10-Q 1 j9779901e10vq.txt PERIOD ENDED OCTOBER 31, 2002 (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, 2002 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 --- --- As of December 9, 2002, there were 9,372,330 shares of the registrant's common stock outstanding. PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION PAGE Item 1. Consolidated Financial Statements and Notes to Consolidated Financial Statements (a) Condensed Consolidated Balance Sheets as of October 31, 2002 (unaudited) and January 31, 2002 3 (b) Consolidated Statements of Operations for the Three Months Ended October 31, 2002 and 2001 (unaudited) 4 (c) Consolidated Statements of Operations for the Nine Months Ended October 31, 2002 and 2001 (unaudited) 5 (d) Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2002 and 2001 (unaudited) 6 (e) Notes to Consolidated Financial Statements (unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 3. Defaults Upon Senior Securities 13 Item 6. Exhibits and Reports on Form 8-K 13 Item 14. Controls and Procedures 13 Approval of Non-Audit Services 13 Signature and Certification 14 2 PART I. FINANCIAL INFORMATION PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

OCTOBER 31, JANUARY 31, 2002 2002* ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and short-term investments $ 51,000 $ 373,000 Accounts receivable - net 9,789,000 12,723,000 Costs and estimated earnings in excess of billings on uncompleted contracts 2,687,000 2,817,000 Inventory 559,000 461,000 Other current assets 506,000 379,000 ------------ ------------ TOTAL CURRENT ASSETS 13,592,000 16,753,000 PROPERTY, PLANT AND EQUIPMENT 7,425,000 7,922,000 Less: accumulated depreciation (6,048,000) (5,960,000) ------------ ------------ 1,377,000 1,962,000 GOODWILL 582,000 582,000 OTHER ASSETS 379,000 491,000 ------------ ------------ TOTAL ASSETS $ 15,930,000 $ 19,788,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 4,029,000 $ 6,166,000 Billings in excess of costs and estimated earnings on uncompleted contracts 789,000 1,164,000 Current portion of long-term debt 476,000 551,000 Accrued liabilities 1,236,000 2,381,000 ------------ ------------ TOTAL CURRENT LIABILITIES 6,530,000 10,262,000 LONG-TERM DEBT 5,161,000 5,582,000 MINORITY INTEREST (18,000) -- STOCKHOLDERS' EQUITY Cumulative convertible 2% preferred stock 14,000 14,000 Common stock 189,000 189,000 Additional paid-in capital 8,110,000 8,108,000 Deferred compensation (31,000) (46,000) (Deficit) retained earnings (3,987,000) (4,283,000) Less treasury stock (38,000) (38,000) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 4,257,000 3,944,000 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,930,000 $ 19,788,000 ============ ============

*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, --------------------------------- 2002 2001 ------------ ------------ CONTRACT REVENUE $ 9,157,000 $ 12,184,000 CONTRACT COSTS 7,575,000 10,546,000 ------------ ------------ Gross margin 1,582,000 1,638,000 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,486,000 1,442,000 ------------ ------------ Income from operations 96,000 196,000 OTHER INCOME (EXPENSE): Interest expense (93,000) (119,000) Gain on sale of fixed assets and inventory 48,000 -- Interest and other income 12,000 13,000 ------------ ------------ (33,000) (106,000) ------------ ------------ Income before minority interest and income taxes 63,000 90,000 INCOME TAX PROVISION -- -- MINORITY INTEREST 43,000 -- ------------ ------------ NET INCOME $ 106,000 $ 90,000 ============ ============ PER SHARE OF COMMON STOCK: BASIC $ 0.01 $ 0.01 ============ ============ DILUTIVE $ 0.01 $ 0.01 ============ ============ AVERAGE COMMON SHARE EQUIVALENTS OUTSTANDING 9,372,000 9,342,000 AVERAGE DILUTIVE COMMON SHARE EQUIVALENTS OUTSTANDING 29,000 330,000 ------------ ------------ AVERAGE COMMON SHARES AND DILUTIVE COMMON EQUIVALENTS OUTSTANDING FOR EARNINGS PER SHARE CALCULATION 9,401,000 9,672,000 ============ ============

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, --------------------------------- 2002 2001 ------------ ------------ CONTRACT REVENUE $ 32,285,000 $ 28,725,000 CONTRACT COSTS 28,225,000 25,755,000 ------------ ------------ Gross margin 4,060,000 2,970,000 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,870,000 3,911,000 ------------ ------------ Income (loss) from operations 190,000 (941,000) OTHER INCOME (EXPENSE): Interest expense (294,000) (305,000) Gain on sale of St. Louis operation and other fixed assets and inventory 321,000 -- Interest and other income 46,000 22,000 ------------ ------------ 73,000 (283,000) ------------ ------------ Income (loss) before minority interest and income taxes 263,000 (1,224,000) INCOME TAX PROVISION (16,000) -- MINORITY INTEREST 49,000 -- ------------ ------------ NET INCOME (LOSS) $ 296,000 $ (1,224,000) ============ ============ PER SHARE OF COMMON STOCK: BASIC $ 0.03 $ (0.13) ============ ============ DILUTIVE $ 0.03 $ (0.13) ============ ============ AVERAGE COMMON SHARE EQUIVALENTS OUTSTANDING 9,372,000 9,181,000 AVERAGE DILUTIVE COMMON SHARE EQUIVALENTS OUTSTANDING 151,000 -- ------------ ------------ AVERAGE COMMON SHARES AND DILUTIVE COMMON EQUIVALENTS OUTSTANDING FOR EARNINGS PER SHARE CALCULATION 9,523,000 9,181,000 ============ ============

