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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 2003
[ ] 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.)
1386 BEULAH ROAD, BUILDING 801
PITTSBURGH, PENNSYLVANIA 15235
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 412-243-3200
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 $2,343,083 as of April 17, 2003, computed on the basis of the
average of the bid and asked prices on such date.
As of April 17, 2003 there were 9,372,330 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]
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders, to
be filed subsequent to the date hereof, are incorporated by reference into Part
III of this Form 10-K to the extent stated herein.
PART I
ITEM 1. BUSINESS
OVERVIEW
PDG Environmental, Inc., the registrant or corporation, is a holding company
which, through its wholly-owned operating subsidiaries, provides environmental
and specialty contracting services including asbestos and lead abatement,
insulation, microbial remediation, demolition and related services. In the first
quarter of fiscal 2003, the Corporation formed IAQ Training Institute ("IAQTI"),
a 50/50 joint venture, to provide training in mold awareness and remediation.
DESCRIPTION OF THE BUSINESS
During the past fiscal year the registrant derived the majority of its revenues
from the abatement of asbestos but has broadened its offering of services to
include a number of complementary services which utilize the registrant's
existing infrastructure and personnel. The following is a discussion of each of
the major services provided by the registrant.
ASBESTOS ABATEMENT
The asbestos abatement industry 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.
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. During the last
ten years the industry has remained stable with revenues tracking the general
economic cycle.
The registrant has expertise in all types of asbestos abatement including
removal and disposal, enclosure and encapsulation. Asbestos abatement projects
have been performed in commercial buildings, government and institutional
buildings, schools, hospitals and industrial facilities for both the public and
private sector. Asbestos abatement work is completed in accordance with EPA,
OSHA, state and local regulations governing asbestos abatement operations,
disposal and air monitoring requirements.
LEAD
During the 1990's an increasing awareness of the dangers associated with lead
developed. While lead poisoning takes many forms, the most serious and troubling
in the United States is the danger posed to children and infants from the
ingestion of lead, primarily in the form of paint chips containing lead.
Ingestion of lead has been proven to reduce mental capacities and is especially
detrimental to children in the early stages of development.
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The low income and public housing markets, due to the age of the structures,
contain a significant amount of lead paint that is flaking and peeling. In
response to this problem many municipal and state governments have developed
programs to remediate the structures. The registrant has experience in utilizing
various methods to remove lead-based paint that is adhered to surfaces and the
removal of loose and flaking lead-based paint and dust or lead-contaminated
soil. Removal methods include chemical stripping, wet scraping, needle gun,
high-pressure water/vacuum and abrasive blasting. HEPA vacuums are utilized for
dust and debris clean up. Analysis of removed material, as required, is
performed to assure proper disposal of lead- contaminated waste and debris
generated from removal operations.
The registrant competitively bids the majority of the work it receives from
municipal and state governments.
INSULATION
The insulation industry is involved with providing thermal insulation for
piping, tanks, boilers and other systems in industrial, commercial and
institutional facilities for both new construction and retrofits. Many
applications require the removal of old asbestos containing insulation prior to
the retrofits. The registrant's capabilities include the installation of new
thermal insulation, fireproofing and firestopping. The registrant's experience
includes piping systems, HVAC, process distribution systems and tanks for
commercial, industrial, power generation and petrochemical facilities. The
registrant is also experienced with cryogenic systems insulation as well as
high-pressure boilers and steam pipe insulation for new installations or repair
and renovation to existing systems.
INDOOR AIR QUALITY / MICROBIAL REMEDIATION
Health professionals have been aware of the adverse health effects of exposure
to mold for decades, but the issue has gained increased public awareness in
recent years. Studies indicate that 50% of all homes contain mold and that the
dramatic increase in asthma over the past 20 years can be attributed to mold
exposure. The registrant's current focus is on mold remediation in both
commercial and residential structures. The registrant's experience includes
identification and development of remediation plans, detailing methods and
performing microbial (mold, fungus, etc.) abatement in commercial, residential,
educational, medical and industrial facilities. The registrant's activities
include decontamination, application of biocides and sealant, removal of
building systems (drywall, carpet, etc.), duct cleaning, and disposal of
building furnishings.
DEMOLITION
Similar to the insulation industry, the demolition industry has a wide range of
applications and services. The registrant has currently limited their services
to the performance of selective interior and structural demolition. The
registrant's experience includes interior and structural demolition in occupied
buildings utilizing specially equipped air filtration devices to minimize
airborne dust emissions in occupied areas.
This work has been a natural progression from asbestos abatement work, which
often requires significant interior demolition to access asbestos material for
removal.
MOLD REMEDIATION TRAINING
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.
OPERATIONS
The registrant's operating subsidiaries provide 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 is typically less than
one year; however, larger projects may require two or more 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 contracted work is performed by a qualified labor force in accordance with
regulatory requirements, contract specifications and the registrant's written
operating procedures which describes worker safety and protection procedures,
air monitoring protocols and abatement methods.
The registrant's operations are nationwide. The majority of the registrant's
national marketing efforts are performed by members
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of senior management located in the headquarters facility in Pittsburgh,
Pennsylvania. Regional marketing and project operations are also conducted
through branch offices located in New York City, New York; Hazleton and Export,
Pennsylvania; Fort Lauderdale and Tampa, Florida; Houston, Texas; Los Angeles,
California, Phoenix, Arizona; Portland, Oregon; Seattle, Washington and Rock
Hill, South Carolina. Since the registrant and its subsidiaries are able to
perform 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 business from a
number of suppliers. Two of these suppliers accounted for 48% and 15%,
respectively, of the registrant's purchases in fiscal 2003. The items are
purchased from the vendor's available stock and are not covered by a formalized
agreement.
In fiscal 2003, the registrant estimates that approximately 78% of its operating
subsidiaries' revenues were derived from private sector clients, 12% from
government contracts and 10% from public institutions. 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 years ended January 31, 2003 and 2002 no customer accounted for more than
10% of the registrant's consolidated revenues for that year. For the year ended
January 31, 2001, one customer, the US Army, accounted for 12% of the
registrant's consolidated revenue.
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 and professional organizations.
INSURANCE AND BONDS
The registrant and its operating subsidiaries maintain liability insurance for
claims arising from its business. The policy, which provides a $1.0 million
limit per claim and in the aggregate, insures against both property damage and
bodily injury arising from the 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 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.
A 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 environmental and specialty contractor industries are highly competitive and
include both small firms and large diversified firms, which have the financial,
technical and marketing capabilities to compete on a national level. The
industries are 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
environmental 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 asbestos and lead
containing material during abatement projects and the transportation and
disposal of ACM and lead 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 health and safety of personnel involved in the removal of asbestos and lead
are protected by OSHA regulations which specify allowable airborne exposure
standards for asbestos workers and allowable blood levels for lead workers,
engineering controls, work area practices, supervision, training, medical
surveillance and decontamination practices for worker protection.
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The registrant believes it is in compliance with all of the federal, state and
local statutes and regulations that affect its asbestos and lead abatement
business.
The other segments of the environmental and specialty contractor industry that
the registrant operates in are not currently as regulated as the asbestos and
lead abatement industries.
BACKLOG
The registrant and its operating subsidiaries had a backlog of orders totaling
approximately $31.5 million and $31.7 million at January 31, 2003 and 2002,
respectively. The backlog at January 31, 2003 consisted of $22.0 million of
uncompleted work on fixed fee contracts and an estimated $9.5 million of work to
be completed on time and materials or unit price contracts. The backlog at
January 31, 2002 consisted of $24.0 million of uncompleted work on fixed fee
contracts and an estimated $7.7 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, 2003
backlog and anticipates that approximately 84% of this backlog will be completed
and realized as revenue by January 31, 2004 in accordance with the terms of the
applicable contracts between the registrant and the owners of these properties.
The remaining 16% are expected to be completed and realized as revenue
subsequent to January 31, 2004. Approximately 66% of the backlog existing at
January 31, 2002 was completed and recognized as revenue by January 31, 2003
with 19% expected to be completed and realized as revenue during the year ending
January 31, 2004 and 15% thereafter.
