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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 APRIL 30, 2005 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 June 8, 2005, there were 13,064,330 shares of the registrant's common
stock outstanding.
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements and Notes to Consolidated
Financial Statements
(a) Condensed Consolidated Balance Sheets as of April 30, 2005
(unaudited) and January 31, 2005 3
(b) Consolidated Statements of Operations for the Three Months
Ended April 30, 2005 and 2004 (unaudited) 4
(c) Consolidated Statements of Cash Flows for the Three Months
Ended April 30, 2005 and 2004 (unaudited)) 5
(d) Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature and Certification 15
2
PART I. FINANCIAL INFORMATION
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 30, JANUARY 31,
2005 2005
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and Cash equivalents $ 250,000 $ 333,000
Accounts receivable - net 16,422,000 14,907,000
Costs and estimated earnings in excess of billings on uncompleted contracts 4,083,000 4,940,000
Inventory 629,000 590,000
Other current assets 1,143,000 226,000
------------ ------------
TOTAL CURRENT ASSETS 22,527,000 20,996,000
------------ ------------
PROPERTY, PLANT AND EQUIPMENT 8,907,000 8,565,000
Less: accumulated depreciation (7,366,000) (7,227,000)
------------ ------------
1,541,000 1,338,000
------------ ------------
GOODWILL 1,492,000 1,338,000
OTHER ASSETS 254,000 270,000
------------ ------------
TOTAL ASSETS $ 25,814,000 $ 23,942,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,506,000 $ 4,145,000
Billings in excess of costs and estimated earnings
on uncompleted contracts 1,915,000 2,222,000
Current portion of long-term debt 117,000 192,000
Current income tax liabilities 133,000 305,000
Accrued liabilities 2,652,000 2,937,000
------------ ------------
TOTAL CURRENT LIABILITIES 9,323,000 9,801,000
LONG-TERM DEBT 7,015,000 5,013,000
------------ ------------
TOTAL LIABILITIES 16,338,000 14,814,000
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 261,000 260,000
Common stock warrant 153,000 153,000
Additional paid-in capital 9,961,000 9,940,000
Deficit (861,000) (1,187,000)
Less treasury stock, at cost (38,000) (38,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 9,476,000 9,128,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,814,000 $ 23,942,000
============ ============
See accompanying notes to consolidated financial statements.
3
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED APRIL 30,
-------------------------------
2005 2004
------------ ------------
CONTRACT REVENUE $ 13,951,000 $ 10,798,000
CONTRACT COSTS 11,651,000 9,113,000
------------ ------------
Gross margin 2,300,000 1,685,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,737,000 1,501,000
------------ ------------
Income from operations 563,000 184,000
OTHER INCOME (EXPENSE):
Interest expense (100,000) (89,000)
Gain on sale of equity investment 48,000 --
Gain on sale of fixed assets -- 110,000
Equity in income (losses) of equity investment 4,000 (2,000)
Interest and other income 14,000 3,000
------------ ------------
(34,000) 22,000
------------ ------------
Income before income taxes 529,000 206,000
INCOME TAX PROVISION (203,000) (17,000)
------------ ------------
NET INCOME $ 326,000 $ 189,000
============ ============
PER SHARE OF COMMON STOCK:
BASIC $ 0.03 $ 0.02
============ ============
DILUTIVE $ 0.02 $ 0.02
============ ============
AVERAGE COMMON SHARE EQUIVALENTS OUTSTANDING 12,983,000 10,297,000
AVERAGE DILUTIVE COMMON SHARE EQUIVALENTS
OUTSTANDING 1,198,000 1,195,000
------------ ------------
AVERAGE COMMON SHARES AND DILUTIVE COMMON EQUIVALENTS
OUTSTANDING FOR EARNINGS PER
SHARE CALCULATION 14,181,000 11,492,000
============ ============
See accompanying notes to consolidated financial statements.
