<PAGE> 1
(conformed)
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, 1996 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.)
300 OXFORD DRIVE, MONROEVILLE, PENNSYLVANIA 15146
(Address of principal executive offices) (Zip Code)
412-856-2200
(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 _______
As of May 9, 1996, there were 5,908,868 shares of the registrant's common stock
outstanding.
<PAGE> 2
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Consolidated Financial Statements and Notes to Consolidated Financial Statements
(a) Condensed Consolidated Balance Sheets as of April 30, 1996 (unaudited) and January 31, 1996 3
(b) Consolidated Statements of Operations for the Three Months Ended April 30, 1996 and 1995 (unaudited) 4
(c) Consolidated Statements of Cash Flows for the Three Months Ended April 30, 1996 and 1995 (unaudited) 5
(d) Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 3. Defaults Upon Senior Securities 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1996 1996*
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 594,000 $ 636,000
Cash held in escrow 838,000 968,000
Accounts receivable - net 4,096,000 4,847,000
Costs and estimated earnings in excess of billings on
uncompleted contracts 3,230,000 2,990,000
Inventory 202,000 181,000
Other current assets 552,000 753,000
------------ ------------
TOTAL CURRENT ASSETS 9,512,000 10,375,000
PROPERTY, PLANT AND EQUIPMENT 4,573,000 4,502,000
Less: accumulated depreciation 3,610,000 3,503,000
------------ ------------
963,000 999,000
OTHER ASSETS 75,000 76,000
------------ ------------
TOTAL ASSETS $ 10,550,000 $ 11,450,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,511,000 $ 2,734,000
Insurance company accrual 1,284,000 1,284,000
Accrual for sale of discontinued operations 140,000 140,000
Billings in excess of costs and estimated earnings
on uncompleted contracts 914,000 615,000
Current portion of long-term debt 200,000 192,000
Accrued liabilities 1,420,000 1,535,000
------------ ------------
TOTAL CURRENT LIABILITIES 6,469,000 6,500,000
LONG-TERM DEBT 2,768,000 2,786,000
MINORITY INTEREST 774,000 946,000
STOCKHOLDERS' EQUITY
Cumulative convertible 2% preferred stock 444,000 444,000
Common stock 118,000 118,000
Additional paid-in capital 4,230,000 4,230,000
(Deficit) retained earnings (4,253,000) (3,574,000)
-------------- ------------
TOTAL STOCKHOLDERS' EQUITY 539,000 1,218,000
-------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,550,000 $ 11,450,000
============== ============
</TABLE>
*Derived from audited financial statements.
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED APRIL 30,
--------------------------------
1996 1995*
----------- -----------
<S> <C> <C>
CONTRACT REVENUES $ 5,103,000 $ 4,896,000
CONTRACT COSTS 4,517,000 3,896,000
----------- -----------
Gross margin 586,000 1,000,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,270,000 1,321,000
----------- -----------
Income (loss) from operations (684,000) (321,000)
OTHER INCOME (EXPENSE):
Gain on sale of PDG Remediation, Inc. common stock - 1,354,000
Interest expense (184,000) (250,000)
Interest income 9,000 15,000
Other income 8,000 3,000
----------- -----------
(167,000) 1,122,000
----------- -----------
Income (loss) before income taxes, discontinued operations
and minority interest in consolidated subsidiary (851,000) 801,000
INCOME TAX PROVISION - 76,000
MINORITY INTEREST IN (EARNINGS) LOSS OF CONSOLIDATED SUBSIDIARY 172,000 (24,000)
----------- -----------
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS (679,000) 701,000
DISCONTINUED OPERATIONS - (87,000)
----------- -----------
NET INCOME (LOSS) $ (679,000) $ 614,000
=========== ===========
UNDECLARED PREFERRED STOCK DIVIDENDS $ 9,000 $ -
=========== ===========
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS $ (0.12) $ 0.09
Discontinued operations - (0.01)
----------- -----------
NET INCOME (LOSS) PER SHARE $ (0.12) $ 0.08
=========== ===========
AVERAGE COMMON SHARES AND DILUTIVE COMMON
EQUIVALENTS OUTSTANDING 5,909,000 7,236,000
=========== ===========
</TABLE>
*Reclassified for discontinued operations. See Note 1.
