<PAGE> 1
(Conformed)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-13667
PDG ENVIRONMENTAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2677298
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
300 OXFORD DRIVE, MONROEVILLE, PENNSYLVANIA 15146
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 412-856-2200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.02 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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The aggregate market value of the voting stock held by non-affiliates of the
registrant was $10,893,812 as of April 2, 1998, computed on the basis of the
average of the bid and asked prices on such date.
As of April 2, 1998 there were 6,484,412 shares of the registrant's Common Stock
outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders are
incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
(a) DEVELOPMENT OF THE BUSINESS
PDG Environmental, Inc., the registrant, is a holding company which, through its
wholly-owned operating subsidiaries and a joint venture, is engaged primarily in
providing asbestos abatement services to the private and public sectors.
Prior to fiscal 1991, the registrant was solely engaged in providing asbestos
abatement services. The registrant expanded the scope of its business to include
environmental remediation services in fiscal 1991 through the formation of an
operating subsidiary in Florida specializing in remediating leaking underground
storage tanks ("USTs"). In fiscal 1992, the registrant expanded its underground
storage tank remediation business to Pennsylvania. In December 1992, the
registrant entered the soil remediation business by purchasing a thermal
desorption plant in West Central Florida. The thermal desorption plant was
discontinued effective January 31, 1996, and the plant was sold April 25, 1996.
On July 20, 1994, PDG Remediation, Inc., now known as ICHOR Corporation,
("ICHOR") was incorporated under the laws of the Commonwealth of Pennsylvania as
a wholly-owned subsidiary of the registrant. The registrant's environmental
remediation services business was merged into ICHOR effective October 20, 1994
in order to separate this business segment from the registrant's other business
segments and facilitate an initial public offering of ICHOR common stock. On
February 9, 1995, ICHOR sold 1,000,000 shares of its common stock and 1,000,000
redeemable warrants to purchase an additional 1,000,000 shares of common stock
to the public. Of the shares of common stock sold, 600,000 were offered by ICHOR
and 400,000 were offered by the registrant, thereby reducing the registrant's
ownership in ICHOR to approximately 60%.
On July 31, 1996, the registrant entered into a Loan Modification Agreement
("Modification Agreement") with Drummond Financial Corporation ("Drummond")
formerly CVD Financial Corporation. Pursuant to the Modification Agreement,
Drummond purchased all 1,470,320 shares of ICHOR common stock held by the
Corporation for $0.82 per share and the aggregate purchase price of $1,205,662
was utilized to reduce the outstanding balance on the line of credit maintained
by the Corporation with Drummond. This resulted in a $203,000 gain on the sale.
In December 1997, the Corporation and Philip Environmental Services Corporation
("Philip") formed a limited partnership, PDG/Philip, L.P. ("Venture"). The
Corporation is both a general and limited partner of the Venture and holds a 60%
ownership share. The Venture is performing a $12 million asbestos abatement
contract which is expected to be completed by the end of the second quarter of
fiscal 1999.
(b) DESCRIPTION OF THE BUSINESS
ASBESTOS ABATEMENT CONTRACTING BUSINESS
OVERVIEW
The registrant, through its wholly-owned subsidiaries and joint venture
interest, provides asbestos abatement contracting services to the public and
private sectors. The asbestos abatement industry has developed due to increased
public awareness in the early 1970's of the health risks associated with
asbestos, which was extensively used in building construction.
Asbestos, which is a fibrous mineral found in rock formations throughout the
world, was used extensively in a wide variety of construction-related products
as a fire retardant and insulating material in residential, commercial and
industrial properties. During the period from approximately 1910 to 1973,
asbestos was commonly used as a construction material in structural steel
fireproofing, as thermal insulation on pipes and mechanical equipment and as an
acoustical insulation material. Asbestos was also used as a component in a
variety of building materials (such as plaster, drywall, mortar and building
block) and in caulking, tile adhesives, paint, roofing felts, floor tile and
other surfacing materials.
In the early 1970's, it became publicly recognized that inhalation or ingestion
of asbestos fibers was a direct cause of certain diseases, including asbestosis
(a debilitating pulmonary disease), lung cancer, mesothelioma (a cancer of the
abdominal and lung lining) and other diseases. In particular, friable
asbestos-containing materials ("ACM") were designated as a potential health
hazard because these materials can produce microscopic fibers and become
airborne when disturbed.
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The Environmental Protection Agency (the "EPA") first banned the use of asbestos
as a construction material in 1973 and the federal government subsequently
banned the use of asbestos in other building materials as well.
Most structures built before 1973 contain ACM in some form and surveys conducted
by the federal government have estimated that 31,000 schools and 733,000 public
and commercial buildings contain friable ACM. Also, many more industrial
facilities are known to contain asbestos.
The asbestos abatement industry grew rapidly in the 1980's due to increasing
public awareness and concern over health hazards associated with ACM,
legislative action mandating safety standards and requiring abatement in certain
circumstances, and economic pressures on building owners seeking to satisfy the
requirements of financial institutions, insurers and tenants. It is estimated
that the asbestos abatement market grew from approximately $200 million in
revenues in 1983 to approximately $4.0 billion in 1990. However, due to the
effects of the collapse of the real estate industry and the overall recession in
1991, the asbestos abatement market contracted to approximately $3.5 billion and
is expected to remain fairly constant in future years.
OPERATIONS
Through its operating subsidiaries, the registrant has expertise in all types of
asbestos abatement including removal and disposal, enclosure (constructing
structures around asbestos-containing area) and encapsulation (spraying asbestos
containing materials with an approved sealant). Asbestos abatement is
principally performed in commercial buildings, government and institutional
buildings, schools and industrial facilities.
The registrant's operating subsidiaries provide asbestos abatement services on a
project contract basis. Individual projects are competitively bid, although most
contracts with private owners are ultimately negotiated. The majority of
contracts undertaken are on a fixed price basis. The length of the contracts are
typically less than one year; however, larger projects may require two or three
years to complete.
The registrant closely monitors contracts by assigning responsibility for each
contract to a project manager who coordinates the project until its completion.
The asbestos abatement process is performed by a qualified labor force in
accordance with regulatory requirements, contract specifications and the
registrant's written operating procedures manual which describes worker safety
and protection procedures, air monitoring protocols and abatement methods.
The registrant's asbestos abatement operations have been generally concentrated
in the northeastern, mid-atlantic, southeastern and southwestern portions of the
United States. The majority of the registrant's national marketing efforts are
performed by members of senior management located in the headquarters facility
in Monroeville, Pennsylvania. Regional marketing and project operations are also
conducted through branch offices located in New York City, New York; Hazleton
and Export, Pennsylvania; Atlanta, Georgia; Fort Lauderdale, Florida; Houston,
Texas; Phoenix, Arizona and Rock Hill, South Carolina. Since the registrant and
its subsidiaries are able to perform asbestos abatement work throughout the
year, the business is not considered seasonal in nature. However, it is affected
by the timing of large contracts.
SUPPLIERS AND CUSTOMERS
The registrant purchases the equipment and supplies used in the asbestos
abatement business from a number of manufacturers. One of these manufacturers
(Aramsco, Inc.) accounted for 31% of the registrant's asbestos abatement
purchases in fiscal 1998. The items purchased are made from the vendor's
available stock and are not covered by a formalized agreement.
The customers of the registrant's asbestos abatement business include both
private sector clients and government or publicly funded entities. In fiscal
1998, the registrant estimates that approximately 65% of its operating
subsidiaries' revenues were derived from private sector clients, 30% from
government contracts and 5% from schools. Due to the nature of the registrant's
business, which involves large contracts that are often completed within one
year, customers that account for a significant portion of revenue in one year
may represent an immaterial portion of revenue in subsequent years. For the year
ended January 31, 1998, one customer, the U.S. Army, accounted for 11.4% of the
registrant's consolidated revenues for that year.
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LICENSES
The registrant, through its operating subsidiaries, is licensed and/or certified
in all jurisdictions where required in order to conduct its operations. In
addition, certain management and staff members are licensed and/or certified by
various governmental agencies as asbestos abatement supervisors and workers.
INSURANCE AND BONDS
The registrant and its operating subsidiaries maintain liability insurance for
claims arising from its asbestos abatement business. The policy, which provides
a $2.0 million limit per claim and in the aggregate, insures against both
property damage and bodily injury arising from the asbestos abatement
contracting activities of the registrant's operating subsidiaries. The policy is
written on an "occurrence" basis which provides coverage for insured risks that
occur during the policy period, irrespective of when a claim is made. Higher
policy limits of up to $10.0 million are available for individual projects. The
registrant also provides worker's compensation insurance, at statutory limits,
which covers the employees of the registrant's operating subsidiaries engaged in
asbestos removal or encapsulation activities.
A substantial number of the registrant's contracts require performance and
payment bonds and the registrant maintains a bonding program to satisfy these
requirements.
COMPETITIVE CONDITIONS
The asbestos abatement industry is highly competitive and includes both small
firms and large diversified firms, which have the financial, technical and
marketing capabilities to compete on a national level. The industry is not
dominated by any one firm. The registrant principally competes on the basis of
competitive pricing, a reputation for quality and safety, and the ability to
obtain the appropriate level of insurance and bonding.
REGULATORY MATTERS
Numerous regulations at the federal, state and local levels impact the asbestos
abatement industry, including the EPA's Clean Air Act and Occupational Safety
and Health Administration ("OSHA") requirements. As outlined below, these
agencies have mandated procedures for monitoring and handling ACM during
abatement projects and the transportation and disposal of ACM following removal.
Current EPA regulations establish procedures for controlling the emission of
asbestos fibers into the environment during removal, transportation or disposal
of ACM. The EPA also has notification requirements before removal operations can
begin. Many state authorities and local jurisdictions have implemented similar
programs governing removal, handling and disposal of ACM.
The EPA instituted the Asbestos Hazard Emergency Response Act of 1986 which
requires that schools be inspected for asbestos by accredited personnel. In the
event that the inspection program shows evidence of ACM, a maintenance or
abatement program must be implemented and the school must conduct continuing
operations and maintenance programs including reinspection every three years,
training custodial employees in asbestos hazards and furnishing asbestos
notifications to parents and building occupants.
The transportation of ACM, which has been designated a hazardous material, is
governed by the Department of Transportation under the Hazardous Materials
Transportation Act of 1975 which has established guidelines for the
transportation of ACM.
The health and safety of personnel involved in the removal of asbestos is
protected by OSHA regulations which specify allowable airborne exposure
standards for asbestos workers, engineering and administrative control methods,
work area practices, proper supervision, training, medical surveillance and
decontamination practices for worker protection.
The registrant believes it is in compliance with all of the federal, state and
local statutes and regulations which affect its asbestos abatement business.
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BACKLOG
The registrant and its operating subsidiaries had asbestos abatement backlog
orders totaling approximately $27.6 million and $14.4 million at January 31,
1998 and 1997, respectively. The backlog at January 31, 1998 consisted of $17.7
million of uncompleted work on fixed fee contracts and an estimated $9.9 million
of work on time and materials or unit price contracts. The backlog at January
31, 1997 consisted of $9.2 million of uncompleted work on fixed fee contracts
and an estimated $5.2 million of work to be completed on time and materials or
unit price contracts. The Company, from time to time, enters into fixed-price
subcontracts which tends to reduce the risk to the Company on fixed-price
contracts.
The backlog represents the portion of contracts which remain to be completed at
a given point in time. As these contracts are completed, the backlog will be
reduced and a compensating amount of revenue will be recognized. The Company is
currently working on virtually all of the contracts in its January 31, 1998
backlog and anticipates that approximately 80% of this backlog will be completed
and realized as revenue by January 31, 1999 in accordance with the terms of the
applicable contracts between the registrant and the owners of these properties.
The remaining 20% is expected to be completed and realized as revenue subsequent
to January 31, 1999. Approximately 85% of the backlog existing at January 31,
1997 was completed and recognized as revenue by January 31, 1998 with the
remaining 15% expected to be completed and realized as revenue during the year
ending January 31, 1999.
EMPLOYEES
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As of January 31, 1998, the registrant employs approximately 80 employees
consisting of senior management and staff employees between its headquarters in
Monroeville and branch offices located in New York City, Hazleton, Export,
Atlanta, Fort Lauderdale, Houston, Phoenix and Rock Hill. The staff employees
include accounting, administrative, sales and clerical personnel as well as
project managers and field supervisors. The registrant also employs laborers for
field operations based upon specific projects; therefore, the precise number
varies based upon the outstanding backlog. Approximately 155 laborers and
supervisors are employed on a steady basis, with casual labor hired on an
as-needed basis to supplement the work force.
A portion of the field laborers who provide services to the registrant are
represented by a number of different unions. In every case, the Company is a
member of a multi-employer plan. Management considers its employee labor
relations to be good.
ITEM 2. PROPERTIES
As of January 31, 1998, the registrant leases certain office space for its
executive offices in Monroeville totaling 3,500 square feet. In addition, a
combination of warehouse or shop and office space is leased in Houston (3,990
square feet), Atlanta (250 square feet), Hazleton (1,800 square feet), Fort
Lauderdale (3,800 square feet), Rock Hill (4,943 square feet), Phoenix (2,400
square feet) and New York City (3,800 square feet).
The registrant also owns a 15,000 square foot office/warehouse situated on
approximately six (6) acres in Export, Pennsylvania which is subject to a
mortgage.
ITEM 3. LEGAL PROCEEDINGS
On June 30, 1995, an action, caption Klein v. PDG Remediation, Inc., et al., No.
CIV-4954 (DAB), was filed in the United States District Court for the Southern
District of New York asserting federal securities law claims against the
registrant, its directors and certain of its officers, PDGR and the underwriters
of the registrant's initial public offering. The Klein action is brought as a
purported class action on behalf of the named plaintiff and all persons and
entities who purchased PDGR's common stock from February 9, 1995, the effective
date of the initial public offering, through May 23, 1995. The plaintiff alleges
that the defendants violated Sections 11 and/or 15 of the Securities Act of
1933, as amended, and Section 12(2) of the Securities Exchange Act of 1934, as
amended, by issuing or participating in the issuance of the registration
statement and prospectus which contained material misstatements or omissions,
and that the purported class members purchased shares of Common Stock in
reliance on the allegedly false and misleading registration statement and
prospectus. Specifically, plaintiff alleges that the defendants knew or should
have known that the Florida reimbursement program in which PDGR participates was
operating at a deficit and was being revised to eliminate funding of remediation
activities for lower priority sites. The plaintiff is seeking certification of
the action as a class action and recision of the purchase of shares of common
stock by
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members of the purported class or statutory damages, as well as interest,
attorneys' fees and other costs and expenses. The registrant believes that the
plaintiff's allegations are without merit or that there are meritorious defenses
to the allegation, and intends to defend the action vigorously. On September 1,
1995, an answer was filed on behalf of the registrant, its officers and
directors and PDGR which generally denied the plaintiff's claims.
By letter dated December 5, 1995, the plaintiff requested a pre-motion
conference on a motion for class certification. By letter dated December 6,
1995, the underwriter's counsel requested a pre-motion conference on a motion to
dismiss the complaint. In December 1995, the underwriter defendants filed a
notice of motion to dismiss and a memorandum of law in support of the motion.
The motion to dismiss was denied in September 1996. The parties have negotiated
a stipulation concerning class certification, and the court has certified a
class. The notice of class certification was sent to potential class members in
August 1997.