4
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED APRIL 30,
-----------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 326,000 $ 189,000
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH:
Depreciation and amortization 176,000 201,000
Gain on sale of fixed assets and equity investment (48,000) (110,000)
Stock based compensation -- 5,000
Equity in (income) losses of equity investment (4,000) 2,000
CHANGES IN ASSETS AND LIABILITIES
OTHER THAN CASH:
Accounts receivable (1,515,000) (32,000)
Costs and estimated earnings in excess of billings
on uncompleted contracts 857,000 (695,000)
Inventory (39,000) (68,000)
Other current assets 42,000 31,000
Accounts payable 210,000 196,000
Billings in excess of costs and estimated earnings
on uncompleted contracts (307,000) (77,000)
Current income taxes (172,000) --
Accrued liabilities (948,000) (203,000)
----------- -----------
TOTAL ADJUSTMENT (1,872,000) (848,000)
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (1,422,000) (561,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (162,000) (99,000)
Proceeds from sale of equity investment and fixed assets 50,000 131,000
Additional investment in joint venture (18,000) --
Acquisition of businesses -- (130,000)
Increase in other assets (28,000) (10,000)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (158,000) (108,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placement of common stock -- 498,000
Proceeds from debt 2,000,000 500,000
Proceeds from exercise of stock options 28,000 37,000
Redemption of preferred stock -- (13,000)
Payment of accrued earnout liability (150,000) --
Payment of premium financing (300,000) (176,000)
Principal payments on debt (81,000) (202,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,497,000 644,000
----------- -----------
Change in Cash and Cash Equivalents (83,000) (25,000)
Cash and Cash Equivalents, Beginning of Period 333,000 36,000
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 250,000 $ 11,000
=========== ===========
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITY:
FIXED ASSET ACQUISITIONS INCLUDED IN ACCOUNTS PAYABLE $ 171,000 $ --
=========== ===========
INCREASE IN GOODWILL AND ACCRUED LIABILITIES FOR EARNOUT LIABILITY $ 154,000 $ 219,000
=========== ===========
FINANCING OF ANNUAL INSURANCE PREMIUM $ 959,000 $ 891,000
=========== ===========
See accompanying notes to consolidated financial statements
5
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED APRIL 30, 2005
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The consolidated financial statements include PDG Environmental, Inc. (the
"Corporation" or "Company") 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 Corporation sold its
investment in IAQ venture in the quarter ended April 30, 2005.
The condensed consolidated financial statements as of and for the three month
period ended April 30, 2005 and 2004 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, as amended, for the
year ended January 31, 2005. 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
A federal income tax provision of $160,000 was provided for the three month
period ended April 30, 2005.
During the quarter ended April 30, 2004, the Corporation made no provision for
federal income taxes due to the utilization of net operating loss carryforwards
for financial reporting purposes.
At April 30, 2005 a valuation allowance for deferred taxes of $0.46 million had
been provided due to the uncertainty as to the future realization of those
deferred income tax assets.
State income tax provisions of $43,000 and $17,000 were made in the current and
prior year periods, respectively, due to income in the current and prior year.
Income taxes paid by the Corporation for the three months ended April 30, 2005
and 2004 totaled approximately $375,000 and $36,000, 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
were initially at an interest rate of prime plus 1%. 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.
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
6
In April 2004 Sky Bank extended the maturity date on the line of credit until
June 6, 2006.
In October 2004 and December 2004 Sky Bank approved a temporary $1,000,000 and
$500,000, respectively, increase in the Company's line of credit to $8.0 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 May 18, 2005 Sky Bank permanently increased the line of credit to $8 million
and extended the maturity date to June 6, 2007, subject to finalization of the
loan documentation. Additionally, the interest rate on the line of credit was
lowered to prime plus 1/4% and the Chief Executive Officer's limited personnel
guarantee was removed.
In May 2005 Sky Bank also approved an equipment financing note of a maximum of
$400,000 with a four year term and an approximate 7% interest rate, subject to
finalization of the loan documentation. The April 30, 2005 balance sheet
reflects $171,000 of equipment, which will be financed under this note in
accounts payable as Sky Bank had not disbursed the funds to the vendor as of
April 30,2005.
The majority of the Corporation's property and equipment are pledged as security
for the above obligations.
On April 30, 2005, the balance on the line of credit was $6,700,000 with an
unused availability of $1,300,000.
The Corporation paid interest costs totaling approximately $99,000 and $116,000
during the three months ended April 30, 2005 and 2004, 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 APRIL 30,
2005 2004
----------- -----------
NUMERATOR:
Net Income $ 326,000 $ 189,000
=========== ===========
DENOMINATOR:
Denominator for basic earnings per share--weighted average
shares 12,983,000 10,297,000
Effect of dilutive securities:
Warrants -- 122,000
Employee Stock Options 1,198,000 1,073,000
----------- -----------
1,198,000 1,195,000
----------- -----------
Denominator for diluted earnings per share--adjusted
weighted-average shares and assumed conversions 14,181,000 11,492,000
=========== ===========
BASIC EARNINGS PER SHARE $ 0.03 $ 0.02
=========== ===========
DILUTED EARNINGS PER SHARE $ 0.02 $ 0.02
=========== ===========
7
At April 30, 2005 and 2004; -0- and 61,000 options, and 2,000,000 and 2,000,000
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.