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED APRIL 30,
-------------------------------
1996 1995*
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(679,000) $ 614,000
ADJUSTMENTS TO RECONCILE NET INCOME
(LOSS) TO CASH:
Gain on sale of PDG Remediation, Inc. common stock - (1,354,000)
Depreciation and amortization 133,000 163,000
Other (182,000) 42,000
CHANGES IN ASSETS AND LIABILITIES
OTHER THAN CASH:
Cash in escrow 130,000 (16,000)
Accounts receivable 763,000 32,000
Costs and estimated earnings in excess of billings
on uncompleted contracts (240,000) (222,000)
Inventory (21,000) (20,000)
Prepaid income taxes (25,000) -
Other current assets 244,000 336,000
Net assets of discontinued operations - (836,000)
Accounts payable (267,000) (916,000)
Billings in excess of costs and estimated earnings
on uncompleted contracts 299,000 350,000
Accrued income taxes - 72,000
Accrued liabilities (116,000) (289,000)
Other - (2,000)
--------- ------------
TOTAL ADJUSTMENTS 718,000 (2,660,000)
--------- ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 39,000 (2,046,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (71,000) (122,000)
--------- ------------
NET CASH USED BY INVESTING ACTIVITIES (71,000) (122,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on sale of PDG Remediation, Inc. common stock - 3,586,000
Proceeds on sale of warrants - 100,000
Proceeds from debt 40,000 3,676,000
Principal payments on debt (50,000) (4,697,000)
--------- ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (10,000) 2,665,000
--------- ------------
Net Increase (Decrease) in Cash and Short-Term Investments (42,000) 497,000
Cash and Short-Term Investments, Beginning of Period 636,000 680,000
--------- ------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 594,000 $ 1,177,000
========= ============
</TABLE>
*Reclassified for discontinued operations.
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED APRIL 30, 1996
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The consolidated financial statements include PDG Environmental, Inc.'s (the
"Corporation") wholly-owned subsidiaries and the accounts of PDG Remediation,
Inc. ("PDGR"), in which the Corporation maintains a 59.5% ownership interest.
The accompanying financial statements of PDG Environmental, Inc. and
subsidiaries (the "Corporation") are unaudited. However, in the opinion of
management, they include all adjustments necessary for a fair presentation of
financial position, results of operations and cash flows. All adjustments made
during the three months ended April 30, 1996 were of a normal, recurring
nature. Additional information is contained in the Annual Report on Form 10-K
of the Corporation for the year ended January 31, 1996, as amended by Form
10-K/A No. 1 dated May 31, 1996, and should be read in conjunction with this
quarterly report.
Certain reclassifications have been made to the prior year financial statements
to conform with the current year presentation. Additionally, GeoLogic Recovery
Systems was treated as a discontinued operation in the January 31, 1996
financial statements, and all prior year financial statements were reclassified
to conform with this presentation.
NOTE 2 - FEDERAL INCOME TAXES
No federal income tax have been provided for the three months ended April 30,
1996 due to a loss for financial reporting purposes.
Income taxes paid by the Corporation for the three months ended April 30, 1996
and 1995 totaled approximately $5,000 and $11,000, respectively.
NOTE 3 - LINE OF CREDIT
On October 31, 1995, the Corporation entered into an Amended and Restated Loan
Agreement with CVD Financial Corporation wherein the maximum borrowings under
this line of credit was set at $2,419,994. The interest rate under this line
of credit was reduced from prime plus 7% to prime plus 3% and all amounts
borrowed under this line of credit were due and payable on December 31, 1996.
A term loan for $559,991 was also provided as part of the Loan Agreement, with
interest at the prime rate of interest plus 3%. The Term Loan requires monthly
principal payments of $13,533 plus interest and matured December 31, 1996.
Prior to the October 31, 1995 refinancing, CVD Financial held warrants to
purchase 752,500 shares of the Corporation's common stock at prices ranging
from $0.75 to $1.25 per share. As part of the new Loan Agreement, CVD
Financial continues to hold the warrants.
As part of the aforementioned Loan Agreement, CVD Financial was granted the
right to convert any portion of the outstanding balances of the line of credit
and the term loan, any time after January 31, 1996, into common stock of the
Corporation. The conversion price is the lesser of the market price, as
defined, of the Corporation's common stock on January 31, 1996 or the market
price on the date of the conversion notice, except that the conversion price,
in neither case, shall not be less than $0.65 per share. Additionally, the
Corporation pledged PDGR shares representing its 59.5% interest as additional
collateral for the Loan Agreement. At April 30, 1996, the Corporation was
fully borrowed under the $2.42 million of combined availability existing under
the CVD Agreement.
