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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, 2004
[ ] 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 $7,532,010 as of April 19, 2004, computed on the basis of the
average of the bid and asked prices on such date.
As of April 19, 2004 there were 10,746,330 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 2004 Annual Meeting of Stockholders,
which statement will be filed not later than 120 days after the end of the
fiscal year covered by this Report, 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, ("we") are a holding company which,
through our wholly-owned operating subsidiaries, provides environmental and
specialty contracting services including asbestos and lead abatement,
insulation, microbial remediation, demolition and related services throughout
the United States. We were incorporated in Delaware on February 9, 1987.
We have three operating subsidiaries, Project Development Group, Inc which is
incorporated in Pennsylvania, PDG, Inc. which is incorporated in Pennsylvania
and Enviro-Tech Abatement Services Co. which is incorporated in North Carolina.
In the first quarter of fiscal 2003, we formed IAQ Training Institute ("IAQTI"),
a 50/50 joint venture, to provide training in mold awareness and remediation to
workers in the indoor air quality and microbial remediation industry.
DESCRIPTION OF THE BUSINESS
During the past fiscal year we derived the majority of our revenues from the
abatement of asbestos but have broadened our offering of services to include a
number of complementary services which utilize our existing infrastructure and
personnel. Revenue is generated from periodic progress billings on large
contracts and single project billings on small short duration projects. The
following is a discussion of each of the major services we provide.
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. Most structures built before 1973 contain ACM in some
form and surveys conducted by the U.S. federal government have estimated that
31,000 schools and 733,000 public and commercial buildings contain friable ACM.
In addition, many more industrial facilities are known to contain other forms of
asbestos.
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.
During the 1980's the asbestos abatement industry grew rapidly 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.
We have 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,
Occupational Safety and Health Administration ("OSHA"), state and local
regulations governing asbestos abatement operations, disposal and air monitoring
requirements.
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LEAD ABATEMENT
During the 1990's, the lead abatement industry developed due to increased public
awareness of the dangers associated with lead poisoning. 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.
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. We have 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. We complete such lead removal work in
accordance with EPA, OSHA, state and local regulations governing lead removal
operations, disposal and air monitoring requirements.
INSULATION
The insulation industry is involved in the installation of thermal insulation
for piping, tanks, boilers and other systems in industrial, commercial and
institutional facilities for both new construction and retrofits. In connection
with such installation projects, many applications require the removal of old
asbestos containing insulation prior to the retrofits.
Our capabilities include the installation of new thermal insulation,
fireproofing and firestopping. Our experience includes piping systems, HVAC,
process distribution systems and tanks for commercial, industrial, power
generation and petrochemical facilities. We are 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.
We provide mold remediation services in both commercial and residential
structures. Such services include decontamination, application of biocides and
sealant, removal of building systems (drywall, carpet, etc.), duct cleaning, and
disposal of building furnishings. We have experience in identification and
development of remediation plans, detailing methods and performing microbial
(mold, fungus, etc.) abatement in commercial, residential, educational, medical
and industrial facilities.
DEMOLITION
Similar to the insulation industry, the demolition industry has a wide range of
applications and services. We have currently limited their services to the
performance of selective interior and structural demolition. Our 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, we formed IAQ Training Institute ("IAQ
Venture"), a 50/50 joint venture, to provide training in mold awareness and
remediation. IAQ Venture is one of five companies nationwide that provide this
training. Course offerings include a Certified Mold Remediator ("CMR")
certificate program and worker training for mold remediaton. The CMR
certification is being required by an increasing number of states.
OPERATIONS
Our 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.
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Larger and longer-term contracts are billed on a progress basis (usually
monthly) in accordance with the terms of the contract. Smaller and shorter
duration contracts are billed upon completion. Larger and longer term contracts
which are billed on progress basis may contain a provision for retainage whereby
a portion of each billing (10% in many cases) is held by the owner until the
completion of the contract or until certain contractually defined milestones are
met.
We monitor 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 our written operating procedures which describes
worker safety and protection procedures, air monitoring protocols and abatement
methods.
Our operations are nationwide. The majority of our national marketing efforts
are performed by members 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 our subsidiaries are able to
perform work throughout the year, the business is not considered seasonal in
nature. However, our revenue is affected by the timing of large contracts.
BUSINESS STRATEGY
We intend to acquire restoration/mold remediation companies that service major
metropolitan population centers or regions with high population densities. We
desire to acquire restoration/ mold remediation companies in markets that we
currently services for asbestos abatement but are not opposed to an
opportunistic acquisition in a market that we do not currently service.
Acquisitions in markets that are currently serviced would be integrated into
the existing operations, thereby hopefully achieving economies of scale.
Additionally, the location would benefit from our existing management structure,
employee base and customer contacts.
SUPPLIERS AND CUSTOMERS
We purchase the equipment and supplies used in the business from a number of
suppliers. Two of these suppliers accounted for 37% and 17%, respectively, of
our purchases in fiscal 2004. The items are purchased from the vendor's
available stock and are not covered by a formalized agreement.
In fiscal 2004, we estimates that approximately 75% of our operating
subsidiaries' revenues were derived from private sector clients, 14% from
government contracts and 11% from public institutions. Due to the nature of our
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, 2004, 2003 and 2002 no customer accounted for more than
10% of our consolidated revenues for that year.
LICENSES
We are licensed and/or certified in all jurisdictions where required in order to
conduct our operations. In addition, certain management and staff members are
licensed and/or certified by various governmental agencies and professional
organizations.
INSURANCE AND BONDS
We maintain liability insurance for claims arising from our 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 our 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. Obtaining adequate insurance is a
problem faced by us and the asbestos industry as a whole due to the limited
number of insurers and the increasing cost of coverage. To the best of our
knowledge, we currently have insurance sufficient to satisfy all regulatory
requirements. Although we believe that we will be able to obtain renewals of, or
replacements for our existing coverage should we be cancelled, there can be no
assurance that we will be able to maintain insurance in compliance with
regulatory and our customers' requirements. Failure to satisfy these insurance
requirements could have a material adverse effect on our business and financial
condition.
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We also provide worker's compensation insurance, at statutory limits, which
covers the employees of our operating subsidiaries. We believe that we are fully
covered by workers' compensation insurance with respect to any claims that may
be made by current and former employees relating to asbestos operations. The
amount of workers' compensation insurance maintained varies from state to state
but is generally greater than the maximum recovery limits established by law and
is not subject to any aggregate policy limits.
In line with industry practice, we are often required to provide payment and
performance bonds to customers under fixed-price contracts. These bonds
indemnify the customer should we fail to perform our obligations under the
contract. If a bond is required for a particular project and we are unable to
obtain an appropriate bond, we cannot pursue that project. We have a bonding
facility but, as is typically the case, the issuance of bonds under that
facility is at the surety's sole discretion. The recent difficult insurance
market combined with large losses experienced by sureties in the aftermath of
Enron and other financial scandals, as well as a result of the September 11,
2001 terrorist attacks have made bond markets, in general, unpredictable and
chaotic. Bonds may be more difficult to obtain in the future or they may only be
available at significant additional cost. There can be no assurance that bonds
will continue to be available to us on reasonable terms. Our inability to obtain
adequate bonding and, as a result, to bid on new work could have a material
adverse effect on our businesses, financial condition, results of operations,
and cash flows.
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. We principally compete 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
The environmental remediation industry is generally subject to extensive
federal, state and local regulations, including the EPA's Clean Air Act and
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.
We believe we are in compliance with all of the federal, state and local
statutes and regulations that affect our asbestos and lead abatement business.
However, if we fail to comply with the laws and regulations that are directly
applicable to our business, we could suffer civil and/or criminal penalties or
be subject to injunctions or cease and desist orders.
The other segments of the environmental and specialty contractor industry that
we operate in are not currently as regulated as the asbestos and lead abatement
industries.
BACKLOG
We had a backlog of orders totaling approximately $36.5 million and $31.5
million at January 31, 2004 and 2003, respectively. The backlog at January 31,
2004 consisted of $24.9 million of uncompleted work on fixed fee contracts and
an estimated $11.6 million of work to be completed on time and materials or unit
price contracts. 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 From time to time we
enter into fixed-price subcontracts which tends to reduce our risk on
fixed-price contracts.
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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. We are
currently working on nearly all of the contracts in our January 31, 2004 backlog
and anticipate that approximately 60% of this backlog will be completed and
realized as revenue by January 31, 2005 in accordance with the terms of the
applicable contracts between ourselves and the owners of these properties. The
remaining 40% are expected to be completed and realized as revenue subsequent to
January 31, 2005. Approximately 57% of the backlog existing at January 31, 2003
was completed and recognized as revenue by January 31, 2004 with 31% expected to
be completed and realized as revenue during the year ending January 31, 2005 and
12% thereafter.
