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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 March 31, 2005
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 May 5, 2005 41,805,267
Common Stock, $.001 Par Value (excluding 988,000 shares held as
treasury stock)
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PERMA-FIX ENVIRONMENTAL SERVICES, INC.
INDEX
PART I FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 2005 and December 31, 2004....................... 2
Consolidated Statements of Operations -
Three Months Ended March 31, 2005 and 2004................. 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2005 and 2004................. 5
Consolidated Statement of Stockholders' Equity -
Three Months Ended March 31, 2005.......................... 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................................................33
Item 4. Controls and Procedures........................................34
PART II OTHER INFORMATION
Item 1. Legal Proceedings..............................................35
Item 5. Other Information..............................................35
Item 6. Exhibits.......................................................36
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
PART I, ITEM 1
The consolidated financial statements included herein have been prepared by the
Company (which may be referred to as we, us or our), without an audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes the disclosures which are made are adequate to make the
information presented not misleading. Further, the consolidated financial
statements reflect, in the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position and results of operations as of and for the periods indicated.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2004.
The results of operations for the three months ended March 31, 2005, are not
necessarily indicative of results to be expected for the fiscal year ending
December 31, 2005.
1
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
March 31,
2005 December 31,
(Amounts in Thousands, Except for Share Amounts) (Unaudited) 2004
- ---------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 78 $ 215
Restricted cash 60 60
Accounts receivable, net of allowance for doubtful
accounts of $481 and $570 27,411 27,192
Inventories 1,184 882
Prepaid expenses 2,800 2,891
Other receivables 51 45
Current assets of discontinued operations, net of allowance for
doubtful accounts of $119 and $125 1,585 1,609
--------- ---------
Total current assets 33,169 32,894
Property and equipment:
Buildings and land 18,337 18,313
Equipment 30,441 30,281
Vehicles 4,310 4,187
Leasehold improvements 11,489 11,514
Office furniture and equipment 2,435 2,396
Construction-in-progress 2,291 1,852
--------- ---------
69,303 68,543
Less accumulated depreciation and amortization (22,476) (21,282)
--------- ---------
Net property and equipment 46,827 47,261
Property of discontinued operations 600 600
Intangibles and other assets:
Permits 12,978 12,895
Goodwill 1,330 1,330
Finite Risk Sinking Fund 3,216 2,225
Other assets 3,063 3,250
--------- ---------
Total assets $ 101,183 $ 100,455
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
2
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
March 31,
2005 December 31,
(Amounts in Thousands, Except for Share Amounts) (Unaudited) 2004
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,355 $ 6,529
Current environmental accrual 630 721
Accrued expenses 11,392 12,100
Unearned revenue 4,715 5,115
Current liabilities of discontinued operations 2,371 2,550
Current portion of long-term debt 6,361 6,376
--------- ---------
Total current liabilities 32,824 33,391
Environmental accruals 2,113 2,141
Accrued closure costs 5,095 5,062
Other long-term liabilities 2,033 1,944
Long-term liabilities of discontinued operations 1,804 1,804
Long-term debt, less current portion 13,876 12,580
--------- ---------
Total long-term liabilities 24,921 23,531
--------- ---------
Total liabilities 57,745 56,922
Commitments and Contingencies (see Notes 4 and 6) -- --
Preferred Stock of subsidiary, $1.00 par value; 1,467,396 shares authorized,
1,284,730 shares issued and outstanding, liquidation value $1.00 per share 1,285 1,285
Stockholders' equity:
Preferred Stock, $.001 par value; 2,000,000 shares authorized, 2,500
shares issued and outstanding -- --
Common Stock, $.001 par value; 75,000,000 shares authorized,
42,793,267 and 42,749,117 shares issued, including 988,000 shares held
as treasury stock, respectively 43 43
Additional paid-in capital 80,958 80,902
Accumulated deficit (36,962) (36,794)
Interest rate swap (24) (41)
--------- ---------
44,015 44,110
Less: Common Stock in treasury at cost; 988,000 shares (1,862) (1,862)
--------- ---------
Total stockholders' equity 42,153 42,248
--------- ---------
Total liabilities and stockholders' equity $ 101,183 $ 100,455
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
3
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
------------------------
(Amounts in Thousands, Except for Per Share Amounts) 2005 2004
- -------------------------------------------------------------------------------------
Net revenues $ 21,608 $ 16,811
Cost of goods sold 16,107 12,961
-------- --------
Gross profit 5,501 3,850
Selling, general and administrative expenses 4,919 4,338
Gain on disposal of fixed assets -- (17)
-------- --------
Income (loss) from operations 582 (471)
Other income (expense):
Interest income 1 1
Interest expense (412) (665)
Interest expense-financing fees (111) (256)
Other (14) (54)
-------- --------
Income (loss) from continuing operations 46 (1,445)
Loss from discontinued operations (167) (553)
-------- --------
Net loss (121) (1,998)
Preferred Stock dividends (47) (47)
-------- --------
Net loss applicable to Common Stock $ (168) $ (2,045)
======== ========
Net loss per common share - basic
Continuing operations $ -- $ (.04)
Discontinued operations -- (.02)
-------- --------
Net loss per common share $ -- $ (.06)
======== ========
Net loss per common share - diluted
Continuing operations $ -- $ (.04)
Discontinued operations -- (.02)
-------- --------
Net loss per common share $ -- $ (.06)
======== ========
Number of shares and potential common shares used in net
loss per common share:
Basic 41,778 37,040
======== ========
Diluted 44,539 37,040
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
4
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
------------------------
(Amounts in Thousands) 2005 2004
- -----------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (121) $ (1,998)
Adjustments to reconcile net loss to cash provided by
(used in) operations:
Depreciation and amortization 1,205 1,080
Debt discount amortization -- 81
Provision for bad debt and other reserves (85) 24
Gain on sale of plant, property and equipment -- (17)
Changes in assets and liabilities:
Accounts receivable (135) 3,043
Prepaid expenses, inventories and other assets (537) 62
Accounts payable, accrued expenses, and unearned revenue 112 336
Discontinued operations (155) 1
-------- --------
Net cash provided by operations 284 2,612
Cash flows from investing activities:
Purchases of property and equipment, net (478) (1,092)
Proceeds from sale of plant, property and equipment -- 19
Change in restricted cash, net (1) --
Change in finite risk sinking fund (991) (991)
Discontinued operations -- 19
Funds used for acquisitions (net of cash acquired) -- (2,903)
-------- --------
Net cash used in investing activities (1,470) (4,948)
Cash flows from financing activities:
Net borrowings (repayments) of revolving credit 1,484 (7,800)
Principal repayments of long-term debt (483) (517)
Proceeds from issuance of stock 48 10,759
-------- --------
Net cash provided by financing activities 1,049 2,442
-------- --------
Increase (decrease) in cash (137) 106
Cash at beginning of period 215 411
-------- --------
Cash at end of period $ 78 $ 517
======== ========
Supplemental disclosure
Interest paid $ 239 $ 509
Non-cash investing and financing activities:
Issuance of Common Stock for services 8 10
Issuance of Common Stock for payment of dividends -- 63
Gain on interest rate swap 17 12
Long-term debt incurred for purchase of property and equipment 281 --
The accompanying notes are integral part of these consolidated
financial statements.
5
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, for the three months ended March 31, 2005)
Additional
(Amounts in thousands, Preferred Stock Common Stock Paid-In Accumulated Interest
except for share amounts) Shares Amount Shares Amount Capital Deficit Rate Swap
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 2,500 $ -- 42,749,117 $ 43 $ 80,902 $ (36,794) $ (41)
Comprehensive loss:
Net loss -- -- -- -- -- (121) --
Other Comprehensive income:
Gain on interest rate swap -- -- -- -- -- -- 17
Comprehensive loss
Preferred Stock dividends -- -- -- -- -- (47) --
Issuance of Common Stock for cash
and services -- -- 31,287 -- 56 -- --
Issuance of Common Stock upon
cashless exercise of Warrants -- -- 12,863 -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 2005 2,500 $ -- 42,793,267 $ 43 $ 80,958 $ (36,962) $ (24)
========== ========== ========== ========== ========== ========== ==========
Common Stock Total
(Amounts in thousands, Held In Stockholders'
except for share amounts) Treasury Equity
- -----------------------------------------------------------------
Balance at December 31, 2004 $ (1,862) $ 42,248
Comprehensive loss:
Net loss -- (121)
Other Comprehensive income:
Gain on interest rate swap -- 17
----------
Comprehensive loss (104)
Preferred Stock dividends -- (47)
Issuance of Common Stock for cash
and services -- 56
Issuance of Common Stock upon
cashless exercise of Warrants -- --
---------- ----------
Balance at March 31, 2005 $ (1,862) $ 42,153
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
6
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
Reference is made herein to the notes to consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2004.
1. Summary of Significant Accounting Policies
Our accounting policies are as set forth in the notes to consolidated financial
statements referred to above.
Recent Accounting Pronouncements
In December 2004, FASB issued Statement No. 123 (revised) ("SFAS 123R"),
Share-Based Payment. SFAS 123R is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and its related implementation
guidance, and establishes standards for the accounting for transactions in which
an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
SFAS 123R requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide service in
exchange for the award. This statement requires companies to recognize the fair
value of stock options and other stock-based compensation to employees
prospectively, beginning with awards granted, modified, repurchased or cancelled
after the fiscal periods beginning after June 15, 2005. We currently measure
stock-based compensation in accordance with APB Opinion No. 25. The impact on
our financial condition or results of operations will depend on the number and
terms of stock options outstanding on the date of change, as well as future
options that may be granted. See Stock-Based Compensation below for the pro
forma impact that the fair value method would have had on our net income/loss
for each of the quarters ended March 31, 2005, and 2004. We do not expect the
impact of SFAS 123R to have an impact on our cash flows or liquidity.
In April 2005, the Securities and Exchange Commission ("SEC") amended its
Regulation S-X to amend the date of compliance with SFAS 123R to the first
reporting period of the fiscal year beginning on or after June 15, 2005. We
anticipate adopting SFAS 123R on January 1, 2006.
Reclassifications
Certain prior period amounts have been reclassified to conform with the current
period presentation.
Stock-Based Compensation
We account for our stock-based employee compensation plans under the accounting
provisions of APB Opinion 25, Accounting for Stock Issued to Employees, and have
furnished the pro forma disclosures required under Statement of Financial
Accounting Standards ("SFAS") 123, Accounting for Stock-Based Compensation, and
SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure.
