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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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
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PERMA-FIX ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-1954497
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
1940 N.W. 67th Place, Gainesville, FL 32653
(Address of principal executive offices) (Zip Code)
(352) 373-4200
(Registrant's telephone number)
N/A
----------------------------------------------
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the close of the latest practical date.
Class Outstanding at August 5, 2004
Common Stock, $.001 Par Value 41,657,568
(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 -
June 30, 2004 and December 31, 2003.......................2
Consolidated Statements of Operations -
Three and Six Months Ended June 30, 2004 and 2003.........4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2004 and 2003...................5
Consolidated Statement of Stockholders' Equity -
Six Months Ended June 30, 2004............................6
Notes to Consolidated Financial Statements.........................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................31
Item 4. Controls and Procedures...........................................32
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................33
Item 5. Other Information.................................................33
Item 6. Exhibits and Reports on Form 8-K..................................34
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 six months ended June 30, 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
June 30,
2004 December 31,
(Amounts in Thousands, Except for Share Amounts) (Unaudited) 2003
- -------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 190 $ 411
Restricted cash 61 30
Accounts receivable, net of allowance for doubtful
accounts of $711 and $703 27,347 24,622
Inventories 1,009 589
Prepaid expenses 1,660 2,332
Other receivables 416 397
----------- -----------
Total current assets 30,683 28,381
Property and equipment:
Buildings and land 22,372 21,391
Equipment 33,565 32,121
Vehicles 3,236 2,881
Leasehold improvements 11,235 11,082
Office furniture and equipment 2,205 2,153
Construction-in-progress 3,600 2,636
----------- -----------
76,213 72,264
Less accumulated depreciation and amortization (21,668) (19,195)
----------- -----------
Net property and equipment 54,545 53,069
Intangibles and other assets:
Permits 16,680 16,680
Goodwill 6,216 6,216
Finite Risk Sinking Fund 2,225 1,234
Other assets 4,128 4,635
----------- -----------
Total assets $ 114,477 $ 110,215
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
2
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
June 30,
2004 December 31,
(Amounts in Thousands, Except for Share Amounts) (Unaudited) 2003
- ------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,245 $ 6,359
Current environmental accrual 986 1,143
Accrued expenses 9,940 11,553
Unearned revenue 2,978 2,271
Current portion of long-term debt 2,296 2,896
------------ -----------
Total current liabilities 23,445 24,222
Environmental accruals 1,910 1,432
Accrued closure costs 5,037 4,965
Other long-term liabilities 1,862 1,677
Long-term debt, less current portion 21,478 26,192
------------ ------------
Total long-term liabilities 30,287 34,266
------------ ------------
Total liabilities 53,732 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, 42,545,331 and
37,241,881 shares issued, including 988,000 shares held as
treasury stock, respectively 43 37
Additional paid-in capital 80,573 69,640
Accumulated deficit (19,218) (17,243)
Interest rate swap (76) (130)
------------ ------------
61,322 52,304
Less Common Stock in treasury at cost; 988,000 shares (1,862) (1,862)
------------ ------------
Total stockholders' equity 59,460 50,442
------------ ------------
Total liabilities and stockholders' equity $ 114,477 $ 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 Six Months Ended
June 30, June 30,
--------------------- ---------------------
(Amounts in Thousands, Except for Per Share Amounts) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Net revenues $ 19,868 $ 19,909 $ 37,337 $ 39,427
Cost of goods sold 14,438 15,391 28,346 29,848
--------- --------- --------- --------
Gross profit 5,430 4,518 8,991 9,579
Selling, general and administrative expenses 4,417 4,786 8,807 9,166
--------- --------- --------- --------
Income (loss) from operations 1,013 (268) 184 413
Other income (expense):
Interest income 1 3 2 5
Interest expense (579) (691) (1,249) (1,393)
Interest expense-financing fees (257) (257) (513) (558)
Other (61) 10 (305) (55)
--------- --------- --------- --------
Net income (loss) 117 (1,203) (1,881) (1,588)
Preferred Stock dividends (47) (48) (94) (94)
--------- --------- --------- --------
Net income (loss) applicable to Common Stock $ 70 $ (1,251) $ (1,975) $ (1,682)
========= ========= ========= ========
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share:
Basic $ -- $ (.04) $ (.05) $ (.05)
========= ========= ========= ========
Diluted $ -- $ (.04) $ (.05) $ (.05)
========= ========= ========= ========
Number of shares and potential common shares used
in net income (loss) per common share:
Basic 41,448 34,798 39,244 34,702
========= ========= ========= ========
Diluted 45,210 34,798 39,244 34,702
========= ========= ========= ========
The accompanying notes are an integral part of these
consolidated financial statements.
4
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
----------------------
(Amounts in Thousands) 2004 2003
- -----------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (1,881) $ (1,588)
Adjustments to reconcile net loss to cash provided by
(used in) operations:
Depreciation and amortization 2,643 2,379
Debt discount amortization 162 162
Provision for bad debt and other reserves 119 82
Gain on sale of plant, property and equipment (18) (1)
Changes in assets and liabilities:
Accounts receivable (641) 774
Prepaid expenses, inventories and other assets 19 (1,932)
Accounts payable and accrued expenses (78) 1,596
---------- ---------
Net cash provided by operations 325 1,472
Cash flows from investing activities:
Purchases of property and equipment, net (1,886) (1,337)
Proceeds from sale of plant, property and equipment 19 1
Change in restricted cash, net -- (2)
Change in finite risk sinking fund (991) (1,234)
Funds used for acquisitions (net of cash acquired) (2,903) --
---------- ---------
Net cash used in investing activities (5,761) (2,572)
Cash flows from financing activities:
Net borrowings (repayments) of revolving credit (3,899) 2,178
Principal repayments of long-term debt (1,744) (1,831)
Proceeds from issuance of stock 10,858 591
---------- ---------
Net cash provided by financing activities 5,215 938
---------- ---------
Decrease in cash (221) (162)
Cash at beginning of period 411 212
---------- ---------
Cash at end of period $ 190 $ 50
========== =========
Supplemental disclosure:
Interest paid $ 1,061 $ 1,051
Non-cash investing and financing activities:
Issuance of Common Stock for services 18 17
Issuance of Common Stock for payment of dividends 63 63
Gain on interest rate swap 54 23
Long-term debt incurred for purchase of property and equipment 167 726
The accompanying notes are integral part of these
consolidated financial statements.