EMPLOYEES
As of January 31, 2004, we employed approximately 110 employees consisting of
senior management and staff employees among our 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. We also employ laborers for field operations based upon
specific projects; therefore, the precise number varies based upon the projects
in progress. 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, we are a member of a
multi-employer plan. Management considers its employee labor relations to be
good.
WEB SITE POSTINGS
Our annual report on Form 10-K and quarterly reports on Form 10-Q filed with the
U.S. Securities and Exchange Commission are available to the public free of
charge through its website as soon as reasonably practicable after making such
filings. Our website can be accessed at the following address: www.pdge.com. The
information found on our website or that may be accessed through our website is
not part of this report and is not incorporated herein by this reference.
RISK FACTORS
In addition to the other information included in this Annual Report on Form
10-K, any of the following risks could materially adversely affect our business,
operating results and financial condition:
THIS TIMING OF CASH FLOW IS DIFFICULT TO PREDICT, AND ANY SIGNIFICANT DELAY IN
THE CONTRACT CYCLE COULD MATERIALLY IMPAIR OUR CASH FLOW
The timing of our cash receipts from accounts receivables is unpredictable. In
many cases we are a subcontractor to the general contractor on the project and,
therefore, funds are not made available to us until the general contractor has
been paid by the owner. Additionally, many of our contracts provide for
retention of a portion of our billings until the project has been accepted by
the owner. As our activities are usually early in the contract cycle, if we are
acting as a subcontractor, the retainage (typically 5% to 10% of the contract
value) may be held until the project is complete. This time frame may be many
months after our completion of our portion of the contract. This delay further
subjects us to the credit risk associated with the general contractor and the
owner of the project. We can avail ourselves 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
our cash availability and cause us to delay payments to vendors and
subcontractors.
WE ARE DEPENDENT UPON OUR LINE OF CREDIT TO FINANCE OPERATIONS, AND THE FAILURE
TO MAINTAIN THE LINE OF CREDIT WOULD HAVE A MATERIALLY ADVERSE EFFECT ON OUR
OPERATIONS.
We currently have a $5.5 million line of credit from our financial institution
Sky Bank. The timing of collection of our account receivable is unpredictable
and, we cannot be certain whether such timing will impair our ability to repay
the line of credit when due. To secure the line of credit, Mr. Regan, our Chief
Executive Officer, has provided a limited personal guarantee to the bank..
However, Mr. Regan is under no obligation to provide such a guarantee in the
future. If we are required to obtain additional financing in the future, we may
not be able to do so on terms that are favorable to us, if at all.
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IF WE ARE UNABLE TO MAINTAIN ADEQUATE INSURANCE AND SUFFICIENT BONDING CAPACITY,
OUR OPERATIONS WOULD BE SIGNIFICANTLY IMPAIRED.
We maintain an insurance and bonding program consistent with our 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. We do not know whether our
current insurance and bonding programs will be sufficient to satisfy our needs
in the future. If such programs are insufficient, we may be unable to secure and
perform contracts. To secure the surety bonds, Mr. Regan, our Chief Executive
Officer, has provided a limited personal guarantee to our surety. Mr. Regan is
under no obligation to provide such guarantee in the future.
WE DEPEND UPON A FEW KEY EMPLOYEES AND THE LOSS OF THESE EMPLOYEES WOULD
SEVERELY IMPACT UPON US.
We are dependent upon our senior management to make all material decisions with
respect to our businesses. Qualified personnel are difficult to attract and in
some markets there is a shortage of qualified personnel in the businesses in
which we operate. The loss of a senior manager or managers could have a material
adverse impact upon us.
WE HAVE A SIGNIFICANT AMOUNT OF WORK UNDER CONTRACT WITH NEW YORK CITY PUBLIC
AGENCIES, AND ANY CURTAILMENT OF THIS WORK, DUE TO NEW YORK'S CURRENT FINANCIAL
CONDITION, WOULD IMPACT UPON OUR REVENUES AND RESULTS OF OPERATIONS.
We currently have 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
us to commence these contracts, continued reduction of work under these
contracts might require negative contract adjustments in the future.
A SIGNIFICANT AMOUNT OF OUR CONTRACTS ARE AWARDED VIA COMPETITIVE BID, AND
FAILURE TO ACCURATELY ESTIMATE THE COST OF SUCH WORK COULD RESULT IN SIGNIFICANT
FINANCIAL LOSSES.
A significant amount of our business is performed on a contract basis as a
result of competitive bidding. We must estimate the costs involved with the
applicable job prior to submitting a bid and, therefore, if awarded the job bear
the risk if actual costs exceed the estimated costs. Failure to make accurate
estimate could result in losses being incurred by us and thereby reducing or
eliminating profit for a specific quarter or fiscal year.
THE ASBESTOS ABATEMENT BUSINESS IS SUBJECT TO SIGNIFICANT GOVERNMENT
REGULATIONS, AND THE FAILURE TO COMPLY WITH ANY SUCH REGULATIONS COULD RESULT IN
FINES OR INJUNCTIONS, WHICH COULD MATERIALLY IMPAIR OR EVEN PREVENT THE
OPERATION OF OUR BUSINESS.
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 our asbestos
abatement operations or more stringent implementation thereof could have a
material adverse effect on us or require substantial capital expenditures to
comply with such laws and regulations.
The microbial remediation portion of our business currently is largely
unregulated. As this business grows it is likely that government regulation will
increase. We 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.
THE RECEIPT OF CONTRACT AWARDS IS UNPREDICTABLE, AND THE FAILURE TO ADJUST OUR
OVERHEAD STRUCTURE TO MEET THE UNEXPECTED DECLINE IN REVENUE COULD SIGNIFICANTLY
IMPACT OUR NET INCOME.
We are an environmental and specialty contractor and as such are affected by the
timing of the award of large contracts. Therefore, backlogs, revenues and income
are subject to significant fluctuation between quarters and years. Since our
overhead structure is reasonably fixed, we may not be able to rapidly adjust our
operating expenses to meet an unexpected decline in revenue, which could impact
revenue and net income.
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OUR CREDIT FACILITY CONTAINS RESTRICTIVE COVENANTS THAT LIMIT OUR FINANCIAL AND
OPERATIONAL FLEXIBILITY AND OUR ABILITY TO PAY DIVIDENDS.
Our credit facility contains restrictive covenants that limit our ability to
incur debt, require us to maintain financial ratios, such as a debt service
coverage ratio and leverage ratio and restrict our ability to pay dividends.
These restrictions may adversely affect our ability to conduct and expand our
operations. For example, our business is somewhat capital intensive, requiring
trained personnel to provide our services. We may need to raise additional funds
through public or private debt or equity financing. Adequate funds may not be
available when needed or may not be available on favorable terms. Even if
adequate funds are available, our credit facility may restrict our ability to
raise additional funds. If we are unable to raise capital, our finances and
operations may be adversely affected.
WE ARE EXPOSED TO POTENTIAL ENVIRONMENTAL LIABILITIES.
Our operations are regulated under a number of federal, state and local
environmental laws and regulations, which govern, among other things, the
discharge of hazardous materials into the air and water, as well as the
handling, storage, and disposal of hazardous materials and the remediation of
contaminated sites. Our businesses often involve working around and with
volatile, toxic and hazardous substances and other highly regulated materials,
the improper characterization, handling or disposal of which could constitute
violations of U.S. federal, state or local laws and regulations and result in
criminal and civil liabilities. Environmental laws and regulations generally
impose limitations and standards for certain pollutants or waste materials and
require us to obtain a permit and comply with various other requirements.
Governmental authorities may seek to impose fines and penalties on us, or revoke
or deny issuance or renewal of operating permits, for failure to comply with
applicable laws and regulations. We are also exposed to potential liability for
personal injury or property damage caused by any release, spill, exposure or
other accident involving such substances or materials.
The environmental health and safety laws and regulations to which we are subject
are constantly changing, and it is impossible to predict the effect of such laws
and regulations on us in the future. We cannot be assured that our operations
will continue to comply with future laws and regulations or that these laws and
regulations will not cause us to incur significant costs or adopt more costly
methods of operation.