SFAS 123 requires pro forma information regarding net income and earnings per
share as if compensation cost for our employee and director stock options had
been determined in accordance with the fair market value-based method prescribed
in SFAS 123. We estimate the fair value of each stock option at the grant date
by using the Black-Scholes option-pricing model with the following assumptions
7
used for grants in 2004: no dividend yield; an expected life of ten years;
expected volatility between 21.72% and 37.50%; and risk free interest rates
between 3.34% and 3.82%. No stock options have been granted in 2005.
Under the accounting provisions of SFAS 123, our net loss and net loss per share
would have been increased to the pro forma amounts indicated below (in thousands
except for per share amounts):
Three Months Ended
(Unaudited) March 31,
------------------------
2005 2004
- ------------------------------------------------------------------------------------------------------
Net loss from continuing operations applicable to Common Stock, as reported $ (1) $ (1,492)
Deduct: Total Stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects (92) (94)
----------- ---------
Pro forma net loss from continuing operations applicable to Common Stock $ (93) $ (1,586)
=========== =========
Loss per share:
Basic - as reported $ -- $ (.04)
=========== =========
Basic - pro-forma $ -- $ (.04)
=========== =========
Diluted - as reported $ -- $ (.04)
=========== =========
Diluted - pro-forma $ -- $ (.04)
=========== =========
2. Earnings Per Share
Basic EPS is based on the weighted average number of shares of Common Stock
outstanding during the period. Diluted EPS includes the dilutive effect of
potential common shares. Diluted loss per share for the three months ended March
31, 2004, does not include potential common shares as their effect would be
anti-dilutive.
8
The following is a reconciliation of basic net income (loss) per share to
diluted net income (loss) per share for the three months ended March 31, 2005
and 2004:
Three Months Ended
March 31,
--------------------
(Amounts in Thousands, Except for Per Share Amounts) 2005 2004
- --------------------------------------------------------------------------------------------
Earnings per share from continuing operations
Income (loss) from continuing operations $ 46 $ (1,445)
Preferred stock dividends (47) (47)
Loss from continuing operations applicable to Common Stock (1) (1,492)
Effect of dilutive securities:
Preferred Stock dividends 47 --
-------- --------
Income (loss) - diluted $ 46 $ (1,492)
======== ========
Basic income (loss) per share $ -- $ (.04)
======== ========
Diluted income (loss) per share $ -- $ (.04)
======== ========
Earnings per share from discontinued operations
Loss - basic and diluted $ (167) $ (553)
======== ========
Basic loss per share $ -- $ (.02)
======== ========
Diluted loss per share $ -- $ (.02)
======== ========
Weighted average shares outstanding - basic 41,778 37,040
Potential shares exercisable under stock option plans 250 --
Potential shares upon exercise of Warrants 844 --
Potential shares upon conversion of Preferred Stock 1,667 --
-------- --------
Weighted average shares outstanding - diluted 44,539 37,040
======== ========
- -------------------------------------------------------------------------------------------
Potential shares excluded from above weighted average share calculations due
to their anti-dilutive effect include:
Upon exercise of options 1,339 3,140
Upon exercise of Warrants 1,776 12,980
Upon conversion of Preferred Stock -- 1,667
9
3. Long Term Debt
Long-term debt consists of the following at March 31, 2005, and December 31,
2004:
March 31,
2005 December 31,
(Amounts in Thousands) (Unaudited) 2004
- --------------------------------------------------------------------------------------------------------------------
Revolving Credit facility dated December 22, 2000, borrowings based upon $ 7,964 $ 6,480
eligible accounts receivable, subject to monthly borrowing base
calculation, variable interest paid monthly at prime rate plus 1/2% (6.25%
at March 31, 2005), balance due in May 2008
Term Loan dated December 22, 2000, payable in equal monthly installments of
principal of $83, balance due in May 2008, variable interest paid monthly
at prime rate plus 1% (6.75% at March 31, 2005) 2,833 3,083
Unsecured Promissory Note dated August 31, 2000, payable in lump sum in
August 2005, interest paid annually at 7.0% 3,500 3,500
Promissory Note dated June 25, 2001, payable in semiannual installments on
June 30 and December 31 through December 31, 2008, variable interest
accrues at the applicable law rate determined under the IRS Code Section
(7.0% on March 31, 2005) and is payable in one lump sum at the end of
installment period 3,034 3,034
Installment Agreement dated June 25, 2001, payable in semiannual
installments on June 30 and December 31 through December 31, 2008, variable
interest accrues at the applicable law rate determined under the IRS Code
Section (7.0% on March 31, 2005) and is payable in one lump sum
at the end of installment period 753 753
Various capital lease and promissory note obligations, payable 2005 to 2010,
interest at rates ranging from 5.0% to 14.2% 2,153 2,106
------- -------
20,237 18,956
Less current portion of long-term debt 6,361 6,376
------- -------
$13,876 $12,580
======= =======
Revolving Credit and Term Loan
On December 22, 2000, we entered into a Revolving Credit, Term Loan and Security
Agreement ("Agreement") with PNC Bank, National Association, a national banking
association ("PNC") acting as agent ("Agent") for lenders, and as issuing bank.
The Agreement provided for a term loan ("Term Loan") in the amount of
$7,000,000, which requires principal repayments based upon a seven-year
amortization, payable over five years, with monthly installments of $83,000 and
the remaining unpaid principal balance due on December 22, 2005. The Agreement
also provided for a revolving line of credit ("Revolving Credit") with a maximum
principal amount outstanding at any one time of $18,000,000, as amended. The
Revolving Credit advances are subject to limitations of an amount up to the sum
of (a) up to 85% of Commercial Receivables aged 90 days or less from invoice
date, (b) up to 85% of Commercial Broker Receivables aged up to 120 days from
invoice date, (c) up to 85% of acceptable Government Agency Receivables aged up
to 150 days from invoice date, and (d) up to 50% of acceptable unbilled amounts
aged up to 60 days, less (e) reserves Agent reasonably deems proper and
necessary. The Revolving Credit advances were to be due and payable in full on
December 22, 2005. As of March 31, 2005, the excess availability under our
Revolving Credit was $7,003,000 based on our eligible receivables.
On March 15, 2005, the Company entered into a commitment letter with PNC,
whereby PNC agreed to renew and extend the agreement, and to increase the term
loan back up to $7.0 million. Effective March 25, 2005, the Company and PNC
entered into an amended agreement (Amendment No. 4), which, among other things,
extends the $25 million credit facility through May 31, 2008. The credit
facility consists of an $18 million revolving line of credit and a $7 million
10
term loan. The terms of the credit facility remain principally unchanged, with
the exception of a 50 basis point reduction in the variable interest rate on
both loans. The increase to the term loan will be handled as a subsequent
amendment, subject to the updating of the existing mortgages held by PNC. We
expect the mortgage updates to be completed during the second quarter of 2005,
with proceeds of approximately $4.0 million to be received shortly thereafter.
As a condition of this amended agreement, we paid a $140,000 fee to PNC.
Pursuant to the Agreement, as amended, the Term Loan bears interest at a
floating rate equal to the prime rate plus 1%, and the Revolving Credit at a
floating rate equal to the prime rate plus 1/2%. The loans are subject to a
prepayment fee of 1% until March 25, 2006, and 1/2% until March 25, 2007.
Unsecured Promissory Note
On August 31, 2000, as part of the consideration for the purchase of Diversified
Scientific Services, Inc. ("DSSI"), we issued to Waste Management Holdings a
long-term unsecured promissory note (the "Unsecured Promissory Note") in the
aggregate principal amount of $3,500,000, bearing interest at a rate of 7% per
annum and having a five-year term with interest to be paid annually and
principal due in one lump sum at the end of the term of the Unsecured Promissory
Note (August 2005). This debt balance was reclassed in its entirety from long
term to current in the third quarter of 2004. We plan to utilize the proceeds of
the amended agreement with PNC, mentioned above, to repay this note prior to its
August 2005 expiration date.
Promissory Note
In conjunction with our acquisition of M&EC, M&EC issued a promissory note for a
principal amount of $3.7 million to Performance Development Corporation ("PDC"),
dated June 25, 2001, for monies advanced to M&EC for certain services performed
by PDC. The promissory note is payable over eight years on a semiannual basis on
June 30 and December 31. The principal repayments for 2005 will be approximately
$400,000 semiannually. Interest is accrued at the applicable law rate
("Applicable Rate") pursuant to the provisions of section 6621 of the Internal
Revenue Code of 1986 as amended. (7% on March 31, 2005) and payable in one lump
sum at the end of the loan period. On March 31, 2005, the outstanding balance
was $4,170,000 including accrued interest of approximately $1,136,000. PDC has
directed M&EC to make all payments under the promissory note directly to the IRS
to be applied to PDC's obligations under its installment agreement with the IRS.
Installment Agreement
Additionally, M&EC entered into an installment agreement with the Internal
Revenue Service ("IRS") for a principal amount of $923,000 effective June 25,
2001, for certain withholding taxes owed by M&EC. The installment agreement is
payable over eight years on a semiannual basis on June 30 and December 31. The
principal repayments for 2005 will be approximately $100,000 semiannually.
Interest is accrued at the Applicable Rate, and is adjusted on a quarterly basis
and payable in lump sum at the end of the installment period. On March 31, 2005,
the rate was 7%. On March 31, 2005, the outstanding balance was $1,028,000
including accrued interest of approximately $275,000.
4. Commitments and Contingencies
Hazardous Waste
In connection with our waste management services, we handle both hazardous and
non-hazardous waste, which we transport to our own, or other facilities for
destruction or disposal. As a result of disposing of hazardous substances, in
the event any cleanup is required, we could be a potentially responsible party
for the costs of the cleanup notwithstanding any absence of fault on our part.
11
Legal
In the normal course of conducting our business, we are involved in various
litigations. There has been no material change in legal proceedings from those
disclosed previously in the Company's Form 10-K for the year ended December 31,
2004, except as follows.
