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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 JULY 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 September 9, 2004, there were 10,936,330 shares of the registrant's common
stock outstanding.
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements and Notes to Consolidated Financial Statements
(a) Condensed Consolidated Balance Sheets as of July 31, 2004 (unaudited) and
January 31, 2004 3
(b) Consolidated Statements of Operations for the Three Months Ended July 31, 2004 and 2003 (unaudited) 4
(c) Consolidated Statements of Operations for the Six Months Ended July 31, 2004 and 2003 (unaudited) 5
(d) Consolidated Statements of Cash Flows for the Six Months Ended July 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 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
Signature and Certification 17
2
PART I. FINANCIAL INFORMATION
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, JANUARY 31,
2004 2004
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 32,000 $ 49,000
Accounts receivable - net 13,211,000 11,057,000
Costs and estimated earnings in excess of billings on uncompleted contracts 4,731,000 3,327,000
Inventory 696,000 514,000
Other current assets 820,000 250,000
------------ ------------
TOTAL CURRENT ASSETS 19,490,000 15,197,000
PROPERTY, PLANT AND EQUIPMENT 8,018,000 7,806,000
Less: accumulated depreciation (6,969,000) (6,882,000)
------------ ------------
1,049,000 924,000
GOODWILL 1,235,000 714,000
OTHER ASSETS 336,000 348,000
------------ ------------
TOTAL ASSETS $ 22,110,000 $ 17,183,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,416,000 $ 3,810,000
Billings in excess of costs and estimated earnings
on uncompleted contracts 2,328,000 1,449,000
Current portion of long-term debt 253,000 401,000
Accrued liabilities 2,237,000 1,328,000
------------ ------------
TOTAL CURRENT LIABILITIES 10,234,000 6,988,000
LONG-TERM DEBT 5,863,000 5,306,000
------------ ------------
TOTAL LIABILITIES 16,097,000 12,294,000
MINORITY INTEREST (21,000) (20,000)
STOCKHOLDERS' EQUITY
Cumulative convertible 2% preferred stock -- 14,000
Common stock 220,000 189,000
Additional paid-in capital 8,742,000 8,111,000
Deferred compensation -- (6,000)
(Deficit) retained earnings (2,890,000) (3,361,000)
Less treasury stock (38,000) (38,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 6,034,000 4,909,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,110,000 $ 17,183,000
============ ============
See accompanying notes to consolidated financial statements.
3
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED JULY 31,
-----------------------------------
2004 2003
------------ ------------
CONTRACT REVENUE $ 15,208,000 $ 9,473,000
CONTRACT COSTS 13,258,000 7,827,000
------------ ------------
Gross margin 1,950,000 1,646,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,554,000 1,401,000
------------ ------------
Income from operations 396,000 245,000
OTHER INCOME (EXPENSE):
Interest expense (93,000) (90,000)
Interest and other income 3,000 8,000
------------ ------------
(90,000) (82,000)
------------ ------------
Income before minority interest and income taxes 306,000 163,000
INCOME TAX PROVISION (25,000) (18,000)
MINORITY INTEREST 14,000 1,000
------------ ------------
NET INCOME $ 295,000 $ 146,000
============ ============
PER SHARE OF COMMON STOCK:
BASIC $ 0.03 $ 0.02
============ ============
DILUTIVE $ 0.02 $ 0.02
============ ============
AVERAGE COMMON SHARE EQUIVALENTS OUTSTANDING 10,886,000 9,372,000
AVERAGE DILUTIVE COMMON SHARE EQUIVALENTS
OUTSTANDING 1,390,000 124,000
------------ ------------
AVERAGE COMMON SHARES AND DILUTIVE COMMON EQUIVALENTS
OUTSTANDING FOR EARNINGS PER
SHARE CALCULATION 12,276,000 9,496,000
============ ============
See accompanying notes to consolidated financial statements.
