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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2004 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
____________ TO ____________
COMMISSION FILE NUMBER 0-13667
PDG ENVIRONMENTAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2677298
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1386 BEULAH ROAD, BUILDING 801
PITTSBURGH, PENNSYLVANIA 15235
(Address of principal executive offices) (Zip Code)
412-243-3200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of December 7, 2004, there were 10,996,330 shares of the registrant's common
stock outstanding.
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements and Notes to Consolidated Financial Statements
(a) Condensed Consolidated Balance Sheets as of October 31, 2004
(unaudited) and January 31, 2004 3
(b) Consolidated Statements of Operations for the Three Months Ended October 31, 2004
and 2003 (unaudited) 4
(c) Consolidated Statements of Operations for the Nine Months Ended October 31, 2004
and 2003 (unaudited) 5
(d) Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2004
and 2003 (unaudited) 6
(e) Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature and Certification 18
2
PART I. FINANCIAL INFORMATION
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 31, JANUARY 31,
2004 2004
---- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and Cash equivalents $ 24,000 $ 36,000
Accounts receivable - net 17,601,000 11,050,000
Costs and estimated earnings in excess of billings on uncompleted contracts 5,418,000 3,327,000
Inventory 766,000 512,000
Other current assets 505,000 247,000
--------------- -------------
TOTAL CURRENT ASSETS 24,314,000 15,172,000
PROPERTY, PLANT AND EQUIPMENT 8,425,000 7,804,000
Less: accumulated depreciation (7,094,000) (6,881,000)
--------------- -------------
1,331,000 923,000
GOODWILL 1,273,000 714,000
OTHER ASSETS 296,000 345,000
--------------- -------------
TOTAL ASSETS $ 27,214,000 $ 17,154,000
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,656,000 $ 3,760,000
Billings in excess of costs and estimated earnings
on uncompleted contracts 3,654,000 1,449,000
Current portion of long-term debt 246,000 401,000
Accrued liabilities 3,173,000 1,309,000
--------------- -------------
TOTAL CURRENT LIABILITIES 13,729,000 6,919,000
LONG-TERM DEBT 6,439,000 5,306,000
---------------- -------------
TOTAL LIABILITIES 20,168,000 12,225,000
LOSSES IN EQUITY INVESTMENT 29,000 20,000
STOCKHOLDERS' EQUITY
Cumulative convertible 2% preferred stock - 14,000
Common stock 220,000 189,000
Additional paid-in capital 8,719,000 8,111,000
Deferred compensation - (6,000)
(Deficit) retained earnings (1,884,000) (3,361,000)
Less treasury stock (38,000) (38,000)
--------------- -------------
TOTAL STOCKHOLDERS' EQUITY 7,017,000 4,909,000
--------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,214,000 $ 17,154,000
=============== =============
See accompanying notes to consolidated financial statements.
3
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED OCTOBER 31,
-----------------------------------
2004 2003
---- ----
CONTRACT REVENUE $ 18,903,000 $ 9,332,000
CONTRACT COSTS 16,024,000 7,592,000
------------- -------------
Gross margin 2,879,000 1,740,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,676,000 1,533,000
------------- -------------
Income from operations 1,203,000 207,000
OTHER INCOME (EXPENSE):
Interest expense (104,000) (84,000)
Equity in losses of equity investment (8,000) (11,000)
Interest and other income 3,000 8,000
------------- -------------
(109,000) (87,000)
------------- -------------
Income before income taxes 1,094,000 120,000
INCOME TAX PROVISION (88,000) (14,000)
------------- -------------
NET INCOME $ 1,006,000 $ 106,000
============= =============
PER SHARE OF COMMON STOCK:
BASIC $ 0.09 $ 0.01
============= =============
DILUTIVE $ 0.09 $ 0.01
============= =============
AVERAGE COMMON SHARE EQUIVALENTS OUTSTANDING 10,936,000 9,372,000
AVERAGE DILUTIVE COMMON SHARE EQUIVALENTS
OUTSTANDING 834,000 255,000
------------- -------------
AVERAGE COMMON SHARES AND DILUTIVE COMMON EQUIVALENTS
OUTSTANDING FOR EARNINGS PER
SHARE CALCULATION 11,770,000 9,627,000
============= =============
See accompanying notes to consolidated financial statements.