On April 25, 1996, the Corporation entered into a Loan Extension Agreement
("Extension Agreement") whereby the maturity dates for the line of credit and
term loan were extended to May 1, 1997. The Extension Agreement also provides
that if the Corporation sells its remaining 59.5% interest in PDGR, CVD would
re-advance the Corporation $325,000 under the existing line of credit for
working capital purposes. If the Corporation has not
6
<PAGE> 7
sold its remaining interest in PDGR by July 24, 1996, CVD would have the option
at that time and thereafter to acquire the PDGR shares at $1 per share with the
purchase price credited against the aforementioned loans. Upon sale of the
PDGR stock by CVD prior to the maturity date of the loans, at amounts varying
from $1 per share, the variance from $1 per share will be credited/charged to
the Corporation's loan balance except that CVD may not sell the PDGR shares at
a price below a defined floor amount which is $0.99 per share. CVD will be
obligated to sell the PDGR shares to a third party identified by PDGR providing
that the third party is paying at least $1 per share and the maturity date of
the loans has not been reached.
On May 29, 1996, PDGR filed a registration statement (Form S-3) relating to the
offer and sale of the 1,470,320 shares of PDGR stock held by the Corporation.
The Corporation intends to consummate the sale of all or a portion of the PDGR
shares held by it in the second quarter of fiscal 1997.
PDG Environmental Services, Inc. ("PDGES"), a wholly-owned subsidiary of PDGR,
currently maintains a Master Funding Agreement with Sirrom Environmental
Funding, LLC (the "Sirrom Agreement") which provides $4.0 million of funding
relative to unbilled amounts under the EDI program through August 21, 1997.
The Sirrom Agreement enables PDGR to fund amounts billed under the EDI Program
at the prime rate of interest, as defined, plus 3%. PDGR is advanced 100% of
amounts billed under the EDI Program, but is required to deposit 34% into an
escrow account to cover potential disallowances, future interest costs, and a
commitment fee of 2% of the total funding provided. In connection with the
execution of the Sirrom Agreement, PDGR also issued Sirrom Environmental
Funding, LLC a warrant to purchase 100,000 shares of PDGR's common stock at an
exercise price of $1.37 per share. The warrant expires on January 31, 1999 and
PDGR has recorded $50,000 as the estimated fair market value of the warrant.
The Corporation and PDGR are guarantors on the Sirrom Agreement. As of April
30, 1996, PDGR was advanced approximately $2.1 million under the Sirrom
Agreement. PDGR has provided an indemnification to Sirrom Environmental
Funding, LLC for any amounts advanced to PDGR under the current Sirrom
Agreement and under a previous agreement which are not reimbursed under the EDI
Program in the amount of $2.8 million.
The Corporation paid interest costs totaling approximately $174,000 and
$431,000 during the three months ended April 30, 1996 and 1995, respectively.
The previous fiscal quarter included a significantly higher interest rate on
the Corporation's CVD debt and interest expense associated with the debt on the
GeoLogic business discontinued effective January 31, 1996.
NOTE 4 - PREFERRED STOCK
Cumulative dividends in arrears on the Corporation's 2% Series A Preferred
Stock were approximately $100,000 at April 30, 1996. At April 30, 1996, there
were 186,052 shares of Series A Preferred Stock outstanding. Each share of
Series A Preferred Stock is convertible into four shares of the Corporation's
common stock at the option of the preferred stockholder.
The conversion rate on the Series A Preferred Stock is also subject to
adjustment as a result of certain changes in the Corporation's capital
structure or distributions to common stockholders (except for cash dividends
permissible under law).
NOTE 5 - NET LOSS PER SHARE
Primary earnings per share for the three months ended April 30, 1996 are
calculated by dividing the net loss, after deducting Series A Preferred Stock
dividends of $9,000 for the three months ended April 30, 1996, by the average
of common shares outstanding. The effects of assuming the conversion of
preferred stock or the exercise of stock options, stock warrants and common
stock rights would be anti-dilutive for the three months ended April 30, 1996.
Primary earnings per share for the three months ended April 30, 1995 were
calculated by dividing the net income by the average common shares outstanding
and dilutive common stock equivalents.
7
<PAGE> 8
NOTE 6 - DISCONTINUED OPERATIONS
On April 25, 1996, the interest in GeoLogic was sold to Specialty
Environmental, Inc. (SEI) effective as of January 31, 1996, in exchange for the
assumption by SEI of all of the obligations and liabilities of GeoLogic.
