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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ to ______________
Commission File No. 111596
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-1954497
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
1940 N.W. 67th Place, Gainesville, FL 32653
(Address of principal executive offices) (Zip Code)
(352) 373-4200
(Registrant's telephone number)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the close of the latest practical date.
Class Outstanding at August 4, 2005
----------------------------- -----------------------------
Common Stock, $.001 Par Value 41,918,546
(excluding 988,000 shares
held as treasury stock)
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PERMA-FIX ENVIRONMENTAL SERVICES, INC.
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2005 and December 31, 2004.....................2
Consolidated Statements of Operations -
Three and Six Months Ended June 30, 2005 and 2004.......4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2005 and 2004.................5
Consolidated Statement of Stockholders' Equity -
Six Months Ended June 30, 2005..........................6
Notes to Consolidated Financial Statements.....................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..........18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk......................................38
Item 4. Controls and Procedures.......................................39
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................40
Item 6. Exhibits......................................................41
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
PART I, ITEM 1
The consolidated financial statements included herein have been prepared by the
Company (which may be referred to as we, us or our), without an audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes the disclosures which are made are adequate to make the
information presented not misleading. Further, the consolidated financial
statements reflect, in the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position and results of operations as of and for the periods indicated.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2004.
The results of operations for the six months ended June 30, 2005, are not
necessarily indicative of results to be expected for the fiscal year ending
December 31, 2005.
1
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
2005 December 31,
(Amounts in Thousands, Except for Share Amounts) (Unaudited) 2004
- -------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 100 $ 215
Restricted cash 60 60
Accounts receivable, net of allowance for doubtful
accounts of $517 and $570 26,678 27,192
Inventories 904 882
Prepaid expenses 1,799 2,891
Other receivables 83 45
Current assets of discontinued operations, net of allowance for
doubtful accounts of $93 and $125 194 1,609
------------ ------------
Total current assets 29,818 32,894
Property and equipment:
Buildings and land 18,085 18,313
Equipment 30,824 30,281
Vehicles 4,461 4,187
Leasehold improvements 11,489 11,514
Office furniture and equipment 2,502 2,396
Construction-in-progress 2,367 1,852
------------ ------------
69,728 68,543
Less accumulated depreciation and amortization (23,665) (21,282)
------------ ------------
Net property and equipment 46,063 47,261
Property and equipment of discontinued operations 603 600
Intangibles and other assets:
Permits 13,045 12,895
Goodwill 1,330 1,330
Finite Risk Sinking Fund 3,216 2,225
Other assets 2,875 3,250
------------ ------------
Total assets $ 96,950 $ 100,455
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
2
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
June 30,
2005 December 31,
(Amounts in Thousands, Except for Share Amounts) (Unaudited) 2004
- -------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,788 $ 6,529
Current environmental accrual 570 721
Accrued expenses 11,027 12,100
Unearned revenue 4,095 5,115
Current liabilities of discontinued operations 2,235 2,550
Current portion of long-term debt 2,868 6,376
------------ ------------
Total current liabilities 27,583 33,391
Environmental accruals 2,110 2,141
Accrued closure costs 5,128 5,062
Other long-term liabilities 2,172 1,944
Long-term liabilities of discontinued operations 1,600 1,804
Long-term debt, less current portion 13,664 12,580
------------ ------------
Total long-term liabilities 24,674 23,531
------------ ------------
Total liabilities 52,257 56,922
Commitments and Contingencies (see Notes 4 and 6) -- --
Preferred Stock of subsidiary, $1.00 par value; 1,467,396 shares
authorized, 1,284,730 shares issued and outstanding,
liquidation value $1.00 per share 1,285 1,285
Stockholders' equity:
Preferred Stock, $.001 par value; 2,000,000 shares authorized,
2,500 shares issued and outstanding -- --
Common Stock, $.001 par value; 75,000,000 shares authorized,
42,793,267 and 42,749,117 shares issued, including 988,000
shares held as treasury stock, respectively 43 43
Additional paid-in capital 80,968 80,902
Accumulated deficit (35,727) (36,794)
Interest rate swap (14) (41)
------------ ------------
45,270 44,110
Less: Common Stock in treasury at cost; 988,000 shares (1,862) (1,862)
------------ ------------
Total stockholders' equity 43,408 42,248
------------ ------------
Total liabilities and stockholders' equity $ 96,950 $ 100,455
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
3
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
(Amounts in Thousands, Except for Per Share Amounts) 2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------
Net revenues $ 25,359 $ 19,128 $ 46,967 $ 35,939
Cost of goods sold 18,016 13,425 34,123 26,386
---------- ---------- ---------- ----------
Gross profit 7,343 5,703 12,844 9,553
Selling, general and administrative expenses 5,741 4,320 10,660 8,658
Gain on disposal of property and equipment (337) (1) (337) (18)
---------- ---------- ---------- ----------
Income from operations 1,939 1,384 2,521 913
Other income (expense):
Interest income 1 1 2 2
Interest expense (381) (575) (793) (1,240)
Interest expense-financing fees (110) (257) (221) (513)
Other (45) 36 (59) (18)
---------- ---------- ---------- ----------
Income (loss) from continuing operations 1,404 589 1,450 (856)
Loss from discontinued operations (122) (472) (289) (1,025)
---------- ---------- ---------- ----------
Net income (loss) 1,282 117 1,161 (1,881)
Preferred Stock dividends 47 47 94 94
---------- ---------- ---------- ----------
Net income (loss) applicable to Common Stock $ 1,235 $ 70 $ 1,067 $ (1,975)
========== ========== ========== ==========
Net income (loss) per common share - basic
Continuing operations $ .03 $ .01 $ .03 $ (.02)
Discontinued operations -- (.01) -- (.03)
---------- ---------- ---------- ----------
Net income (loss) per common share $ .03 $ -- $ .03 $ (.05)
========== ========== ========== ==========
Net income (loss) per common share - diluted
Continuing operations $ .03 $ .01 $ .03 $ (.02)
Discontinued operations -- (.01) -- (.03)
---------- ---------- ---------- ----------
Net income (loss) per common share $ .03 $ -- $ .03 $ (.05)
========== ========== ========== ==========
Number of shares and potential common shares
used in net income (loss) per common share:
Basic 41,805 41,448 41,792 39,244
========== ========== ========== ==========
Diluted 44,476 45,210 44,508 39,244
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
4
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
----------------------------
(Amounts in Thousands) 2005 2004
- --------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $ 1,161 $ (1,881)
Adjustments to reconcile net income (loss) to cash provided by
(used in) operations:
Depreciation and amortization 2,403 2,330
Debt discount amortization -- 162
Provision for bad debt and other reserves (37) 89
Gain on disposal of property and equipment (337) (18)
Issuance of Common Stock for services 18 18
Changes in assets and liabilities:
Accounts receivable 552 (741)
Prepaid expenses, inventories and other assets 1,370 77
Accounts payable, accrued expenses, and unearned revenue (1,904) 449
Discontinued operations 896 (160)
------------ ------------
Net cash provided by operations 4,122 325
Cash flows from investing activities:
Purchases of property and equipment, net (1,100) (1,835)
Proceeds from sale of plant, property and equipment 700 19
Change in restricted cash, net (2) --
Change in finite risk sinking fund (991) (991)
Discontinued operations (3) (51)
Funds used for acquisitions (net of cash acquired) -- (2,903)
------------ ------------
Net cash used in investing activities (1,396) (5,761)
Cash flows from financing activities:
Net repayments of revolving credit (2,318) (3,899)
Principal repayments of long-term debt (4,986) (1,744)
Borrowings of long-term debt 4,416 --
Proceeds from issuance of stock 47 10,858
------------ ------------
Net cash (used in) provided by financing activities (2,841) 5,215
------------ ------------
Decrease in cash (115) (221)
Cash at beginning of period 215 411
------------ ------------
Cash at end of period $ 100 $ 190
============ ============
Supplemental disclosure
Interest paid $ 594 $ 1,061
Non-cash investing and financing activities:
Issuance of Common Stock for payment of dividends -- 63
Gain on interest rate swap 27 54
Long-term debt incurred for purchase of property and equipment 465 167
The accompanying notes are integral part of these consolidated
financial statements.
5
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, for the six months ended June 30, 2005)
Preferred Stock Common Stock Additional
(Amounts in thousands, ------------------------- ------------------------- Paid-In
except for share amounts) Shares Amount Shares Amount Capital
- ---------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 2,500 $ -- 42,749,117 $ 43 $ 80,902
Comprehensive income:
Net income -- -- -- -- --
Other Comprehensive income:
Gain on interest rate swap -- -- -- -- --
Comprehensive income
Preferred Stock dividends -- -- -- -- --
Issuance of Common Stock for
cash and services -- -- 31,287 -- 66
Issuance of Common Stock upon
cashless exercise of Warrants -- -- 12,863 -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 2005 2,500 $ -- 42,793,267 $ 43 $ 80,968
=========== =========== =========== =========== ===========
Common
Stock Total
(Amounts in thousands, Accumulated Interest Held In Stockholders'
except for share amounts) Deficit Rate Swap Treasury Equity
- ---------------------------------------------------------------------------------------------
Balance at December 31, 2004 $ (36,794) $ (41) $ (1,862) $ 42,248
Comprehensive income:
Net income 1,161 -- -- 1,161
Other Comprehensive income:
Gain on interest rate swap -- 27 -- 27
-------------
Comprehensive income 1,188
Preferred Stock dividends (94) -- -- (94)
Issuance of Common Stock for
cash and services -- -- -- 66
Issuance of Common Stock upon
cashless exercise of Warrants -- -- -- --
----------- ----------- ----------- -------------
Balance at June 30, 2005 $ (35,727) $ (14) $ (1,862) $ 43,408
=========== =========== =========== =============
The accompanying notes are an integral part of these consolidated
financial statements.
6
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
Reference is made herein to the notes to consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2004.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Our accounting policies are as set forth in the notes to consolidated financial
statements referred to above.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, FASB issued Statement No. 154 ("SFAS 154"), Accounting Changes and
Error Corrections. SFAS 154 replaces APB No. 20, Accounting Changes, and SFAS 3,
Reporting Accounting Changes in Interim Financial Statements, and establishes
retrospective application as the required method for reporting a change in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154 applies
to all voluntary changes in accounting principles and to changes required by an
accounting pronouncement in the instance that the pronouncement does not include
specific transition provisions. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Company does not anticipate that the adoption of SFAS 154 will have a
material impact on its consolidated results of operations.
In March 2005, FASB issued FASB Interpretation No. 47 ("FIN 47"), Accounting for
Conditional Asset Retirement Obligations -- An Interpretation of FASB Statement
No. 143. FIN 47 clarifies that the term conditional asset retirement obligation,
as used in SFAS 143, Accounting for Asset Retirement Obligations, refers to a
legal obligation to perform an asset retirement activity in which the timing and
(or) method of settlement are conditional on a future event that may or may not
be within control of the entity. The obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing and
(or) method of settlement. Uncertainty about the timing and (or) method of
settlement of a conditional asset retirement obligation should be factored into
the measurement of the liability when sufficient information exists. FIN 47 also
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The Interpretation is
effective for fiscal years ending after December 15, 2005. We do not expect the
adoption of FIN 47 to have a material effect on our consolidated financial
position or results of operations for the year ending December 31, 2005.
In December 2004, FASB issued Statement No. 123 (revised) ("SFAS 123R"),
Share-Based Payment. SFAS 123R is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and its related implementation
guidance, and establishes standards for the accounting for transactions in which
an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
SFAS 123R requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide service in
exchange for the award. This statement requires companies to recognize the fair
value of stock options and other stock-based compensation to employees
prospectively, beginning with awards granted, modified, repurchased or cancelled
after the fiscal periods beginning after June 15, 2005. We currently measure
stock-based compensation in accordance with APB Opinion No. 25.
7
The impact on our financial condition or results of operations will depend on
the number and terms of stock options outstanding on the date of change, as well
as future options that may be granted. See Stock-Based Compensation below for
the pro forma impact that the fair value method would have had on our net
income/loss for each of the three and six month periods ended June 30, 2005, and
2004. We do not expect the impact of SFAS 123R to have an impact on our cash
flows or liquidity.
In April 2005, the Securities and Exchange Commission ("SEC") amended its
Regulation S-X to amend the date of compliance with SFAS 123R to the first
reporting period of the fiscal year beginning on or after June 15, 2005. We
anticipate adopting SFAS 123R on January 1, 2006.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the current
period presentation.
STOCK-BASED COMPENSATION
We account for our stock-based employee compensation plans under the accounting
provisions of APB Opinion 25, Accounting for Stock Issued to Employees, and have
furnished the pro forma disclosures required under Statement of Financial
Accounting Standards ("SFAS") 123, Accounting for Stock-Based Compensation, and
SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure.
SFAS 123 requires pro forma information regarding net income and earnings per
share as if compensation cost for our employee and director stock options had
been determined in accordance with the fair market value-based method prescribed
in SFAS 123. We estimate the fair value of each stock option at the grant date
by using the Black-Scholes option-pricing model with the following assumptions
used for grants in 2004: no dividend yield; an expected life of ten years;
expected volatility between 21.72% and 37.50%; and risk free interest rates
between 3.34% and 3.82%. No stock options have been granted in 2005.