4
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED OCTOBER 31,
-----------------------------------
2004 2003
---- ----
CONTRACT REVENUE $ 44,874,000 $ 26,973,000
CONTRACT COSTS 38,371,000 22,008,000
------------- -------------
Gross margin 6,503,000 4,965,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,692,000 4,183,000
------------- -------------
Income from operations 1,811,000 782,000
OTHER INCOME (EXPENSE):
Interest expense (286,000) (271,000)
Gain on sale of fixed assets 110,000 -
Equity in losses of equity investment (24,000) (13,000)
Interest and other income 9,000 43,000
------------- -------------
(191,000) (241,000)
------------- -------------
Income before income taxes 1,620,000 541,000
INCOME TAX PROVISION (130,000) (62,000)
------------- -------------
NET INCOME $ 1,490,000 $ 479,000
============= =============
PER SHARE OF COMMON STOCK:
BASIC $ 0.14 $ 0.05
============= =============
DILUTIVE $ 0.13 $ 0.05
============= =============
AVERAGE COMMON SHARE EQUIVALENTS OUTSTANDING 10,710,000 9,372,000
AVERAGE DILUTIVE COMMON SHARE EQUIVALENTS
OUTSTANDING 1,123,000 114,000
------------- -------------
AVERAGE COMMON SHARES AND DILUTIVE COMMON EQUIVALENTS
OUTSTANDING FOR EARNINGS PER
SHARE CALCULATION 11,833,000 9,486,000
============= =============
See accompanying notes to consolidated financial statements.
5
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED OCTOBER 31,
---------------------------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,490,000 $ 479,000
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH:
Depreciation and amortization 507,000 667,000
Provision for allowance for doubtful accounts 150,000 -
Gain on sale of fixed assets (110,000) -
Stock based compensation 6,000 15,000
Equity in losses of equity investment 24,000 13,000
CHANGES IN ASSETS AND LIABILITIES
OTHER THAN CASH:
Accounts receivable (6,701,000) 29,000
Costs and estimated earnings in excess of billings
on uncompleted contracts (2,091,000) (98,000)
Inventory (224,000) (58,000)
Other current assets (150,000) 84,000
Accounts payable 2,896,000 (547,000)
Billings in excess of costs and estimated earnings
on uncompleted contracts 2,205,000 157,000
Accrued liabilities 1,366,000 (273,000)
------------ --------------
(2,699,000) (706,000)
------------ --------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (632,000) 468,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (740,000) (291,000)
Proceeds from sale of fixed assets 131,000 -
Additional investment in joint venture (15,000) -
Acquisition of businesses (190,000) (234,000)
Other assets (26,000) (6,000)
------------ --------------
NET CASH USED BY INVESTING ACTIVITIES (840,000) (531,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placement of common stock 448,000 -
Proceeds from debt 1,400,000 400,000
Proceeds from exercise of stock options 117,000 -
Redemption of preferred stock (13,000) -
Principal payments on debt (492,000) (327,000)
------------ --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,460,000 73,000
------------ --------------
Change in Cash and Cash Equivalents (12,000) 10,000
Cash and Cash Equivalents, Beginning of Period 36,000 9,000
------------ --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 24,000 $ 19,000
============ ==============
See accompanying notes to consolidated financial statements.
6
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED OCTOBER 31, 2004
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The consolidated financial statements include PDG Environmental, Inc. (the
"Corporation") and its wholly-owned subsidiaries. In the quarter ending April
30, 2002, the Corporation formed IAQ Training Institute ("IAQ venture") a 50/50
joint venture to provide training in mold awareness and remediation. The IAQ
venture is accounted for by the equity method of accounting whereby the
Corporation records its proportionate shares of the IAQ venture's income or loss
as a component of Other Income/(Expense).