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, ------------------------------- 2002 2001 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 296,000 $(1,224,000) ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH: Depreciation and amortization 782,000 921,000 Contingent acquisition consideration (219,000) 225,000 Stock based compensation 15,000 -- Gain on sale of St. Louis operation and other fixed assets and inventory (321,000) -- Minority interest (49,000) -- CHANGES IN ASSETS AND LIABILITIES OTHER THAN CASH: Accounts receivable 2,934,000 (3,531,000) Costs and estimated earnings in excess of billings on uncompleted contracts 130,000 (169,000) Inventory (125,000) (72,000) Other current assets 434,000 119,000 Accounts payable (2,698,000) 1,957,000 Billings in excess of costs and estimated earnings on uncompleted contracts (872,000) 780,000 Accrued liabilities (375,000) (153,000) ----------- ----------- (572,000) (1,069,000) ----------- ----------- NET CASH USED BY OPERATING ACTIVITIES (68,000) (1,147,000) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (254,000) (695,000) Acquisition of businesses (24,000) (891,000) Other venture's capitalization of joint venture 30,000 -- Proceeds from sale of St. Louis operation and other fixed assets and inventory 490,000 -- Increase in other assets (2,000) (31,000) ----------- ----------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 240,000 (1,617,000) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt -- 2,834,000 Exercise of stock options 2,000 -- Principal payments on debt (496,000) (275,000) ----------- ----------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (494,000) 2,559,000 ----------- ----------- Net Decrease in Cash and Short-Term Investments (322,000) (205,000) Cash and Short-Term Investments, Beginning of Period 373,000 214,000 ----------- ----------- CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 51,000 $ 9,000 =========== ===========

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, 2002 (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION The consolidated financial statements include PDG Environmental, Inc. (the "Corporation") and its wholly-owned subsidiaries. In the first quarter of fiscal 2003, 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 and nine months ended October 31, 2002 were of a normal, recurring nature. The amounts presented for the three and nine months ended October 31, 2002 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, 2002 dated March 28, 2002 and the Quarterly Reports on Form 10-Q of the Corporation for the quarter ended April 30, 2002 dated June 14, 2002 and for the quarter ended July 31, 2002 dated September 14, 2002, which should be read in conjunction with this quarterly report. NOTE 2 - NEW ACCOUNTING PRONOUNCEMENT The Company adopted SFAS 142, "Goodwill and Other Intangible Assets," effective February 1, 2002. SFAS 142 addresses the financial and accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill be separately disclosed from other intangible assets in the statement of financial position, and no longer be amortized but tested for impairment on a periodic basis. The provisions of this accounting standard also require the completion of a transitional impairment test within six months of adoption, with any impairments identified treated as a cumulative effect of a change in accounting principle. Non amortization of goodwill in fiscal 2003 will eliminate a $37,000 annual charge. NOTE 3 - FEDERAL INCOME TAXES No federal income tax has been provided for the nine months ended October 31, 2002 due to the existence of unused net operating loss carryforwards. A state income tax provision was made in the current period due to income in the current year. No state income taxes were provided in the prior year period due to the loss in the prior fiscal year. Income taxes paid by the Corporation for the nine months ended October 31, 2002 and 2001 totaled approximately $65,000 and $78,000, respectively. NOTE 4 - SALE OF ST. LOUIS OPERATION AND SOUTHEAST TEXAS FIXED ASSETS AND INVENTORY 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. Revenues of the St. Louis operation for fiscal 2002 were $2.2 million. 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. The Company intends to expand the mold remediation market in southeastern Texas and curtail its work in the asbestos abatement market. Revenues of the southeast Texas asbestos operation for fiscal 2002 were approximately $4.4 million. 