Although we maintain liability insurance, this insurance is subject to coverage
limitations, deductibles and exclusions. We may incur liabilities that may not
be covered by insurance policies, or, if covered, the dollar amount of such
liabilities may exceed our policy limits. Such claims could also make it more
difficult for us to obtain adequate insurance coverage in the future at a
reasonable cost. A partially or completely uninsured claim, if successful and of
significant magnitude, could cause us to suffer a significant loss and reduce
cash available for our operations.
THE BUSINESSES IN WHICH THE COMPANY OPERATES ARE VERY COMPETITIVE.
All sectors of our business are highly competitive and a number of firms in the
asbestos abatement and specialty contracting business have resources exceeding
those we possess. Additionally, the asbestos abatement market is a relatively
mature industry with limited growth potential.
VOTING CONTROL IS HELD BY OUR DIRECTORS AND OFFICERS.
Currently our directors and officers as a group beneficially own approximately
30% of our voting securities. Accordingly, acting together, they will be able to
substantially influence the election of directors, management and policies and
the outcome of any corporate transaction or other matter submitted to its
stockholders for approval, including mergers, consolidations and the sale of all
or substantially all of our assets.
THERE MAY BE LIMITED LIQUIDITY IN OUR COMMON STOCK AND ITS PRICES MAY BE SUBJECT
TO FLUCTUATION.
Our common stock is currently traded on the OTC Bulletin Board and there is only
a limited market for our common stock. We cannot provide any assurances that we
will be able to have our common stock listed on an exchange or quoted on Nasdaq
or that we will continue to be quoted on the OTC Bulletin Board. If there is no
market for trading our common stock, the market price of our common stock will
be materially and adversely affected.
SEC RULES CONCERNING SALES OF LOW-PRICED SECURITIES MAY HINDER RE-SALES OF OUR
COMMON STOCK.
Because our common stock has a market price that is less than five dollars per
share, our common stock is not listed on an exchange or quoted on Nasdaq and is
traded on the OTC Bulletin Board. Brokers and dealers who handle trades in our
common stock are subject to certain SEC rules when effecting trades in our
common stock, the compensation of the brokerage
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firm and the salesperson handling a trade and legal remedies available to the
buyer. These requirements may hinder re-sales of our common stock and may
adversely affect the market price of its common stock.
CERTAIN OF THE HOLDERS OF OUR COMMON STOCK HAVE DEMAND RIGHTS THAT CAUSE US TO
FILE A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 COVERING RESALES
OF OUR STOCK, WHICH SALES COULD CAUSE OUR STOCK PRICE TO FALL.
Under the terms of a registration rights agreement with Barron Partners, L.P.,
we are required to file, at our expense, a registration statement under the
Securities Act of 1933 covering the resale of their shares. Such registration
statement must be filed with the SEC by June 4, 2004. This agreement requires
the registration of 1,250,000 shares of our outstanding common stock and
warrants to purchase up 3,500,000 shares of our common stock. If we do not meet
this deadline, we must pay per month an amount equal to 18% per annum of the
purchase price for those shares until such time as the holders of such shares no
longer hold more than 20% of those shares or such shares are so registered.
These shares may also be sold under Rule 144 of the Securities Act, depending
upon their holding period and are subject to significant restrictions in the
case of shares held by persons deemed to be our affiliates.
ITEM 2. PROPERTIES
As of January 31, 2004, we lease certain office space for our 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).
We also own a 15,000 square foot office/warehouse situated on approximately six
(6) acres in Export, Pennsylvania which is subject to a mortgage of $347,000 at
January 31, 2004.
ITEM 3. LEGAL PROCEEDINGS
We are subject to dispute and litigation in the ordinary course of business. We
are not aware of any pending or threatened litigation that we believe is
reasonably likely to have a material adverse effect on us, based upon
information available at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our 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. The prices below may not
represent actual transactions. These quotations reflect inter-dealer prices,
without retail markup, markdown or commissions.
MARKET PRICE RANGE
FISCAL 2004 FISCAL 2003
------------------------ -----------------------
HIGH LOW HIGH LOW
-------- ------- ------- --------
First Quarter $ 0.29 $ 0.14 $ 0.75 $ 0.45
Second Quarter 0.50 0.25 0.58 0.22
Third Quarter 0.56 0.33 0.45 0.17
Fourth Quarter 0.69 0.30 0.30 0.19
At March 15, 2004, we had 2,033 stockholders of record.
We have not historically declared or paid dividends with respect to our common
stock and have no intention to pay dividends in the foreseeable future. Our
ability to pay dividends is prohibited due to limitations imposed by our banking
agreement, which requires the prior consent of the bank before dividends are
declared.
On March 4, 2004, we completed a private placement transaction pursuant to which
we sold 1,250,000 million shares of our Common Stock (the "Shares") to Barron
Partners, LP (the "Investor") for an aggregate purchase price of $500,000. In
addition, we issued two warrants to the Investor exercisable for shares of our
Common Stock (the "Warrants"). The Shares and the Warrants were issued in a
private placement transaction pursuant to Section 4(2) and Regulation D under
the Securities Act of 1933, as amended.
The First Warrant provides the Investor the right to purchase up to 1,500,000
shares of our Common Stock. The First Warrant has an exercise price of $0.80 per
share resulting in proceeds of $1,200,000 to us upon its full exercise and
expires five years from the date of issuance. We may require the Investor to
exercise the First Warrant in full at any time until December 4, 2005, if the
average price of our Common Stock exceeds $1.20 for ten consecutive trading days
and the we have a Registration Statement effective for the same ten consecutive
trading days.
The Second Warrant provides the Investor the right to purchase up to 2,000,000
shares of our Common Stock. The Second Warrant has an exercise price of $1.60
per share resulting in proceeds of $3,200,000 to us on upon its full exercise
and expires five years from the date of issuance. We may require the Investor to
exercise the Second Warrant in full at any time until December 4, 2005, if the
average price of our Common Stock exceeds $2.40 for ten consecutive trading days
and the we have a Registration Statement effective for the same ten consecutive
trading days.
In connection with these transactions, we entered into a Registration Rights
Agreement with the Investor. Under this agreement, we are required to file
within ninety (90) days of closing a registration statement with the U.S.
Securities and Exchange Commission for the purpose of registering the resale of
the Shares and the shares of Common Stock underlying the Warrants. If we do not
meet this deadline, we must pay per month an amount equal to 18% per annum of
the purchase price for those shares until such time as the holders of such
shares no longer hold more than 20% of those shares or such shares are so
registered.
We intend to utilize the proceeds from the sale of our Common Stock for general
business purposes and to fund our acquisition strategy.
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated selected financial data should be read in conjunction
with the consolidated financial statements and
9
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 year ended January
31, 2004 and the consolidated balance sheet data as of January 31, 2004 have
been derived from the consolidated financial statements that have been audited
by Parente Randolph 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, 2003, 2002 and the consolidated balance sheet data as of
January 31, 2003 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, 2001 and 2000 and the
consolidated balance sheet data as of January 31, 2002, 2001 and 2000 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,
2004 2003 2002 2001 2000
------------------------------------------------------------------
(THOUSANDS EXCEPT PER SHARE DATA)
OPERATING DATA
Contract revenues $ 36,367 $ 40,883 $ 42,587 $ 34,584 $ 28,480
Gross margin 6,814 5,799 4,258 4,983 4,526
Income (loss) from operations 1,001 401 (1,191) 436 395
Other income (expense) (202) (149) (380) (222) (127)
Net income (loss) 644 278 (1,601) 173 246
COMMON SHARE DATA
Net income (loss) from continuing
operations per common share:
Basic 0.07 0.03 (0.17) 0.02 0.03
Diluted 0.07 0.03 (0.17) 0.02 0.03
Net income (loss) per common share:
Basic 0.07 0.03 (0.17) 0.02 0.03
Diluted 0.07 0.03 (0.17) 0.02 0.03
Weighted average common shares outstanding 9,373 9,372 9,211 8,731 8,394
BALANCE SHEET DATA
Working capital $ 8,311 $ 7,137 $ 6,491 $ 5,884 $ 3,308
Total assets 17,183 15,610 19,788 13,409 10,353
Long-term obligations 5,306 4,922 5,582 3,152 542
Total stockholders' equity 4,909 4,244 3,944 5,334 5,061
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with, and is qualified in
its entirety by, our audited financial statements and notes thereto, and other
financial information included elsewhere in this Annual Report on Form 10-K.
GENERAL
Through our operating subsidiaries, we provide environmental and specialty
contracting services including asbestos and lead abatement, insulation,
microbial remediation, demolition and related services.
10
The following paragraphs are intended to highlight key operating trends and
developments in our operations and to identify other factors affecting our
consolidated results of operations for the three years ended January 31, 2004.