5
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited, for the six months ended June 30, 2004)
Common
Preferred Stock Common Stock Additional Stock Total
(Amounts in thousands, --------------- --------------- Paid-In Accumulated Interest Held In Stockholders'
except for share amounts) Shares Amount Shares Amount Capital Deficit Rate Swap Treasury Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 2,500 $ -- 37,241,881 $ 37 $69,640 $(17,243) $ (130) $ (1,862) $ 50,442
Comprehensive loss:
Net loss -- -- -- -- -- (1,881) -- -- (1,881)
Other Comprehensive income:
Gain on interest rate swap -- -- -- -- -- -- 54 -- 54
--------
Comprehensive loss (1,827)
Preferred Stock dividends -- -- -- -- -- (94) -- -- (94)
Issuance of Common Stock for
Preferred Stock dividend -- -- 19,643 -- 63 -- -- -- 63
Issuance of stock for cash
and services -- -- 667,694 1 1,005 -- -- -- 1,006
Issuance of Common Stock in
private placement -- -- 4,616,113 5 9,865 -- -- -- 9,870
----- ---- ---------- ---- ------- -------- ------ -------- --------
Balance at June 30, 2004 2,500 $ -- 42,545,331 $ 43 $80,573 $(19,218) $ (76) $ (1,862) $ 59,460
===== ==== ========== ==== ======= ======== ====== ========= ========
The accompanying notes are an integral part of these
consolidated financial statements.
6
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 income (loss) and net
income (loss) per share would have been increased to the pro forma amounts
indicated below (in thousands except for per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------------
2004 2003 2004 2003
------- -------- --------- ---------
Net income (loss) applicable to Common Stock, as
reported $ 70 $ (1,251) $ (1,975) $ (1,682)
Deduct: Total Stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects (90) (103) (186) (199)
------- -------- -------- ---------
Pro forma net loss applicable to Common Stock $ (20) $ (1,354) $ (2,161) $ (1,881)
======= ======== ======== =========
Loss per share:
Basic - as reported $ -- $ (.04) $ (.05) $ (.05)
======= ======== ======== =========
Basic - pro-forma $ -- $ (.04) $ (.06) $ (.05)
======= ======== ======== =========
Diluted - as reported $ -- $ (.04) $ (.05) $ (.05)
======= ======== ======== =========
Diluted - pro-forma $ -- $ (.04) $ (.06) $ (.05)
======= ======== ======== =========
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 June
30, 2003, and the six months ended June 30, 2004 and 2003, do not include
potential common shares as their effect would be anti-dilutive.
The following is a reconciliation of basic net income (loss) per share and
diluted net income (loss) per share for the three and six months ended June 30,
2004, and 2003.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------
(Amounts in thousands except per share amounts) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to Common Stock-basic $ 70 $ (1,251) $ (1,975) $ (1,682)
Effect of dilutive securities - Preferred Stock dividends 47 -- -- --
--------- --------- --------- ---------
Net income (loss) applicable to Common Stock - diluted $ 117 $ (1,251) $ (1,975) $ (1,682)
========= ========= ========= =========
Basic net income (loss) per share $ -- $ (.04) $ (.05) $ (.05)
========= ========= ========= =========
Diluted net income (loss) per share $ -- $ (.04) $ (.05) $ (.05)
========= ========= ========= =========
Weighted average shares outstanding - basic 41,448 34,798 39,244 34,702
Potential shares exercisable under stock option plans 351 -- -- --
Potential shares upon exercise of Warrants 1,744 -- -- --
Potential shares upon conversion of Preferred Stock 1,667 -- -- --
--------- --------- --------- ---------
Weighted average shares outstanding - diluted 45,210 34,798 39,244 34,702
========= ========= ========= =========
Potential shares excluded from above weighted average share
calculations due to their anti-dilutive effect include:
Upon exercise of Options 1,583 3,682 3,140 3,682
Upon exercise of Warrants 1,776 12,893 12,791 12,893
Upon conversion of Preferred Stock -- 1,667 1,667 1,667
8
3. Long Term Debt
Long-term debt consists of the following at June 30, 2004, and December 31,
2003:
June 30,
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% (5.25% at
June 30, 2004), balance due in December 2005. $ 5,336 $ 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% (5.75% at June 30, 2004). 3,583 4,083
Three promissory notes dated May 27, 1999, payable in equal monthly
installments of principal and interest of $90 over 60 months, interest at
7.0%, paid in full in June 2004. -- 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 $676 at June 30, 2004 and $838 at December
31, 2003. 4,949 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 June 30, 2004) and is payable in one lump sum at the end of
installment period. 3,194 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 June 30, 2004) and is payable in one lump sum at the end of
installment period. 793 833
Various capital lease and promissory note obligations, payable 2004 to 2009,
interest at rates ranging from 5.2% to 17.9%. 2,419 2,765
--------- -----------
23,774 29,088
Less current portion of long-term debt 2,296 2,896
--------- -----------
$ 21,478 $ 26,192
========= ===========
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 June 30, 2004, the excess
availability under our Revolving Credit was $13,314,000 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
9
portion of the unused excess availability to pay off higher interest debt, such
as our 13.5% Senior Subordinated Notes, during the third quarter of 2004.