4
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
FOR THE SIX MONTHS
ENDED JULY 31,
-----------------------------------
2004 2003
------------ ------------
CONTRACT REVENUE $ 26,110,000 $ 17,838,000
CONTRACT COSTS 22,428,000 14,524,000
------------ ------------
Gross margin 3,682,000 3,314,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,106,000 2,743,000
------------ ------------
Income from operations 576,000 571,000
OTHER INCOME (EXPENSE):
Interest expense (182,000) (187,000)
Gain on sale of fixed assets 110,000 --
Interest and other income 6,000 35,000
------------ ------------
(66,000) (152,000)
------------ ------------
Income before minority interest and income taxes 510,000 419,000
INCOME TAX PROVISION (42,000) (48,000)
MINORITY INTEREST 16,000 2,000
------------ ------------
NET INCOME $ 484,000 $ 373,000
============ ============
PER SHARE OF COMMON STOCK:
BASIC $ 0.05 $ 0.04
============ ============
DILUTIVE $ 0.04 $ 0.04
============ ============
AVERAGE COMMON SHARE EQUIVALENTS OUTSTANDING 10,595,000 9,372,000
AVERAGE DILUTIVE COMMON SHARE EQUIVALENTS
OUTSTANDING 1,287,000 87,000
------------ ------------
AVERAGE COMMON SHARES AND DILUTIVE COMMON EQUIVALENTS
OUTSTANDING FOR EARNINGS PER
SHARE CALCULATION 11,882,000 9,459,000
============ ============
See accompanying notes to consolidated financial statements.
5
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS
ENDED JULY 31,
---------------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 484,000 $ 373,000
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH:
Depreciation and amortization 341,000 466,000
Gain on sale of fixed assets (110,000) --
Stock based compensation 6,000 10,000
Minority interest (16,000) (2,000)
CHANGES IN ASSETS AND LIABILITIES
OTHER THAN CASH:
Accounts receivable (2,154,000) (735,000)
Costs and estimated earnings in excess of billings
on uncompleted contracts (1,404,000) (17,000)
Inventory (152,000) (103,000)
Other current assets (147,000) (45,000)
Accounts payable 1,606,000 (651,000)
Billings in excess of costs and estimated earnings
on uncompleted contracts 879,000 277,000
Accrued liabilities 84,000 623,000
----------- -----------
(1,288,000) (651,000)
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (583,000) 196,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (331,000) (168,000)
Proceeds from sale of fixed assets 131,000 --
Other venturee's capitalization of joint venture 15,000 --
Acquisition of businesses (140,000) (196,000)
(Increase) Decrease in other assets (23,000) 1,000
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (348,000) (363,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placement of common stock 473,000 --
Proceeds from debt 750,000 400,000
Exercise of stock options 115,000 --
Redemption of preferred stock (13,000) --
Principal payments on debt (411,000) (220,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 914,000 180,000
----------- -----------
Net Increase (Decrease) in Cash and Short-Term Investments (17,000) 13,000
Cash and Short-Term Investments, Beginning of Period 49,000 38,000
----------- -----------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 32,000 $ 51,000
=========== ===========
See accompanying notes to consolidated financial statements.
6
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JULY 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 condensed consolidated financial statements as of and for the three month
and six month periods ended July 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 dated April 23, 2004 and the
Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 2004
dated June 14, 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 construction industry, the results of operations for
any interim period are not necessarily indicative of the results expected for
the full fiscal year.
NOTE 2 - FEDERAL INCOME TAXES
No federal income tax has been provided for the six months ended July 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 six months ended July 31, 2004 and
2003 totaled approximately $37,000 and $25,000, respectively.
NOTE 3 - LINE OF CREDIT
On August 3, 2000, the Corporation closed on a $4.7 million credit facility with
Sky Bank, an Ohio banking association, consisting of a 3-year $3 million
revolving line of credit, a 5-year $1 million equipment note, a 15-year $0.4
million mortgage and a 5-year $0.3 million commitment for future equipment
financing. The 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. 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
7
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.
On July 31, 2004, the balance on the line of credit was $5,450,000 with an
unused availability of $1,050,000.
