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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
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 May 5, 2004
----- --------------------------
Common Stock, $.001 Par Value 41,427,725
(excluding 988,000 shares
held as treasury stock)
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PERMA-FIX ENVIRONMENTAL SERVICES, INC.
INDEX
PART I FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 2004 and December 31, 2003..............2
Consolidated Statements of Operations -
Three Months Ended March 31, 2004 and 2003........4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2004 and 2003........5
Consolidated Statement of Stockholders' Equity -
Three Months Ended March 31, 2004.................6
Notes to Consolidated Financial Statements.................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................27
Item 4. Controls and Procedures...................................28
PART II OTHER INFORMATION
Item 1. Legal Proceedings.........................................29
Item 2. Changes in Securities and Use of Proceeds.................29
Item 6. Exhibits and Reports on Form 8-K..........................31
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, 2003.
The results of operations for the three months ended March 31, 2004, are not
necessarily indicative of results to be expected for the fiscal year ending
December 31, 2004.
1
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
March 31,
2004 December 31,
(Amounts in Thousands, Except for Share Amounts) (Unaudited) 2003
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 517 $ 411
Restricted cash 61 30
Accounts receivable, net of allowance
for doubtful accounts of $863 and $703 23,526 24,622
Inventories 957 589
Prepaid expenses 2,332 2,332
Other receivables 467 397
--------- ---------
27,860 28,381
Total current assets
Property and equipment:
Buildings and land 22,349 21,391
Equipment 33,183 32,121
Vehicles 3,245 2,881
Leasehold improvements 11,235 11,082
Office furniture and equipment 2,139 2,153
Construction-in-progress 3,148 2,636
--------- ---------
75,299 72,264
Less accumulated depreciation and
amortization (20,328) (19,195)
--------- ---------
54,971 53,069
Net property and equipment
Intangibles and other assets:
Permits 16,680 16,680
Goodwill 6,216 6,216
Finite Risk Sinking Fund 2,225 1,234
Other assets 4,377 4,635
--------- ---------
Total assets $ 112,329 $ 110,215
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
2
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
March 31,
2004 December 31,
(Amounts in Thousands, Except for Share Amounts) (Unaudited) 2003
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,553 $ 6,359
Current environmental accrual 1,107 1,143
Accrued expenses 11,912 11,553
Unearned revenue 1,694 2,271
Current portion of long-term debt 2,570 2,896
-------- --------
Total current liabilities 24,836 24,222
Environmental accruals 1,910 1,432
Accrued closure costs 4,999 4,965
Other long-term liabilities 1,777 1,677
Long-term debt, less current portion 18,281 26,192
-------- --------
Total long-term liabilities 26,967 34,266
-------- --------
Total liabilities 51,803 58,488
Commitments and Contingencies (see Note 4) -- --
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, 42,415,725 and 37,241,881
shares issued, including 988,000 shares held as
treasury stock, respectively 42 37
Additional paid-in capital 80,467 69,640
Accumulated deficit (19,288) (17,243)
Interest rate swap (118) (130)
-------- --------
61,103 52,304
Less Common Stock in treasury at cost;
988,000 shares (1,862) (1,862)
-------- --------
Total stockholders' equity 59,241 50,442
-------- --------
Total liabilities and stockholders' equity $112,329 $110,215
======== ========
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
March 31,
-----------------------
(Amounts in Thousands, Except for Per Share Amounts) 2004 2003
- --------------------------------------------------------------------------------
Net revenues $ 17,469 $ 19,518
Cost of goods sold 13,908 14,457
-------- --------
Gross profit 3,561 5,061
Selling, general and administrative expenses 4,390 4,380
-------- --------
Income (loss) from operations (829) 681
Other income (expense):
Interest income 1 2
Interest expense (670) (702)
Interest expense-financing fees (256) (301)
Other (244) (65)
-------- --------
Net loss (1,998) (385)
Preferred Stock dividends (47) (46)
-------- --------
Net loss applicable to Common Stock $ (2,045) $ (431)
======== ========
Net loss per common share:
Basic $ (.06) $ (.01)
-------- --------
Diluted $ (.06) $ (.01)
-------- --------
Number of shares and potential common shares
used in net loss per common share:
Basic 37,040 34,605
-------- --------
Diluted 37,040 34,605
-------- --------
The accompanying notes are an integral part of these consolidated
financial statements.
4
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
---------------------
(Amounts in Thousands) 2004 2003
- --------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (1,998) $ (385)
Adjustments to reconcile net loss to cash provided by
(used in) operations:
Depreciation and amortization 1,236 1,140
Debt discount amortization 81 81
Provision for bad debt and other reserves 36 52
Gain on sale of plant, property and equipment (17) --
Changes in assets and liabilities:
Accounts receivable 3,263 (376)
Prepaid expenses, inventories and other assets (36) (243)
Accounts payable and accrued expenses 47 668
-------- --------
Net cash provided by operations 2,612 937
Cash flows from investing activities:
Purchases of property and equipment, net (1,073) (896)
Proceeds from sale of plant, property and equipment 19 --
Change in restricted cash, net -- (1)
Change in finite risk sinking fund (991) --
Funds used for acquisitions (net of cash acquired) (2,903) --
-------- --------
Net cash used in investing activities (4,948) (897)
Cash flows from financing activities:
Net repayments of revolving credit (7,800) (258)
Principal repayments of long-term debt (517) (492)
Proceeds from issuance of stock 10,759 591
-------- --------
Net cash provided by (used in) financing activities 2,442 (159)
-------- --------
Increase (decrease) in cash 106 (119)
Cash at beginning of period 411 212
-------- --------
Cash at end of period $ 517 $ 93
======== ========
Supplemental disclosure
Interest paid $ 509 $ 540
Non-cash investing and financing activities:
Issuance of Common Stock for services 10 10
Issuance of Common Stock for payment of dividends 63 63
Gain on interest rate swap 12 14
Long-term debt incurred for purchase of property and equipment -- 308
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 three months ended March 31, 2004)
Common
Preferred Stock Common Stock Additional Interest Stock Total
--------------- ----------------- Paid-In Accumulated Rate Held In Stockholders'
(Amounts in thousands, Shares Amount Shares Amount Capital Deficit Swap Treasury Equity
except for share amounts)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 2,500 $ -- 37,241,881 $ 37 $69,640 $(17,243) $ (130) $(1,862) $ 50,442
Comprehensive loss:
Net loss -- -- -- -- -- (1,998) -- -- (1,998)
Other Comprehensive income:
Gain on interest rate swap -- -- -- -- -- -- 12 -- 12
--------
Comprehensive loss (1,986)
Preferred Stock dividends -- -- -- -- -- (47) -- -- (47)
Issuance of Common Stock for -- -- 19,643 -- 63 -- -- -- 63
Preferred Stock dividend
Issuance of stock for cash -- -- 538,088 -- 898 -- -- -- 898
and services
Issuance of Common Stock in -- -- 4,616,113 5 9,866 -- -- -- 9,871
private placement
----- ----- ---------- ---- ------- --------- ----- -------- --------
Balance at March 31, 2004 2,500 $ -- 42,415,725 $ 42 $80,467 $ (19,288) $(118) $ (1,862) $ 59,241
===== ===== ========== ==== ======= ========= ===== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
6
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(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, 2003.
1. Summary of Significant Accounting Policies
Our accounting policies are as set forth in the notes to consolidated financial
statements referred to above.