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 our 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".
Contract revenues are recognized on the percentage of completion method measured
by the relationship of total costs incurred to total estimated contract costs
(cost-to-cost method). The majority of the Company's contracts are fixed price
contracts, therefore, any change in estimated costs to complete a contract will
have a direct impact upon the revenues and related gross margin recognized on a
particular contract.
Contract costs represent the cost of our laborers working on our contracts and
related benefit costs, materials expended during the course of the contract,
periodic billings from subcontractors that worked on our contracts, costs
incurred for project management and supervision by our personnel and
depreciation of machinery and equipment utilized on our contracts.
Selling, general and administrative expenses consist of the personnel at our
executive offices and the costs related to operating that office and the Company
as a whole including marketing, legal, accounting and other corporate expenses,
the costs of management and administration at our eleven branch offices, office
rental, depreciation and amortization of corporate and non-operational assets
and other costs related to the operation of our branch offices.
Interest expense consist primarily of interest charges on our line of credit but
also includes the interest expense of term debt with our lending institution.
Other income (expense) components are as described in our statement of
operation.
The income tax provision is the amount accrued and payable to the various state
taxing authorities. No amounts have been due to the federal government as we
have a net operating loss carryforward which has been sufficient to offset
taxable income in recent years.
Minority interest represents the other venturee's 50% share of IAQ Venture's
loss. We consolidate 100% IAQ Venture's results in our statement of operation
and eliminate the other venturee's 50% share of the loss with this line item.
CRITICAL ACCOUNTING POLICIES
We have identified the following critical accounting policies that affect the
more significant judgments and estimates used in the preparation of our
consolidated financial statements. The preparation of our financial statements
in conformity with accounting principles generally accepted in the United States
of America requires us to make estimates and judgments that affect our reported
amounts of assets and liabilities, revenues and expenses and related disclosures
of contingent assets and liabilities. We evaluate our estimates on an on-going
basis, including those related to asset impairment, accruals for insurance,
allowances for doubtful accounts, contingencies and litigation. We state our
accounting policies in the notes to the audited consolidated financial
statements and related notes for the year ended January 31, 2004, contained
herein. These estimates are based on information that is currently available to
us and on various other assumptions that we believe to be reasonable under the
circumstances. Actual results could vary from those estimates under different
assumptions or conditions.
Revenue Recognition
Revenues are recognized on the percentage of completion method measured by the
relationship of total costs incurred to total estimated contract costs
(cost-to-cost method). The majority of our contracts are fixed price contracts,
therefore, any change in estimated costs to complete a contract will have a
direct impact upon the revenues and related gross margin recognized on a
particular contract. Additionally, change orders which increase or decrease the
total value of the contract, contract penalty provisions, deviations from cost
estimates by subcontractors, varying job conditions and performance and other
factors beyond our control may arise at any point in the contract process. All
of the aforementioned factors must be evaluated in determining the estimate of
costs remaining on a contract. Our executive and branch management review and
revise contract status and estimates
11
to complete on at least a monthly basis with the resultant changes reflected in
the accounting records at that time. While our management makes every effort to
make accurate estimates at the time a contract is bid or quoted and once a
contract has been accepted attempts to keep informed of significant events and
reflect those events in the financial statements, changes, both positive and
negative, occur quickly in the construction industry. Therefore, over the past
years significant adjustments have had to be made to our financial statements to
reflect significant changes in contract conditions. While we strive to keep pace
with significant contract changes that can affect the financial statements,
there can be no assurances that in the future our management will not have to
make significant changes to the financial statements to reflect events that have
occurred on our contracts.
Billing Realization / Accounts Receivable Collectability
We perform services for a wide variety of customers including governmental
entities, institutions, property owners, general contractors and specialty
contractors. Our ability to render billings on in-process jobs is governed by
the requirements of the contract and, in many cases, is tied to progress towards
completion or the aforementioned specified mileposts. Realization of contract
billings is in some cases guaranteed by a payment bond provided by the surety of
our customer. In all other cases we are an unsecured creditor of its customers,
except that we may perfect its rights to payment by filing a mechanics lien,
subject to the requirements of the particular jurisdiction. Payments may be
delayed or disputed by a customer due to contract performance issues and / or
disputes with the customer. Ultimately, we have recourse to the judicial system
to secure payment. All of the aforementioned matters may result in significant
delays in the receipt of payment from the customer. Executive and branch
management review the issues attendant upon the status of customer contracts and
payments and makes adjustments to the accounting records as necessary. As
discussed in the previous section, "revenue recognition", there can be no
assurances that future events will not result in significant changes to the
financial statements to reflect changing events.
RESULTS OF OPERATIONS
YEAR ENDED JANUARY 31, 2004 COMPARED TO YEAR ENDED JANUARY 31, 2003
During the year ended January 31, 2004, (fiscal 2004) our consolidated revenues
decreased to $36.4 million as compared to $40.9 million for the previous fiscal
year ended January 31, 2003 (fiscal 2003). The decrease was due in part to
revenue decreases from the exclusion of the St. Louis operations for the entire
2004 fiscal year (the St. Louis operation was sold in July 2002) and the
refocusing of the southeast Texas operations in mid fiscal 2003. Those two
operations has revenues of $5.5 million in fiscal 2003.
Our reported gross margin increased to $6.8 million in fiscal 2004 compared to
$5.8 million in fiscal 2003. The increase in gross margin is due to higher gross
margin percentage realized on contracts in the current fiscal year.
Selling, general and administrative expenses increased slightly in fiscal 2004
to $5.8 million compared to $5.4 million in fiscal 2003. This increase was
primarily due costs associated with opening an office in southeastern Texas to
focus on mold remediation, increased employee bonuses due to increased
profitability and an increased funding of mold infrastructure and marketing
costs in the current fiscal year.
As a result of the factors discussed above, we reported income from operations
in fiscal 2004 of $1.0 million compared to an income from operations of $0.4
million in fiscal 2003.
Interest expense decreased to $0.35 million in fiscal 2004 compared to $0.38
million in fiscal 2003 due to lower interest rates in fiscal 2004 that offset a
higher level of borrowings to support operations.
Fiscal year 2003 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 a goodwill impairment charge of $149,000 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 2004 totaled approximately $49,000 versus $54,000 in
fiscal 2003.
The $8,000 and $42,000 add back to income for minority interest in fiscal 2004
and 2003, respectively, 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.
12
As a result of net operating loss carryforwards for book purposes, there was no
federal income tax provision in fiscal 2004 and 2003. State income tax
provisions of $64,000 and $16,000 were made in fiscal 2004 and 2003,
respectively. At January 31, 2004, we had approximately $2.9 million of net
operating loss carryforwards to offset future federal income taxes.
YEAR ENDED JANUARY 31, 2003 COMPARED TO YEAR ENDED JANUARY 31, 2002
During the year ended January 31, 2003, (fiscal 2003) our 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 in July 2003 and the
refocusing of the southeast Texas operations in mid fiscal 2003 which were
partially offset by $3.0 million of revenues from a significant project in New
York and the inclusion of a full fiscal years operations from the Los Angeles
office where no revenues were generated in the prior year fiscal period prior to
the operation's acquisition on June 1, 2001.
Our 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 us during the current period and decreased costs from the
St. Louis and southeast Texas operations, partially offset by costs associated
with the Los Angeles office which was owned the entire twelve-month period in
the current fiscal year.
As a result of the factors discussed above, we 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 2003 fiscal 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 a goodwill 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.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL 2004
During fiscal 2004, we experienced an increase in liquidity of $0.011 million as
cash and short-term investments increased from $0.038 million at January 31,
2003 to $0.049 million at January 31, 2004. The increase in liquidity in fiscal
2004 was attributable to cash inflows of $0.46 million from operating activities
and of $0.32 million from financing activities partially offset by cash utilized
by investing activities of $0.77 million.
Cash inflows from operating activities were generated by net income of $0.64
million, depreciation and amortization of $1.03 million, a $0.09 million
decrease in costs and estimated earnings in excess of billings on uncompleted
contracts, a $0.29 million increase in accounts payable and a $0.38 million
increase in billings in excess of costs and estimated earnings on uncompleted
contracts. The cash inflows were partially offset by cash utilizations including
a $1.79 million increase in accounts receivable, due to a significantly higher
volume of customer billings in January 2004, a $0.03 million increase in
inventories and a $0.2 million decrease in accrued liabilities related to the
timing of the payments.
