##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED JULY 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM
 TO
 COMMISSION FILE NUMBER 0-13667
 PDG Environmental, Inc.
  Delaware
    
    22-2677298(State or other jurisdiction of incorporation
    
    (I.R.S. Employeror organization)
    
    Identification No.)1386 Beulah Road, Building 801Pittsburgh, Pennsylvania
    
    15235(Address of principal executive offices)
    
    (Zip Code)
 412-243-3200
 þ o
  o o þ
 o þ




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##### 



PDG Environmental, Inc. and Subsidiaries
 INDEX
 PagePart I. Financial InformationItem 1.
    
    Consolidated Financial Statements and Notes to Consolidated Financial Statements(a)
    
    Condensed Consolidated Balance Sheets as of July 31, 2006 (unaudited) and January 31, 2006
    
    
    3(b)
    
    Consolidated Statements of Operations for the Three Months Ended July 31, 2006 and 2005 (unaudited)
    
    
    4(c)
    
    Consolidated Statements of Operations for the Six Months Ended July 31, 2006 and 2005 (unaudited)
    
    
    5(d)
    
    Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2006 and 2005 (unaudited)
    
    
    6(e)
    
    Notes to Consolidated Financial Statements (unaudited)
    
    
    7Item 2.
    
    Managements  Discussion  and  Analysis  of  Financial  Condition  and Results  of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4.
    
    Controls and Procedures
    
    
    21Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    22Item 1A.
    
    Risk Factors
    
    
    22Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    22Item 6.
    
    Exhibits
    
    
    22Signature and Certification
    
    
    24EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 July 31,
    
    
    January 31,2006
    
    
    2006(unaudited)AssetsCurrent AssetsCash and cash equivalents
    
    $
    947,000
    
    
    $
    230,000Contracts receivable
    
    
    25,210,000
    
    
    
    24,471,000Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    7,084,000
    
    
    
    5,174,000Inventories
    
    
    662,000
    
    
    
    669,000Prepaid income taxes
    
    
    689,000
    
    
    
    560,000Deferred income tax asset
    
    
    319,000
    
    
    
    373,000Other current assets
    
    
    1,128,000
    
    
    
    131,000Total Current Assets
    
    
    36,039,000
    
    
    
    31,608,000Property, Plant and Equipment
    
    
    10,461,000
    
    
    
    10,137,000Less: accumulated depreciation
    
    
    (8,248,000
    )
    
    
    (7,838,000
    )2,213,000
    
    
    
    2,299,000Goodwill
    
    
    2,621,000
    
    
    
    2,316,000Deferred Income Tax Asset
    
    
    620,000
    
    
    
    216,000Intangible and Other Assets
    
    
    6,059,000
    
    
    
    6,423,000Total Assets
    
    $
    47,552,000
    
    
    $
    42,862,000Liabilities and Stockholders EquityCurrent LiabilitiesAccounts payable
    
    $
    6,948,000
    
    
    $
    6,537,000Billings in excess of costs and estimated earnings
on uncompleted contracts
    
    
    2,678,000
    
    
    
    2,012,000Current portion of long-term debt
    
    
    528,000
    
    
    
    513,000Accrued liabilities
    
    
    5,979,000
    
    
    
    4,459,000Total Current Liabilities
    
    
    16,133,000
    
    
    
    13,521,000Long-Term Debt
    
    
    11,485,000
    
    
    
    9,059,000Series C Redeemable Convertible Preferred Stock
    
    
    2,153,000
    
    
    
    2,803,000Total Liabilities
    
    
    29,771,000
    
    
    
    25,383,000Stockholders EquityCommon stock
    
    
    408,000
    
    
    
    345,000Common stock warrants
    
    
    1,628,000
    
    
    
    1,881,000Additional paid-in capital
    
    
    19,046,000
    
    
    
    15,582,000Retained earnings (deficit)
    
    
    (3,263,000
    )
    
    
    (291,000
    )Less treasury stock, at cost
    
    
    (38,000
    )
    
    
    (38,000
    )Total Stockholders Equity
    
    
    17,781,000
    
    
    
    17,479,000Total Liabilities and Stockholders Equity
    
    $
    47,552,000
    
    
    $
    42,862,000
 See accompanying notes to consolidated financial statements.
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PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
 
 STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
 For the Three MonthsEnded July 31,2006
    
    
    2005Contract revenues
    
    $
    22,744,000
    
    
    $
    16,320,000Contract costs
    
    
    19,385,000
    
    
    
    13,836,000Gross margin
    
    
    3,359,000
    
    
    
    2,484,000Selling, general and administrative expenses
    
    
    3,324,000
    
    
    
    1,663,000Income from operations
    
    
    35,000
    
    
    