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 2003: no dividend yield; an expected life of ten years;
expected volatility between 23.8% and 23.2%; and risk free interest rates
between 2.75% and 3.27%. No stock options have been granted in 2004.
Under the accounting provisions of SFAS 123, our net loss and net loss per share
would have been increased to the pro forma amounts indicated below (in thousands
except for per share amounts):
Three Months Ended
March 31,
-------------------
(Unaudited) 2004 2003
- --------------------------------------------------------------------------------
Net loss applicable to Common Stock, as reported $(2,045) $ (431)
Deduct: Total Stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects (96) (96)
------- -------
Pro forma net loss applicable to Common Stock $(2,141) $ (527)
======= =======
Loss per share:
Basic - as reported $ (.06) $ (.01)
======= =======
Basic - pro-forma $ (.06) $ (.02)
======= =======
Diluted - as reported $ (.06) $ (.01)
======= =======
Diluted - pro-forma $ (.06) $ (.02)
======= =======
7
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 three months ended March
31, 2004 and 2003, does not include potential common shares as their effect
would be anti-dilutive.
The following are potential shares excluded from weighted average share
calculations due to their anti-dilutive effect for the three months ended March
31, 2004 and 2003:
Three Months Ended
March 31,
--------------------------
(Unaudited) 2004 2003
- --------------------------------------------------------------------------------
Upon exercise of Options 3,139,950 3,675,000
Upon exercise of Warrants 12,980,493 13,749,827
Upon conversion of Preferred Stock 1,666,667 1,666,667
3. Long Term Debt
Long-term debt consists of the following at March 31, 2004, and December 31,
2003:
March 31,
2004 December 31,
(Amounts in Thousands) (Unaudited) 2003
- ---------------------------------------------------------------------------------------------------------------------------
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% (5.00% at March 31,
2004), balance due in December 2005. $ 1,685 $ 9,235
Term Loan dated December 22, 2000, payable in equal monthly installments of
principal of $83, balance due in December 2005, variable interest paid
monthly at prime rate plus 1 1/2% (5.50% at March 31, 2004). 3,833 4,083
Three promissory notes dated May 27, 1999, payable in equal monthly installments of
principal and interest of $90 over 60 months, due June 2004, interest at 7.0%. 268 531
Unsecured promissory note dated August 31, 2000, payable in lump sum in August 2005,
interest paid annually at 7.0%. 3,500 3,500
Senior subordinated notes dated July 31, 2001, payable in lump sum on July 31, 2006,
interest payable quarterly at an annual interest rate of 13.5%, net of unamortized
debt discount of $757 at March 31, 2004 and $838 at December 31, 2003. 4,868 4,787
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 (7.0% on March
31, 2004) and is payable in one lump sum at the end of installment period. 3,354 3,354
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 (7.0% on
March 31, 2004) and is payable in one lump sum at the end of installment period. 833 833
Various capital lease and promissory note obligations, payable 2004 to 2008, interest
at rates ranging from 5.2% to 17.9%. 2,510 2,765
------- -------
20,851 29,088
Less current portion of long-term debt 2,570 2,896
------- -------
$18,281 $26,192
======= =======
8
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, at inception, 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. The Revolving Credit advances are due and
payable in full on December 22, 2005. As of March 31, 2004, the excess
availability under our Revolving Credit was $11,437,000 based on our eligible
receivables, and after reducing the outstanding balance of our Revolving Credit
with approximately $6,966,000 of the net proceeds from our recently completed
private placement.
Pursuant to the Agreement the Term Loan bears interest at a floating rate equal
to the prime rate plus 1 1/2 %, and the Revolving Credit at a floating rate
equal to the prime rate plus 1%. The loans are subject to a prepayment fee of 1
1/2 % in the first year, 1% in the second and third years and 3/4 % after the
third anniversary until termination date.
Three Promissory Notes
Pursuant to the terms of the Stock Purchase Agreements in connection with the
acquisition of Perma-Fix of Orlando, Inc. ("PFO"), Perma-Fix of South Georgia,
Inc. ("PFSG") and Perma-Fix of Michigan, Inc. ("PFMI"), a portion of the
consideration was paid in the form of the Promissory Notes, in the aggregate
amount of $4,700,000 payable to the former owners of PFO, PFSG and PFMI. The
Promissory Notes are paid in equal monthly installments of principal and
interest of approximately $90,000 over five years and having an interest rate of
5.5% for the first three years and 7% for the remaining two years. The aggregate
outstanding balance of the Promissory Notes total $268,000 at March 31, 2004,
which is in the current portion. Payments of such Promissory Notes are
guaranteed by PFMI under a non-recourse guaranty, which non-recourse guaranty is
secured by certain real estate owned by PFMI. These Promissory Notes are subject
to subordination agreements with our senior and subordinated lenders.
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).
Senior Subordinated Notes
On July 31, 2001, we issued approximately $5,625,000 of our 13.50% Senior
Subordinated Notes due July 31, 2006 (the "Notes"). The Notes were issued
pursuant to the terms of a Note and Warrant Purchase Agreement, dated July 31,
2001 (the "Purchase Agreement"), between the Company, Associated Mezzanine
Investors - PESI, L.P. ("AMI"), and Bridge East Capital, L.P. ("BEC"). The Notes
are unsecured and are unconditionally guaranteed by our subsidiaries. Our
payment obligations under the Notes are subordinate to our payment obligations
to our primary lender and to certain other of our debts up to an aggregate
amount of $25,000,000.
9
Under the terms of the Purchase Agreement, we also issued to AMI and BEC
Warrants to purchase up to 1,281,731 shares of our Common Stock ("Warrant
Shares") at an initial exercise price of $1.50 per share (the "Warrants"),
subject to adjustment under certain conditions which were valued at $1,622,000
and recorded as a debt discount and are being amortized over the term of the
Notes. As of March 31, 2004, the unamortized portion of the debt discount was
$757,000. The Warrants, as issued, also contain a cashless exercise provision.
The Warrant Shares are registered under an S-3 Registration Statement that was
declared effective on November 27, 2002.
Promissory Note
In conjunction with our acquisition of East Tennessee Materials and Energy
Corporation ("M&EC"), M&EC issued a promissory note for a principal amount of
$3,714,000 to 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. 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, (7.0% on March 31, 2004)
and payable in lump sum at the end of the loan period. On March 31, 2004, the
outstanding balance was $4,363,000 including accrued interest of approximately
$1,009,000. 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.
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 March 31, 2004
the Applicable Rate was 7.0%. On March 31, 2004, the outstanding balance was
$1,078,000 including accrued interest of approximately $245,000.
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.
Legal
In the normal course of conducting our business, we are involved in various
litigations. Except as stated below, there has been no material change in legal
proceedings from those disclosed previously in the Company's Form 10-K for the
year ended December 31, 2003.
In March 2004, we settled the lawsuit, Bryson Adams, et al. v. Environmental
Purification Advancement Corporation, et al.; Civil Action No. 99-1998, United
States District Court, Western District of Louisiana. We paid in settlement of
this lawsuit the sum of $60,000 in April 2004, and accrued the expense during
the three months ended March 31, 2004.