The condensed consolidated financial statements as of and for the three and nine
month periods ended October 31, 2004 and 2003 are unaudited and are presented
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Accordingly, these condensed consolidated financial statements should
be read in conjunction with the Company's Annual Report on Form 10-K for the
year ended January 31, 2004. In the opinion of management, the accompanying
condensed consolidated financial statements reflect all adjustments (which are
of a recurring nature) necessary for the fair statement of the results for the
interim periods.
Due to variations in the environmental and specialty contracting industry, the
results of operations for any interim period are not necessarily indicative of
the results expected for the full fiscal year.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
NOTE 2 - FEDERAL INCOME TAXES
No federal income tax has been provided for the nine months ended October 31,
2004 due to the existence of unused net operating loss carryforwards. A state
income tax provision was made in the current and prior year periods due to
income in the current and prior year.
Income taxes paid by the Corporation for the nine months ended October 31, 2004
and 2003 totaled approximately $52,000 and $27,000, respectively.
NOTE 3 - TERM DEBT
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. The
mortgage is at an interest rate of 9.15% fixed for three years and is then
adjusted to 2.75% above the 3-year Treasury Index every three years. The Chief
Executive Officer of the Corporation provided a limited personal guarantee for
the credit facility.
In November 2000, Sky Bank approved a $1.5 million increase in the line of
credit to $4.5 million to fund the acquisition of Tri-State Restorations, Inc.
("Tri-State"), an asbestos abatement and demolition company in California.
Additionally, Sky Bank increased the commitment for future equipment financing
by $0.3 million to $0.6 million. In April 2001 and June 2001, the Company
borrowed $273,000 and $283,000, respectively, against the commitment for future
equipment financing to fund the fixed asset portion of the Tri-State acquisition
and to fund other equipment purchases. In August 2001, the remaining $44,000 was
borrowed against the commitment for future equipment financing to fund equipment
purchases. The acquisition of Tri-State closed on June 1, 2001.
On February 28, 2003 Sky Bank increased the line of credit by $600,000 to $5.1
million for a four-month period.
7
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 in January 2004 Sky Bank approved a permanent
$500,000 increase in the Company's line of credit to $5.5 million and in July
2004 Sky Bank approved a permanent $1,000,000 increase in the Company's line of
credit to $6.5 million
In April 2004 Sky Bank extended the maturity date on the line of credit until
June 6, 2006.
In October 2004 Sky Bank approved a temporary $1,000,000 increase in the
Company's line of credit to $7.5 million until June 30, 2005. The increase in
the line of credit was required to fund the increase in revenues generated by
the hurricane recovery work beginning in the third quarter of fiscal 2005.
On October 31, 2004, the balance on the line of credit was $6,100,000 with an
unused availability of $1,400,000.
The Corporation paid interest costs totaling approximately $306,000 and $277,000
during the nine months ended October 31, 2004 and 2003, respectively.
NOTE 4 - PREFERRED STOCK
In March 2004 in conjunction with the private placement of the Company's common
stock, as discussed in Note 7, 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 5 - NET EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
FOR THE THREE MONTHS
ENDED OCTOBER 31,
2004 2003
---- ----
NUMERATOR:
Net Income $ 1,006,000 $ 106,000
Preferred stock dividends - -
------------- -------------
Numerator for basic earnings per share--income available
to common stockholders 1,006,000 106,000
Effect of dilutive securities:
Preferred stock dividends - -
------------- -------------
Numerator for diluted earnings per share--income available to
common stock after assumed conversions $ 1,006,000 $ 106,000
============= =============
DENOMINATOR:
Denominator for basic earnings per share--weighted average
shares 10,936,000 9,372,000
Effect of dilutive securities:
Convertible Preferred Stock - 29,000
Warrants - -
Employee Stock Options 834,000 226,000
------------- -------------
8
834,000 255,000
------------- -------------
Denominator for diluted earnings per share--adjusted
weighted-average shares and assumed conversions 11,770,000 9,627,000
============= =============
BASIC EARNINGS PER SHARE $ 0.09 $ 0.01
============= =============
DILUTED EARNINGS PER SHARE $ 0.09 $ 0.01
============= =============
At October 31, 2004 and 2003; 415,000 and 1,159,000 options, and 3,500,000 and
250,000 warrants, respectively, were not included in the calculation of dilutive
earnings per share as their inclusion would have been antidilutive.