13
Cash inflows from financing activities of $0.32 million during fiscal 2004
included an increase in borrowings on the line of credit by $0.75 million to
$4.7 million at January 31, 2004 from $3.95 million at January 31, 2003 which
was partially offset by of $0.43 million of repayments on debt.
Our investing activities utilized cash flow of $0.77 million which included
$0.52 million for the purchase of property, plant and equipment and $0.26
million of payments related to acquisitions completed both in a current and a
prior fiscal year.
FISCAL 2003
During fiscal 2003, we 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 investing activities.
Cash outflows from financing activities of $0.74 million during fiscal 2003
included $0.74 million of repayments on debt including reducing borrowings on
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.
Our 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.
CONTRACTUAL OBLIGATIONS
PAYMENT DUE BY PERIOD
LESS THAN 1-3 3-5 MORE THAN
TOTAL 1 YEAR YEARS YEARS 5 YEARS
------------------------------------------------------------------
(THOUSANDS)
Long-Term Debt Obligations $ 5,707 $ 401 $ 5,015 $ 55 $ 236
Capital Lease Obligations - - - - -
Operating Lease Obligations 1,113 528 559 26 -
Purchase Obligations - - - - -
Other Long-Term Liabilities Reflected
On Registrant's Balance Sheet Under GAAP - - - - -
--------- --------- --------- -------- ---------
Total $ 6,820 $ 929 $ 5,574 $ 81 $ 236
========= ========= ========= ======== =========
The 1-3 year payment due column includes $4.7 million for the line of credit
which is due June 6, 2006. The line of credit is at an interest rate of prime
plus 1%. Our Chief Executive Officer has provided a limited personal guarantee.
We rely significantly upon our access to credit facilities in order to operate
our business. We expect to be able to maintain our existing line of credit (or
to obtain replacement or additional financing) as the current arrangements
expire or become fully utilized; however, there can be no assurance that such
financing will be obtainable on favorable terms, if at all. An inability to
maintain an adequate line of credit could result in limitations on our ability
to bid for new or renew existing contracts which could have a material adverse
effect on our financial condition and results of operations. It has been the
practice of our lending institution to annually extend the maturity date of the
line of credit. While we are confident that this will remain the case, there can
be no assurance that the lending institution will continue to extend the
maturity date of the line of credit annually.
14
Under our credit facility, we are also required to maintain specified financial
ratios and satisfy certain financial tests. At January 31, 2004 we were not in
compliance with the debt to net worth and net worth covenant of our debt
agreement. Although we have been able to obtain waivers from our lending
institution in the past for failure to meet certain of the covenants under the
credit facility, the availability of any future required waivers cannot be
assured. Any failure on our part to obtain a waiver from our lending
institution, if required, would have a material adverse effect on our business
and financial condition.
In March 2004, we raised $0.5 million from a private placement of our Common
Stock to fund general business purposes and our acquisition strategy. In
connection with the private placement, we also issued warrants exercisable for
an addition 3.5 million shares. The full exercise of these warrants would result
in process of $4.4 million.
Based upon the current operating plan, we expect that our existing cash balances
and cash flows from operations will be sufficient to finance our working capital
and capital expenditure requirements through Fiscal 2005. However, if events
occur or circumstances change such that we fail to meet our operating plan as
expected, we may require additional funds to support our 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, we can not be assured that such financing will
be available on commercially reasonable terms or at all.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The only market risk, as defined, that we are 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 $57,000 change in borrowing costs based upon the
balance outstanding at January 31, 2004.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and the report of Parente Randolph LLC are
attached to this Annual Report on Form 10-K beginning on page F-1 and are
incorporated herein by reference .
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures as of the end of the period covered
by this report have been designed and are functioning effectively to provide
reasonable assurance that the information required to be disclosed by us in
reports filed under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. A controls system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the controls systems are met,
and no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been detected.
No change in our internal control over financial reporting occurred during our
most recent fiscal quarter that has materially affected or is reasonable likely
to materially affect, our internal control over financial reporting.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except as set forth herein, the information set forth in our definitive Proxy
Statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 (the
"Exchange Act") to be filed with the Securities and Exchange Commission is
incorporated herein by reference in response to this Item 10.
Code of Ethics
We have adopted a Code of Business Ethics for directors and executive officers
(including our principal executive officer and principal financial officer) (the
"Code of Ethics"). A copy of the Code of Ethics is available upon request, free
of charge, by contacting our Corporate Secretary at PDG Environmental, Inc.,
1386 Beulah Road, Building 801, Pittsburgh, PA 15235. Pursuant to Exchange Act
rules, a copy of the Code of Ethics is filed as Exhibit 14 to this Annual Report
on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in our definitive Proxy Statement pursuant to
Regulation 14A of the Exchange Act to be filed with the Securities and Exchange
Commission is incorporated herein by reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information set forth in our definitive Proxy Statement pursuant to
Regulation 14A of the Exchange Act to be filed with the Securities and Exchange
Commission is incorporated herein by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in our definitive Proxy Statement pursuant to
Regulation 14A of the Exchange Act to be filed with the Securities and Exchange
Commission is incorporated herein by reference in response to this Item 13.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth in our definitive Proxy Statement pursuant to
Regulation 14A of the Exchange Act to be filed with the Securities and Exchange
Commission is incorporated herein by reference in response to this Item 14.
16
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, 2004 and 2003.......................... F-2
Consolidated Statements of Operations for the Years Ended
January 31, 2004, 2003, and 2002................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended January 31, 2004, 2003, and 2002....................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
January 31, 2004, 2003, and 2002................................................... F-6
Notes to Consolidated Financial Statements for the Three Years
Ended January 31, 2004, 2003, and 2002............................................. 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:
INCLUDED AFTER AUDITED FINANCIAL STATEMENTS
17
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, 2004
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, 2004
- --------------------------------
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, 2004
Edgar Berkey, Director By /s/ John C. Regan
---------------------------------------------
John C. Regan, Attorney-in-Fact
April 23, 2004
James D. Chiafullo, Director By /s/ John C. Regan
---------------------------------------------
John C. Regan, Attorney-in-Fact
April 23, 2004
Edwin J. Kilpela, Director By /s/ John C. Regan
---------------------------------------------
John C. Regan, Attorney-in-Fact
April 23, 2004
18
PDG ENVIRONMENTAL, INC.
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(c) AND (d)
FINANCIAL STATEMENTS, CERTAIN EXHIBITS & SCHEDULE
19
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
PDG Environmental, Inc.
We have audited the accompanying consolidated balance sheet of PDG
Environmental, Inc. (the "Corporation") and subsidiaries as of January 31, 2004
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
financial statements as of January 31, 2003, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years ended January 31, 2003 and 2002 were audited by Stokes & Hinds, LLC, who
merged with Parente Randolph, LLC as of June 1, 2003, and whose report dated
April 7, 2003, expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provide a reasonable
basis for our opinion.
In our opinion, the consolidated 2004 financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PDG Environmental, Inc. as of January 31, 2004 and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The additional information in Schedule II
is presented for purposes of additional analysis. Such information has been
subjected to the auditing procedure applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
/s/ Parente Randolph, LLC
Pittsburgh, Pennsylvania
April 7, 2004
F-1
CONSOLIDATED BALANCE SHEETS
PDG ENVIRONMENTAL, INC.
JANUARY 31,
2004 2003
------------ -------------
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 49,000 $ 38,000
Accounts receivable, net of $150,000 allowance in fiscal 2004
and fiscal 2003 11,057,000 9,271,000
Costs and estimated earnings in excess of billings on
uncompleted contracts 3,327,000 3,412,000
Inventories 514,000 484,000
Other current assets 250,000 286,000
------------ -------------
TOTAL CURRENT ASSETS 15,197,000 13,491,000
PROPERTY, PLANT AND EQUIPMENT
Land 42,000 42,000
Leasehold improvements 203,000 194,000
Furniture and fixtures 177,000 176,000
Vehicles 749,000 781,000
Equipment 6,265,000 5,934,000
Buildings 370,000 370,000
------------ -------------
7,806,000 7,497,000
Less: accumulated depreciation 6,882,000 6,238,000
------------ -------------
924,000 1,259,000
COVENANTS NOT TO COMPETE, NET OF ACCUMULATED AMORTIZATION OF $218,000
AND $130,000 IN 2004 AND 2003, respectively 112,000 100,000
GOODWILL 714,000 433,000
OTHER ASSETS 236,000 327,000
------------ -------------
TOTAL ASSETS $ 17,183,000 $ 15,610,000
============ =============
See accompanying notes to consolidated financial statements.