EMPLOYEES
As of January 31, 2003, the registrant employs approximately 110 employees
consisting of senior management and staff employees among its headquarters in
Pittsburgh and branch offices located in New York City, NY; Hazleton, PA;
Export, PA; Fort Lauderdale, FL; Tampa, FL; Los Angeles, CA; Houston, TX;
Phoenix, AZ; Portland, OR; Seattle, WA and Rock Hill, SC. 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 400-500 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 many cases, the Company is a
member of a multi-employer plan. Management considers its employee labor
relations to be good.
WEB SITE POSTINGS
The registrant makes its annual report on Form 10-K and quarterly reports on
Form 10-Q filed with the U.S. Securities and Exchange Commission available to
the public free of charge through its website as soon as reasonably practicable
after making such filings. The registrant's website can be accessed at the
following address: www.pdge.com. The information found on the registrant's
website or that may be accessed through the registrant's website is not part of
this report and is not incorporated hereby by this reference.
RISK FACTORS
Any of the following risks could materially adversely affect the registrant's
business, operating results and financial condition.
THIS TIMING OF CASH FLOW IS DIFFICULT TO PREDICT
The timing of the Company's cash receipts from accounts receivables is
unpredictable. In many cases the Company is a subcontractor to the general
contractor on the job and, therefore, funds are not made available to the
Company until the general contractor has been paid by the owner of the job.
Additionally, many of the Company's contracts provide for retainage of a portion
of the Company's billings until the job has been accepted by the owner. As the
Company's activities are usually early in the contract cycle, if the Company is
acting as a subcontractor, the retainage (typically 5% to 10% of the contract
value) may be held until the project is complete. This timeframe may be many
months after the Company's completion of their portion of the
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contract. This delay further subjects the Company to the credit risk associated
with the general contractor and the owner of the project. The Company can avail
itself of lien rights and other security common to the construction industry to
offset the aforementioned credit risk. Unexpected delays in receiving amounts
due from customers can put a strain on the Company's cash availability and cause
the Company to delay payments to vendors and subcontractors.
THE COMPANY IS DEPENDENT UPON ITS LINE OF CREDIT TO FINANCE OPERATIONS
The Company currently has a $5.1 million line of credit from its financial
institution. The line of credit, by agreement, will reduce to $4.5 million on
July 1, 2003. The timing of collection of the Company's account receivable is
unpredictable and, there can be no assurance that the Company will have the cash
flow to fund the aforementioned reduction in the line of credit. The Company's
current bank has required the personnel guarantee of the Chief Executive Officer
as a credit enhancement to support the credit facility. Mr. Regan has provided
same but there exists no assurance that he will continue to do so in the future.
Should the Company not be able to secure sufficient financing to fund operations
its ability to pay employees, vendors and subcontractors would be impacted which
would have a material adverse effect upon the Company.
TO MAINTAIN OUR OPERATION, THE COMPANY MUST HAVE ADEQUATE INSURANCE AND
SUFFICIENT BONDING CAPACITY
The Company maintains an insurance and bonding program consistent with the
Company's financial needs; however, there have been events in the national
economy which have adversely affected the major insurance and surety companies.
This has resulted in a tightening of the insurance and bonding markets which has
resulted in the costs increasing and the availability of certain types of
insurance and surety capacity either decreasing or becoming non-existent. There
can be no assurance the Company's insurance and bonding program will be adequate
or that it will be available to the Company in the future. The lack of an
adequate insurance and bonding program could have a material and adverse effect
upon the ability of the Company to secure and perform contracts. The Company's
current surety company has required the personnel guarantee of the Chief
Executive Officer as a credit enhancement to support the issuance of the bonds.
Mr. Regan has provided same but there exists no assurance that he will continue
to do so in the future.
THE COMPANY DEPENDS UPON A FEW KEY EMPLOYEES
The Company is dependent upon its senior management to make all material
decisions with respect to the management of the Company. Qualified personnel are
difficult to attract and in some markets there is a shortage of qualified
personnel in the businesses in which the Company operates. The loss of a senior
manager or managers could have a material adverse impact upon the Company.
THE COMPANY HAS A SIGNIFICANT AMOUNT OF WORK UNDER CONTRACT WITH NEW YORK CITY
PUBLIC AGENCIES
The Company currently has several contracts with New York City public agencies.
Funding for these projects is dependent upon the financial condition of New York
City; which has been adversely affected by the downturn in the economy and the
increased funding required for homeland security, resulting in a decreased level
of activity under these contracts. Due to significant initial costs incurred by
the Company to commence these contracts, continued curtailment of work under
these contracts may require negative contract adjustments in the future.
A SIGNIFICANT OF THE COMPANY'S CONTRACTS ARE AWARDED VIA COMPETITIVE BID
A significant amount of the Company's business is performed on a contract basis
as a result of competitive bidding. The Company must estimate the costs involved
with the applicable job prior to submitting a bid and, therefore, if awarded the
job bears the risk if actual costs exceed the estimated costs. Failure to make
accurate estimate could result in losses being incurred by the Company and
thereby reducing or eliminating profit for a specific quarter or fiscal year.
THE ASBESTOS ABATEMENT BUSINESS IS SUBJECT TO SIGNIFICANT GOVERNMENT REGULATIONS
WHILE THE MICROBIAL REMEDIATION BUSINESS IS LARGELY UNREGULATED
Demand for asbestos abatement services is partially related to various federal,
state and local laws and substantial regulations promulgated by governmental
agencies, including the Environmental Protection Agency, various state agencies
and county and local authorities acting in conjunction with such federal and
state entities. Governmental authorities have the power to enforce compliance
with those regulations and to obtain injunctions or impose fines in the case of
violations. Amendments to current laws and regulations governing the Company's
asbestos abatement operations or more stringent implementation thereof could
have a material adverse effect on the Company or require substantial capital
expenditures to comply with such laws and regulations.
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The microbial remediation portion of the Company's business currently is largely
unregulated. As this business grows it is likely that government regulation will
increase. The Company can not predict how the regulations may evolve or whether
they may require increased capital and/or operating expenditures to comply with
the new regulations. New regulation may have an adverse impact upon the
Company's microbial remediation business.
THE RECEIPT OF CONTRACT AWARDS BY THE COMPANY IS UNPREDICTABLE
The Company is an environmental and specialty contractor and as such is affected
by the timing of the award of large contracts. Therefore, backlogs, revenues and
income are subject to significant fluctuation between quarters and years. These
fluctuations can significantly impact revenue and net income as the Company may
not be able to adjust its overhead structure and costs to meet an unexpected
decline in revenue.
THE BUSINESSES IN WHICH THE COMPANY OPERATES ARE VERY COMPETITIVE
The Company competes with numerous firms in the asbestos abatement and specialty
contracting business, some of which have resources exceeding those of the
Company. Additionally, the asbestos abatement market is a relatively mature
industry with limited growth potential.
VOTING CONTROL IS HELD BY THE DIRECTORS AND OFFICERS OF THE COMPANY
Currently directors and officers of the Company as a group beneficially own
approximately 34% of the voting securities of the Company and, therefore, can
have a significant impact upon any proposal brought to the shareholders for a
vote if they vote as a block.
ITEM 2. PROPERTIES
As of January 31, 2003, the registrant leases certain office space for its
executive offices in Pittsburgh totaling 3,334 square feet. In addition, a
combination of warehouse and office space is leased in Los Angeles (6,500 square
feet), Hazleton (1,800 square feet), Fort Lauderdale (6,000 square feet), Tampa
(5,400 square feet), Rock Hill (15,000 square feet), Houston (3,800 square
feet), Phoenix (3,125 square feet), Portland (6,000 square feet), Seattle (2,150
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 of $366,000 at January 31, 2003.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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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.
MARKET PRICE RANGE
FISCAL 2003 FISCAL 2002
----------- -----------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter $ 0.75 $ 0.45 $ 0.53 $ 0.28
Second Quarter 0.58 0.22 0.79 0.30
Third Quarter 0.45 0.17 0.79 0.41
Fourth Quarter 0.30 0.19 0.65 0.43
At March 26, 2003, the registrant had 2,091 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 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 and by the Company's banking agreement
which requires the prior consent of the bank before dividends are declared.