We recently discovered that our Tulsa, Oklahoma subsidiary, which has a permit
to treat and store hazardous waste in certain areas of its facility, had been
improperly accepting and storing a substantial amount of hazardous and
non-hazardous waste in violation of certain environmental laws in areas not
permitted to accept and/or to store hazardous and non-hazardous waste. We
voluntarily reported this matter to the appropriate Oklahoma authorities and
have removed this waste to permitted treated, storage and/or disposal
facilities. We are working with the Oklahoma authorities to provide the
information they requested as to this matter. As of the date of this report, we
have not been notified by the Oklahoma
10
authorities as to what action or actions, if any, they will take against our
subsidiary as a result of this improper acceptance and storage of waste. The
Oklahoma authorities could assert monetary fines or penalties or take other
action against our subsidiary (including, but not limited to, loss of permits),
which may have a material adverse effect on us.
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.
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 guarantee
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 we paid the first 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 March 31, 2004, we have recorded $2,225,000 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. As of March 23, 2004, we
performed preliminary purchase price allocations based upon information
available as of this date, and we are in the process of obtaining third party
evaluations
11
of certain assets, thus, the allocation of the purchase prices are subject to
refinement. Accordingly, the purchase prices were preliminarily allocated to the
net assets and net liabilities so acquired and assumed based on their estimated
fair values. Included in these preliminary allocations were current assets of
$2,481,000, property and equipment of $2,066,000, current liabilities of
approximately $1,141,000 and long-term environmental liability of $491,000.
Based on the preliminary purchase price allocations no goodwill was recorded.
6. Private Placement
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 $9,946,000, after paying placement agent fees, 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 have incurred an
additional $75,000 for expenses related to the private placement. We intend to
use our availability under our Revolving Credit to repay higher interest debt
such as the Notes with an interest rate of 13.5%. 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.
7. Operating Segments
Pursuant to FAS 131, we define an operating segment as:
o A business activity from which we may earn revenue and incur expenses;
o Whose operating results are regularly reviewed by the chief operating
decision maker to make decisions about resources to be allocated to the
segment and assess its performance; and
o 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.
Our operating segments are defined as follows:
The Industrial Waste Management Services segment, which provides on-and-off site
treatment, storage, processing and disposal of hazardous and non-hazardous
industrial waste, commercial waste and wastewater through our eight 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 Michigan, Inc., Perma-Fix of Maryland, Inc. (which acquired certain
assets and assumed certain liabilities of A&A) and Perma-Fix of Pittsburgh, Inc.
(which acquired certain assets of EMAX) We provide through Perma-Fix Field
Services various waste management services to certain governmental agencies.
The Nuclear Waste Management Services segment, which provides treatment,
storage, processing and disposal services for waste which is both hazardous and
low-level radioactive ("Mixed Waste"). Included in such is research,
development, on and off-site waste remediation of nuclear mixed and low-level
radioactive waste through our three facilities; Perma-Fix of Florida, Inc.,
Diversified Scientific Services, Inc. and East Tennessee Materials and Energy
Corporation.
12
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, as well as,
engineering support as needed by our other segments.
The table below presents certain financial information in thousands by business
segment for the three months ended March 31, 2004 and 2003.
Segment Reporting for the Quarter Ended March 31, 2004
Industrial Nuclear
Waste Waste Segments Consolidated
Services Services Engineering Total Corporate(2) Total
------------- ---------- ------------- ------------ ------------- --------------
Revenue from external customers $ 7,266 $ 9,475(3) $ 728 $ 17,469 $ -- $17,469
Intercompany revenues 275 988 61 1,324 -- 1,324
Interest income 1 -- -- 1 -- 1
Interest expense 166 454 -- 620 50 670
Interest expense-financing fees -- -- -- -- 256 256
Depreciation and amortization 575 649 7 1,231 5 1,236
Segment profit (loss) (2,533) 484 4 (2,045) -- (2,045)
Segment assets(1) 44,572 56,749 2,076 103,397 8,932 112,329
Expenditures for segment assets 359 662 8 1,029 44 1,073
Segment Reporting for the Quarter Ended March 31, 2003
Industrial Nuclear
Waste Waste Segments Consolidated
Services Services Engineering Total Corporate(2) Total
------------- ---------- ------------- ----------- ------------- --------------
Revenue from external customers $10,243 $ 8,386(3) $ 889 $ 19,518 $ -- $ 19,518
Intercompany revenues 1,143 407 133 1,683 -- 1,683
Interest income 2 -- -- 2 -- 2
Interest expense 182 485 (3) 664 38 702
Interest expense-financing fees -- 2 -- 2 299 301
Depreciation and amortization 534 577 10 1,121 19 1,140
Segment profit (loss) (828) 316 81 (431) -- (431)
Segment assets(1) 41,597 58,176 2,155 101,928 4,559 106,487
Expenditures for segment assets 446 669 2 1,117 87 1,204
(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 ended March 31, 2004,
which total $1,516,000 or (8.7%) of total revenue and $1,733,000 (or 8.9%)
for the same quarter in 2003.
13
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,
o improve our operations and liquidity;
o anticipated improvement in the financial performance of the Company;
o ability to comply with the Company's general working capital
requirements;
o ability to be able to continue to borrow under the Company's
revolving line of credit;
o 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; and Valdosta, Georgia;
o ability to remediate certain contaminated sites for projected
amounts;
o ability to fund up to $5,625,000 of budgeted capital expenditures
during 2004;
o as the M&EC facility continues to enhance its processing
capabilities and completes certain expansion projects, the Company
could see higher total revenues under Oak Ridge Contracts;
o increasing other sources of revenue at M&EC;
o growth of our Nuclear segment;
o positive results in our Industrial segment from our strategy;
o improvement in the second and third quarters;
o Actions to be taken against our Oklahoma subsidiary;
o use of proceeds from the private placement to pay off higher
interest debt; and
o ability under the joint ventures to win contract awards and perform
remedial activities.
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:
o general economic conditions;
o material reduction in revenues;
o inability to collect in a timely manner a material amount of
receivables;
o increased competitive pressures;
o the ability to maintain and obtain required permits and approvals to
conduct operations;
o the ability to develop new and existing technologies in the conduct
of operations;
o ability to retain or renew certain required permits;
o 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 and
Detroit, Michigan, which would result in a material increase in
remediation expenditures;
o changes in federal, state and local laws and regulations, especially
environmental laws and regulations, or in interpretation of such;
14
o potential increases in equipment, maintenance, operating or labor
costs;
o management retention and development;
o financial valuation of intangible assets is substantially less than
expected;
o termination of the Oak Ridge Contracts as a result of our lawsuit
against Bechtel Jacobs or otherwise;
o the requirement to use internally generated funds for purposes not
presently anticipated;
o inability to continue to be profitable on an annualized basis;
o the inability of the Company to maintain the listing of its Common
Stock on the NASDAQ;
o Oklahoma authorities could assert monetary fines or penalties or
other action against our Tulsa subsidiary (including, but not
limited to, loss of permits);
o the determination that PFMI or PFO was responsible for a material
amount of remediation at certain superfund sites; and
o 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.
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 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.
The results, on a consolidated basis, for the first quarter of 2004 were
disappointing. However, we were able to achieve a number of important
developments during the quarter, including the acquisitions of certain assets by
Perma-Fix of Maryland, Inc. ("PFMD") and Perma-Fix of Pittsburgh, Inc. ("PFP").
These acquisitions enable us to expand the Industrial segment's presence within
one of its most consistent and profitable markets. Also, the Nuclear segment
continues to grow the business, to reduce its processing costs and to
demonstrate its capabilities. We are working on several strategic initiatives to
not only treat, but also characterize and handle radioactive and mixed waste,
which should ultimately improve the flow of waste into our Nuclear facilities.