During February, 2005, the Company received a federal grand jury subpoena
requesting documents "from the period of January 1, 2000, to the present
concerning or relating to Wabash Environmental Technologies, LLC," ("Wabash"),
an Indiana based entity that is not affiliated with the Company. The Company has
been advised that the target of the grand jury investigation is Wabash and that
neither the Company nor any subsidiary of the Company is a target of the
investigation. The Company and any subsidiary that has documents concerning or
relating to Wabash are compiling responsive documents and will be complying with
the subpoena.
The Company is performing an extensive internal review as to whether the
treatment, storage, processing and/or disposal of certain waste by its
subsidiary, PFD, was in accordance with applicable environmental laws and
regulations because it has identified a potential issue or issues with regard to
its handling of said waste. Upon completion of the internal review, the Company
will take any necessary and appropriate steps to report or otherwise address any
issues arising from its handling of that certain particular waste.
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 guarantees
to the states that, in the event of closure, our permitted facilities will be
closed in accordance with the regulations. The policy provides $35,000,000 of
financial assurance coverage and has available capacity to allow for annual
inflation and other performance and surety bond requirements. On the fourth and
subsequent anniversaries of the contract inception, the Company may elect to
terminate this contract. During the second quarter of 2003 we made an upfront
payment of $4,000,000, of which $2,766,000 represents the full premium for the
25-year term of the policy, and the remaining $1,234,000, was deposited in a
sinking fund account. Additionally, in February 2004 and 2005 we paid the first
and second of nine required annual installments of $1,004,000, of which $991,000
was deposited in the sinking fund account, the remaining $13,000 represents a
terrorism premium. As of March 31, 2005, we have recorded $3,216,000 in our
Finite Risk Sinking Fund on the balance sheet.
5. Acquisitions
On March 23, 2004, our subsidiary, Perma-Fix of Maryland, Inc. ("PFMD")
completed it's acquisition of certain assets of USL Environmental Services, Inc.
d/b/a A&A Environmental ("A&A"), primarily located in Baltimore, Md., and our
subsidiary, Perma-Fix of Pittsburgh, Inc. ("PFP") completed its acquisition of
certain assets of US Liquids of Pennsylvania, Inc. d/b/a EMAX ("EMAX"). Both A&A
and EMAX are wholly owned subsidiaries of US Liquids Inc. ("USL"). PFMD is using
the acquired assets of A&A to provide a full line of environmental, marine and
industrial maintenance services. PFMD offers expert environmental services such
12
as 24-hour emergency response, vacuum services, hazardous and non-hazardous
waste disposal, marine environmental and other remediation services. PFP is
utilizing the acquired assets of EMAX to provide a variety of environmental
services such as transportation of drums and bulk loads, tank cleaning,
industrial maintenance, dewatering, drum management and chemical packaging. PFP
also has a wastewater treatment group, which provides for the treatment of
non-hazardous wastewaters such as leachates, oily waters, industrial process
waters and off-spec products.
We paid $2,915,000 in cash for the acquired assets and assumed certain
liabilities of A&A and EMAX. The acquisitions were accounted for using the
purchase method effective March 23, 2004, and accordingly, the estimated fair
values of the assets acquired and liabilities assumed of A&A and EMAX as of this
date, and the results of operations since this date, are included in the
accompanying consolidated financial statements.
6. Discontinued Operations
On October 4, 2004, our Board of Directors approved the discontinuation of
operations at the facility in Detroit, Michigan, owned by our subsidiary,
Perma-Fix of Michigan, Inc. ("PFMI"). The decision to discontinue operations at
the Detroit facility was principally a result of two fires that significantly
disrupted operations at the facility in 2003, and the facility's continued drain
on the financial resources of our Industrial segment. We are in the process of
remediating the facility and evaluating our available options for future use or
sale of the property. The operating activities for the current and prior periods
have been reclassified to discontinued operations in our Consolidated Statements
of Operations.
Expenses of $167,000 were recorded during the first quarter of 2005. PFMI
recorded revenues of $658,000, and operating losses of $553,000 for the quarter
ended March 31, 2004. Assets and liabilities related to the discontinued
operation have been reclassified to separate categories in the Consolidated
Balance Sheets as of March 31, 2005 and December 31, 2004. As of March 31, 2005,
assets are recorded at their net realizable value, and consist of property of
$600,000, and insurance proceeds receivable of $1,585,000. We have submitted
three insurance claims relative to the two fires at PFMI, a property claim for
the first fire and a property claim and business interruption claim for the
second fire. During the fourth quarter of 2004, we finalized our negotiations
with the insurance carrier on the business interruption claim and recorded an
additional $1,130,000 receivable, an increase to the previous receivable amount
of $455,000. We are currently negotiating settlements for the remaining two
claims, but at this time we cannot estimate actual proceeds to be received.
Additional proceeds, if any, received on these remaining claims will be recorded
as income from discontinued operations. Liabilities as of March 31, 2005,
consist of accounts payable and current accrued expenses of $1,972,000 and
environmental accruals of $2,203,000. Included in current accruals is a pension
plan withdrawal liability, which is a result of the termination of substantially
all of the union employees of PFMI. The PFMI union employees participate in the
Central States Teamsters Pension Fund ("CST"), which provides that a partial or
full termination of union employees may result in a withdrawal liability, due
from PFMI to CST. We have recorded a $1,680,000 pension withdrawal liability at
March 31, 2005, based upon an actuarial study. This withdrawal liability
represents our best estimate, and is subject to numerous factors such as the
date and timing of union employee terminations, partial versus complete
termination status, the pension funds unfunded vested benefit liability and
PFMI's portion of such liability. This obligation is recorded as a current
liability, but may not be paid out in the current year due to the timing of the
termination event and process of determining the final liability.
As a result of the discontinuation of operations at the PFMI facility, we are
required to complete certain closure and remediation activities pursuant to our
RCRA permit. Also, in order to close and dispose of or sell the facility, we may
have to complete certain additional remediation activities related to the land,
building, and equipment. The extent and cost of the clean-up and remediation
will be determined by state mandated requirements, the extent to which are not
13
known at this time. Also, impacting this estimate is the level of contamination
discovered, as we begin remediation, and the related clean-up standards which
must be met in order to dispose of or sell the facility. We engaged our
engineering firm, SYA, to perform an analysis and related estimate of the cost
to complete the RCRA portion of the closure/clean-up costs and the potential
long-term remediation costs. Based upon this analysis, we arrived at our best
estimate of the cost of this environmental closure and remediation liability of
$2,464,000. We have spent approximately $261,000 of this closure cost estimate
since September 30, 2004, of which approximately $145,000 was spent in the first
quarter of 2005. In the event we retain PFMI, we anticipate spending an
additional $399,000 in 2005 and the remainder over the next two to five years.
7. Operating Segments
Pursuant to FAS 131, we define an operating segment as a business activity:
o from which we may earn revenue and incur expenses;
o whose operating results are regularly reviewed by the segment
president to make decisions about resources to be allocated to the
segment and assess its performance; and
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, and our discontinued operation, PFMI.
Our operating segments are defined as follows:
The Industrial Waste Management Services segment provides on-and-off site
treatment, storage, processing and disposal of hazardous and non-hazardous
industrial waste, and wastewater through our seven facilities; Perma-Fix
Treatment Services, Inc., Perma-Fix of Dayton, Inc., Perma-Fix of Ft.
Lauderdale, Inc., Perma-Fix of Orlando, Inc., Perma-Fix of South Georgia, Inc.,
Perma-Fix of Maryland, Inc., and Perma-Fix of Pittsburgh, Inc. We provide
through certain of our facilities various waste management services to certain
governmental agencies.
The Nuclear Waste Management Services segment provides treatment, storage,
processing and disposal of nuclear, low-level radioactive, mixed (waste
containing both hazardous and non-hazardous constituents), hazardous and
non-hazardous waste through our three facilities; Perma-Fix of Florida, Inc.,
Diversified Scientific Services, Inc. and East Tennessee Materials and Energy
Corporation.
The Consulting Engineering Services segment provides environmental engineering
and regulatory compliance services through Schreiber, Yonley & Associates, Inc.
which includes oversight management of environmental restoration projects, air
and soil sampling and compliance and training activities to industrial and
government customers, as well as, engineering and compliance support needed by
our other segments.
14
The table below presents certain financial information in thousands by business
segment as of and for the three months ended March 31, 2005 and 2004.
Segment Reporting for the Quarter Ended March 31, 2005
Segments Consolidated
Industrial Nuclear Engineering Total Corporate (2) Total
---------- ------- ----------- -------- ------------- -------------
Revenue from external customers $ 9,949 $ 10,896(3) $ 763 $ 21,608 $ -- $ 21,608
Intercompany revenues 621 746 115 1,482 -- 1,482
Gross profit 1,800 3,546 155 5,501 -- 5,501
Interest income 1 -- -- 1 -- 1
Interest expense 207 174 2 383 29 412
Interest expense-financing fees -- 1 -- 1 110 111
Depreciation and amortization 489 696 10 1,195 10 1,205
Segment profit (loss) (245) 1,647 31 1,433 (1,387) 46
Segment assets(1) 27,127 61,629 2,279 91,035 10,148(4) 101,183
Expenditures for segment assets 449 300 7 756 10 766
Total long-term debt 1,636 7,775 29 9,440 10,797(5) 20,237
Segment Reporting for the Quarter Ended March 31, 2004
Segments Consolidated
Industrial Nuclear Engineering Total Corporate (2) Total
---------- ------- ----------- -------- ------------- -------------
Revenue from external customers $ 6,608 $ 9,475(3) $ 728 $ 16,811 $ -- $ 16,811
Intercompany revenues 240 988 61 1,289 -- 1,289
Gross profit 320 3,363 167 3,850 -- 3,850
Interest income 1 -- -- 1 -- 1
Interest expense 161 454 -- 615 50 665
Interest expense-financing fees -- -- -- -- 256 256
Depreciation and amortization 419 649 7 1,075 5 1,080
Segment profit (loss) (1,526) 1,267 68 (191) (1,254) (1,445)
Segment assets(1) 35,111 56,749 2,076 93,936 18,393(4) 112,329
Expenditures for segment assets 340 662 8 1,010 44 1,054
Total long-term debt 2,182 8,214 36 10,432 10,419(5) 20,851
(1) Segment assets have been adjusted for intercompany accounts to reflect
actual assets for each segment.
(2) Amounts reflect the activity for corporate headquarters not included in
the segment information.