Concurrently, the Corporation entered into a Surrender and Release Agreement,
effective as of January 31, 1996, with respect to an equipment lease associated
with the facility in exchange for a $0.22 million payment. The net sales of
GeoLogic for the three months ended April 30, 1995 were $0.6 million.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
PDGES is currently involved in litigation with International Surplus Lines
Insurance Company ("ISLIC") as a result of insurance advances made to PDGES by
ISLIC as described in further detail in Item 1. Legal Proceedings contained in
Part II located elsewhere herein. A judgment rendered against PDGES would have
a detrimental impact on PDGR's future cash flow.
As discussed in further detail in Item 3. Legal Proceedings contained in the
Corporation's Annual Report on Form 10-K for the year ended January 31, 1996,
as amended by Form 10-K/A dated May 31, 1996, the Corporation and PDGR has been
named as a defendant in a purported class action lawsuit involving the purchase
by all persons and entities of PDGR's common stock from February 9, 1995,
through May 23, 1995. The action alleges that the defendants violated certain
federal securities laws.
The Corporation and PDGR believe that the allegations are without merit or that
there are meritorious defenses to the allegations, and intends to defend the
action vigorously. If, however, the plaintiff is successful in its claims, a
judgment rendered against the Corporation and the other defendants would likely
have a material adverse effect on the business and operations of the
Corporation.
NOTE 8 - POTENTIAL ACQUISITION
During March 1996, PDGR entered into a letter of intent to acquire SPATCO
Environmental, Inc. ("SPATCO"), an environmental remediation services company
located in the southeastern United States, from its sole shareholder, Vigour
Holding & Finance b v, in exchange for shares of PDGR's common stock and
preferred stock. For the fiscal year ended December 31, 1995 SPATCO generated
revenues of approximately $11.7 million and a loss before interest and taxes of
$47,000. SPATCO's results of operations for the fiscal year ended December 31,
1995 included the effects of a management fee of $493,000 which was paid to an
affiliate of SPATCO. PDGR intends to provide similar services to SPATCO upon
completion of the purchase which PDGR anticipates will result in significant
cost savings compared to the current management fee.
PDGR believes that the effect of this acquisition will be to replace and expand
PDGR's revenues which were severely depressed by the changes in the EDI Program
in the fiscal year ended January 31, 1996. The consummation of the transaction
is subject to a number of conditions, including the negotiation and execution
of a definitive agreement and the replacement of certain financing currently
outstanding with respect to SPATCO. It is currently anticipated that the
transaction will close during the second or third quarter of fiscal 1997.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1996 AND 1995
On February 9, 1995, the Corporation sold approximately 40.5% of its common
stock interest in its wholly-owned environmental services subsidiary, PDGR, in
an initial public offering of PDGR's common stock. The Corporation recorded
the sale effective as of February 1, 1995 and continues to consolidate its
remaining 59.5% ownership interest.
During the three months ended April 30, 1996, the Corporation's contract
revenues increased by approximately 4% to $5.1 million compared to $4.9 million
in the three months ended April 30, 1995. The Corporation's contract revenues
segregated by business segment between the three month periods of fiscal 1997
and 1996 reflects asbestos abatement revenues of $3.8 million and $2.9 million,
respectively, and environmental remediation services business revenues of PDGR
of $1.3 million and $2.0 million, respectively. Asbestos abatement revenues
increased in the current three month period principally due to a higher level
of projects during a traditionally slow period. The $0.7 million decrease in
PDGR's contract revenues between the two three month periods principally
results from lower contract revenues at its Florida remediation services
operation due to the changes in late March 1995 to the EDI Program. This was
partially offset by an increase in revenue at the Pennsylvania operation.
The Corporation's gross margin decreased to $0.6 million in the first quarter
of fiscal 1997 compared to $1.0 million in the first quarter of fiscal 1996.
During the three months ended April 30, 1996, the gross margin within the
Corporation's asbestos abatement segment remained constant at $0.3 million.
The Corporation experienced low gross margins in the asbestos abatement
business segment due to negative adjustments on three larger jobs. PDGR
reported lower gross margins in the three months ended April 30, 1996 of $0.3
million compared to $0.7 million in the three months ended April 30, 1996.
PDGR's Florida remediation services operation experienced an 85% decrease in
gross margin in the current three month period due to changes in the EDI
Program in late March 1995 under which a substantial portion of the Florida
operations were generated. Further, access to work in the private remediation
market has been extremely competitive. PDGR has responded to the significant
reduction in gross margin at the Florida operation by further staff cuts in
late March 1996 and will continue to review the prospects for this operation on
an on-going basis associated with the Pre-Approval Program. The Pennsylvania
operation's gross margins increased by 64% due to favorable margins under a
large contract.