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 were paid in full in June 2004.
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. We currently have approximately $540,000 in unamortized
prepaid financing fees that are being amortized over the remaining life of the
Notes. It is our intent to prepay the Notes as discussed above. If we prepay the
Notes in August 2004, we will be required to expense approximately $1,357,000,
which includes the unamortized prepaid financing fees, the unamortized debt
discount (discussed below), and payment of a prepayment premium of approximately
$190,000.
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 June 30, 2004, the unamortized portion of the debt discount was
$676,000. 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 connection with the sale of the Notes, the Company, AMI, and BEC entered into
an Option Agreement, dated July 31, 2001 (the "Option Agreement"). Pursuant to
the Option Agreement, the Company granted each purchaser an irrevocable option
requiring the Company to purchase any of the Warrants or Warrant Shares then
held by the purchaser (the "Put Option"). The Put Option may be exercised at any
time commencing July 31, 2004, and ending July 31, 2008. In addition, each
purchaser granted to the Company an irrevocable option to purchase all the
Warrants or the Warrant Shares then held by the purchaser (the "Call Option").
The Call Option may be exercised at any time commencing July 31, 2005, and
ending July 31, 2008. The purchase price under the Put Option and the Call
Option is based on the
10
quotient obtained by dividing (a) the sum of six times the Company's
consolidated EBITDA for the period of the 12 most recent consecutive months
minus Net Debt plus the Warrant Proceeds by (b) the Company's Diluted Shares (as
the terms EBITDA, Net Debt, Warrant Proceeds, and Diluted Shares are defined in
the Option Agreement). We account for the changes in redemption value
immediately as they occur and adjust the carrying value of the security to equal
the redemption value at the end of each reporting period. On June 30, 2004, the
Put Option had no value and no liability was recorded.
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 June 30, 2004)
and payable in lump sum at the end of the loan period. On June 30, 2004, the
outstanding balance was $4,301,000 including accrued interest of approximately
$1,107,000. 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 June 30, 2004
the Applicable Rate was 7.0%. On June 30, 2004, the outstanding balance was
$1,063,000 including accrued interest of approximately $270,000.
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 and the Company's Form 10-Q for the quarter ended
March 31, 2004.
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 have received a notice of
violation ("NOV") and are currently working with the Oklahoma authorities to
provide the information they requested and resolve this matter. Although no
fines or penalties were assessed under the NOV, our Oklahoma subsidiary was
required to make modifications to the existing facility.
11
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 June 30, 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 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
12
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 $76,000 for expenses related to the private placement. We intend to
use a portion of our availability under our Revolving Credit, after paying such
down with a portion of the net proceeds from the private placement, 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).
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.
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.
13
The table below presents certain financial information in thousands by business
segment for the three and six months ended June 30, 2004 and 2003.
Segment Reporting for the Quarter Ended June 30, 2004
Industrial Nuclear
Waste Waste Segments Consolidated
Services Services Engineering Total Corporate Total
-------------- ------------ ------------- ----------- ---------- -------------
Revenue from external $ 10,531 $ 8,509 $ 828 $ 19,868 $ -- $ 19,868
customers
Intercompany revenues 754 861 158 1,773 -- 1,773
Interest income 1 -- -- 1 -- 1
Interest expense 187 415 -- 602 (23) 579
Interest expense-financing
fees -- 1 -- 1 256 257
Depreciation and amortization 731 659 7 1,397 10 1,407
Segment profit (loss) (583) 630 23 70 -- 70
Segment assets(1) 46,557 58,736 2,192 107,485 6,992 114,477
Expenditures for segment
assets 96 867 9 972 8 980
Segment Reporting for the Quarter Ended June 30, 2003
Industrial Nuclear
Waste Waste Segments Consolidated
Services Services Engineering Total Corporate Total
-------------- ------------ ------------- ----------- ---------- -------------
Revenue from external $ 11,265 $ 7,880 $ 764 $ 19,909 $ -- $ 19,909
customers
Intercompany revenues 1,132 900 141 2,173 -- 2,173
Interest income 1 -- -- 1 2 3
Interest expense 192 458 (3) 647 44 691
Interest expense-financing
fees -- 1 -- 1 256 257
Depreciation and amortization 578 634 8 1,220 19 1,239
Segment profit (loss) (579) (747) 75 (1,251) -- (1,251)
Segment assets(1) 42,318 55,583 2,179 100,080 7,143 107,223
Expenditures for segment
assets 390 399 6 795 65 860
Segment Reporting for the Six Months Ended June 30, 2004
Industrial Nuclear
Waste Waste Segments Consolidated
Services Services Engineering Total Corporate Total
-------------- ------------ ------------- ----------- ---------- -------------
Revenue from external $ 17,797 $ 17,984 $ 1,556 $ 37,337 $ -- $ 37,337
customers
Intercompany revenues 1,029 1,849 219 3,097 -- 3,097
Interest income 2 -- -- 2 -- 2
Interest expense 353 869 -- 1,222 27 1,249
Interest expense-financing
fees -- 1 -- 1 512 513
Depreciation and amortization 1,306 1,308 14 2,628 15 2,643
Segment profit (loss) (3,116) 1,114 27 (1,975) -- (1,975)
Segment assets(1) 46,557 58,736 2,192 107,485 6,992 114,477
Expenditures for segment
assets 455 1,529 17 2,001 52 2,053
Segment Reporting for the Six Months Ended June 30, 2003
Industrial Nuclear
Waste Waste Segments Consolidated
Services Services Engineering Total Corporate Total
-------------- ------------ ------------- ----------- ---------- -------------
Revenue from external $ 21,508 $ 16,266 $ 1,653 $ 39,427 $ -- $ 39,427
customers
Intercompany revenues 2,275 1,307 274 3,856 -- 3,856
Interest income 3 -- -- 3 2 5
Interest expense 374 943 (6) 1,311 82 1,393
Interest expense-financing
fees -- 3 -- 3 555 558
Depreciation and amortization 1,112 1,211 18 2,341 38 2,379
Segment profit (loss) (1,407) (431) 156 (1,682) -- (1,682)
Segment assets(1) 42,318 55,583 2,179 100,080 7,143 107,223
Expenditures for segment
assets 836 1,068 8 1,912 151 2,063
14
(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 include revenues within the Nuclear Waste
Services segment from Bechtel Jacobs for the quarter and six months ended
June 30, 2004, which total $2,609,000 or 13.1% and 4,125,000 or 11.1% of
consolidated revenues and $4,170,000 or 20.9% and 5,903,000 or 15.0% of
consolidated revenues for the same periods in 2003.