Under the accounting provisions of SFAS 123, our net income (loss) and net
income (loss) per share would have been adjusted to the pro forma amounts
indicated below (in thousands except for per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2005 2004 2005 2004
---------------------------------------------------------
Net income (loss) from continuing operations
applicable to Common Stock, as reported $ 1,357 $ 542 $ 1,356 $ (950)
Deduct: Total Stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (75) (80) (167) (174)
------------ ------------ ------------ ------------
Pro forma net income (loss) from continuing
operations applicable to Common Stock $ 1,282 $ 462 $ 1,189 $ (1,124)
============ ============ ============ ============
Income (loss) per share:
Basic - as reported $ .03 $ .01 $ .03 $ (.02)
============ ============ ============ ============
Basic - pro-forma $ .03 $ .01 $ .03 $ (.03)
============ ============ ============ ============
Diluted - as reported $ .03 $ .01 $ .03 $ (.02)
============ ============ ============ ============
Diluted - pro-forma $ .03 $ .01 $ .03 $ (.03)
============ ============ ============ ============
8
2. EARNINGS PER SHARE
------------------
Basic EPS is based on the weighted average number of shares of Common Stock
outstanding during the period. Diluted EPS includes the dilutive effect of
potential common shares. Diluted loss per share for the six months ended June
30, 2004, does not include potential common shares as their effect would be
anti-dilutive.
The following is a reconciliation of basic net income (loss) per share to
diluted net income (loss) per share for the three and six months ended June 30,
2005 and 2004:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
(Amounts in thousands except per share amounts) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------
Earnings per share from continuing operations
- ---------------------------------------------
Income (loss) from continuing operations $ 1,404 $ 589 $ 1,450 $ (856)
Preferred stock dividends (47) (47) (94) (94)
---------- ---------- ---------- ----------
Income (loss) from continuing operations applicable to
Common Stock 1,357 542 1,356 (950)
Effect of dilutive securities:
Preferred Stock dividends 47 47 94 --
---------- ---------- ---------- ----------
Income (loss) - diluted $ 1,404 $ 589 $ 1,450 $ (950)
========== ========== ========== ==========
Basic income (loss) per share $ .03 $ .01 $ .03 $ (.02)
========== ========== ========== ==========
Diluted income (loss) per share $ .03 $ .01 $ .03 $ (.02)
========== ========== ========== ==========
Earnings per share from discontinued operations
- -----------------------------------------------
Loss - basic and diluted $ (122) $ (472) $ (289) $ (1,025)
========== ========== ========== ==========
Basic loss per share $ -- $ (.01) $ -- $ (.03)
========== ========== ========== ==========
Diluted loss per share $ -- $ (.01) $ -- $ (.03)
========== ========== ========== ==========
Weighted average shares outstanding - basic 41,805 41,448 41,792 39,244
Potential shares exercisable under stock option plans 239 351 244 --
Potential shares upon exercise of Warrants 765 1,744 805 --
Potential shares upon conversion of Preferred Stock 1,667 1,667 1,667 --
---------- ---------- ---------- ----------
Weighted average shares outstanding - diluted 44,476 45,210 44,508 39,244
========== ========== ========== ==========
- -------------------------------------------------------------------------------------------------------------
Potential shares excluded from above weighted average
share calculations due to their anti-dilutive
effect include:
Upon exercise of options 1,339 1,583 1,339 3,140
Upon exercise of Warrants 1,776 1,776 1,776 12,791
Upon conversion of Preferred Stock -- -- -- 1,667
9
3. LONG TERM DEBT
--------------
Long-term debt consists of the following at June 30, 2005, and December 31,
2004:
- ----------------------------------------------------------------------------------------------------------
Revolving Credit facility dated December 22, 2000, borrowings based upon
eligible accounts receivable, subject to monthly borrowing base calculation,
variable interest paid monthly at prime rate plus 1/2% (6.75% at June 30, 2005),
balance due in May 2008. $ 4,162 $ 6,480
Term Loan dated December 22, 2000, payable in equal monthly installments of
principal of $83, balance due in May 2008, variable interest paid monthly at
prime rate plus 1% (7.25% at June 30, 2005). 7,000 3,083
Unsecured Promissory Note dated August 31, 2000, payable in August 2005,
interest paid annually at 7.0%. Paid in full in June 2005. -- 3,500
Promissory Note dated June 25, 2001, payable in semiannual installments on
June 30 and December 31 through December 31, 2008, variable interest
accrues at the applicable law rate determined under the IRS Code Section (8.0%
on June 30, 2005) and is payable in one lump sum at the end of installment
period. 2,634 3,034
Installment Agreement dated June 25, 2001, payable in semiannual installments
on June 30 and December 31 through December 31, 2008, variable interest
accrues at the applicable law rate determined under the IRS Code Section (8.0%
on June 30, 2005) and is payable in one lump sum at the end of installment
period. 653 753
Various capital lease and promissory note obligations, payable 2005 to 2010,
interest at rates ranging from 5.0% to 14.2%. 2,083 2,106
--------- ---------
16,532 18,956
Less current portion of long-term debt 2,868 6,376
--------- ---------
$ 13,664 $ 12,580
========= =========
REVOLVING CREDIT AND TERM LOAN
On December 22, 2000, we entered into a Revolving Credit, Term Loan and Security
Agreement ("Agreement") with PNC Bank, National Association, a national banking
association ("PNC") acting as agent ("Agent") for lenders, and as issuing bank.
The Agreement provided for a term loan ("Term Loan") in the amount of
$7,000,000, which requires principal repayments based upon a seven-year
amortization, payable over five years, with monthly installments of $83,000 and
the remaining unpaid principal balance due on December 22, 2005. The Agreement
also provided for a revolving line of credit ("Revolving Credit") with a maximum
principal amount outstanding at any one time of $18,000,000, as amended. The
Revolving Credit advances are subject to limitations of an amount up to the sum
of (a) up to 85% of Commercial Receivables aged 90 days or less from invoice
date, (b) up to 85% of Commercial Broker Receivables aged up to 120 days from
invoice date, (c) up to 85% of acceptable Government Agency Receivables aged up
to 150 days from invoice date, and (d) up to 50% of acceptable unbilled amounts
aged up to 60 days, less (e) reserves Agent reasonably deems proper and
necessary. As of June 30, 2005, the excess availability under our Revolving
Credit was $10,217,000 based on our eligible receivables.
Effective March 25, 2005, the Company and PNC entered into an amended agreement
(Amendment No. 4), which, among other things, extends the $25 million credit
facility through May 31, 2008. The other terms of the credit facility remain
principally unchanged, as a result of the amendment, with the exception of a 50
basis point reduction in the variable interest rate on both loans.
10
On June 29, 2005, we entered into an amendment ("Amendment No. 5") to the
Agreement. Pursuant to Amendment No. 5, PNC increased our Term Loan by
approximately $4.4 million, resulting in a Term Loan of $7 million. Under
Amendment No. 5, the Term Loan continues to be payable in monthly installments
of approximately $83,000, plus accrued interest, with the remaining unpaid
principal balance and accrued interest, payable in May 2008, upon termination of
the amended Agreement. As part of Amendment No. 5, certain of our subsidiaries
have modified or granted mortgages to PNC on their facilities, in addition to
the collateral previously granted to PNC under the Agreement. All other terms
and conditions to the Agreement, remain principally unchanged. We used the
additional loan proceeds to prepay a $3.5 million unsecured promissory note,
which was due and payable in August 2005, and the balance was used for general
working capital. As a condition of Amendments No. 4 and 5, we paid a $140,000
fee to PNC.
Pursuant to the Agreement, as amended, the Term Loan bears interest at a
floating rate equal to the prime rate plus 1%, and the Revolving Credit at a
floating rate equal to the prime rate plus 1/2%. The loans are subject to a
prepayment fee of 1% until March 25, 2006, and 1/2% until March 25, 2007.
UNSECURED PROMISSORY NOTE
On August 31, 2000, as part of the consideration for the purchase of Diversified
Scientific Services, Inc. ("DSSI"), we issued to Waste Management Holdings a
long-term unsecured promissory note (the "Unsecured Promissory Note") in the
aggregate principal amount of $3,500,000, bearing interest at a rate of 7% per
annum and having a five-year term with interest to be paid annually and
principal due in one lump sum at the end of the term of the Unsecured Promissory
Note (August 2005). This debt balance was reclassed in its entirety from long
term to current in the third quarter of 2004. We utilized the proceeds of the
amended agreement with PNC, mentioned above, to repay this note in June 2005.
PROMISSORY NOTE
In conjunction with our acquisition of M&EC, M&EC issued a promissory note for a
principal amount of $3.7 million to Performance Development Corporation ("PDC"),
dated June 25, 2001, for monies advanced to M&EC for certain services performed
by PDC. The promissory note is payable over eight years on a semiannual basis on
June 30 and December 31. The principal repayments for 2005 will be approximately
$400,000 semiannually. Interest is accrued at the applicable law rate
("Applicable Rate") pursuant to the provisions of section 6621 of the Internal
Revenue Code of 1986 as amended. (8% on June 30, 2005) and payable in one lump
sum at the end of the loan period. On June 30, 2005, the outstanding balance was
$3,854,000 including accrued interest of approximately $1,220,000. PDC has
directed M&EC to make all payments under the promissory note directly to the IRS
to be applied to PDC's obligations under its installment agreement with the IRS.
INSTALLMENT AGREEMENT
Additionally, M&EC entered into an installment agreement with the Internal
Revenue Service ("IRS") for a principal amount of $923,000 effective June 25,
2001, for certain withholding taxes owed by M&EC. The installment agreement is
payable over eight years on a semiannual basis on June 30 and December 31. The
principal repayments for 2005 will be approximately $100,000 semiannually.
Interest is accrued at the Applicable Rate, and is adjusted on a quarterly basis
and payable in lump sum at the end of the installment period. On June 30, 2005,
the rate was 8%. On June 30, 2005, the outstanding balance was $949,000
including accrued interest of approximately $296,000.
4. COMMITMENTS AND CONTINGENCIES
-----------------------------
HAZARDOUS WASTE
In connection with our waste management services, we handle both hazardous and
non-hazardous waste, which we transport to our own, or other facilities for
destruction or disposal. As a result of disposing of hazardous substances, in
the event any cleanup is required, we could be a potentially responsible party
for the costs of the cleanup notwithstanding any absence of fault on our part.
11
LEGAL
In the normal course of conducting our business, we are involved in various
litigations. There has been no material change in legal proceedings from those
disclosed previously in our Form 10-K for the year ended December 31, 2004, and
our Form 10-Q for the period ended March 31, 2005, except as stated below:
During February 2005, we received a federal grand jury subpoena requesting
documents from the period of January 1, 2000, to the present concerning or
relating to Wabash Environmental Technologies, LLC, ("Wabash"), an Indiana based
entity that is not affiliated with us. We have been advised that the target of
the grand jury investigation is Wabash and that neither we nor any subsidiary of
ours is a target of the investigation. We and any subsidiary that had documents
concerning or relating to Wabash have compiled responsive documents and complied
with the subpoena.
We have previously reported that our subsidiary, PFD, has been performing an
extensive internal review as to whether the treatment, storage, processing and
disposal of certain waste streams by it were in accordance with applicable
environmental laws and regulations. PFD retained outside counsel to assist it in
this review. As a result of the review, PFD has notified the Ohio EPA of the
following:
. that PFD discovered an error in its 2003 Annual Hazardous Waste
Report, which was submitted to the Ohio EPA. The error was in
connection with the reporting of a shipment offsite of certain
waste water inadvertently reported as H081 (biological treatment
with or without precipitation) in the report. PFD believes a
management method code of H129 (other treatment) would have been
more appropriate for the entries of these shipments, with
filtration as the process. This wastewater was shipped offsite for
beneficial reuse. Additional quality control measures have been put
in place to reduce the potential for this type of administrative
error; and
. from February, 2003 to November, 2003, PFD received 56 shipments
(approximately 273,000 gallons) of hazardous wastewaters from a
particular generator. PFD filtered this particular wastewater in
its wastewater treatment unit and transmitted this filtered
wastewater under a bill of lading to Wabash for beneficial reuse.
As part of its internal investigation, it was determined that,
while PFD's compliance personnel at the time believed it
appropriate to classify this material as meeting the beneficial
reuse requirements pursuant to the regulations promulgated under
the Resource Conservation and Recovery Act, and shipped such under
a straight bill of lading, they also recognized this at that time
to be a vague and unclear area of the regulations. Due to the
beneficial reuse regulations under RCRA being vague and unclear,
PFD has notified Ohio EPA of these facts.
INSURANCE
We believe we maintain insurance coverage adequate for our needs and which is
similar to, or greater than, the coverage maintained by other companies of our
size in the industry. There can be no assurances, however, those liabilities,
which may be incurred by us, will be covered by our insurance or that the dollar
amount of such liabilities, which are covered, will not exceed our policy
limits. Under our insurance contracts, we usually accept self-insured
retentions, which we believe is appropriate for our specific business risks. We
are required by EPA regulations to carry environmental impairment liability
insurance providing coverage for damages on a claims-made basis in amounts of at
least $1,000,000 per occurrence and $2,000,000 per year in the aggregate. To
meet the requirements of customers, we have exceeded these coverage amounts.