The Industrial segment's revenues and gross margin were down dramatically during
the first quarter of 2004, due principally to the recent restructuring, which
included the elimination of low-margin, high volume services, and the reduction
in the segment's dependence on outside broker disposal services. The quarter was
also affected by an exaggerated seasonal slowdown in this first quarter, coupled
with the ongoing disruption of our Michigan facility resulting from a fire in
the fourth quarter of 2003, and a reduction in our government revenue within the
Industrial segment.
15
Results of Operations
The table below should be used when reviewing management's discussion and
analysis for the three months ended March 31, 2004 and 2003:
Three Months Ended
March 31,
----------------------------------
Consolidated (amounts in thousands) 2004 % 2003 %
- --------------------------------------------------------------------------------
Net Revenues $17,469 100.0 $19,518 100.0
Cost of good sold 13,908 79.6 14,457 74.1
------- ----- ------- -----
Gross Profit 3,561 20.4 5,061 25.9
Selling, general and administrative 4,390 25.1 4,380 22.4
------- ----- ------- -----
Income (loss) from operations $ (829) (4.7) $ 681 3.5
======= ===== ====== ====
Interest expense (670) (3.8) (702) (3.6)
Interest expense-financing fees (256) (1.5) (301) (1.5)
Preferred Stock dividends (47) (.3) (46) (.2)
Summary - Three Months Ended March 31, 2004 and 2003
Net Revenue
Consolidated net revenues decreased to $17,469,000 for the quarter ended March
31, 2004, as compared to $19,518,000 for the same quarter in 2003. Historically
we experience reduced revenues during the first quarter of our fiscal year. See
"Known Trends and Uncertainties - Seasonality" of this Management's Discussion
and Analysis. During the first quarter 2004 this trend was more severe than we
normally experienced during the first quarter in previous years. The decrease of
$2,049,000 or 10.5% is primarily attributable to a decrease in the Industrial
segment of approximately $2,977,000 resulting principally from the continued
restructuring of the segment. The Industrial segment has made the strategic
decision to eliminate low margin broker business and replace it with higher
margin generator direct revenue, which resulted in reduced revenues in the first
quarter of 2004. We have noticed revenues turning upward during the last month
of the quarter as we believe that our strategy has begun to show positive
results. Other reductions were due to the Industrial segment suffering a
temporary disruption in their bulking services at our Michigan facility since
November of last year due to a fire and from the first quarter seasonal
slowdown. The remaining decrease for the segment is attributable to the decline
in government revenues of approximately $993,000, partially a result of special
event work that was performed in the first quarter of 2003, which was not
available in 2004, and roughly $336,000 due to a contract that expired during
the second quarter of 2003. Partially offsetting the decrease within the segment
is $505,000 of revenue contributed from two facilities acquired as of March 23,
2004. See "Acquisitions" of this Management's Discussion and Analysis for
further information on the acquired facilities. Positively impacting 2003, which
was not duplicated in 2004, was the Newport Hydrolysate project, from which we
recognized revenue of $560,000 during the first quarter of 2003. The Consulting
Engineering Service segment also experienced a decrease of approximately
$161,000. Offsetting these decreases, was an increase in the Nuclear segment of
approximately $1,089,000, resulting from the continued expansion within the
mixed waste market as our facilities demonstrate their ability to accept and
process more complex waste streams, and we receive new contracts for additional
services such as the characterization and handling of radioactive and mixed
waste. Consolidated revenues with Bechtel Jacobs Company, which includes the Oak
Ridge contracts, totaled $1,516,000 or 8.7% of total revenues for the three
months ended March 31, 2004, compared to $1,733,000 or 8.9% for the three months
ended March 31, 2003. See
16
"Known Trends and Uncertainties - Significant Contracts" of this Management's
Discussion and Analysis. The backlog of stored waste within the Nuclear segment
at March 31, 2004, was approximately $5,040,000, compared to $5,782,000 at
December 31, 2003.
Cost of Goods Sold
Cost of goods sold decreased $549,000 or 3.8% for the quarter ended March 31,
2004, as compared to the quarter ended March 31, 2003. This decrease in cost of
goods sold principally reflects a decrease in the Industrial segment of
approximately $1,058,000, which primarily relates to the decrease in revenues.
This decrease, included the reduction in costs from 2003 due to the Newport
hydrolysate project, not duplicated in 2004. Partially offsetting the decrease
was the additional costs to process and dispose of waste related to the loss of
our Michigan facility's ability to perform bulking services in November 2003, as
this facility is still unable to perform certain services, and the additional
transportation and disposal costs incurred as the segment completes its
restructuring and integration efforts. The first quarter of 2004 also reflected
additional operating costs related to revenue from the two facilities acquired,
as of March 23, 2004. Additionally, the Consulting Engineering Services segment
experienced a decrease of $37,000, which corresponds with the reduction in
revenue. Partially offsetting these decreases was an increase in cost of goods
sold for the Nuclear segment of $546,000 due to the correlating increase in
sales. Depreciation expense of $1,140,000 and $1,036,000 for the quarters ended
March 31, 2004 and 2003, respectively, is included in cost of goods sold, which
reflects an increase of $104,000.
Gross Profit
The resulting gross profit for the quarter ended March 31, 2004, decreased
$1,500,000 to $3,561,000, which as a percentage of revenue is 20.4%, as compared
to 25.9% for the quarter ended March 31, 2003. The decrease in gross profit
percentage principally reflects a decrease in the Industrial segment from 19.0%
in 2003 to 0.4% in 2004. The segment's decrease reflects the fixed costs of
operating the facilities being spread over reduced revenues, relating in part to
the restructuring, as well as the decrease in margin from the loss of the
Michigan facility's ability to perform bulking services after the fire in
November of last year. The effects of the March 23, 2004 acquisitions and the
loss of the Newport hydrolysate project included in the first quarter of 2003,
principally offset each other for the quarter ended March 31, 2004.
Additionally, there was a decrease in the Consulting Engineering Services
segment from 32.7% in 2003 to 22.9% in 2004, which reflects the impact of lower
revenues during the quarter covering certain fixed costs. The decrease in gross
profit percentage is partially offset by an increase in the Nuclear segment from
33.6% in 2003 to 35.5% in 2004, reflecting mainly the favorable product mix
during the quarter, improvements within the waste processing lines and the
benefit from the fixed cost nature of these facilities as revenues increase.
Selling, General and Administrative
Selling, general and administrative expenses increased $10,000 or 0.2% for the
quarter ended March 31, 2004, as compared to the quarter ended March 31, 2003.
This increase is partially due to the Nuclear segment expenses increasing
$139,000, over the first quarter of 2003 as a result of increased payroll and
related expense, as the segment builds stronger infrastructures. Additionally,
the Company as a whole experienced increases of $232,000, from payroll related
expenses, as well as additional legal, audit and public company expenses in the
normal course of business for 2004, which included Sarbanes Oxley Compliance
activities. The first quarter of 2003 was positively impacted by a one time
insurance credit of $90,000. Offsetting the increase was a decrease in the
Industrial and Consulting Engineering Services segments. The majority of the
savings for these two segments relates to payroll and related expenses and
outside services, with the decrease in the Industrial segment partially due to
the restructuring of the segment. Depreciation and amortization expense of
$97,000 and $104,000 was included within selling, general and administrative
expenses for the first quarters of 2004 and 2003, respectively. As a percentage
of revenue, selling, general and administrative expenses increased to 25.1% for
the quarter ended March 31, 2004, compared to 22.4% for the same period in 2003.