    821,000Other income (expense):Interest expense
    
    
    (251,000
    )
    
    
    (97,000
    )Non-cash interest expense for preferred dividends and accretion of discount
    
    
    (891,000
    )
    
    
    (80,000
    )Interest and other income
    
    
    8,000
    
    
    
    5,000(1,134,000
    )
    
    
    (172,000
    )Income (loss) before income taxes
    
    
    (1,099,000
    )
    
    
    649,000Income tax provision (benefit)
    
    
    (58,000
    )
    
    
    275,000Net income (loss)
    
    $
    (1,041,000
    )
    
    $
    374,000Per share of common stock:Basic
    
    $
    (0.05
    )
    
    $
    0.03Dilutive
    
    $
    (0.05
    )
    
    $
    0.03Average common share equivalents outstanding
    
    
    19,875,000
    
    
    
    13,620,000Average dilutive common share equivalents
outstanding
    
    
    
    
    
    
    1,096,000Average common shares and dilutive common equivalents
outstanding for earnings per
share calculation
    
    
    19,875,000
    
    
    
    14,716,000
 See accompanying notes to consolidated financial statements.
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PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
 
 STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
 For the Six MonthsEnded July 31,2006
    
    
    2005Contract revenues
    
    $
    39,488,000
    
    
    $
    30,271,000Contract costs
    
    
    34,941,000
    
    
    
    25,487,000Gross margin
    
    
    4,547,000
    
    
    
    4,784,000Selling, general and administrative expenses
    
    
    6,256,000
    
    
    
    3,400,000Income (loss) from operations
    
    
    (1,709,000
    )
    
    
    1,384,000Other income (expense):Interest expense
    
    
    (470,000
    )
    
    
    (197,000
    )Non-cash interest expense for preferred dividends and accretion of discount
    
    
    (1,675,000
    )
    
    
    (80,000
    )Gain on sale of equity investment
    
    
    
    
    
    
    48,000Equity in income of equity investment
    
    
    
    
    
    
    4,000Interest and other income
    
    
    8,000
    
    
    
    19,000(2,137,000
    )
    
    
    (206,000
    )Income (loss) before income taxes
    
    
    (3,846,000
    )
    
    
    1,178,000Income tax provision (benefit)
    
    
    (874,000
    )
    
    
    478,000Net income (loss)
    
    $
    (2,972,000
    )
    
    $
    700,000Per share of common stock:Basic
    
    $
    (0.16
    )
    
    $
    0.05Dilutive
    
    $
    (0.16
    )
    
    $
    0.05Average common share equivalents outstanding
    
    
    19,085,000
    
    
    
    13,307,000Average dilutive common share equivalents
outstanding
    
    
    
    
    
    
    1,205,000Average common shares and dilutive common equivalents
outstanding for earnings per
share calculation
    
    
    19,085,000
    
    
    
    14,512,000
 See accompanying notes to consolidated financial statements.
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PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
 
 STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
 For the Six MonthsEnded July 31,2006
    
    
    2005Cash Flows from Operating Activities:Net income (loss)
    
    $
    (2,972,000
    )
    
    $
    700,000Adjustments to Reconcile Net Income to Cash:Depreciation and amortization
    
    
    854,000
    
    
    
    352,000Deferred income taxes
    
    
    (350,000
    )
    
    
    Interest expense for preferred dividends and accretion of discount
    
    
    1,675,000
    
    
    
    80,000Provision for uncollectible accounts
    
    
    40,000
    
    
    
    (Gain) loss on sale of equity investment and fixed assets
    
    
    5,000
    
    
    
    (48,000
    )Stock based compensation
    
    
    163,000
    
    
    
    Equity in (income) of equity investment
    
    
    
    
    
    
    (4,000
    )Changes in Assets and LiabilitiesOther than Cash:Contracts receivable
    
    
    (779,000
    )
    
    
    (3,756,000
    )Costs and estimated earnings in excess of billings
on uncompleted contracts
    
    
    (1,910,000
    )
    
    
    438,000Inventories
    
    
    7,000
    
    
    
    (145,000
    )Prepaid income taxes
    
    
    (129,000
    )
    
    
    (186,000
    )Other current assets
    
    
    160,000
    
    
    
    413,000Accounts payable
    
    
    411,000
    
    
    
    687,000Billings in excess of costs and estimated earnings
on uncompleted contracts
    
    
    666,000
    
    
    
    167,000Current income tax liabilities
    
    
    
    
    
    
    (305,000
    )Accrued liabilities
    
    
    749,000
    
    
    
    (74,000
    )Total Changes in Assets and Liabilities Other than Cash
    
    
    (825,000
    )
    
    
    (2,761,000
    )Net Cash Used by Operating Activities
    
    
    (1,410,000
    )
    