The action is still in the discovery stage. Discovery is scheduled to close on
July 31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The registrant's common stock has traded on the OTC Bulletin Board since
September 1996. Prior to that, it was listed for trading on NASDAQ Small Cap
(Symbol: PDGE) and the information presented for the following periods reflects
the high and low bid information as reported by the OTC Bulletin Board and
NASDAQ.
<TABLE>
<CAPTION>
MARKET PRICE RANGE
FISCAL 1998 FISCAL 1997
----------- -----------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $ 0.81 $ 0.42 $ 0.63 $ 0.31
Second Quarter 0.87 0.56 1.00 0.31
Third Quarter 1.12 0.71 0.83 0.31
Fourth Quarter 2.18 1.06 0.47 0.25
</TABLE>
At April 2, 1998, the registrant had 2,191 stockholders of record.
The registrant has not historically declared or paid dividends with respect to
its common stock and has no intention to pay dividends in the foreseeable
future. The registrant's ability to pay preferred and common dividends is
prohibited due to limitations imposed by the registrant's Series A Preferred
Stock which require that dividends must be paid to holders of preferred stock
prior to the payment of dividends to holders of common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table reflects selected consolidated financial data for the
registrant for the five fiscal years ended January 31, 1998.
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<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
1998 1997 1996 1995 1994
---------------------------------------------------------------
(THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Contract revenues $24,610 $16,183 $16,215 $17,659 $16,310
Gross margin 4,319 2,485 1,442 2,178 1,810
Income (loss) from operations 1,530 (6) (1,567) (591) (1,363)
Other income (expense) (168) (178) 920 (423) (302)
Income (loss) from continuing operations 1,240 (184) (750) (1,038) (1,651)
Income (loss) from discontinued operations - (302) (1,701) 896 206
Net income (loss) 1,240 (486) (2,451) 473 (1,445)
COMMON SHARE DATA
Net income (loss) from continuing
operations per common share:
Basic 0.20 (0.04) (0.14) (0.20) (0.67)
Diluted 0.17 (0.04) (0.14) (0.20) (0.67)
Net income (loss) per common share:
Basic 0.20 (0.09) (0.44) 0.08 (0.61)
Diluted 0.17 (0.09) (0.44) 0.08 (0.61)
Weighted average common shares outstanding 6,060 5,913 5,670 7,157 3,267
BALANCE SHEET DATA
Working capital $ 2,794 $ 409 $ 3,110 $ 3,177 $ 3,427
Total assets 10,337 6,165 7,564 9,690 7,904
Long-term obligations 1,768 372 2,766 510 1,735
Total stockholders' equity 2,265 762 1,218 3,609 3,049
</TABLE>
The earnings per share amounts prior to fiscal 1998 have been restated as
required to comply with Statement of Financial Accounting Standards No. 128,
Earnings Per Share. For further discussion of earnings per share and the impact
of Statement No. 128, see Note 14 to the Consolidated Financial Statements.
The years ended January 31, 1997, 1996, 1995 and 1994 include gain (loss) from
discontinued operations of ($0.3 million), ($1.7 million), $0.9 million and $0.2
million respectively; ($0.05), ($0.30), $0.13 and $0.06 per common share
respectively. For the year ended January 31, 1996, other income includes a gain
of $1.4 million on the sale of 40.5% of its investment in PDGR.
The year ended January 31, 1995 includes an extraordinary item related to the
early extinguishment of debt totaling $0.6 million ($0.09 per common share).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The registrant, through its operating subsidiaries, provides asbestos abatement
services to the public and private sectors.
The following paragraphs are intended to highlight key operating trends and
developments in the registrant's operations and to identify other factors
affecting the Company's consolidated results of operations for the three years
ended January 31, 1998.
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RESULTS OF OPERATIONS
YEAR ENDED JANUARY 31, 1998 COMPARED TO YEAR ENDED JANUARY 31, 1997
Consolidated revenues reported by the registrant increased to $24.6 million for
the year ended January 31, 1998 (fiscal 1998) compared to $16.2 million for the
year ended January 31, 1997 (fiscal 1997). The fiscal 1998 increase was
primarily attributable to increased bidding opportunities and contract awards.
Contract costs increased to $20.3 million in fiscal 1998 compared to $13.7
million in fiscal 1997 and resulted in reported gross margins of $4.3 million
and $2.5 million, respectively in each fiscal year. The higher margins
experienced in fiscal 1998 resulted from increased contract revenue and higher
project margins.
The registrant's selling, general and administrative expenses increased by 12%
between the two fiscal years to $2.8 million in fiscal 1998 compared to $2.5
million in fiscal 1997. The increase between the two fiscal years principally
related to employee bonuses and the operating costs associated with the two
additional branch offices in operation in fiscal 1998.
The factors discussed above resulted in the registrant reporting income from
operations of $1.5 million in fiscal 1998 compared to loss from operations of
$0.01 million in fiscal 1997.
Interest expense decreased to $0.2 million from $0.3 million due to decreased
average borrowings during fiscal 1998. Interest income increased to $16,000 for
the year ended January 31, 1998 compared to $8,000 for the previous fiscal year
due to higher invested cash balances at certain periods throughout the year.
Other income decreased to $36,000 from $101,000 in 1997 due to a number of
non-recurring items included in the fiscal 1997 amounts including proceeds from
a casualty loss, rental of excess equipment and the sale of fixed assets.
As a result of net operating loss carryforwards for book purposes, there was no
federal income tax provision in fiscal 1998. A $20,000 state income tax
provision was made. No income tax provision was made in fiscal 1997 due to a net
operating loss in fiscal 1997.
The loss from discontinued operations in fiscal 1997 was due to the registrant
recording its 59.5% ownership share of ICHOR up to July 31, 1996 at which time,
the registrant sold its remaining interest in ICHOR to Drummond resulting in a
$0.2 million gain.
YEAR ENDED JANUARY 31, 1997 COMPARED TO YEAR ENDED JANUARY 31, 1996
During the year ended January 31, 1997, (fiscal 1997) the registrant's
consolidated revenues remain unchanged at $16.2 million when compared to the
previous fiscal year ended January 31, 1996 (fiscal 1996).
The registrant's reported gross margin increased to $2.5 million in fiscal 1997
compared to $1.4 million in fiscal 1996. The increased margin in fiscal 1997 was
due to higher margins on work obtained and the effect in fiscal 1996 of a cost
overrun on a large contract, an additional provision on a completed contract and
extreme competitive pressures which reduced margins.
Selling, general and administrative expenses decreased in fiscal 1997 to $2.5
million compared to $3.0 million in fiscal 1996 due to significant cost-saving
measures adopted early in fiscal 1997. The cost-savings measures included the
closure of two branch offices, the resignation of the President of the
registrant, employee layoffs and general cost containment.
As a result of the factors discussed above, the registrant reported a loss from
operations in fiscal 1997 of $0.01 million compared to a loss from operations of
$1.6 million in fiscal 1996.
Interest expense decreased to $0.3 million in fiscal 1997 compared to $0.5
million in fiscal 1996 as a result of a significant reduction in both the
outstanding balance on the indebtedness to Drummond and the related interest
rate. Interest income decreased to $8,000 in fiscal 1997 compared to $24,000 in
fiscal 1996 due to the lower invested cash balances during the current year.
Other income in fiscal 1997 totaled approximately $101,000 versus $9,000 in
fiscal 1996. Significant components of other income were the proceeds from a
casualty loss, rental of excess equipment and the sale of fixed assets. During
the year ended
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January 31, 1996, the registrant reported a gain of $1.4 million from the
initial public offering of common stock and warrants by ICHOR since the basis of
the registrant's investment was lower than the proceeds realized from the
initial public offering. As a result of the sale, the registrant's ownership
percentage in ICHOR was reduced to 59.5%.
As a result of a net operating loss for book purposes, the registrant had no
federal tax provision. During fiscal 1996, the registrant recorded a deferred
income tax provision of $103,000.
The registrant recorded its 59.5% interest in the losses of ICHOR resulting in a
$0.5 million and $1.2 million loss from discontinued operations for fiscal 1997
and 1996, respectively. The sale of the remaining ICHOR shares to Drummond on
July 31, 1996 resulted in a $0.2 million gain. The $0.5 million loss on disposal
in fiscal 1996 represented the registrant's 59.5% share of the loss resulting
from the sale of ICHOR's thermal treatment facility in Florida.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL 1998
During fiscal 1998, the registrant experienced an increase in liquidity of $0.5
million as cash and short-term investments increased from $0.4 million at
January 31, 1997 to $0.9 million at January 31, 1998. The increase in liquidity
in fiscal 1998 was attributable to cash inflows of $1.0 million from operating
activities partially offset by $0.6 million of cash utilized by investing
activities.
Specifically, cash inflows from operating activities were generated by net
income of $1.2 million, depreciation and amortization of $0.4 million, a $1.8
million increase in accounts payable, a $0.3 increase in other current assets, a
$0.2 million increase in billings in excess of costs and estimated earnings on
uncompleted contracts and a $0.1 million increase in accrued liabilities. Cash
outflows related to operating activities included a $3.1 million increase in
accounts receivable and a $0.1 million increase in costs and estimated earnings
in excess of billings on uncompleted contracts. The increases in accounts
receivable and accounts payable are attributable to the significant (52%)
increase in revenues from fiscal 1997 to fiscal 1998.
The $0.04 million of cash flows from financing activities during fiscal 1998
included $1.8 million of proceeds generated from the issuance of new debt
including the refinancing of all Drummond debt ($1.8 million outstanding under a
line of credit and a term loan at January 31, 1997) with a $0.4 million mortgage
loan with a seven-year term, a $0.5 million five-year equipment loan and a $1.5
million maximum three-year line of credit facility. Additional funds of $0.2
million were generated from the exercise of 470,000 stock options and warrants.
These cash flows were wholly offset by the repayment of the aforementioned debt
due Drummond which was refinanced and monthly payments on the new debt
instruments.
The registrant's investing activities of $0.6 million were due to the purchase
of property, plant and equipment, including the acquisition of the fixed assets
of American Environmental Abatement Corporation located in Phoenix, Arizona.
The registrant maintains a $1.5 million revolving line of credit collateralized
by eligible accounts receivable with an August 2000 maturity and a $0.5 million
equipment note with an August 2002 maturity. At January 31, 1998, there was
$917,000 borrowed on the line of credit. Both the revolving line of credit and
the equipment note are at an interest rate of prime plus 3.5%. Additionally, the
registrant's Export real estate is collateral for a $375,000 seven-year mortgage
loan at an interest rate of 9.5% for the first four years of the loan with
interest reset at 3.25% above the five-year treasury bill rate for the remaining
three-year term of the mortgage loan.
The registrant believes that it has adequate liquidity to fund its current and
future operations.
FISCAL 1997
During fiscal 1997, the registrant experienced an increase in liquidity of $0.1
million as cash and short-term investments increased from $0.3 million at
January 31, 1996 to $0.4 million at January 31, 1997. The increase in liquidity
in fiscal 1997 was attributable to cash inflows in the amount of $0.2 million
from operating activities and $0.1 million from financing activities partially
offset by $0.1 million used to fund the purchase of property, plant and
equipment.
Specifically, cash inflows from operating activities were generated by a
decrease in other current assets of $0.6 million, a $0.1 million increase in
accrued liabilities, a decrease of $0.5 million in net assets of discontinued
operations and $0.4 million of
-8-
<PAGE> 10
depreciation. Cash outflows related to the accounts receivable balance which
increased $0.5 million as a result of the higher revenues during the fourth
quarter of fiscal 1997, accounts payable which decreased $0.2 million, an
adjustment of $0.2 million due to the gain on the sale of PDGR and $0.5 million
as a result of the net loss generated in the period.
The $0.12 million from financing activities during fiscal 1997 included $0.29
million advanced under the line of credit offset by $0.17 million of principal
repayments made on the Drummond term debt. Additionally, the $1.2 million of
proceeds from the sale of PDGR stock to Drummond was a direct offset to reduce
borrowings under the line of credit.
The registrant's investing activities of $0.1 million during fiscal 1997 were
attributable to the purchase of property, plant and equipment.
During fiscal 1996, the registrant entered into two agreements guaranteeing
ICHOR accounts receivable financed by Sirrom Environmental Funding, LLC
("Sirrom"). At January 31, 1997, the balance guaranteed by the registrant under
the two agreements was approximately $3 million. Subsequent to January 31, 1997,
ICHOR's customer has made significant payments reducing the amount of the
registrant's guarantee to approximately $300,000. It is expected that the
remaining outstanding receivables covered by the guarantee will be paid by
ICHOR's customer during the first half of Fiscal 1999, eliminating the
registrant remaining guarantee.
The registrant, from time to time, enters into fixed-price subcontracts which
tends to reduce the risk to the Company of fixed-price contracts.
PROSPECTIVE INFORMATION
The registrant has been named in a purported class action suit involving the
purchase by all persons and entities of ICHOR's common stock from February 9,
1995 through May 23, 1995. The action alleges that the defendants violated
certain federal securities laws. (See "Item 3 - Legal Proceedings" for a
description of this litigation.)
The registrant 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 registrant and the other defendants would likely have a
material adverse effect on the business and operations of the registrant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the registrant and its subsidiaries and
the report of Ernst & Young LLP are submitted under Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the two most recent fiscal years of the registrant, there were no
disagreements with the independent auditors on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreement would have caused the auditors to make reference
to the subject matter of the disagreement or disagreements in connection with
their reports.
-9-
<PAGE> 11
PART III
The information called for by Part III (Items #10, 11, 12 and 13) is
incorporated herein by references to the registrant's definitive Proxy Statement
for the 1998 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of
1934.
-10-
<PAGE> 12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) AND (2) The following consolidated financial statements and financial
statement schedule of the registrant and its subsidiaries are submitted pursuant
to the requirements of this section.
PAGE
----
Report of Independent Auditors...............................................F-1
Consolidated Balance Sheets as of January 31, 1998 and 1997..................F-2
Consolidated Statements of Operations for the Three Years Ended
January 31, 1998...........................................................F-4
Consolidated Statements of Changes in Stockholders' Equity for the Three
Years Ended January 31, 1998...............................................F-5
Consolidated Statements of Cash Flows for the Three Years Ended
January 31, 1998...........................................................F-6
Notes to Consolidated Financial Statements for the Three Years
Ended January 31, 1998.....................................................F-7
Schedule II - Valuation and Qualifying Accounts.............................F-18
All other schedules for PDG Environmental, Inc. and consolidated
subsidiaries for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, not applicable, or the required information is shown in
the consolidated financial statements or notes thereto.
(a) (3) EXHIBITS:
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3.1 Certificate of Incorporation of the registrant and all amendments thereto,
filed as Exhibit 3.1 to the registrant's Annual Report on Form 10-K for
the year ended September 30, 1990, is incorporated herein by reference.
3.2 Certificate of Amendment to the Certificate of Incorporation of the
registrant, approved by stockholders on June 25, 1991, filed as Exhibit
3(a) to the registrant's Quarterly Report on Form 10-Q for the quarter
ended July 31, 1991, is incorporated herein by reference.
3.3 Amended and Restated By-laws of the registrant, filed as Exhibit 4.2 to
the registrant's registration statement on Form S-8 of securities under
the PDG Environmental, Inc. Amended and Restated Incentive Stock
Option Plan as of June 25, 1991, are incorporated herein by reference.