(3) The consolidated revenues within the Nuclear Waste Services segment
include the Bechtel Jacobs revenues for the quarter ended March 31, 2005,
which total $1,646,000 or (7.6%) of total revenue and $1,516,000 (or 9.0%)
for the same quarter in 2004.
(4) Amount includes assets from Perma-Fix of Michigan, Inc., a discontinued
operation from the Industrial segment, of approximately $ 2,189,000 and
$9,461,000 as of March 31, 2005 and 2004, respectively.
(5) Includes the balance outstanding from our revolving line of credit and
term loan, which is utilized by all of our segments.
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 the financial performance of the Company;
o ability to comply with the Company's general working capital
requirements;
o ability to be able to continue to borrow under the Company's
revolving line of credit;
o ability to generate sufficient cash flow from operations to fund all
costs of operations and remediation of certain formerly leased
property in Dayton, Ohio, and the Company's facilities in Memphis,
Tennessee; Detroit, Michigan; Valdosta, Georgia; Ft. Lauderdale,
Florida; and Tulsa, Oklahoma;
o ability to remediate certain contaminated sites for projected
amounts;
o ability to fund budgeted capital expenditures during 2005;
o increasing other sources of revenue at M&EC;
o growth of our Nuclear segment;
o anticipated decline in third party charges related to Section 404 of
Sarbanes-Oxley;
o ability to close and remediate the Michigan facility for the
estimated amounts;
o ability to repay our Unsecured Promissory Note utilizing proceeds
from the amended term loan with PNC Bank;
o completion of the amendment of the PNC term loan; and
o no expectation to close any facilities, other than the Michigan
facility.
While the Company believes the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance such expectations will prove
to have been correct. There are a variety of factors, which could cause future
outcomes to differ materially from those described in this report, including,
but not limited to:
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;
Detroit, Michigan; Ft. Lauderdale, Florida; and Tulsa, Oklahoma,
which would result in a material increase in remediation
expenditures;
o changes in federal, state and local laws and regulations, especially
environmental laws and regulations, or in interpretation of such;
16
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, PFSG, or PFO was responsible for a
material amount of remediation at certain superfund sites;
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; and
o determination that PFD is required to have a Title V air permit in
connection with its operations, or is determined to have violated
environmental laws or regulations in a material manner.
The Company undertakes no obligations to update publicly any forward-looking
statement, whether as a result of new information, future events or otherwise.
Overview
We provide services through three reportable operating segments. The Industrial
Waste Management Services segment ("Industrial segment") is engaged in on-site
and off-site treatment, storage, disposal and processing of a wide variety of
by-products and industrial, hazardous and non-hazardous wastes, and with the
recent acquisitions, added 24-hour emergency response, vacuum services and
marine and industrial maintenance services. The segment operates and maintains
facilities and businesses in the waste by-product brokerage, on-site treatment
and stabilization, and off-site blending, treatment and disposal industries. The
Nuclear Waste Management Services segment ("Nuclear segment") provides
treatment, storage, processing and disposal services of mixed waste (waste
containing both hazardous and low-level radioactive materials) and low-level
radioactive wastes, including research, development and on-site and off-site
waste remediation. The presence of nuclear and low-level radioactive
constituents within the waste streams processed by this segment create different
and unique operational, processing and permitting/licensing requirements from
those contained within the Industrial segment. Our Consulting Engineering
Services segment ("Engineering segment") provides a wide variety of
environmental related consulting and engineering services to both industry and
government. These services include oversight management of environmental
restoration projects, air and soil sampling, compliance reporting, surface and
subsurface water treatment design for removal of pollutants, and various
compliance and training activities.
The first quarter of 2005 reflects a revenue increase of 28% or $4.8 million
over the same period of 2004, with all three of our operating segments
contributing to this increase. Revenues for the first quarter total $21,608,000,
the highest first quarter revenue total in our history. Revenues from our
Industrial segment were up approximately 51% over the first quarter of last year
and our Industrial segment gross profit margin was 18% this quarter, compared to
just 5% in the first quarter last year. We continue to experience revenue growth
in part due to contract awards such as the Kennedy Space Center and leading
North-American home improvement chain contracts awarded in 2005, reduced costs
and improved margins within our Industrial segment, as we come out of our
recently completed restructuring of this segment. Nuclear revenues for the first
quarter of 2005 were $10.9 million, an increase of $1.4 million or15% over the
first quarter of last year. The Nuclear segment continues to perform well, to
receive new treatment contracts and generate good margins (32.5% in the first
quarter of 2005). As a result of the balance sheet restructuring activities of
2004 and improved cash flow, our interest expense for the first quarter of 2005
was down $253,000 or 38% and our interest expense-financing fees were down
17
$145,000 or 57% from the same period of 2004. The combined result of this
revenue growth, improved margins and reduced expenses, was our ability to
achieve income from continuing operations of $46,000 during our seasonally
weakest period.
Results of Operations
The reporting of financial results and pertinent discussions are tailored to
three reportable segments: Industrial Waste Management Services ("Industrial"),
Nuclear Waste Management Services ("Nuclear") and Consulting Engineering
Services ("Engineering"). The table below should be used when reviewing
management's discussion and analysis for the three months ended March 31, 2005
and 2004:
Three Months Ended
March 31,
------------------------------------------------
Consolidated (amounts in thousands) 2005 % 2004 %
- ----------------------------------------------------------------------------------------------
Net Revenues $ 21,608 100.0 $ 16,811 100.0
Cost of good sold 16,107 74.5 12,961 77.1
-------- ----- -------- -----
Gross Profit 5,501 25.5 3,850 22.9
Selling, general and administrative 4,919 22.8 4,338 25.8
Loss (gain) on disposal of fixed assets -- -- (17) (.1)
-------- ----- -------- -----
Income (loss) from operations $ 582 2.7 $ (471) (2.8)
======== ===== ======== =====
Interest expense (412) (1.9) (665) (4.0)
Interest expense-financing fees (111) (.5) (256) (1.5)
Other (14) (.1) (54) (.3)
Income (loss) from continuing operations 46 .2 (1,445) (8.6)
Preferred Stock dividends (47) (.2) (47) (.2)
Summary - Three Months Ended March 31, 2005 and 2004
Net Revenue
Consolidated revenues increased for the three months ended March 31, 2005,
compared to the three months ended March 31, 2004, as follows:
(In thousands) 2005 % Revenue 2004 % Revenue Change % Change
- ------------------------------------------------------------------------------------------------------
Nuclear
Government waste $ 5,166 23.9 $ 5,461 32.5 $ (295) (5.4)
Hazardous/Non-hazardous 1,551 7.2 331 2.0 1,220 368.9
Other nuclear waste 2,533 11.7 2,167 12.9 366 16.9
Bechtel Jacobs 1,646 7.6 1,516 9.0 130 8.6
------- ------- ------- ------- -------
Total 10,896 50.4 9,475 56.4 1,421 15.0
Industrial Revenues
Commercial waste 6,121 28.4 4,677 27.8 1,444 30.9
Government services 1,320 6.1 1,426 8.5 (106) (7.4)
Acquisitions 2,508 11.6 505 3.0 2,003 395.8
------- ------- ------- ------- -------
Total 9,949 46.1 6,608 39.3 3,341 50.6
Engineering 763 3.5 728 4.3 35 4.8
------- ------- ------- ------- -------
Total $21,608 100.0 $16,811 100.0 $ 4,797 28.5
======= ======= ======= ======= =======
18
The growth in revenues was realized across all segments with the majority of the
increase due to the Industrial segment followed strongly by Nuclear. The
increase in the Industrial segment was related to the revenue contributed by the
two facilities acquired as of March 23, 2004 and increased commercial waste
revenue, highlighted by growth from the cruise line and home improvement
industries. See "Acquisitions" in Note 5 to Notes to Consolidated Financial
Statements for further information on the acquired facilities. The increase in
the Nuclear segment is primarily the result of a special event soil project
performed in relation to hazardous and non-hazardous waste streams from existing
industrial customers. Additionally, the increase is due to the continued
expansion within the mixed waste market as our facilities demonstrate their
ability to accept and process more complex waste streams, including additional
contracts, such as a contract awarded by a Fortune 500 company in late June 2004
to treat and dispose of mixed waste from research and development activities.
Adding to the segment's increase was an overall increase in the Bechtel Jacobs
revenue, as a result of increased processing and disposal revenue realized for
the quarter. The Oak Ridge contracts revenue is included under Bechtel Jacobs.
Partially offsetting these increases was a decrease in Government waste revenue.
Although receipts were up for Government in the first quarter of 2005, the
processing focus was on other waste streams to maximize efficiencies while
remaining within compliance deadlines, which resulted in a decrease in total
Government revenue. See "Known Trends and Uncertainties - Significant Contracts"
of this Management's Discussion and Analysis. The backlog of stored waste within
the Nuclear segment at March 31, 2005, was approximately $14,800,000, compared
to $16,247,000 at December 31, 2004.
Cost of Goods Sold
Cost of goods sold increased for the quarter ended March 31, 2005, compared to
the quarter ended March 31, 2004, as follows:
(In thousands) 2005 % Revenue 2004 % Revenue Change
- ----------------------------------------------------------------------
Nuclear $ 7,350 67.5 $ 6,112 64.5 $ 1,238
Industrial 8,149 81.9 6,288 95.2 1,861
Engineering 608 79.7 561 77.1 47
------- ------ ------- ------ -------
Total $16,107 74.5 $12,961 77.1 $ 3,146
======= ====== ======= ====== =======
The increase in cost of goods sold was present across all segments. The increase
in the Industrial segment predominantly correlates to the additional revenues,
as well as having a complete quarter's costs associated with the two facilities
acquired, as of March 23, 2004. Additionally, 2005 is benefiting from the
completion of the segment's restructuring and integration along with the
segment's ability to more effectively process and dispose of waste that had been
diverted from our discontinued operation in the first quarter of 2004. The
Nuclear segment increase principally relates to the additional revenues, aided
by the increased complexity of the waste streams, which caused the increase in
payroll, materials and processing expenses. The Engineering segment accounted
for the remaining increase experiencing higher payroll and other direct costs
for projects completed this year. Included within cost of goods sold is
depreciation and amortization expense of $1,113,000 and $1,022,000 for the
quarters ended March 31, 2005 and 2004, respectively, reflecting an increase of
$92,000 over 2004. As a percentage of revenue, cost of goods sold decreased by
2.6%.