F-2
CONSOLIDATED BALANCE SHEETS
PDG ENVIRONMENTAL, INC.
JANUARY 31,
2004 2003
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,810,000 $ 3,519,000
Billings in excess of costs and estimated earnings on
uncompleted contracts 1,449,000 1,070,000
Accrued liabilities 1,328,000 1,400,000
Current portion of long-term debt 401,000 467,000
------------ ------------
TOTAL CURRENT LIABILITIES 6,988,000 6,456,000
LONG-TERM DEBT 5,306,000 4,922,000
------------ ------------
TOTAL LIABILITIES 12,294,000 11,378,000
MINORITY INTEREST (20,000) (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,
2004 and 2003
(liquidation preference of $60,000 at January 31, 2004) 14,000 14,000
Common stock, $0.02 par value, 30,000,000 shares authorized and
9,423,840 and 9,418,840 shares issued and outstanding at
January 31, 2004 and 2003, respectively 189,000 189,000
Paid-in capital 8,111,000 8,110,000
Deferred compensation (6,000) (26,000)
(Deficit) retained earnings (3,361,000) (4,005,000)
Less treasury stock, at cost, 46,510 shares at January 31, 2004 and 2003 (38,000) (38,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 4,909,000 4,244,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,183,000 $ 15,610,000
============ ============
See accompanying notes to consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
PDG ENVIRONMENTAL, INC.
FOR THE YEARS ENDED JANUARY 31,
2004 2003 2002
-------------- --------------- -------------
CONTRACT REVENUES $ 36,367,000 $ 40,883,000 $ 42,587,000
CONTRACT COSTS 29,553,000 35,084,000 38,329,000
-------------- --------------- -------------
GROSS MARGIN 6,814,000 5,799,000 4,258,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,813,000 5,398,000 5,449,000
-------------- --------------- -------------
INCOME (LOSS) FROM OPERATIONS 1,001,000 401,000 (1,191,000)
OTHER INCOME (EXPENSE):
Interest expense (352,000) (375,000) (404,000)
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 49,000 54,000 24,000
-------------- --------------- -------------
(303,000) (149,000) (380,000)
-------------- --------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 698,000 252,000 (1,571,000)
INCOME TAX PROVISION (62,000) (16,000) (30,000)
MINORITY INTEREST 8,000 42,000
-------------- ---------------
NET INCOME (LOSS) $ 644,000 $ 278,000 $ (1,601,000)
============== =============== =============
EARNINGS PER COMMON SHARE - BASIC: $ 0.07 $ 0.03 $ (0.17)
============== =============== =============
EARNINGS PER COMMON SHARE - DILUTIVE: $ 0.07 $ 0.03 $ (0.17)
============== =============== =============
AVERAGE COMMON SHARES OUTSTANDING 9,373,000 9,372,000 9,211,000
AVERAGE DILUTIVE COMMON STOCK EQUIVALENTS OUTSTANDING 195,000 274,000 -
-------------- --------------- -------------
AVERAGE COMMON SHARES AND DILUTIVE COMMON STOCK
EQUIVALENTS OUTSTANDING 9,568,000 9,646,000 9,211,000
============== =============== =============
See accompanying notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PDG ENVIRONMENTAL, INC.
PREFERRED (DEFICIT) TOTAL
STOCK COMMON PAID-IN DEFERRED TREASURY RETAINED STOCKHOLDERS
SERIES A STOCK CAPITAL COMPENSATION STOCK EARNINGS EQUITY
--------- --------- ---------- ------------ -------- ----------- -------------
BALANCE AT JANUARY 31, 2001 $ 14,000 $ 177,000 $7,767,000 $ - $(38,000) $(2,586,000) $ 5,334,000
Issuance of 300,000 shares in
connection with an acquisition 6,000 183,000 189,000
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 9,000
Amortization of stock based compensation 13,000 13,000
Issuance of 259,696 shares to reflect
declaration of 1/3 of the common
stock rights 5,000 91,000 (96,000) -
Net Loss (1,601,000) (1,601,000)
--------- --------- ---------- ------------ -------- ----------- -------------
BALANCE AT JANUARY 31, 2002 14,000 189,000 8,108,000 (46,000) (38,000) (4,283,000) 3,944,000
Issuance of 5,000 shares under Employee
Incentive Stock Option Plan - 2,000 2,000
Amortization of stock based compensation 20,000 20,000
Net Income 278,000 278,000
--------- --------- ---------- ------------ -------- ----------- -------------
BALANCE AT JANUARY 31, 2003 14,000 189,000 8,110,000 (26,000) (38,000) (4,005,000) 4,244,000
Issuance of 5,000 shares under Employee
Incentive Stock Option Plan - 1,000 1,000
Amortization of stock based compensation 20,000 20,000
Net Income 644,000 644,000
--------- --------- ---------- ------------ -------- ----------- -------------
BALANCE AT JANUARY 31, 2004 $ 14,000 $ 189,000 $8,111,000 $ (6,000) $(38,000) $(3,361,000) $ 4,909,000
========= ========= ========== ============ ======== =========== =============
See accompanying notes to consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
PDG ENVIRONMENTAL, INC.
FOR THE YEARS ENDED JANUARY 31,
2004 2003 2002
-----------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (Loss) $ 644,000 $ 278,000 $ (1,601,000)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Depreciation 823,000 851,000 857,000
Amortization 205,000 194,000 340,000
Contingent acquisition consideration - (219,000) 260,000
Stock based compensation 20,000 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 -
Provision for uncollectable accounts - 20,000 200,000
Minority interest (8,000) (42,000) -
CHANGES IN CURRENT ASSETS AND LIABILITIES OTHER THAN CASH:
Accounts receivable (1,786,000) 3,432,000 (5,645,000)
Costs and estimated earnings in excess of billings on
uncompleted contracts 85,000 (595,000) (271,000)
Inventories (30,000) (50,000) 7,000
Other current assets 36,000 (9,000) 293,000
Accounts payable 291,000 (2,647,000) 3,872,000
Billings in excess of costs and estimated earnings on
uncompleted contracts 379,000) (94,000) 254,000
Accrued liabilities (195,000) (736,000) 563,000
-------------- ----------- ------------
TOTAL CHANGES (1,220,000) (699,000) (927,000)
-------------- ----------- ------------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES 464,000 231,000 (858,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (523,000) (324,000) (757,000)
Acquisition of businesses (258,000) (24,000) (921,000)
Other venture's capitalization of joint venture - 30,000 -
Proceeds from sale of St. Louis operation and other fixed assets
and inventory 35,000 490,000 15,000
Changes in other assets (26,000) 4,000 (37,000)
-------------- ----------- ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (772,000) 176,000 (1,700,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 750,000 - 3,134,000
Proceeds from exercise of stock options and warrants 1,000 2,000 9,000
Principal payments on debt (432,000) (744,000) (426,000)
-------------- ----------- ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 319,000 (742,000) 2,717,000
-------------- ----------- ------------
Net increase (decrease) in cash and short-term investments 11,000 (335,000) 159,000
Cash and short-term investments, beginning of year 38,000 373,000 214,000
-------------- ----------- ------------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR $ 49,000 $ 38,000 $ 373,000
============== =========== ============
See accompanying notes to consolidated financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PDG ENVIRONMENTAL, INC.
FOR THE THREE YEARS ENDED JANUARY 31, 2004
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 Corporation 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.
GOODWILL
The Corporation accounts for goodwill as required by SFAS No. 142 and reviews
goodwill annually for impairment.
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.
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. For pro forma
effect of applying SFAS 123 refer to footnote 10 - Compensation Plans.
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Bards (the "FASB") issued
Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS
150"). SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The Corporation has adopted the provisions
of this Statement but the Statement did not have any effect on the Corporation
as it did not have any of these financial instruments.
On April 30, 2003, FASB issues Statement of Financial Accounting Standards No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"). SFAS 149 improves financial reporting by requiring
that contracts with comparable characteristics be accounted for similarly. SFAS
149 clarifies 1) the circumstances in which a contract with an initial net
investment meets the characteristics of a derivative, 2) when a derivative
contains a financing component and amends certain other existing pronouncements.
This Statement is effective for contracts entered into or modified after June
30, 2003. The Corporation has adopted the provisions of this Statement but the
Statement did not have any effect on the Corporation as it did not have any of
these financial instruments.
On January 15, 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." The objective of this interpretation is to improve financial
reporting by enterprises involved with variable interest entities. The
interpretation is effective for financial statements issued after October 9,
2003. The Corporation has no variable interest entities that are not currently
consolidated.