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated selected financial data should be read in conjunction
with the consolidated financial statements and related notes, and "Management
Discussion and Analysis of Financial Condition and Results of Operations'
included elsewhere in this annual report on Form 10-K. The consolidated
statement of operations data for the years ended January 31, 2003, 2002 and 2001
and the consolidated balance data as of January 31, 2003 and 2002 have been
derived from the consolidated financial statements that have been audited by
Stokes & Hinds LLC, independent auditors, included elsewhere in this annual
report on Form 10-K. The consolidated statement of operations data for the years
ended January 31, 2000 and 1999 and the consolidated balance data as of January
31, 2001, 2000 and 1999 have been derived from audited consolidated financial
statements not included in this annual report on Form 10-K. The historical
results presented below are not necessarily indicative of future results.
FOR THE YEARS ENDED JANUARY 31,
2003 2002 2001 2000 1999
---------------------------------------------------------------
(THOUSANDS EXCEPT PER SHARE DATA)
OPERATING DATA
Contract revenues $ 40,883 $ 42,587 $ 34,584 $ 28,480 $ 36,828
Gross margin 5,799 4,258 4,983 4,526 5,306
Income (loss) from operations 401 (1,191) 436 395 2,317
Other income (expense) (149) (380) (222) (127) (147)
Income (loss) from continuing operations 278 (1,601) 173 246 1,310
Loss from discontinued operations - - - - (200)
Net income (loss) 278 (1,601) 173 246 1,110
COMMON SHARE DATA
Net income (loss) from continuing
operations per common share:
Basic 0.03 (0.17) 0.02 0.03 0.18
Diluted 0.03 (0.17) 0.02 0.03 0.16
Net income (loss) per common share:
Basic 0.03 (0.17) 0.02 0.03 0.15
Diluted 0.03 (0.17) 0.02 0.03 0.14
Weighted average common shares outstanding 9,372 9,211 8,731 8,394 7,437
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BALANCE SHEET DATA
Working capital $ 7,137 $ 6,491 $ 5,884 $ 3,308 $ 3,507
Total assets 15,610 19,788 13,409 10,353 9,564
Long-term obligations 4,922 5,582 3,152 542 1,120
Total stockholders' equity 4,244 3,944 5,334 5,061 4,801
The year ended January 31, 2003 included a $0.3 million of gain from the sale of
the St. Louis operation and other fixed assets and a $0.15 million provision for
impairment in value of goodwill.
The year ended January 31, 2001 included a $0.2 million charge to write off
deferred acquisition and financing costs.
The year ended January 31, 2000 included a $0.38 million charge to settle a
benefits claim litigation.
The year ended January 31, 1999 include loss from discontinued operations of
($0.2 million); ($0.02) 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 environmental and
specialty contracting services including asbestos and lead abatement,
insulation, microbial remediation, demolition and related services.
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, 2003.
Certain statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this report are
forward-looking statements that involve risks and uncertainties. These
statements relate to future events or the registrant's future financial
performance. In some cases, forward-looking statements can be identified by
terminology such as "may", "will", "should", "expect", "anticipate", "intend",
"plan", "believe", "estimate", "potential", or "continue", the negative of these
terms or other comparable terminology. These statements involve a number of
risks and uncertainties. Actual events or results may differ materially from any
forward-looking statement as a result of various factors, including those
described above under "Risk Factors".
RESULTS OF OPERATIONS
YEAR ENDED JANUARY 31, 2003 COMPARED TO YEAR ENDED JANUARY 31, 2002
During the year ended January 31, 2003, (fiscal 2003) the registrant's
consolidated revenues decreased to $40.9 million as compared to $42.6 million
the previous fiscal year ended January 31, 2002 (fiscal 2002). The decrease was
due in part to revenue decreases from the sale of the St. Louis operations and
refocusing of the southeast Texas operations which were partially offset by $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.
The registrant's reported gross margin increased to $5.8 million in fiscal 2003
compared to $4.3 million in fiscal 2002. The increase in gross margin is due to
higher gross margin percentage realized on contracts in the current fiscal year.
Additionally, the prior fiscal year included $1.3 million of negative contract
adjustments on four in process projects.
Selling, general and administrative expenses decreased slightly in fiscal 2003
to $5.4 million compared to $5.45 million in fiscal 2002. This decrease was due
to cost containment by the registrant during the current period and decreased
costs from the St.
8
Louis and southeast Texas operations, partially offset by costs associated with
the Los Angeles office which was owned the entire twelve-month period in the
current fiscal year.
As a result of the factors discussed above, the registrant reported income from
operations in fiscal 2003 of $0.4 million compared to a loss from operations of
($1.2) million in fiscal 2002.
Interest expense decreased to $0.38 million in fiscal 2003 compared to $0.40
million in fiscal 2002 as a result of 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 year 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 and an impairment charge of $149,000 was made to
reflect the termination of operations at the St. Louis and Chicago locations
which were sold/closed, respectively, during fiscal 2003. The St. Louis and
Chicago operations were acquired in fiscal 1999.
Other income in fiscal 2003 totaled approximately $54,000 versus $24,000 in
fiscal 2002.
The $42,000 add back to income for minority interest reflects the other
venturee's 50% share of the IAQTI's loss which is reflected throughout the
Statement of Operations as the results of the IAQTI are consolidated.
As a result of net operating loss carryforwards for book purposes, there was no
federal income tax provision in fiscal 2003 and 2002. State income tax
provisions of $16,000 and $30,000 were made in fiscal 2003 and 2002,
respectively. At January 31, 2003, the Company has approximately $5.8 million of
net operating loss carryforwards to offset future federal income taxes.
YEAR ENDED JANUARY 31, 2002 COMPARED TO YEAR ENDED JANUARY 31, 2001
Consolidated revenues reported by the registrant increased to $42.6 million for
the year ended January 31, 2002 (fiscal 2002) compared to $34.6 million for the
year ended January 31, 2001 (fiscal 2001). The fiscal 2002 revenue included $7.7
million from the Los Angeles office acquired June 1, 2001. Excluding the effect
of this acquisition on revenue, revenues increased $0.3 million or 1% in fiscal
2002.
Contract costs increased to $38.3 million in fiscal 2002 compared to $29.6
million in fiscal 2001 and resulted in reported gross margins of $4.3 million
and $5.0 million, respectively, in each fiscal year. The decrease in gross
margin is due primarily to labor shortages and $1.3 million of negative contract
adjustments on four significant contracts in the fourth quarter of Fiscal 2002.
The registrant's selling, general and administrative expenses increased by 20%
between the two fiscal years to $5.5 million in fiscal 2002 compared to $4.6
million in fiscal 2001. This increase was due to the addition of five branch
offices (three from acquisition and two via the opening of new offices) during
Fiscal 2002 and 2001 and a provision of $0.2 million for uncollectable accounts
in fiscal 2002.
The factors discussed above resulted in the registrant reporting a loss from
operations of $1.2 million in fiscal 2002 compared to income from operations of
$0.4 million in fiscal 2001.
Interest expense increased to $0.4 million from $0.26 million due to a higher
level of borrowings to support increased revenues and borrowings required to
finance the acquisition of the Los Angeles office acquired in June 2001.
Interest income decreased to $3,000 for the year ended January 31, 2002 compared
to $16,000 for the previous fiscal year due to lower invested cash balances at
certain periods throughout the year.
As a result of the current year loss in fiscal 2002 and existing net operating
loss carryforwards for book purposes, no federal income tax provision was
required in fiscal 2002 and 2001. In fiscal 2002, a $30,000 state income tax
provision was made as compared to a $41,000 state income tax provision in fiscal
2001.
9
LIQUIDITY AND CAPITAL RESOURCES
FISCAL 2003
During fiscal 2003, the registrant experienced a decrease in liquidity of $0.335
million as cash and short-term investments decreased from $0.37 million at
January 31, 2002 to $0.04 million at January 31, 2003. The decrease in liquidity
in fiscal 2003 was attributable to cash utilized by financing activities of
$0.74 million partially offset by cash inflows of $0.23 million from operating
activities and of $0.18 million from financing activities.
Cash outflows from financing activities of $0.74 million during fiscal 2003
included $0.74 million of repayments on debt including reducing the line of
credit by $0.15 million to $3.95 million at January 31, 2003 from $4.1 million
at January 31, 2002.