19
Gross Profit
Gross profit for the quarter ended March 31, 2005, increased over 2004, as
follows:
(In thousands) 2005 % Revenue 2004 % Revenue Change
- ----------------------------------------------------------------------
Nuclear $ 3,546 32.5 $ 3,363 35.5 $ 183
Industrial 1,800 18.1 320 4.8 1,480
Engineering 155 20.3 167 22.9 (12)
------- ------ ------- ------ -------
Total $ 5,501 25.5 $ 3,850 22.9 $ 1,651
======= ====== ======= ====== =======
The resulting gross profit increase is principally attributable to the
Industrial segment slightly aided by the Nuclear segment and partially offset by
Engineering. However, the increase in the gross profit as a percentage of
revenue was due to the Industrial segment. The segment's increase reflects the
fixed costs of operating the facilities being spread over greater revenues,
relating in part to the completion of the restructuring and integration and more
efficient handling in 2005 of the waste that had to be diverted from our
discontinued operation in the prior year. Slightly offsetting this increase was
the addition of the March 2004, acquired facilities, which operate at a slightly
lower gross profit percentage. The Nuclear and Engineering segments experienced
a decrease in their gross profit percentage mainly due to the product mix and
projects performed, respectively.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased for the three
months ended March 31, 2005, as compared to the corresponding period for 2004,
as follows:
(In thousands) 2005 % Revenue 2004 % Revenue Change
- ----------------------------------------------------------------------
Administrative $1,248 -- $ 888 -- $ 360
Nuclear 1,710 15.7 1,638 17.3 72
Industrial 1,838 18.5 1,705 25.8 133
Engineering 123 16.1 107 14.7 16
------ ------ ------ ------ ------
Total $4,919 22.8 $4,338 25.8 $ 581
====== ====== ====== ====== ======
The increase in SG&A expenses predominately relates to corporate administrative
expense, which included third party charges of $214,000 incurred for additional
audit fees, and compliance work performed with regard to Sarbanes Oxley and
completion of the related internal control assessment required under Section 404
of the Act. We anticipate that the third party charges related to Section 404
will decline slightly in 2005, as we have completed the initial year of
assessment, documented our deficiencies and are focused on their successful
remediation. Also, additional payroll related expenses to build stronger
infrastructures within the Corporate office and the Nuclear and Industrial
segments, were incurred during the first quarter. Included in the increase for
the Industrial segment were the full quarter's expenses related to the two
facilities acquired, effective March 23, 2004. SG&A expenses includes
depreciation and amortization expense of $92,000 and $58,000 for the quarters
ended March 31, 2005 and 2004, respectively.
20
Interest Expense
Interest expense decreased for the quarter ended March 31, 2005, as compared to
the corresponding period of 2004.
(In thousands) 2005 2004 Change
- -------------------------------------------------------------
PNC interest $ 195 $ 202 $ (7)
AMI/BEC -- 190 (190)
Other 217 273 (56)
----- ----- -----
Total $ 412 $ 665 $(253)
===== ===== =====
This decrease reflects lower borrowing levels on our PNC revolving credit and
term loan resulting from improved cash flows from operations and scheduled
repayments on the term loan. In addition, in August 2004, we prepaid in full the
AMI/BEC 13.5% Senior Subordinated Debt. We also experienced a decrease in
interest expense due to the final repayment of debt associated with our 1999
acquisitions, which was completed in June 2004, and from the final repayment of
debt to various other sources as our overall debt position continues to improve.
Interest Expense - Financing Fees
Interest expense-financing fees decreased approximately $145,000 for the quarter
ended March 31, 2005, as compared to the corresponding period of 2004. This
decrease was principally due to the write-off of $1,217,000 of prepaid financing
fees and debt discount associated with the early termination of senior
subordinated notes, which were paid in full in August 2004. The remaining
financing fees are principally associated with the PNC revolving credit and term
loan, and are amortized to expense over the term of the loan agreements. As of
March 31, 2005, the unamortized balance of prepaid financing fees is $330,000,
which will be amortized to expense at the rate of approximately $37,000 per
month during 2005. We have an additional $168,000 of prepaid financing fees
associated with Amendment No. 4 that will be amortized at the monthly amount of
$4,667 through the expiration date of May 2008.
Preferred Stock Dividends
Preferred Stock dividends remained constant at approximately $47,000 for the
three months ended March 31, 2005, and 2004. The Preferred dividends are
comprised of approximately $31,000 in 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.
Discontinued Operations
On October 4, 2004, our Board of Directors approved the discontinuation of
operations at the facility in Detroit, Michigan, owned by our subsidiary,
Perma-Fix of Michigan, Inc. ("PFMI"). The decision to discontinue operations at
the Detroit facility was principally as a result of two fires that significantly
disrupted operations at the facility in 2003, and the facility's continued drain
on the financial resources of our Industrial segment. We are in the process of
remediating the facility and evaluating our available options for future use or
sale of the property. The operating activities for the current and prior periods
have been reclassified to discontinued operations in our Consolidated Statements
of Operations.
Expenses of $167,000 were recorded during the first quarter of 2005. PFMI
recorded revenues of $658,000, and operating losses of $553,000 for the quarter
ended March 31, 2004. Assets and liabilities related to the discontinued
operation have been reclassified to separate categories in the Consolidated
Balance Sheets as of March 31, 2005 and December 31, 2004. As of March 31, 2005,
assets are recorded at their net realizable value, and consist of property of
$600,000, and insurance proceeds receivable of $1,585,000. We have submitted
three insurance claims relative to the two fires at PFMI, a property claim for
the first fire and a property claim and business interruption claim for the
second fire. During the fourth quarter of 2004, we finalized our negotiations
with the insurance carrier on the business interruption claim and recorded an
21
additional $1,130,000 receivable, an increase to the previous receivable amount
of $455,000. We are currently negotiating settlements for the remaining two
claims, but at this time we cannot estimate actual proceeds to be received.
Additional proceeds, if any, received on these remaining claims will be recorded
as income from discontinued operations. Liabilities as of March 31, 2005,
consist of accounts payable and current accrued expenses of $1,972,000 and
environmental accruals of $2,203,000. Included in current accruals is a pension
plan withdrawal liability, which is a result of the termination of substantially
all of the union employees of PFMI. The PFMI union employees participate in the
Central States Teamsters Pension Fund ("CST"), which provides that a partial or
full termination of union employees may result in a withdrawal liability, due
from PFMI to CST. We have recorded a $1,680,000 pension withdrawal liability at
March 31, 2005, based upon an actuarial study. This withdrawal liability
represents our best estimate, and is subject to numerous factors such as the
date and timing of union employee terminations, partial versus complete
termination status, the pension funds unfunded vested benefit liability and
PFMI's portion of such liability. This obligation is recorded as a current
liability but may not be paid out in the current year, due to the timing of the
termination event and process of determining the final liability.
As a result of the discontinuation of operations at the PFMI facility, we are
required to complete certain closure and remediation activities pursuant to our
RCRA permit. Also, in order to close and dispose of or sell the facility, we may
have to complete certain additional remediation activities related to the land,
building, and equipment. The extent and cost of the clean-up and remediation
will be determined by state mandated requirements, the extent to which are not
known at this time. Also, impacting this estimate is the level of contamination
discovered, as we begin remediation, and the related clean-up standards which
must be met in order to dispose of or sell the facility. We engaged our
engineering firm, SYA, to perform an analysis and related estimate of the cost
to complete the RCRA portion of the closure/clean-up costs and the potential
long-term remediation costs. Based upon this analysis, we arrived at our best
estimate of the cost of this environmental closure and remediation liability of
$2,464,000. We have spent approximately $261,000 of this closure cost estimate
since September 30, 2004, of which approximately $145,000 was spent in the first
quarter of 2005. In the event we retain PFMI, we anticipate spending an
additional $399,000 in 2005 and the remainder over the next two to five years.
Liquidity and Capital Resources of the Company
Our capital requirements consist of general working capital needs, scheduled
principal payments on our debt obligations and capital leases, remediation
projects and planned capital expenditures. Our capital resources consist
primarily of cash generated from operations, funds available under our revolving
credit facility and proceeds from issuance of our Common Stock. Our capital
resources are impacted by changes in accounts receivable as a result of revenue
fluctuation, economic trends, collection activities, and the profitability of
the segments.
At March 31, 2005, we had cash of $78,000. The following table reflects the cash
flow activities during the first quarter of 2005.
(In thousands) 2005
--------------------------------------------------
Cash provided by operations $ 284
Cash used in investing activities (1,470)
Cash provided by financing activities 1,049
-------
Decrease in cash $ (137)
=======
22
We are in a net borrowing position and therefore attempt to move all excess cash
balances immediately to the revolving credit facility, so as to reduce debt and
interest expense. We utilize a centralized cash management system, which
includes remittance lock boxes and is structured to accelerate collection
activities and reduce cash balances, as idle cash is moved without delay to the
revolving credit facility. The cash balance at March 31, 2005, primarily
represents minor petty cash and local account balances used for miscellaneous
services and supplies.
Operating Activities
Accounts Receivable, net of allowances for doubtful accounts, totaled
$27,411,000, an increase of $219,000 over the December 31, 2004, balance of
$27,192,000. The Nuclear segment experienced an increase of $1,251,000 as a
result of higher revenues in the first quarter when compared to prior year and
the complexity involved with government accounts which require a greater amount
of documentation that results in delays in the collection of these receivables.
The Engineering segment also experienced an increase of $18,000. Offsetting
these increases, was a decrease in the accounts receivable from the Industrial
segment of $1,050,000 primarily resulting from increased collection efforts and
certain write-offs of uncollectible balances.
As of March 31, 2005, total consolidated accounts payable was $7,355,000, an
increase of $826,000 from the December 31, 2004, balance of $6,529,000. Accounts
payable increased due to additional operating expenses associated with increased
revenues from the Nuclear segment during the fourth quarter of 2004 and the
first quarter of 2005. Additionally, accounts payable increased as we continue
to fund capital expenditures through the use of working capital.
Accrued Expenses as of March 31, 2005, totaled $11,392,000, a decrease of
$708,000 over the December 31, 2004, balance of $12,100,000. Accrued expenses
are made up of disposal and processing cost accruals, accrued compensation,
interest payable, insurance payable and certain tax accruals. The decrease to
accrued expenses was principally a result of payments made in the first quarter
for insurance payables of $424,000, royalty settlement payments of $225,000, and
other environmental issue payments related to Title V air issues, superfund
settlements and other environmental reserves.
