10-Q 1 j9483301e10vq.txt PDG ENVIRONMENTAL, INC. (conformed) SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 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 No X --- --- As of June 8, 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 April 30, 2002 (unaudited) and 3 January 31, 2002 (b) Consolidated Statements of Operations for the Three Months Ended April 30, 2002 4 and 2001 (unaudited) (c) Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2002 5 and 2001 (unaudited) (d) Notes to Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings 10 Item 3. Defaults Upon Senior Securities 10 Item 6. Exhibits and Reports on Form 8-K 10 Signatures 11

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

APRIL 30, JANUARY 31, 2002 2002* ------------ ------------ ASSETS (UNAUDITED) CURRENT ASSETS Cash and short-term investments $ 44,000 $ 373,000 Accounts receivable - net 12,213,000 12,723,000 Costs and estimated earnings in excess of billings on uncompleted contracts 2,159,000 2,817,000 Inventory 532,000 461,000 Other current assets 961,000 379,000 ------------ ------------ TOTAL CURRENT ASSETS 15,909,000 16,753,000 PROPERTY, PLANT AND EQUIPMENT 7,978,000 7,922,000 Less: accumulated depreciation (6,184,000) (5,960,000) ------------ ------------ 1,794,000 1,962,000 GOODWILL 582,000 582,000 OTHER ASSETS 454,000 491,000 ------------ ------------ TOTAL ASSETS $ 18,739,000 $ 19,788,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 5,249,000 $ 6,166,000 Billings in excess of costs and estimated earnings on uncompleted contracts 1,760,000 1,164,000 Current portion of long-term debt 552,000 551,000 Accrued liabilities 2,058,000 2,381,000 ------------ ------------ TOTAL CURRENT LIABILITIES 9,619,000 10,262,000 LONG-TERM DEBT 5,373,000 5,582,000 MINORITY INTEREST 23,000 - 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 (41,000) (46,000) (Deficit) retained earnings (4,510,000) (4,283,000) Less treasury stock (38,000) (38,000) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 3,724,000 3,944,000 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,739,000 $ 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 APRIL 30, ---------------------------- 2002 2001 ------------ ------------ CONTRACT REVENUE $ 10,900,000 $ 5,823,000 CONTRACT COSTS 9,981,000 5,498,000 ------------ ------------ Gross margin 919,000 325,000 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,067,000 1,243,000 ------------ ------------ Income (loss) from operations (148,000) (918,000) OTHER INCOME (EXPENSE): Interest expense (96,000) (85,000) Interest and other income 13,000 7,000 ------------ ------------ (83,000) (78,000) ------------ ------------ Income (loss) before minority interest and income taxes (231,000) (996,000) INCOME TAX PROVISION - - MINORITY INTEREST 4,000 - ------------ ------------ NET INCOME (LOSS) $ (227,000) $ (996,000) ============ ============ PER SHARE OF COMMON STOCK: BASIC $ (0.02) $ (0.11) ============ ============ DILUTIVE $ (0.02) $ (0.11) ============ ============ AVERAGE COMMON SHARE EQUILIVENTS OUTSTANDING 9,370,000 8,899,000 AVERAGE DILUTIVE COMMON SHARE EQUILIVENTS OUTSTANDING - - ------------ ------------ AVERAGE COMMON SHARES AND DILUTIVE COMMON EQUILIVENTS OUTSTANDING FOR EARNINGS PER SHARE CALCULATION 9,370,000 8,899,000 ============ ============