3.4 Agreement of Limited Partnership of PDG/Philip, L.P. dated December
1997 between PDG, Inc., PDG Environmental, Inc. and Philip
Environmental Services Corporation.
</TABLE>
-11-
<PAGE> 13
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4.1 Certificate of the Powers, Designation, Preferences, and Relative,
Participating, Optional or Other Rights, and the Qualifications,
Limitations or Restrictions of the Series A, 9.00% Cumulative
Convertible Preferred Stock, filed as Exhibit H with the registrant's
preliminary proxy materials on July 23, 1990 (File No. 0-13667), is
incorporated herein by reference.
4.2 Certificate of Amendment of Certificate of the Powers, Designation,
Preferences and Relative, Participating, Optional or Other Rights, and
the Qualifications, Limitations, or Restrictions of the Series A 9%
Cumulative Convertible Preferred Stock (par value $0.01 per share),
filed as Exhibit 4(a) to the registrant's Quarterly Report on Form 10-Q
for the quarter ended July 31, 1993, is incorporated herein by
reference.
4.3 Certificate of Powers, Designation, Preferences and Relative,
Participating, Optional or Other Rights, and the Qualifications,
Limitations or Restrictions of the Series B, 4.00% Cumulative,
Convertible Preferred Stock, filed as Exhibit 4.2 to the registrant's
registration on Form S-3 on March 17, 1993, is incorporated herein by
reference.
4.4 Share Purchase Agreement, dated as of December 23, 1992, between the
registrant and Conversion Industries, Inc., filed as Exhibit (i) to the
registrant's Current Report on Form 8-K dated December 23, 1992, is
incorporated herein by reference.
4.5 Security Agreement dated August 19, 1997 between Finova Capital
Corporation and PDG Environmental, Inc., PDG, Inc., Project
Development Group, Inc. and Enviro-Tech Abatement Services Co.,
filed as Exhibit 4(a) of the PDG Environmental, Inc. Quarterly Report
on Form 10-QSB for the quarter ended July 31, 1997, is incorporated
herein by reference.
10.1 Indemnity Agreement dated as of the first day of July 1990 by and
among Project Development Group, Inc. and John C. and Eleanor
Regan, filed as Exhibit 10.1 to the registrant's Annual Report on Form
10-K for the year ended September 30, 1990, is incorporated herein by
reference.
10.2 Assumption Agreement entered into as of the fourteenth day of
December 1990 among Project Development Group, Inc., and John C.
and Eleanor Regan, filed as Exhibit 10.2 to the registrant's Annual
Report on Form 10-K for the year ended September 30, 1990, is
incorporated herein by reference.
10.3 PDG Environmental, Inc. Amended and Restated Incentive Stock Option
Plan as of June 25, 1991, filed as Exhibit 10.3 to the registrant's Annual
Report on Form 10-K for the year ended January 31, 1992, is
incorporated herein by reference.
10.4 PDG Environmental, Inc. 1990 Stock Option Plan for Employee
Directors, filed as Exhibit 10.4 to the registrant's Annual Report on
Form 10-K for the year ended January 31, 1992, is incorporated herein
by reference.
</TABLE>
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<PAGE> 14
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10.5 PDG Environmental, Inc. 1990 Stock Option Plan for Non-Employee
Directors, filed as Exhibit 10.5 to the registrant's Annual Report on
Form 10-K for the year ended January 31, 1992, is incorporated herein
by reference.
10.6 Demand note between the registrant and John C. Regan, filed as Exhibit
10.4 to the registrant's Annual Report on Form 10-K for the transition
period from October 1, 1990 to January 31, 1991, is incorporated herein
by reference.
10.7 Demand note between the registrant and Dulcia Maire, filed as Exhibit
10.6 to the registrant's Annual Report on Form 10-K for the transition
period from October 1, 1990 to January 31, 1991, is incorporated herein
by reference.
10.8 Letter agreement between the registrant and Messrs. Sorenson and
Bendis, filed as Exhibit 10.7 to the registrant's Annual Report on Form
10-K for the transition period from October 1, 1990 to January 31,
1991, is incorporated herein by reference.
10.9 Stock Purchase Agreement dated as of March 31, 1992 by and between
PDG Environmental, Inc. and Jones Group, Inc., filed as Exhibit 10.10
to the registrant's Annual Report on Form 10-K for the year ended
January 31, 1992, is incorporated herein by reference.
10.10 Asset Purchase Agreement dated as of October 13, 1992, among PDG
Environmental, Inc., Resource Recovery of America, Inc., and
International Recovery Corp., filed as Exhibit (i) to the
registrant's Current Report on Form 8-K dated December 31, 1992,
is incorporated herein by reference.
10.11 Professional Consulting Agreement dated June 14, 1996 between Len
Turano and PDG Environmental, Inc. filed as Exhibit 10(a) of the
PDG Environmental, Inc. Quarterly Report on Form 10-Q for the
quarter ended July 31, 1996, is incorporated herein by reference.
10.12 Security Agreement dated August 19, 1997 between Finova Capital
Corporation and PDG Environmental, Inc., PDG, Inc., Project
Development Group, Inc. and Enviro-Tech Abatement Services Co.
filed as Exhibit 4(a) of the PDG Environmental, Inc. Quarterly
Report on Form 10-QSB for the quarter ended July 31, 1997, is
incorporated herein by reference (as it appears at 4.5).
21 List of subsidiaries of the registrant.
23 Consent of independent auditors.
24 Power of attorney of directors.
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 January 31, 1998.
-13-
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
PDG ENVIRONMENTAL, INC.
/s/ JOHN C. REGAN
---------------------------------------------------
John C. Regan, Chairman and Chief Executive Officer
Date: April 8, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ JOHN C. REGAN April 8, 1998
- -------------------------------------------------
John C. Regan
Chairman and Chief Executive Officer
(Principal Executive Officer and Director)
Richard A. Bendis, Director By /s/ JOHN C. REGAN
----------------------------------------
John C. Regan, Attorney-in-Fact
April 8, 1998
Edgar Berkey, Director By /s/ JOHN C. REGAN
----------------------------------------
John C. Regan, Attorney-in-Fact
April 8, 1998
Edwin J. Kilpela, Director By /s/ JOHN C. REGAN
----------------------------------------
John C. Regan, Attorney-in-Fact
April 8, 1998
-14-
<PAGE> 16
PDG ENVIRONMENTAL, INC.
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(a)(1) AND (2)
FINANCIAL STATEMENTS & SCHEDULES
-15-
<PAGE> 17
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
PDG Environmental, Inc.
We have audited the accompanying consolidated balance sheets of PDG
Environmental, Inc. (the "Corporation") as of January 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended January 31, 1998. Our
audits also included the financial statement schedule listed in the index at
Item 14(a). These financial statements and schedule are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PDG
Environmental, Inc. at January 31, 1998 and 1997, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended January 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
March 26, 1998
F-1
<PAGE> 18
CONSOLIDATED BALANCE SHEETS
PDG ENVIRONMENTAL, INC.
<TABLE>
<CAPTION>
JANUARY 31,
1998 1997
---------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 892,000 $ 429,000
Accounts receivable, less allowance of $48,000 and
$47,000 in 1998 and 1997, respectively 6,751,000 3,708,000
Costs and estimated earnings in excess of billings on
uncompleted contracts 725,000 614,000
Inventories 202,000 182,000
Notes receivable from officers 132,000 132,000
Prepaid income taxes 165,000 182,000
Other current assets 129,000 193,000
----------- ----------
TOTAL CURRENT ASSETS 8,996,000 5,440,000
PROPERTY, PLANT AND EQUIPMENT
Land 42,000 42,000
Leasehold improvements 55,000 55,000
Furniture and fixtures 136,000 130,000
Vehicles 470,000 361,000
Equipment 3,455,000 3,015,000
Buildings 369,000 369,000
----------- ----------
4,527,000 3,972,000
Less: accumulated depreciation 3,558,000 3,284,000
----------- ----------
969,000 688,000
OTHER ASSETS 372,000 37,000
----------- ----------
TOTAL ASSETS $10,337,000 $6,165,000
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 19
CONSOLIDATED BALANCE SHEETS
PDG ENVIRONMENTAL, INC.
<TABLE>
<CAPTION>
JANUARY 31,
1998 1997
---------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,746,000 $1,699,000
Billings in excess of costs and estimated earnings on
uncompleted contracts 842,000 635,000
Accrued liabilities 1,416,000 1,212,000
Current portion of long-term debt 198,000 1,485,000
----------- ----------
TOTAL CURRENT LIABILITIES 6,202,000 5,031,000
OTHER LONG-TERM LIABILITIES 140,000 --
LONG-TERM DEBT 1,628,000 372,000
MINORITY INTEREST 102,000 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Cumulative convertible Series A preferred stock, (2%) $0.01 par value,
5,000,000 shares authorized and 167,338 and 185,925 issued and
outstanding shares at January 31, 1998 and 1997, respectively
(liquidation preference of $1,673,380 and $1,859,250 respectively) 400,000 444,000
Common stock, $0.02 par value, 30,000,000 shares authorized and
6,474,412 shares and 5,923,868 shares issued and outstanding
at January 31, 1998 and 1997, respectively 130,000 118,000
Paid-in capital 4,571,000 4,260,000
----------- ----------
5,101,000 4,378,000
(Deficit) retained earnings (2,836,000) (4,060,000)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 2,265,000 762,000
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,337,000 $6,165,000
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 20
CONSOLIDATED STATEMENTS OF OPERATIONS
PDG ENVIRONMENTAL, INC.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
1998 1997 1996
-----------------------------------------------------
<S> <C> <C> <C>
CONTRACT REVENUES $24,610,000 $16,183,000 $16,215,000
CONTRACT COSTS 20,291,000 13,698,000 14,773,000
----------- ----------- -----------
GROSS MARGIN 4,319,000 2,485,000 1,442,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,789,000 2,491,000 3,009,000
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 1,530,000 (6,000) (1,567,000)
OTHER INCOME (EXPENSE):
Gain on sale of PDG Remediation, Inc. Common Stock - - 1,354,000
Interest expense (220,000) (287,000) (467,000)
Interest income 16,000 8,000 24,000
Other income 36,000 101,000 9,000
----------- ----------- -----------
(168,000) (178,000) 920,000
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND DISCONTINUED
OPERATIONS 1,362,000 (184,000) (647,000)
INCOME TAX PROVISION (20,000) - (103,000)
MINORITY INTEREST (102,000) - -
----------- ----------- -----------
INCOME LOSS BEFORE DISCONTINUED OPERATION 1,240,000 (184,000) (750,000)
DISCONTINUED OPERATION:
Income (loss) from operation - (505,000) (1,201,000)
Gain (loss) on disposal - 203,000 (500,000)
----------- ----------- -----------
- (302,000) (1,701,000)
----------- ----------- -----------
NET INCOME (LOSS) $ 1,240,000 $ (486,000) $(2,451,000)
=========== =========== ===========
UNDECLARED PREFERRED STOCK DIVIDEND REQUIREMENTS $ - $ 37,000 $ 45,000
=========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE - BASIC:
Income (loss) before extraordinary item and discontinued
operation $ 0.20 $ (0.04) $ (0.14)
Discontinued operation - (0.05) (0.30)
----------- ----------- -----------
Net income (loss) per share $ 0.20 $ (0.09) $ (0.44)
=========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE - DILUTIVE
Income (loss) before discontinued operations $ 0.17 $ (0.04) $ (0.14)
Discontinued Operations - (0.05) (0.30)
----------- ----------- -----------
Net income (loss) per share $ 0.17 $ (0.09) $ (0.44)
=========== =========== ===========
AVERAGE COMMON SHARES OUTSTANDING 6,060,000 5,913,000 5,670,000
AVERAGE DILUTIVE COMMON STOCK EQUIVALENTS OUTSTANDING 1,160,000 59,000 36,000
----------- ----------- -----------
AVERAGE COMMON SHARES AND DILUTIVE COMMON
EQUIVALENTS OUTSTANDING 7,220,000 5,972,000 5,706,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 21
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PDG ENVIRONMENTAL, INC.
<TABLE>
<CAPTION>
PREFERRED (DEFICIT) TOTAL
STOCK COMMON PAID-IN RETAINED STOCKHOLDERS'
SERIES A STOCK CAPITAL EARNINGS EQUITY
-------- ----- ------- -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 31, 1995 562,000 109,000 3,866,000 (928,000) 3,609,000
Conversion of 49,047 shares of
cumulative convertible 2%
preferred stock into 204,902
shares of common stock (118,000) 4,000 134,000 (20,000) -
Issuance of 1,000,000 warrants by PDGR 60,000 60,000
Issuance of 280,071 shares of
common stock to reflect declaration
of 1/3 of the common stock rights 5,000 170,000 (175,000) -
Net loss (2,451,000) (2,451,000)
---------- ---------- ---------- ------------ ----------
BALANCE AT JANUARY 31, 1996 444,000 118,000 4,230,000 (3,574,000) 1,218,000
Issuance of 150,000 warrants 24,000 24,000
Issuance of 15,000 shares 6,000 6,000
Net loss (486,000) (486,000)
---------- ---------- ---------- ------------ ----------
BALANCE AT JANUARY 31, 1997 444,000 118,000 4,260,000 (4,060,000) 762,000
Conversion of 18,587 shares of
cumulative convertible 2%
preferred stock into 80,544
shares of common stock (44,000) 2,000 58,000 (16,000) -
Issuance of 150,000 warrants 71,000 71,000
Issuance of 170,000 shares under
Employee Incentive Stock Option Plan 4,000 57,000 61,000
Exercise of stock warrants for 300,000
shares of common stock 6,000 125,000 131,000
Net Income 1,240,000 1,240,000
---------- ---------- ---------- ------------ ----------
BALANCE AT JANUARY 31, 1998 $ 400,000 $ 130,000 $4,571,000 $(2,836,000) $2,265,000
========== ========== =========== ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 22
CONSOLIDATED STATEMENTS OF CASH FLOWS
PDG ENVIRONMENTAL, INC.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,240,000 $ (486,000) $(2,451,000)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Depreciation and amortization 389,000 367,000 525,000
Minority interest 102,000 - -
Gain on sale of PDG Remediation, Inc. common stock - (203,000) (1,354,000)
Other 64,000 3,000 (33,000)
CHANGES IN CURRENT ASSETS AND LIABILITIES OTHER THAN CASH:
Accounts receivable (3,091,000) (490,000) 147,000
Costs and estimated earnings in excess of billings on
uncompleted contracts (111,000) 56,000 163,000
Inventories (20,000) (1,000) 35,000
Prepaid income taxes 17,000 1,000 110,000
Other current assets 324,000 612,000 142,000
Accounts payable 1,764,000 (241,000) (413,000)
Billings in excess of costs and estimated earnings on
uncompleted contracts 207,000 28,000 (4,000)
Net assets of discontinued operations - 489,000 2,171,000
Accrued liabilities 134,000 95,000 158,000
Other (7,000) (63,000) 25,000
---------- ---------- ----------
TOTAL ADJUSTMENTS (783,000) 486,000 2,534,000
---------- ---------- ----------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,012,000 167,000 (779,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (593,000) (135,000) (346,000)
Proceeds from sale of property, plant and equipment 1,000 3,000 -
---------- ---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (592,000) (132,000) (346,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 1,758,000 286,000 20,000
Proceeds from exercise of stock options and warrants 192,000 - -
Proceeds on sale of PDG Remediation, Inc. common stock - 1,206,000 1,435,000
Principal payments on debt (1,907,000) (1,371,000) (730,000)
---------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 43,000 121,000 725,000
---------- ---------- ----------
Net increase (decrease) in cash and short-term investments 463,000 156,000 (400,000)
Cash and short-term investments, beginning of year 429,000 273,000 673,000
---------- ---------- ----------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR $ 892,000 $ 429,000 $ 273,000
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PDG ENVIRONMENTAL, INC.