Selling, general and administrative expenses remained constant at $1.3 million
in the three months ended April 30, 1996 compared to the same quarter of the
previous fiscal year. Within the asbestos abatement operation, selling,
general and administrative expenses decreased to $0.7 million from $0.8 million
when comparing the first quarter of the current and the prior fiscal year due
to the closure of two branch offices at the beginning of fiscal 1997 and other
cost saving measures implemented at the end of fiscal 1996. These savings were
partially offset by a $0.08 million nonrecurring charge for insurance. PDGR
experienced a slight increase in selling, general and administrative expenses
to $0.6 million compared to $0.5 million between the first quarters of fiscal
1997 and 1996. This increase is attributable to higher legal costs associated
with pending litigation.
The Corporation reported a loss from operations of $0.7 million for the three
months ended April 30, 1996 compared to a loss from operations of $0.3 million
for the three months ended April 30, 1995 as a direct result of the factors
discussed above. The asbestos abatement segment had losses of $0.35 million
and $0.49 million, and the environmental remediation segment had a loss of
$0.33 million and income of $0.17 million during the three months ended April
30, 1996 and 1995, respectively.
During the three months ended April 30, 1995, the Corporation reported a net
gain of approximately $1.4 million from the initial public offering of common
stock and warrants by PDGR since the basis of the Corporation's investment was
lower than the proceeds realized from the initial public offering. As a result
of the sale, the Corporation's ownership percentage in PDGR was reduced from
100% to 59.5% on an ongoing basis.
9
<PAGE> 10
Interest expense decreased to $0.18 million in the current quarter compared to
$0.25 million in the same quarter of a year ago. The Corporation's interest
expense decreased to $0.08 million in the current three months compared to
$0.14 million in the prior year's three month period due to a decline in the
interest rates on outstanding indebtedness while PDGR's interest expense
remained relatively constant at $0.1 million when comparing the two quarters.
PDGR's interest expense includes costs associated with the Sirrom Agreements
relative to funding under the EDI Program.
During the quarter ended April 30, 1996, the Corporation did not provide an
income tax provision due to a loss for financial reporting purposes.
The Corporation recorded a 40.5% minority interest in the losses (income) of
PDGR of $172,000 and ($24,000) for the three months ended April 30, 1996 and
1995, respectively.
As noted previously, the operations of GeoLogic Recovery Systems were
discontinued effective January 31, 1996, and the operation was sold April 25,
1996. During the three months ended April 30, 1995, the Corporation's 59.5%
share of GeoLogic's operating loss was $87,000. There was no corresponding
amount for the three months ended April 30, 1996 as the operation was closed,
and the loss on disposal had been provided as of January 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended April 30, 1996, the Corporation's liquidity
decreased by $0.04 million to $0.6 million compared to an increase in cash and
short-term investments of $0.5 million in the three months ended April 30,
1995. The Corporation's cash and short-term investment balance at April 30,
1996 included $0.4 million related to PDGR, in which the Company maintains a
59.5% ownership interest. For the three months ended April 30, 1996, the
Corporation's cash flows pertaining to PDGR's operations were unrestricted.
The decrease in cash and short term investments during the first quarter of
fiscal 1997 is principally attributable to cash outflows used to fund investing
activities of $0.07 million offset by $0.04 million of cash provided by
operating activities. During the three months ended April 30, 1996, the
Corporation's cash outflows from financing activities totaled $0.01 million and
included $0.04 million of cash inflows related to proceeds from debt and $0.05
million of cash outflows related to principal payments on debt.
Financing activities in the first quarter of fiscal 1997 were nominal. In the
first quarter of fiscal 1996, they included $3.6 million of proceeds from the
initial public offering of PDGR stock, $1.4 million of which was received
directly by the Corporation and $2.2 million of which was received by PDGR.
PDGR also received $0.1 million related to the sale of warrants in connection
with the initial public offering. Financing activities in the first quarter of
fiscal 1996 also included $3.7 million of proceeds from refinanced indebtedness
related to PDGR offset by $4.7 million of principal payments on debt related to
PDGR.