17
Interest Expense
Interest expense decreased $32,000 for the quarter ended March 31, 2004, as
compared to the corresponding period of 2003. This decrease reflects lower
borrowing levels and interest rates on our PNC revolving credit and term loan,
resulting in a decrease in interest expense of $40,000. Additionally, this
decrease reflects the impact of the reduction in debt associated with past
acquisitions resulting in a decrease in interest expense of $18,000. Offsetting
these decreases was an increase in interest expense of $26,000 associated with
debt entered into in 2003, principally related to facility and computer
upgrades.
Interest Expense - Financing Fees
Interest expense-financing fees decreased $45,000 for the three months ended
March 31, 2004, as compared to the corresponding period for 2003. These
financing fees are principally associated with the credit facility and term loan
with PNC and the senior subordinated notes, and are amortized to expense over
the term of the loan agreements. This decrease was primarily due to a one-time
write-off of fees in March 2003, associated with other short term financing.
Preferred Stock Dividends
Preferred Stock dividends remained relatively constant at $47,000 and $46,000
for the quarters ended March 31, 2004 and 2003, respectively. The Preferred
Stock dividends are comprised of approximately $31,000 accrued dividends from
our Series 17 Preferred Stock, and $16,000 from the accrual of preferred
dividends on the Preferred Stock of our subsidiary, M&EC.
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 March 31, 2004, we had cash of $517,000. This cash total reflects an increase
of $106,000 from December 31, 2003, as a result of net cash provided by
operations of $2,612,000 and cash provided by financing activities of $2,442,000
(principally proceeds from the issuance of Common Stock in connection with
Warrant and option exercises and issuances under our employee stock purchase
plan of approximately $888,000 and net proceeds of $9,871,000 received in
connection with the private placement discussed below under "Private Placement"
of this Management's Discussion and Analysis, and partially offset by net
repayments of our revolving credit facility and repayments of our long-term debt
of approximately $8,317,000) offset by cash used in investing activities of
$4,948,000 (principally funds used for acquisitions of $2,903,000, net purchases
of equipment, totaling $1,073,000 and a deposit to the finite risk sinking fund
of $991,000). 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 March 31, 2004
represents payroll account fundings, which were not withdrawn until after
quarter-end and from proceeds received from Warrant exercises.
Operating Activities
Accounts receivable, net of allowances for doubtful accounts, totaled
$23,526,000, a decrease of $1,096,000 from the December 31, 2003 balance of
$24,622,000. This decrease reflects the impact of decreased revenues within the
Industrial segment, which resulted in a decrease of $819,000. This decrease was
offset by an increase in accounts receivable of $2,095,000 as a result of the
assets purchased
18
in the acquisitions discussed below in this Management's Discussion & Analysis.
Additionally the Nuclear segment experienced a decrease of $2,310,000 primarily
due to increased collections within this segment. The Consulting Engineering
Services segment also experienced a decrease of $62,000 reflecting the impact of
decreased revenues during the quarter for this segment.
As of March 31, 2004, total consolidated accounts payable was $7,553,000, an
increase of $1,194,000 from the December 31, 2003, balance of $6,359,000. This
increase in accounts payable reflects the impact of the acquisitions, which
resulted in an increase of $992,000. Additionally, accounts payable increased
due to unfinanced capital expenditures.
Working capital at March 31, 2004, was $3,024,000, as compared to working
capital of $4,159,000 at December 31, 2003, reflecting a decrease of $1,135,000.
This working capital decrease principally reflects the decreased accounts
receivable balance net of the increased accounts payable balance at the end of
the period.
Investing Activities
Our purchases of capital equipment for the three-month period ended March 31,
2004, totaled approximately $1,073,000. These expenditures were for expansion
and improvements to the operations principally within both our Industrial and
Nuclear segments. The capital expenditures were funded by cash provided by
operations and from proceeds from the issuance of stock, upon exercise of
Warrants and Options. We had budgeted capital expenditures of up to
approximately $5,600,000 for 2004, which includes an estimated $1,675,000 for
completion of certain 2003 projects in process, as well as other identified
capital purchases for the expansion and improvement to the operations and for
certain compliance related enhancements. Our purchases during 2004 include
approximately $517,000 to complete certain of the 2003 projects in process. We
anticipate funding capital expenditures by a combination of lease financing,
internally generated funds, and/or the proceeds received from Option and Warrant
exercises.
Financing Activities
We have a Revolving Credit, Term Loan and Security Agreement ("Agreement") with
PNC Bank, National Association, a national banking association ("PNC"). The
Agreement provided, at inception, 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 PNC reasonably deems proper and necessary.
The Revolving Credit advances shall be due and payable in full on December 22,
2005. As of March 31, 2004, the excess availability under our Revolving Credit
was $11,437,000 based on our eligible receivables, and after reducing the
outstanding balance of our Revolving Credit with approximately $6,966,000 of the
net proceeds from our recently completed private placement. We intend to use a
portion of the unused excess availability to pay off higher interest debt, such
as our 13.5 % Senior Subordinated Notes.
Pursuant to the Agreement the Term Loan bears interest at a floating rate equal
to the prime rate plus 1 1/2 %, and the Revolving Credit at a floating rate
equal to the prime rate plus 1%. The loans are subject to a prepayment fee of 1
1/2 % in the first year, 1% in the second and third years and 3/4 % after the
third anniversary until termination date.
19
Pursuant to the terms of the Stock Purchase Agreements in connection with the
acquisition of Perma-Fix of Orlando, Inc. ("PFO"), Perma-Fix of South Georgia,
Inc. ("PFSG") and Perma-Fix of Michigan, Inc. ("PFMI"), a portion of the
consideration was paid in the form of the Promissory Notes, in the aggregate
amount of $4,700,000 payable to the former owners of PFO, PFSG and PFMI. The
Promissory Notes are paid in equal monthly installments of principal and
interest of approximately $90,000 over five years and having an interest rate of
5.5% for the first three years and 7% for the remaining two years. The aggregate
outstanding balance of the Promissory Notes total $268,000 at March 31, 2004,
which is in current liabilities. Payments of such Promissory Notes are
guaranteed by PFMI under a non-recourse guaranty, which non-recourse guaranty is
secured by certain real estate owned by PFMI. These Promissory Notes are subject
to subordination agreements with our senior and subordinated lenders.
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).
On July 31, 2001, we issued approximately $5,625,000 of our 13.50% Senior
Subordinated Notes due July 31, 2006 (the "Notes"). The Notes were issued
pursuant to the terms of a Note and Warrant Purchase Agreement, dated July 31,
2001 (the "Purchase Agreement"), between the Company, Associated Mezzanine
Investors - PESI, L.P. ("AMI"), and Bridge East Capital, L.P. ("BEC"). The Notes
are unsecured and are unconditionally guaranteed by our subsidiaries. Our
payment obligations under the Notes are subordinate to our payment obligations
to our primary lender and to certain other of our debts up to an aggregate
amount of $25,000,000. It is our intent to prepay the Notes as discussed above.
Under the terms of the Purchase Agreement, we also issued to AMI and BEC
Warrants to purchase up to 1,281,731 shares of our Common Stock ("Warrant
Shares") at an initial exercise price of $1.50 per share (the "Warrants"),
subject to adjustment under certain conditions which were valued at $1,622,000
and recorded as a debt discount and are being amortized over the term of the
Notes. As of March 31, 2004, the unamortized portion of the debt discount was
$757,000. The Warrants, as issued, also contain a cashless exercise provision.