12
In June 2003, we entered into a 25-year finite risk insurance policy, which
provides financial assurance to the applicable states for our permitted
facilities in the event of unforeseen closure. Prior to obtaining or renewing
operating permits we are required to provide financial assurance that guarantees
to the states that, in the event of closure, our permitted facilities will be
closed in accordance with the regulations. The policy provides $35,000,000 of
financial assurance coverage and has available capacity to allow for annual
inflation and other performance and surety bond requirements. On the fourth and
subsequent anniversaries of the contract inception, the Company may elect to
terminate this contract. During the second quarter of 2003 we made an upfront
payment of $4,000,000, of which $2,766,000 represents the full premium for the
25-year term of the policy, and the remaining $1,234,000, was deposited in a
sinking fund account. Additionally, in February 2004 and 2005 we paid the first
and second of nine required annual installments of $1,004,000, of which $991,000
was deposited in the sinking fund account, the remaining $13,000 represents a
terrorism premium. As of June 30, 2005, we have recorded $3,216,000 in our
Finite Risk Sinking Fund on the balance sheet.
5. ACQUISITIONS
------------
On March 23, 2004, our subsidiary, Perma-Fix of Maryland, Inc. ("PFMD")
completed it's acquisition of certain assets of USL Environmental Services, Inc.
d/b/a A&A Environmental ("A&A"), primarily located in Baltimore, Md., and our
subsidiary, Perma-Fix of Pittsburgh, Inc. ("PFP") completed its acquisition of
certain assets of US Liquids of Pennsylvania, Inc. d/b/a EMAX ("EMAX"). Both A&A
and EMAX are wholly owned subsidiaries of US Liquids Inc. ("USL"). PFMD is using
the acquired assets of A&A to provide a full line of environmental, marine and
industrial maintenance services. PFMD offers expert environmental services such
as 24-hour emergency response, vacuum services, hazardous and non-hazardous
waste disposal, marine environmental and other remediation services. PFP is
utilizing the acquired assets of EMAX to provide a variety of environmental
services such as transportation of drums and bulk loads, tank cleaning,
industrial maintenance, dewatering, drum management and chemical packaging. PFP
also has a wastewater treatment group, which provides for the treatment of
non-hazardous wastewaters such as leachates, oily waters, industrial process
waters and off-spec products.
We paid $2,915,000 in cash for the acquired assets and assumed certain
liabilities of A&A and EMAX. The acquisitions were accounted for using the
purchase method effective March 23, 2004, and accordingly, the estimated fair
values of the assets acquired and liabilities assumed of A&A and EMAX as of this
date, and the results of operations since this date, are included in the
accompanying consolidated financial statements.
6. DISCONTINUED OPERATIONS
-----------------------
On October 4, 2004, our Board of Directors approved the discontinuation of
operations at the facility in Detroit, Michigan, owned by our subsidiary,
Perma-Fix of Michigan, Inc. ("PFMI"). The decision to discontinue operations at
the Detroit facility was principally a result of two fires that significantly
disrupted operations at the facility in 2003, and the facility's continued drain
on the financial resources of our Industrial segment. We are in the process of
remediating the facility and evaluating our available options for future use or
sale of the property. The operating activities for the current and prior periods
have been reclassified to discontinued operations in our Consolidated Statements
of Operations.
Expenses of $122,000 and $289,000 were recorded during the three and six months
ended June 30, 2005, respectively. PFMI recorded revenues of $740,000 and
$1,398,000, and operating losses of $472,000 and $1,025,000 for the three and
six months ended June 30, 2004. Assets and liabilities related to the
discontinued operation have been reclassified to separate categories in the
Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004. As of
June 30, 2005, assets are recorded at their net realizable value, and consist of
property and equipment of $603,000, and receivables of $194,000, which includes
$190,000 for estimated insurance proceeds.
13
We submitted three insurance claims relative to the two fires at PFMI, a
property claim for the first fire and a property claim and business interruption
claim for the second fire. During the second quarter of 2005, we received a
partial payment of $1,500,000 less adjustor fees of approximately $105,000, for
a net payment of $1,395,000 from the insurance carrier on the business
interruption claim. We are currently negotiating remaining settlement for the
claims, but at this time we cannot estimate actual proceeds to be received.
Additional proceeds beyond the remaining balance, if any, received on these
claims will be recorded as income from discontinued operations. Liabilities as
of June 30, 2005, consist of accounts payable and current accrued expenses of
$1,835,000 and environmental accruals of $2,000,000. Included in current
accruals is a pension plan withdrawal liability, which is a result of the
termination of substantially all of the union employees of PFMI. The PFMI union
employees participate in the Central States Teamsters Pension Fund ("CST"),
which provides that a partial or full termination of union employees may result
in a withdrawal liability, due from PFMI to CST. At June 30, 2005, we have a
recorded pension withdrawal liability of $1,680,000, based upon an actuarial
study. This withdrawal liability represents our best estimate, and is subject to
numerous factors such as the date and timing of union employee terminations,
partial versus complete termination status, the pension funds unfunded vested
benefit liability and PFMI's portion of such liability. This obligation is
recorded as a current liability, but may not be paid out in the current year due
to the timing of the termination event and process of determining the final
liability.
As a result of the discontinuation of operations at the PFMI facility, we are
required to complete certain closure and remediation activities pursuant to our
RCRA permit. Also, in order to close and dispose of the facility, we may have to
complete certain additional remediation activities related to the land,
building, and equipment. The level and cost of the clean-up and remediation will
be determined by state mandated requirements, the extent to which are not known
at this time. Also, impacting this estimate is the level of contamination
discovered, as we begin remediation, and the related clean-up standards which
must be met in order to dispose of or sell the facility. We engaged our
engineering firm, SYA, to perform an analysis and related estimate of the cost
to complete the RCRA portion of the closure/clean-up costs and the potential
long-term remediation costs. Based upon this analysis, we arrived at our best
estimate of the cost of this environmental closure and remediation liability of
$2,464,000. We have spent approximately $464,000 of this closure cost estimate
since September 30, 2004, of which approximately $348,000 was spent in the first
six months of 2005. In the event we retain the PFMI facility, we anticipate
spending an additional $400,000 within the next year and the remainder over the
next two to five years.
7. OPERATING SEGMENTS
Pursuant to FAS 131, we define an operating segment as a business activity:
. from which we may earn revenue and incur expenses;
. whose operating results are regularly reviewed by the segment
president to make decisions about resources to be allocated to the
segment and assess its performance; and
. for which discrete financial information is available.
We have three operating segments, which are defined as each business line that
we operate. This however, excludes corporate headquarters, which does not
generate revenue, and our discontinued operation, PFMI.
14
Our operating segments are defined as follows:
The Industrial Waste Management Services segment provides on-and-off site
treatment, storage, processing and disposal of hazardous and non-hazardous
industrial waste, and wastewater through our seven facilities; Perma-Fix
Treatment Services, Inc., Perma-Fix of Dayton, Inc., Perma-Fix of Ft.
Lauderdale, Inc., Perma-Fix of Orlando, Inc., Perma-Fix of South Georgia, Inc.,
Perma-Fix of Maryland, Inc., and Perma-Fix of Pittsburgh, Inc. We provide
through certain of our facilities various waste management services to certain
governmental agencies.
The Nuclear Waste Management Services segment provides treatment, storage,
processing and disposal of nuclear, low-level radioactive, mixed (waste
containing both hazardous and non-hazardous constituents), hazardous and
non-hazardous waste through our three facilities; Perma-Fix of Florida, Inc.,
Diversified Scientific Services, Inc. and East Tennessee Materials and Energy
Corporation.
The Consulting Engineering Services segment provides environmental engineering
and regulatory compliance services through Schreiber, Yonley & Associates, Inc.
which includes oversight management of environmental restoration projects, air
and soil sampling and compliance and training activities to industrial and
government customers, as well as, engineering and compliance support needed by
our other segments.
15
The table below presents certain financial information in thousands by business
segment as of and for the three and six months ended June 30, 2005 and 2004.
SEGMENT REPORTING FOR THE QUARTER ENDED JUNE 30, 2005
Segments Corporate Consolidated
Industrial Nuclear Engineering Total (2) Total
----------- ----------- ----------- ----------- ----------- ------------
Revenue from external customers $ 10,853 $ 13,807(3) $ 699 $ 25,359 $ -- $ 25,359
Intercompany revenues 618 694 107 1,419 -- 1,419
Gross profit 959 6,242 142 7,343 -- 7,343
Interest income 1 -- -- 1 -- 1
Interest expense 157 173 4 334 47 381
Interest expense-financing fees -- -- -- -- 110 110
Depreciation and amortization 484 693 10 1,187 11 1,198
Segment profit (loss) (1,003) 4,003 42 3,042 (1,638) 1,404
Segment assets(1) 25,715 61,230 2,218 89,163 7,787(4) 96,950
Expenditures for segment assets 217 574 3 794 18(4) 812
Total long-term debt 1,476 3,867 27 5,370 11,162(5) 16,532
SEGMENT REPORTING FOR THE QUARTER ENDED JUNE 30, 2004
Segments Corporate Consolidated
Industrial Nuclear Engineering Total (2) Total
----------- ----------- ----------- ----------- ----------- ------------
Revenue from external customers $ 9,791 $ 8,509(3) $ 828 $ 19,128 $ -- $ 19,128
Intercompany revenues 709 861 158 1,728 -- 1,728
Gross profit 2,274 3,160 269 5,703 -- 5,703
Interest income 1 -- -- 1 -- 1
Interest expense 183 415 -- 598 (23) 575
Interest expense-financing fees -- 1 -- 1 256 257
Depreciation and amortization 574 659 7 1,240 10 1,250
Segment profit (loss) 298 1,332 125 1,755 (1,166) 589
Segment assets(1) 37,166 58,736 2,192 98,094 16,383(4) 114,477
Expenditures for segment assets 38 867 9 914 66(4) 980
Total long-term debt 1,766 8,105 34 9,905 13,869(5) 23,774
SEGMENT REPORTING FOR THE SIX MONTHS ENDED JUNE 30, 2005
Segments Corporate Consolidated
Industrial Nuclear Engineering Total (2) Total
----------- ----------- ----------- ----------- ----------- ------------
Revenue from external customers $ 20,802 $ 24,703(3) $ 1,462 $ 46,967 $ -- $ 46,967
Intercompany revenues 1,239 1,440 222 2,901 -- 2,901
Gross profit 2,759 9,787 298 12,844 -- 12,844
Interest income 2 -- -- 2 -- 2
Interest expense 364 347 6 717 76 793
Interest expense-financing fees -- 1 -- 1 220 221
Depreciation and amortization 973 1,389 20 2,382 21 2,403
Segment profit (loss) (1,248) 5,650 73 4,475 (3,025) 1,450
Segment assets(1) 25,715 61,230 2,218 89,163 7,787(4) 96,950
Expenditures for segment assets 660 874 10 1,544 24(4) 1,568
Total long-term debt 1,476 3,867 27 5,370 11,162(5) 16,532
SEGMENT REPORTING FOR THE SIX MONTHS ENDED JUNE 30, 2004
Segments Corporate Consolidated
Industrial Nuclear Engineering Total (2) Total
----------- ----------- ----------- ----------- ----------- ------------
Revenue from external customers $ 16,399 $ 17,984(3) $ 1,556 $ 35.939 $ -- $ 35,939
Intercompany revenues 949 1,849 219 3,017 -- 3,017
Gross profit 2,594 6,523 436 9,553 -- 9,553
Interest income 2 -- -- 2 -- 2
Interest expense 344 869 -- 1,213 27 1,240
Interest expense-financing fees -- 1 -- 1 512 513
Depreciation and amortization 993 1,308 14 2,315 15 2,330
Segment profit (loss) (1,228) 2,599 193 1,564 (2,420) (856)
Segment assets(1) 37,166 58,736 2,192 98,094 16,383(4) 114,477
Expenditures for segment assets 378 1,529 17 1,924 129(4) 2,053
Total long-term debt 1,766 8,105 34 9,905 13,869(5) 23,774
16
(1) Segment assets have been adjusted for intercompany accounts to reflect
actual assets for each segment.
(2) Amounts reflect the activity for corporate headquarters not included in
the segment information.
(3) The consolidated revenues within the Nuclear Waste Services segment
include the Bechtel Jacobs revenues for the quarter and six months ended
June 30, 2005, which total $4,761,000 or 18.8% and $6,407,000 or 13.7%
of total revenue and $2,609,000 or 13.7% and $4,125,000 or 11.5% for the
same periods in 2004.
(4) Segment assets include assets from Perma-Fix of Michigan, Inc., ("PFMI")
a discontinued operation from the Industrial segment, of approximately
$797,000 and $9,391,000 as of June 30, 2005 and 2004, respectively.
Expenditures for segment assets include expenditures from PFMI of $3,000
for the three and six months ended June 30, 2005, and $58,000 and
$77,000 for the three and six months ended June 30, 2004, respectively.
(5) Includes the balance outstanding from our revolving line of credit and
term loan, which is utilized by all of our segments.