15
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 our financial performance;
o ability to comply with the general working capital requirements;
o ability to be able to continue to borrow under the 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 our 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 the additional $1,600,000 of the $3,600,000
revised capital expenditure estimate during 2004;
o as the M&EC facility continues to enhance its processing
capabilities and completes certain expansion projects, we could see
higher total revenues with Bechtel Jacobs;
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 third quarter;
o use of proceeds from the private placement to pay off higher
interest debt;
o ability under the joint ventures to win contract awards and perform
remedial activities; and
o completion of the contract with the Fortune 500 company during the
first quarter of next year.
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;
16
o changes in federal, state and local laws and regulations, especially
environmental laws and regulations, or in interpretation of such;
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 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 second quarter of 2004 reflect a
significant improvement over the losses incurred in the first quarter of the
year, as we achieved profitability for the quarter. We continue to see revenue
growth and contract opportunities within the Nuclear segment, while at the same
time enhancing our processing capabilities and efficiencies, improving our gross
margins and reducing our overhead costs within the segment. Our recent
restructuring efforts within the Industrial segment are beginning to have a
positive effect. Even though our revenues have declined within this segment over
the past two quarters, we are now seeing improvements as our new sales efforts
take effect. The Industrial segment improved its gross margins, reduced its
overhead and reduced its overall loss position, from that reported in the first
quarter. A major contributor however to its loss was the operating losses
sustained at the Michigan facility as a result of its ongoing disruption. We are
reviewing in detail all activities and options as to the Michigan facility. We
continue to strengthen our balance sheet and cash position, and reduce our debt,
which should have a positive effect as we move into our strongest quarter.
17
Results of Operations
The table below should be used when reviewing management's discussion and
analysis for the three and six months ended June 30, 2004 and 2003:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ -------------------------------------
Consolidated (amounts in thousands) 2004 % 2003 % 2004 % 2003 %
- --------------------------------------------------------------------------- -------------------------------------
Net revenues $19,868 100.0 $19,909 100.0 $ 37,337 100.0 $39,427 100.0
Cost of goods sold 14,438 72.7 15,391 77.3 28,346 75.9 29,848 75.7
------ ----- ------- ---- ------- ----- ------- -----
Gross profit 5,430 27.3 4,518 22.7 8,991 24.1 9,579 24.3
Selling, general and administrative 4,417 22.2 4,786 24.0 8,807 23.6 9,166 23.2
------ ----- ------- ---- ------- ----- ------- -----
Income (loss) from operations $1,013 5.1 $ (268) (1.3) $ 184 0.5 $ 413 1.1
====== ===== ======= ==== ======= ===== ======= =====
Interest expense $ (579) (2.9) $ (691) (3.4) $(1,249) (3.3) $(1,393) (3.5)
Interest expense-financing fees (257) (1.3) (257) (1.3) (513) (1.4) (558) (1.4)
Preferred Stock dividends (47) (0.2) (48) (0.2) (94) (0.3) (94) (0.2)
Summary - Three and Six Months Ended June 30, 2004 and 2003
Net Revenue
Consolidated net revenues decreased to $19,868,000 for the quarter ended June
30, 2004, as compared to $19,909,000 for the same quarter in 2003. The decrease
of $41,000 or 0.2% is primarily attributable to a decrease in the Industrial
segment of approximately $734,000 or 6.5% resulting principally from the
continued restructuring of the segment. The Industrial segment had 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 and second quarters of 2004. Other reductions within the Industrial
segment include a disruption in our bulking services due to a fire at our
Michigan facility in November of 2003. The remaining decrease for the Industrial
segment is attributable to the decline in government revenues of approximately
$283,000, principally a result of a $252,000 reduction from a contract that
expired during the second quarter of 2003. Partially offsetting the decrease
within the segment is $2,691,000 of revenue contributed from two facilities
acquired as of March 23, 2004. See "Acquisitions" in this Management's
Discussion and Analysis for further information on the acquired facilities.
Positively impacting 2003, which was not duplicated in 2004, was the Army's
Newport Hydrolysate project, from which we recognized revenue of $625,000 during
the second quarter of 2003. Offsetting this decrease, was an increase in the
Nuclear segment of approximately $629,000 or 8.0%, 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. We recently were awarded a contract by a
Fortune 500 company to treat and dispose of mixed waste from research and
development activities. During the second quarter of 2004 we performed a
demonstration project for the U.S. Environmental Protection Agency on a new PCB
treatment process for contaminated soils. This demonstration utilized a portion
of our processing capacities over approximately a five-week period, which
negatively impacted our revenue generating processing capacity during the
quarter. Additionally, the second quarter of 2003 was negatively impacted by the
government's inability to ship waste to our facilities due to the war in Iraq
and prolonged terrorism alerts. Revenues from Bechtel Jacobs Company, which
includes the Oak Ridge contracts, totaled $2,609,000 or 13.1% of total
consolidated revenues for the three months ended June 30, 2004, compared to
$4,170,000 or 20.9% for
18
the three months ended June 30, 2003. See "Known Trends and Uncertainties -
Significant Contracts" of this Management's Discussion and Analysis.