The Corporation's cash inflows to fund operating activities of $0.1 million in
the three months ended April 30, 1996 included a decrease in escrowed cash of
$0.1 million, a decrease of $0.8 million in accounts receivable, a decrease in
other current assets of $0.2 million, an increase in billings in excess of
costs on uncompleted contracts of $0.3 million and depreciation and
amortization of $0.1 million. These cash inflows in operating activities were
offset in part by cash outflows relating to a $0.2 million increase related to
costs in excess of billings on uncompleted contracts, a $0.3 million decrease
in accounts payable, a decrease in accrued liabilities of $0.1 million and a
net loss of $0.7 million.
Cash flows used to fund operating activities totaled $2.0 million in the three
months ended April 30, 1995 which included $1.2 million related to the
Corporation and $0.8 million related to PDGR. These cash outflows principally
included a $0.2 million increase in costs and estimated earnings in excess of
billings on uncompleted contracts related to the timing of certain contract
activity, a $0.9 million decrease in accounts payable as a result of a
reduction in sales and payments, a $0.3 million reduction in accrued
liabilities related to the timing of payments and an adjustment of $1.4 million
related to the gain on the sale of PDGR and a $0.9 million increase in net
assets of discontinued operations . These cash outflows were principally
offset by cash inflows of $0.6 million related to net income generated during
the current three months, cash inflows of $0.3 million due to a
10
<PAGE> 11
decrease in other current assets related to deferred costs associated with the
PDGR initial public offering, a $0.3 million increase in billings in excess of
costs and estimated earnings on uncompleted contracts related to the timing of
contracts and $0.2 million of depreciation and amortization.
Cash outflows associated with investing activities during the current quarter
and the prior fiscal quarter of $0.1 million related to the purchase of
property, plant and equipment.
At April 30, 1996, the Corporation's backlog associated with its asbestos
abatement business totaled $6.2 million ($4.9 million on fixed fee contracts
and $1.3 million on time and materials or unit price contracts). PDGR's
backlog is expected to result in revenues of approximately $3 million to $5
million during the remainder of fiscal 1997.
The Corporation maintains a line of credit with CVD Financial Corporation for
$2.4 million which expires on May 1, 1997. The line of credit provides the
Corporation with the ability to borrow up to 85% of eligible accounts
receivable as defined and bear interest at a bank prime rate of interest plus
3%. At April 30, 1996, the Corporation was fully borrowed under the line of
credit of $2.4 million.
On October 31, 1995, the Corporation entered into an Amended and Restated Loan
Agreement with CVD Financial wherein the maximum borrowings under this line of
credit was set at $2,419,994. The interest rate under this line of credit was
reduced from prime plus 7% to prime plus 3% and all amounts borrowed under this
line of credit were due and payable on December 31, 1996. A term loan for
$559,991 was also provided as part of the Loan Agreement, with interest at the
prime rate of interest plus 3%. The Term Loan requires monthly principal
payments of $13,533 plus interest and matured December 31, 1996. Prior to the
October 31, 1995 refinancing, CVD Financial held warrants to purchase 752,500
shares of the Corporation's common stock at prices ranging from $0.75 to $1.25
per share. As part of the new Loan Agreement, CVD Financial continues to hold
the warrants.
As part of the aforementioned Loan Agreement, CVD Financial was granted the
right to convert any portion of the outstanding balances of the line of credit
and the term loan, any time after January 31, 1996, into common stock of the
Corporation. The conversion price is the lesser of the market price, as
defined, of the Corporation's common stock on January 31, 1996 or the market
price on the date of the conversion notice, except that the conversion price,
in neither case, shall not be less than $0.65 per share. Additionally, the
Corporation pledged PDGR shares representing its 59.5% interest as additional
collateral for the Loan Agreement.
On April 25, 1996, the Corporation entered into a Loan Extension Agreement
("Extension Agreement") whereby the maturity date for the line of credit and
term loan were extended to May 1, 1997. The Extension Agreement also provides
that if the Corporation sells its remaining 59.5% interest in PDGR, CVD would
re-advance the Corporation $325,000 under the existing line of credit for
working capital purposes. If the Corporation has not sold its remaining
interest in PDGR by July 24, 1996, CVD would have the option at that time and
thereafter to acquire the PDGR shares at $1 per share with the purchase price
credited against the aforementioned loans. Upon sale of the PDGR stock by CVD
prior to the maturity date of the loans, at amounts varying from $1 per share,
the variance from $1 per share will be credited/charged to the Corporation's
loan balance except that CVD may not sell the PDGR shares at a price below a
defined floor amount which is $0.99 per share. CVD will be obligated to sell
the PDGR shares to a third party identified by PDGR providing that the third
party is paying at least $1 per share and the maturity date of the loans has
not been reached.