The working capital position at March 31, 2005, was $345,000, as compared to a
working capital deficit of $497,000 at December 31, 2004. The increase in this
position of $842,000 is principally a result of an increase in inventory and a
decrease in accrued expenses. The increase in inventory is primarily a result of
the stockpiling of used oil product in preparation for the higher seasonal
demand of product in the warmer months. Accrued expenses decreased principally
due to payments made towards insurance payables, environmental issues and
royalty settlements, mentioned above. Our working capital position continues to
experience the negative impact of certain liabilities associated with
discontinued operations.
Investing Activities
Our purchases of new capital equipment for the three-month period ended March
31, 2005, totaled approximately $766,000 of which $281,000 was financed,
resulting in net purchases of $478,000, funded out of cash flow. These
expenditures were for expansion and improvements to the operations principally
within the Nuclear and Industrial segments. These capital expenditures were
principally funded by the cash provided by operations, and through various other
lease financing sources. We budgeted capital expenditures of approximately
$6,000,000 for fiscal year 2005, which includes an estimated $523,000 to
complete certain current projects committed at December 31, 2004, as well as
other identified capital and permit compliance purchases. Our purchases during
the first quarter of 2005 include approximately $181,000 of those projects
committed at December 31, 2004. Certain of these budgeted projects are
discretionary and may either be delayed until later in the year or deferred
altogether. We have traditionally incurred actual capital spending totals for a
given year less than initial budget amount. The initiation and timing of
projects are also determined by financing alternatives or funds available for
23
such capital projects. We anticipate funding these capital expenditures by a
combination of lease financing, internally generated funds, and/or the proceeds
received from Warrant exercises.
In June 2003, we entered into a 25-year finite risk insurance policy, which
provides financial assurance to the applicable states for our permitted
facilities in the event of unforeseen closure. Prior to obtaining or renewing
operating permits we are required to provide financial assurance that guarantees
to the states that in the event of closure our permitted facilities will be
closed in accordance with the regulations. The policy provides $35 million of
financial assurance coverage of which the coverage amount totals $28,546,000 at
March 31, 2005, and has available capacity to allow for annual inflation and
other performance and surety bond requirements. This finite risk insurance
policy required an upfront payment of $4.0 million, of which $2,766,000
represents the full premium for the 25-year term of the policy, and the
remaining $1,234,000, to be deposited in a sinking fund account representing a
restricted cash account. Additionally, in February 2004 and 2005, we paid the
first and second of nine required annual installments of $1,004,000, of which
$991,000 was deposited in the sinking fund account, the remaining $13,000
represents a terrorism premium. As of March 31, 2005, we have recorded
$3,216,000 in our sinking fund on the balance sheet. On the fourth and
subsequent anniversaries of the contract inception, we may elect to terminate
this contract. If we so elect, the Insurer will pay us an amount equal to 100%
of the sinking fund account balance in return for complete releases of liability
from both us and any applicable regulatory agency using this policy as an
instrument to comply with financial assurance requirements.
On March 23, 2004, our subsidiary, PFMD completed it's acquisition of certain
assets of A&A and our subsidiary, PFP completed its acquisition of certain
assets of EMAX. We paid $2,915,000 in cash for the acquired assets and assumed
liabilities of A&A and EMAX, using funds received in connection with the private
placement discussed below, under financing activities.
Financing Activities
On December 22, 2000, we entered into a Revolving Credit, Term Loan and Security
Agreement ("Agreement") with PNC Bank, National Association, a national banking
association ("PNC") acting as agent ("Agent") for lenders, and as issuing bank.
The Agreement provided for a term loan ("Term Loan") in the amount of
$7,000,000, which requires principal repayments based upon a seven-year
amortization, payable over five years, with monthly installments of $83,000 and
the remaining unpaid principal balance due on December 22, 2005. The Agreement
also provided for a revolving line of credit ("Revolving Credit") with a maximum
principal amount outstanding at any one time of $18,000,000, as amended. The
Revolving Credit advances are subject to limitations of an amount up to the sum
of (a) up to 85% of Commercial Receivables aged 90 days or less from invoice
date, (b) up to 85% of Commercial Broker Receivables aged up to 120 days from
invoice date, (c) up to 85% of acceptable Government Agency Receivables aged up
to 150 days from invoice date, and (d) up to 50% of acceptable unbilled amounts
aged up to 60 days, less (e) reserves Agent reasonably deems proper and
necessary. The Revolving Credit advances were to be due and payable in full on
December 22, 2005. As of March 31, 2005, the excess availability under our
Revolving Credit was $7,003,000 based on our eligible receivables.
On March 15, 2005, the Company entered into a commitment letter with PNC,
whereby PNC agreed to renew and extend the agreement, and to increase the term
loan back up to $7.0 million. Effective March 25, 2005, the Company and PNC
entered into an amended agreement (Amendment No. 4), which, among other things,
extends the $25 million credit facility through May 31, 2008. The credit
facility consists of an $18 million revolving line of credit and a $7 million
term loan. The terms of the credit facility remain principally unchanged, with
the exception of a 50 basis point reduction in the variable interest rate on
both loans. The increase to the term loan will be handled as a subsequent
amendment, subject to the updating of the existing mortgages held by PNC. We
expect the mortgage updates to be completed during the second quarter of 2005,
24
with proceeds of approximately $4.0 million to be received shortly thereafter.
As a condition of this amended agreement, we paid a $140,000 fee to PNC.
Pursuant to the Agreement, as amended, the Term Loan bears interest at a
floating rate equal to the prime rate plus 1%, and the Revolving Credit at a
floating rate equal to the prime rate plus 1/2%. The loans are subject to a
prepayment fee of 1% until March 25, 2006, and 1/2% until March 25, 2007.
On August 31, 2000, as part of the consideration for the purchase of Diversified
Scientific Services, Inc. ("DSSI"), we issued to Waste Management Holdings a
long-term unsecured promissory note (the "Unsecured Promissory Note") in the
aggregate principal amount of $3,500,000, bearing interest at a rate of 7% per
annum and having a five-year term with interest to be paid annually and
principal due in one lump sum at the end of the term of the Unsecured Promissory
Note (August 2005). This debt balance was reclassed in its entirety from long
term to current in the third quarter of 2004. We plan to utilize the proceeds of
the amended agreement with PNC, mentioned above, to repay this note prior to its
August 2005 expiration date.
In conjunction with our acquisition of M&EC, M&EC issued a promissory note for a
principal amount of $3.7 million to Performance Development Corporation ("PDC"),
dated June 25, 2001, for monies advanced to M&EC for certain services performed
by PDC. The promissory note is payable over eight years on a semiannual basis on
June 30 and December 31. The principal repayments for 2005 will be approximately
$400,000 semiannually. Interest is accrued at the applicable law rate
("Applicable Rate") pursuant to the provisions of section 6621 of the Internal
Revenue Code of 1986 as amended. (7% on March 31, 2005) and payable in one lump
sum at the end of the loan period. On March 31, 2005, the outstanding balance
was $4,170,000 including accrued interest of approximately $1,136,000. PDC has
directed M&EC to make all payments under the promissory note directly to the IRS
to be applied to PDC's obligations under its installment agreement with the IRS.
Additionally, M&EC entered into an installment agreement with the Internal
Revenue Service ("IRS") for a principal amount of $923,000 effective June 25,
2001, for certain withholding taxes owed by M&EC. The installment agreement is
payable over eight years on a semiannual basis on June 30 and December 31. The
principal repayments for 2005 will be approximately $100,000 semiannually.
Interest is accrued at the Applicable Rate, and is adjusted on a quarterly basis
and payable in lump sum at the end of the installment period. On March 31, 2005,
the rate was 7%. On March 31, 2005, the outstanding balance was $1,028,000
including accrued interest of approximately $275,000.
On March 22, 2004, we completed a private placement for gross proceeds of
approximately $10,386,000 through the sale of 4,616,113 shares of our Common
Stock at $2.25 per share and Warrants to purchase an additional 1,615,638 shares
of our Common Stock exercisable at $2.92 per share and a term of three years.
The private placement was sold to fifteen accredited investors. The net cash
proceeds received of $9,870,000, after paying placement agent fees, and other
related expenses, were used in connection with the acquisitions of certain
acquired assets of A&A and EMAX discussed above, and to pay down the Revolving
Credit. We subsequently reborrowed the private placement funds from the
revolving credit facility in August 2004, and prepaid the higher interest, 13.5%
Notes, as discussed above. We also issued Warrants to purchase an aggregate of
160,000 shares of our Common Stock, exercisable at $2.92 per share and with a
three year term, for consulting services related to the private placement.
We have outstanding 2,500 shares of Preferred Stock, with each share having a
liquidation preference of $1,000 ("Liquidation Value"). Annual dividends on the
Preferred Stock are 5% of the Liquidation Value. Dividends on the Preferred
Stock are cumulative, and are payable, if and when declared by our Board of
Directors, on a semiannual basis. Dividends on the outstanding Preferred Stock
may be paid at our option, if declared by the Board of Directors, in cash or in
shares of our Common Stock.
25
During 2005, accrued dividends for the period July 1, 2004, through December 31,
2004, in the amount of approximately $63,000 were paid in cash in March 2005.
The accrued dividends for the period January 1, 2005, through March 31, 2005, in
the amount of approximately $31,000 will be paid in August 2005.
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 within both the
Nuclear and Industrial segments. We have experienced the positive impact of
increased accounts receivable collections and increased availability under our
Revolving Credit. Additionally, accounts payable have remained relatively steady
and within terms. Offsetting these positives is the continued negative impact of
current reserves recorded on discontinued operations. The reserves recorded on
discontinued operations could be reduced or paid over a longer period of time
than initially anticipated. If we are unable to improve our operations and
become profitable in the foreseeable future, such would have a material adverse
effect on our liquidity position.