FOR THE THREE YEARS ENDED JANUARY 31, 1998
NOTE 1 - BASIS OF PRESENTATION
BUSINESS ACTIVITIES
PDG Environmental, Inc. (the "Corporation") is engaged in providing asbestos
abatement services to the public and private sectors.
Asbestos abatement services are generally performed under the terms of fixed
price contracts or time and materials contracts with a duration of less than one
year, although larger projects may require two or three years to complete.
Effective July 20, 1994, the Corporation formed a new subsidiary, PDG
Remediation, Inc., now known as ICHOR Corporation ("PDGR"). The Corporation's
environmental remediation services business was merged into PDGR effective
October 20, 1994. PDGR operated as a wholly-owned subsidiary of the Corporation
until February 9, 1995, at which time, the Corporation sold approximately 40.5%
of its interest in PDGR to the public. The sale consisted of 1,000,000 shares of
PDGR common stock (at $5.00 per share) and 1,000,000 redeemable warrants to
purchase an additional 1,000,000 shares of PDGR common stock (at $0.10 per
warrant). The Corporation sold 400,000 of its PDGR common shares as part of the
offering and received net proceeds of approximately $1,400,000. PDGR sold
600,000 newly issued common shares plus 1,000,000 redeemable warrants and
received net proceeds of approximately $2,300,000. The Corporation recognized a
pre-tax gain of $1,354,000 on the transaction. The redeemable warrants entitle
the holder to purchase one share of common stock at an exercise price of $6.00
per share. The redeemable warrants may be exercised at any time and expire on
February 9, 2000.
On July 31, 1996, the Corporation entered into a Loan Modification Agreement
("Modification Agreement") with Drummond Financial Corporation ("Drummond")
formerly CVD Financial Corporation. Pursuant to the Modification Agreement,
Drummond purchased all 1,470,320 shares of PDGR common stock held by the
Corporation for $0.82 per share and the aggregate purchase price of $1,205,662
was utilized to reduce the outstanding balance on the line of credit maintained
by the Corporation with Drummond. This resulted in a $203,000 gain on the sale.
In December 1997, the Corporation and Philip Environmental Services Corporation
("Philip") formed a limited partnership, PDG/Philip, L.P. ("Venture"). The
Corporation is both a general and limited partner of the Venture and holds a 60%
ownership share. The Venture is performing a $12 million asbestos abatement
contract which is expected to be completed by the end of the second quarter of
fiscal 1999.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL PRESENTATION:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the Corporation's wholly-owned
subsidiaries.
The results of the Venture, in which the Corporation holds a 60% interest, are
also consolidated since the Corporation is the majority owner of the Venture and
exercises day-to-day operating control. Philip's portion of the Venture is
reflected as minority interest.
F-7
<PAGE> 24
The accounts of PDGR in which the Corporation maintained, until July 31, 1996, a
59.5% ownership interest subsequent to the initial public offering of PDGR's
common stock and warrants as described above, are reflected as a discontinued
operation. All significant intercompany transactions are eliminated in
consolidation.
REVENUES AND COST RECOGNITION:
Revenues for asbestos abatement are recognized on the percentage-of-completion
method, measured by the relationship of total cost incurred to total estimated
contract costs (cost-to-cost method).
Contract costs include direct labor and material costs and those indirect costs
related to contract performance, such as indirect labor, supplies, tools,
depreciation, repairs and insurance. Selling, general and administrative costs
are charged to expense as incurred. Bidding and proposal costs are also
recognized as an expense in the period in which such amounts are incurred.
Provisions for estimated losses on uncompleted contracts are recognized in the
period in which such losses are determined. Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions and final contract settlements, may result in revisions to
estimated costs and income, and are recognized in the period in which the
revisions are determined. Profit incentives are included in revenues when their
realization is reasonably assured.
CASH AND SHORT-TERM INVESTMENTS:
Cash and short-term investments consist principally of currency on hand, demand
deposits at commercial banks, and liquid investment funds having a maturity of
three months or less at the time of purchase. At January 31, 1997, cash and
short-term investments included two certificates of deposit totaling $75,000,
which secure underlying letters of credit and cash held in escrow totaling
$75,000. The certificates of deposit were released during fiscal 1998.
INVENTORIES:
Inventories consisting of materials and supplies used in the completion of
contracts is stated at the lower of cost (on a first-in, first-out basis) or
market.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost and depreciated over the
estimated useful lives of the assets using the straight-line method.
INCOME TAXES:
Earnings on construction contracts, for income tax purposes, are determined
using the percentage-of-completion method of accounting.
Deferred income taxes are recognized for the future tax effects of temporary
differences between financial and income tax reporting based on enacted laws and
rates.
EARNINGS PER SHARE:
In 1997, the Financial Accounting Standards Board issued Statement ("SFAS") No.
128, Earnings per Share. SFAS 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement 128 requirements.
NOTE 3 - DISCONTINUED OPERATION
On May 1, 1996, the Corporation made the decision to divest its remaining 59.5%
interest in PDGR. The loss from discontinued operations in the Statement of
Consolidated Operations represents the Corporation's 59.5% portion of PDGR's
loss during fiscal 1997 and 1996. No corporate interest expense has been
allocated for the discontinued operations of PDGE.
F-8
<PAGE> 25
During the six-month period ending July 31, 1996, PDGR had revenues of $2.5
million. Revenues of PDGR were $4.8 million in fiscal year 1996. See Note 7 for
a discussion of the sale of PDGR.
The Corporation accounted for GeoLogic Recovery Systems ("Geologic"), a
subsidiary of PDGR, as a discontinued operation as of January 31, 1996 and,
accordingly, its operating results are reported in this manner in all years
presented in the accompanying consolidated financial statements. The Corporation
recorded a loss on the disposition of GeoLogic of $0.5 million in fiscal 1996
net of minority interest.
NOTE 4 - ACCOUNTS RECEIVABLE
Accounts receivable at January 31, 1998 and 1997 include $397,000 and $220,000,
respectively, of retainage receivables. For the year ended January 31, 1998, one
customer, the U.S. Army, accounted for 11.4% of the Corporation's consolidated
revenues for that year. For the year ended January 31, 1997, no single customer
contributed to 10% or more of the Corporation's consolidated revenues.
It is the Corporation's policy not to require collateral with respect to
outstanding receivables. The Corporation continuously reviews the
creditworthiness of customers and, when necessary, requests collateral to secure
the performance of services.
All of the Corporation's outstanding accounts receivable are expected to be
collected within the normal operating cycle of one year.
NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Details related to contract activity are as follows:
JANUARY 31,
1998 1997
-------------------------
Revenues earned on uncompleted contracts $18,428,000 $8,968,000
Less: billings to date 18,545,000 8,989,000
----------- -------------
Net Over Billings $ (117,000) $ (21,000)
=========== ==========
Included in the accompanying consolidated balance sheets under the following
captions:
JANUARY 31,
1998 1997
-----------------------
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 725,000 $ 614,000
Billings in excess of costs and estimated earnings on
uncompleted contracts (842,000) (635,000)
---------- ---------
Net Over Billings $(117,000) $ (21,000)
========== =========
Costs and estimated earnings in excess of billings on uncompleted contracts at
January 31, 1997 include approximately $470,000 related to contracts where the
customers are disputing the related scope. The majority of this amount was
received by the Company during the fiscal year ending January 31, 1998.
F-9
<PAGE> 26
NOTE 6 - ACCRUED LIABILITIES
Accrued liabilities are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
1998 1997
-----------------------
<S> <C> <C>
Worker's compensation $ 430,000 $ 524,000
Wages 260,000 -
Withheld and accrued taxes 235,000 226,000
Accrued fringe benefits 273,000 181,000
Accrued insurance 4,000 113,000
Other 214,000 168,000
---------- -------
Total Accrued Liabilities $1,416,000 $1,212,000
========== ==========
</TABLE>
NOTE 7 - LONG-TERM DEBT
Long-term debt of the Corporation less amounts due within one year is as
follows:
<TABLE>
<CAPTION>
JANUARY 31,
1998 1997
-----------------------
<S> <C> <C>
Term loan due in monthly installments of $6,129 including
interest at 9.5% due in May 2005 $ 350,000 $ -
Term loan due in monthly installments of $14,000, plus
interest at 3% above the prime rate, due in August 1997 - 330,000
Equipment note due in monthly installments of $8,333 plus
interest at 3.5% above the prime rate, due in August 2002 467,000 -
Revolving line of credit expiring on August 24, 2000 and
bearing interest at 3.5% above the prime rate 917,000 -
Revolving line of credit maturing on August 1, 1997 and
bearing interest at 3% above the prime rate - 1,500,000
Other 92,000 27,000
--------- ----------
1,826,000 1,857,000
Less amount due within one year 198,000 1,485,000
--------- ----------
$1,628,000 $ 372,000
========== ==========
</TABLE>
On August 25, 1997, the Corporation closed on a new $2.0 million credit facility
consisting of a $1.5 million three-year revolving line of credit and a $0.5
million five-year equipment note. The line of credit and the equipment note are
at an interest rate of prime plus 3.5%. (At January 31, 1998, prime was 8.5%).
The line of credit is collateralized by accounts receivable. Under the terms of
the revolving credit agreement, the Company is required to reduce borrowings as
the accounts receivable are collected. Since those accounts receivable are
replaced with new accounts receivable and it is the Company's intent to maintain
at least the same level of borrowings, the outstanding balance is reflected as
long term. Additionally, the Chief Executive Officer of the Corporation provided
a limited personal guarantee for the credit facility.
F-10
<PAGE> 27
The proceeds of the aforementioned financing fully satisfied the remaining
outstanding balance on the Drummond Financial Corporation ("Drummond") line of
credit (described in the following paragraph) and provided working capital for
the Corporation. As of January 31, 1998, the balance on the line of credit was
$917,000.
Prior to obtaining the credit facility, the Corporation had a $1,500,000 line of
credit facility which expired on August 1, 1997 and a $330,000 term loan which
expired on August 1, 1997 with Drummond. All borrowings under the Drummond
Agreement bore interest at a bank rate (as defined) plus 3%. Borrowings under
the Drummond Agreement were limited to 85% of the receivables borrowing base.
The principal balance of the term loan amortized over a five-year period and was
secured by the fixed assets and a mortgage on certain property of the
Corporation.
On July 31, 1996, the Corporation entered into a Loan Modification Agreement
("Modification Agreement") with Drummond. Pursuant to the Modification
Agreement, Drummond purchased all 1,470,320 shares of PDGR common stock held by
the Corporation for $0.82 per share and the aggregate purchase price of
$1,205,662 was utilized to reduce the outstanding balance on the line of credit
maintained by the Corporation with Drummond. This resulted in a $203,000 gain on
the sale ($0.03 per share). After application of the proceeds, the debt under
the line of credit was reduced to $1,214,332 at July 31, 1996, and the maximum
allowable borrowings under the line of credit were capped at $1,500,000. The
maturity date of the line of credit and term loan agreements was extended until
August 1, 1997.
The proceeds on the sale of PDG Remediation, Inc. common stock of $1,206,000 for
the year ended January 31, 1997 were not received in the form of cash, but
rather were a direct offset to the debt owed Drummond Financial Corporation.
On May 27, 1997, the Corporation closed on a $375,000 loan from a financial
institution to refinance the $330,000 term loan payable to Drummond maturing on
August 1, 1997. The new loan has a seven-year term at a 9.5% interest rate fixed
for the first four years of the loan. The interest rate will then be readjusted
to the current five year treasury bill rate plus 3.25% for the remaining
three-year term of the loan.
The majority of the Corporation's property and equipment are pledged as security
for the above obligations.
During fiscal 1996, the Corporation entered into two agreements guaranteeing
ICHOR accounts receivable financed by Sirrom Environmental Funding, LLC
("Sirrom"). At January 31, 1997, the balance guaranteed by the Corporation under
the two agreements was approximately $3 million. Subsequent to January 31, 1997,
ICHOR's customer has made significant payments reducing the amount of the
Corporation's guarantee to approximately $300,000. It is expected that the
remaining outstanding receivables covered by the guarantee will be paid by
ICHOR's customer during the first half of fiscal 1999, eliminating the
Corporation's remaining guarantee.
Maturity requirements on long-term debt aggregate $198,000 in fiscal 1999,
$172,000 in fiscal 2000, $1,078,000 in fiscal 2001, $156,000 in fiscal 2002,
$129,000 in fiscal 2003 and $93,000 thereafter.
The Corporation paid approximately $223,000, $328,000 and $528,000 for interest
costs during the years ended January 31, 1998, 1997 and 1996, respectively.
NOTE 8 - INCOME TAXES
The Corporation provides for income taxes under the liability method as required
by SFAS No. 109.
At January 31, 1998, the Corporation has net operating loss carryforwards of
approximately $7,726,000 for income tax purposes which expire in years 1999
through 2011. For financial reporting purposes, a valuation allowance of
approximately $2,967,000 has been recognized to offset the deferred tax asset
related to those carryforwards and to other deferred tax assets. When realized,
the tax benefit of these net operating loss carryforwards will be applied to
reduce income tax expense. These loss carryforwards are subject to various
restrictions based on future operations of the group. The valuation allowance
decreased by approximately $418,000 during the year ended January 31, 1998. The
decrease was primarily due to the current year increase in taxable temporary
differences and an adjustment to correct the amount of available net operating
loss carryforwards.
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The significant components of the
Corporation's deferred tax liabilities and assets as of January 31, 1998 and
1997 are as follows:
F-11
<PAGE> 28
<TABLE>
<CAPTION>
JANUARY 31,
1998 1997
---------------------------------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ 83,000 $ 103,000
Deferred tax assets:
Accounts receivable allowance 164,000 147,000
Workers compensation reserve 183,000 215,000
Other 76,000 29,000
Net operating loss carryforwards 2,627,000 3,097,000
---------- ----------
Total deferred tax assets 3,050,000 3,488,000
Valuation allowance for deferred tax assets 2,967,000 3,385,000
---------- ----------
Net deferred tax assets 83,000 103,000
---------- ----------
Net deferred tax liabilities $ - $ -
========== ==========
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State 20,000 - -
------- --------- --------
Total current 20,000 - -
Deferred:
Federal - - 103,000
State - - -
------- --------- --------
Total deferred - - 103,000
------- --------- --------
Total income tax provision $20,000 $ - $103,000
======= ========= ========
</TABLE>
The reconciliation of income tax computed at the federal statutory rates to
income tax expense is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate $ 425,000 $ (63,000) $(220,000)
State income taxes, net of federal tax benefit 13,000 - -
Limitation on utilization of net operating loss (418,000) 63,000 220,000
Goodwill - - -
Other - - 103,000
-------- --------- ---------
$ 20,000 $ - $ 103,000
======== ========= =========
</TABLE>
F-12
<PAGE> 29
The Corporation paid approximately $12,000, $8,000 and $64,000 for federal and
state income taxes during the years ended January 31, 1998, 1997 and 1996,
respectively.