    
    (1,681,000
    )Cash Flows from Investing Activities:Purchase of property, plant and equipment
    
    
    (403,000
    )
    
    
    (564,000
    )Proceeds from sale of equity investment and fixed assets
    
    
    34,000
    
    
    
    50,000Additional investment in joint venture
    
    
    
    
    
    
    (18,000
    )Increase in other assets
    
    
    (50,000
    )
    
    
    (12,000
    )Net Cash Used by Investing Activities
    
    
    (419,000
    )
    
    
    (544,000
    )Cash Flows from Financing Activities:Proceeds from private placement of common and preferred stock
    
    
    
    
    
    
    6,443,000Proceeds from debt
    
    
    2,514,000
    
    
    
    240,000Proceeds from exercise of stock options and warrants
    
    
    792,000
    
    
    
    47,000Payment of accrued earnout liability
    
    
    
    
    
    
    (294,000
    )Payment of insurance premium financing
    
    
    (687,000
    )
    
    
    (628,000
    )Principal payments on debt
    
    
    (73,000
    )
    
    
    (3,766,000
    )Net Cash Provided by Financing Activities
    
    
    2,546,000
    
    
    
    2,042,000Change in Cash and Cash Equivalents
    
    
    717,000
    
    
    
    (183,000
    )Cash and Cash Equivalents, Beginning of Period
    
    
    230,000
    
    
    
    333,000Cash and Cash Equivalents, End of Period
    
    $
    947,000
    
    
    $
    150,000Supplementary disclosure of non-cash Investing and Financing Activity:Increase
in goodwill and accrued liabilities for contingent payment liability
    
    $
    301,000
    
    
    $
    233,000Financing of annual insurance premium
    
    $
    1,157,000
    
    
    $
    959,000
 See
accompanying notes to consolidated financial statements.
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PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED JULY 31, 2006
 (UNAUDITED)
 NOTE 1  BASIS OF PRESENTATION
    NOTE 2  FEDERAL INCOME TAXES
     NOTE 3
 TERM DEBT
  1 4
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NOTE 4  NET EARNINGS PER SHARE
  For the Three MonthsEnded July 31,2006
    
    
    2005Numerator:Net Income (loss)- Numerator for basic earnings per shareincome
available to common stockholders
    
    $
    (1,041,000
    )
    
    $
    374,000Effect of dilutive securities:Preferred stock dividends and accretion of discount
    
    
    
    
    
    
    Numerator for diluted earnings per shareincome available to
common stock after assumed conversions
    
    $
    (1,041,000
    )
    
    $
    374,000Denominator:Denominator for basic earnings per shareweighted average
shares
    
    
    19,875,000
    
    
    
    13,620,000Effect of dilutive securities:Convertible Preferred Stock and related accrued dividends
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    119,000Employee Stock Options
    
    
    
    
    
    
    977,000
    
    
    
    1,096,000Denominator for diluted earnings per shareadjusted
weighted-average shares and assumed conversions
    
    
    19,875,000
    
    
    
    14,716,000Basic earnings per share
    
    $
    (0.05
    )
    
    $
    0.03Diluted earnings per share
    
    $
    (0.05
    )
    
    $
    0.03
 8




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For the Six MonthsEnded July 31,2006
    
    
    2005Numerator:Net Income (loss)- Numerator for basic earnings per shareincome
available to common stockholders
    
    $
    (2,972,000
    )
    
    $
    700,000Effect of dilutive securities:Preferred stock dividends and accretion of discount
    
    
    
    
    
    
    Numerator for diluted earnings per shareincome available to
common stock after assumed conversions
    
    $
    (2,972,000
    )
    
    $
    700,000Denominator:Denominator for basic earnings per shareweighted average
shares
    
    
    19,085,000
    
    
    
    13,307,000Effect of dilutive securities:Convertible Preferred Stock and related accrued dividends
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    138,000Employee Stock Options
    
    
    
    
    
    
    1,067,000
    
    
    
    1,205,000Denominator for diluted earnings per shareadjusted
weighted-average shares and assumed conversions
    
    
    19,085,000
    
    
    
    14,512,000Basic earnings per share
    
    $
    (0.16
    )
    
    $
    0.05Diluted earnings per share
    
    $
    (0.16
    )
    
    $
    0.05
  NOTE 5  STOCK OPTIONS
   9




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For Three Months
    
    
    For the Six MonthsEnded July 31,
    
    
    Ended July 31,2005
    
    
    2005Net income, as reported
    
    $
    374,000
    
    
    $
    700,000Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects of a $5,000 and $235,000 benefit, respectively
    
    
    (8,000
    )
    