Cash inflows from operating activities were generated by net income of $0.28
million, depreciation and amortization of $1.05 million, a $3.4 million decrease
in accounts receivable and a $0.15 million provision for impairment of goodwill.
The cash inflows were partially offset by cash utilizations including a $0.22
million decrease in contingent acquisition consideration, the $0.32 million gain
on the sale of the St. Louis operations and certain southwest Texas fixed assets
and inventory, $0.04 million of minority interest in the IAQTI, a $0.59 million
increase in costs and estimated earnings in excess of billings on uncompleted
contracts, a $0.05 million increase in inventories, a $2.65 million decrease in
accounts payable, a $0.09 million decrease in billings in excess of costs and
estimated earnings on uncompleted contracts and a $0.74 million decrease in
accrued liabilities related to the timing of the payments.
The registrant's investing activities generated cash flow of $0.18 million which
included $0.49 million of proceeds from the sale of the St. Louis operation and
certain southwestern Texas fixed assets and inventory and the $0.03 million of
capital contributions from the other venturee in the IAQTI. These inflows were
partially offset by $0.32 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.
Based upon the current operating plan, the Company expects that its existing
cash balances and cash flows from operations will be sufficient to finance the
Company's working capital and capital expenditure requirements through Fiscal
2004. However, if events occur or circumstances change such that the Company
fails to meets its operating plan as expected, the Company may require
additional funds to support its working capital requirements or for other
purposes and may seek to raise additional funds through public or private equity
or debt financing or from other sources. If additional financing is needed, the
Company can not be assured that such financing will be available on commercially
reasonable terms or at all.
FISCAL 2002
During fiscal 2002, the registrant experienced an increase in liquidity of $0.16
million as cash and short-term investments increased from $0.21 million at
January 31, 2001 to $0.37 million at January 31, 2002. The increase in liquidity
in fiscal 2002 was attributable to $2.7 million of cash provided by financing
activities this was partially offset by cash outflows of $0.86 million from
operating activities and $1.7 million from investing activities.
Specifically, cash outflows from operating activities were related to accounts
receivable which increased by $5.65 million, costs and estimated earnings in
excess of billings on uncompleted contracts which increased by $0.27 million and
the net loss of $1.6 million. These cash outflows were partially offset cash
inflows from accounts payable which increased $3.87 million, billings in excess
of costs and estimated earnings on uncompleted contracts which increased by
$0.25 million, a decrease in other current assets of $0.29 million, a $0.56
million increase in accrued liabilities, $1.2 million of depreciation and
amortization, a $0.2 million provision for uncollectable accounts and a $0.26
million increase in contingent payment consideration.
The registrant's investing activities utilized cash of $1.7 million during
fiscal 2002 which was attributable to $0.76 million of purchases of property,
plant and equipment and $0.92 million for the acquisition of businesses.
The $2.72 million from financing activities during fiscal 2002 included proceeds
from debt of $3.13 million consisting of $0.6 million from new term equipment
loans from the Company's prime lender, $2.35 million of borrowings on the line
of credit and $0.18 million of equipment financing. Additionally, $0.01 million
was received from the exercise of stock options. These inflows were partially
offset by $0.43 million of scheduled principal payments on term debt.
ITEM 7A. QUANTITATIVE 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 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 $48,000 change in borrowing costs based upon the
balance outstanding at January 31, 2003. The interest rate on the term debt is
10
readjusted in August 2003 and if the current interest rate environment exists in
August 2003, the interest rate on the term debt would decrease.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the registrant and its subsidiaries and
the report of Stokes & Hinds LLC are submitted in a separate section 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.
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 2003 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of
1934.
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Based upon his evaluation as of a date within 90 days of the filing date of this
annual report on Form 10-K, the Company's Chief Executive Officer has concluded
that the disclosure controls and procedures (as defined in rules 13a-14(c) and
15-d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act")) are
effective to ensure that information required to be disclosed by the Company in
reports that the Company files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission's rules and forms.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation. There were no significant deficiencies or material weaknesses, and
therefore, there were no corrective actions taken.
12
PART IV
ITEM 15. 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 included in Item
8.
PAGE
----
Report of Independent Auditors.......................................................... F-1
Consolidated Balance Sheets as of January 31, 2003 and 2002............................. F-2
Consolidated Statements of Operations for the Years Ended
January 31, 2003, 2002 and 2001....................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended January 31, 2003, 2002 and 2001........................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
January 31, 2003, 2002 and 2001......................................................... F-6
Notes to Consolidated Financial Statements for the Three Years
Ended January 31, 2003, 2002 and 2001................................................. 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
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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.
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.
13
PAGES
OF SEQUENTIAL
EXHIBIT INDEX NUMBERING SYSTEM
------------- ----------------
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 Loan Agreement dated August 3, 2000 between Sky Bank and PDG
Environmental, Inc., PDG, Inc., Project Development Group, Inc. and
Enviro-Tech Abatement Services Co., filed as Exhibit 4.4 to the
registrant's Annual Report on Form 10-K for the year ended January
31, 2001, 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.
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.
14
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OF SEQUENTIAL
EXHIBIT INDEX NUMBERING SYSTEM
------------- ----------------
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 Loan Agreement dated August 3, 2000 between Sky Bank and PDG
Environmental, Inc., PDG, Inc., Project Development Group, Inc. and
Enviro-Tech Abatement Services Co. (as it appears at 4.4).
10.09 Employee Agreement dated June 20, 2000 for John C. Regan filed as
Exhibit 10 of the PDG Environmental, Inc. Quarterly Report on Form
10-Q for the quarter ended July 31, 2000, is hereby incorporated
herein by reference.
10.10 Asset Purchase Agreement dated June 15, 2001 by and among Tri-State
Restoration, Inc. Project Development Group, Inc. and PDG
Environmental, Inc., filed as Exhibit 2 of the registrant's Interim
Report on Form 8-K dated July 6, 2001, is hereby incorporated herein
by reference.
21 List of subsidiaries of the registrant.
23 Consent of independent auditors.
24 Power of attorney of directors.
99 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 January 31, 2003.
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, Chief Executive Officer and
Chief Financial Officer
Date: April 23, 2003
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 23, 2003
- -------------------------------------------------
John C. Regan
Chairman and Chief Executive Officer
(Principal Executive Officer, Financial Officer and Director)
Richard A. Bendis, Director By /s/ John C. Regan
---------------------------------
John C. Regan, Attorney-in-Fact
April 23, 2003
Edgar Berkey, Director By /s/ John C. Regan
---------------------------------
John C. Regan, Attorney-in-Fact
April 23, 2003
James D. Chiafullo, Director By /s/ John C. Regan
---------------------------------
John C. Regan, Attorney-in-Fact
April 23, 2003
Edwin J. Kilpela, Director By /s/ John C. Regan
---------------------------------
John C. Regan, Attorney-in-Fact
April 23, 2003
16
CERTIFICATION
I, John C. Regan, certify that:
1. I have reviewed this annual report on Form 10-K of PDG Environmental,
Inc;
2. Based on my knowledge, this annual 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 annual 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 annual 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 my 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 annual 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: April 23, 2003
17
PDG ENVIRONMENTAL, INC.
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(c) AND (d)
FINANCIAL STATEMENTS, CERTAIN EXHIBITS & SCHEDULE
18
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, 2003 and 2002, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended January 31, 2003.
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 auditing standards generally accepted
in the United States of America. 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, 2003 and 2002, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended January 31, 2003 in conformity with accounting principles generally
accepted in the United States of America. 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/ Stokes & Hinds, LLC
Pittsburgh, Pennsylvania
March 28, 2003
F-1
CONSOLIDATED BALANCE SHEETS
PDG ENVIRONMENTAL, INC.