NOTE 9 - NOTES RECEIVABLE - OFFICERS
At January 31, 1998 and 1997, the Corporation had approximately $132,000 in
notes receivable from its officers in the form of personal loans. A breakdown of
the notes receivable balance at January 31, 1998 by officer is as follows: John
C. Regan, Chairman -$95,000; Dulcia Maire, Secretary -$30,000 and Lawrence
Horvat, Vice President -$7,000. These loans are evidenced by demand notes and
bear interest at the rate of 6% per annum.
NOTE 10 - COMPENSATION PLANS
The Corporation has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
The Corporation maintains a qualified incentive stock option plan (the "Plan")
which provides for the grant of incentive options to purchase an aggregate of up
to 1,550,000 shares of the common stock of the Corporation to certain officers
and employees of the Corporation and its subsidiaries. All options granted have
10-year terms. Options to purchase 350,000 shares of the Corporation's common
stock at an exercise price of $0.79 per share were granted under the Plan
effective August 19, 1997 issuable related to fiscal 1999. Vesting of one-half
of the stock options is contingent upon the individual offices, and in the case
of the executive office, the Corporation, meeting pre-established financial
goals for the fiscal year. Vesting of the remaining one-half of the stock
options will be based upon a number of discretionary items. If the financial
goals are not achieved, the options do not vest. All unvested options are
returned to the plan for future grants.
Options to purchase 1,075,000 and 190,000 shares of the Corporation's common
stock at an exercise price of $0.36 per share were granted under the Plan
effective June 17, 1996 and November 1, 1996, respectively, with 520,000 shares
and 765,000 shares issuable related to fiscal 1997 and 1998, respectively.
Vesting of 50% of the respective year's options is contingent upon the
individual offices, and in the case of the executive office, the Corporation,
meeting pre-established financial goals for the respective fiscal year. If the
financial goals are exceeded by 25%, the remaining 50% of the options for the
respective fiscal year vest. If financial goals are not achieved, the options do
not vest and are returned to the plan for future grants.
Options granted in fiscal 1996 and prior years had three-year vesting
conditioned upon continued employment with the Corporation.
The following table summarizes information with respect to the Plan for the
three years ended January 31, 1998.
OPTION
NUMBER OF PRICE RANGE
SHARES PER SHARE
---------- -------------
OUTSTANDING AT JANUARY 31, 1995 264,000 $0.60 - $2.94
Granted 11,000 $0.75
Cancelled - Reusable (46,998) $1.63 - $2.94
---------
OUTSTANDING AT JANUARY 31, 1996 228,002 $0.60 - $2.94
Granted 1,285,000 $0.36
Cancelled - Reusable (253,335) $0.36 - $2.94
---------
OUTSTANDING AT JANUARY 31, 1997 1,259,667 $0.36 - $1.91
Granted 492,666 $0.66 - $0.83
Cancelled - Reusable (120,000) $0.36 - $0.66
F-13
<PAGE> 30
Exercised (170,000) $0.36
---------
OUTSTANDING AT JANUARY 31, 1998 1,462,333 $0.36 - $1.91
=========
EXERCISABLE AT JANUARY 31, 1998 1,070,666 $0.36 - $1.91
=========
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for fiscal
1998 and 1997: risk-free interest rate of 7%; dividend yield of 0%; volatility
factors of the expected market price of the Company's common stock of 0.85 and
1.43 in fiscal 1998 and 1997, respectively; and a weighted-average expected life
of the option of 7 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
FISCAL FISCAL
98 97
-- --
Pro forma net income (loss) $70,000 $(557,000)
Pro forma earnings per share (basic and dilutive) $ 0.01 $ (0.10)
No proforma presentation is presented for fiscal 1996 since the effect is
immaterial.
Cancellations in fiscal 1996 include 33,497 options relinquished by employees
receiving options for ICHOR stock.
The following table summarizes information with respect to non-qualified stock
options for the three years ended January 31, 1998.
OPTION
NUMBER OF PRICE RANGE
SHARES PER SHARE
----------------------------
OUTSTANDING AT JANUARY 31, 1995 26,250 $0.60 - $6.00
Expired (3,125) $6.00
------
OUTSTANDING AT JANUARY 31, 1996 23,125 $0.60 - $6.00
Expired (3,125) $6.00
------
OUTSTANDING AT JANUARY 31, 1997 20,000 $0.60
======
No Activity - -
OUTSTANDING AT JANUARY 31, 1998 20,000 $0.60
======
EXERCISABLE AT JANUARY 31, 1998 20,000 $0.60
======
F-14
<PAGE> 31
The Corporation also maintains the 1990 Stock Option Plan for Employee Directors
(the "Employee Directors Plan") which provides for the grant of options to
purchase an aggregate of up to 250,000 shares of the Corporation's common stock.
Options to purchase 50,000 shares of the Corporation's common stock at an
exercise price of $0.60 per share have been granted under the Employee Director
Plan. At January 31, 1998, all of the options granted under the Employee
Directors Plan were exercisable.
The 1990 Stock Option Plan for Non-Employee Directors (the "Non-Employee
Directors Plan") provides for the grant of options to purchase an aggregate of
up to 350,000 shares of the Corporation's common stock. Options to purchase
202,212 shares of the Corporation's common stock at prices ranging from $0.36
per share to $0.79 per share have been granted under the Non-Employee Directors
Plan. At January 31, 1998, options to purchase 132,212 shares of the
Corporation's common stock granted under the Non-Employee Directors Plan were
exercisable.
No pro forma information is presented relative to the non-qualified stock option
plan, the Employee Director Plan or the Non-Employee Directors Plan as the
effect is either immaterial or non-existent.
Effective November 1, 1994, the Corporation established the PDG Environmental
Retirement Savings Plan (the "Retirement Savings Plan") under Section 401(k) of
the Internal Revenue Code. Substantially all full time employees with at least
one year of service, except for certain bargaining unit employees, are eligible
to participate in the Retirement Savings Plan. Employees may contribute to the
Retirement Savings Plan up to 15% of their eligible compensation. Under the
terms of the Retirement Savings Plan, the Corporation may match up to 6% of
compensation; the match is to be determined annually by the Corporation's Board
of Directors. Corporation contributions are 100% vested after seven years of
service. There were no contributions made by the Corporation in the years ended
January 31, 1998 and 1997.
NOTE 11 - STOCK WARRANTS
At January 31, 1998 and 1997, the Corporation had approximately 894,660 and
1,105,000, respectively, of fully vested warrants outstanding. The exercise
price of the warrants range from $0.50 per share to $2.50 per share and the
expiration dates range from fiscal 1999 through fiscal 2001. The majority of
these warrants were issued in conjunction with debt financings obtained by the
Corporation.
During fiscal 1998, 150,000 warrants with an exercise price of $0.375 per share
and 150,000 warrants with an exercise price of $0.50 per share were exercised
for 300,000 shares of the Corporation's common stock.
NOTE 12 - PREFERRED STOCK
At the Corporation's Annual Meeting of Stockholders held on July 23, 1993, the
following matters were approved by a majority of the Corporation's preferred and
common stockholders which affected the Corporation's Series A Preferred stock
and common stock: a reduction in the Series A Preferred Stock dividend rate from
9% to 2% and the cancellation of the accrued but unpaid dividends and the
special voting rights associated with such preferred stock in the event of a
certain accumulation of accrued but unpaid dividends thereon; and a
recapitalization of the Corporation in order to effect a one for two reverse
stock split (the "Recapitalization"). In exchange for the forfeiture of the
accrued but undeclared and unpaid dividends, the holders of the Series A
Preferred Stock were granted a common stock right which, if and when declared by
the Board of Directors, will grant to the holders of such common stock rights
shares of the common stock of the Corporation. At the May 23, 1995 Board of
Directors meeting, the issuance of one third of the shares (280,071 common
shares) covered by the aforementioned right was approved. At January 31, 1998
and 1997, there were 560,143 common stock rights outstanding. The
Recapitalization was contingent upon the Corporation's listing on the American
Stock Exchange. The Corporation made a decision not to currently pursue such a
listing; therefore, the Recapitalization was indefinitely postponed.
On October 20, 1997 and November 1, 1995, 18,587 and 49,047 shares,
respectively, of the Corporation's Series A Preferred Stock and cumulative
dividends in arrears were converted into 80,544 and 204,902 shares,
respectively, of Common Stock. At January 31, 1998, there were 167,338 shares of
the Corporation's Series A Preferred Stock outstanding. Cumulative dividends in
arrears on the Series A Preferred Stock were approximately $149,000 at January
31, 1998.
The Series A Preferred Stock is convertible into four shares of the
Corporation's common stock at the option of the preferred stockholder. However,
if at the time of conversion the Corporation is in arrears on the payment of
dividends on such preferred stock, the holder is entitled to receive additional
shares of the Corporation's common stock at the conversion price of $2.50 per
share, upon conversion, equivalent to the cumulative dividends in arrears. The
Series A Preferred Stock is callable at the Corporation's option at a cash price
per share of $11.00 plus any accrued and unpaid dividends until the
F-15
<PAGE> 32
redemption date. The conversion rate on the Series A Preferred Stock is 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 13 - NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
NUMERATOR:
Income (loss) before discontinued operations $1,240,000 (184,000) (750,000)
Preferred stock dividends (33,000) (37,000) (37,000)
---------- ----------- ----------
Numerator for basic earnings per share--income available
to common stockholders 1,207,000 (221,000) (787,000)
Effect of dilutive securities:
Preferred stock dividends 33,000 - -
---------- ----------- ----------
Numerator for diluted earnings per share--income available to
common stock after assumed conversions 1,240,000 (221,000) (787,000)
---------- ----------- ----------
DENOMINATOR:
Denominator for basic earnings per share--weighted average 6,060,000 5,913,000 5,670,000
shares
Effect of dilutive securities:
Employee stock options 397,000 26,000 36,000
Warrants 34,000 33,000 -
Convertible preferred stock 729,000 - -
---------- ----------- ----------
Dilutive potential common shares 1,160,000 59,000 36,000
---------- ----------- ----------
Denominator for diluted earnings per share--adjusted
weighted-average shares and assumed conversions 7,220,000 5,972,000 5,706,000
========== =========== ==========
BASIC EARNINGS PER SHARE $ 0.20 $ (0.04) $ (0.14)
========== =========== ==========
DILUTED EARNINGS PER SHARE $ 0.17 $ (0.04) $ (0.14)
========== =========== ==========
</TABLE>
NOTE 14 - COMMITMENTS AND CONTINGENCIES
The Corporation leases certain facilities and equipment under non-cancelable
operating leases. Rental expense under operating leases aggregated $221,000,
$217,000 and $279,000 for the years ended January 31, 1998, 1997 and 1996,
respectively. Minimum rental payments under these leases with initial or
remaining terms of one year or more at January 31, 1998 aggregated $451,000 and
payments due during the next five fiscal years are as follows: 1999 - $200,000;
2000 - $152,000; 2001 - $86,000; and 2002 - $11,000 and 2003 - $2,000.
The registrant has been named defendant in a purported class action involving
the purchase by all persons and entities who purchased PDGR's common stock from
February 9, 1995, the effective date of the initial public offering, through May
23, 1995. The plaintiff is seeking certification of the action as a class action
and recision of the purchase of shares of common stock by members of the
purported class or statutory damages, as well as interest, attorneys' fees and
other costs and expenses. The registrant believes that the plaintiff's
allegations are without merit or that there are meritorious defenses to the
allegation, and intends to defend the action vigorously.
By letter dated December 5, 1995, the plaintiff requested a pre-motion
conference on a motion for class certification. By letter dated December 6,
1995, the underwriter's counsel requested a pre-motion conference on a motion to
dismiss the complaint. In December 1995, the underwriter defendants filed a
notice of motion to dismiss and a memorandum of law in
F-16
<PAGE> 33
support of the motion. The motion to dismiss was denied in September 1996. The
parties have negotiated a stipulation concerning class certification, and the
court has certified a class. The notice of certification was sent to potential
class members in August 1997.
The action is still in the discovery stage. Discovery is scheduled to close on
July 31, 1998.
NOTE 15 - QUARTERLY RESULTS (UNAUDITED)
The Company had the following results by quarter:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
YEAR ENDING JANUARY 31, 1998
Revenues $4,489,000 $5,310,000 $6,204,000 $8,607,000 $24,610,000
Gross margin 829,000 901,000 1,096,000 1,493,000 4,319,000
Net income 158,000 266,000 359,000 457,000 1,240,000
Earnings per share
Basic $ 0.03 $ 0.04 $ 0.06 $ 0.07 $ 0.20
Diluted $ 0.02 $ 0.04 $ 0.05 $ 0.06 $ 0.17
YEAR ENDING JANUARY 31, 1997
Revenues $3,810,000 $3,715,000 $4,023,000 $4,635,000 $16,183,000
Gross margin 321,000 513,000 718,000 933,000 2,485,000
Net income (loss) before discontinued operations (426,000) (88,000) 51,000 279,000 (184,000)
Net income (loss) (679,000) (128,000) 42,000 279,000 (486,000)
Earnings per share before discontinued operations
Basic (0.07) (0.02) 0.01 0.05 (0.04)
Diluted (0.07) (0.02) 0.01 0.04 (0.04)
Earnings per share
Basic $ (0.12) $ (0.02) $ 0.01 $ 0.05 $ (0.09)
Diluted $ (0.12) $ (0.02) $ 0.01 $ 0.04 $ (0.09)
</TABLE>
The fiscal 1997 and first three quarters of fiscal 1998 earnings per share
amounts have been restated to comply with SFAS No. 128, Earnings per Share.
NOTE 16 - IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
The Company has not completed a formal assessment of the Year 2000 issue;
however, the Company does not have any significant system interfaces with
outside vendors or customers which, in the opinion of management, are vulnerable
to those third parties' failure to remediate their own Year 2000 issues. There
are no internal computer systems which present a Year 2000 issue. While
management cannot reasonably estimate the cost that may be necessary to address
Year 2000 issues related to its outside vendors or customers, in the opinion of
management, such cost will not have an adverse material effect on the results of
operations.
F-17
<PAGE> 34
PDG ENVIRONMENTAL, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED
JANUARY 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED AT CLOSE
OF YEAR TO INCOME DEDUCTIONS(1) OF YEAR
------- --------- ------------- -------
<S> <C> <C> <C> <C>
1998
Allowance for doubtful accounts $ 47,000 $48,000 $ 47,000 $48,000
======== ======= ======== =======
1997
Allowance for doubtful accounts $ 44,000 $ 3,000 $ - $47,000
======== ======= ======== =======
1996
Allowance for doubtful accounts $317,000 $15,000 $288,000 $44,000
======== ======= ======== =======
</TABLE>
(1)Uncollectible accounts written off, net of recoveries.
F-18
<PAGE> 1
Exhibit 3.4
AGREEMENT OF LIMITED PARTNERSHIP
OF
PDG/PHILIP, L.P.
Agreement of Limited Partnership, effective as of the _________
day of December 1997, by and among PDG, Inc., a Pennsylvania corporation ("PDG")
(the "General Partner"), PDG Environmental, Inc., a Delaware corporation
("PDGE") and Philip Environmental Services Corporation, a Missouri corporation
("Philip") (PDGE and Philip are referred to as the "Limited Partner") (the
General Partner and the Limited Partners are sometimes referred to herein
collectively as the "Partners") (the "Agreement").