Contractual Obligations
The following table summarizes our contractual obligations at March 31, 2005,
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods, (in thousands):
Payments due by period
------------------------------------------------
2006 - 2009 - After
Contractual Obligations Total 2005 2008 2010 2010
- ----------------------------------------------------------------------------------------------------
Long-term debt $20,237 $ 6,338 $13,818 $ 81 $ --
Interest on long-term debt (1) 1,411 -- 1,411 -- --
Operating leases 3,648 1,408 2,190 50 --
Finite risk policy (2) 7,026 -- 3,011 2,008 2,007
Pension withdrawal liability (3) 1,680 1,680 -- -- --
Purchase obligations (4) -- -- -- -- --
------- ------- ------- ------- -------
Total contractual obligations $34,002 $ 9,426 $20,430 $ 2,139 $ 2,007
======= ======= ======= ======= =======
(1) Our IRS Note and PDC Note agreements state that the interest on those
notes is paid at the end of the term, December 2008.
(2) Our finite risk insurance policy provides financial assurance guarantees
to the states in the event of unforeseen closure of our permitted
facilities. See Liquidity and Capital Resources - Investing activities
earlier in this Management's Discussion and Analysis for further
discussion on our finite risk policy.
(3) The pension withdrawal liability is the estimated liability to us upon
termination of substantially all of our union employees at our
discontinued operation, PFMI. See Discontinued Operation earlier in this
section for discussion on our discontinued operation.
(4) We are not a party to any significant long-term service or supply
contracts with respect to our processes. We refrain from entering into any
long-term purchase commitments in the ordinary course of business.
Critical Accounting Estimates
In preparing the consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as, the reported amounts of revenues and expenses during the reporting
26
period. We believe the following critical accounting policies affect the more
significant estimates used in preparation of the consolidated financial
statements:
Revenue Recognition Estimates. Effective September 1, 2003 we refined our
percentage of completion methodology for purposes of revenue recognition in our
Nuclear Segment. As we accept more complex waste streams in this segment, the
treatment of those waste streams becomes more complicated and more time
consuming. We have continued to enhance our waste tracking capabilities and
systems, which has enabled us to better match the revenue earned to the
processing phases achieved. The major processing phases are receipt,
treatment/processing and shipment/final disposition. Upon receiving mixed waste
we recognize a certain percentage (33%) of revenue as we incur costs for
transportation, analytical and labor associated with the receipt of mixed
wastes. As the waste is processed, shipped and disposed of we recognize the
remaining 67% of revenue and the associated costs of transportation and burial.
The waste streams in our Industrial segment are much less complicated, and
services are rendered shortly after receipt, as such we don't use percentage of
completion estimates in our Industrial segment. We review and evaluate our
revenue recognition estimates and policies on a quarterly basis.
Allowance for Doubtful Accounts. The carrying amount of accounts receivable is
reduced by an allowance for doubtful accounts, which is a valuation allowance
that reflects management's best estimate of the amounts that are uncollectable.
We regularly review all accounts receivable balances that exceed 60 days from
the invoice date and based on an assessment of current credit worthiness,
estimate the portion, if any, of the balance that are uncollectable. Specific
accounts that are deemed to be uncollectible are reserved at 100% of their
outstanding balance. The remaining balances aged over 60 days have a percentage
applied by aging category (5% for balances 61-90 days, 20% for balances 91-120
days and 40% for balances over 120 days aged), based on a historical valuation,
that allows us to calculate the total reserve required. This allowance was
approximately 0.7%, and 0.8% of revenue and approximately 2.1%, and 2.9% of
accounts receivable for 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 are tested annually as of October 1. Our annual impairment test as
of October 1, 2004, resulted in an impairment of goodwill and permits, in our
Industrial segment in the amounts of $4,886,000 and $4,116,000, respectively,
which resulted in remaining balance of Industrial segment intangible permits in
the amount of $2,370,000. 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
Resource Conservation and Recovery Act ("RCRA"). Such costs are evaluated
annually and adjusted for inflationary factors and for approved changes or
expansions to the facilities. Increases due to inflationary factors for 2005 and
2004, have been approximately 2.1%, and 1.6%, respectively, and based on the
27
historical information, we do not expect future inflationary changes to differ
materially from the last three years. Increases or decreases in accrued closure
costs resulting from changes or expansions at the facilities are determined
based on specific RCRA guidelines applied to the requested change. This
calculation includes certain estimates, such as disposal pricing, external
labor, analytical costs and processing costs, which are based on current market
conditions. However, with the exception of the Michigan facility, we have no
intention, at this time, to close any of our facilities.
Accrued Environmental Liabilities. We have six remediation projects currently in
progress. The current and long-term accrual amounts for the projects are our
best estimates based on proposed or approved processes for clean-up. The
circumstances that could affect the outcome range from new technologies that are
being developed every day to reduce our overall costs, to increased
contamination levels that could arise as we complete remediation which could
increase our costs, neither of which we anticipate at this time. In addition,
significant changes in regulations could adversely or favorably affect our costs
to remediate existing sites or potential future sites, which cannot be
reasonably quantified. We have also accrued long-term environmental liabilities
for our recently acquired facilities, however, as these are not permitted
facilities we are currently under no obligation to clean up the contamination.
Disposal Costs. We accrue for waste disposal based upon a physical count of the
total waste at each facility at the end of each accounting period. Current
market prices for transportation and disposal costs are applied to the end of
period waste inventories to calculate the disposal accrual. Costs are calculated
using current costs for disposal, but economic trends could materially affect
our actual costs for disposal. As there are limited disposal sites available to
us, a change in the number of available sites or an increase or decrease in
demand for the existing disposal areas could significantly affect the actual
disposal costs either positively or negatively.
Known Trends and Uncertainties
Seasonality. Historically we have experienced reduced revenues, operating losses
or decreased operating profits during the first and fourth quarters of our
fiscal years due to a seasonal slowdown in operations from poor weather
conditions and overall reduced activities during the holiday season and through
January and February of the first quarter. During our second and third fiscal
quarters there has historically been an increase in revenues and operating
profits. Management expects this trend to continue in future years. 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 U.S.
Department of Energy ("DOE") and U.S. Department of Defense ("DOD") represent
major customers for the Nuclear segment. In conjunction with the federal
government's September 30 fiscal year-end, the Nuclear segment experiences
seasonably large shipments during the third quarter, leading up to this
government fiscal year-end, as a result of incentives and other quota
requirements. Correspondingly for a period of approximately three months
following September 30, the Nuclear segment is generally seasonably slow, as the
governmental budgets are still being finalized, planning for the new year is
occurring and we enter the holiday season.
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 throughout 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 DOE's appointed manager of the
environmental program to perform certain treatment and disposal services in Oak
Ridge, Tennessee. In this capacity Bechtel Jacobs entered into certain
28
subcontracts with our Oak Ridge, Tennessee subsidiary ("M&EC"). Our revenues
from Bechtel Jacobs contributed 7.6% of total consolidated revenues in the
quarter ended March 31, 2005 and 9.0% of total consolidated revenues during the
same period in 2004. The Oak Ridge contracts have been extended, 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. As the DOE site in Oak Ridge continues to complete
certain of its clean-up milestones and moves toward completing its closure
efforts, the revenue from these contracts may continue to decline. The Nuclear
segment has and will pursue other similar or related contracts for environmental
programs at other DOE and government sites. In February 2003, M&EC commenced
legal proceedings against Bechtel Jacobs, the general contractor under the Oak
Ridge contracts, seeking payment from Bechtel Jacobs of approximately $4.3
million in surcharges relating to certain wastes that were treated by M&EC in
2001 and 2002 under the Oak Ridge contracts. During 2001, we recognized
approximately $381,000 in revenue for these surcharges, which represented an
initial offer for settlement by Bechtel Jacobs. Bechtel Jacobs continues to
deliver waste to M&EC for treatment, and M&EC continues to accept such waste. In
addition, subsequent to the filing of the lawsuit, M&EC has entered into a new
contract with Bechtel Jacobs to treat DOE waste. There is no guarantee of future
business under the Oak Ridge contracts, and either party may terminate the Oak
Ridge contracts at any time. Termination of these contracts could have a
material adverse effect on us. We are working towards increasing other sources
of revenues at M&EC to reduce the risk of reliance on one major source of
revenues.
During the second quarter of 2004, the Nuclear segment was awarded a contract
from a Fortune 500 company valued at approximately $6,218,000 to treat and
dispose of mixed waste generated from research and development activities. This
contract requires innovative treatment processing technologies we developed to
accommodate the complex nature of these wastes. The contract should be completed
during the third quarter of 2005. We recognized $893,000 in revenues from this
contract for the three months ended March 31, 2005 or 4.1% of total consolidated
revenues. During 2004, we recognized $3,195,000 in revenue from this contract.
During October 2004, the Nuclear segment was awarded a three-year contract
valued at approximately $23,000,000 for the treatment of mixed low-level wastes
generated at the DOE's Hanford Site. Fluor Hanford, a prime contractor
supporting DOE's cleanup mission at Hanford, has awarded this contract to us to
provide specialized thermal treatment for a variety of mixed low-level
radioactive wastes generated at Hanford. As with contracts or subcontracts with
or involving the federal government, this contract may be terminated or
renegotiated at anytime at the government's option. We recognized $914,000 in
revenues from this contract for the quarter ended March 31, 2005.
Insurance. We maintain insurance coverage similar to, or greater than, the
coverage maintained by other companies of the same size and industry, which
complies with the requirements under applicable environmental laws. We evaluate
our insurance policies annually to determine adequacy, cost effectiveness and
desired deductible levels. Due to the downturn in the economy and changes within
the environmental insurance market, we have no guarantee that we will be able to
obtain similar insurance in future years, or that the cost of such insurance
will not increase materially.
Certain Legal Proceedings. PFD is involved in legal proceedings with the EPA and
others alleging, among other things, that PFD is required to have obtained a
Title V air permit in order to carry out its operations, which PFD vigorously
disagrees with and is contesting. If it is determined that PFD is required to
have a Title V air permit, such could have a material adverse effect on our
liquidity and we anticipate substantial additional capital expenditures at PFD
would be required in order to bring PFD into compliance with Title V air permit
requirements. As of the date of this report, we do not have any reliable
estimates of the effect on our liquidity or the cost of such additional capital
expenditures if there is an adverse ruling regarding the Title V air permit
issue.