The Corporation paid interest costs totaling approximately $221,000 and $203,000
during the six months ended July 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 JULY 31,
--------------------------------
2004 2003
----------- -----------
NUMERATOR:
Net Income $ 295,000 $ 146,000
Preferred stock dividends -- --
----------- -----------
Numerator for basic earnings per share--income available
to common stockholders 295,000 146,000
Effect of dilutive securities:
Preferred stock dividends -- --
----------- -----------
Numerator for diluted earnings per share--income available to
common stock after assumed conversions $ 295,000 $ 146,000
=========== ===========
DENOMINATOR:
Denominator for basic earnings per share--weighted average
shares 10,886,000 9,372,000
Effect of dilutive securities:
Convertible Preferred Stock -- 29,000
Warrants 234,000 --
Employee Stock Options 1,156,000 95,000
----------- -----------
1,390,000 124,000
----------- -----------
Denominator for diluted earnings per share--adjusted
weighted-average shares and assumed conversions 12,276,000 9,496,000
=========== ===========
BASIC EARNINGS PER SHARE $ 0.03 $ 0.02
=========== ===========
DILUTED EARNINGS PER SHARE $ 0.02 $ 0.02
=========== ===========
At July 31, 2004 and 2003; 60,000 and 1,910,000 options, and 2,000,000 and
250,000 warrants, respectively, were
8
not included in the calculation of dilutive earnings per share as their
inclusion would have been antidilutive.
FOR THE SIX MONTHS
ENDED JULY 31,
--------------------------------
2004 2003
----------- -----------
NUMERATOR:
Net Income $ 484,000 $ 373,000
Preferred stock dividends -- (1,000)
----------- -----------
Numerator for basic earnings per share--income available
to common stockholders 484,000 372,000
Effect of dilutive securities:
Preferred stock dividends -- 1,000
----------- -----------
Numerator for diluted earnings per share--income available to
common stock after assumed conversions $ 484,000 $ 373,000
=========== ===========
DENOMINATOR:
Denominator for basic earnings per share--weighted average
shares 10,595,000 9,372,000
Effect of dilutive securities:
Convertible Preferred Stock -- 29,000
Warrants 180,000 --
Employee Stock Options 1,107,000 58,000
----------- -----------
1,287,000 87,000
----------- -----------
Denominator for diluted earnings per share--adjusted
weighted-average shares and assumed conversions 11,882,000 9,459,000
=========== ===========
BASIC EARNINGS PER SHARE $ 0.05 $ 0.04
=========== ===========
DILUTED EARNINGS PER SHARE $ 0.04 $ 0.04
=========== ===========
At July 31, 2004 and 2003; 60,000 and 1,914,000 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 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.
9
FOR THE THREE MONTHS
ENDED JULY 31,
----------------------------
2004 2003
--------- ---------
Net income, as reported $ 295,000 $ 146,000
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 $ 263,000 $ 133,000
========= =========
Earnings per share:
Basic-as reported $ 0.03 $ 0.02
========= =========
Basic-pro forma $ 0.02 $ 0.01
========= =========
Diluted-as reported $ 0.02 $ 0.02
========= =========
Diluted-pro forma $ 0.02 $ 0.01
========= =========
FOR THE SIX MONTHS
ENDED JULY 31,
----------------------------
2004 2003
--------- ---------
Net income, as reported $ 484,000 $ 373,000
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards net of
related tax effects (32,000) (27,000)
--------- ---------
Pro forma net income $ 452,000 $ 346,000
========= =========
Earnings per share:
Basic-as reported $ 0.05 $ 0.04
========= =========
Basic-pro forma $ 0.04 $ 0.04
========= =========
Diluted-as reported $ 0.04 $ 0.04
========= =========
Diluted-pro forma $ 0.04 $ 0.04
========= =========
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 $27,000 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 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
10
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 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 Company's registration statement was declared effective by the U.S.
Securities and Exchange Commission on June 30, 2004.