F-8
NOTE 4 - ACCOUNTS RECEIVABLE
Accounts receivable at January 31, 2004 and 2003 include $1,406,000 and
$1,308,000, respectively, of retainage receivables. For the years ended January
31, 2004 and 2003, 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,
2004 2003
------------------------------------
Revenues earned on uncompleted contracts $ 43,979,000 $ 44,859,000
Less: billings to date 42,101,000 42,517,000
------------- ------------
Net Under Billings $ 1,878,000 $ 2,342,000
============= ============
Included in the accompanying consolidated balance sheets under the following
captions:
JANUARY 31,
2004 2003
-----------------------------------
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 3,327,000 $ 3,412,000
Billings in excess of costs and estimated earnings on
uncompleted contracts (1,449,000) (1,070,000)
------------- ------------
Net Under Billings $ 1,878,000 $ 2,342,000
============= ============
NOTE 6 - ACCRUED LIABILITIES
Accrued liabilities are as follows:
JANUARY 31,
2004 2003
-----------------------------------
Wages and withholdings $ 529,000 $ 689,000
Accrued fringe benefits 248,000 291,000
Covenants not to compete 17,000 175,000
Additional acquisition consideration 281,000 -
Other 253,000 245,000
------------- ------------
Total Accrued Liabilities $ 1,328,000 $ 1,400,000
============= ============
F-9
NOTE 7 - LONG-TERM DEBT
Long-term debt of the Corporation less amounts due within one year is as
follows:
JANUARY 31,
2004 2003
-----------------------------------
Term loan due in monthly installments of $4,095 including
interest at 4.875% due in August 2015 $ 347,000 $ 366,000
Equipment note due in monthly installments of $21,495 including
interest at 1% above the prime rate, due in August 2005 368,000 585,000
Equipment note due in monthly installments of $16,114 including
interest at 1% above the prime rate, due in August 2005 133,000 256,000
Revolving line of credit expiring on June 6, 2006 and
bearing interest at 1% above the prime rate 4,700,000 3,950,000
Equipment notes, most significant note due in monthly installments of $4,472
including interest at 7.25%, due until July, 2005 76,000 138,000
Term note payable to the former shareholders of Tri-State Restoration
with interest at 6.5% 83,000 94,000
------------- ------------
5,707,000 5,389,000
Less amount due within one year 401,000 467,000
------------- ------------
$ 5,306,000 $ 4,922,000
============= ============
On August 3, 2000, the Corporation closed on a $4.7 million credit facility with
Sky Bank, an Ohio banking association, consisting of a 3-year $3 million
revolving line of credit, a 5-year $1 million equipment note, a 15-year $0.4
million mortgage and a 5-year $0.3 million commitment for future equipment
financing. The 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, 2004 prime was 4%). 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, 2004, 2003 and 2002.
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 availability on the line of credit was
reduced to $4.5 million on July 1, 2003.
In July 2003 Sky Bank approved a permanent $500,000 increase in the Company's
line of credit to $5 million and extended the maturity date until June 6, 2005.
In January 2004 Sky Bank approved a permanent $500,000 increase in the Company's
line of credit to $5.5 million,
In April 2004 Sky Bank extended the maturity date on the line of credit until
June 6, 2006.
F-10
On January 31, 2004, the balance on the line of credit was $4,700,000 with an
unused availability of $800,000.
The majority of the Corporation's property and equipment are pledged as security
for the above obligations.
Maturity requirements on long-term debt aggregate $401,000 in fiscal 2005,
$293,000 in fiscal 2006, $4,722,000 in fiscal 2007, $26,000 in fiscal 2008,
$29,000 in fiscal 2009 and $236,000 thereafter.
The Corporation paid approximately $344,000, $378,000, and $367,000 for interest
costs during the years ended January 31, 2004, 2003 and 2002, respectively.
NOTE 8 - INCOME TAXES
At January 31, 2004, the Corporation has net operating loss carryforwards of
approximately $2,923,000 for income tax purposes which expire in years 2004
through 2011. For financial reporting purposes, a valuation allowance of
approximately $1,656,000 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 $481,000 during the year ended January 31, 2004 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, 2004 and 2003 are as follows:
JANUARY 31,
2004 2003
-------------------------------
Deferred tax liabilities:
Tax over book depreciation $ - $ -
Deferred tax assets:
Book over tax depreciation and amortization 506,000 115,000
Other 156,000 56,000
Net operating loss carryforwards 994,000 1,966,000
---------- -----------
Total deferred tax assets 1,656,000 2,137,000
Valuation allowance for deferred tax assets 1,656,000 2,137,000
---------- -----------
Net deferred tax assets - -
---------- -----------
Net deferred tax liabilities $ - $ -
========== ===========
Significant components of the provision for income taxes (all current) are as
follows:
FOR THE YEARS ENDED JANUARY 31,
2004 2003 2002
-------------------------------------------------
Current:
Federal $ - $ - $ -
State 62,000 16,000 30,000
--------- ----------- ------------
Total income tax provision $ 62,000 $ 16,000 $ 30,000
========= =========== ============
F-11
The reconciliation of income tax computed at the federal statutory rates to
income tax expense is as follows:
FOR THE YEARS ENDED JANUARY 31,
2004 2003 2002
---------------------------------------------------
Tax at statutory rate $ 219,000 $ 95,000 $ (534,000)
State income taxes, net of federal tax benefit 43,000 11,000 20,000
Limitation on utilization of net operating loss (200,000) (90,000) 544,000
--------- ------------ ---------------
$ 62,000 $ 16,000 $ 30,000
========= ============ ===============
The Corporation paid approximately $30,000, $65,000 and $104,000 for federal and
state income and franchise taxes during the years ended January 31, 2004, 2003
and 2002, respectively.
NOTE 9 - NOTES RECEIVABLE - OFFICERS
At January 31, 2004 and 2003, the Corporation had approximately $102,000 in
notes receivable from its officers in the form of personal loans. A breakdown of
the notes receivable balance at January 31, 2004 by officer is as follows: John
C. Regan, Chairman -$95,000 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 629,333 shares of the Corporation's common stock were
granted under the Plan issuable related to fiscal 2004. Vesting of the
non-discretionary portion of the stock options, at an exercise price of $0.19
per share, 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 2011. 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 300,500 options to purchase shares of common stock vested at January
31, 2004 relative to fiscal 2004.
Options to purchase 660,000 shares of the Corporation's common stock were
granted under the Plan issuable related to fiscal 2003. Vesting of the
non-discretionary portion of the stock options, at an exercise price of $0.46
per share, 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 were
granted under the Plan issuable related to fiscal
F-12
2002. Vesting of the non-discretionary portion of the stock options, at an
exercise price of $0.40 per share, 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 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.
The following table summarizes information with respect to the Plan for the
three years ended January 31, 2004:
OPTION
WEIGHTED AVERAGE NUMBER OF PRICE RANGE
EXERCISE PRICE SHARES PER SHARE
------------------------------------------------------
OUTSTANDING AT JANUARY 31, 2001 $0.52 2,208,083 $0.36 - $1.91
Granted $0.48 1,137,500 $0.40 - $0.50
Cancelled - Reusable $0.50 (234,250) $0.40 - $1.63
Exercised $0.36 (25,000) $0.36
---------
OUTSTANDING AT JANUARY 31, 2002 $0.52 3,086,333 $0.36 - $1.91
Granted $0.37 643,367 $0.19 - $0.46
Cancelled - Reusable $0.54 (591,500) $0.36 - $1.91
Exercised $0.36 (5,000) $0.36
---------
OUTSTANDING AT JANUARY 31, 2003 $0.43 3,133,200 $0.19 - $1.63
Granted $0.58 25,000 $0.58
Cancelled - Reusable $0.33 (266,166) $0.19 - $1.63
Exercised $0.19 (5,000) $0.19
---------
OUTSTANDING AT JANUARY 31, 2004 $0.46 2,887,034 $0.19 - $0.87
=========
EXERCISABLE AT JANUARY 31, 2004 $0.46 1,952,834 $0.19 - $0.87
=========
The weighted average life of the options outstanding at January 31, 2004 and
2003 was 6.2 years and 6.4 years, 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
2004, 2003 and 2002: risk-free interest rates of 4%, 4% and 5% in fiscal 2004,
2003 and 2002, respectively; dividend yield of 0%; volatility factors of the
expected market price of the Company's common stock of 1.18, 1.14 and 0.88 in
fiscal 2004, 2003 and 2002, 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 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.