FOR THE NINE MONTHS
ENDED OCTOBER 31,
2004 2003
---- ----
NUMERATOR:
Net Income $ 1,490,000 $ 479,000
Preferred stock dividends - (1,000)
------------- -------------
Numerator for basic earnings per share--income available
to common stockholders 1,490,000 478,000
Effect of dilutive securities:
Preferred stock dividends - 1,000
------------- -------------
Numerator for diluted earnings per share--income available to
common stock after assumed conversions $ 1,490,000 $ 479,000
============= =============
DENOMINATOR:
Denominator for basic earnings per share--weighted average
shares 10,710,000 9,372,000
Effect of dilutive securities:
Convertible Preferred Stock - 29,000
Warrants 94,000 -
Employee Stock Options 1,029,000 85,000
------------- -------------
1,123,000 114,000
------------- -------------
Denominator for diluted earnings per share--adjusted
weighted-average shares and assumed conversions 11,833,000 9,486,000
============= =============
BASIC EARNINGS PER SHARE $ 0.14 $ 0.05
============= =============
DILUTED EARNINGS PER SHARE $ 0.13 $ 0.05
============= =============
At October 31, 2004 and 2003; 210,000 and 1,910,000 options, and 2,000,000 and
250,000 warrants, respectively, were not included in the calculation of dilutive
earnings per share as their inclusion would have been antidilutive.
NOTE 6 - STOCK OPTIONS
The Company accounts for its stock-based compensation plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates
9
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of FASB Statement No. 123, "Accounting for
Stock-Based Compensation", to stock-based employee compensation. For purposes of
pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period.
FOR THE THREE MONTHS
ENDED OCTOBER 31,
2004 2003
---- ----
Net income, as reported $ 1,006,000 $ 106,000
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards net of
related tax effects (32,000) (13,000)
------------- -------------
Pro forma net income $ 974,000 $ 93,000
============= =============
Earnings per share:
Basic-as reported $ 0.09 $ 0.01
============= =============
Basic-pro forma $ 0.09 $ 0.01
============= =============
Diluted-as reported $ 0.09 $ 0.01
============= =============
Diluted-pro forma $ 0.08 $ 0.01
============= =============
FOR THE NINE MONTHS
ENDED OCTOBER 31,
2004 2003
---- ----
Net income, as reported $ 1,490,000 $ 479,000
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards net of
related tax effects (32,000) (41,000)
------------------ ------------------
Pro forma net income $ 1,458,000 $ 438,000
================== ==================
Earnings per share:
Basic-as reported $ 0.14 $ 0.05
================== ==================
Basic-pro forma $ 0.14 $ 0.05
================== ==================
Diluted-as reported $ 0.13 $ 0.05
================== ==================
Diluted-pro forma $ 0.12 $ 0.05
================== ==================
During fiscal year 2005, 40,000 stock options were issued to the non-employee
directors of the Company.
NOTE 7 - PRIVATE PLACEMENT OF SECURITIES
On March 4, 2004 the Corporation closed on a private placement transaction
pursuant to which it sold 1,250,000 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. Offset against
the proceeds is $52,000 of costs incurred in conjunction with the private
placement transaction, primarily related to the cost of the registration of the
common stock and common stock underlying the warrants, as discussed in the
fourth paragraph of this note.
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
10
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 during the same ten consecutive trading days. The warrant
holder may exercise through a cashless net exercise procedure after March 4,
2005 if the shares underlying the warrant are either not subject to an effective
registration statement or, if subject to a registration statement, during a
suspension of the registration statement.
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 ten consecutive trading days and the Corporation has a
Registration Statement effective during the same ten consecutive trading days.
The warrant holder may exercise through a cashless net exercise procedure after
March 4, 2005 if the shares underlying the warrant are either not subject to an
effective registration statement or, if subject to a registration statement,
during a suspension of the registration statement.