7 NOTE 5 - 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. On May 6, 2002 Sky Bank increased the line of credit by $750,000 to $5.25 million for a ninety-day period. In July 2002, the Corporation and Sky Bank reached an agreement whereby the Corporation's availability on the line of credit would be reduced by $50,000 on August 6, 2002, by $100,000 for each of the five successive months and by $200,000 on February 6, 2003 thereby eliminating the $750,000 increase. Additionally in August 2002, the Corporation agreed to pay $100,000 of the proceeds from the sale of the St. Louis operation to reduce the balance outstanding on the equipment notes with Sky Bank. In December 2002 Sky Bank extended the maturity date of the Company's line of credit until June 2004. Based upon the aforementioned extension, the line of credit was classified as a long-term liability at October 31, 2002. On October 31, 2002, the balance on the line of credit was $4,100,000 with an unused availability of $900,000. The Corporation paid interest costs totaling approximately $292,000 and $293,000 during the nine months ended October 31, 2002 and 2001, respectively. NOTE 6 - PREFERRED STOCK Cumulative dividends in arrears on the Corporation's 2% Series A Preferred Stock were approximately $11,000 at October 31, 2002. At October 31, 2002, 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 interest. 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). 8 NOTE 7 - NET EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:

FOR THE NINE MONTHS ENDED OCTOBER 31, 2002 2001 ----------- ----------- NUMERATOR: Net Income (loss) $ 296,000 $(1,224,000) Preferred stock dividends (1,000) (1,000) ----------- ----------- Numerator for basic earnings per share--income available to common stockholders 295,000 (1,225,000) 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 $ 296,000 $(1,224,000) =========== =========== DENOMINATOR: Denominator for basic earnings per share--weighted average shares 9,372,000 9,181,000 Effect of dilutive securities: Convertible Preferred Stock 28,000 -- Employee Stock Options 123,000 -- ----------- ----------- 151,000 -- ----------- ----------- Denominator for diluted earnings per share--adjusted weighted-average shares and assumed conversions 9,523,000 9,181,000 =========== =========== BASIC EARNINGS PER SHARE $ 0.03 $ (0.13) =========== =========== DILUTED EARNINGS PER SHARE $ 0.03 $ (0.13) =========== ===========

FOR THE THREE MONTHS ENDED OCTOBER 31, 2002 2001 ---------- ---------- NUMERATOR: Net Income $ 106,000 $ 90,000 Preferred stock dividends -- -- ---------- ---------- Numerator for basic earnings per share--income available to common stockholders 106,000 90,000 Effect of dilutive securities: Preferred stock dividends -- -- ---------- ---------- Numerator for diluted earnings per share--income available to common stock after assumed conversions $ 106,000 $ 90,000 ========== ========== DENOMINATOR: Denominator for basic earnings per share--weighted average shares 9,372,000 9,342,000 Effect of dilutive securities: Convertible Preferred Stock 28,000 -- Employee Stock Options 1,000 302,000 Warrants -- 28,000 ---------- ---------- 29,000 330,000 ---------- ---------- Denominator for diluted earnings per share--adjusted weighted-average shares and assumed conversions 9,401,000 9,672,000 ========== ========== BASIC EARNINGS PER SHARE $ 0.01 $ 0.01 ========== ========== DILUTED EARNINGS PER SHARE $ 0.01 $ 0.01 ========== ==========

9 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. 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. OVERVIEW RESULTS OF OPERATIONS NINE MONTHS ENDED OCTOBER 31, 2002 AND 2001 During the nine months ended October 31, 2002 ("Fiscal 2003"), the Corporation's contract revenues increased to $32.3 million compared to $28.7 million in the nine months ended October 31, 2001 ("Fiscal 2002") due in part to $3.0 million of revenues from a significant project in New York and the inclusion of $2.2 million of revenues for the period February 1, 2002 to May 31, 2002 from the Los Angeles office where no revenues were generated in the prior year fiscal period as the operation was acquired June 1, 2001. These positive revenue items in fiscal 2003 were partially offset by revenue decreases from the sale of the St. Louis operations and refocusing of the southeast Texas operations. The Corporation's gross margin increased to $4.1 million in the first nine months of fiscal 2003 compared to $2.9 million in the first nine months of fiscal 2002. The increase in gross margin is due to the increased levels of revenues and higher gross margin percentage realized on contracts in the current fiscal period. Selling, general and administrative expenses decreased slightly to $3.87 million in the current nine-month period as compared to $3.91 million in the nine months ended October 31, 2002. This decrease was due to cost containment by the Corporation during the current period and decreased costs from the St. Louis and southeast Texas operations, partially offset by costs associated with the Los Angeles office which was owned the entire nine-month period in the current fiscal year. The Corporation reported income from operations of $0.19 million for the nine months ended October 31, 2002 compared to a loss from operations of $0.94 million for the nine months ended October 31, 2001 as a direct result of the factors discussed above. Interest expense decreased to $0.29 million in the current quarter as compared to $0.31 million in the same period a year ago due to lower interest rates in fiscal 2003 which