FOR THE THREE MONTHS
ENDED APRIL 30,
2005 2004
--------- ---------
Net income, as reported $ 326,000 $ 189,000
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects of a $203,000 benefit and -0- for 2005 and
2004, respectively (407,000) (10,000)
--------- ---------
Pro forma net income (loss) $ (81,000) $ 179,000
========= =========
Earnings per share:
Basic-as reported $ 0.03 $ 0.02
========= =========
Basic-pro forma $ (0.01) $ 0.02
========= =========
Diluted-as reported $ 0.02 $ 0.02
========= =========
Diluted-pro forma $ (0.01) $ 0.02
========= =========
During the three months ended April 30, 2005, 250,500 stock options were issued
to employees of the Corporation with the achievement of performance measures and
250,000 stock options were issued to the employee director of the Company in
conjunction with his execution of a new employment agreement. The weighted
average fair value of the stock options granted during the three months ended
April 30, 2005 was $1.20 per share.
During the three months ended April 30, 2005 and 2004, 86,500 and 23,000 shares,
respectively, of the Corporation's common stock were issued due to the exercise
of stock options.
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 Rule 506 of
Regulation D and Section 4(2) under the Securities Act of 1933, as amended.
Offset against the proceeds is $51,000 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 provided the Investor the right to purchase up to 1,500,000
shares of the Corporation's Common Stock. During the year ended January 31, 2005
Barron exercised the First Warrant in full at an exercise price of $0.80 per
share warrants resulting in proceeds of $1,200,000 to the Corporation.
8
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. The Corporation has reserved
sufficient shares of its common stock to cover the issuance of shares relative
to the unexercised warrants held by the Investor.
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 . At January 31, 2005, the
Second Warrant could still be exercised for up to 2,000,000 shares at an
exercise price of $1.60 per share. In the event that the Investor is not
permitted to sell its Shares pursuant to the registration statement as a result
of a permitted Black-Out Period (as defined in the Registration Statement) being
exceeded or otherwise, then the Company will be obligated to pay the Investor
liquidated damages equal to 18% of the Investor's purchase price per annum.
The Corporation utilized the proceeds from the sale of its Common Stock for
general business purposes and to partially fund its acquisition strategy.
The Corporation granted the Investor the right of first refusal on certain
subsequent offerings of the Corporation's securities and has agreed to maintain
a listing of its common stock on the OTC Bulletin Board or another publicly
traded market and cause its common stock to continue to be registered under
Section 12 (b) or (g) of the Exchange Act of 1934.
The net proceeds to the Corporation from the offering, after costs associated
with the offering, of $449,000 have been allocated among common stock and
warrants based upon their relative fair values. The Corporation used the
Black-Scholes pricing model to determine the fair value of the warrants to be
$287,000.
NOTE 8 - GOODWILL
At April 30, 2005 and January 31, 2005, the Corporation's goodwill was
$1,492,000 and $1,338,000, respectively. The increase in goodwill during the
current period 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
April 30, 2005, $842,000 had been earned and accrued, of which $350,000 had been
paid under the agreement.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 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. There can be no assurance that future
developments and actual actions or results affecting the 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, as
amended, for the year ended January 31, 2005 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.
OVERVIEW
We provide environmental and specialty contracting services including asbestos
and lead abatement, insulation, microbial remediation, disaster response, loss
mitigation and reconstruction, demolition and related services throughout the
United States. During the current fiscal quarter, the Corporation derived the
majority of its revenues from the abatement of asbestos but has broadened its
offering of services in recent years 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.
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, as amended, for
the year ended January 31, 2005, as amended, and supplemented elsewhere in this
report.
10
CRITICAL ACCOUNTING POLICIES
In general, there have been no significant changes in the Corporation's critical
accounting policies since January 31, 2005. For a detailed discussion of these
policies, please see Item 7 of the Corporation's Annual Report on Form 10-K, as
amended, for the year ended January 31, 2005.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2005
During the three months ended April 30, 2005 ("Fiscal 2006"), the Corporation's
contract revenues increased by 29% to $14.0 million compared to $10.8 million in
the three months ended April 30, 2004 ("Fiscal 2005"). The increase was due a
significant increase in contract activity at our New York, Drums and Tampa
offices as compared to the prior fiscal quarter. The increase was attributable
to increase volume of work placed under contract and performed by these offices.
The Corporation's gross margin increased to $2.3 million in the first quarter of
fiscal 2006 compared to $1.7 million in the first quarter of fiscal 2005. Gross
margin as a percentage of revenue increased to 16.5% for the current quarter
from 15.6% for the prior year quarter. The increase in gross margin of $0.6
million is due to a higher volume of work. The current fiscal quarter had
negative contract adjustments of $0.2 million, due to cost overruns and
unexpected conditions, primarily at our Pittsburgh and Ft. Lauderdale offices.
The prior fiscal quarter had negative contract adjustments of $0.6 million, due
to cost overruns and unexpected conditions, primarily at our New York and Los
Angeles offices.