    
    (384,000
    )Pro forma net income
    
    $
    366,000
    
    
    $
    316,000Earnings per share:Basic-as reported
    
    $
    0.03
    
    
    $
    0.05Basic-pro forma
    
    $
    0.03
    
    
    $
    0.02Diluted-as reported
    
    $
    0.03
    
    
    $
    0.05Diluted-pro forma
    
    $
    0.02
    
    
    $
    0.02
     NOTE 6
 PRIVATE PLACEMENT OF SECURITIES  JULY 2005
 Common Private Placement
 Securities Purchase Agreement
  10




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Common Warrants
    Preferred Private Placement
 Securities Purchase Agreement
  11




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Preferred Warrants
    Terms of the Preferred Stock
   12




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Over-Allotment Warrants
    Warrant Derivative Liability
  Conversion of Preferred Stock to Common Stock
  13




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Exercise of Warrants for Common Stock
   NOTE 7  ACQUISITION
   Allocated Value
    
    Amortization PeriodFixed assets
    
    $
    50,000
    
    
    
    3 to 7 yearsCovenant-not-to-compete
    
    
    78,000
    
    
    4 1/2 yearsCustomer relationships
    
    
    5,766,000
    
    
    10 yearsSubcontractor relationships
    
    
    530,000
    
    
    5 yearsGoodwill
    
    
    160,000
    
    
    
    N/A
   14




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Three months ended
    
    
    Six months endedJuly 31, 2005
    
    
    July 31, 2005Sales
    
    $
    23,053,000
    
    
    $
    43,737,000Net Income
    
    $
    832,000
    
    
    $
    1,524,000Net income per common shares:Basic
    
    $
    0.05
    
    
    $
    0.10Dilutive
    
    $
    0.05
    
    
    $
    0.09Weighted average shares outstanding:Basic
    
    
    15,523,000
    
    
    
    15,210,000Dilutive
    
    
    17,217,000
    
    
    
    22,605,000
 NOTE 8  GOODWILL
   NOTE
9  NEW ACCOUNTING PRONOUNCEMENTS
  15




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MANAGEMENTS DISCUSSION AND ANALYSIS OF
 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  OVERVIEW
    16




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CRITICAL ACCOUNTING POLICIES
   RESULTS OF OPERATIONS
 Three Months Ended July 31, 2006
      17




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Six Months Ended July 31, 2006
      18




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FINANCIAL CONDITION
 Liquidity and Capital Resources
      19




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20




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ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   21




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PART IIOTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   Total Votes Cast
    
    For
    
    Against
    
    WithheldJohn C. Regan
    
    
    18,490,165
    
    
    
    18,459,403
    
    
    
    30,762
    
    
    
    0Richard A. Bendis
    
    
    18,490,165
    
    
    
    18,423,825
    
    
    
    66,340
    
    
    
    0Edgar Berkey
    
    
    18,490,165
    
    
    
    18,419,722
    
    
    
    70,443
    
    
    
    0James D. Chiafullo
    
    
    18,490,165
    
    
    
    18,421,322
    
    
    
    68,843
    
    
    
    0Edwin J. Kilpela
    
    
    18,489,165
    
    
    
    18,413,925
    
    
    
    76,240
    
    
    
    0
  Votes For
    
    
    7,659,345Votes Against
    
    
    255,181Abstained
    
    
    4,539Broker Non-Votes
    
    
    10,292,882
  Votes For
    
    
    18,475,961Votes Against
    
    
    9,491Abstained
    
    
    4,713
 
 ITEM 6. EXHIBITS
 (a)
    
    The following exhibits are being filed with this report:
 ExhibitsNumber
    
    DescriptionEXHIBIT INDEX
    
    Pages of SequentialExhibit No. and Description
    
    Numbering SystemExhibit 31.1
    
    Certification Pursuant to Rule 13a-14(a) of the Securities Act of 1934, as amended, and Section
302 Of The Sarbanes-Oxley Act of 2002
 22




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ExhibitsNumber
    
    DescriptionExhibit 31.2
    
    Certification Pursuant to Rule 13a-14(a) of the
Securities Act of 1934, as amended, and Section 302
Of The Sarbanes-Oxley Act of 2002Exhibit 32.1
    
    Certification Pursuant To 18 U.S.C. Section 1350, As
Amended Pursuant To Section 906 Of The Sarbanes-Oxley
Act of 2002Exhibit 32.2
    
    Certification Pursuant To 18 U.S.C. Section 1350, As
Amended Pursuant To Section 906 Of The Sarbanes-Oxley
Act of 2002
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SIGNATURES
  PDG ENVIRONMENTAL, INC.By
    /s/John C. ReganJohn C. ReganChairman and Chief Executive OfficerBy
    /s/Todd B. FortierTodd B. FortierChief Financial Officer  24