F-13
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
04 03 02
-- -- --
Net income (loss), as reported $ 644,000 $ 278,000 $ (1,601,000)
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards net of
related tax effects (119,000) (58,000) (179,000)
------------ ------------ ------------
Pro forma net income (loss) $ 525,000 $ 220,000 $ (1,780,000)
============ ============ ============
Earnings per share:
Basic-as reported $ 0.07 $ 0.03 $ (0.17)
============ ============ ============
Basic-pro forma $ 0.05 $ 0.02 $ (0.19)
============ ============ ============
Diluted-as reported $ 0.07 $ 0.03 $ (0.17)
============ ============ ============
Diluted-pro forma $ 0.05 $ 0.02 $ (0.19)
============ ============ ============
The following table summarizes information with respect to non-qualified stock
options for the three years ended January 31, 2004:
OPTION
NUMBER OF PRICE RANGE
SHARES PER SHARE
--------- -----------
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
No Activity - -
------
OUTSTANDING AND EXERCISABLE AT JANUARY 31, 2004 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, 2004 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
370,250 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, 2004, 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.
NOTE 11 - STOCK WARRANTS
At January 31, 2004, the Corporation did not have any warrants outstanding. At
January 31, 2003, the Corporation had 250,000 fully vested warrants outstanding.
The exercise price of the warrants ranged from $1.20 per share to $2.50 per
share. These warrants were issued in conjunction with shareholder relations and
investment banking agreements and expired during fiscal 2004.
F-14
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, 2004, 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 $13,000 at January 31, 2004. In March 2004 in
conjunction with the private placement of the Company's common stock, as
discussed in Note 16, the remaining 6,000 shares of preferred stock were
converted into 24,000 shares Common Stock with the accrued but unpaid dividends
paid in cash.
NOTE 13 - 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. 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.
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 14 - GOODWILL
Goodwill increased by $281,000 during the year ended January 31, 2004 due to the
accrual of additional purchase price consideration earned by the former owners
of Tri-State Restoration, Inc. ("Tri-State") in accordance with Emerging Issues
Task Force ("EITF 95-8") "Accounting for Contingent Consideration Paid to the
Shareholders of an Acquired Enterprise in a Purchase Business Combination". The
payment of contingent consideration is based upon the operating income of the
former Tri-State operation and payable annually based upon operating results
through May 31, 2006.
F-15
NOTE 15 - NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
FOR THE YEARS ENDED JANUARY 31,
2004 2003 2002
----------------------------------------------------
NUMERATOR:
Income (loss) before discontinued operations $ 644,000 $ 278,000 $ (1,601,000)
Preferred stock dividends (1,000) (1,000) (1,000)
-------------- --------------- ------------
Numerator for basic earnings per share--income available
to common stockholders 245,000 643,000 277,000 (1,602,000)
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 $ 644,000 $ 278,000 $ (1,601,000)
============== =============== ============
DENOMINATOR:
Denominator for basic earnings per share--weighted average shares 9,373,000 9,372,000 9,211,000
Effect of dilutive securities:
Employee stock options 166,000 245,000 -
Warrants - - -
Convertible preferred stock 29,000 29,000 -
-------------- --------------- ------------
Dilutive potential common shares 195,000 274,000 -
-------------- --------------- ------------
Denominator for diluted earnings per share--adjusted
weighted-average shares and assumed conversions 9,568,000 9,646,000 9,211,000
============== =============== ============
BASIC EARNINGS (LOSS) PER SHARE $ 0.07 $ 0.03 $ (0.17)
============== =============== ============
DILUTED EARNINGS (LOSS) PER SHARE $ 0.07 $ 0.03 $ (0.17)
============== =============== ============
At January 31, 2004, 2003 and 2002; 1,467,750, 1,165,083 and 1,961,083 options,
and - 0-, 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 $516,000,
$578,000 and $554,000 for the years ended January 31, 2004, 2003 and 2002,
respectively. Minimum rental payments under these leases with initial or
remaining terms of one year or more at January 31, 2004 aggregated $1,113,000
and payments due during the next five fiscal years are as follows: 2005 -
$528,000, 2006 - $348,000, 2007 - $211,000, 2008 - $25,000 and 2009 - $1,000.
NOTE 17 - SUBSEQUENT EVENT
On March 4, 2004 the Corporation closed on a private placement transaction
pursuant to which it sold 1,250,000 million shares of Common Stock, (the
"Shares"), to Barron Partners, LP (the "Investor") for an aggregate purchase
price of $500,000. In addition, the Corporation issued two warrants to the
Investor exercisable for shares of its Common Stock (the "Warrants"). The Shares
and the Warrants were issued in a private placement transaction pursuant to
Section 4(2) and Regulation D under the Securities Act of 1933, as amended.
The First Warrant provides the Investor the right to purchase up to 1,500,000
shares of the Corporation's Common Stock. The First Warrant has an exercise
price of $0.80 per share resulting in proceeds of $1,200,000 to the Company upon
its full exercise and expires five years from the date of issuance. The
Corporation may require the Investor to exercise the First Warrant in full at
any time until December 4, 2005, if the average price of the Corporation's
Common Stock exceeds $1.20 for ten consecutive trading days and the Corporation
has a Registration Statement effective for the same ten consecutive trading
days.
The Second Warrant provides the Investor the right to purchase up to 2,000,000
shares of the Corporation's Common Stock. The Second Warrant has an exercise
price of $1.60 per share resulting in proceeds of $3,200,000 to the Corporation
upon its full exercise and expires five years from the date of issuance. The
Corporation may require the Investor to exercise the Second Warrant in full at
any time until December 4, 2005 if the average price of the Corporation's Common
Stock exceeds $2.40 for twenty consecutive trading days and the Corporation has
a Registration Statement effective for the same twenty consecutive trading days.
In connection with these transactions, the Corporation and the Investor entered
into a Registration Rights Agreement. Under this agreement, the Corporation is
required to file within ninety (90) days of closing a registration statement
with the U.S. Securities and Exchange Commission for the purpose of registering
the resale of the Shares and the shares of Common Stock underlying the Warrants.
The Corporation intends to utilize the proceeds from the sale of its Common
Stock for general business purposes and to fund its acquisition strategy.
F-16
NOTE 18 - QUARTERLY RESULTS (UNAUDITED)
The Company had the following results by quarter:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
YEAR ENDING JANUARY 31, 2004
Revenues $ 8,366,000 $ 9,473,000 $ 9,414,000 $ 9,114,000 $36,367,000
Gross margin 1,669,000 1,646,000 1,775,000 1,724,000 6,814,000
Net income $ 227,000 $ 146,000 $ 106,000 $ 165,000 $ 644,000
Earnings per share
Basic $ 0.02 $ 0.02 $ 0.01 $ 0.02 $ 0.07
Diluted $ 0.02 $ 0.02 $ 0.01 $ 0.02 $ 0.07
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
F-17
PDG ENVIRONMENTAL, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED
JANUARY 31, 2004, 2003 AND 2002
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED AT CLOSE
OF YEAR TO INCOME DEDUCTIONS(1) OF YEAR
-------------- --------- ------------ -------
2004
Allowance for doubtful accounts $ 150,000 $ - $ - $ 150,000
============== ============== =============== ==============
2003
Allowance for doubtful accounts $ 130,000 $ 20,000 $ - $ 150,000
============== ============== =============== ==============
2002
Allowance for doubtful accounts $ - $ 200,000 $ 70,000 $ 130,000
============== ============== =============== ==============
(1)Uncollectible accounts written off, net of recoveries.
F-18
(a) (3) EXHIBITS:
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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.
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.
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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.
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.
10.11 Stock Purchase Agreement between PDG Environmental, Inc. and
Barron Partners LP, dated March 4, 2004 along with Registration
Rights Agreement between PDG Environmental, Inc. and Barron
Partners, First Warrant to purchase shares of PDG Environmental,
Inc. and Second Warrant to purchase shares of PDG Environmental,
Inc. filed as Exhibits 10.1, 10.2, 10.3 and 10.4 of the
registrant's Interim Report on Form 8-K dated March 12, 2004, is
hereby incorporated herein by reference.
14 Code of Ethics
21 List of subsidiaries of the registrant.
23 Consent of independent auditors.
24 Power of attorney of directors.
31 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32 Certification Pursuant to 18 U.S.C. Section 1350, As Amended
Pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K
We did not file any current reports on Form 8-K during the three
months ended January 31, 2004 except for the Form 8-K filed
December 15, 2003 containing an Item 12 - Results of Operation
and Financial Condition discussing our earnings for the quarter
ending October 31, 2003.