The Corporation will continue to closely monitor its short-term and long-term
liquidity requirements on an ongoing basis and is prepared to implement any
measures required to conserve cash to meet its needs and to satisfy its
obligations. Those measures may include the sale of all or a portion of the
Corporation's remaining 59.5% ownership in PDGR. As noted elsewhere herein, on
May 29, 1996, PDGR filed a registration statement (Form S-3) relating to the
offer and sale of the 1,470,320 shares of PDGR stock held by the Corporation.
Consummation of the sale of all or a portion of the PDGR shares held by the
Corporation is expected to occur in the second quarter.
11
<PAGE> 12
PROSPECTIVE INFORMATION
The Corporation's current business consists principally of asbestos abatement
contracting and a 59.5% ownership interest in PDGR, which is engaged in
providing environmental remediation services.
PDGR has historically performed a substantial amount of work under a Florida
state funded site rehabilitation program, known as the "EDI Program," which
provided for the remediation of contaminated sites related to the storage of
petroleum and petroleum products. During the fiscal year ended January 31,
1996, the EDI Program was substantially modified to establish a protocol for
continued work on sites based on their priority ranking and a pre-approval
process for both the scope and the cost of work for petroleum clean up program
tasks. The revised Florida state funded site rehabilitation program is known
as the "Pre-Approval Program."
As a result of the changes in the EDI Program, PDGR experienced a material
adverse change in its operations during the last three quarters of fiscal 1996
and in the first quarter of fiscal 1997, which included substantial reductions
in contract revenues and significant operating losses, since the number of
sites in PDGR's backlog immediately eligible for continued reimbursement were
significantly reduced. Further, volume at PDGR's thermal treatment facility,
GeoLogic Recovery Systems ("GeoLogic"), was significantly affected by the EDI
Program changes that were indirectly attributable to the EDI Program changes
and, accordingly, PDGR sold this facility on April 25, 1996.
PDGR has responded to the impact of the EDI Program changes on its operations
through reductions in staff and other overhead costs, the reallocation of a
portion of its workforce to cover existing backlog at its Pennsylvania
remediation operation, the discontinuance of its thermal treatment facility,
increased marketing efforts focused on obtaining remediation service contracts
for high priority sites eligible for reimbursement under the Pre-Approval
Program, and the identification of potential acquisitions to replace the
revenues lost.
Although PDGR has increased its backlog of high priority sites eligible under
the Pre-Approval Program in recent months, delays associated with the
Pre-Approval Program have prevented PDGR from commencing work on these high
priority sites. As a result of these delays, PDGR generated a loss in the
quarter ended April 30, 1996 and expects that its operations will continue to
be adversely affected in the second quarter of fiscal 1997.
The state of Florida passed legislation at the end of May 1996 that includes
measures to satisfy the existing obligations to fund the backlog under the EDI
Program. The legislation requires clean-ups to continue on the basis of
priority rankings under the Pre-Approval Program and also authorizes clean-up
in advance of a site's priority ranking on a limited basis to facilitate
property transactions or public works projects pursuant to a Pre-Approval
Advance Clean-Up ("PAC") provision. The legislation provides for the State of
Florida to fund the existing backlog through the issuance of bonds, thereby
enabling reimbursement applications submitted under the EDI Program to be paid
on an accelerated basis. However, in exchange for this accelerated payment,
reimbursement applications will be paid at a discount effective January 1,
1997. The annual discount rate to be used is 3.5%, and the present value of an
application will be based upon the accelerated date the Florida Department of
Environmental Protection ("FDEP") anticipates settling a reimbursement
application, compared to the original date a reimbursement application was
scheduled to be settled.
PDGR estimates that the acceleration of payments by the FDEP on reimbursement
applications under the EDI Program will include the early release of cash,
which is currently being held in escrow to cover future interest costs and
potential disallowances on reimbursement applications, and the termination of
interest obligations. In addition, it is anticipated that the satisfaction of
the backlog by the FDEP will result in an increase in the annual allocation of
new work from the FDEP, thus accelerating PDGR's ability to access its backlog
of higher priority sites.
Until the FDEP establishes a schedule of anticipated payment dates, PDGR will
not be able to determine the impact of discounting on its operating results.
However, PDGR may be required to record an adjustment to reflect the negative
impact of the discounting on its results of operations and financial condition.
PDGR is required to complete all field work under the existing EDI Program by
no later than July 31, 1996, and the FDEP must be invoiced for this work by no
later than December 31, 1996.