17
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART I, ITEM 2
FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be deemed "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(collectively, the "Private Securities Litigation Reform Act of 1995"). All
statements in this report other than a statement of historical fact are
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors, which could cause actual results and
performance of the Company to differ materially from such statements. The words
"believe," "expect," "anticipate," "intend," "will," and similar expressions
identify forward-looking statements. Forward-looking statements contained herein
relate to, among other things,
. improve our operations and liquidity;
. anticipated improvement in the financial performance of the Company;
. ability to comply with the Company's general working capital
requirements;
. ability to be able to continue to borrow under the Company's revolving
line of credit;
. ability to generate sufficient cash flow from operations to fund all
costs of operations and remediation of certain formerly leased property
in Dayton, Ohio, and the Company's facilities in Memphis, Tennessee;
Detroit, Michigan; Valdosta, Georgia; Ft. Lauderdale, Florida; and
Tulsa, Oklahoma;
. ability to remediate certain contaminated sites for projected amounts;
. ability to fund budgeted capital expenditures during 2005;
. increasing other sources of revenue at M&EC;
. growth of our Nuclear segment; o expectation that there will be a
further decline in Section 404 of Sarbanes-Oxley related third party
changes for the third and fourth quarters of 2005.
. ability to close and remediate the Michigan facility for the estimated
amounts; and
. no expectation to close any facilities, other than the Michigan
facility.
While the Company believes the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance such expectations will prove
to have been correct. There are a variety of factors, which could cause future
outcomes to differ materially from those described in this report, including,
but not limited to:
. general economic conditions;
. material reduction in revenues;
. inability to collect in a timely manner a material amount of
receivables;
. increased competitive pressures;
. the ability to maintain and obtain required permits and approvals to
conduct operations;
. the ability to develop new and existing technologies in the conduct of
operations;
. ability to retain or renew certain required permits;
18
. discovery of additional contamination or expanded contamination at a
certain Dayton, Ohio, property formerly leased by the Company or the
Company's facilities at Memphis, Tennessee; Valdosta, Georgia; Detroit,
Michigan; Ft. Lauderdale, Florida; and Tulsa, Oklahoma, which would
result in a material increase in remediation expenditures;
. changes in federal, state and local laws and regulations, especially
environmental laws and regulations, or in interpretation of such;
. Fluctuation of variable interest rates could materially affect our
estimated future payments of interest on our variable rate debt.
. potential increases in equipment, maintenance, operating or labor costs;
. management retention and development;
. financial valuation of intangible assets is substantially less than
expected;
. termination of the Oak Ridge Contracts as a result of our lawsuit
against Bechtel Jacobs or otherwise;
. the requirement to use internally generated funds for purposes not
presently anticipated;
. inability to continue to be profitable on an annualized basis;
. the inability of the Company to maintain the listing of its Common Stock
on the NASDAQ;
. the determination that PFMI, PFSG, or PFO was responsible for a material
amount of remediation at certain superfund sites;
. terminations of contracts with federal agencies or subcontracts
involving federal agencies, or reduction in amount of waste delivered to
the Company under these contracts or subcontracts;
. determination that PFD is required to have a Title V air permit in
connection with its operations, or is determined to have violated
environmental laws or regulations in a material manner; and
The Company undertakes no obligations to update publicly any forward-looking
statement, whether as a result of new information, future events or otherwise.
OVERVIEW
We provide services through three reportable operating segments. The Industrial
Waste Management Services segment ("Industrial segment") is engaged in on-site
and off-site treatment, storage, disposal and processing of a wide variety of
by-products and industrial, hazardous and non-hazardous wastes, and with the
recent acquisitions, added 24-hour emergency response, vacuum services and
marine and industrial maintenance services. The segment operates and maintains
facilities and businesses in the waste by-product brokerage, on-site treatment
and stabilization, and off-site blending, treatment and disposal industries. The
Nuclear Waste Management Services segment ("Nuclear segment") provides
treatment, storage, processing and disposal services of mixed waste (waste
containing both hazardous and low-level radioactive materials) and low-level
radioactive wastes, including research, development and on-site and off-site
waste remediation. The presence of nuclear and low-level radioactive
constituents within the waste streams processed by this segment create different
and unique operational, processing and permitting/licensing requirements from
those contained within the Industrial segment. Our Consulting Engineering
Services segment ("Engineering segment") provides a wide variety of
environmental related consulting and engineering services to both industry and
government. These services include oversight management of environmental
restoration projects, air and soil sampling, compliance reporting, surface and
subsurface water treatment design for removal of pollutants, and various
compliance and training activities.
19
The second quarter of 2005 reflected a revenue increase of 32.6% or $6.2 million
over the same period of 2004, with both the Industrial and Nuclear segments
contributing to this increase. Revenues for the second quarter totaled $25.4
million, the highest quarterly revenue total in our history. The Nuclear segment
achieved a 62.3% or $5.3 million increase in revenues, which also represents the
highest Nuclear segment revenue quarter in our history. We continue to
experience growth and profitability within our Nuclear segment, which can be
partially attributed to increased shipments, favorable product mix, improvements
in our treatment processes and operational efficiencies. The Oak Ridge contracts
with Bechtel Jacobs have been extended through August 2005. We are currently
working with Bechtel Jacobs to extend these contracts through June 2007, with
several pricing modifications. However, there are no assurances we will be
successful in extending these contracts The Nuclear segment achieved a 45.2%
gross margin for the quarter and a segment profit of $4.0 million. In contrast,
the performance of the Industrial segment did not meet expectations this
quarter. Despite the encouraging increase in the Industrial segment revenues of
$1.1 million or 10.8%, the gross profit and net loss were well below our
established goals for the segment. We are continuing our evaluation of the
segment and the thorough review of the pricing and cost structure impacting
these results. As a result of the balance sheet restructuring activities of 2004
and improved cash flow, our interest expense for the second quarter was down
$194,000 and our interest expense-financing fees were down $147,000 from the
same period of 2004. On a consolidated basis we were able to achieve a $1.2
million net income applicable to Common Stock for the second quarter of 2005, an
increase of $1,165,000 over the same period of 2004. We also improved our
working capital position, continued to repay our long term debt, including the
prepayment of the $3.5 million unsecured promissory note which was due in August
2005, and strengthened our balance sheet during the quarter.
RESULTS OF OPERATIONS
The reporting of financial results and pertinent discussions are tailored to
three reportable segments: Industrial Waste Management Services ("Industrial"),
Nuclear Waste Management Services ("Nuclear") and Consulting Engineering
Services ("Engineering"). The table below should be used when reviewing
management's discussion and analysis for the three and six months ended June 30,
2005 and 2004:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------- -----------------------------------------
Consolidated (amounts in thousands) 2005 % 2004 % 2005 % 2004 %
- ---------------------------------------------------------------------------------------------------------------------------
Net revenues $ 25,359 100.0 $ 19,128 100.0 $ 46,967 100.0 $ 35,939 100.0
Cost of goods sold 18,016 71.0 13,425 70.2 34,123 72.7 26,386 73.4
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 7,343 29.0 5,703 29.8 12,844 27.3 9,553 26.6
Selling, general
and administrative 5,741 22.6 4,320 22.6 10,660 22.7 8,658 24.1
Gain on disposal of
property & equipment (337) (1.3) (1) -- (337) (.7) (18) --
-------- -------- -------- -------- -------- -------- -------- --------
Income from operations $ 1,939 7.7 $ 1,384 7.2 $ 2,521 5.3 $ 913 2.5
======== ======== ======== ======== ======== ======== ======== ========
Interest expense $ (381) (1.5) $ (575) (3.0) $ (793) (1.7) $ (1,240) (3.5)
Interest expense-financing fees (110) (.4) (257) (1.3) (221) (.5) (513) (1.4)
Other income (expense) (45) (.2) 36 .2 (59) (.1) (18) --
Income (loss) from
continuing operations 1,404 5.5 589 3.1 1,450 3.1 (856) (2.4)
Preferred Stock dividends (47) (.2) (47) (.2) (94) (.2) (94) (.3)
20
SUMMARY - THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
Net Revenue
Consolidated revenues increased for the three months ended June 30, 2005,
compared to the three months ended June 30, 2004, as follows:
(In thousands) 2005 % Revenue 2004 % Revenue Change % Change
- ------------------------------------------------------------------------------------------------------
Nuclear
- -------
Government waste $ 3,285 13.0 $ 2,131 11.1 $ 1,154 54.2
Hazardous/Non-hazardous 1,234 4.8 1,320 6.9 (86) (6.5)
Other nuclear waste 4,527 17.8 2,449 12.8 2,078 84.9
Bechtel Jacobs 4,761 18.8 2,609 13.7 2,152 82.5
--------- --------- --------- --------- ---------
Total 13,807 54.4 8,509 44.5 5,298 62.3
Industrial Revenues
- -------------------
Commercial waste 6,873 27.1 5,649 29.5 1,224 21.7
Government services 1,477 5.8 1,450 7.6 27 1.9
Acquisitions 2,503 9.9 2,692 14.1 (189) (7.0)
--------- --------- --------- --------- ---------
Total 10,853 42.8 9,791 51.2 1,062 10.8
Engineering 699 2.8 828 4.3 (129) (18.5)
- ----------- --------- --------- --------- --------- ---------
Total $ 25,359 100.0 $ 19,128 100.0 $ 6,231 32.6
========= ========= ========= ========= =========
We experienced revenue growth in both the Nuclear and Industrial segments during
the second quarter of 2005. The increase in the Nuclear segment is partially due
to an overall increase in the Bechtel Jacobs revenue, as a result of increased
receipts, processing and disposal revenue realized for the quarter. This
increase in the quarter is partially due to our efforts to have Bechtel Jacobs
expand the shipments of waste typically received during the third quarter, over
a longer time period, as well as Bechtel Jacobs' need to reach certain milestone
goals. The Oak Ridge contracts revenue is included under Bechtel Jacobs.
Government waste revenue also increased during the quarter, as a result of
additional receipts from newer contracts and the need to meet certain deadlines
imposed on the contractors. Additionally, the increase is due to continued
growth within the mixed waste market as our facilities demonstrate their ability
to accept and process more complex waste streams, including additional
contracts, such as a contract awarded by a Fortune 500 company in late June 2004
to treat and dispose of mixed waste from research and development activities.
See "Known Trends and Uncertainties - Significant Contracts" of this
Management's Discussion and Analysis. The increase in revenues in the Industrial
segment was related to increased commercial waste revenue, primarily due to
additional sales from the cruise line industry, increased oil sales, and an
expanded contract to service a national home improvement chain. The expanded
contract increased the service area as well as extended the term of the contract
for two years.
21
Consolidated revenues increased for the six months ended June 30, 2005, compared
to the six months ended June 30, 2004, as follows:
(In thousands) 2005 % Revenue 2004 % Revenue Change % Change
- ------------------------------------------------------------------------------------------------------
Nuclear
- -------
Government waste $ 8,451 18.0 $ 7,592 21.1 $ 859 11.3
Hazardous/Non-hazardous 2,785 5.9 1,651 4.6 1,134 68.7
Other nuclear waste 7,060 15.0 4,616 12.9 2,444 52.9
Bechtel Jacobs 6,407 13.7 4,125 11.5 2,282 55.3
--------- --------- --------- --------- ---------
Total 24,703 52.6 17,984 50.1 6,719 37.4
Industrial Revenues
- -------------------
Commercial waste 12,994 27.7 10,326 28.7 2,668 25.8
Government services 2,797 6.0 2,876 8.0 (79) (2.7)
Acquisitions 5,011 10.6 3,197 8.9 1,814 56.7
--------- --------- --------- --------- ---------
Total 20,802 44.3 16,399 45.6 4,403 26.8
Engineering 1,462 3.1 1,556 4.3 (94) (6.0)
- ----------- --------- --------- --------- --------- ---------
Total $ 46,967 100.0 $ 35,939 100.0 $ 11,028 30.7
========= ========= ========= ========= =========
We experienced revenue growth in both the Nuclear and Industrial segments during
the first six months of 2005. As with the quarter, the increase in the Nuclear
segment for the six months is partially due to an increase in the Bechtel Jacobs
revenue, and overall government waste revenue. The Oak Ridge contracts revenue
is included under Bechtel Jacobs. Additionally, the increase is due to the
continued growth within the mixed waste market as our facilities demonstrate
their ability to accept and process more complex waste streams, including
additional contracts, such as the contract awarded by a Fortune 500 company, as
discussed above. See "Known Trends and Uncertainties - Significant Contracts" of
this Management's Discussion and Analysis for discussion on the Fortune 500
contract and the Oak Ridge contracts, including renewal negotiations. Nuclear
segment revenues from hazardous and non-hazardous waste streams also increased
as a result of the special event soil projects performed for existing industrial
customers. The backlog of stored waste within the Nuclear segment at June 30,
2005, was approximately $14,924,000, compared to $16,247,000 at December 31,
2004. The increase in revenues in the Industrial segment was principally related
to increased commercial waste revenue, due to additional sales from the cruise
line industry, increased oil sales, and an expanded contract to service a
national home improvement chain. The Industrial segment revenues also increased
as a result of revenues from two facilities acquired in March 2004.