29
In December 2004, PFD received a complaint brought under the citizen's suit
provisions of the Clean Air Act in the United States District Court for the
Southern District of Ohio, Western district, styled Barbara Fisher v. Perma-Fix
of Dayton, Inc. The suit alleges violation by PFD of a number of state and
federal clean air statutes in connection with the operation of PFD's facility,
primarily due to the operating without a Title V air permit, and further alleges
that air emissions from PFD's facility endanger the health of the public and
constitutes a nuisance in violation of Ohio law. The action seeks injunctive
relief, imposition of civil penalties, attorney fees and costs and other forms
of relief. We intend to vigorously defend ourselves in connection with this
matter. See above discussion as to administrative proceedings instituted by the
EPA.
During February, 2005, the Company received a federal grand jury subpoena
requesting documents "from the period of January 1, 2000, to the present
concerning or relating to Wabash Environmental Technologies, LLC," ("Wabash"),
an Indiana based entity that is not affiliated with the Company. The Company has
been advised that the target of the grand jury investigation is Wabash and that
neither the Company nor any subsidiary of the Company is a target of the
investigation. The Company and any subsidiary that has documents concerning or
relating to Wabash are compiling responsive documents and will be complying with
the subpoena.
The Company is performing an extensive internal review as to whether the
treatment, storage, processing and/or disposal of certain waste by its
subsidiary, PFD, was in accordance with applicable environmental laws and
regulations because it has identified a potential issue or issues with regard to
its handling of said waste. Upon completion of the internal review, the Company
will take any necessary and appropriate steps to report or otherwise address any
issues arising from its handling of that certain particular waste.
PFD Environmental. We have recently discovered that our facility, PFD had
inadvertently received high level PCB contaminated oil, at a level greater than
PFD is permitted to accept, and have notified regulators of the incident. We are
currently investigating the extent of contamination and our disposal options.
The cost of disposal of this PCB contaminated oil has not yet been determined.
Environmental Contingencies
We are engaged in the waste management services segment of the pollution control
industry. As a participant in the on-site treatment, storage and disposal market
and the off-site treatment and services market, we are subject to rigorous
federal, state and local regulations. These regulations mandate strict
compliance and therefore are a cost and concern to us. Because of their integral
role in providing quality environmental services, we make every reasonable
attempt to maintain complete compliance with these regulations; however, even
with a diligent commitment, we, along with many of our competitors, may be
required to pay fines for violations or investigate and potentially remediate
our waste management facilities.
We routinely use third party disposal companies, who ultimately destroy or
secure landfill residual materials generated at our facilities or at a client's
site. We, compared to certain of our competitors, dispose of significantly less
hazardous or industrial by-products from our operations due to rendering
material non-hazardous, discharging treated wastewaters to publicly-owned
treatment works and/or processing wastes into saleable products. In the past,
numerous third party disposal sites have improperly managed wastes and
consequently require remedial action; consequently, any party utilizing these
sites may be liable for some or all of the remedial costs. Despite our
aggressive compliance and auditing procedures for disposal of wastes, we could,
in the future, be notified that we are a PRP at a remedial action site, which
could have a material adverse effect.
30
We have budgeted for 2005, $1,265,000 in environmental remediation expenditures
to comply with federal, state and local regulations in connection with
remediation of certain contaminates at our facilities. Our facilities where the
remediation expenditures will be made are the Leased Property in Dayton, Ohio
(EPS), a former RCRA storage facility as operated by the former owners of PFD,
PFM's facility in Memphis, Tennessee, PFSG's facility in Valdosta, Georgia,
PFTS's facility in Tulsa, Oklahoma, a property adjacent to our PFFL facility,
PFMD's facility in Baltimore, Maryland, PFP's leased property in Pittsburgh,
Pennsylvania, and PFMI's facility in Detroit, Michigan. We expect to fund the
expenses to remediate the sites from funds generated internally, however, no
assurances can be made that we will be able to do so.
At March 31, 2005, we had total accrued environmental remediation liabilities of
$4,946,000, of which $1,029,000 is recorded as a current liability, which
reflects a decrease of $236,000 from the December 31, 2004, balance of
$1,265,000. The decrease represents payments on remediation projects. The March
31, 2005, current and long-term accrued environmental balance is recorded as
follows:
` Current Long-term
Accrual Accrual Total
---------- ---------- ----------
PFD $ 110,000 $ 595,000 $ 705,000
PFM 261,000 434,000 695,000
PFSG 207,000 501,000 708,000
PFTS 27,000 42,000 69,000
PFFL 25,000 -- 25,000
PFMD -- 391,000 391,000
PFP -- 150,000 150,000
---------- ---------- ----------
630,000 2,113,000 2,743,000
PFMI 399,000 1,804,000 2,203,000
---------- ---------- ----------
$1,029,000 $3,917,000 $4,946,000
========== ========== ==========
Recent Accounting Pronouncements
In December 2004, FASB issued Statement No. 123 (revised) ("SFAS 123R"),
Share-Based Payment. SFAS 123R is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and its related implementation
guidance, and establishes standards for the accounting for transactions in which
an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
SFAS 123R requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide service in
exchange for the award. This statement requires companies to recognize the fair
value of stock options and other stock-based compensation to employees
prospectively, beginning with awards granted, modified, repurchased or cancelled
after the fiscal periods beginning after June 15, 2005. We currently measure
stock-based compensation in accordance with APB Opinion No. 25. The impact on
our financial condition or results of operations will depend on the number and
terms of stock options outstanding on the date of change, as well as future
options that may be granted. See Note 1 to Notes to Consolidated Financial
Statements - Stock-Based Compensation for the pro forma impact that the fair
value method would have had on our net income/loss for each of the quarters
ended March 31, 2005 and 2004. We do not expect the impact of SFAS 123R to have
an impact on our cash flows or liquidity.
31
In April 2005, the Securities and Exchange Commission ("SEC") amended its
Regulation S-X to amend the date of compliance with SFAS 123R to the first
reporting period of the fiscal year beginning on or after June 15, 2005. We
anticipate adopting SFAS 123R on January 1, 2006.
Interest Rate Swap
We entered into an interest rate swap agreement effective December 22, 2000, to
modify the interest characteristics of our outstanding debt from a floating
basis to a fixed rate, thus reducing the impact of interest rate changes on
future income. This agreement involves the receipt of floating rate amounts in
exchange for fixed rate interest payments over the life of the agreement without
an exchange of the underlying principal amount. The differential to be paid or
received is accrued as interest rates change and recognized as an adjustment to
interest expense related to the debt. The related amount payable to or
receivable from counter parties is included in other assets or liabilities. At
March 31, 2005, the market value of the interest rate swap was in an unfavorable
value position of $24,000 and was recorded as a liability. During the three
months ended March 31, 2005, we recorded a gain on the interest rate swap of
$17,000 that offset other comprehensive loss in the Statement of Stockholders'
Equity.
32
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.
33
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONTROLS AND PROCEDURES
PART 1, ITEM 4
(a) Evaluation of disclosure, controls, and procedures.
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our periodic reports filed
with the Securities and Exchange Commission (the "SEC") is recorded,
processed, summarized and reported within the time periods specified in
the rules and forms of the SEC and that such information is accumulated
and communicated to our management. Based on their most recent evaluation,
which was completed as of the end of the period covered by this Quarterly
Report on Form 10-Q, we have evaluated, with the participation of our
Chief Executive Officer and Chief Financial Officer the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15 and
15d-15 of the Securities Exchange Act of 1934, as amended) and believe
that such are not effective, as a result of identifying three material
weaknesses in our internal control over financial reporting, as reported
in our Annual Report on Form 10-K for the year ended December 31, 2004,
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)).
(b) Changes in internal control over financial reporting.
There have been no changes in our internal control over financial
reporting, other than reported below:
Effective January 1, 2005, we changed our payroll processing provider for
all of our facilities. With this change, we now utilize a centralized
payroll and human resources database which provides for corporate
oversight on a real-time basis of all payroll related activities, and
automatic benefit calculations on all employees.
34
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
PART II - Other Information
Item 1. Legal Proceedings
There are no additional material legal proceedings pending against us
and/or our subsidiaries not previously reported by us in Item 3 of our
Form 10-K for the year ended December 31, 2004, which is incorporated
herein by reference, except for the following:
During February, 2005, the Company received a federal grand jury
subpoena requesting documents "from the period of January 1, 2000, to
the present concerning or relating to Wabash Environmental
Technologies, LLC," ("Wabash"), an Indiana based entity that is not
affiliated with the Company. The Company has been advised that the
target of the grand jury investigation is Wabash and that neither the
Company nor any subsidiary of the Company is a target of the
investigation. The Company and any subsidiary that has documents
concerning or relating to Wabash are compiling responsive documents
and will be complying with the subpoena.
The Company is performing an extensive internal review as to whether
the treatment, storage, processing and/or disposal of certain waste by
its subsidiary, PFD, was in accordance with applicable environmental
laws and regulations because it has identified a potential issue or
issues with regard to its handling of said waste. Upon completion of
the internal review, the Company will take any necessary and
appropriate steps to report or otherwise address any issues arising
from its handling of that certain particular waste.
Item 5. Other Information
We have recently discovered that our facility, PFD had inadvertently
received high level PCB contaminated oil, at a level greater than PFD
is permitted to accept, and have notified regulators of the incident.
We are currently investigating the extent of contamination and our
disposal options. The cost of disposal of this PCB contaminated oil
has not yet been determined.
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Item 6. Exhibits
(a) Exhibits
4.1 Amendment No. 4 to Revolving Credit, Term Loan, and Security
Agreement, dated as of March 25, 2005, between the Company and PNC
Bank, as incorporated by reference from Exhibit 4.12 to the Company's
Form 10-K for the year ended December 31, 2004.
10.1 Perma-Fix Environmental Services, Inc. 2005 Compensation Plan for the
Chairman, Chief Executive Officer, and President.
10.2 Perma-Fix Environmental Services, Inc. 2005 Compensation Plan for the
Vice President, Chief Financial Officer.
10.3 Perma-Fix Environmental Services, Inc. 2005 Compensation Plan for the
President - Nuclear
10.4 Perma-Fix Environmental Services, Inc. 2005 Compensation Plan for the
President - Industrial
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.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
PERMA-FIX ENVIRONMENTAL SERVICES
Date: May 9, 2005 By: /s/ Dr. Louis F. Centofanti
---------------------------------
Dr. Louis F. Centofanti
Chairman of the Board
Chief Executive Officer
Date: May 9, 2005 By: /s/ Richard T. Kelecy
---------------------------------
Richard T. Kelecy
Chief Financial Officer
37