Selling, general and administrative expenses increased to $1.74 million in the
current fiscal quarter as compared to $1.5 million in the three months April 30,
2004. This increase was due to inflationary salary increases in the current
fiscal year as compared to the prior fiscal year and the inclusion of the PT&L
operation, which was acquired effective April 1, 2004. As a percentage of
contract revenues, selling, general and administrative expense decreased by
1.45% to 12.45% for the current fiscal quarter from 13.90% for the prior year
fiscal quarter.
The Corporation reported income from operations of $0.56 million for the three
months ended April 30, 2005 compared to income from operations of $0.18 million
for the three months ended April 30, 2004 as a direct result of the factors
discussed above.
Interest expense increased to $0.10 million in the current quarter as compared
to $0.09 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.
The current fiscal year's other income included a $0.05 million gain from the
Company's sale of its 50% interest in the IAQ venture, which had been accounted
for under the equity method of accounting. The prior year's fiscal quarter
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 quarter ended April 30, 2005, the Corporation made a $0.16 million
provision for federal income taxes and a $0.04 million for state income taxes.
During the quarter ended April 30, 2004, the Corporation made no provision for
federal income taxes due to the utilization of net operating loss carryforwards
for financial reporting purposes and a state income tax provision of $0.02
million. At April 30, 2005 a valuation allowance for deferred taxes of $0.46
million had been provided due to the uncertainty as to the future realization of
those deferred income tax assets.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended April 30, 2005, the Corporation's cash decreased
by $0.08 million to $0.25 million.
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The decrease in cash and short-term investments during the first three months of
fiscal 2006 is attributable to cash outflows from operations of $1.42 million
and cash outflows of $0.16 million associated with investing activities. These
cash outflows were partially offset by $1.50 million of cash inflows associated
with financing activities.
Investing activities cash outflows included $0.16 million for the purchase of
property, plant and equipment and a $0.02 million additional investment in the
IAQ venture in preparation for the sale. These cash outflows were partially
offset by $0.05 million of proceeds from the sale of the Company's 50% interest
in the IAQ venture.
Financing activities cash inflows consisted of $2.0 million of proceeds from
debt consisting of net borrowings on the line of credit and $0.03 million from
the exercise of employee stock options. These cash inflows were partially offset
by $0.32 million for the repayment of debt and insurance premium financing and
$0.15 million of earnout payments related to the acquisition of businesses
acquired in prior years.
At April 30, 2005, the Corporation's backlog totaled $35.4 million ($23.1
million on fixed fee contracts and $12.3 million on time and materials or unit
price contracts).
During the three months ended April 30, 2004, the Corporation's cash decreased
by $0.02 million to $0.01 million.
The decrease in cash and short-term investments during the first three months of
fiscal 2005 is attributable to cash outflows from operations of $0.56 million
and cash outflows of $0.11 million associated with investing activities. These
cash outflows were partially offset by $0.64 million of cash inflows associated
with financing activities.
Investing activities cash outflows included $0.1 million for the purchase of
property, plant and equipment and $0.13 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 $0.5 million from the private
placement of the Company's common stock, $0.5 million of proceeds from debt
consisting of net borrowings on the line of credit and $0.04 million from the
exercise of employee stock options. These cash inflows were partially offset by
$0.01 million for the redemption of preferred stock and $0.38 million for the
repayment of debt and insurance premium financing.
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.
In January 2005 the Company executed a non-binding letter of intent to purchase
a restoration company in the southwestern United States. A part of the purchase
consideration, is the payment at closing of a significant amount of cash. The
Company is currently considering a number of options to raise sufficient cash to
consummate this transaction.
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 $71,000 change in borrowing costs based upon the
balance outstanding at April 30, 2005
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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 April 30, 2005 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.
Additionally, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are also effective to ensure that
information required to be disclosed in the reports that we file or submit under
the Exchange Act is accumulated and communicated to our management, including
our chief financial officer and chief executive officer, to allow timely
decisions regarding required disclosures.
Our Chief Executive Officer and Chief Financial Officer considered the material
weaknesses that were identified by our external auditors as related to the
changes in the rules associated with the advent of the Public Company Accounting
Oversight Board ("PCAOB"), specifically, our past practices related to controls
over period ending reporting processes and controls over non-routine and
non-systematic transactions are now considered to contain material weaknesses as
a result of the new rules adopted by the PCAOB. Our Chief Executive Officer and
Chief Financial Officer concluded that the material weaknesses cited did not
compromise the financial reporting process. Our management is taking actions to
identify and remediate control deficiencies as part of its Sarbanes-Oxley 404
internal controls over financial reporting readiness project. This process only
recently commenced. Our analysis is continuing and we plan to complete the
project before the end of the initial assessment reporting period ending January
31, 2007.
There were no significant changes in the Company's internal control over
financial reporting identified in management's evaluation during the first
quarter of fiscal 2006 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
(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
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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: June 13, 2005
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