In connection with these transactions, the Corporation and the Investor entered
into a Registration Rights Agreement. Under this agreement, the Corporation was
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 Company's registration statement was declared effective by the U.S.
Securities and Exchange Commission on June 30, 2004.
The Corporation utilized the proceeds from the sale of its Common Stock for
general business purposes and to partially fund its acquisition strategy.
NOTE 8 - GOODWILL
At October 31, 2004 and January 31, 2004, the Corporation's goodwill was
$1,273,000 and $714,000, respectively. The increase in goodwill during the
current fiscal year was primarily attributable to a contingent earnout
obligation related to an acquisition completed in fiscal 2002.
SFAS No. 142 "Goodwill and Other Intangible Assets" prescribes a two-phase
process for impairment testing of goodwill, which is performed annually, absent
any indicators of impairment. The first phase screens for impairment, while the
second phase (if necessary) measures impairment. The Corporation has elected to
perform its annual analysis during the fourth quarter of each year based upon
goodwill balances as of the end of the third quarter. Although no indicators of
impairment have been identified during fiscal 2005, there can be no assurance
that future goodwill impairment tests will not result in a charge to earnings.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Corporation is party to litigation matters and claims that are in the
ordinary course of its operations, and while the results of such litigation and
claims cannot be predicted with certainty, management believes that the final
outcome of such matters will not have a material adverse effect on the
Corporation's consolidated financial statements.
In June 2001, the Corporation acquired the net assets of Tri-State Restorations,
Inc. The terms of the acquisition provide for an "Earnout Payment" payable in
cash based upon a calculation of net profits earned through May 2005. As of
October 31, 2004, $623,000 had been earned and accrued, of which $50,000 had
been paid under the agreement.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The previous discussion and other sections of this Form 10-Q contain
forward-looking statements that have been made pursuant to the provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are based on current expectations, estimates and projections about
our industry, management's beliefs and certain assumptions made by management.
Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates," "may," and similar expressions are intended to identify
forward-looking statements. These statements are not guarantees of future
performance and actual actions or results may differ materially from those
stated herein. These statements are subject to certain risks, uncertainties and
assumptions that are difficult to predict. The Corporation undertakes no
obligation to update publicly any forward-looking statements as a result of new
information, future events or otherwise, unless required by law. Readers should,
however, carefully review the risk factors included in other reports or
documents filed by the Corporation from time to time with the Securities and
Exchange Commission.
OVERVIEW
The Corporation operates in a complex environment due to the nature of our
customers and our projects. Due to the size and nature of many of our contracts,
the estimation of overall risk, revenue and cost at completion is complicated
and subject to many variables. Depending on the contract, this poses challenges
to the Corporation's executive management team in overseeing contract
performance and in evaluating the timing of the recognition of revenues and
project costs, both initially and when there is a change in project status.
Thus, the Corporation's executive management team spends considerable time in
evaluating and structuring key contracts, in monitoring project performance, and
in assessing the financial impact of many of our contracts. Due to the
complexity in the revenue recognition for the Corporation's projects, executive
financial management is particularly attentive to developments in individual
contracts that may affect the timing and measurement of contract costs and
related revenues.
The Corporation continues to manage its projects to minimize risk and the
financial impact upon the Corporation. More information on risks and the
Corporation's efforts to manage risks is available in Item 1 under the caption
"Risk Factors" in the Corporation's Annual Report on Form 10-K for the year
ended January 31, 2004, as amended, and supplemented elsewhere in this report.
The Corporation provides environmental and specialty contracting services
including asbestos and lead abatement, insulation, microbial remediation,
demolition and related services throughout the United States. During the past
fiscal year, the Corporation derived the majority of its revenues from the
abatement of asbestos but have broadened its offering of services to include a
number of complementary services which utilize its existing infrastructure and
personnel. Cash flows from contracting services are primarily generated from
periodic progress billings on large contracts under which the Corporation
performs services and single project billings on small short duration projects.