W I T N E S S E T H:
WHEREAS, the parties hereto desire to form a limited partnership
to engage in the business of carrying out the asbestos abatement in the building
commonly known as the Transportation and Safety Building (the "Project").
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, and intending to be legally bound hereby, the
parties hereto agree as follows:
ARTICLE I
FORMATION OF PARTNERSHIP
1.01. The parties hereby enter into a limited partnership (the
"Partnership") under and pursuant to the provisions of the Pennsylvania Revised
Uniform Limited Partnership Act, 15 Pa.C.S.A.
<PAGE> 2
Section 8501 et seq., as amended ("Act"). The rights and liabilities of the
Partners shall be as provided in the Act except as herein otherwise expressly
stated.
1.02. The Partnership shall commence as of the effective date of
the filing of the Certificate of Limited Partnership with the Secretary of the
Commonwealth of Pennsylvania, and shall continue until December 31, 2001 unless
sooner terminated under the provisions of Article XI hereof.
ARTICLE II
DEFINITIONS
The following terms shall have the following meanings (except as
may be otherwise expressly provided in this Agreement or unless the context
otherwise requires).
2.01. "Adjusted Capital Account Deficit" means, with respect to
any Partner, the deficit balance, if any, in such Partner's Capital Account as
of the end of the relevant fiscal year, after giving effect to the following
adjustments:
(i) such Capital Account shall be deemed to be increased by
any amounts which such Partner is obligated to restore to the Partnership
(pursuant to this Agreement or otherwise) under Treasury Regulation section
1.704-l(b)(2)(ii)(c) or is deemed to be obligated to restore pursuant to the
second to last sentences of Treasury Regulation sections 1.704-2(g)(1) and
1.704-2(i)(5) (relating to allocations attributable to nonrecourse debt); and
-2-
<PAGE> 3
(ii) such Capital Account shall be deemed to be decreased by
the items described in Treasury Regulation sections 1.704-1(b)(2)(ii)(d)(4), (5)
and (6). The foregoing definition of Adjusted Capital Account Deficit is
intended to comply with the provisions of Treasury Regulation section
1.704-1(b)(2)(ii)(d) and shall be interpreted and applied consistently
therewith.
2.02. "Capital Account" has the meaning set forth in Section 6.06.
2.03. "Capital Event" means a sale, transfer, conveyance,
distribution, exchange, lease, taking, financing, refinancing or disposition of
Partnership assets, including in connection with the liquidation of the
Partnership, other than any such transaction arising in the ordinary course of
business or any distribution made pursuant to Section 7.02
2.04. "Carrying Value" means, with respect to any asset of the
Partnership, the asset's adjusted basis as of the relevant date for federal
income tax purposes, except as follows:
(i) the aggregate Carrying Value of the assets as of the
formation of the Partnership pursuant to Section 1.02, after taking into account
the events occurring on such date, is equal to the sum of the amounts credited
to the Partners' Capital Accounts upon the formation of the Partnership,
increased by the amount of any liabilities assumed by the Partnership in
connection therewith;
(ii) the initial Carrying Value of any asset contributed by a
Partner to the Partnership after the formation of the Partnership
-3-
<PAGE> 4
shall be the gross fair market value of such asset, which shall be equal to the
amount credited to such Partner's Capital Account for such contribution
(increased by the amount of any liabilities by which the Partnership assumes or
takes subject to) as set forth herein or in any amendment or supplement hereto
providing for the contribution of such asset (the intent of the Partners is that
cash only will be contributed), resulting from or as required by the Project;
(iii) the Carrying Values of all Partnership assets shall be
adjusted, at the election of the General Partner, to equal its fair market
values (determined on a gross basis) as of the following times:
(A) the acquisition of an additional interest in the
Partnership by any new or existing Partner in exchange for more than a de
minimis capital contribution within the meaning of Treasury Regulation section
1.704-1(b)(2)(iv)(f)(5);
(B) the distribution by the Partnership to a Partner
of more than a de minimis amount of money or Partnership property as
consideration for an interest in the Partnership; and
(C) the liquidation of the Partnership within the
meaning of Treasury Regulation section 1.704-1(b)(2)(iv)(f)(5)(ii); and
(iv) if the Carrying Value of an asset has been determined or
adjusted pursuant to subsection (ii) or (iii) above, such Carrying Value shall
thereafter be adjusted by the depreciation taken into account with respect to
such asset for purposes of computing Profits and Losses and other items
allocated pursuant to Article VII.
-4-
<PAGE> 5
The foregoing definition of Carrying Value is intended to comply with the
provisions of Treasury Regulation section 1.704-1(b)(2)(iv) and shall be
interpreted and applied consistently therewith.
2.05. "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
2.06. "Excess Cash" means so much of the Partnership's cash on
hand at any time as is determined by the General Partner not to be necessary or
required for the continuing conduct of the Partnership's business. In making
such determination, any obligations of the Partnership to Partners shall be
repaid and any obligations of the Partnership owed to commercial or other
lenders, contractors, materialmen, subcontractors and equipment suppliers for
the Project shall next be repaid before any Excess Cash shall be deemed
available.
2.07. "Fiscal Year" means the calendar year.
2.08. "General Partner" means PDG, Inc., a Pennsylvania
corporation.
2.09. "Limited Partners" means the entities whose names are listed
on the first page of this Agreement as Limited Partners.
2.10. "Net Loss" means the net loss of the Partnership for federal
income tax purposes.
2.11. "Net Profit" means the net income of the Partnership for
federal income tax purposes.
2.12. "Partners" means the General Partner and the Limited
Partners.
-5-
<PAGE> 6
2.13. "Partnership Interest" means the entire legal and equitable
ownership interest of a Partner in the Partnership at any particular time.
2.14. "Profits and Losses" means, for each year or other
applicable period, the Partnership's taxable income or loss for such period
determined in accordance with Code section 703(a)(for this purpose, all items of
income, gain, loss or deduction required to be stated separately pursuant to
Code section 703(a)(1) shall be included in taxable income or loss) with the
following adjustments:
(i) any income of the Partnership that is exempt from federal
income tax and not otherwise taken into account in computing Profits and Losses
pursuant to the definitions herein shall be added to such taxable income or
loss;
(ii) any expenditures of the Partnership described in Code
section 705(a)(2)(B) or treated as such pursuant to Treasury Regulation section
1.704-1(b)(2)(iv)(i) shall be subtracted from such taxable income or loss;
(iii) depreciation for financial reporting purposes for such
period shall be taken into account in lieu of the depreciation, amortization and
other cost recovery deductions taken into account in computing such taxable
income or loss;
(iv) gain or loss resulting from any disposition of
Partnership property with respect to which gain or loss is recognized for
federal income tax purposes shall be computed with reference to
-6-
<PAGE> 7
the Carrying Value of the property disposed of, rather than the adjusted tax
basis of such property;
(v) if any property is distributed in kind to any Partner, the
difference between its fair market value and its Carrying Value at the time of
distribution shall be treated as Profit or Loss, as the case may be, recognized
by the Partnership;
(vi) such taxable income or loss shall not be deemed to
include items of income, gain, loss, deduction and Code section 705(a)(2)(B)
expenditures allocated pursuant to Sections 7.04(b) (relating to allocations
caused by the occurrence of deficit Capital Account balances); and
(vii) the amount of any adjustment to the Carrying Value of
any Partnership asset pursuant to clause (iii) of the definition of "Carrying
Value" herein shall be taken into account as Profit or Loss from the disposition
of such asset.
2.15. "Treasury Regulations" means the regulations issued by the
United States Treasury Department pursuant to the Code.
2.16. The Partners anticipate that only cash will be contributed
by the Partners to the capital of the Partnership. The Partnership's assets will
be primarily cash and accounts receivable. All other assets shall remain with
the individual Partners and, if used by the Partnership, the Partner that owns
such assets shall be paid an amount of rent to be agreed upon by the Partners.
-7-
<PAGE> 8
ARTICLE III
NAME
3.01. The business of the Partnership shall be conducted under the
name of PDG/Philip, L.P.
ARTICLE IV
PRINCIPAL PLACE OF BUSINESS
4.01. The principal office and place of business of the
Partnership shall be located at 300 Oxford Drive, Pittsburgh, Pennsylvania
15146, or such other location as the General Partner may from time to time
designate.
ARTICLE V
PURPOSE
5.01. The purpose of the Partnership is to engage in and carryout
the asbestos abatement in the building commonly known as the Transportation and
Safety Building located in Harrisburg, Pennsylvania.
ARTICLE VI
CAPITAL CONTRIBUTIONS
6.01. Initial Capital Contributions. Each Limited Partner shall
make initial capital contributions to the Partnership as set forth opposite such
Limited Partner's name on Schedule A attached hereto and made a part hereof,
and, in consideration thereof, shall have the percentage interest in the capital
and profits and losses of the Partnership set forth opposite such Limited
Partner's name on Schedule A ("Limited Partnership Interests").
-8-
<PAGE> 9
The General Partner shall contribute to the initial capital of
the Partnership the sum set forth opposite such General Partner's name on
Schedule A. The General Partner shall have the percentage interest in the
capital and profits and losses of the Partnership set forth opposite The General
Partner's name on Schedule A (the "General Partnership Interests").
6.02. Contributions for Additional Working Capital. In the event
the Partnership is in need of additional working capital for the Project that
the General Partner reasonably determines, the General Partner and the Limited
Partners shall be required to advance additional funds to the Partnership for
any such purpose in the percentage set forth opposite such Partner's name on
Schedule A.
6.03. No Interest on Capital Contribution. No interest shall be
paid by the Partnership or any Partner on the capital contribution of any
Partner.
6.04. Return of Capital Contribution. No Partner shall have the
right to withdraw or receive any return of such Partner's capital contribution,
except as may be specifically provided in this Agreement, and under
circumstances requiring a return of any capital contribution, no Partner shall
have the right to receive property other than cash, except as may be provided in
this Agreement.
6.05. Capital Accounts. A separate capital account shall be
maintained for each Partner (each a "Capital Account"), and the amount of each
Partner's contributions to the capital of the Partnership shall be credited to
its Capital Account. Except as expressly
-9-
<PAGE> 10
provided for herein, no Partner may withdraw any portion of its Capital Account
without the consent of the General Partner, which consent shall not be
unreasonably withheld.
(b) Capital Account Balances. The initial Capital Account
balance of each Partner shall be equal to the amount set forth opposite such
partner's name on Schedule A hereto, and such Capital Account shall thereafter
be further adjusted with respect to subsequent events as follows:
(i) increased by: (A) the aggregate amount of such
Partner's cash contributions to the Partnership, (B) the Carrying Value of
property contributed by such Partner to the Partnership, net of liabilities
secured by such property that the Partnership is considered to assume or take
subject to under Code section 752, and (C) Profits, items of income and gain
allocated to such Partner pursuant to Section 7.03; and
(ii) decreased by: (A) cash distributions to such
Partner from the Partnership, (B) the Carrying Value of property distributed in
kind to such Partner, net of liabilities secured by such property that such
Partner is deemed to assume or take subject to under Code section 752, and (C)
Losses and items of loss or deduction allocated to such Partner pursuant to
Section 7.03.
(c) Intent to Comply with Treasury Regulations. This Section
6.06 and the other provisions of this Agreement relating to the maintenance of
Capital Accounts are intended to comply with Treasury Regulation section
1.704-1(b), and shall be interpreted and
-10-
<PAGE> 11
applied in a manner consistent with such regulation. To the extent such
provisions are inconsistent with such regulation or are incomplete with respect
thereto, the Capital Accounts of the Partners shall be maintained in accordance
with such regulation.
6.07. Partition/Accounting. No Partner shall have the right to
demand a partition of the Partnership or an accounting, absent a material breach
of this Agreement by another Partner.
ARTICLE VII
ALLOCATION OF PROFITS AND LOSSES;
DISTRIBUTIONS TO PARTNERS
7.00. Introduction. Article VII generally sets forth the rules for
allocations to the Partners. Section 7.03 sets forth the allocations of Profits,
Losses and similar items, determined in accordance with the Partnership's method
of accounting, which is based on federal income tax principles as adjusted by
the Partnership allocation rules set forth in Treasury Regulation sections
1.704-l(b) and 1.704-2, rather than in accordance with either generally accepted
accounting principles (GAAP) or the method used in filing the Partnership's
federal income tax return. Section 7.04 sets forth the manner in which items of
income, gain, loss, deduction, credits and basis therefor will be allocated to
the Partners for income tax purposes to the extent such items may be allocated
differently from the allocations referred to in the preceding sentence.
7.01. Profits and Losses. As of the last day of each Fiscal Year
of the Partnership, the Partnership's Net Profit or Net Loss for
-11-
<PAGE> 12
such Fiscal Year shall be fixed and determined and each Partner's Capital
Account shall be increased by such Partner's allocable share of Net Profit and
decreased by such Partner's allocable share of Net Loss.
7.02. Distributions. The Partnership may, at the discretion of the
General Partner, distribute to the Partners in proportion to their Partnership
Interests an amount equal to at least the estimated federal and state income
taxes payable by the Partners on or with respect to the taxable income of the
Partnership, assuming that each Partner will pay taxes at the highest marginal
rate then in effect under the Code and under the laws of the Commonwealth of
Pennsylvania, irrespective of where each Partner resides. Such distribution
shall be made from time to time prior to the due date of each tax payment
required to be made by the Partners resulting in part from the inclusion of the
Partnership's taxable income in the gross income of the Partners. Within a
reasonable time after the close of each Fiscal Year, the Partnership shall also
distribute the Partnership's Excess Cash for such Fiscal Year in accordance with
each Partner's Partnership Share. The General Partner is authorized to withhold
from such distributions such sums as required under law. Distributions in
liquidation of the Partnership or a deemed liquidation pursuant to Code section
708 shall be made in accordance with Article XI.
7.03. Allocations. Section 7.03(a) sets forth the general rules
for allocations of Profit, Loss and similar items to the Partners. Section
7.03(b) sets forth various special rules which modify or clarify the general
rules of Section 7.03(a).
-12-
<PAGE> 13
(a) General Rule.
(i) Operating Profits and Losses. Profits and Losses
of the Partnership, other than Profits and Losses arising in connection with
Capital Events, shall be allocated to the Partners in proportion to their
respective Partnership Interests, as modified by Section 6.02.
(ii) Capital Event Allocations. Profits and Losses of
the Partnership with respect to a Capital Event shall be allocated as set forth
in this Section 7.03(a)(ii), before taking into account any distributions
(including liquidating distributions) occurring in connection therewith.
(A) Profits. Profits with respect to a Capital Event
shall be allocated as follows:
(1) first, to the Partners, if any, having
negative balances in their Capital Accounts, in the proportion that the negative
balance of each such Partner's negative Capital Account bears to the aggregate
negative balances in the Capital Accounts of all Partners, the least amount of
such Profits necessary to cause the balances in their Capital Accounts to equal
zero;
(2) second, so much of the remaining Profit
as is necessary to cause the positive balances in the Partners' Capital Accounts
(as adjusted to reflect any allocation made pursuant to clause (1) above), to
bear the same relationship as their respective Partnership Interests, shall be
allocated among the Partners in
-13-
<PAGE> 14
proportion to the amount of Profit required to be allocated to each Partner to
achieve such result; and
(3) thereafter, any remaining Profits shall
be allocated among the Partners in accordance with their respective Partnership
Interests.