JANUARY 31,
2003 2002
-------------------------
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 38,000 $ 373,000
Accounts receivable, net of $150,000 and $130,000 allowance in fiscal 2003
and fiscal 2002, respectively 9,271,000 12,723,000
Costs and estimated earnings in excess of billings on
uncompleted contracts 3,412,000 2,817,000
Inventories 484,000 461,000
Notes receivable from officers 132,000 132,000
Other current assets 256,000 247,000
----------- -----------
TOTAL CURRENT ASSETS 13,593,000 16,753,000
PROPERTY, PLANT AND EQUIPMENT
Land 42,000 42,000
Leasehold improvements 194,000 196,000
Furniture and fixtures 176,000 178,000
Vehicles 781,000 912,000
Equipment 5,934,000 6,224,000
Buildings 370,000 370,000
----------- -----------
7,497,000 7,922,000
Less: accumulated depreciation 6,238,000 5,960,000
----------- -----------
1,259,000 1,962,000
COVENANTS NOT TO COMPETE, NET OF ACCUMULATED AMORTIZATION OF $130,000
AND $84,000 IN 2003 AND 2002, RESPECTIVELY 100,000 146,000
GOODWILL, NET OF ACCUMULATED AMORTIZATION OF $29,000 AND $67,000 IN 2003
and 2002, respectively 433,000 582,000
OTHER ASSETS 225,000 345,000
----------- -----------
TOTAL ASSETS $15,610,000 $19,788,000
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
CONSOLIDATED BALANCE SHEETS
PDG ENVIRONMENTAL, INC.
JANUARY 31,
2003 2002
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,519,000 $ 6,166,000
Billings in excess of costs and estimated earnings on
uncompleted contracts 1,070,000 1,164,000
Accrued liabilities 1,400,000 2,381,000
Current portion of long-term debt 467,000 551,000
------------ ------------
TOTAL CURRENT LIABILITIES 6,456,000 10,262,000
LONG-TERM DEBT 4,922,000 5,582,000
MINORITY INTEREST (12,000) -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Cumulative convertible Series A preferred stock, $0.01 par value, 5,000,000
shares authorized and 6,000 issued and outstanding shares at January 31,
2003 and 2002
(liquidation preference of $60,000 at January 31, 2003) 14,000 14,000
Common stock, $0.02 par value, 30,000,000 shares authorized and
9,418,840 and 9,413,840 shares issued and outstanding at
January 31, 2003 and 2002, respectively 189,000 189,000
Paid-in capital 8,110,000 8,108,000
Deferred compensation (26,000) (46,000)
(Deficit) retained earnings (4,005,000) (4,283,000)
Less treasury stock, 46,510 shares at January 31, 2003 and 2002 (38,000) (38,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 4,244,000 3,944,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,610,000 $ 19,788,000
============ ============
See accompanying notes to consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
PDG ENVIRONMENTAL, INC.
FOR THE YEARS ENDED JANUARY 31,
2003 2002 2001
--------------------------------------------
CONTRACT REVENUES $ 40,883,000 $ 42,587,000 $ 34,584,000
CONTRACT COSTS 35,084,000 38,329,000 29,601,000
------------ ------------ ------------
GROSS MARGIN 5,799,000 4,258,000 4,983,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,398,000 5,449,000 4,547,000
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 401,000 (1,191,000) 436,000
OTHER INCOME (EXPENSE):
Interest expense (375,000) (404,000) (257,000)
Gain on sale of St. Louis operation and other fixed assets 321,000 - -
Provision for impairment in value of goodwill (149,000) - -
Interest and other income 54,000 24,000 35,000
------------ ------------ ------------
(149,000) (380,000) (222,000)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 252,000 (1,571,000) 214,000
INCOME TAX PROVISION (16,000) (30,000) (41,000)
MINORITY INTEREST 42,000 - -
------------ ------------ ------------
NET INCOME (LOSS) $ 278,000 $ (1,601,000) $ 173,000
============ ============ ============
EARNINGS PER COMMON SHARE - BASIC: $ 0.03 $ (0.17) $ 0.02
============ ============ ============
EARNINGS PER COMMON SHARE - DILUTIVE: $ 0.03 $ (0.17) $ 0.02
============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING 9,372,000 9,211,000 8,731,000
AVERAGE DILUTIVE COMMON STOCK EQUIVALENTS OUTSTANDING 274,000 - 316,000
------------ ------------ ------------
AVERAGE COMMON SHARES AND DILUTIVE COMMON STOCK
EQUIVALENTS OUTSTANDING 9,646,000 9,211,000 9,047,000
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PDG ENVIRONMENTAL, INC.
PREFERRED
STOCK COMMON PAID-IN DEFERRED
SERIES A STOCK CAPITAL COMPENSATION
-------- ----- ------- ------------
BALANCE AT JANUARY 31, 2000 $ 14,000 $ 169,000 $ 7,421,000 $ -
Issuance of 121,652 shares in
connection with an acquisition 2,000 98,000
Issuance of 259,696 shares to reflect declaration
of 1/3 of the common stock rights 6,000 248,000
Net Income
----------- ----------- ----------- -----------
BALANCE AT JANUARY 31, 2001 14,000 177,000 7,767,000 -
Issuance of 300,000 shares in
connection with an acquisition 6,000 183,000
Issuance of 450,000 stock options 59,000 (59,000)
Issuance of 25,000 shares under Employee
Incentive Stock Option Plan 1,000 8,000
Amortization of stock based compensation 13,000
Issuance of 259,696 shares to reflect declaration
of 1/3 of the common stock rights 5,000 91,000
Net Loss
----------- ----------- ----------- -----------
BALANCE AT JANUARY 31, 2002 14,000 189,000 8,108,000 (46,000)
Issuance of 5,000 shares under Employee
Incentive Stock Option Plan - 2,000
Amortization of stock based compensation 20,000
Net Income
----------- ----------- ----------- -----------
BALANCE AT JANUARY 31, 2003 $ 14,000 $ 189,000 $ 8,110,000 $ (26,000)
=========== =========== =========== ===========
(DEFICIT) TOTAL
TREASURY RETAINED STOCKHOLDERS'
STOCK EARNINGS EQUITY
----- -------- ------
BALANCE AT JANUARY 31, 2000 $ (38,000) $(2,505,000) $ 5,061,000
Issuance of 121,652 shares in
connection with an acquisition 100,000
Issuance of 259,696 shares to reflect declaration
of 1/3 of the common stock rights (254,000) -
Net Income 173,000 173,000
----------- ----------- -----------
BALANCE AT JANUARY 31, 2001 (38,000) (2,586,000) 5,334,000
Issuance of 300,000 shares in
connection with an acquisition 189,000
Issuance of 450,000 stock options -
Issuance of 25,000 shares under Employee
Incentive Stock Option Plan 9,000
Amortization of stock based compensation 13,000
Issuance of 259,696 shares to reflect declaration
of 1/3 of the common stock rights (96,000) -
Net Loss (1,601,000) (1,601,000)
----------- ----------- -----------
BALANCE AT JANUARY 31, 2002 (38,000) (4,283,000) 3,944,000
Issuance of 5,000 shares under Employee
Incentive Stock Option Plan 2,000
Amortization of stock based compensation 20,000
Net Income 278,000 278,000
----------- ----------- -----------
BALANCE AT JANUARY 31, 2003 $ (38,000) $(4,005,000) $ 4,244,000
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
PDG ENVIRONMENTAL, INC.
FOR THE YEARS ENDED JANUARY 31,
2003 2002 2001
-----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (Loss) $ 278,000 $(1,601,000) $ 173,000
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Depreciation 851,000 857,000 688,000
Amortization 194,000 340,000 485,000
Contingent acquisition consideration (219,000) 260,000 -
Stock based compensation 20,000 13,000 -
Gain on sale of St. Louis operation and other fixed assets
and inventory (321,000) - -
Provision for impairment in value of goodwill 149,000 - -
Write off of deferred acquisition and financing costs - - 205,000
Provision for uncollectable accounts 20,000 200,000 35,000
Minority interest (42,000) - -
CHANGES IN CURRENT ASSETS AND LIABILITIES OTHER THAN CASH:
Accounts receivable 3,432,000 (5,645,000) (1,195,000)
Costs and estimated earnings in excess of billings on
uncompleted contracts (595,000) (271,000) (1,491,000)
Inventories (50,000) 7,000 (139,000)
Other current assets (9,000) 293,000 452,000
Accounts payable (2,647,000) 3,872,000 (747,000)
Billings in excess of costs and estimated earnings on
uncompleted contracts (94,000) 254,000 (105,000)
Accrued liabilities (736,000) 563,000 336,000
----------- ----------- -----------
TOTAL CHANGES (699,000) (927,000) (2,889,000)
----------- ----------- -----------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES 231,000 (858,000) (1,303,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (324,000) (757,000) (630,000)
Acquisition of business (24,000) (921,000) (579,000)
Other venture's capitalization of joint venture 30,000 - -
Proceeds from sale of St. Louis operation and other fixed assets
and inventory 490,000 15,000 12,000
Increase in other assets 4,000 (37,000) (138,000)
----------- ----------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 176,000 (1,700,000) (1,335,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt - 3,134,000 4,624,000
Proceeds from exercise of stock options and warrants 2,000 9,000 -
Principal payments on debt (744,000) (426,000) (2,054,000)
----------- ----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (742,000) 2,717,000 2,570,000
----------- ----------- -----------
Net increase (decrease) in cash and short-term investments (335,000) 159,000 (68,000)
Cash and short-term investments, beginning of year 373,000 214,000 282,000
----------- ----------- -----------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR $ 38,000 $ 373,000 $ 214,000
=========== =========== ===========
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
PDG ENVIRONMENTAL, INC.