Additionally, the Consulting Engineering Service segment also experienced an
increase of approximately $64,000.
Consolidated net revenues decreased to $37,337,000 from $39,427,000 for the
six-month period ended June 30, 2004. This decrease of $2,090,000 or 5.3% is
principally attributable to a decrease in the Industrial segment of
approximately $3,711,000 resulting primarily from the continued restructuring of
the segment as discussed above. Other reductions within the Industrial segment
include a disruption in our bulking services due to a fire at our Michigan
facility in November of 2003. The remaining decrease for the segment is
attributable to the reduction in government revenues of approximately
$1,276,000, partially a result of special event work that was performed in the
first six months of 2003, which was not available in 2004, and roughly $588,000
due to a contract that expired during the second quarter of 2003. Partially
offsetting the decrease within the segment is $3,197,000 of revenue contributed
from two facilities acquired as of March 23, 2004. See "Acquisitions" in this
Management's Discussion and Analysis for further information on the acquired
facilities. Positively impacting 2003, was the Army's Newport Hydrolysate
project, from which we recognized revenue of $1,185,000 during the first six
months of 2003, and was not duplicated in 2004. The Consulting Engineering
Service segment also experienced a decrease of approximately $97,000, which was
primarily due to new contract work for a major cement manufacturer in the first
six months of 2003. Offsetting these decreases, was an increase in the Nuclear
segment of approximately $1,718,000, 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. Additionally, 2003 was negatively effected by the
government's inability to ship waste to our facilities due to the war in Iraq
and prolonged terrorism alerts, which has not been an obstacle for the first six
months of 2004. Consolidated revenues with Bechtel Jacobs Company, which
includes the Oak Ridge contracts, totaled $4,125,000 or 11.1% of total revenues
for the six months ended June 30, 2004, compared to $5,903,000 or 15.0% for the
six months ended June 30, 2003. See "Known Trends and Uncertainties -
Significant Contracts" of this Management's Discussion and Analysis. The backlog
of stored waste within the Nuclear segment at June 30, 2004, was approximately
$8,646,000, compared to $5,782,000 at December 31, 2003.
Cost of Goods Sold
Cost of goods sold decreased $953,000 or 6.2% for the quarter ended June 30,
2004, as compared to the quarter ended June 30, 2003. This decrease in cost of
goods sold predominantly reflects a decrease in the Nuclear segment of $639,000
due to a decrease in disposal and treatment costs associated with the continued
refinement of our treatment processes along with the reduction of our insurance
costs as a result of the finite risk insurance program. Additionally, the
Industrial segment experienced a decrease of approximately $407,000, which
primarily relates to the decrease in revenues. This decrease includes the
reduction in costs from 2003 due to the Army's Newport Hydrolysate project, not
repeated 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 since November 2003 and the additional
operating costs incurred as the segment completes its restructuring and
integration efforts. The second quarter of 2004 also reflected additional costs
related to revenue generated from the two facilities acquired, as of March 23,
2004. Partially offsetting these decreases was an increase in cost of goods sold
for the Consulting Engineering Services segment of $93,000, which corresponds
with the increase in revenue. Depreciation expense of $1,304,000 and $1,131,000
for the quarters ended June 30, 2004 and 2003, respectively, is included in cost
of goods sold, which reflects an increase of $173,000.
Cost of goods sold decreased $1,502,000 or 5.0% for the six-month period ended
June 30, 2004, as compared to the six-month period ended June 30, 2003. This
decrease in cost of goods sold principally reflects a decrease in the Industrial
segment of approximately $1,466,000, which primarily relates to the decrease in
revenues. This decrease includes the reduction in costs from 2003 due to the
Army's Newport
19
Hydrolysate project, not repeated in 2004. Partially offsetting this decrease
was the additional costs to process and dispose of waste at our Michigan
facility and the additional operating costs incurred as the segment completes
its restructuring and integration efforts. The first six months of 2004 also
reflected additional costs related to revenue generated from the two facilities
acquired, as of March 23, 2004. Additionally, the Nuclear segment experienced a
decrease of $93,000 due to a decrease in disposal and treatment costs associated
with the continued refinement of our treatment processes, along with the
reduction of our insurance costs related to our finite risk insurance program.
Partially offsetting these decreases was an increase in cost of goods sold for
the Consulting Engineering Services segment of $57,000, which relates to the
higher costs of the consulting projects completed this year. Included within
cost of goods sold is depreciation expense of $2,444,000 and $2,167,000 for the
six months ended June 30, 2004 and 2003, respectively, reflecting an increase of
$277,000 over 2003.
Gross Profit
The resulting gross profit for the quarter ended June 30, 2004, increased
$912,000 to $5,430,000, which as a percentage of revenue is 27.3%, as compared
to 22.7% for the quarter ended June 30, 2003. The increase in gross profit
percentage principally reflects an increase in the Nuclear segment from 24.0% in
2003 to 37.1% 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. The increase in
gross profit percentage is primarily offset by a decrease in the Industrial
segment from 20.7% in 2003 to 19.0% in 2004. This 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 gross profit
from the loss of the Michigan facility's ability to perform bulking services
after the fire in November of 2003. The positive effects of the March 23, 2004
acquisitions more than offset the elimination of the Army's Newport Hydrolysate
project included in the second quarter of 2003. Additionally, there was a
decrease in the Consulting Engineering Services segment from 39.1% in 2003 to
32.5% in 2004, which reflects the impact of lower margin projects being
performed in the second quarter of 2004.