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

FOR THE THREE MONTHS ENDED APRIL 30, -------------------------- 2002 2001 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (227,000) $ (996,000) ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH: Depreciation and amortization 267,000 322,000 Contingent acquisition consideration (219,000) - Stock based compensation 5,000 - Minority interest (4,000) - CHANGES IN ASSETS AND LIABILITIES OTHER THAN CASH: Accounts receivable 510,000 754,000 Costs and estimated earnings in excess of billings on uncompleted contracts 658,000 87,000 Inventory (71,000) (28,000) Other current assets (404,000) (265,000) Accounts payable (1,095,000) (231,000) Billings in excess of costs and estimated earnings on uncompleted contracts 596,000 (115,000) Accrued liabilities (104,000) (83,000) ----------- ----------- 90,000 119,000 ----------- ----------- NET CASH USED BY OPERATING ACTIVITIES (88,000) (555,000) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (56,000) (297,000) Acquisition of Businesses - (129,000) Other venture's capitalization of joint venture 27,000 - Increase in other assets (6,000) (9,000) ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES (35,000) (435,000) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt - 936,000 Exercise of stock options 2,000 - Principal payments on debt (208,000) (120,000) ----------- ----------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (206,000) 816,000 ----------- ----------- Net Decrease in Cash and Short-Term Investments (329,000) (174,000) Cash and Short-Term Investments, Beginning of Period 373,000 214,000 ----------- ----------- CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 44,000 $ 40,000 =========== ===========

See accompanying notes to consolidated financial statements. 5 PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED APRIL 30, 2002 (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION The consolidated financial statements include PDG Environmental, Inc.'s (the "Corporation") and its wholly-owned subsidiaries. In the first quarter of fiscal 2003 the Company formed IAQ Training Institute a 50/50 joint venture to provide training in toxic mold 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 months ended April 30, 2002 were of a normal, recurring nature. The amounts presented for the three months ended April 30, 2002 are not necessarily indicative of results of operations for a full year. Additional information is contained in the Annual Report on Form 10-KSB of the Corporation for the year ended January 31, 2002 dated March 28, 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. The Company does not anticipate any impairment charges relative to goodwill. 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 three months ended April 30, 2002 due to the loss in the current period and the existence of unused net operating loss carryforwards. No state income taxes were provided due to the loss in the current period. Income taxes paid by the Corporation for the three months ended April 30, 2002 and 2001 totaled approximately $62,000 and $47,000, respectively. NOTE 4 - LINE OF CREDIT On August 3, 2000, the Corporation closed on a new $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 new 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 proposed 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, 6 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 April 30, 2002, the balance on the line of credit was $4,000,000 with an unused availability of $500,000. On May 6, 2002 Sky Bank increased the line of credit by $750,000 to $5.25 million for a ninety day period. The Corporation paid interest costs totaling approximately $99,000 and $85,000 during the three months ended April 30, 2002 and 2001, respectively. NOTE 5 - PREFERRED STOCK Cumulative dividends in arrears on the Corporation's 2% Series A Preferred Stock were approximately $10,000 at April 30, 2002. At April 30, 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). NOTE 6 - NET EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:

FOR THE THREE MONTHS ENDED APRIL 30, 2002 2001 ----------- ----------- NUMERATOR: Net Income (loss) $ (227,000) $ (996,000) Preferred stock dividends - - ----------- ----------- Numerator for basic earnings per share--income available to common stockholders (227,000) (996,000) Effect of dilutive securities: Preferred stock dividends - - ----------- ----------- Numerator for diluted earnings per share--income available to common stock after assumed conversions $ (227,000) $ (996,000) =========== =========== DENOMINATOR: Denominator for basic earnings per share--weighted average shares 9,370,000 8,899,000 Effect of dilutive securities - - ----------- ----------- Denominator for diluted earnings per share--adjusted weighted-average shares and assumed conversions 9,370,000 8,899,000 =========== =========== BASIC EARNINGS PER SHARE $ (0.02) $ (0.11) =========== =========== DILUTED EARNINGS PER SHARE $ (0.02) $ (0.11) =========== ===========