Cost of Goods Sold
Cost of goods sold increased for the quarter ended June 30, 2005, compared to
the quarter ended June 30, 2004, as follows:
(In thousands) 2005 % Revenue 2004 % Revenue Change
- ------------------------------------------------------------------------------------------
Nuclear $ 7,565 54.8 $ 5,349 62.9 $ 2,216
Industrial 9,894 91.2 7,517 76.8 2,377
Engineering 557 79.7 559 67.5 (2)
--------- --------- ---------
Total $ 18,016 71.0 $ 13,425 70.2 $ 4,591
========= ========= =========
22
The increase in cost of goods sold was present in both the Nuclear and
Industrial segments. The increase in the Industrial segment predominantly
correlates to the additional revenues, which is principally a result of
increased disposal, transportation and other operating material costs associated
with the increase in revenue. The segment also experienced an increase due to
unexpected PCB contamination of our fuel oil inventory and other one time
processing related expenses. The PCB contamination was due to one of our
facilities inadvertently receiving PCB contaminated oil at levels greater than
its permit allows, resulting in this facility having to record an accrual to
remediate the PCB contamination at an estimated cost of approximately $398,000
during the second quarter of 2005. The Nuclear segment increase principally
relates to the additional revenues during the quarter, however, as a result of
improved processing efficiencies, the percentage increase wasn't as great as the
increase in revenues. The Engineering segment remained relatively constant, but
as a percentage of revenue increased due to the high fixed cost nature of the
segment. Included within cost of goods sold is depreciation and amortization
expense of $1,112,000 and $1,185,000 for the quarters ended June 30, 2005 and
2004, respectively, reflecting a decrease of $73,000 over 2004. As a percentage
of revenue, cost of goods sold increased by 0.8%.
Cost of goods sold increased for the six months ended June 30, 2005, compared to
the six months ended June 30, 2004, as follows:
(In thousands) 2005 % Revenue 2004 % Revenue Change
- ------------------------------------------------------------------------------------------
Nuclear $ 14,916 60.4 $ 11,461 63.7 $ 3,455
Industrial 18,043 86.7 13,805 84.2 4,238
Engineering 1,164 79.6 1,120 72.0 44
--------- --------- ---------
Total $ 34,123 72.7 $ 26,386 73.4 $ 7,737
========= ========= =========
The increase in cost of goods sold was experienced among all segments. The
increase in the Industrial segment partially correlates to the additional cost
of goods sold of $2,246,000 associated with the two facilities acquired, as of
March 23, 2004. In addition to the increase in operating costs discussed above,
the Industrial segment experienced an increase related to the increase in
revenue from the expanded contract to service a national home improvement chain.
The Nuclear segment increase principally relates to the additional revenues
experienced by the segment, and the additional costs of payroll, disposal, and
transportation associated with those revenues. The Engineering segment also
experienced an increase primarily related to increased payroll costs associated
with internal permit renewal and compliance related projects. Included within
cost of goods sold is depreciation and amortization expense of $2,225,000 and
$2,207,000 for the six months ended June 30, 2005 and 2004, respectively,
reflecting a decrease of $105,000 over 2004. As a percentage of revenue, cost of
goods sold decreased by 0.7%.
Gross Profit
Gross profit for the quarter ended June 30, 2005, increased over 2004, as
follows:
(In thousands) 2005 % Revenue 2004 % Revenue Change
- ------------------------------------------------------------------------------------------
Nuclear $ 6,242 45.2 $ 3,160 37.1 $ 3,082
Industrial 959 8.8 2,274 23.2 (1,315)
Engineering 142 20.3 269 32.5 (127)
--------- --------- ---------
Total $ 7,343 29.0 $ 5,703 29.8 $ 1,640
========= ========= =========
23
The resulting gross profit increase is due to the Nuclear segment reflecting the
incremental value of increased revenues and the favorable product mix during the
quarter. Also, impacting the increase are improved margins from handling more
complex and diverse waste. Offsetting this increase in gross profit, was a
decrease in the Industrial segment as a result of the lower margin revenue mix
and increased cost of goods sold related to PCB contamination at one of our
facilities, as discussed above, and other one time processing charges. The
Engineering segment also experienced a decrease in gross profit principally as a
result of decreased revenues. Gross profit as a percentage of revenue
experienced a slight decrease due to the increased cost of goods sold for the
Industrial segment, explained above. The decrease in the gross profit percentage
was reduced by an increase in the gross profit percentage from the Nuclear
segment due to improved efficiencies in the segment as it matures.
Gross profit for the six months ended June 30, 2005, increased over 2004, as
follows:
(In thousands) 2005 % Revenue 2004 % Revenue Change
- ------------------------------------------------------------------------------------------
Nuclear $ 9,787 39.6 $ 6,523 36.3 $ 3,264
Industrial 2,759 13.3 2,594 15.8 165
Engineering 298 20.4 436 28.0 (138)
--------- --------- ---------
Total $ 12,844 27.3 $ 9,553 26.6 $ 3,291
========= ========= =========
The resulting gross profit increase is principally attributable to the Nuclear
segment reflecting the incremental value of increased revenues and the favorable
product mix during the six months. The increase is also impacted by improved
margins from handling more complex and diverse waste. The Industrial segment
experienced an increase in gross profit. However, as a percentage of revenue the
segment experienced a decrease as a result of the lower margin revenue mix,
increased cost of goods sold related to PCB contamination at one of our
facilities and other one time processing charges. The Engineering segment also
experienced a decrease in gross profit as a result of decreased revenues. Gross
profit as a percentage of revenue experienced a slight increase and was impacted
by the increased cost of goods sold for the Industrial segment, explained above.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased for the three
months ended June 30, 2005, as compared to the corresponding period for 2004, as
follows:
(In thousands) 2005 % Revenue 2004 % Revenue Change
- ------------------------------------------------------------------------------------------
Administrative $ 1,481 -- $ 937 -- $ 544
Nuclear 2,063 14.9 1,436 16.9 627
Industrial 2,100 19.3 1,797 18.4 303
Engineering 97 13.9 150 18.1 (53)
--------- --------- ---------
Total $ 5,741 22.6 $ 4,320 22.6 $ 1,421
========= ========= =========
The change in the corporate administrative overhead is due to increased payroll
and benefits, as a result of our focus on strengthening our corporate governance
structure and information services infrastructures. The corporate overhead
increase is also from a refund in 2004 due to an insurance audit, which we did
not benefit from in 2005, and due to legal and environmental consulting fees
related to an extensive internal review we have performed at our Industrial
facility in Dayton, Ohio. The increase in SG&A in the Nuclear segment was a
result of increased payroll and benefits, and general administrative expenses as
the segment works to build a stronger management and support team. The
Industrial segment also experienced an increase in SG&A from increased payroll
and benefits, as well as legal fees and other costs incurred to supply documents
in connection with an investigation of an unrelated entity, Wabash Environmental
Technologies ("Wabash"). For further discussion on our review of our Dayton
facility and Wabash, see Known Trends and Uncertainties later in this
Management's Discussion and Analysis. SG&A expense includes depreciation and
amortization expense of $86,000 and $65,000 for the quarters ended June 30, 2005
and 2004, respectively.
24
SG&A expenses increased for the six months ended June 30, 2005, as compared to
the corresponding period for 2004, as follows:
(In thousands) 2005 % Revenue 2004 % Revenue Change
- ------------------------------------------------------------------------------------------
Administrative $ 2,729 -- $ 1,825 -- $ 904
Nuclear 3,773 15.3 3,074 17.1 699
Industrial 3,938 18.9 3,502 21.3 436
Engineering 220 15.0 257 16.5 (37)
--------- --------- ---------
Total $ 10,660 22.7 $ 8,658 24.1 $ 2,002
========= ========= =========
As with the quarter, the change in the corporate administrative overhead is due
to increased payroll and benefits, as a result of our focus on corporate
governance and information services, the insurance refund in 2004 due to an
insurance audit, and legal and environmental consulting fees related to the
extensive internal review performed on our treatment of certain waste at our
Industrial facility in Dayton, Ohio. The increase in administrative overhead was
also from third party charges incurred for additional audit fees, and compliance
work performed with regard to Sarbanes Oxley and completion of the related
internal control assessment required under Section 404 of the Act. As we have
completed the initial year of assessment and documentation we are seeing a
decline in the third party charges related to Section 404 and expect to see a
further decline in the third and fourth quarters of 2005, as compared to the
same periods of 2004, which reflect the bulk of Section 404 expenditures for the
initial year. The increase in SG&A in the Nuclear segment was a result of
increased payroll and benefits, as the segment works to build stronger
management and support team, and increased franchise taxes. The increase in the
Industrial segment was also from increased payroll and benefits, legal fees and
other costs incurred to supply documents in connection with an investigation of
Wabash, an unrelated entity. For further discussion on our review of our Dayton
facility and Wabash, see Known Trends and Uncertainties later in this
Management's Discussion and Analysis. Included in the increase in the Industrial
segment were the full six months of expenses related to the two facilities
acquired, effective March 23, 2004. SG&A expense includes depreciation and
amortization expense of $178,000 and $123,000 for the six months ended June 30,
2005 and 2004, respectively.
Gain on Disposal of Property and Equipment
During June 2005, we sold property at our facility in Maryland. The sale was
for net proceeds of $695,000, for land and building with a net book value of
$332,000. The resulting gain of $363,000 was included in income from operations,
and was partially offset by losses on disposal of other equipment of
approximately $26,000.
Interest Expense
Interest expense decreased for the quarter and six months ended June 30, 2005,
as compared to the corresponding period of 2004.
Three Months Six Months
--------------------------------- ---------------------------------
(In thousands) 2005 2004 Change 2005 2004 Change
---------------------------------------------------------------------
PNC interest $ 159 $ 141 $ 18 $ 354 $ 343 $ 11
AMI/BE -- 190 (190) -- 380 (380)
Other 222 244 (22) 439 517 (78)
--------- --------- --------- --------- --------- ---------
Total $ 381 $ 575 $ (194) $ 793 $ 1,240 $ (447)
========= ========= ========= ========= ========= =========
25
This decrease principally reflects the impact of the prepayment in full of the
AMI/BE 13.5% senior subordinated debt in August 2004. We also experienced a
decrease in interest expense due to the final repayment of debt associated with
our 1999 acquisitions, which was completed in June 2004, and from the final
repayment of debt to various other lenders as our overall debt position
continues to improve. Offsetting these decreases, was an increase in PNC
interest which was a result of a decreased revolver balance in 2004, between the
time the equity was raised in our private placement during March 2004, and the
AMI/BE debt was paid.
Interest Expense - Financing Fees
Interest expense-financing fees decreased approximately $147,000 for the quarter
ended June 30, 2005, as compared to the corresponding period of 2004. This
decrease was principally due to the write-off of $1,217,000 of prepaid financing
fees and debt discount associated with the early termination of senior
subordinated notes, which were paid in full in August 2004. The remaining
financing fees are principally associated with the PNC revolving credit and term
loan, and are amortized to expense over the term of the loan agreements. As of
June 30, 2005, the unamortized balance of prepaid financing fees is $507,000,
which is comprised of $220,000 from the original debt and $287,000 associated
with Amendment No. 4 and Amendment No. 5. These prepaid financing fees will be
amortized through May 2008.
Interest expense-financing fees decreased approximately $292,000 for the six
months ended June 30, 2005, as compared to the corresponding period of 2004.
This decrease was principally due to the write-off of $1,217,000 of prepaid
financing fees and debt discount associated with the early termination of senior
subordinated notes, which were paid in full in August 2004.
Preferred Stock Dividends
Preferred Stock dividends remained constant at approximately $47,000 for the
three months ended June 30, 2005, and 2004, and $94,000 for the six months ended
June 30, 2005 and 2004. The Preferred dividends are comprised of approximately
$31,000 and $62,000 in dividends from our Series 17 Preferred Stock for the
three and six months, respectively, and $16,000 and $32,000 from the accrual of
preferred dividends on the Preferred Stock of our subsidiary, M&EC, for the
three and six months, respectively.
DISCONTINUED OPERATIONS
On October 4, 2004, our Board of Directors approved the discontinuation of
operations at the facility in Detroit, Michigan, owned by our subsidiary,
Perma-Fix of Michigan, Inc. ("PFMI"). The decision to discontinue operations at
the Detroit facility was principally a result of two fires that significantly
disrupted operations at the facility in 2003, and the facility's continued drain
on the financial resources of our Industrial segment. We are in the process of
remediating the facility and evaluating our available options for future use or
sale of the property. The operating activities for the current and prior periods
have been reclassified to discontinued operations in our Consolidated Statements
of Operations.
Expenses of $122,000 and $289,000 were recorded during the three and six months
ended June 30, 2005, respectively. PFMI recorded revenues of $740,000 and
$1,398,000, and operating losses of $472,000 and $1,025,000 for the three and
six months ended June 30, 2004. Assets and liabilities related to the
discontinued operation have been reclassified to separate categories in the
Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004. As of
June 30, 2005, assets are recorded at their net realizable value, and consist of
property and equipment of $603,000, and receivables of $194,000, which includes
$190,000 for estimated insurance proceeds. We submitted three insurance claims
relative to the two fires at PFMI, a property claim for the first fire and a
property claim and business interruption claim for the second fire. During the
second quarter of 2005, we received a partial payment of $1,500,000 less
adjustor fees of approximately $105,000, for a net payment of $1,395,000 from
the insurance carrier on the business interruption claim. We are currently
negotiating remaining settlement for the claims, but at this time we cannot
estimate actual proceeds to be received. Additional proceeds, beyond the
remaining balance, if any, received on these claims will be recorded as income
from discontinued operations. Liabilities as of June 30, 2005, consist of
accounts payable and current accrued expenses of $1,835,000 and environmental
accruals of $2,000,000.
26
Included in current accruals is a pension plan withdrawal liability, which is a
result of the termination of substantially all of the union employees of PFMI.