The resulting gross profit for the six months ended June 30, 2004, decreased
$588,000 to $8,991,000, which as a percentage of revenue is 24.1%, reflecting a
decrease from the 2003 corresponding six months percentage of revenue of 24.3%.
This decrease in gross profit percentage principally reflects a decrease in the
Industrial segment from 19.9% in 2003 to 11.4% in 2004. This 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
gross profit from the loss of the Michigan facility's ability to perform bulking
services after the fire in November of 2003. The positive effects of the March
23, 2004 acquisitions more than offset the elimination of the Army's Newport
Hydrolysate project included in the first six months of 2003. Additionally,
there was a decrease in the Consulting Engineering Services segment from 35.7%
in 2003 to 28% in 2004, which reflects the impact of lower margin projects being
performed in the first six months of 2004. The decrease in gross profit
percentage was partially offset by an increase in the Nuclear segment from 29.0%
in 2003 to 36.3% in 2004, reflecting mainly the favorable product mix during the
first six months, 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 decreased $369,000 or 7.7% for the
quarter ended June 30, 2004, as compared to the quarter ended June 30, 2003.
This decrease was achieved throughout all of our segments, and included
reductions in payroll related expenses and outside services, the most
significant of which came from the Industrial segment, as a result of the
restructuring of the segment. Partially offsetting these decreases within the
segment are the additional expenses related to the two facilities acquired
effective March 23, 2004. Depreciation and amortization expense of $102,000 and
$108,000 was included within selling, general and administrative expenses for
the second quarters of 2004 and
20
2003, respectively. As a percentage of revenue, selling, general and
administrative expenses decreased to 22.2% for the quarter ended June 30, 2004,
compared to 24.0% for the same period in 2003.
Selling, general and administrative expenses decreased $359,000 or 3.9% for the
six months ended June 30, 2004, as compared to the same period in 2003. This
decrease primarily relates to the Consulting Engineering Services and Industrial
segments reductions in payroll and related expenses, with the decrease in the
Industrial segment primarily due to the restructuring of the segment. Partially
offsetting the decrease within the Industrial segment are the additional
expenses related to the two facilities acquired, effective March 23, 2004.
Offsetting these decreases was an increase in corporate administrative expenses
and Nuclear segment payroll related expenses, as stronger infrastructures are
built. Included in selling, general and administrative expenses is depreciation
and amortization expense of $199,000 and $212,000 for the six months ended June
30, 2004 and 2003, respectively. As a percentage of revenue, selling, general
and administrative expenses increased to 23.6% for the six months ended June 30,
2004, compared to 23.2% for the same period in 2003.
Interest Expense
Interest expense decreased $112,000 for the quarter ended June 30, 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 $86,000. In March 2004, we
received proceeds from the private placement, that were used to temporarily
reduce the revolver, resulting in this decrease in interest expense.
Additionally, this decrease reflects the impact of the final repayment of debt
associated with past acquisitions resulting in a decrease in interest expense of
$19,000, and a decrease in interest expense of $7,000 associated with scheduled
payments of other debt.
Interest expense also decreased by $144,000 for the six-month period ended June
30, 2004, as compared to the corresponding period of 2003. This decrease
reflects the impact of lower interest rates and decreased borrowing levels on
the revolving credit and term loans with PNC, which resulted in a decrease in
interest expense of $116,000 when compared to prior year, principally a result
of the private placement funds raised in 2004. Additionally, the final repayment
of debt associated with past acquisitions resulted in a decrease in interest
expense of $37,000. In March 2004, we received proceeds related to the private
placement that was used to temporarily reduce the revolver, which resulted in a
decrease in interest expense. Offsetting these decreases was an increase in
interest expense of $9,000 due to an increase in debt associated with facility
and computer upgrades.
Interest Expense - Financing Fees
Interest expense-financing fees remained constant at $257,000 during the three
months ended June 30, 2004, and 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.
Interest expense-financing fees decreased by $45,000 for the six months ended
June 30, 2004, as compared to the corresponding period of 2003. 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 $48,000
for the quarters ended June 30, 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. Preferred dividends for the six
months remained constant at $94,000 for 2004 and 2003.
21
Liquidity and Capital Resources of the Company
Our capital requirements consist of general working capital needs, scheduled
principal payments on our debt obligations and capital leases, remediation
projects and planned capital expenditures. Our capital resources consist
primarily of cash generated from operations, funds available under our revolving
credit facility and proceeds from issuance of our Common Stock. Our capital
resources are impacted by changes in accounts receivable as a result of revenue
fluctuation, economic trends, collection activities, and the profitability of
the segments.
At June 30, 2004, we had cash of $190,000. This cash total reflects a decrease
of $221,000 from December 31, 2003, as a result of net cash provided by
operations of $325,000 and cash provided by financing activities of $5,215,000
(principally proceeds from the issuance of Common Stock in connection with
Warrant and option exercises, issuances under our employee stock purchase plan
and the private placement completed in the first quarter partially offset by net
repayments of our revolving credit facility and long-term debt) offset by cash
used in investing activities of $5,761,000 (principally funds used for
acquisitions, net purchases of equipment, and a deposit to the finite risk
sinking fund). We are in a net borrowing position and therefore attempt to move
all excess cash balances immediately to the revolving credit facility, so as to
reduce debt and interest expense. We utilize a centralized cash management
system, which includes remittance lock boxes and is structured to accelerate
collection activities and reduce cash balances, as idle cash is moved without
delay to the revolving credit facility. The cash balance at June 30, 2004
represents payroll account fundings, which were not withdrawn until after
quarter-end.