CRITICAL ACCOUNTING POLICIES
In general, there have been no significant changes in the Corporation's critical
accounting policies since January 31, 2004. For a detailed discussion of these
policies, please see Item 7 of the Corporation's Annual Report on Form 10-K for
the year ended January 31, 2004.
FORWARD LOOKING STATEMENTS
The statements contained in this Management's Discussion and Analysis of the
Consolidated Condensed Financial Statements and other sections of this Form 10-Q
that are not purely historical are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including without limitation, statements regarding the
Corporation's or Corporation management's expectations, hopes, beliefs,
intentions or strategies regarding the future. These forward-looking statements
are based on the Corporation's current expectations and beliefs concerning
future developments and their potential effects on the Corporation. There can be
no assurance that future developments affecting the
12
Corporation will be those that the Corporation has anticipated. These
forward-looking statements involve a number of risks, uncertainties (some of
which are beyond the Corporation 's control) or other assumptions that may cause
actual results or performance to be materially different from those expressed or
implied by such forward-looking statements. These risks and uncertainties
include, but are not limited to, the continuing validity of the underlying
assumptions and estimates of total forecasted project revenues, costs and
profits and project schedules; the outcomes of pending or future litigation,
arbitration or other dispute resolution proceedings; the availability of
borrowed funds on terms acceptable to the Corporation; the ability to retain
certain members of management; the ability to obtain surety bonds to secure the
Corporation's performance under certain construction contracts; possible labor
disputes or work stoppages within the construction industry; changes in federal
and state appropriations for infrastructure projects; possible changes or
developments in worldwide or domestic political, social, economic, business,
industry, market and regulatory conditions or circumstances; and actions taken
or not taken by third parties including the Corporation's customers, suppliers,
business partners, and competitors and legislative, regulatory, judicial and
other governmental authorities and officials; and other risks and uncertainties
discussed under the heading "Risk Factors" in the Corporation's Annual Report on
Form 10-K for the year ended January 31, 2004 filed with the Securities and
Exchange Commission. The Corporation undertakes no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required under
applicable securities laws.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 2004 AND 2003
During the three months ended October 31, 2004 ("Fiscal 2005"), the
Corporation's contract revenues increased by 103% to $18.9 million compared to
$9.3 million in the three months ended October 31, 2003 ("Fiscal 2004"). The
increase was due a significant increase in contract activity at our Pittsburgh,
Tampa and Ft. Lauderdale offices and in part due to the demand for services as a
result of the four hurricanes which hit the southeastern United States in August
and September of 2004.
The Corporation's gross margin increased to $2.88 million in the third quarter
of fiscal 2005 compared to $1.74 million in the third quarter of fiscal 2004.
The increase in gross margin is due to a higher volume of work offset in part by
negative contract adjustments of $0.6 million, due to cost overruns and
unexpected conditions, primarily at our New York, Pittsburgh and Seattle
offices.
Selling, general and administrative expenses increased to $1.68 million in the
current fiscal quarter as compared to $1.53 million in the three months October
31, 2003. This increase was due in part to the significantly higher level of
operating activity and the addition of the Kleen-All and PT&L operations
acquired in the first quarter of the current fiscal year.
The Corporation reported income from operations of $1.2 million for the three
months ended October 31, 2004 compared to income from operations of $0.21
million for the three months ended October 31, 2003 as a direct result of the
factors discussed above.
Interest expense increased to $0.10 million in the current quarter as compared
to $0.08 million in the same quarter of a year ago as a result of an increase in
the prime rate of interest, to which a majority of the Corporations borrowings
are tied, and increase in borrowings throughout the quarter on the line of
credit to finance the significantly higher level of operations.
During the quarters ended October 31, 2004 and 2003, the Corporation made no
provision for federal income taxes due to the utilization of net operating loss
carryforwards for financial reporting purposes. State income tax provisions of
$0.09 million and $0.01 million were made in the current and prior years fiscal
quarter, respectively.