The PFMI union employees participate in the Central States Teamsters Pension
Fund ("CST"), which provides that a partial or full termination of union
employees may result in a withdrawal liability, due from PFMI to CST. At June
30, 2005, we had a recorded pension withdrawal liability of $1,680,000, based
upon an actuarial study. This withdrawal liability represents our best estimate,
and is subject to numerous factors such as the date and timing of union employee
terminations, partial versus complete termination status, the pension funds
unfunded vested benefit liability and PFMI's portion of such liability. This
obligation is recorded as a current liability, but may not be paid out in the
current year due to the timing of the termination event and process of
determining the final liability.
As a result of the discontinuation of operations at the PFMI facility, we are
required to complete certain closure and remediation activities pursuant to our
RCRA permit. Also, in order to close and dispose of the facility, we may have to
complete certain additional remediation activities related to the land,
building, and equipment. The level and cost of the clean-up and remediation will
be determined by state mandated requirements, the extent to which are not known
at this time. Also, impacting this estimate is the level of contamination
discovered, as we begin remediation, and the related clean-up standards which
must be met in order to dispose of or sell the facility. We engaged our
engineering firm, SYA, to perform an analysis and related estimate of the cost
to complete the RCRA portion of the closure/clean-up costs and the potential
long-term remediation costs. Based upon this analysis, we arrived at our best
estimate of the cost of this environmental closure and remediation liability of
$2,464,000. We have spent approximately $464,000 of this closure cost estimate
since September 30, 2004, of which approximately $348,000 was spent in the first
six months of 2005. In the event we retain the PFMI facility, we anticipate
spending an additional $400,000 within the next year and the remainder over the
next two to five years.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
Our capital requirements consist of general working capital needs, scheduled
principal payments on our debt obligations and capital leases, remediation
projects and planned capital expenditures. Our capital resources consist
primarily of cash generated from operations, funds available under our revolving
credit facility and proceeds from issuance of our Common Stock. Our capital
resources are impacted by changes in accounts receivable as a result of revenue
fluctuation, economic trends, collection activities, and the profitability of
the segments.
At June 30, 2005, we had cash of $100,000. The following table reflects the cash
flow activities during the first six months of 2005.
(In thousands) 2005
-----------------------------------------------
Cash provided by operations $ 4,122
Cash used in investing activities (1,396)
Cash used in financing activities (2,841)
----------
Decrease in cash $ (115)
==========
We are in a net borrowing position and therefore attempt to move all excess cash
balances immediately to the revolving credit facility, so as to reduce debt and
interest expense. We utilize a centralized cash management system, which
includes remittance lock boxes and is structured to accelerate collection
activities and reduce cash balances, as idle cash is moved without delay to the
revolving credit facility. The cash balance at June 30, 2005, primarily
represents minor petty cash and local account balances used for miscellaneous
services and supplies.
27
Operating Activities
Accounts Receivable, net of allowances for doubtful accounts, totaled
$26,678,000, a decrease of $514,000 from the December 31, 2004, balance of
$27,192,000. Included in this decrease, was a decrease in the accounts
receivable from the Industrial segment of $1,495,000 primarily resulting from
increased collection efforts, due to increased staffing and focus on receivables
collection. The Engineering segment also experienced a decrease of $26,000. The
Nuclear segment experienced an increase of $1,007,000 as a result of higher
revenues in the second quarter and the complexity involved with government
accounts which require a greater amount of documentation that results in delays
in the collection of these receivables.
As of June 30, 2005, total consolidated accounts payable was $6,788,000, an
increase of $259,000 from the December 31, 2004, balance of $6,529,000. Accounts
payable increased due to additional operating expenses associated with increased
revenues during the second quarter of 2005. Included in this increase are
invoices related to a large contaminated soil job completed in the second
quarter and previously accrued hazardous waste taxes payable at the beginning of
the third quarter. Additionally, accounts payable increased as we continue to
fund capital expenditures through the use of working capital.
Accrued Expenses as of June 30, 2005, totaled $11,027,000, a decrease of
$1,073,000 from the December 31, 2004, balance of $12,100,000. Accrued expenses
are made up of disposal and processing cost accruals, accrued compensation,
interest payable, insurance payable and certain tax accruals. The decrease to
accrued expenses was principally a result of payments made in the first and
second quarters for insurance payables of $1,196,000, royalty settlement
payments of $225,000, and other environmental issue payments related to Title V
air issues, offset by increases in other operational accruals.
The working capital position at June 30, 2005, was $2,235,000 as compared to a
working capital deficit of $497,000 at December 31, 2004. The increase in this
position of $2,732,000 is principally a result of the current liabilities
decrease of $5,808,000, partially offset by a decrease in current assets of
$3,076,000. The decrease in current liabilities is principally a result of the
prepayment of the unsecured promissory note in the amount of $3,500,000 plus
interest of $202,000. Additionally, current liabilities decreased as a result of
payments of liabilities utilizing improved cash flow generated from greater
profitability, the receipt of cash related to the sale of property in Maryland
and the receipt of the partial payment on insurance claims. Our working capital
position continues to experience the negative impact of certain liabilities
associated with discontinued operations.
Investing Activities
Our purchases of capital equipment for the six-month period ended June 30, 2005,
totaled approximately $1,568,000 of which $465,000 was financed, resulting in
$1,103,000, funded out of cash flow. These expenditures were for expansion and
improvements to the operations principally within the Nuclear and Industrial
segments. These capital expenditures were principally funded by the cash
provided by operations, and through various other lease financing. We budgeted
capital expenditures of approximately $6,000,000 for fiscal year 2005, which
includes an estimated $523,000 to complete certain current projects in process
at December 31, 2004, as well as other identified capital and permit compliance
purchases. Our purchases during the first six months of 2005 include
approximately $233,000 of those projects in process at December 31, 2004.
Certain of these budgeted projects are discretionary and may either be delayed
until later in the year or deferred altogether. Historically, our actual capital
spending for a given year has been less than initial budget amount. The
initiation and timing of projects are also determined by financing alternatives
or funds available for such capital projects. We anticipate funding these
capital expenditures by a combination of lease financing, internally generated
funds, and/or the proceeds received from Warrant exercises.
28
In June 2003, we entered into a 25-year finite risk insurance policy, which
provides financial assurance to the applicable states for our permitted
facilities in the event of unforeseen closure. Prior to obtaining or renewing
operating permits we are required to provide financial assurance that guarantees
to the states that in the event of closure our permitted facilities will be
closed in accordance with the regulations. The policy provides $35 million of
financial assurance coverage of which the coverage amount totals $28,546,000 at
June 30, 2005, and has available capacity to allow for annual inflation and
other performance and surety bond requirements. This finite risk insurance
policy required an upfront payment of $4.0 million, of which $2,766,000
represents the full premium for the 25-year term of the policy, and the
remaining $1,234,000, to be deposited in a sinking fund account representing a
restricted cash account. Additionally, in February 2004 and 2005, we paid the
first and second of nine required annual installments of $1,004,000, of which
$991,000 was deposited in the sinking fund account, the remaining $13,000
represents a terrorism premium. As of June 30, 2005, we have recorded $3,216,000
in our sinking fund on the balance sheet. On the fourth and subsequent
anniversaries of the contract inception, we may elect to terminate this
contract. If we so elect, the Insurer will pay us an amount equal to 100% of the
sinking fund account balance in return for complete releases of liability from
both us and any applicable regulatory agency using this policy as an instrument
to comply with financial assurance requirements.
On March 23, 2004, our subsidiary, PFMD completed it's acquisition of certain
assets of A&A and our subsidiary, PFP completed its acquisition of certain
assets of EMAX. We paid $2,915,000 in cash for the acquired assets and assumed
liabilities of A&A and EMAX, using funds received in connection with the private
placement discussed below, under financing activities.
Financing Activities
On December 22, 2000, we entered into a Revolving Credit, Term Loan and Security
Agreement ("Agreement") with PNC Bank, National Association, a national banking
association ("PNC") acting as agent ("Agent") for lenders, and as issuing bank.
The Agreement provided for a term loan ("Term Loan") in the amount of
$7,000,000, which requires principal repayments based upon a seven-year
amortization, payable over five years, with monthly installments of $83,000 and
the remaining unpaid principal balance due on December 22, 2005. The Agreement
also provided for a revolving line of credit ("Revolving Credit") with a maximum
principal amount outstanding at any one time of $18,000,000, as amended. The
Revolving Credit advances are subject to limitations of an amount up to the sum
of (a) up to 85% of Commercial Receivables aged 90 days or less from invoice
date, (b) up to 85% of Commercial Broker Receivables aged up to 120 days from
invoice date, (c) up to 85% of acceptable Government Agency Receivables aged up
to 150 days from invoice date, and (d) up to 50% of acceptable unbilled amounts
aged up to 60 days, less (e) reserves Agent reasonably deems proper and
necessary. As of June 30, 2005, the excess availability under our Revolving
Credit was $10,217,000 based on our eligible receivables.
Effective March 25, 2005, the Company and PNC entered into an amended agreement
(Amendment No. 4), which, among other things, extends the $25 million credit
facility through May 31, 2008. The other terms of the credit facility remain
principally unchanged, as a result of the amendment, with the exception of a 50
basis point reduction in the variable interest rate on both loans.
On June 29, 2005, we entered into an amendment ("Amendment No. 5") to the
Agreement. Pursuant to Amendment No. 5, PNC increased our Term Loan by
approximately $4.4 million, resulting in a Term Loan of $7 million. Under
Amendment No. 5, the Term Loan continues to be payable in monthly installments
of approximately $83,000, plus accrued interest, with the remaining unpaid
principal balance and accrued interest, payable in May 2008, upon termination of
the amended Agreement. As part of Amendment No. 5, certain of our subsidiaries
have modified or granted mortgages to PNC on their facilities, in addition to
the collateral previously granted to PNC under the Agreement. All other terms
and conditions to the Agreement, remain principally unchanged. We used the
additional loan proceeds to prepay a $3.5 million unsecured promissory note,
which was due and payable in August 2005, and the balance was used for general
working capital. As a condition of Amendments No. 4 and 5, we paid a $140,000
fee to PNC.
29
Pursuant to the Agreement, as amended, the Term Loan bears interest at a
floating rate equal to the prime rate plus 1%, and the Revolving Credit at a
floating rate equal to the prime rate plus 1/2%. The loans are subject to a
prepayment fee of 1% until March 25, 2006, and 1/2% until March 25, 2007.
On August 31, 2000, as part of the consideration for the purchase of Diversified
Scientific Services, Inc. ("DSSI"), we issued to Waste Management Holdings a
long-term unsecured promissory note (the "Unsecured Promissory Note") in the
aggregate principal amount of $3,500,000, bearing interest at a rate of 7% per
annum and having a five-year term with interest to be paid annually and
principal due in one lump sum at the end of the term of the Unsecured Promissory
Note (August 2005). This debt balance was reclassed in its entirety from long
term to current in the third quarter of 2004. We utilized the proceeds of the
amended agreement with PNC, mentioned above, to repay this note in June 2005.
In conjunction with our acquisition of M&EC, M&EC issued a promissory note for a
principal amount of $3.7 million to Performance Development Corporation ("PDC"),
dated June 25, 2001, for monies advanced to M&EC for certain services performed
by PDC. The promissory note is payable over eight years on a semiannual basis on
June 30 and December 31. The principal repayments for 2005 will be approximately
$400,000 semiannually. Interest is accrued at the applicable law rate
("Applicable Rate") pursuant to the provisions of section 6621 of the Internal
Revenue Code of 1986 as amended. (8% on June 30, 2005) and payable in one lump
sum at the end of the loan period. On June 30, 2005, the outstanding balance was
$3,854,000 including accrued interest of approximately $1,220,000. PDC has
directed M&EC to make all payments under the promissory note directly to the IRS
to be applied to PDC's obligations under its installment agreement with the IRS.
Additionally, M&EC entered into an installment agreement with the Internal
Revenue Service ("IRS") for a principal amount of $923,000 effective June 25,
2001, for certain withholding taxes owed by M&EC. The installment agreement is
payable over eight years on a semiannual basis on June 30 and December 31. The
principal repayments for 2005 will be approximately $100,000 semiannually.
Interest is accrued at the Applicable Rate, and is adjusted on a quarterly basis
and payable in lump sum at the end of the installment period. On June 30, 2005,
the rate was 8%. On June 30, 2005, the outstanding balance was $949,000
including accrued interest of approximately $296,000.
On March 22, 2004, we completed a private placement for gross proceeds of
approximately $10,386,000 through the sale of 4,616,113 shares of our Common
Stock at $2.25 per share and Warrants to purchase an additional 1,615,638 shares
of our Common Stock exercisable at $2.92 per share and a term of three years.
The private placement was sold to fifteen accredited investors. The net cash
proceeds received of $9,870,000, after paying placement agent fees, and other
related expenses, were used in connection with the acquisitions of certain
acquired assets of A&A and EMAX discussed above, and to pay down the Revolving
Credit. We subsequently reborrowed the private placement funds from the
revolving credit facility in August 2004, and prepaid the higher interest, 13.5%
Notes, as discussed above. We also issued Warrants to purchase an aggregate of
160,000 shares of our Common Stock, exercisable at $2.92 per share and with a
three year term, for consulting services related to the private placement.