FOR THE THREE YEARS ENDED JANUARY 31, 2003
NOTE 1 - BASIS OF PRESENTATION
BUSINESS ACTIVITIES
PDG Environmental, Inc. (the "Corporation") is a holding company which, through
its wholly-owned operating subsidiaries, provides environmental and specialty
contracting services including asbestos and lead abatement, insulation,
microbial remediation, demolition and related services. In the first quarter of
fiscal 2003, the Corporation formed IAQ Training Institute ("IAQTI") a 50/50
joint venture to provide training in mold awareness and remediation.
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 more to complete.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL PRESENTATION:
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States 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 and its
wholly-owned subsidiaries.
The results of IAQTI, in which the Corporation holds a 50% interest, were also
consolidated since the Corporation is a 50% owner of IAQTI and exercises
management control. The other 50% owner's portion is reflected as minority
interest in the financial statements.
REVENUES AND COST RECOGNITION:
Revenues for services performed 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, material and subcontractor 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.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
The Company provides for estimated losses on uncollectible accounts receivable
based upon management's review of outstanding trade receivables.
F-7
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:
The Corporation provides for income taxes under the liability method as required
by SFAS No. 109.
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
applicable rates.
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," which eliminated the pooling of interest method of
accounting for all business combinations initialed after June 30, 2001 and
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. The Company adopted this
accounting standard for business combinations initiated after June 30, 2001.
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.
No impairment charge was made at that time. At January 31, 2003 an impairment
charge of $149,000 was made to reflect the termination of operations at the St.
Louis and Chicago locations which were sold/closed, respectively, during fiscal
2003. The aforementioned operations were acquired in fiscal 1999. Non
amortization of goodwill in fiscal 2003 eliminated a $37,000 annual charge.
In August 2002, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes SFAS No. 121 and provides a
single accounting model for long-lived assets to be disposed of. The new rules
significantly change what would have to be met to classify an asset as held for
sale. In addition, more dispositions will qualify for discontinued operations
treatment in the income statement as the criteria for discontinued operation
presentation is changed to a component of the business rather than a segment of
the business. The Company will be required to apply SFAS No. 144 as of October
1, 2003.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," addresses financial accounting and reporting for costs associated
with exit or disposal activities and requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred, rather than at the date of an entity's commitment to
an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initialed after December 31, 2002, with early application
encouraged. The Company does not expect that the impact will be material.
In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123.
This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for this Statement
and amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company was required to apply SFAS No. 148 for the
year ended January 31, 2003. The adoption of Statement No. 148 did
F-8
not have a material effect on the Corporation's financial position or results of
operations as it continues to account for stock based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations.
NOTE 4 - ACCOUNTS RECEIVABLE
Accounts receivable at January 31, 2003 and 2002 include $1,308,000 and
$1,247,000, respectively, of retainage receivables. For the years ended January
31, 2003 and 2002, no customer accounted for more than 10% 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 feasible, 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,
2003 2002
-------------------------
Revenues earned on uncompleted contracts $44,859,000 $35,173,000
Less: billings to date 42,517,000 33,520,000
----------- -----------
Net Under Billings $ 2,342,000 $ 1,653,000
=========== ===========
Included in the accompanying consolidated balance sheets under the following
captions:
JANUARY 31,
2003 2002
--------------------------
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 3,412,000 $ 2,817,000
Billings in excess of costs and estimated earnings on
uncompleted contracts (1,070,000) (1,164,000)
----------- -----------
Net Under Billings $ 2,342,000 $ 1,653,000
=========== ===========
NOTE 6 - ACCRUED LIABILITIES
Accrued liabilities are as follows:
JANUARY 31,
2003 2002
-----------------------
Wages and withholdings $ 689,000 $1,150,000
Accrued fringe benefits 291,000 484,000
Covenants not to compete 175,000 420,000
Other 245,000 327,000
---------- ----------
Total Accrued Liabilities $1,400,000 $2,381,000
========== ==========
F-9
NOTE 7 - LONG-TERM DEBT
Long-term debt of the Corporation less amounts due within one year is as
follows:
JANUARY 31,
2003 2002
-----------------------
Term loan due in monthly installments of $4,095 including
interest at 9.15% due in August 2015 $ 366,000 $ 381,000
Equipment note due in monthly installments of $21,495 including
interest at 1% above the prime rate, due in August 2005 585,000 790,000
Equipment note due in monthly installments of $16,114 including
interest at 1% above the prime rate, due in August 2005 256,000 509,000
Revolving line of credit expiring on June 1, 2004 and
bearing interest at 1% above the prime rate 3,950,000 4,100,000
Equipment notes, most significant note due in monthly installments of $4,472
including interest at 7.25%, due until July, 2005 138,000 203,000
Term note payable to the former shareholders of Tri-State Restoration
due May 31, 2003 plus interest at 6.5% 94,000 150,000
---------- ----------
5,389,000 6,133,000
Less amount due within one year 467,000 551,000
---------- ----------
$4,922,000 $5,582,000
========== ==========
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 (at
January 31, 2003 prime was 4.25%). 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. The credit facility
contains certain financial covenants which the Corporation required waiver at
January 31, 2003 and 2002 and met at January 31, 2001.
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, an asbestos abatement and demolition company in California. (See
Note 13 for further discussion of the acquisition). 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 Restoration 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.
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 was reduced by $50,000 on August 6, 2002, by $100,000 for each of the
seven successive months thereby eliminating the $750,000 increase by March 5,
2003. 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.
On February 28, 2003 Sky Bank increased the line of credit by $600,000 to $5.1
million for a four-month period. The
F-10
availability on the line of credit will be reduced to $4.5 million on July 1,
2003.
In December 2002 Sky Bank extended the maturity date of the Company's line of
credit until June 1, 2004.
On January 31, 2003, the balance on the line of credit was $3,950,000 with an
unused availability of $650,000.
The majority of the Corporation's property and equipment are pledged as security
for the above obligations.
Maturity requirements on long-term debt aggregate $467,000 in fiscal 2004,
$4,352,000 in fiscal 2005, $256,000 in fiscal 2006, $21,000 in fiscal 2007,
$23,000 in fiscal 2008 and $270,000 thereafter.
The Corporation paid approximately $378,000, $367,000, and $236,000 for interest
costs during the years ended January 31, 2003, 2002 and 2001, respectively.
NOTE 8 - INCOME TAXES
At January 31, 2003, the Corporation has net operating loss carryforwards of
approximately $5,783,000 for income tax purposes which expire in years 2003
through 2011. For financial reporting purposes, a valuation allowance of
approximately $2,137,000 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 $178,000 during the year ended January 31, 2003 primarily due to
the utilization of the net operating loss carryforward.