12
<PAGE> 13
PDGES, a wholly-owned subsidiary of PDGR, is currently involved in litigation
with ISLIC as a result of insurance advances made to PDGES by ISLIC. A
judgment rendered against PDGES would have a detrimental impact on PDGR's
future cash flow.
The Corporation and PDGR have also been named in a purported class action suit
involving the purchase by all persons and entities of the registrant's common
stock from February 9, 1995 through May 23, 1995. The action alleges that the
defendants violated certain federal securities laws. The Corporation believes
that the allegations are without merit or that there are meritorious defenses
to the allegations, and intends to defend the action vigorously. If, however,
the plaintiff is successful in its claims, a judgment rendered against the
Corporation and the other defendants would likely have a material adverse
effect on the business and operations of the Corporation.
13
<PAGE> 14
PART II-- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
With respect to the action captioned Klein v. PDG Remediation, Inc., described
in the Corporation's Form 10-K for the year ended January 31, 1996, the parties
have begun initial discovery with respect to the action.
With respect to the action captioned International Surplus Lines Insurance Co.
vs. PDG Environmental Services, Inc. described in the Corporation's Form 10-K
for the year ended January 31, 1996. On December 19, 1994, ("PDGES"), a
wholly-owned subsidiary of PDGR filed an Answer and Counterclaims to the
Complaint in which PDGES vigorously contests the allegation in the Complaint.
The counterclaim is for an amount in excess of $2,517,215, and this amount
continues to increase. The basis of the counterclaim is based upon the legal
theories of breach of contract, bad faith (insurance), unjust enrichment,
promissory estoppel and implied contract. PDGES and ISLIC met in March 1996 to
explore settlement options; however, to date the parties have been unable to
reach a settlement. Discovery with respect to the matter was completed in May
1996. Motions for summary judgement were filed on behalf of both PDGES and
ISLIC on May 3, 1996, and each party filed a response to the other party's
motion on May 29, 1996. PDGES has made an additional offer of settlement to
ISLIC, but ISLIC has not yet responded. If neither party's summary judgement
motion is granted, or no settlement is reached, trial is expected to commence
on August 5, 1996.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The registrant is currently in arrears with respect to the payment of dividends
on its Series A Preferred Stock. At April 30, 1996, the cumulative dividends
in arrears on the Series A Preferred Stock were approximately $100,000.
ITEM 5. OTHER INFORMATION
PDGR has historically performed a substantial amount of work under the EDI
Program in the State of Florida. The EDI Program was substantially modified
during the registrant's fiscal year ended January 31, 1996. These
modifications continued to have a material adverse effect on PDGR's operations
in the three months ended April 30, 1996. Further, the Florida legislature
recently passed a bill to satisfy the State of Florida's existing obligations
to fund the backlog under the EDI Program.
The modifications in the EDI Program and the legislative activity are discussed
in further detail in prospective information segment of Management's Discussion
and Analysis of Financial Condition and Results of Operation on Page 12
contained in Part I located elsewhere herein.
PDGR has entered into a letter of intent to acquire SPATCO Environmental, Inc.
from its sole shareholder. This potential acquisition is discussed in greater
detail in Note 8 to the consolidated financial statements of the registrant
contained in Part I located elsewhere herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT INDEX
EXHIBIT NO. AND DESCRIPTION
<TABLE>
<CAPTION>
PAGES OF SEQUENTIAL
NUMBERING SYSTEM
<S> <C>
27. Financial data schedule
</TABLE>
(b) Reports on Form 8-K
The registrant did not file any current reports on Form 8-K during the three
months ended April 30, 1996.
14
<PAGE> 15
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 and Chief Executive Officer
Date: June 14, 1996
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF APRIL 30, 1996 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> APR-30-1996
<CASH> 594,000
<SECURITIES> 0
<RECEIVABLES> 4,096,000
<ALLOWANCES> 0
<INVENTORY> 202,000
<CURRENT-ASSETS> 9,512,000
<PP&E> 4,573,000
<DEPRECIATION> 3,610,000
<TOTAL-ASSETS> 10,550,000
<CURRENT-LIABILITIES> 6,469,000
<BONDS> 2,768,000
<COMMON> 118,000
0
444,000
<OTHER-SE> (23,000)
<TOTAL-LIABILITY-AND-EQUITY> 10,550,000
<SALES> 5,103,000
<TOTAL-REVENUES> 5,103,000
<CGS> 4,517,000
<TOTAL-COSTS> 4,517,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 184,000
<INCOME-PRETAX> (679,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (679,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (679,000)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