The Corporation intends to utilize the proceeds from the sale of its Common
Stock for general business purposes and to fund its acquisition strategy.
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 Company undertakes no obligation
to update publicly any forward-looking statements as a result of new
information, future events or otherwise, unless required by law. Readers should,
however, carefully review the risk factors included in other reports or
documents filed by the Company from time to time with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2004 AND 2003
During the three months ended July 31, 2004 ("Fiscal 2005"), the Corporation's
contract revenues increased to $15.2 million compared to $9.5 million in the
three months ended July 31, 2003 ("Fiscal 2004"). The increase was due a
significant increase in contract activity at our Los Angeles, Pittsburgh and Ft.
Lauderdale offices and in part to increased revenues from mold remediation.
The Corporation's gross margin increased to $1.95 million in the second quarter
of fiscal 2005 compared to $1.65 million in the second 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 $0.4 million, primarily at our New York,
Pittsburgh and Seattle offices.
Selling, general and administrative expenses increased to $1.55 million in the
current fiscal quarter as compared to $1.4 million in the three months July 31,
2003. This increase was due in part to the significantly higher level of
operating activity, the addition of the Kleen-All and PT&L operations acquired
in the first quarter of the current fiscal year and higher insurance costs.
The Corporation reported income from operations of $0.40 million for the three
months ended July 31, 2004 compared to income from operations of $0.24 million
for the three months ended July 31, 2003 as a direct result of the factors
discussed above.
Interest expense remained constant at $0.09 million in the current quarter as
compared to the same quarter of a year ago as the effect of increases in the
prime rate of interest to which a majority of the Corporations borrowings are
tied offset the decrease in borrowings throughout the quarter on the line of
credit.
During the quarters ended July 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
$0.03 million and $0.02 million were made in the current and prior years fiscal
quarter, respectively.
SIX MONTHS ENDED JULY 31, 2004 AND 2003
During the six months ended July 31, 2004, the Corporation's contract revenues
increased to $26.1 million compared to $17.8 million in the six months ended
July 31, 2003. The increase was due a significant increase in contract activity
at our Los Angeles, Pittsburgh and Ft. Lauderdale offices and in part to
increased revenues from mold remediation.
The Corporation's gross margin increased to $3.68 million in the half of fiscal
2005 compared to $3.31 million in the first half of fiscal 2004. The increase in
gross margin is due to a higher volume of work offset in part by negative
contract adjustments of $0.7 million primarily at our New York, Pittsburgh and
Los Angeles offices.
12
Selling, general and administrative expenses increased to $3.11 million in the
current six-month period as compared to $2.74 million in the six months ended
July 31, 2003. This increase was due in part to the significantly higher level
of operating activity, the addition of the Kleen-All and PT&L operations
acquired in the first quarter of the current fiscal year and higher insurance
costs.
The Corporation reported income from operations of $0.58 million for the six
months ended July 31, 2004 compared to income from operations of $0.57 million
for the six months ended July 31, 2003 as a direct result of the factors
discussed above.
Interest expense remained constant at $0.18 million in the current six-month
period as compared to the same six-month period of a year ago as the effect of
increases in the prime rate of interest to which a majority of the Corporations
borrowings are tied offset the decrease in borrowings throughout the period on
the line of credit.
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 six-months ended July 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
$0.04 million and $0.05 million were made in the current and prior year fiscal
periods, respectively.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended July 31, 2004, the Corporation's cash decreased by
$0.02 million to $0.03 million.
The decrease in cash and short-term investments during the first six months of
fiscal 2005 is attributable to cash outflows from operations of $0.58 million
and cash outflows of $0.35 million associated with investing activities. These
cash outflows were partially offset by $0.91 million of cash inflows associated
with financing activities.