NINE MONTHS ENDED OCTOBER 31, 2004 AND 2003
During the nine months ended October 31, 2004, the Corporation's contract
revenues increased by 66% to $44.9 million compared to $27.0 million in the nine
months ended October 31, 2003. The increase was due a significant increase in
contract activity at our Los Angeles, Pittsburgh, Tampa and Ft. Lauderdale
offices and in part to increased revenues from mold remediation. The increase at
the Tampa and Ft. Lauderdale offices and in part at
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the Pittsburgh office was partially due to the tremendous demand for services as
a result of the four hurricanes which hit the southeastern United States in
August and September of 2004.
The Corporation's gross margin increased to $6.5 million in the first nine
months of fiscal 2005 compared to $5.0 million in the first nine months of
fiscal 2004. The increase in gross margin is due to a higher volume of work
offset in part by negative contract adjustments of $1.1 million, due to cost
overruns and unexpected conditions, primarily at our New York, Pittsburgh,
Seattle and Los Angeles offices.
Selling, general and administrative expenses increased to $4.69 million in the
current nine-month period as compared to $4.18 million in the nine months ended
October 31, 2003. This increase was due in part to the significantly higher
level of operating activity and the addition of the Kleen-All and PT&L
operations acquired in the first quarter of the current fiscal year.
The Corporation reported income from operations of $1.8 million for the nine
months ended October 31, 2004 compared to income from operations of $0.78
million for the nine months ended October 31, 2003 as a direct result of the
factors discussed above.
Interest expense increased to $0.29 million in the nine-month period as compared
to $0.27 million in the same nine-month period of a year ago due to an increase
in the prime rate of interest, to which a majority of the Corporations
borrowings are tied, and increased borrowings throughout the current nine-month
period on the line of credit to finance the significantly higher level of
operations.
The current fiscal period other income included a $0.11 million gain from the
sale of fixed assets as the Company sold equipment that was currently not being
utilized.
During the nine-months ended October 31, 2004 and 2003, the Corporation made no
provision for federal income taxes due to the utilization of net operating loss
carryforwards for financial reporting purposes. State income tax provisions of
$0.13 million and $0.06 million were made in the current and prior year fiscal
periods, respectively.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended October 31, 2004, the Corporation's cash decreased
by $0.01 million to $0.02 million.
The decrease in cash and short-term investments during the first nine months of
fiscal 2005 is attributable to cash outflows from operations of $0.63 million
and cash outflows of $0.84 million associated with investing activities. These
cash outflows were partially offset by $1.46 million of cash inflows associated
with financing activities.
Cash utilized by operating activities totaled $0.63 million in the nine months
ended October 31, 2004. Cash outflows included the $0.11 million gain on the
sale of fixed assets, a $6.7 million increase in accounts receivable caused by
the significant increase in billings in the second and third quarters, a $2.1
million increase in costs and estimated earnings in excess of billings on
uncompleted contracts, a $0.22 million increase in inventories and a $0.15
million increase in other current assets. These cash outflows were partially
offset by cash inflows including $1.49 million of net income in the current
fiscal period, a $2.9 million increase in accounts payable, a $2.2 million
increase in billings in excess of costs and estimated earnings on uncompleted
contracts, a $1.4 million increase in accrued liabilities related to the timing
of payments and $0.51 million of depreciation and amortization.
Investing activities cash outflows included $0.74 million for the purchase of
property, plant and equipment, a $0.02 million additional investment in the IAQ
venture and $0.19 million of payments related to the acquisition of businesses.
These cash outflows were partially offset by $0.13 million of proceeds from the
sale of fixed assets.
Financing activities cash inflows consisted of $0.45 million from the private
placement of the Company's common stock (which was net of $0.05 million of costs
associated with registering the Company's common stock related to the private
placement), $1.4 million of proceeds from debt consisting of net borrowings on
the line of credit and $0.12 million from the exercise of employee stock
options. These cash inflows were partially offset by $0.49 million
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for the repayment of debt.
At October 31, 2004, the Corporation's backlog totaled $36.6 million ($18.9
million on fixed fee contracts and $17.7 million on time and materials or unit
price contracts).
During the nine months ended October 31, 2003, the Corporation's cash increased
by $0.01 million to $0.02 million.
