quarter of fiscal 2003. Selling, general and administrative expenses increased to $4.3 million in the current fiscal period as compared to $3.9 million in the prior fiscal period. The current fiscal period included a provision for contingent acquisition consideration for an acquisition completed in fiscal 2002. The prior fiscal period included overhead costs related to the St. Louis and southeast Texas operations which were sold in the second and third quarters of fiscal 2003, respectively, which were partially offset by the reversal of $0.2 million of contingent purchase consideration related to the Tri-State acquisition. The Corporation reported income from operations of $0.76 million for the nine months ended October 31, 2003 compared to income from operations of $0.19 million for the nine months ended October 31, 2002 as a direct result of the factors discussed above. Interest expense decreased to $0.27 million in the current fiscal period as compared the $0.29 million in the prior fiscal period as the effect of decreases in the prime rate of interest to which a majority of the Corporations borrowings are tied which more than offset the increase in borrowings on the line of credit. The prior fiscal period other income included a $0.32 million gain from the sale of the St. Louis operation and the sale of certain fixed assets and inventory of the southeast Texas operations. The $0.012 million and $0.049 million add back to income for minority interest for the nine months ended October 31, 2003 and 2002, respectively, reflects the other venutree's 50% share of the IAQ venture's loss which is reflected throughout the Statement of Operations as the results of the IAQ venture are consolidated. During the nine month periods ended October 31, 2003 and 2002, the Corporation made no provision for federal income taxes due to the utilization of net operating loss carryforwards for financial reporting purposes. A state income tax provision of $0.06 million was made in the current fiscal period and a $0.02 million provision was made in the prior fiscal period. LIQUIDITY AND CAPITAL RESOURCES During the nine months ended October 31, 2003, the Corporation's cash decreased by $0.03 million to $0.01 million. The decrease in cash and short-term investments during the first nine months of fiscal 2004 is attributable to cash outflows of $0.53 million associated with investing activities. These cash outflows were partially offset by cash inflows from operations of $0.43 million and $0.07 million of cash inflows associated with finance activities. Investing activities cash outflows included $0.29 million for the purchase of property, plant and equipment and a $0.23 million of payments related primarily to an acquisition completed in a prior fiscal year. Cash provided by operating activities totaled $0.43 million in the nine months ended October 31, 2003. Cash inflows including $0.48 million of net income in the current fiscal period, a $0.04 million decrease in accounts receivables, a $0.16 million increase in billings in excess of costs and estimated earnings on uncompleted contracts, a $0.08 million decrease in other assets and $0.67 million of depreciation and amortization. These cash 12 inflows were partially offset by cash outflows including a $0.1 million increase in costs and estimated earnings in excess of billings on uncompleted contracts, a $0.06 million increase in inventories, a $0.56 million decrease in accounts payable and a $0.27 million decrease in accrued liabilities related to the timing of payments. Financing activities net cash inflows consisted of $0.4 million of proceeds from debt consisting of net borrowings on the line of credit partially offset by $0.33 million for the repayment of debt. At October 31, 2003, the Corporation's backlog totaled $31.6 million ($21.2 million on fixed fee contracts and $10.4 million on time and materials or unit price contracts). During the nine months ended October 31, 2002, the Corporation's cash decreased by $0.32 million to $0.05 million. Cash used by operating activities totaled $0.07 million in the nine months ended October 31, 2002. Items which resulted in negative cash from operating activities included the $0.22 million decrease in contingent acquisition consideration, the $0.32 million gain on the sale of the St. Louis operations and certain southeast Texas fixed assets and inventory, $0.05 million of minority interest in the IAQ joint venture, a $0.13 million increase in inventory, a $2.7 million decrease in accounts payable, a $0.87 million decrease in billings in excess of costs and estimated earnings on uncompleted contracts and a $0.38 million decrease in accrued liabilities related to the timing of payments. These negative cash items were partially offset by cash generating items including $0.3 million of net income in the current fiscal period, a $2.9 million decrease in accounts receivables, a $0.13 million decrease in costs and estimated earnings in excess of billings on uncompleted contracts, a $0.43 decrease in other current assets and $0.78 million of depreciation and amortization. The decrease in cash and short-term investments during the first nine months of fiscal 2003 is attributable to the aforementioned cash outflows from operations of $0.07 million and $0.49 million of cash outflows associated with finance activities. Financing activities cash outflows included $0.5 million for the repayment of debt. These cash outflows were partially offset by cash inflows from investing activities of $0.24 million, which included $0.49 million proceeds from the sale of the St. Louis operation and the sale of certain southeast Texas fixed assets and inventory and $0.03 million of capital contributions from the other venturee in the IAQ Training Institute. These inflows were partially offset by $0.25 million for the purchase of property, plant and equipment and a $0.02 million payment related to an acquisition completed in a prior fiscal year. ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The only market risk, as defined, that the Company is exposed to is interest rate sensitivity. The interest rate on the equipment notes and revolving line of credit fluctuate based upon changes in the prime rate. Each 1% change in the prime rate will result in a $49,000 change in borrowing costs based upon the balance outstanding at October 31, 2003. ITEM 4. CONTROLS AND PROCEDURES As of October 31, 2003, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the Chief Executive Officer, concluded that the Company's disclosure controls and procedures were effective as of October 31, 2003. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to October 31, 2003. 13 PART II-- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Registrant is subject to dispute and litigation in the ordinary course of business. None of these matters, in the opinion of management, is likely to result in a material effect on the Registrant based upon information available at this time. ITEM 3. DEFAULTS UPON SENIOR SECURITIES The Registrant is currently in arrears with respect to the payment of dividends on its Series A Preferred Stock. At October 31, 2003, the cumulative dividends in arrears on the Series A Preferred Stock were approximately $12,000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: EXHIBIT INDEX PAGES OF SEQUENTIAL EXHIBIT NO. AND DESCRIPTION NUMBERING SYSTEM Exhibit 31 Certification Pursuant to Rule 13a-14(a) of the Securities Act of 1934, as amended, and Section 302 Of The Sarbanes-Oxley Act of 2002 Exhibit 32 Certification Pursuant To 18 U.S.C. Section 1350, As Amended Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K The registrant did not file any current reports on Form 8-K during the three months ended October 31, 2003 except for the Form 8-K filed September 16, 2003 containing an Item 12 - Results of Operation and Financial Condition discussing the Company's earnings for the quarter ending July 31, 2003. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PDG ENVIRONMENTAL, INC. By /s/John C. Regan ------------------------------------------ John C. Regan Chairman, Chief Executive Officer and Chief Financial Officer Date: December 12, 2003 15