The Warrant Shares are registered under an S-3 Registration Statement that was
declared effective on November 27, 2002.
In conjunction with our acquisition of East Tennessee Materials and Energy
Corporation ("M&EC"), M&EC issued a promissory note for a principal amount of
$3,714,000 to 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. 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, (7.0% on March 31, 2004)
and payable in lump sum at the end of the loan period. On March 31, 2004, the
outstanding balance was $4,363,000 including accrued interest of approximately
$1,009,000. 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.
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 March 31, 2004
the Applicable Rate was 7.0%. On March 31, 2004, the outstanding balance was
$1,078,000 including accrued interest of approximately $245,000.
20
The accrued dividends on the outstanding Preferred Stock for the period July 1,
2003, through December 31, 2003, in the amount of approximately $63,000 were
paid in February 2004 in the form of 19,643 shares of Common Stock of the
Company. The dividends for the period January 1, 2004, through March 31, 2004,
total $31,000, and will be paid in August 2004. Under our loan agreements, we
are prohibited from paying cash dividends on our outstanding capital stock.
As previously discussed, a fire at our Michigan facility did considerable damage
to the facility. The facility had also incurred minor disruption from off
specification waste from a customer shipment received during the first quarter
of 2003. We intend to replace and repair this facility using insurance proceeds.
However, we have a $500,000 deductible under our policy, which we will be
required to pay. We have brought litigation against the customer that we believe
contributed to the disruption during the first quarter of 2003, and at this
time, there are no assurances that we will be successful in our lawsuit.
In summary, we have continued to take steps to improve our operations and
liquidity as discussed above. However, we continue to invest our working capital
back into our facilities to fund capital additions for expansion within both the
nuclear and industrial segments. The first quarter, which is traditionally our
slowest period, experienced an exaggerated seasonal slowdown. This slowdown,
combined with the continued weak performance from the economy, the disruption of
our Michigan facility from a fire in the fourth quarter of 2003 and the
elimination of low margin business and reduction in government revenues in the
Industrial segment, has negatively impacted our liquidity. If we are unable to
improve our operations and become profitable in the foreseeable future, such
would have a material adverse effect on our liquidity position.
Acquisitions
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. A&A and EMAX had unaudited combined revenues of
approximately $15.0 million in 2003 and a combined loss of approximately
$299,000.
Private Placement
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 $9,946,000, after paying placement agent fees, 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 have incurred an
additional $75,000 for expenses related to the private placement. We intend to
use our availability under our Revolving Credit to repay higher interest debt
such as the Notes with an interest rate of 13.5%. 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. See Item 2, Part II of this report for further discussion
as to the private placement.
21
Contractual Obligation
The following table summarizes our contractual obligations at March 31, 2004,
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods, (in thousands):
Payments due by period
-------------------------------------
After
Contractual Obligations Total 2004 2005-2007 2008-2009 2009
- --------------------------------------------------------------------------------
Long-term debt $20,851 $ 2,570 $17,480 $ 801 $ --
Interest on long-term debt 1,254 -- -- 1,254 --
Operating leases 3,848 1,092 2,671 85 --
Finite risk policy 8,030 -- 3,011 2,008 3,011
Purchase obligations (1) -- -- -- -- --
------- ------- ------- ------- -------
Total contractual obligations $33,983 $ 3,662 $23,162 $ 4,148 $ 3,011
======= ======= ======= ======= =======
(1) 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.
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. This finite risk
insurance policy required 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 we paid the first 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 March 31, 2004, we have
recorded $2,225,000 in our sinking fund on the balance sheet. In comparison, we
paid $1,121,000 of non-returnable insurance premiums for the year 2002 financial
assurance program, along with an additional collateral requirement of $4,000,000
in the form of a letter of credit issued by PNC, at an annual fee of $160,000
per year. 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.
Warrant and Option Exercises
During the first quarter of 2004, Capital Bank Grawe Gruppe, AG ("Capital Bank")
exercised three of its outstanding warrants and a portion of two other warrants
to purchase an aggregate of 329,262 shares of our Common Stock at a total
exercise price of approximately $625,000. Additionally, various other investors
exercised Warrants to purchase 86,787 shares of our Common Stock, of which
36,787 shares were issued on a cashless basis, and proceeds of $85,000 were
received for the remaining shares. Holders of certain outstanding options
exercised their options to purchase 77,240 shares of our Common Stock for an
aggregate purchase price of approximately $107,000. The Warrants and options
were exercised in accordance with the terms of their respective documents. The
proceeds of the Warrant and options exercise were used to fund capital
expenditures and current working capital needs.
22
Critical Accounting Policies
In preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States, 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 milestones achieved. The major milestones are receipt,
treatment/processing, and shipment/final disposition. Upon receiving mixed waste
we recognize 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 all
associated costs.
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 and based on an assessment
of current credit worthiness, estimate the portion, if any, of the balance that
are uncollectable. This allowance was approximately 0.8%, of revenue for both
2003 and 2002, and approximately 3.6%, and 2.9% of accounts receivable for the
three month periods ended March 31, 2004 and 2003, respectively.
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. Effective January 1, 2002, we adopted
SFAS 142. We utilized an independent appraisal firm to test goodwill and
permits, separately, for impairment. The initial report provided by the
appraiser indicated that no impairment existed as of January 1, 2002. Goodwill
and permits were again tested as of October 1, 2002 and October 1, 2003, and
each of these tests also indicated no impairment. Effective January 1, 2002, we
discontinued amortizing indefinite life intangible assets (goodwill and permits)
as required by SFAS 142. The appraisers estimated 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.
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 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 2004 and 2003, have been approximately 1.6% and 1.1% respectively,
and based on the historical information, we do not expect future inflationary
changes to differ materially. 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
23
processing costs, which are based on current market conditions. However, we have
no intention, at this time, to close any of our facilities.
Accrued Environmental Liabilities. We have four 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. As discussed
above, this trend continued in the first quarter 2004, but the reduction in
revenues and the net loss for the first quarter 2004 was greater than we have
historically experienced in prior first quarter periods as previously discussed.
The DOE and 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.
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 2003, and that this trend
continued into 2004.
Significant contracts. Our revenues are principally derived from numerous and
varied customers. However, our Nuclear segment has a significant relationship
with Bechtel Jacobs, who manages the Oak Ridge contracts under which our Oak
Ridge Tennessee subsidiary ("M&EC") operates. Our revenues with Bechtel Jacobs
contributed 8.7% of total consolidated revenues in the three months ended March
31, 2004 and 8.9% of total consolidated revenues during the same period in 2003.
As the M&EC facility continues to enhance its processing capabilities and
completes certain expansion projects and with the amended pricing structure
under the Oak Ridge contracts, we could see higher total revenue with Bechtel
Jacobs and under the Oak Ridge contracts. The Oak Ridge contracts have been
extended for a period of
24
two years, through June 2005, with several pricing modifications. 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. These surcharges
have not yet been billed. 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 first quarter of 2004, we finalized negotiations on two joint venture
agreements with other remedial waste companies for the purposes of bidding on
certain contracts and, if such contracts are awarded, to perform various
remedial activities. If the joint ventures are awarded the contracts, we would
be required to make an initial contribution of working capital to the newly
formed joint venture companies. The potential initial working capital
contribution for the two joint ventures in the aggregate would be approximately
$500,000.
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.