The increase in cash and short-term investments during the first nine months of
fiscal 2004 is attributable to cash inflows from operations of $0.47 million and
$0.07 million of cash inflows associated with finance activities. These cash
inflows were partially offset by cash outflows of $0.53 million associated with
investing activities.
Cash provided by operating activities totaled $0.47 million in the nine months
ended October 31, 2003. Cash inflows including $0.48 million of net income in
the prior nine-month period, a $0.03 million decrease in accounts receivables, a
$0.16 million increase in billings in excess of costs and estimated earnings on
uncompleted contracts, a $0.08 million decrease in other assets and $0.67
million of depreciation and amortization. These cash inflows were partially
offset by cash outflows including a $0.1 million increase in costs and estimated
earnings in excess of billings on uncompleted contracts, a $0.06 million
increase in inventories, a $0.55 million decrease in accounts payable and a
$0.27 million decrease in accrued liabilities related to the timing of payments.
Investing activities cash outflows included $0.29 million for the purchase of
property, plant and equipment and a $0.23 million of payments related primarily
to an acquisition completed in a prior fiscal year.
Financing activities net cash inflows consisted of $0.4 million of proceeds from
debt consisting of net borrowings on the line of credit partially offset by
$0.33 million for the repayment of debt.
The Corporation believes funds generated by operations, amounts available under
existing credit facilities and external sources of liquidity, such as the
issuance of debt and equity instruments, will be sufficient to finance capital
expenditures, the settlement of earnout obligations, the settlement of
commitments and contingencies (as fully described in Note 16 to the
Corporation's consolidated financial statements.) and working capital needs for
the foreseeable future. However, there can be no assurance that such funding
will be available, as our ability to generate cash flows from operations and our
ability to access funding under the revolving credit facilities may be impacted
by a variety of business, economic, legislative, financial and other factors
which may be outside the Corporation's control. Additionally, while the
Corporation currently has significant, uncommitted bonding facilities, primarily
to support various commercial provisions in the Corporation's contracts, a
termination or reduction of these bonding facilities could result in the
utilization of letters of credit in lieu of performance bonds, thereby reducing
the Corporation's available capacity under the revolving credit facilities.
There can be no assurance that such facilities will be available at reasonable
terms to service the Corporation's ordinary course obligations.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The only market risk, as defined, that the Company is exposed to is interest
rate sensitivity. The interest rate on the equipment notes and revolving line of
credit fluctuate based upon changes in the prime rate. Each 1% change in the
prime rate will result in a $64,000 change in borrowing costs based upon the
balance outstanding at October 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation under the supervision and with the participation of the
Company's management, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and
procedures (as defined under the Securities Exchange Act of 1934, as amended
(Exchange Act)) were effective as of October 31, 2004 to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms. There were no significant changes in the Company's internal control over
financial reporting identified in management's evaluation during the third
quarter of fiscal 2005 that have materially affected or are reasonably likely to
materially affect the Company's internal control over financial reporting.
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PART II-- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Registrant is subject to dispute and litigation in the ordinary course of
business. None of these matters, in the opinion of management, is likely to
result in a material effect on the Registrant based upon information available
at this time.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT INDEX PAGES OF SEQUENTIAL
EXHIBIT NO. AND DESCRIPTION NUMBERING SYSTEM
Exhibit 31 Certification Pursuant to Rule 13a-14(a) of the Securities Act
of 1934, as amended, and Section 302 Of The Sarbanes-Oxley Act
of 2002
Exhibit 32 Certification Pursuant To 18 U.S.C. Section 1350, As Amended
Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The registrant did not file any current reports on Form 8-K during the three
months ended October 31, 2004 except for the following:
Form 8-K filed September 13, 2004 containing an Item 12 - Results of Operation
and Financial Condition discussing the Company's earnings for the quarter ending
July 31, 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PDG ENVIRONMENTAL, INC.
By /s/John C. Regan
--------------------------------
John C. Regan
Chairman, Chief Executive Officer and
Chief Financial Officer
Date: December 14, 2004
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