Operating Activities
Accounts receivable, net of allowance for doubtful accounts, totaled
$27,347,000, an increase of $2,725,000 from the December 31, 2003 balance of
$24,622,000. This increase reflects the impact of additional accounts receivable
of $2,540,000 as a result of the assets purchased in the acquisitions discussed
below in this Management's Discussion and Analysis. Additionally, the Industrial
segment experienced an increase in accounts receivable of $1,600,000 as a result
of the final billing of the Army's Newport Hydrolysate project, which was
principally offset by enhanced collection efforts within the segment. The
Nuclear segment experienced an increase of $141,000, partially as a result of a
$1,900,000 billing in June related to a major contract, offset almost entirely
by collections made primarily on Government invoices. The Consulting Engineering
segment experienced an increase of $61,000.
As of June 30, 2004, total consolidated accounts payable was $7,245,000, an
increase of $886,000 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 $890,000. Additionally, accounts payable increased
due to unfinanced capital expenditures, offset by decreases in accounts payable
which was achieved by improved cash flow during the second quarter and the
positive impact of the first quarter acquisitions.
Working capital at June 30, 2004, was $7,238,000, as compared to working capital
of $4,159,000 at December 31, 2003, reflecting an increase of $3,079,000. This
working capital increase principally reflects the increased accounts receivable
balance primarily due to the acquisitions, which contributed $1,740,000 of this
increase, net of the increased accounts payable balance at the end of the
period, and improved cash flow during the second quarter.
Investing Activities
Our purchases of capital equipment for the six-month period ended June 30, 2004,
totaled approximately $2,053,000, including financed purchases of $167,000.
These expenditures were for expansion and improvements to the operations
principally within 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
22
$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. We have revised our capital expenditures estimate for
2004, down to approximately $3,600,000. Our purchases during 2004 include
approximately $884,000 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 June 30, 2004, the excess availability under our Revolving Credit
was $13,314,000 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, during the third quarter of 2004.
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.
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 Promissory Notes, in the aggregate amount
of $4,700,000 payable to the former owners of PFO, PFSG and PFMI. The Promissory
Notes were paid in full in June 2004.
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. We currently have approximately $540,000 in unamortized
23
prepaid financing fees that are being expenses over the life of the Notes. It is
our intent to prepay the Notes as discussed above. If we prepay the Notes in
August 2004, we will be required to expense approximately $1,357,000, which
includes the unamortized prepaid financing fees, the unamortized debt discount
(discussed below), and payment of a prepayment premium of approximately
$190,000.
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 June 30, 2004, the unamortized portion of the debt discount was
$676,000. 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 connection with the sale of the Notes, the Company, AMI, and BEC entered into
an Option Agreement, dated July 31, 2001 (the "Option Agreement"). Pursuant to
the Option Agreement, the Company granted each purchaser an irrevocable option
requiring the Company to purchase any of the Warrants or Warrant Shares then
held by the purchaser (the "Put Option"). The Put Option may be exercised at any
time commencing July 31, 2004, and ending July 31, 2008. In addition, each
purchaser granted to the Company an irrevocable option to purchase all the
Warrants or the Warrant Shares then held by the purchaser (the "Call Option").
The Call Option may be exercised at any time commencing July 31, 2005, and
ending July 31, 2008. The purchase price under the Put Option and the Call
Option is based on the quotient obtained by dividing (a) the sum of six times
the Company's consolidated EBITDA for the period of the 12 most recent
consecutive months minus Net Debt plus the Warrant Proceeds by (b) the Company's
Diluted Shares (as the terms EBITDA, Net Debt, Warrant Proceeds, and Diluted
Shares are defined in the Option Agreement). We account for the changes in
redemption value immediately as they occur and adjust the carrying value of the
security to equal the redemption value at the end of each reporting period. On
June 30, 2004, the Put Option had no value and no liability was recorded.
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 June 30, 2004)
and payable in lump sum at the end of the loan period. On June 30, 2004, the
outstanding balance was $4,301,000 including accrued interest of approximately
$1,107,000. 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 June 30, 2004
the Applicable Rate was 7.0%. On June 30, 2004, the outstanding balance was
$1,063,000 including accrued interest of approximately $270,000.
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 our Common Stock. The
dividends for the period January 1, 2004, through June 30, 2004, total $62,000,
and will be paid in August 2004, through the issuance of 34, 938 shares of our
Common Stock. Under our loan agreements, we are prohibited from paying cash
dividends on our outstanding capital stock.
24
During the first quarter of 2003, our Michigan facility incurred minor
disruption from off specification waste shipped to the facility from a customer.
We have filed, and are negotiating, an insurance settlement, in addition to
bringing litigation against both the customer and broker who shipped the waste.
There are no assurances that we will be successful in our lawsuit. During the
fourth quarter of 2003, the Michigan facility had a second incident occur which
resulted in a fire that did considerable damage to the facility and significant
disruption to its bulk processing area. We are finalizing this second insurance
claim submittal and are currently reviewing the cost estimates to rebuild the
facility. Under our insurance policy we have a $500,000 per claim deductible,
which will be deducted from each of the gross claim amounts. As a result of the
above noted disruptions, the Michigan facility continues to incur operating
losses and we are evaluating all possible options, including a full or partial
rebuild, sale of the facility or complete shutdown. We have recently completed
another series of layoffs at the facility in an attempt to mitigate the losses.
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 disruption of our Michigan facility resulting from a fire in
the fourth quarter of 2003, the elimination of low margin business and reduction
in government revenues in the Industrial segment, has negatively impacted our
liquidity. However, the second quarter of this year has shown improvement with a
return to profitability and improved cashflow. The restructuring process for the
Industrial segment is showing positive results, as are the acquisitions. 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 $76,000 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.