We have outstanding 2,500 shares of Preferred Stock, with each share having a
liquidation preference of $1,000 ("Liquidation Value"). Annual dividends on the
Preferred Stock are 5% of the Liquidation Value. Dividends on the Preferred
Stock are cumulative, and are payable, if and when declared by our Board of
Directors, on a semiannual basis. Dividends on the outstanding Preferred Stock
may be paid at our option, if declared by the Board of Directors, in cash or in
shares of our Common Stock.
30
During 2005, accrued dividends for the period July 1, 2004, through December 31,
2004, in the amount of approximately $63,000 were paid in cash in March 2005.
The accrued dividends for the period January 1, 2005, through June 30, 2005, in
the amount of approximately $62,000 will be paid in August 2005.
In summary, we have continued to take steps to improve our operations and
liquidity, as discussed above. We have experienced the positive impact of
increased accounts receivable collections and increased availability under our
Revolving Credit. Additionally, accounts payable have remained relatively steady
and within terms. We have also been successful in reducing our overall debt
position. However, we continue to invest our working capital back into our
facilities to fund capital additions within both the Nuclear and Industrial
segments. Further offsetting these positives is the continued negative impact of
current reserves recorded on discontinued operations and the continuing losses
sustained by our Industrial segment. Although we have been able to increase the
revenues of our Industrial segment, we have not yet been able to bring this
segment into a profitable position. The reserves recorded on discontinued
operations could be reduced or paid over a longer period of time than initially
anticipated. If we are unable to remain profitable over the foreseeable future,
such would have a material adverse effect on our liquidity position.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at June 30, 2005, and
the effect such obligations are expected to have on our liquidity and cash flow
in future periods, (in thousands):
Payments due by period
-------------------------------------------------
2006 - 2009 - After
Contractual Obligations Total 2005 2008 2010 2010
- ------------------------------------ ---------- ---------- ---------- ---------- ----------
Long-term debt $ 16,532 $ 1,452 $ 14,935 $ 145 $ --
Interest on long-term debt (1) 1,516 -- 1,516 -- --
Interest on variable rate debt (2) 1,474 323 1,151 -- --
Operating leases 3,204 909 2,244 51 --
Finite risk policy (3) 7,026 -- 3,011 2,008 2,007
Pension withdrawal liability (4) 1,680 1,680 -- -- --
Environmental Contingencies (5) 4,680 491 3,164 349 676
Purchase obligations (6) -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total contractual obligations $ 36,112 $ 4,855 $ 26,021 $ 2,553 $ 2,683
========== ========== ========== ========== ==========
(1) Our IRS Note and PDC Note agreements state that the interest on those notes
is paid at the end of the term, December 2008.
(2) We have variable interest rates on our Term Loan and Revolving Credit of 1%
and 1/2% over the prime rate of interest, respectively, and as such we have
made certain assumptions in estimating future interest payments on this
variable interest rate debt. We assume a 0.25% increase in prime rate in the
remaining months of 2005, and prime rate increases of 0.5% in 2006, 0.25% in
2007 and 0.5% in 2008. We anticipate a full repayment of our Revolving
Credit by December 2006, and full repayment of our Term Loan by May of 2008.
(3) Our finite risk insurance policy provides financial assurance guarantees to
the states in the event of unforeseen closure of our permitted facilities.
See Liquidity and Capital Resources - Investing activities earlier in this
Management's Discussion and Analysis for further discussion on our finite
risk policy.
31
(4) The pension withdrawal liability is the estimated liability to us upon
termination of substantially all of our union employees at our discontinued
operation, PFMI. See Discontinued Operation earlier in this section for
discussion on our discontinued operation.
(5) The environmental contingencies and related assumptions are discussed
further in the Environmental Contingencies section of this Management's
Discussion and Analysis, and are based on estimated cash flow spending for
these liabilities.
(6) We are not a party to any significant long-term service or supply contracts
with respect to our processes. We refrain from entering into any long-term
purchase commitments in the ordinary course of business.
CRITICAL ACCOUNTING ESTIMATES
In preparing the consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as, the reported amounts of revenues and expenses during the reporting
period. We believe the following critical accounting policies affect the more
significant estimates used in preparation of the consolidated financial
statements:
Revenue Recognition Estimates. Effective September 1, 2003 we refined our
percentage of completion methodology for purposes of revenue recognition in our
Nuclear Segment. As we accept more complex waste streams in this segment, the
treatment of those waste streams becomes more complicated and more time
consuming. We have continued to enhance our waste tracking capabilities and
systems, which has enabled us to better match the revenue earned to the
processing phases achieved. The major processing phases are receipt,
treatment/processing and shipment/final disposition. Upon receiving mixed waste
we recognize a certain percentage (33%) of revenue as we incur costs for
transportation, analytical and labor associated with the receipt of mixed
wastes. As the waste is processed, shipped and disposed of we recognize the
remaining 67% of revenue and the associated costs of transportation and burial.
The waste streams in our Industrial segment are much less complicated, and
services are rendered shortly after receipt, as such we don't use percentage of
completion estimates in our Industrial segment. We review and evaluate our
revenue recognition estimates and policies on a quarterly basis.
Allowance for Doubtful Accounts. The carrying amount of accounts receivable is
reduced by an allowance for doubtful accounts, which is a valuation allowance
that reflects management's best estimate of the amounts that are uncollectable.
We regularly review all accounts receivable balances that exceed 60 days from
the invoice date and based on an assessment of current credit worthiness,
estimate the portion, if any, of the balances that are uncollectable. Specific
accounts that are deemed to be uncollectible are reserved at 100% of their
outstanding balance. The remaining balances aged over 60 days have a percentage
applied by aging category (5% for balances 61-90 days, 20% for balances 91-120
days and 40% for balances over 120 days aged), based on a historical valuation,
that allows us to calculate the total reserve required. This allowance was
approximately 0.7%, of revenue and approximately 2.1%, of accounts receivable
for 2004. Additionally, this allowance was approximately 1.1% of revenue for the
six months ended June 30, 2005, and approximately 1.9% of accounts receivable
for 2005.
Intangible Assets. Intangible assets relating to acquired businesses consist
primarily of the cost of purchased businesses in excess of the estimated fair
value of net assets acquired ("goodwill") and the recognized permit value of the
business. We continually reevaluate the propriety of the carrying amount of
permits and goodwill to determine whether current events and circumstances
warrant adjustments to the carrying value. We utilize an independent appraisal
firm to test goodwill and permits, separately, for impairment, annually as of
October 1. Our annual impairment test as of October 1, 2004, resulted in an
impairment of goodwill and permits, in our Industrial segment in the amounts of
$4,886,000 and $4,116,000, respectively, which resulted in remaining balance of
Industrial segment intangible permits in the amount of $2,370,000. The
appraisers estimate the fair value of our operating segments using a discounted
cash flow valuation approach. This approach is dependent on estimates for future
sales, operating income, depreciation and amortization, working capital changes,
and capital expenditures, as well as, expected growth rates for cash flows and
long-term interest rates, all of which are impacted by economic conditions
related to our industry as well as conditions in the U.S. capital markets.
32
Accrued Closure Costs. Accrued closure costs represent a contingent
environmental liability to clean up a facility in the event we cease operations
in an existing facility. The accrued closure costs are estimates based on
guidelines developed by federal and/or state regulatory authorities under
Resource Conservation and Recovery Act ("RCRA"). Such costs are evaluated
annually and adjusted for inflationary factors and for approved changes or
expansions to the facilities. Increases due to inflationary factors for 2005 and
2004, have been approximately 2.1%, and 1.6%, respectively, and based on the
historical information, we do not expect future inflationary changes to differ
materially from the last three years. Increases or decreases in accrued closure
costs resulting from changes or expansions at the facilities are determined
based on specific RCRA guidelines applied to the requested change. This
calculation includes certain estimates, such as disposal pricing, external
labor, analytical costs and processing costs, which are based on current market
conditions. However, with the exception of the Michigan facility, we have no
intention, at this time, to close any of our facilities.
Accrued Environmental Liabilities. We have six remediation projects currently in
progress. The current and long-term accrual amounts for the projects are our
best estimates based on proposed or approved processes for clean-up. The
circumstances that could affect the outcome range from new technologies that are
being developed every day to reduce our overall costs, to increased
contamination levels that could arise as we complete remediation which could
increase our costs, neither of which we anticipate at this time. In addition,
significant changes in regulations could adversely or favorably affect our costs
to remediate existing sites or potential future sites, which cannot be
reasonably quantified. We have also accrued long-term environmental liabilities
for our recently acquired facilities, however, as these are not permitted
facilities we are currently under no obligation to clean up the contamination.
Disposal Costs. We accrue for waste disposal based upon a physical count of the
total waste at each facility at the end of each accounting period. Current
market prices for transportation and disposal costs are applied to the end of
period waste inventories to calculate the disposal accrual. Costs are calculated
using current costs for disposal, but economic trends could materially affect
our actual costs for disposal. As there are limited disposal sites available to
us, a change in the number of available sites or an increase or decrease in
demand for the existing disposal areas could significantly affect the actual
disposal costs either positively or negatively.
KNOWN TRENDS AND UNCERTAINTIES
Seasonality. Historically we have experienced reduced revenues, operating losses
or decreased operating profits during the first and fourth quarters of our
fiscal years due to a seasonal slowdown in operations from poor weather
conditions and overall reduced activities during the holiday season and through
January and February of the first quarter. During our second and third fiscal
quarters there has historically been an increase in revenues and operating
profits. Management expects this trend to continue in future years. The U.S.
Department of Energy ("DOE") and U.S. Department of Defense ("DOD") represent
major customers for the Nuclear segment. In conjunction with the federal
government's September 30 fiscal year-end, the Nuclear segment experiences
seasonably large shipments during the third quarter, leading up to this
government fiscal year-end, as a result of incentives and other quota
requirements. Correspondingly, for a period of approximately three months
following September 30, the Nuclear segment is generally seasonably slow, as the
governmental budgets are still being finalized, planning for the new year is
occurring and we enter the holiday season. However, we have experienced limited
success in 2005, in getting governmental customers to extend the timing of their
shipments of wastes typically received in the third quarter, over a longer
period of time. This maturing process of our Nuclear segment has helped smooth
revenues from quarter to quarter.
33
Economic Conditions. Economic downturns or recessionary conditions can adversely
affect the demand for our services, principally within the Industrial segment.
Reductions in industrial production generally follow such economic conditions,
resulting in reduced levels of waste being generated and/or sent off for
treatment. We believe that our revenues and profits were negatively affected
within this segment by the recessionary conditions in 2004. However, we feel
that these conditions have stabilized in 2005 as evidenced by increases in
commercial waste revenues.
Significant Contracts. Our revenues are principally derived from numerous and
varied customers. However, our Nuclear segment has a significant relationship
with Bechtel Jacobs. Bechtel Jacobs is the DOE's appointed manager of the
environmental program to perform certain treatment and disposal services in Oak
Ridge, Tennessee. In this capacity Bechtel Jacobs entered into certain
subcontracts with our Oak Ridge, Tennessee subsidiary ("M&EC"). Our revenues
from Bechtel Jacobs contributed 18.8% and 13.7% of total consolidated revenues
in the quarter and six months ended June 30, 2005 and 13.7% and 11.5% of total
consolidated revenues during the same periods in 2004. The Oak Ridge contracts
have been extended through August 2005. We are currently working with Bechtel
Jacobs to extend the contracts through June 2007, with several pricing
modifications. As with most contracts with the federal government, these
contracts may be terminated or renegotiated at any time at the government's
election. As the DOE site in Oak Ridge continues to complete certain of its
clean-up milestones and moves toward completing its closure efforts, the revenue
from these contracts may decline. The Nuclear segment has and will pursue other
similar or related contracts for environmental programs at other DOE and
government sites. In February 2003, M&EC commenced legal proceedings against
Bechtel Jacobs, the general contractor under the Oak Ridge contracts, seeking
payment from Bechtel Jacobs of approximately $4.3 million in surcharges relating
to certain wastes that were treated by M&EC in 2001 and 2002 under the Oak Ridge
contracts. During 2001, we recognized approximately $381,000 in revenue for
these surcharges, which represented an initial offer for settlement by Bechtel
Jacobs. Bechtel Jacobs continues to deliver waste to M&EC for treatment, and
M&EC continues to accept such waste. In addition, subsequent to the filing of
the lawsuit, M&EC has entered into a new contract with Bechtel Jacobs to treat
DOE waste. There is no guarantee of future business under the Oak Ridge
contracts, and either party may terminate the Oak Ridge contracts at any time.
Termination of these contracts could have a material adverse effect on us. We
are working towards increasing other sources of revenues at M&EC to reduce the
risk of reliance on one major source of revenues.
During the second quarter of 2004, the Nuclear segment was awarded a contract
from a Fortune 500 company valued at approximately $6,218,000 to treat and
dispose of mixed waste generated from research and development activities. This
contract requires innovative treatment processing technologies we developed to
accommodate the complex nature of these wastes. The contract should be completed
during the third quarter of 2005. We recognized $837,000 and $1,730,000 in
revenues from this contract for the three and six months ended June 30, 2005 or
3.3% and 3.7% of total consolidated revenues. During 2004, we recognized
$3,195,000 in revenue from this contract.