The significant components of the Corporation's deferred tax liabilities and
assets as of January 31, 2003 and 2002 are as follows:
JANUARY 31,
2003 2002
-----------------------
Deferred tax liabilities:
Tax over book depreciation $ - $ -
Deferred tax assets:
Book over tax depreciation and amortization 115,000 75,000
Other 56,000 32,000
Net operating loss carryforwards 1,966,000 2,208,000
---------- ----------
Total deferred tax assets 2,137,000 2,315,000
Valuation allowance for deferred tax assets 2,137,000 2,315,000
---------- ----------
Net deferred tax assets - -
---------- ----------
Net deferred tax liabilities $ - $ -
========== ==========
F-11
Significant components of the provision for income taxes (all current) are as
follows:
FOR THE YEARS ENDED JANUARY 31,
2003 2002 2001
-------------------------------
Current:
Federal $ - $ - $ -
State 16,000 30,000 41,000
------- ------- -------
Total income tax provision $16,000 $30,000 $41,000
======= ======= =======
The reconciliation of income tax computed at the federal statutory rates to
income tax expense is as follows:
FOR THE YEARS ENDED JANUARY 31,
2003 2002 2001
-----------------------------------
Tax at statutory rate $ 95,000 $(534,000) $ 73,000
State income taxes, net of federal tax benefit 11,000 20,000 27,000
Limitation on utilization of net operating loss (90,000) 544,000 (59,000)
--------- --------- ---------
$ 16,000 $ 30,000 $ 41,000
========= ========= =========
The Corporation paid approximately $65,000, $104,000 and $73,000 for federal and
state income and franchise taxes during the years ended January 31, 2003, 2002
and 2001, respectively.
NOTE 9 - NOTES RECEIVABLE - OFFICERS
At January 31, 2003 and 2002, 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, 2003 by officer is as follows: John
C. Regan, Chairman -$95,000; Dulcia Maire, Secretary -$30,000 and Lawrence
Horvat, Vice President -$7,000.
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," (as amended by SFAS 148),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the measurement date, 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 3,300,000 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 629,000 shares of the Corporation's common
stock were granted under the Plan issuable related to fiscal 2004 at an exercise
price of $0.19 per share.
Options to purchase 660,000 shares of the Corporation's common stock at an
exercise price of $0.46 per share were granted under the Plan issuable related
to fiscal 2003. Vesting of the non-discretionary portion of the stock options
was contingent upon the individual offices, and in the case of the executive
office, the Corporation meeting pre-established financial goals for the year.
Those individual non-discretionary awards that did not vest due to failure to
achieve goals, vest in November 2010. Vesting of the discretionary portion is
based upon a number of discretionary items, including overall corporate
performance, absolute dollar amount of office contribution and the magnitude of
contracts awarded during the prior year and the office backlog as of the end of
the year to name the most significant criteria among others. All unvested
discretionary options are returned to the Plan for future grants. A total of
430,034 options to purchase shares of common stock vested at January 31, 2003
relative to fiscal 2003.
Options to purchase 536,500 shares of the Corporation's common stock at an
exercise price of $0.40 per share were granted under the Plan issuable related
to fiscal 2002. Vesting of the non-discretionary portion of the stock options
was contingent upon the individual offices, and in the case of the executive
office, the Corporation meeting pre-established financial goals for the year.
Those individual non-discretionary awards that did not vest due to failure to
achieve goals, vest in November 2009. Vesting of the discretionary portion is
based upon a number of discretionary items, including overall corporate
performance, absolute dollar
F-12
amount of office contribution and the magnitude of contracts awarded during the
prior year and the office backlog as of the end of the year to name the most
significant criteria among others. All unvested discretionary options are
returned to the Plan for future grants. A total of 290,000 options to purchase
shares of common stock vested at January 31, 2002 relative to fiscal 2002.
Additionally, 450,000 options to purchase shares of common stock of the Company
were issued to the former majority owner of Tri-State Restorations, Inc. See
Note 13.
Options to purchase 362,000 shares of the Corporation's common stock at an
exercise price of $0.53 per share were granted under the Plan issuable related
to fiscal 2001. Vesting of the non-discretionary portion of the stock options
was contingent upon the individual offices, and in the case of the executive
office, the Corporation meeting pre-established financial goals for the year.
Those individual non-discretionary awards that did not vest due to failure to
achieve goals vest in November 2009. Vesting of the discretionary portion is
based upon a number of discretionary items, including overall corporate
performance, absolute dollar amount of office contribution and the magnitude of
contracts awarded during the prior year and the office backlog as of the end of
the year to name the most significant criteria among others. All unvested
discretionary options are returned to the Plan for future grants. A total of
239,000 options to purchase shares of common stock vested at January 31, 2001
relative to fiscal 2001.
The following table summarizes information with respect to the Plan for the
three years ended January 31, 2003:
OPTION
NUMBER OF PRICE RANGE
SHARES PER SHARE
--------------------------
OUTSTANDING AT JANUARY 31, 2000 1,692,083 $0.36 - $1.91
Granted 544,500 $0.40 - $0.53
Cancelled - Reusable (28,500) $0.53 - $0.87
---------
OUTSTANDING AT JANUARY 31, 2001 2,208,083 $0.36 - $1.91
Granted 1,137,500 $0.40 - $0.46
Cancelled - Reusable (234,250) $0.40 - $1.63
Exercised (25,000) $ 0.36
---------
OUTSTANDING AT JANUARY 31, 2002 3,086,333 $0.36 - $1.91
Granted 643,367 $0.19 - $0.46
Cancelled - Reusable (591,500) $0.36 - $1.91
Exercised (5,000) $ 0.36
---------
OUTSTANDING AT JANUARY 31, 2003 3,133,200 $0.19 - $1.63
=========
EXERCISABLE AT JANUARY 31, 2003 1,558,667 $0.19 - $1.63
=========
The weighted average life of the options outstanding at January 31, 2003 and
2002 and the weighted average exercise price of vested options at January 31,
2003 and 2002 was 6.4 years and 6.8 years, respectively, and $0.52 and $0.54,
respectively.
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
2003, 2002 and 2001: risk-free interest rates of 4%, 5% and 7% in fiscal 2003,
2002 and 2001, respectively; dividend yield of 0%; volatility factors of the
expected market price of the Company's common stock of 1.14, 0.88 and 1.39 in
fiscal 2003, 2002 and 2001, respectively; and a weighted-average expected life
of the option of 10 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
F-13
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 FISCAL
03 02 01
-- -- --
Net income (loss), as reported $ 278,000 $ (1,601,000) $ 173,000
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards net of
related tax effects (58,000) (179,000) (218,000)
------------- ------------- -----------
Pro forma net income (loss) $ 220,000 $ (1,780,000) $ (45,000)
============= ============= ===========
Earnings per share:
Basic-as reported $ 0.03 $ (0.17) $ 0.02
============= ============= ===========
Basic-pro forma $ 0.02 $ (0.19) $ (0.01)
============= ============= ===========
Diluted-as reported $ 0.03 $ (0.17) $ 0.02
============= ============= ===========
Diluted-pro forma $ 0.02 $ (0.19) $ (0.01)
============= ============= ===========
The following table summarizes information with respect to non-qualified stock
options for the three years ended January 31, 2003:
OPTION
NUMBER OF PRICE RANGE
SHARES PER SHARE
-----------------------
OUTSTANDING AND EXERCISABLE AT JANUARY 31, 2000 20,000 $0.60-$0.65
No Activity - -
-------
OUTSTANDING AND EXERCISABLE AT JANUARY 31, 2001 20,000 $0.60-$0.65
Cancelled - Reusable (10,000) $ 0.60
-------
OUTSTANDING AND EXERCISABLE AT JANUARY 31, 2002 10,000 $ 0.65
No Activity - -
-------
OUTSTANDING AND EXERCISABLE AT JANUARY 31, 2003 10,000 $ 0.65
=======
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 $0.65 per share have been granted under the Employee Director
Plan. At January 31, 2003 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 600,000 shares of the Corporation's common stock. Options to purchase
330,250 shares of the Corporation's common stock at prices ranging from $0.26
per share to $1.39 per share have been granted under the Non-Employee Directors
Plan. At January 31, 2003, all of the options 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.
F-14
NOTE 11 - STOCK WARRANTS
At January 31, 2003 and 2002, the Corporation had 250,000 fully vested warrants
outstanding. The exercise price of the warrants range from $1.20 per share to
$2.50 per share expiring in fiscal 2004. These warrants were issued in
conjunction with shareholder relations and investment banking agreements.