(B) Losses. Losses with respect to a Capital Event
shall be allocated among the Partners as follows:
(1) first, the least amount of such Losses
necessary to cause the positive balances in the Partners' Capital Accounts to
bear the same relationship as their respective Partnership Interests shall be
allocated among the Partners in proportion to the amount of Losses required to
be allocated to each Partner to achieve such result; and
(2) thereafter, any remaining Losses shall
be allocated among the Partners in accordance with their respective Partnership
Interests.
(b) Special Rules. Notwithstanding the general allocation rule
set forth in Section 7.03(a), the following special allocation rules shall apply
under the circumstances described therein.
(A) Change in Regulations. If the Treasury
Regulations are hereafter changed or if new Treasury Regulations are hereafter
adopted, and such change or new regulations, in the opinion of independent
recognized tax counsel for the Partnership, make it necessary to revise the
regulatory Allocations or provide further special allocation rules in order to
avoid a significant risk that a
-14-
<PAGE> 15
material portion of any allocation set forth in this Article VII would not be
respected for federal income tax purposes, this Agreement shall be amended (with
the consent of all Partners, which consent shall not be unreasonably withheld)
in such a manner as, in the reasonable opinion of such counsel, is necessary or
desirable, taking into account the interests of the Partners as a whole and all
other relevant factors, to avoid or reduce significantly such risk to the extent
possible without materially changing the amounts distributable to any Partner
pursuant to this Agreement.
(B) Change in Partners' Interests. If there is a
change in any Partner's share of the Partnership's Profits, Losses or other
items during any Year, allocations among the Partners shall be made in
accordance with their Partnership Interests from time to time during such Year
in accordance with Code section 706, as of the end of the preceding month,
except that depreciation, amortization and similar items shall be deemed to
accrue ratably on a daily basis over the entire Year during which the
corresponding asset is owned by the Partnership for the entire Year, and over
the portion of a Year after such asset is placed in service by the Partnership
if such asset is placed in service during the Year.
7.04. Tax Allocations.
(a) Generally. Except as set forth in Section 7.04(b),
allocations for tax purposes of items of income, gain, loss and deduction, and
credits and basis therefor, shall be made in the same manner as allocations for
book purposes as set forth in Section 7.02.
-15-
<PAGE> 16
Allocations pursuant to this Section 7.04 are solely for purposes of federal,
state and local income taxes and shall not affect, or in any way be taken into
account in computing, any Partner's Capital Account or share of Profits, Losses,
other items or distributions pursuant to any provision of this Agreement.
(b) Special Rules.
(i) Elimination of Book/Tax Disparities. If any
Partnership property has a Carrying Value different than its adjusted tax basis
to the Partnership for federal income tax purposes (whether by reason of the
contribution of such property to the Partnership, the revaluation of such
property hereunder, or otherwise), allocations of taxable income, gain, loss and
deduction under this Section 7.04 with respect to such asset shall take account
of any variation between the adjusted tax basis of such asset for federal income
tax purposes and its Carrying Value in the manner prescribed by Code section
704(c) or the principles set forth in Treasury Regulation section
1.704-l(b)(2)(iv)(g), as the case may be.
(ii) Allocation of Items Among Partners. Each item of
income, gain, loss, deduction and credit and all other items governed by Code
section 702(a) shall be allocated among the Partners in proportion to the
allocation of Profits, Losses and other items to such Partners hereunder,
provided that any gain recognized from any disposition of a Partnership asset
which is treated as ordinary income because it is attributable to the recapture
of any depreciation or amortization shall be allocated among the Partners in the
same ratio
-16-
<PAGE> 17
as the prior allocations of Profits, Losses or other items which included such
depreciation or amortization, but not in excess of the gain otherwise allocable
to each such Partner.
(c) Special Allocations Concerning In-Kind Contributions.
(i) In accordance with Code Section 704(c) and the
Regulations thereunder, income gain, loss and deduction with respect to any
property contributed to the capital of the Partnership shall, solely for tax
purposes, be allocated among the Partners so as to take account of any variation
between the adjusted basis of such property to the Partnership for federal
income tax purposes and the Carrying Value of such assets. In the event that the
Carrying Value of an asset is adjusted, subsequent allocations of income, gain,
loss and deduction with respect to such asset shall also be adjusted.
Allocations pursuant to this Section 7.04(c) are solely for purposes of federal,
state and local taxes and shall not affect or be taken into account in computing
any Partner's Capital Account, share of profit or losses, or distributions
pursuant to this Agreement.
(ii) As of the date of the capital contribution of an
asset and at any subsequent adjustment date, the Partnership shall determine the
excess of the Carrying Value over the adjusted tax basis of the asset ("Built-in
Gain") or the excess of the adjusted tax basis over the Carrying Value
("Built-in Loss") of each item of property. Upon the disposition of the item of
property, the Built-in Gain or the Built-in Loss shall be allocated 100 percent
to the contributing Partner.
-17-
<PAGE> 18
(iii) To the extent that the disparity in Carrying
Value and adjusted tax basis causes a Partner to be allocated less depreciation
or amortization for tax purposes than it is allocated under Section 7.03,
additional items of income shall be allocated to the contributing Partner. In
the event of Built-in Loss property, additional items of income shall be
allocated to the non-contributing partner to eliminate the disparity between
Carrying Value and the adjusted basis of the asset.
(iv) If the amount of the difference between Carrying
Value and adjusted tax basis constitutes a "small disparity" as that term is
used in regulations issued under Code section 704(c), curative allocations shall
not be required and the General Partner may disregard the application of Code
section 704(c) to such items of property.
7.05. Elections. The General Partner may, in its discretion, elect
pursuant to Sections 734, 743 and 754 of the Code to adjust the basis of the
Partnership's assets for transfers of a Partnership Interest.
ARTICLE VIII
BOOKS OF ACCOUNT; ANNUAL ACCOUNTS AND REPORTS
8.01. Books of Account. The General Partner shall prepare or cause
to be prepared true, accurate and complete books of account for the Partnership.
The books of account shall be kept at the Partnership's principal place of
business, and each Partner shall,
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<PAGE> 19
upon reasonable notice to the General Partner, have the right to inspect the
same.
8.02. Accounts and Reports. As of the close of each month of the
Partnership, the General Partner shall prepare or cause to be prepared a true,
accurate and complete account of the Net Profit or Net Loss for such month and
the Partnership's assets and liabilities as of the end of such month. The
General Partner shall cause such statements to be furnished to each Partner
within ten (10) days after the close of such month, along with a report
indicating such Partner's share of the Net Profit or Net Loss of the Partnership
for such month and any specially allocated items reported for taxing bodies or
other governmental agencies. The form of reports shall be as reasonably
requested by any Partner.
ARTICLE IX
RIGHTS AND DUTIES OF THE PARTNERS
9.01. Powers of General Partner.
(a) The General Partner shall have the right and power to
manage, direct and control the day-to-day business and affairs of the
Partnership, including, but not limited to, the power to: (i) manage and operate
the Partnership and its properties, including hiring, supervision and dismissal
of Partnership employees, agents and independent contractors; (ii) prepare or
cause to be prepared all financial, accounting and other reports of operations
which are furnished to the Partners or are required by taxing bodies or other
governmental agencies; (iii) negotiate and execute real and personal
-19-
<PAGE> 20
property leases related to the Project and to the purpose of the Partnership;
(iv) render services (either directly or through any affiliate) to the
Partnership as set forth herein or pursuant to other written agreements which
describe the services and the compensation to be paid therefor; (v) make tax
elections which will benefit the Limited Partners; (vi) make distributions from
Excess Cash; and (vii) do all things reasonably necessary to supervise the
business and affairs of the Partnership.
The General Partner is authorized to cause the Partnership to
enter into agreements with any Partner or any affiliate thereof for the
providing of goods or services to or from the Partnership; provided that any and
all such agreements shall be on terms at least as favorable to the Partnership
as those obtainable from unrelated parties and that the terms of any such
agreements with a value greater than $_______________ are fully disclosed in
advance to the Limited Partners.
(b) Limitations on Powers of General Partner.
(i) Notwithstanding any other provision of the
Agreement to the contrary, a unanimous vote of all of the Partners, both Limited
and General, shall be required to approve: (i) a change in the Business of the
Partnership from that described in Section 5.01; (ii) the sale, exchange, lease,
or other transfer of all, or substantially all, of the assets of the
Partnership, except that the transfer of a mortgage or a security interest in
such assets to secure any indebtedness may be made by the General Partner
without the
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<PAGE> 21
consent of the Limited Partners; (iii) the liquidation or dissolution the
Partnership; (iv) the execution of any debt (including a capitalized lease) by
the General Partner that would cause the debts of the Partnership to exceed 95
percent of the net Carrying Value of the assets of the Partnership on its books
and records; (v) a settlement of any claim against the General Partner; or (vi)
a loan of funds to the General Partner.
(ii) Except as otherwise provided in this Agreement,
any amendment to the Partnership Agreement shall require the written consent of
a majority in interest of the Limited Partners. The written consent a Majority
in Interest of the Limited Partners also shall be required: (i) to merge or
consolidate the Partnership with or into another entity; (ii) to offer or to
sell Partnership Interests in the Partnership to persons who are not already
Limited Partners; or (iii) to approve a substitute General Partner in place of
the existing General Partner or the admission of an additional General Partner.
(c) Voting Rights. Unless otherwise specified herein, any and
all actions requiring a vote of the Partners shall require approval of the
Partners owning the requisite percentage of Partnership Interests. It is
expressly provided that any and all voting of the Partners shall be based upon
Partnership Interests and not one vote per Partner.
9.02. Reliance on Acts of the General Partner. No financial
institution or any other person, firm or corporation dealing with the General
Partner shall be required to ascertain whether the General
-21-
<PAGE> 22
Partner is acting in accordance with this Agreement, but such financial
institution or such other person, firm or corporation shall be protected in
relying solely upon the deed, transfer or assurance of and the execution of such
instrument or instruments by the General Partner.
9.03. Other Activities of Partners. Except as otherwise provided
in Sections 9.01 and 12.01, each Partner may, independently or with others,
engage in or possess an interest in any other business ventures of every nature
or description, including business ventures which may be in competition with the
Partnership.
9.04. Reimbursement of Expenses. Each of the Partners shall be
entitled to reimbursement of all reasonable, verifiable, direct, out-of-pocket
expenses they incurred while providing services for the Partnership (i.e.,
excluding overhead). A Partner seeking reimbursement shall furnish to the
General Partner for its review and approval a written statement itemizing the
expenses for which such Partner wishes to obtain reimbursement and setting forth
the Partnership purpose for which the expenses were incurred, which written
statement shall be retained in the Partnership records.
9.05. Compensation Due the General Partner. Other than the General
Partner's share of profits and losses under this Agreement and reimbursement of
Partnership expenses, the General Partner shall not be entitled to any other
compensation from the Partnership.
9.06. Power of Attorney Granted to General Partner. As related
solely to this Partnership, the Project and the purpose
-22-
<PAGE> 23
thereof, each of the Limited Partners hereby irrevocably constitutes and
appoints the General Partner as the Limited Partner's true and lawful attorney
in the name, place and stead of such Limited Partner to make, execute, swear to,
acknowledge, deliver and file:
(a) any certificate or other instruments which may be required
to be filed by the Partnership under the laws of the Commonwealth of
Pennsylvania or any other state in the United States;
(b) any documents, certificates or other instruments,
including, but not limited to, any and all amendments and modifications of this
Agreement or documents to be filed under subsection (a) of this section as may
be required or deemed desirable by the General Partner to effectuate the
provisions of any part of this Agreement, and, by way of extension and not in
limitation, to do all such other things as shall be necessary to continue and to
carry on the business of the Partnership, including, to the extent permitted by
law, the power to ratify the execution and delivery of notes or instruments
authorizing the confession of judgment against the Partnership; and
(c) all documents, certificates or other instruments which may
be required to effectuate the dissolution and termination of the Partnership.
The power of attorney granted hereby shall not constitute a
waiver of, or be used to avoid, the rights of the Limited Partners to (i)
approve certain transactions or (ii) be used in any other manner
-23-
<PAGE> 24
inconsistent with the status of the Partnership as a Limited Partnership.
9.07. Survival of Power of Attorney. It is expressly intended by
each of the Limited Partners that the power of attorney provided for in Section
9.06 is coupled with an interest, is irrevocable and shall survive the death, or
adjudication of insanity, incompetence, dissolution, or bankruptcy of a Limited
Partner or the making of an assignment for the benefit of creditors by any such
Limited Partner. The foregoing power of attorney shall survive the delivery of
an assignment by a Limited Partner of such Limited Partner's entire interest in
the Partnership, except that where an assignee of such entire interest has
become a substituted Limited Partner, then the foregoing power of attorney of
the assignor Limited Partner shall survive the delivery of such assignment for
the sole purpose of enabling the General Partner to execute, acknowledge and
file any and all instruments necessary to effectuate such substitution.
9.08. Liability of Limited Partner. No Limited Partner shall be
liable for any debt of or claim against the Partnership. No Limited Partner, in
his capacity as a Limited Partner, shall take part in the management or control
of the Partnership's business, except as permitted by the Act.
9.09. Liability of the General Partner.
(a) No General Partner shall be personally liable for the
return of all or any part of any Limited Partner's capital
-24-
<PAGE> 25
contributions to the Partnership. Any such return shall be made solely from the
assets of the Partnership.
(b) Neither the General Partner nor any affiliate of the
General Partner nor any of their respective partners, shareholders, officers,
directors, employees or agents shall be liable, in damages or otherwise, to the
Partnership or to any of the Limited Partners for any act or omission on its
part, except for (i) any act or omission resulting from its own gross
negligence, willful misconduct or bad faith, (ii) any breach by a General
Partner of its obligations as a fiduciary of the Partnership or (iii) any
willful breach by a General Partner of any of the material terms and provisions
of this Agreement. The Partnership and the Limited Partners shall indemnify,
defend and hold harmless, to the fullest extent permitted by law, the General
Partner and its affiliates, partners, shareholders, officers, directors,
employees and agents, from and against any claim or liability of any nature
whatsoever arising out of or in connection with the assets or business of the
Partnership, except where attributable to the gross negligence, willful
misconduct or bad faith of such entity or where relating to a breach by the
General Partner of its obligations as a fiduciary of the Partnership or to a
breach by General Partner of any of the terms and provisions of this Agreement.
9.10. Removal of the General Partner.
(a) The Limited Partners, by an affirmative vote of at least
two-thirds of all the Limited Partnership Interests, may remove the General
Partner; however, such removal may only be made for gross
-25-
<PAGE> 26
negligence, willful neglect or embezzlement. Written notice of the effective
date of such a determination setting forth the effective date of such removal
shall be served upon the General Partner so removed and, as of the effective
date, shall terminate all the General Partner's rights and powers as the General
Partner except as to the ability of the former General Partner to share in the
profits, losses and distributions in accordance with its General Partnership
Interest.
(b) If the Limited Partners shall remove the General Partner,
they shall have the power to appoint a Substitute General Partner. Additionally,
the Limited Partners shall be entitled to issue to the Substitute General
Partner a General Partnership Interest in the Partnership.