25
Contractual Obligations
The following table summarizes our contractual obligations at June 30, 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
----------------------------------------
Contractual Obligations After
Total 2004 2005-2007 2008-2009 2009
- ----------------------------------------------------------------------------------------------
Long-term debt $ 23,774 $ 1,687 $ 21,049 $ 1,038 $ --
Interest on long-term debt 1,377 -- -- 1,377 --
Operating leases 3,862 786 2,987 89 --
Finite risk policy 8,030 -- 3,011 2,008 3,011
Purchase obligations (1) -- -- -- -- --
--------- -------- --------- -------- --------
Total contractual obligations $ 37,043 $ 2,473 $ 27,047 $ 4,512 $ 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 June 30, 2004, we have
recorded $2,225,000 in our sinking fund on the balance sheet. On the fourth and
subsequent anniversaries of the contract inception, we may elect to terminate
this contract. If we so elect, the insurer will pay us an amount equal to 100%
of the sinking fund account balance in return for complete releases of liability
from both us and any applicable regulatory agency using this policy as an
instrument to comply with financial assurance requirements.
Option Exercises
During the second quarter of 2004, holders of certain outstanding options
exercised their options to purchase 78,700 shares of our Common Stock for an
aggregate purchase price of approximately $99,000. The options were exercised in
accordance with the terms of their documents. The proceeds of the options
exercised were used to fund capital expenditures and current working capital
needs.
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
26
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 generally 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 generally
recognize the remaining 67% of revenue and all associated costs. We continually
review these revenue recognition percentages by evaluating the processing
milestones and specific contracts, to insure the most accurate percentage of
completion. We are also reviewing the Industrial segment revenue recognition
methodology to determine if any refinement is necessary.
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 3.4%, and 2.9% of accounts receivable for the
six month periods ended June 30, 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 processing costs, which are based on current market conditions. We
have no intention, at this time, to close any of our facilities, however as
discussed above, we are currently evaluating our options regarding the continued
operations of the Michigan facility.
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
27
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 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. Bechtel Jacobs is the government appointed manager of the
environmental program to perform certain treatment and disposal services in Oak
Ridge, Tennessee. In this capacity Bechtel Jacobs entered into certain
subcontracts with our Oak Ridge, Tennessee subsidiary ("M&EC"). Our revenues
from Bechtel Jacobs contributed 11.1% of total consolidated revenues in the six
months ended June 30, 2004 and 15.0% 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 two years, through June 2005, with
several pricing modifications, but, as with most contracts with the federal
government, may be terminated or renegotiated at any time at the government's
election. 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. We have recognized
28
approximately $381,000 in revenue for these surcharges which represented an
initial offer for settlement by Bechtel Jacobs. Bechtel Jacobs continues to
deliver waste to M&EC for treatment, and M&EC continues to accept such waste. In
addition, subsequent to the filing of the lawsuit, M&EC has entered into a new
contract with Bechtel Jacobs to treat DOE waste. There is no guarantee of future
business under the Oak Ridge contracts, and either party may terminate the Oak
Ridge contracts at any time. Termination of these contracts could have a
material adverse effect on us. We are working towards increasing other sources
of revenues at M&EC to reduce the risk of reliance on one major source of
revenues.
We were recently awarded a contract from a Fortune 500 company valued at
approximately $6,218,000 to treat and dispose of mixed waste generated from
research and development activities. This contract will require innovative
treatment processing technologies we developed to accommodate the complex nature
of these wastes. The contract should be completed during the first quarter of
next year.
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
29
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 $16,000; $26,000;
$61,000; and $67,000, respectively, were spent during the first six 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.
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 have received a notice of
violation ("NOV") and are currently working with the Oklahoma authorities to
provide the information they requested and resolve this matter. Although no
fines or penalties were assessed under the NOV, our Oklahoma subsidiary will be
required to make modifications to the existing facility.
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 June 30, 2004, we had accrued environmental liabilities totaling $2,896,000,
which reflects an increase of $321,000 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 June 30, 2004, current and long-term accrued environmental balance
is recorded as follows:
PFD PFM PFSG PFMI PFMD PFP Total
----------- ---------- ---------- ---------- ----------- ---------- -----------
Current Accrual $ 589,000 $ 190,000 $ 185,000 $ 22,000 $ -- $ -- $ 986,000
Long-term accrual 150,000 603,000 666,000 -- 391,000 100,000 1,910,000
---------- --------- --------- --------- ---------- --------- ----------
Total $ 739,000 $ 793,000 $ 851,000 $ 22,000 $ 391,000 $ 100,000 $2,896,000
========== ========= ========= ========= ========== ========= ==========
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
June 30, 2004, the market value of the interest rate swap was in an unfavorable
value position of $76,000 and was recorded as a liability. During the six months
ended June 30, 2004, we recorded a gain on the interest rate swap of $54,000
that offset other comprehensive loss in the Statement of Stockholders' Equity.
30
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.
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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.
32
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 and the Form
10-Q for the quarter ended March 31, 2004, which are incorporated
herein by reference, except as follows:
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 have
received a notice of violation ("NOV") and are currently working
with the Oklahoma authorities to provide the information they
requested and resolve this matter. Although no fines or penalties
were assessed under the NOV, we will be required to make
modifications to the existing facility.
Item 5. Other Information
On July 28, 2004, the Company held its annual meeting of
stockholders. At the meeting the following items were approved:
o All nominees were elected to serve as directors until the the
next annual meeting of stockholders;
o Approved the 2004 Stock Option Plan; and
o Ratified the appointment of BDO Seidman, LLP, as the
independent auditors of the Company for the fiscal year 2004.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Agreement between the Company and a Fortune 500 company, dated
June 21, 2004. List of exhibits are included in the contract
and 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).
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 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.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
PERMA-FIX ENVIRONMENTAL SERVICES
Date: August 9, 2004 By: /s/ Dr. Louis F. Centofanti
---------------------------
Dr. Louis F. Centofanti
Chairman of the Board
Chief Executive Officer
Date: August 9, 2004 By: /s/ Richard T. Kelecy
---------------------------
Richard T. Kelecy
Chief Financial Officer
35