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, March 6,
2000 and March 21, 2001 Board of Directors meetings, the issuance of one third
of the shares (280,071, 259,696 and 259,696 common shares, respectively) covered
by the aforementioned right was approved. At January 31, 2003 and 2002, there
were no common stock rights outstanding, respectively. The Recapitalization was
contingent upon the Corporation's listing on the American Stock Exchange. The
Corporation made a decision not to pursue such a listing; therefore, the
Recapitalization was indefinitely postponed.
At January 31, 2003, there were 6,000 shares of the Corporation's Series A
Preferred Stock outstanding. Cumulative dividends in arrears on the Series A
Preferred Stock were approximately $11,000 at January 31, 2003.
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 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 - ACQUISITION
Effective May 31, 2001, PDG Environmental, Inc. and subsidiaries (the "Company")
entered into an agreement (the "Agreement") with Tri-State Restorations, Inc.
("Tri-State") and Timothy Vitta and Thomas Stevens (collectively "the
Principals") for the purchase of selected assets and assumption of contracts of
Tri-State. Tri-State owned and operated a business which conducted environmental
remediation, demolition and asbestos abatement. The acquisition was accounted
for under the purchase method of accounting and the results of Tri-State
subsequent to June 1, 2001 were included in the Company's results.
As consideration for the purchase, the Company paid Tri-State $541,000 in cash,
$150,000 in the form of a subordinated note at 6 1/2% interest due May 31, 2002
and 300,000 shares of the Company's common stock (valued at $189,000) and
entered into a three-year employment agreement with the Principals that provides
for additional compensation in addition to an annual salary. Additional
compensation consists of 60% of the annual operating income generated by the
former Tri-State operation in excess of $150,000 for the years June 1, 2001
through May 31, 2002 and June 1, 2002 through May 31, 2003 and 60% of the annual
operating income generated by the former Tri-State operation in excess of
$200,000 for the period June 1, 2003 through May 31, 2004. The additional
compensation is payable annually to the Principals on August 31 of each year. No
additional compensation was paid for the twelve month period ending May 31, 2002
as the income goal was not met.
Additionally, the former majority owner of Tri-State received options for
450,000 shares of the Company's common stock at an exercise price of $0.50 per
share. The options vest at a rate of 150,000 per year beginning June 15, 2002
and each of the two successive years. No vesting will occur in a year that the
earnings quota is not reached for the former Tri-State operation, except that if
50% of the earnings quota is reached, 50% of the options will vest for that year
and pro rata from 50% to 100%. Any options not earned and awarded for the
achievement of the aforementioned earnings quota will vest on June 14, 2010.
F-15
The options expire on June 14, 2011. No options vested for the twelve month
period ending June 15, 2002 as the earnings goal was not met.
The goodwill associated with the acquisition ($339,000) was being amortized on a
straight-line basis over 15 years and the customer list is being amortized on a
straight-line basis over 5 years. Beginning February 1, 2002, in accordance with
SFAS 142 amortization of goodwill will cease.
Tri-State's revenues for the years ended December 31, 2000 and 1999 were
$11,665,000 and $9,588,000, respectively.
The following unaudited pro forma condensed results of operations assume that
the acquisition of Tri-State was consummated on February 1, 2000.
Years ended January 31,
2002 2001
------------ ------------
Contract revenues $ 44,215,000 $ 46,249,000
Contract costs 39,660,000 38,012,000
------------ ------------
Gross margin 4,555,000 8,237,000
Selling, general & administrative 5,354,000 6,205,000
Depreciation & amortization 568,000 1,289,000
------------ ------------
Income (loss) from operations (1,367,000) 743,000
Other income (expense) (258,000) (257,000)
------------ ------------
Income (loss) before income taxes (1,625,000) 486,000
Income tax provision 30,000 82,000
------------ ------------
Net Income (Loss) $ (1,655,000) $ 404,000
============ ============
Net income (loss) per common shares $ (0.17) $ 0.04
============ ============
Weighted average shares outstanding 9,511,000 9,347,000
============ ============
NOTE 14 - 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 focus on the mold remediation
market in southeastern Texas. Revenues of the southeast Texas asbestos operation
for fiscal 2002 were approximately $4.4 million.
NOTE 15 - NET INCOME PER COMMON SHARE
F-16
The following table sets forth the computation of basic and diluted earnings per
share:
FOR THE YEARS ENDED JANUARY 31,
2003 2002 2001
-----------------------------------------
NUMERATOR:
Income (loss) before discontinued operations $ 278,000 $(1,601,000) $ 173,000
Preferred stock dividends (1,000) (1,000) (1,000)
----------- ----------- -----------
Numerator for basic earnings per share--income available
to common stockholders 245,000 277,000 (1,602,000) 172,000
Effect of dilutive securities:
Preferred stock dividends 1,000 1,000 1,000
----------- ----------- -----------
Numerator for diluted earnings per share--income available to
common stock after assumed conversions $ 278,000 $(1,601,000) $ 173,000
=========== =========== ===========
DENOMINATOR:
Denominator for basic earnings per share--weighted average shares 9,372,000 9,211,000 8,731,000
Effect of dilutive securities:
Employee stock options 245,000 - 288,000
Warrants - - -
Convertible preferred stock 29,000 - 28,000
----------- ----------- -----------
Dilutive potential common shares 274,000 - 316,000
----------- ----------- -----------
Denominator for diluted earnings per share--adjusted
weighted-average shares and assumed conversions 9,646,000 9,211,000 9,047,000
=========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE $ 0.03 $ (0.17) $ 0.02
=========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE $ 0.03 $ (0.17) $ 0.02
=========== =========== ===========
At January 31, 2003, 2002 and 2001; 1,165,083, 1,961,083 and 695,583 options,
and 250,000, 250,000 and 250,000 warrants, respectively, were not included in
the calculation of dilutive earnings per share as their inclusion would have
been antidilutive.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
The Corporation leases certain facilities and equipment under non-cancelable
operating leases. Rental expense under operating leases aggregated $578,000,
$554,000 and $448,000 for the years ended January 31, 2003, 2002 and 2001,
respectively. Minimum rental payments under these leases with initial or
remaining terms of one year or more at January 31, 2003 aggregated $1,124,000
and payments due during the next five fiscal years are as follows: 2004 -
$520,000, 2005 - $307,000, 2006 - $195,000, 2007 - $86,000 and 2008 - $16,000.
NOTE 17 - QUARTERLY RESULTS (UNAUDITED)
The Company had the following results by quarter:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
YEAR ENDING JANUARY 31, 2003
Revenues $ 10,900,000 $ 12,227,000 $ 9,157,000 $ 8,599,000 $ 40,883,000
Gross margin 919,000 1,558,000 1,583,000 1,739,000 5,799,000
Net income (loss) $ (227,000) $ 417,000 $ 106,000 $ (18,000) $ 278,000
Earnings per share
Basic $ (0.02) $ 0.04 $ 0.01 $ 0.00 $ 0.03
Diluted $ (0.02) $ 0.04 $ 0.01 $ 0.00 $ 0.03
YEAR ENDING JANUARY 31, 2002
Revenues $ 5,823,000 $ 10,718,000 $ 12,184,000 $ 13,862,000 $ 42,587,000
Gross margin 325,000 1,007,000 1,638,000 1,288,000 4,258,000
Net income (loss) $ (996,000) $ (318,000) $ 90,000 $ (377,000) $ (1,601,000)
Earnings per share
Basic $ (0.11) $ (0.03) $ 0.01 $ (0.04) $ (0.17)
Diluted $ (0.11) $ (0.03) $ 0.01 $ (0.04) $ (0.17)
F-17
PDG ENVIRONMENTAL, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED
JANUARY 31, 2003, 2002 AND 2001
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED AT CLOSE
OF YEAR TO INCOME DEDUCTIONS(1) OF YEAR
------- --------- ------------ -------
2003
Allowance for doubtful accounts $ 130,000 $ 20,000 $ - $150,000
=============== ======== ================ ========
2002
Allowance for doubtful accounts $ - $200,000 $ 70,000 $130,000
=============== ======== ================ ========
2001
Allowance for doubtful accounts $ - $ 35,000 $ 35,000 $ -
=============== ======== ================ ========
(1)Uncollectible accounts written off, net of recoveries.
F-18