offset a higher level of borrowings to support operations and the borrowings associated with the acquisition of the Los Angeles office acquired June 1, 2001. The current period other income includes 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 $49,000 add back to income for minority interest reflects the other venutree's 50% share of the IAQ ventures loss which is reflected throughout the Statement of Operations as the results of the IAQ venture are consolidated. During the nine months ended October 31, 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 $0.02 million was made due to the current period income. During the nine months ended October 31, 2001, the Corporation made no provision for federal income taxes due to the loss in the period and the utilization of net operating loss carryforwards for financial reporting purposes. No state income tax provision was made in the prior fiscal period due to the loss. THREE MONTHS ENDED OCTOBER 31, 2002 AND 2001 During the three months ended October 31, 2002 ("Fiscal 2003"), the Corporation's contract revenues decreased to $9.2 million compared to $12.2 million in the three months ended October 31, 2001 ("Fiscal 2002") due partially to the sale of the St. Louis operation and a general business slowdown. 10 The Corporation's gross margin remained relatively constant at $1.6 million for both fiscal third quarters. The fiscal 2003 gross margins were comparable with the prior fiscal quarter due to higher gross margin percentage realized on contracts in the current fiscal quarter. Selling, general and administrative expenses increased to $1.49 million in the current fiscal quarter as compared to $1.44 million in the three months ended October 31, 2001. The Corporation reported income from operations of $0.1 million for the three months ended October 31, 2002 compared to income from operations of $0.20 million for the three months ended October 31, 2001 as a direct result of the factors discussed above. Interest expense decreased to $0.09 million in the current fiscal quarter as compared to $0.12 million in the prior fiscal quarter due to lower interest rates in fiscal 2003. The current period other income includes a $0.05 million gain from the sale of certain southeast Texas fixed assets and inventory. The $43,000 add back to income for minority interest reflects the other venutree's 50% share of the IAQ ventures loss which is reflected throughout the Statement of Operations as the results of the IAQ venture are consolidated. During the quarter ended October 31, 2002, the Corporation made no provision for federal income taxes due to the utilization of net operating loss carryforwards for financial reporting purposes. No state income tax provision was made in the current year income, as the amount provided previously in the year was adequate. During the quarter ended October 31, 2001, the Corporation made no provision for federal income taxes due to the year to date loss and the utilization of net operating loss carryforwards for financial reporting purposes. No state income tax provision was made in the prior fiscal quarter due to the year to date loss. LIQUIDITY AND CAPITAL RESOURCES 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. Cash outflows 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 cash outflows were partially offset by cash inflows 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. At October 31, 2002, the Corporation's backlog totaled $30.1 million ($19.1 million on fixed fee contracts and $11.0 million on time and materials or unit price contracts). During the nine months ended October 31, 2001, the Corporation's cash decreased by $0.21 million to $0.01 million. 11 The decrease in cash and short term investments during the first nine months of fiscal 2002 is attributable to cash outflows from operations of $1.15 million, cash outflows for investing activities of $1.6 million which included $0.6 million relative to the purchase of selected assets of the former Tri-State operation, $0.29 million of payments to the former owners of businesses acquired in prior years and $0.7 million for the purchase of property, plant and equipment. These cash outflows were partially offset by net cash inflows of $2.56 million from funding activities which included proceeds from debt of $2.84 million, consisting of $2.05 million from the utilization of the Corporation's line of credit and $0.84 million from borrowings to finance new equipment purchases. These cash inflows were partially offset by $0.28 million of principal payments on debt. Cash used by operating activities totaled $1.15 million in the nine months ended October 31, 2001. Cash outflows included $1.2 million from the current period loss, a $3.53 million increase in accounts receivables, including a $2.0 million increase to fund the accounts receivable of the former Tri-State operation, a $0.17 million increase in costs and estimated earnings in excess of billings on uncompleted contracts, a $0.07 increase in inventory and a $0.15 million decrease in accrued liabilities. These cash outflows were partially offset by cash