7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED APRIL 30, 2002 AND 2001 During the three months ended April 30, 2002 ("Fiscal 2003"), the Corporation's contract revenues increased to $10.9 million compared to $5.8 million in the three months ended April 30, 2001 ("Fiscal 2002") due in part to $2.2 million of revenues from a significant project in New York and the inclusion of $1.7 million of revenues from the Los Angeles office acquired June 1, 2001. The fiscal 2002 revenues were adversely impacted by delays in commencing contracts in response to the general economic slowdown. The Corporation's gross margin increased to $0.9 million in the first quarter of fiscal 2003 compared to $0.3 million in the first quarter of fiscal 2002. The increase in gross margin is due to the increased levels of revenues in the current fiscal quarter. Selling, general and administrative expenses decreased to $1.1 million in the current fiscal quarter as compared to $1.2 million in the three months ended April 30, 2001. This decrease was due to reversal of $0.2 million of contingent purchase consideration offset by additional costs for the Los Angeles office. The Corporation reported a loss from operations of $0.15 million for the three months ended April 30, 2002 compared to a loss from operations of $0.92 million for the three months ended April 30, 2001 as a direct result of the factors discussed above. Interest expense increased to $0.1 million in the current quarter as compared to $0.08 million in the same quarter of a year ago due to a higher level of borrowings to support operations and the borrowings associated with the acquisition of the Los Angeles office acquired June 1, 2001. During the quarters ended April 30, 2002 and 2001, the Corporation made no provision for federal income taxes due to the loss in the quarters and the utilization of net operating loss carryforwards for financial reporting purposes. No state income tax provision was made in the current quarter or prior fiscal quarter due to the loss. LIQUIDITY AND CAPITAL RESOURCES During the three months ended April 30, 2002, the Corporation's cash decreased by $0.33 million to $0.04 million. Cash used by operating activities totaled $0.09 million in the three months ended April 30, 2001. Cash outflows included the $0.23 million net loss incurred during the current three months, a $0.22 million decrease in contingent acquisition consideration to reflect current period losses at the former Tri-State (Los Angeles) office, a $0.07 million increase in inventories, $0.4 million due to a increase in other current assets, a $1.1 million decrease in accounts payable and a $0.1 million decrease in accrued liabilities related to the timing of payments. These cash outflows were partially offset by cash inflows including a $0.51 million decrease in accounts receivables, a $0.66 million decrease in costs and estimated earnings in excess of billings on uncompleted contracts and a $0.60 million increase in billings in excess of costs and estimated earnings on uncompleted contracts and $0.27 million of depreciation and amortization. The decrease in cash and short term investments during the first quarter of fiscal 2003 is attributable to the aforementioned cash outflows from operations of $0.09 million, cash outflows for investing activities of $0.035 million, which included $0.06 million for the purchase of property, plant and equipment partially offset by the other venturee's capital contribution of $0.03 million to the IAQ joint venture and $0.21 million of cash outflows associated with financing activities due to the repayment of debt. At April 30, 2002, the Corporation's backlog totaled $32.6 million ($22.3 million on fixed fee contracts and $10.3 million on time and materials or unit price contracts). During the three months ended April 30, 2001, the Corporation's cash decreased by $0.17 million to $0.04 million. 8 Cash used by operating activities totaled $0.56 million in the three months ended April 30, 2001. Cash outflows included $1.0 million from the current quarter loss, a $0.27 million increase in other assets, a $0.23 million decrease in accounts payable, a $0.12 million decrease in billings in excess of costs and estimated earnings on uncompleted contracts and a $0.08 million decrease in accrued liabilities. These cash outflows were partially offset by cash inflows including a $0.75 million decrease in accounts receivable, a $0.09 million decrease in costs and estimated earnings in excess of billings on uncompleted contracts and $0.32 million of depreciation and amortization. The decrease in cash and short term investments during the first quarter of fiscal 2001 is attributable to cash outflows from operations of $0.56 million, cash outflows for investing activities of $0.46 million which included $0.13 million of payments to the former owners of businesses acquired in prior years and $0.30 million for the purchase of property, plant and equipment. These cash outflows were partially offset by net cash inflows of $0.81 million from funding activities which included proceeds from debt of $0.94 million consisting of $0.67 million from the utilization of the Corporation's line of credit and $0.27 million from borrowings to finance new equipment purchases. These financing inflows were partially offset by $0.12 million of principal payments on debt. 9 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 April 30, 2002, the cumulative dividends in arrears on the Series A Preferred Stock were approximately $10,000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: EXHIBIT INDEX PAGES OF SEQUENTIAL EXHIBIT NO. AND DESCRIPTION NUMBERING SYSTEM (b) Reports on Form 8-K During the three months ended April 30, 2002 the registrant filed the second and third amendments (dated February 11, 2002 and March 14, 2002, respectively) to its Form 8-K filed in connection with the acquisition of Tri-State Restorations, Inc.. 10 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: June 14, 2002 11