(c) The terminated General Partner, if the Limited Partners
elect to continue the Partnership, shall have its interest in the Partnership
purchased by the Substitute General Partner at an arm's length price.
9.11. Limited Partners In-Kind Contributions. PDGE will provide
insurance for the Project. Philip will provide a surety bond for the Project, as
well as certain supervisory personnel at the Project. Each Partner will
indemnify the other for any loss sustained directly or indirectly related to
such in-kind contributions. Each Partner shall be responsible for workers
compensation insurance and claims for its employees.
-26-
<PAGE> 27
ARTICLE X
TRANSFERS OF PARTNERSHIP SHARES
10.01. Restrictions on Transfers. Except as set forth in this
Article X or in section 11.03 hereof, no Limited Partner may sell, transfer or
assign part or all of such Limited Partner's Limited Partnership Interest to any
person, firm or entity without the written consent of the General Partner and
the written consent of a Majority in Interest of the Limited Partners. If the
General Partner intends to withdraw from the Partnership, other than under
Article XI, it shall give 90 days' written notice to the Limited Partners in
advance of withdrawal.
10.02. Absolute Restriction. Notwithstanding any provision of this
Agreement to the contrary, the sale or exchange of any Limited Partnership
Interest will not be permitted if the interest sought to be sold or exchanged,
when added to the total of all other interests sold or exchanged within the
period of 12 consecutive months ending with the proposed date of the sale or
exchange, results in the termination of the Partnership under Section 708 of the
Code or if such termination would materially and adversely affect the
Partnership or any Partner. Notwithstanding any provision of this Agreement to
the contrary, no transfer shall be permitted that would result in the loss of
applicable federal or state securities exemptions relating to the issuance and
sale of Limited Partnership Interests. In no event shall any Limited Partnership
Interest be transferable within twelve months and one day of the original
issuance of such Limited Partnership Interest to such Limited Partner.
-27-
<PAGE> 28
ARTICLE XI
DISSOLUTION AND LIQUIDATION
11.01. Causes of Termination and Dissolution of the Partnership.
The Partnership shall be dissolved upon the earliest to occur of the following:
(i) upon the bankruptcy or dissolution of a General Partner; (ii) upon the
affirmative vote or written consent of the Partners owning at least two-thirds
of the Partnership Interests; (iii) by decree of court; (iv) upon the sale of
all or substantially all of the assets of the Partnership; or (v) December 31,
2005.
11.02. Liquidation Procedures. Upon dissolution of the
Partnership, the assets of the Partnership shall be liquidated in a manner to be
determined by the General Partner to be in the best interest of the Partnership,
and the resulting cash or property shall be distributed as follows: after
payment to its creditors of all expenses of liquidation, debts and all other
liabilities of the Partnership in the order of priority as provided by law, all
remaining property of the Partnership shall be distributed to the Partners in
the following manner and order of priority:
(i) Each Partner shall receive the unpaid balance of any loans
made by such Partner to the Partnership; and
(ii) Each Partner shall receive such Partner's share of the
remaining property of the Partnership in proportion to the positive Capital
Account balances of that Partner, after adjusting the Capital Accounts for
unrealized gain or loss in accordance with Section 7.04(c).
-28-
<PAGE> 29
11.03. Change in Status of Limited Partner. If any Limited Partner
shall be dissolved, be adjudicated bankrupt, insolvent, insane, incompetent, or
file any petition in bankruptcy or make an assignment or enter any arrangement
for the benefit of creditors, the Partnership shall not terminate but the
executor, administrator, guardian or trustee shall become an assignee of such
Limited Partner's Limited Partnership Interest. As provided in Article X hereof.
The assignee may become a substitute Limited Partner upon the approval of the
General Partner, which acceptance or approval may be withheld in the sole
discretion of the General Partner. If a Limited Partner shall be liquidated, be
dissolved or be declared bankrupt, the Partnership shall not terminate but the
executor, administrator or trustee or heir shall be become an assignee and shall
become a substitute Limited Partner as soon as the assignee executes an
instrument in a form acceptable to the General Partner assuming such obligations
of such Limited Partner and adopting the terms of this Agreement, in accordance
with the provisions of Article X hereof.
11.04. Reserve. Notwithstanding any provision to the contrary
herein, the General Partner or its successor may retain such funds as they
reasonably deem necessary as a reserve for any contingent liabilities or
obligations of the Partnership, which funds shall, after the passage of a
reasonable period of time, be distributed in accordance with the provisions of
this Article.
11.05. Final Accounting. Each of the Partners shall be furnished
with a statement prepared by the Partnership's accountants which shall set forth
the assets and liabilities of the Partnership as
-29-
<PAGE> 30
of the date of the complete liquidation of the Partnership's assets. Upon
compliance by the General Partner (or its successor) with the terms and
conditions of this Article XI, the remaining General Partner of the Partnership
or liquidating trustee, if any, or, if none, a majority in interest of the
Limited Partners shall execute and cause to be filed a Certificate of
Cancellation of the Partnership and any and all other documents necessary with
respect to termination and cancellation of the Partnership.
ARTICLE XII
MISCELLANEOUS PROVISIONS
12.01. Confidential Information. Except as otherwise required by
law or herein, no Partner (or any related person, firm or entity) shall disclose
or use at any time, except in connection with activities on behalf of the
Partnership, during the term hereof, any secret or Confidential Information (as
hereinafter defined) or knowledge obtained from any other Partner in connection
with activities of the Partnership or otherwise developed by the Partnership.
Without limiting the generality of the foregoing, the term "Confidential
Information" shall include all technology, compositions, contracts, sales or
profit figures, the names of and relationships with customers or suppliers and
the terms of any contracts to which it is a party. "Confidential Information"
does not include: (i) any information which becomes generally available to the
public other than as a result of a disclosure by a Partner or employee of the
Partnership; (ii) any information that was available to the Partners on a
non-confidential basis prior to disclosure by the other;
-30-
<PAGE> 31
(iii) any information that is required to be disclosed by law or by any court or
governmental body; provided, however, that each Partner shall provide the other
with reasonable notice prior to disclosure of any such information; and (iv) any
information received from a third party not bound by confidentiality obligations
to any Limited Partner.
12.02. Amendment of Agreement. This Agreement may be amended only
by a subsequent writing executed by all of the Partners. The General Partner
shall have the power to amend this Agreement, without the consent of the Limited
Partners, to cure ambiguities, correct errors, and comply with Treasury
Regulations under the Code, and retain the tax classification of the Partnership
as a Partnership; provided however, that such amendment shall not: (i) affect
the voting rights of a Limited Partner; (ii) amend Section 12.01, or 12.02;
(iii) amend Article IX, Article X, or Article XI; (iv) affect the limited
liability of any Limited Partner; or (iv) materially affect the rights of a
Partner to share in the cash flow from the Partnership.
12.03. Notices. Any and all notices, reports, requests, demands,
and other communications required or permitted to be given by this Agreement or
by any rule of law with reference to the business of the Partnership or to this
Agreement shall be in writing and shall conclusively be deemed to have been duly
given if personally delivered to, or if enclosed in a stamped and sealed
envelope and mailed first class by certified mail, return receipt requested, in
the United States mails or by overnight courier addressed to, the Partner to
which it is authorized to be given to the last known address of such Partner as
shown on the books and records of the Partnership.
-31-
<PAGE> 32
12.04. Governing Law. This Agreement will be governed and
construed under and in accordance with the laws of the Commonwealth of
Pennsylvania without giving effect to its conflicts of law principles.
12.05. Binding Effect. This Agreement shall inure to the benefit
of and shall be binding upon and be enforceable against the parties hereto and
their respective successors and permitted assigns.
12.06. Severability. If and to the extent that any court of
competent jurisdiction shall determine that any provision of this Agreement is
invalid, unlawful or unenforceable, such holding shall in no way affect the
validity or enforceability of the remainder of this Agreement.
12.07. Headings and Interpretation. The Section headings contained
herein are for convenience only and shall not in any way affect the
interpretation or enforceability of any provision of this Agreement. Wherever
used in this Agreement, the singular shall include the plural, the plural the
singular, and use of any gender will be applicable to all genders.
12.08. Entire Agreement. This Agreement contains the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior oral or written communications or agreements between
the parties with respect to the subject matter hereof.
12.09. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute but one document.
-32-
<PAGE> 33
12.10. The Tax Matters Partner. EBITDA, Inc. shall be the Tax
Matters Partner, as defined in the Code, for the Partnership.
IN WITNESS WHEREOF, the parties hereto, by their duly authorized
representatives, have set their hands and seals as of the day and year first
written above with the intention of being legally bound thereby.
GENERAL PARTNER:
ATTEST: PDG, Inc.
/s/ REGIS O'HARA By: /s/ DAVID P. BERESFORD
- ------------------------------- ---------------------------------
Title: Regis O'Hara Title: David P. Beresford, Vice President
-------------------------- ------------------------------------
Assitant Secretary
LIMITED PARTNERS:
ATTEST: PDG Environmental, Inc.
/s/ REGIS O'HARA By: /s/ JOHN C. REGAN
- ------------------------------- ---------------------------------
Title: Assistant Secretary Title: John C. Regan, Chairman & CEO
-------------------------- ------------------------------------
Regis O'Hara
ATTEST: Philip Environmental Services
Corporation
By: /s/ ALEC THOMAS
- ------------------------------- ---------------------------------
Title: Senior Vice President-Law Title: Executive Vice President
-------------------------- ------------------------------------
-33-
<PAGE> 34
PDG/Philip, L.P.
Schedule A to Agreement of Limited Partnership
<TABLE>
<CAPTION>
Amount of Initial
Capital Amount of Contributions Percentag
General Partner Contribution Under Section 6.02 Interest
--------------- ------------ ----------------- --------
<S> <C> <C> <C>
PDG, Inc. $1.00 1.0% 1.0%
300 Oxford Drive
Monroeville, PA 15146
Limited Partners
----------------
PDG Environmental, Inc. $59.00 59.0% 59.0%
300 Oxford Drive
Monroeville, PA 15146
Philip Environmental $40.00 40.0% 40.0%
Services Corporation
2525 McAllister
Houston, TX 77092
100.00%
</TABLE>
<PAGE> 1
Exhibit 21
Name of Subsidiary State of Formation
- ------------------ ------------------
Project Development Group, Inc. PA
PDG, Inc. PA
Enviro-Tech Abatement Services Co. NC
PDG/Philip, L.P. PA
PDG of Delaware, Inc.* DE
DPI Energy, Inc.* PA
Asbestemps, Inc.* DE
Applied Environmental Technology, Inc.* DE
Applied Consulting & Technical Services, Inc.* DE
* Inactive subsidiaries
<PAGE> 1
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
pertaining to the PDG Environmental, Inc. Amended and Restated Incentive Stock
Option Plan as of June 25, 1991 (Form S-8 No. 33-40698); PDG Environmental, Inc.
1990 Stock Option Plan for Employee Directors (Form S-8 No. 33-40699); PDG
Environmental, Inc. 1990 Stock Option Plan for Non- Employee Directors (Form S-8
No. 33-40700) and PDG Environmental, Inc. Consultant Compensation Plan (Form S-8
No. 333- 08673) and in the related Prospectuses of our report dated March 26,
1998, with respect to the consolidated financial statements of PDG
Environmental, Inc. included in the Annual Report (Form 10-KSB) for the year
ended January 31, 1998.
/s/ Ernst & Young, LLP
Pittsburgh, Pennsylvania
April 3, 1998
<PAGE> 1
Exhibit 24
Power of Attorney
KNOW BY ALL MEN BY THESE PRESENTS, that the undersigned director of PDG
ENVIRONMENTAL, INC., a Delaware Corporation, does make, constitute and appoint
JOHN C. REGAN, with full power and authority his true and lawful
attorney-in-fact and agent, for him and his name, place and stead in any and
all capacities, to sign the Annual Report of PDG Environmental, Inc. on Form
10-KSB for the period ended January 31, 1998, and to file such Annual Report,
so signed, with all exhibits thereto, with the Securities and Exchange
Commission, hereby further granting unto said attorney-in-fact full power and
authority to do and perform any and all acts and things requisite and necessary
to be done in and about the premises as fully to all intents and purposes as he
might or could do in person; the undersigned hereby ratifies and confirms all
that said attorney and agent, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
this 2nd day of April, 1998.
/s/ EDGAR BERKEY
- ---------------------------------------(SEAL)
Edgar Berkey, Director
<PAGE> 2
Power of Attorney
KNOW BY ALL MEN BY THESE PRESENTS, that the undersigned director of PDG
ENVIRONMENTAL, INC., a Delaware Corporation, does make, constitute and appoint
JOHN C. REGAN, with full power and authority his true and lawful
attorney-in-fact and agent, for him and his name, place and stead in any and
all capacities, to sign the Annual Report of PDG Environmental, Inc. on Form
10-KSB for the period ended January 31, 1998, and to file such Annual Report,
so signed, with all exhibits thereto, with the Securities and Exchange
Commission, hereby further granting unto said attorney-in-fact full power and
authority to do and perform any and all acts and things requisite and necessary
to be done in and about the premises as fully to all intents and purposes as he
might or could do in person; the undersigned hereby ratifies and confirms all
that said attorney and agent, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
this 2nd day of April, 1998.
/s/ EDWIN J. KILPELA
- ---------------------------------------(SEAL)
Edwin J. Kilpela, Director
<PAGE> 3
Power of Attorney
KNOW BY ALL MEN BY THESE PRESENTS, that the undersigned director of PDG
ENVIRONMENTAL, INC., a Delaware Corporation, does make, constitute and appoint
JOHN C. REGAN, with full power and authority his true and lawful
attorney-in-fact and agent, for him and his name, place and stead in any and
all capacities, to sign the Annual Report of PDG Environmental, Inc. on Form
10-KSB for the period ended January 31, 1998, and to file such Annual Report,
so signed, with all exhibits thereto, with the Securities and Exchange
Commission, hereby further granting unto said attorney-in-fact full power and
authority to do and perform any and all acts and things requisite and necessary
to be done in and about the premises as fully to all intents and purposes as he
might or could do in person; the undersigned hereby ratifies and confirms all
that said attorney and agent, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
this 2nd day of April, 1998.
/s/ RICHARD A. BENDIS
- ---------------------------------------(SEAL)
Richard A. Bendis, Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JANUARY 31, 1998 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 1998 AND IS QULAIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<EXCHANGE-RATE> 1
<CASH> 892,000
<SECURITIES> 0
<RECEIVABLES> 6,751,000
<ALLOWANCES> 48,000
<INVENTORY> 202,000
<CURRENT-ASSETS> 8,996,000
<PP&E> 4,527,000
<DEPRECIATION> 3,558,000
<TOTAL-ASSETS> 10,337,000
<CURRENT-LIABILITIES> 6,202,000
<BONDS> 1,628,000
0
400,000
<COMMON> 130,000
<OTHER-SE> 1,735,000
<TOTAL-LIABILITY-AND-EQUITY> 10,337,000
<SALES> 24,610,000
<TOTAL-REVENUES> 24,610,000
<CGS> 20,291,000
<TOTAL-COSTS> 20,291,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 220,000
<INCOME-PRETAX> 1,260,000
<INCOME-TAX> 20,000
<INCOME-CONTINUING> 1,240,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,240,000
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.17
</TABLE>