inflows including a $0.12 million decrease in other assets, a $1.96 million increase in accounts payable, a $0.78 million increase in billings in excess of costs and estimated earnings on uncompleted contracts, $0.92 million of depreciation and amortization and $0.23 million of contingent acquisition consideration. PROSPECTIVE INFORMATION In December, the Company was notified by its surety company that due to the loss of reinsurance, it was exiting the surety business for its entire portfolio of environmental contractors and would be unable to provide any contract payment and performance bonds after December 31, 2002. While the Company is confident it will be able to find a replacement surety provider, the inability to secure payment and performance bonds on an on-going basis would have a material adverse impact on the Company's operations. Due to the sale of the St. Louis operations and the refocusing of southeast Texas operations, it is anticipated that revenue levels for the last quarter of fiscal 2003 will be reduced from those achieved in the first three quarters of fiscal 2003. MARKET RISK The only market risk, as defined, that the Company is exposed to is interest rate sensitivity. The interest rate on the equipment note and revolving line of credit fluctuate based upon changes in the prime rate. Each 1% change in the prime rate will result in a $50,000 change in borrowing costs based upon the balance outstanding at October 31, 2002. The interest rate on the term debt is readjusted in August 2003 and if the current interest rate environment exists in August 2003, the interest rate on the term debt would decrease. 12 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, 2002, the cumulative dividends in arrears on the Series A Preferred Stock were approximately $11,000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: EXHIBIT INDEX PAGES OF SEQUENTIAL EXHIBIT NO. AND DESCRIPTION NUMBERING SYSTEM Exhibit 99.1 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, 2002. ITEM 14. CONTROLS AND PROCEDURES As of October 31, 2002, 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, 2002. 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, 2002. APPROVAL OF NON-AUDIT SERVICES The Company currently engages Stokes & Hinds as its independent auditors. In addition to the audit services they provide with respect to the Company's annual audited consolidated financial statements included in the Company's Annual Report on Form 10-K and certain other filings with the Securities and Exchange Commission, Stokes & Hinds has provided the Company in the past and may provide in the future certain non-audit services, such as tax services (tax return preparation and tax-related consultations) and audit type assistance, such as review of SEC filings and US GAAP advice. Effective as of July 30, 2002, the Sarbanes-Oxley Act of 2002 requires that all non-auditing services, other than in certain circumstances as provided therein, provided to an issuer by the auditor of the issuer be preapproved by the audit committee of the issuer. Accordingly, the Company's audit committee has approved the tax services and audit type assistance services currently being provided to the Company by Stokes & Hinds. The Company's audit committee of the Company's Board of Directors currently consists of Messrs. Bendis, Berkey, Chiafullo and Kilpela. 13 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 and Chief Executive Officer Date: December 14, 2002 14 CERTIFICATION I, John C. Regan, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PDG Environmental, Inc; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for PDG Environmental,, Inc. and have: (i) Designed such disclosure controls and procedures to ensure that material information relating to PDG Environmental,, Inc. is made known to me by others within the Company, particularly during the period in which the periodic reports are being prepared; (ii) Evaluated the effectiveness of PDG Environmental, Inc's. disclosure controls and procedures as of a date within 90 days prior to the filing date of this report ("Evaluation Date"); and (iii) Presented in the report their conclusions about the effectiveness of the disclosure controls and procedures based on their evaluation as of the Evaluation Date; 5. I have disclosed, based upon their most recent evaluation, to PDG Environmental, Inc's. auditors and the audit committee of the Company's Board of Directors: (i) All significant deficiencies in the design or operation of internal controls which could adversely affect PDG Environmental, Inc's. ability to record, process, summarize and report financial data and have identified for PDG Environmental, Inc's. auditors any material weaknesses in internal control, and (ii) Any fraud, whether or not material, that involves management or other employees who have a significant role in PDG Environmental, Inc's. internal controls, and 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By /s/ John C. Regan ------------------------------------------- John C. Regan Chief Executive Officer and Chief Financial Officer Date: December 14, 2002 15