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, as 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. Compared to certain of our competitors, we 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 that
subsequently required 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 have in
the past and may in the future, be notified that we are a PRP at a remedial
action site, which could have a material adverse effect on us.
We have budgeted for 2004 approximately $1,143,000 in environmental expenditures
to comply with federal, state and local regulations in connection with
remediation of certain contaminates at four locations. The four locations where
these 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 and PFMI's
facility in Detroit, Michigan. We have estimated the expenditures for 2004 to be
approximately $592,000 at the EPS site, $216,000 at the PFM location, $246,000
at the PFSG site and $89,000 at the PFMI site of which $7,000; $17,000;
25
$13,000; and $12,000, respectively, were spent during the first three months of
2004. Additional funds will be required for the next seven years to properly
remediate these sites. We expect to fund the 2004 expenses to remediate these
four sites from funds generated internally, our revolving credit facility and
from the exercise of Warrants and Options, however, no assurances can be made
that we will be able to do so.
We recently discovered that our Tulsa, Oklahoma subsidiary, which has a permit
to treat and store hazardous waste in certain areas of its facility, had been
improperly accepting and storing a substantial amount of hazardous and
non-hazardous waste in violation of certain environmental laws in areas not
permitted to accept and/or to store hazardous and non-hazardous waste. We
voluntarily reported this matter to the appropriate Oklahoma authorities and
have removed this waste to permitted treated, storage and/or disposal
facilities. We are working with the Oklahoma authorities to provide the
information they requested as to this matter. As of the date of this report, we
have not been notified by the Oklahoma authorities as to what action or actions,
if any, they will take against our subsidiary as a result of this improper
acceptance and storage of waste. The Oklahoma authorities could assert monetary
fines or penalties or take other action against our subsidiary (including, but
not limited to, loss of permits), which may have a material adverse effect on
us.
In connection with our acquisitions discussed above, we have accrued long-term
environmental liabilities of $391,000 and $100,000, respectively. As part of our
acquisition due diligence process we completed environmental assessments of each
facility and determined a best estimate of the cost to remediate the hazardous
and/or non-hazardous contamination on certain of the properties owned by PFMD
and a property leased by PFP. These facilities are currently under no obligation
to clean up the contamination, and we do not intend in the immediate future to
begin remediation. If environmental regulations change, we could be forced to
clean up the contamination.
At March 31, 2004, we had accrued environmental liabilities totaling $3,017,000,
which reflects an increase of $442,000 from the December 31, 2003, balance of
$2,575,000. The increase represents the additional environmental liability
accrued for PFMD and PFP, partially offset by payments made on remediation
projects. The March 31, 2004, current and long-term accrued environmental
balance is recorded as follows:
PFD PFM PFSG PFMI PFMD PFP Total
-------- -------- -------- ------- -------- -------- ----------
Current Accrual $598,000 $199,000 $233,000 $77,000 $ -- $ -- $1,107,000
Long-term accrual 150,000 603,000 666,000 -- 391,000 100,000 1,910,000
-------- -------- -------- ------- -------- -------- ----------
Total $748,000 $802,000 $899,000 $77,000 $391,000 $100,000 $3,017,000
======== ======== ======== ======= ======== ======== ==========
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
March 31, 2004, the market value of the interest rate swap was in an unfavorable
value position of $118,000 and was recorded as a liability. During the three
months ended March 31, 2004, we recorded a gain on the interest rate swap of
$12,000 that offset other comprehensive loss in the Statement of Stockholders'
Equity.
26
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 its $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.
27
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONTROLS AND PROCEDURES
PART 1, ITEM 4
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the periodic reports filed by us 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 the most recent evaluation, which was completed as of the
end of the period covered by this Quarterly Report on Form 10-Q, our Chief
Executive Officer and Chief Financial Officer believe that our disclosure
controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities
Exchange Act of 1934, as amended) are effective. There were no significant
changes in our internal controls or in other factors that could significantly
affect these internal controls subsequent to the date of the most recent
evaluation.
28
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, 2003, which is incorporated
herein by reference, except as follows:
In March 2004, we settled the lawsuit, Bryson Adams, et al. v.
Environmental Purification Advancement Corporation, et al.; Civil Action
No. 99-1998, United States District Court, Western District of Louisiana.
We paid in settlement of this lawsuit the sum of $60,000 in April 2004.
We recently discovered that our Tulsa, Oklahoma subsidiary, which has a
permit to treat and store hazardous waste in certain areas of its
facility, had been improperly accepting and storing a substantial amount
of hazardous and non-hazardous waste in violation of certain environmental
laws in areas not permitted to accept and/or to store hazardous and
non-hazardous waste. We voluntarily reported this matter to the
appropriate Oklahoma authorities and have removed this waste to permitted
treated, storage and/or disposal facilities. We are working with the
Oklahoma authorities to provide the information they requested as to this
matter. As of the date of this report, we have not been notified by the
Oklahoma authorities as to what action or actions, if any, they will take
against our subsidiary as a result of this improper acceptance and storage
of waste. The Oklahoma authorities could assert monetary fines or
penalties or take other action against our subsidiary (including, but not
limited to, loss of permits), which may have a material adverse effect on
us.
Item 2. Changes in Securities and Use of Proceeds
(c) During the quarter ended March 31, 2004, we sold equity securities, as
such term is defined under 12b-2 of the Exchange Act of 1934, as amended,
that were not registered under the Securities Act of 1933, as amended,
other than as previously reported, as follows:
On or about January 7, 2004, Capital Bank, exercised a portion of its
outstanding Warrants to purchase an aggregate of 11,762 shares of our
Common Stock at a total exercise price of approximately $21,000, or $1.75
per share, in accordance with the terms of the Warrants. The shares were
issued under the exemption from registration provided by Section 4(2)
and/or Rule 506 of Regulation D based on Capital Bank's representations
contained in the Warrant and prior dealings with us.
On or about January 29, 2004, Capital Bank Grawe Gruppe, AG ("Capital
Bank"), exercised one of its outstanding warrants to purchase 105,000
shares of our Common Stock at a total exercise price of approximately
$207,000, or $1.9688 per share, in accordance with the terms of the
warrant. The shares were issued under the exemption from registration
provided by Section 4(2) and/or Rule 506 of Regulation D based on Capital
Bank's representations contained in the Warrant and prior dealings with
us.
On or about February 27, 2004, Capital Bank, exercised one of its
outstanding Warrants to purchase 105,000 shares of our Common Stock at a
total exercise price of approximately $203,000, or $1.9375 per share, in
accordance with the terms of the Warrant. The shares were issued under the
exemption from registration provided by Section 4(2) and/or Rule 506 of
Regulation D based on Capital Bank's representations contained in the
Warrant and prior capital needs.
29
On or about March 31, 2004, Capital Bank, exercised one of its outstanding
Warrants to purchase 105,000 shares of our Common Stock at a total
exercise price of approximately $190,000, or $1.8125 per share, in
accordance with the terms of the Warrant. The shares were issued under the
exemption from registration provided by Section 4(2) and/or Rule 506 of
Regulation D based on Capital Bank's representations contained in the
Warrant and prior dealings with us. The proceeds from all Warrant
exercises were used to fund capital expenditures and current working
capital needs.