Cash utilized by operating activities totaled $0.58 million in the six months
ended July 31, 2004. Cash outflows included the $0.11 million gain on the sale
of fixed assets, a $2.15 million increase in accounts receivable caused by the
significant increase in billings in the second quarter, a $1.4 million increase
in costs and estimated earnings in excess of billings on uncompleted contracts,
a $0.15 million increase in inventories and a $0.15 million increase in other
current assets. These cash outflows were partially offset by cash inflows
including $0.48 million of net income in the current fiscal period, a $1.6
million increase in accounts payable, a $0.88 million increase in billings in
excess of costs and estimated earnings on uncompleted contracts, a $0.08 million
increase in accrued liabilities related to the timing of payments and $0.34
million of depreciation and amortization.
Investing activities cash outflows included $0.33 million for the purchase of
property, plant and equipment and $0.14 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 and the $0.02 million of
capital contributions from the other venturee in the IAQ joint venture.
Financing activities cash inflows consisted of $0.47 million from the private
placement of the Company's common stock (which was net of $0.03 million of costs
associated with registering the Company's common stock related to the private
placement, $0.75 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 $0.41 million for the
repayment of debt.
At July 31, 2004, the Corporation's backlog totaled $35.8 million ($21.3 million
on fixed fee contracts and $14.5 million on time and materials or unit price
contracts).
During the six months ended July 31, 2003, the Corporation's cash increased by
$0.01 million to $0.05 million.
Cash provided by operating activities totaled $0.20 million in the six months
ended July 31, 2003. Cash inflows
13
including $0.37 million of net income in the current fiscal period, a $0.28
million increase in billings in excess of costs and estimated earnings on
uncompleted contracts, a $0.62 million increase in accrued liabilities related
to the timing of payments and $0.47 million of depreciation and amortization.
These cash inflows were partially offset by cash outflows including a $0.73
million increase in accounts receivables, a $0.02 million increase in costs and
estimated earnings in excess of billings on uncompleted contracts, a $0.10
million increase in inventories, a $0.05 million increase in other assets and a
$0.65 million decrease in accounts payable.
The increase in cash and short-term investments during the first six months of
fiscal 2004 is attributable to the aforementioned cash inflows from operations
of $0.20 million and $0.18 million of cash inflows associated with finance
activities which were partially offset by cash outflows of $0.36 million
associated with investing activities.
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
$0.22 million for the repayment of debt.
Investing activities cash outflows included $0.17 million for the purchase of
property, plant and equipment and a $0.20 million of payments related primarily
to an acquisition completed in a prior fiscal year.
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 $57,000 change in borrowing costs based upon the
balance outstanding at July 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 July 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 second
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 13, 2004, the Annual Meeting of the Stockholders of PDG Environmental,
Inc was held in Pittsburgh. PA.
At the meeting all of the management's nominees were elected directors of the
Corporation with the following votes:
John C. Regan Votes For 9,222,787 Votes Against 87,369
Richard A. Bendis Votes For 9,210,687 Votes Against 99,469
Edgar Berkey Votes For 9,222,787 Votes Against 87,369
James D. Chiafullo Votes For 9,210,787 Votes Against 99,369
Edwin J. Kilpela Votes For 9,210,787 Votes Against 99,369
Parente Randolph, LLC was ratified as the Corporation's auditors as follows:
Votes For 9,284,198
Votes Against 22,433
Abstained 3,525
Reauthorization of the PDG Environmental, Inc. Incentive Stock Option was as
follows:
Votes For 3,457,552
Votes Against 219,284
Abstained 21,799
Not Voted 5,525,553
Reauthorization of the PDG Environmental, Inc. 1990 Stock Option Plan for
Non-Employee Directors was as follows:
Votes For 3,435,364
Votes Against 241,041
Abstained 22,230
Not Voted 5,525,553
Reauthorization of the PDG Environmental, Inc. 1990 Stock Option Plan for
Employee Directors was as follows:
Votes For 3,432,125
Votes Against 242,835
Abstained 23,675
Not Voted 5,525,553
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
15
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 July 31, 2004 except for the following:
Form 8-K filed June 14, 2004 containing an Item 12 - Results of Operation and
Financial Condition discussing the Company's earnings for the quarter ending
April 30, 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: September 14, 2004
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