During October 2004, the Nuclear segment was awarded a three-year contract
valued at approximately $23,000,000 for the treatment of mixed low-level wastes
generated at the DOE's Hanford Site. Fluor Hanford, a prime contractor
supporting DOE's cleanup mission at Hanford, has awarded this contract to us to
provide specialized thermal treatment for a variety of mixed low-level
radioactive wastes generated at Hanford. As with contracts or subcontracts with
or involving the federal government, this contract may be terminated or
renegotiated at anytime at the government's option. We recognized $506,000 and
$1,420,000 in revenues from this contract for the quarter and six months ended
June 30, 2005.
34
Insurance. We maintain insurance coverage similar to, or greater than, the
coverage maintained by other companies of the same size and industry, which
complies with the requirements under applicable environmental laws. We evaluate
our insurance policies annually to determine adequacy, cost effectiveness and
desired deductible levels. Due to the downturn in the economy and changes within
the environmental insurance market, we have no guarantee that we will be able to
obtain similar insurance in future years, or that the cost of such insurance
will not increase materially.
Certain Legal Proceedings. PFD is involved in legal proceedings with the EPA and
others alleging, among other things, that PFD is required to have obtained a
Title V air permit in order to carry out its operations, which PFD vigorously
disagrees with and is contesting. If it is determined that PFD is required to
have a Title V air permit, such could have a material adverse effect on our
liquidity and we anticipate substantial additional capital expenditures at PFD
would be required in order to bring PFD into compliance with Title V air permit
requirements. As of the date of this report, we do not have any reliable
estimates of the effect on our liquidity or the cost of such additional capital
expenditures if there is an adverse ruling regarding the Title V air permit
issue.
In December 2004, PFD received a complaint brought under the citizen's suit
provisions of the Clean Air Act in the United States District Court for the
Southern District of Ohio, Western district, styled Barbara Fisher v. Perma-Fix
of Dayton, Inc. The suit alleges violation by PFD of a number of state and
federal clean air statutes in connection with the operation of PFD's facility,
primarily due to operating without a Title V air permit, and further alleges
that air emissions from PFD's facility endanger the health of the public and
constitutes a nuisance in violation of Ohio law. The action seeks injunctive
relief, imposition of civil penalties, attorney fees and costs and other forms
of relief. We intend to vigorously defend ourselves in connection with this
matter. See above discussion as to administrative proceedings instituted by the
EPA.
ENVIRONMENTAL CONTINGENCIES
We are engaged in the waste management services segment of the pollution control
industry. As a participant in the on-site treatment, storage and disposal market
and the off-site treatment and services market, we are subject to rigorous
federal, state and local regulations. These regulations mandate strict
compliance and therefore are a cost and concern to us. Because of their integral
role in providing quality environmental services, we make every reasonable
attempt to maintain complete compliance with these regulations; however, even
with a diligent commitment, we, along with many of our competitors, may be
required to pay fines for violations or investigate and potentially remediate
our waste management facilities.
We routinely use third party disposal companies, who ultimately destroy or
secure landfill residual materials generated at our facilities or at a client's
site. We, compared to certain of our competitors, dispose of significantly less
hazardous or industrial by-products from our operations due to rendering
material non-hazardous, discharging treated wastewaters to publicly-owned
treatment works and/or processing wastes into saleable products. In the past,
numerous third party disposal sites have improperly managed wastes and
consequently require remedial action; consequently, any party utilizing these
sites may be liable for some or all of the remedial costs. Despite our
aggressive compliance and auditing procedures for disposal of wastes, we could,
in the future, be notified that we are a PRP at a remedial action site, which
could have a material adverse effect.
35
We have budgeted for 2005, $1,265,000 in environmental remediation expenditures
to comply with federal, state and local regulations in connection with
remediation of certain contaminates at our facilities. Our facilities where the
remediation expenditures will be made are the Leased Property in Dayton, Ohio
(EPS), a former RCRA storage facility as operated by the former owners of PFD,
PFM's facility in Memphis, Tennessee, PFSG's facility in Valdosta, Georgia,
PFTS's facility in Tulsa, Oklahoma, a property adjacent to our PFFL facility,
PFMD's facility in Baltimore, Maryland, PFP's leased property in Pittsburgh,
Pennsylvania, and PFMI's facility in Detroit, Michigan. We expect to fund the
expenses to remediate the sites from funds generated internally, however, no
assurances can be made that we will be able to do so.
At June 30, 2005, we had total accrued environmental remediation liabilities of
$4,680,000, of which $970,000 is recorded as a current liability, which reflects
a decrease of $295,000 from the December 31, 2004, balance of $1,265,000. The
decrease represents payments on remediation projects. The June 30, 2005, current
and long-term accrued environmental balance is recorded as follows:
Current Long-term
Accrual Accrual Total
------------ ------------ ------------
PFD $ 105,000 $ 595,000 $ 700,000
PFM 221,000 434,000 655,000
PFSG 190,000 501,000 691,000
PFTS 29,000 39,000 68,000
PFFL 25,000 -- 25,000
PFMD -- 391,000 391,000
PFP -- 150,000 150,000
------------ ------------ ------------
570,000 2,110,000 2,680,000
PFMI 400,000 1,600,000 2,000,000
------------ ------------ ------------
$ 970,000 $ 3,710,000 $ 4,680,000
============ ============ ============
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, FASB issued Statement No. 154 ("SFAS 154"), Accounting Changes and
Error Corrections. SFAS 154 replaces APB No. 20, Accounting Changes, and SFAS 3,
Reporting Accounting Changes in Interim Financial Statements, and establishes
retrospective application as the required method for reporting a change in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154 applies
to all voluntary changes in accounting principles and to changes required by an
accounting pronouncement in the instance that the pronouncement does not include
specific transition provisions. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Company does not anticipate that the adoption of SFAS 154 will have a
material impact on its consolidated results of operations.
In March 2005, FASB issued FASB Interpretation No. 47 ("FIN 47"), Accounting for
Conditional Asset Retirement Obligations -- An Interpretation of FASB Statement
No. 143. FIN 47 clarifies that the term conditional asset retirement obligation,
as used in SFAS 143, Accounting for Asset Retirement Obligations, refers to a
legal obligation to perform an asset retirement activity in which the timing and
(or) method of settlement are conditional on a future event that may or may not
be within control of the entity. The obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing and
(or) method of settlement. Uncertainty about the timing and (or) method of
settlement of a conditional asset retirement obligation should be factored into
the measurement of the liability when sufficient information exists. FIN 47 also
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The Interpretation is
effective for fiscal years ending after December 15, 2005. We do not expect the
adoption of FIN 47 to have a material effect on our consolidated financial
position or results of operations for the year ending December 31, 2005.
36
In December 2004, FASB issued Statement No. 123 (revised) ("SFAS 123R"),
Share-Based Payment. SFAS 123R is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and its related implementation
guidance, and establishes standards for the accounting for transactions in which
an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
SFAS 123R requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide service in
exchange for the award. This statement requires companies to recognize the fair
value of stock options and other stock-based compensation to employees
prospectively, beginning with awards granted, modified, repurchased or cancelled
after the fiscal periods beginning after June 15, 2005. We currently measure
stock-based compensation in accordance with APB Opinion No. 25. The impact on
our financial condition or results of operations will depend on the number and
terms of stock options outstanding on the date of change, as well as future
options that may be granted. See Note 1 to Notes to Consolidated Financial
Statements - Stock-Based Compensation for the pro forma impact that the fair
value method would have had on our net income/loss for each of the three and six
month periods ended June 30, 2005 and 2004. We do not expect the impact of SFAS
123R to have an impact on our cash flows or liquidity.
In April 2005, the Securities and Exchange Commission ("SEC") amended its
Regulation S-X to amend the date of compliance with SFAS 123R to the first
reporting period of the fiscal year beginning on or after June 15, 2005. We
anticipate adopting SFAS 123R on January 1, 2006.
INTEREST RATE SWAP
We entered into an interest rate swap agreement effective December 22, 2000, to
modify the interest characteristics of our outstanding debt from a floating
basis to a fixed rate, thus reducing the impact of interest rate changes on
future income. This agreement involves the receipt of floating rate amounts in
exchange for fixed rate interest payments over the life of the agreement without
an exchange of the underlying principal amount. The differential to be paid or
received is accrued as interest rates change and recognized as an adjustment to
interest expense related to the debt. The related amount payable to or
receivable from counter parties is included in other assets or liabilities. At
June 30, 2005, the market value of the interest rate swap was in an unfavorable
value position of $14,000 and was recorded as a liability. During the six months
ended June 30, 2005, we recorded a gain on the interest rate swap of $27,000
that is included in other comprehensive income in the Statement of Stockholders'
Equity. The interest rate swap agreement is set to expire in December 2005.
37
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PART I, ITEM 3
We are exposed to certain market risks arising from adverse changes in interest
rates, primarily due to the potential effect of such changes on our variable
rate loan arrangements with PNC. We entered into an interest rate swap agreement
to modify the interest characteristics of $3,500,000 of our $7,000,000 term loan
with PNC Bank, from a floating rate basis to a fixed rate, thus reducing the
impact of interest rate changes on this portion of the debt.
38
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONTROLS AND PROCEDURES
PART 1, ITEM 4
(a) Evaluation of disclosure, controls, and procedures.
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our periodic reports
filed with the Securities and Exchange Commission (the "SEC") is
recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC and that such information is
accumulated and communicated to our management. Based on their most
recent evaluation, which was completed as of the end of the period
covered by this Quarterly Report on Form 10-Q, we have evaluated, with
the participation of our Chief Executive Officer and Chief Financial
Officer the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of
1934, as amended) and believe that such are not effective, as a result
of identifying three material weaknesses in our internal control over
financial reporting, as reported in our Annual Report on Form 10-K for
the year ended December 31, 2004, (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)).
(b) Changes in internal control over financial reporting.
There have been no changes in our internal control over financial
reporting during the second quarter of 2005.
39
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
There are no additional material legal proceedings pending against us
and/or our subsidiaries not previously reported by us in Item 3 of our
Form 10-K for the year ended December 31, 2004, or our Form 10-Q for the
period ended March 31, 2005, except as stated below:
During February 2005, we received a federal grand jury subpoena
requesting documents from the period of January 1, 2000, to the present
concerning or relating to Wabash Environmental Technologies, LLC,
("Wabash"), an Indiana based entity that is not affiliated with us. We
have been advised that the target of the grand jury investigation is
Wabash and that neither we nor any subsidiary of ours is a target of the
investigation. We and any subsidiary that had documents concerning or
relating to Wabash have compiled responsive documents and complied with
the subpoena.
We have previously reported that our subsidiary, PFD, has been
performing an extensive internal review as to whether the treatment,
storage, processing and disposal of certain waste streams by it were in
accordance with applicable environmental laws and regulations. PFD
retained outside counsel to assist it in this review. As a result of the
review, PFD has notified the Ohio EPA of the following:
. that PFD discovered an error in its 2003 Annual Hazardous
Waste Report, which was submitted to the Ohio EPA. The error
was in connection with the reporting of a shipment offsite
of certain waste water inadvertently reported as H081
(biological treatment with or without precipitation) in the
report. PFD believes a management method code of H129 (other
treatment) would have been more appropriate for the entries
of these shipments, with filtration as the process. This
wastewater was shipped offsite for beneficial reuse.
Additional quality control measures have been put in place
to reduce the potential for this type of administrative
error; and
. from February, 2003 to November, 2003, PFD received 56
shipments (approximately 273,000 gallons) of hazardous
wastewaters from a particular generator. PFD filtered this
particular wastewater in its wastewater treatment unit and
transmitted this filtered wastewater under a bill of lading
to Wabash for beneficial reuse. As part of its internal
investigation, it was determined that, while PFD's
compliance personnel at the time believed it appropriate to
classify this material as meeting the beneficial reuse
requirements pursuant to the regulations promulgated under
the Resource Conservation and Recovery Act, and shipped such
under a straight bill of lading, they also recognized this
at that time to be a vague and unclear area of the
regulations. Due to the beneficial reuse regulations under
RCRA being vague and unclear, PFD has notified Ohio EPA of
these facts.
40
Item 6. EXHIBITS
--------
(a) EXHIBITS
--------
4.1 Amendment No. 5 to Revolving Credit, Term Loan, and Security
Agreement, dated as of June 29, 2005, between the Company
and PNC Bank, as incorporated by reference from Exhibit 99.1
to the Company's Form 8-K dated June 29, 2005.
31.1 Certification by Dr. Louis F. Centofanti, Chief Executive
Officer of the Company pursuant to Rule 13a-14(a) or
15d-14(a).
31.2 Certification by Richard T. Kelecy, Chief Financial Officer
of the Company pursuant to Rule 13a-14(a) or 15d-14(a).
32.1 Certification by Dr. Louis F. Centofanti, Chief Executive
Officer of the Company furnished pursuant to 18 U.S.C.
Section 1350.
32.2 Certification by Richard T. Kelecy, Chief Financial Officer
of the Company furnished pursuant to 18 U.S.C. Section 1350.
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
PERMA-FIX ENVIRONMENTAL SERVICES
Date: August 8, 2005 By: /s/ Dr. Louis F. Centofanti
---------------------------
Dr. Louis F. Centofanti
Chairman of the Board
Chief Executive Officer
Date: August 8, 2005 By: /s/ Richard T. Kelecy
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Richard T. Kelecy
Chief Financial Officer
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