During March 2004, we completed a private placement of our Common Stock
and Warrants for the purchase of our Common Stock, and for gross proceeds
of approximately $10,386,000 in connection with this offering. We sold to
15 accredited investors 4,616,113 shares of Common Stock at $2.25 per
share and Warrants for the purchase of up to an additional 1,615,638
shares of Common Stock. The Warrants have an exercise price of $2.92 per
share and a three year term. The Warrants may be exercised pursuant to a
cashless exercise option if, at any time after one year from the date of
issuance of the Warrants, there is no effective registration statement
registering the resale of the shares issuable upon exercise of the
Warrants and such shares are not eligible to be sold pursuant to Rule
144(k) of the Securities Act. Effective, May 7, 2004, we registered the
shares of Common Stock issued in the private placement, the shares of
Common Stock issuable upon exercise of the Warrants issued in the private
placement and the shares of Common Stock issuable upon exercise of the
Consultant Warrants discussed below.
We realized net proceeds from the private placement of approximately $9.9
million, after paying fees of $440,000 to the placement agent and certain
expenses of the placement agent. The net proceeds were used as follows:
o $2.9 million in connection with certain acquisitions; and
o the remaining $7.0 million, as discussed elsewhere in this
Form 10-Q.
As compensation for consulting services in connection with the private
placement, we issued Warrants ("Consultant Warrants") to outside
consultant to purchase an aggregate of 160,000 shares of our Common Stock,
subject to adjustment. The Consultant Warrants have an exercise price of
$2.92 per share and a three year term.
The exercise price of, and number of shares of Common Stock issuable upon
exercise of, the Warrants and Consulting Warrants are each subject to
adjustment upon certain events. These events include, among others, stock
splits and reclassifications of our Common Stock, and certain
reorganizations, mergers and consolidations.
The issuance of shares, Warrants and Consultant Warrants described above
was made pursuant to a private placement under Section 4(2) and/or Rule
506 of Regulation D of the Act. The shares issued in the private placement
and issuable upon exercise of the Warrants issued in the private placement
(excluding the shares issuable under the Consultant Warrants) are subject
to demand and piggyback registration rights.
30
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Securities Purchase Agreement dated March 16, 2004, between the
Company and Alexandra Global Master Fund, Ltd., Alpha Capital AG,
Baystar Capital II, L.P., Bristol Investment Fund, Ltd., Crescent
International Ltd, Crestview Capital Master LLC, Geduld Capital
Partners LP, Gruber & McBaine International, Irwin Geduld Revocable
Trust, J Patterson McBaine, Jon D. Gruber and Linda W. Gruber,
Lagunitas Partners LP, Omicron Master Trust, Palisades Master Fund,
L.P., Stonestreet LP, is incorporated by reference from Exhibit 4.1
of our Registration Statement No. 333-115061. The Company will
furnish supplementally a copy of all omitted schedules to the
Commission upon request.
4.2 Registration Rights Agreement, dated March 16, 2004, between the
Company and Alexandra Global Master Fund, Ltd., Alpha Capital AG,
Baystar Capital II, L.P., Bristol Investment Fund, Ltd., Crescent
International Ltd, Crestview Capital Master LLC, Geduld Capital
Partners LP, Gruber & McBaine International, Irwin Geduld Revocable
Trust, J Patterson McBaine, Jon D. Gruber and Linda W. Gruber,
Lagunitas Partners LP, Omicron Master Trust, Palisades Master Fund,
L.P., Stonestreet LP, is incorporated by reference from Exhibit 4.2
of our Registration Statement No. 333-115061.
4.3 Common Stock Purchase Warrant, dated March 16, 2004, issued by the
company to Alexandra Global Master Fund, Ltd., for the purchase of
262,500 shares of the Company's common stock, is incorporated by
reference from Exhibit 4.3 of our Registration Statement No.
333-115061. Substantially similar warrants were issued by the
Company to the following: (1) Alpha Capital AG, for the purchase of
up to 54,444 shares; (2)Baystar Capital II, L.P., for the purchase
of up to 63,000 shares; (3) Bristol Investment Fund, Ltd., for the
purchase of up to 62,222 shares; (4) Crescent International Ltd, for
the purchase of up to 105,000 shares; (5) Crestview Capital Master
LLC, for the purchase of up to 233,334 shares; (6) Geduld Capital
Partners LP, for the purchase of up to 26,250 shares; (7) Gruber &
McBaine International, for the purchase of up to 38,889 shares; (8)
Irwin Geduld Revocable Trust, for the purchase of up to 17,500
shares; (9) J Patterson McBaine, for the purchase of up to 15,555
shares; (10) Jon D. Gruber and Linda W. Gruber, for the purchase of
up to 38,889 shares; (11) Lagunitas Partners LP, for the purchase of
up to 93,333 shares; (12) Omicron Master Trust, for the purchase of
up to 77,778 shares; (13) Palisades Master Fund, L.P., for the
purchase of up to 472,500 shares; and (14) Stonestreet LP, for the
purchase of up to 54,444 shares. Copies will be provided to the
Commission upon request.
10.1 Asset Purchase Agreement dated March 23, 2004, between the Company
and USL Environmental Services, Inc., a Maryland corporation, d/b/a
A & A Environmental, is incorporated by reference from Exhibit 5.1
of our Current Report on Form 8-K dated March 23, 2004, and filed on
April 8, 2004. The Company will furnish supplementally a copy of all
omitted schedules to the Commission upon request.
10.2 Asset Purchase Agreement dated March 23, 2004, between the Company
and US Liquids of Pennsylvania, Inc., a Pennsylvania corporation,
d/b/a EMAX of Pittsburgh, Pa., is incorporated by reference from
Exhibit 5.2 of our Current Report on Form 8-K dated March 23, 2004,
and filed on April 8, 2004. The Company will furnish supplementally
a copy of all omitted schedules to the Commission upon request.
10.3 Common Stock Purchase Warrant, dated March 16, 2004, granted by the
Company to R. Keith Fetter, is incorporated by reference from
Exhibit 10.3 of our Form S-3 Regisration Statement dated April 30,
2004. Substantially similar warrants were granted to Joe Dilustro
and Chet Dubov, each for the purchase of 30,000 shares of the
Company's common stock. Copies will be provided to the Commission
upon request.
31.1 Certification by Dr. Louis F. Centofanti, Chief Executive Officer of
the Company pursuant to Rule 13a-14(a) or 15d-14(a).
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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.
Reports on Form 8-K
A current report on Form 8-K (Item 12 - Results of Operations and
Financial Condition) was filed by the Company on March 2, 2004,
regarding the financial results and conference call for the year
ended December 31, 2003.
A current report on Form 8-K (Item 5 - Other Events) was filed by
the Company on March 23, 2004, announcing the completion of a
private placement of its Common Stock.
A current report on Form 8-K/A (Item 5 - Other Events) was filed by
the Company on April 4, 2004, to correct the previous Form 8-K filed
on March 23, 2004.
A current report on Form 8-K (Item 5 - Other Events) was filed by
the Company on April 8, 2004, to report the completion of the
acquisitions of two facilities.
A current report on Form 8-K (Item 5 - Other Events and Item 12 -
Results of Operations and Financial Condition) was filed by the
Company on April 30, 2004, to report improper acceptance and storage
of waste at our Tulsa ,Oklahoma facility and to announce the
financial results and conference call for the three months ended
March 31, 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
PERMA-FIX ENVIRONMENTAL SERVICES
Date: May 10, 2004 By: /s/ Dr. Louis F. Centofanti
--------------------------------
Dr. Louis F. Centofanti
Chairman of the Board
Chief Executive Officer
Date: May 10, 2004 By: /s/ Richard T. Kelecy
--------------------------------
Richard T. Kelecy
Chief Financial Officer
33