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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
Commission File No. 111596
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-1954497
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
8302 Dunwoody Place, Suite 250, Atlanta, GA 30350
(Address of principal executive offices) (Zip Code)
(770) 587-9898
(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 check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated Filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the close of the latest practical date.
Class Outstanding at August 4, 2006
----------------------------- -----------------------------
Common Stock, $.001 Par Value 51,329,428
(excluding 988,000 shares
held as treasury stock)
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PERMA-FIX ENVIRONMENTAL SERVICES, INC.
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2006 and December 31, 2005...........................2
Consolidated Statements of Operations -
Three and Six Months Ended June 30, 2006 and 2005.............4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2006 and 2005.......................5
Consolidated Statement of Stockholders' Equity -
Six Months Ended June 30, 2006................................6
Notes to Consolidated Financial Statements.............................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk............................................37
Item 4. Controls and Procedures...............................................38
PART II OTHER INFORMATION
Item 1. Legal Proceedings.....................................................39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...........39
Item 6. Exhibits..............................................................41
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
PART I, ITEM 1
The consolidated financial statements included herein have been prepared by the
Company (which may be referred to as we, us or our), without an audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes the disclosures which are made are adequate to make the
information presented not misleading. Further, the consolidated financial
statements reflect, in the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position and results of operations as of and for the periods indicated.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2005.
The results of operations for the six months ended June 30, 2006, are not
necessarily indicative of results to be expected for the fiscal year ending
December 31, 2006.
1
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
(Amounts in Thousands, Except for Share Amounts) 2006 2005
------------------------------------------------------- ------------ ------------
(Unaudited)
ASSETS
Current assets
Cash $ 713 $ 94
Restricted cash 40 511
Accounts receivable, net of allowance for doubtful
accounts of $467 and $512 14,695 16,609
Unbilled receivables 15,554 11,948
Inventories 836 842
Prepaid expenses 1,878 2,777
Other receivables 29 37
Current assets of discontinued operations,
net of allowance for
doubtful accounts of $0 and $90 -- 60
------------ ------------
Total current assets 33,745 32,878
Property and equipment:
Buildings and land 20,285 19,922
Equipment 31,494 31,120
Vehicles 4,509 4,452
Leasehold improvements 11,461 11,489
Office furniture and equipment 2,492 2,414
Construction-in-progress 1,800 850
------------ ------------
72,041 70,247
Less accumulated depreciation and amortization (28,147) (25,767)
------------ ------------
Net property and equipment 43,894 44,480
Property and equipment of discontinued operations,
net of accumulated depreciation of $30 and $80 716 806
Intangibles and other assets:
Permits 13,254 13,188
Goodwill 1,330 1,330
Finite Risk Sinking Fund 4,419 3,339
Other assets 2,186 2,504
------------ ------------
Total assets $ 99,544 $ 98,525
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
2
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
June 30, December 31,
(Amounts in Thousands, Except for Share Amounts) 2006 2005
------------------------------------------------------- ------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,703 $ 6,053
Current environmental accrual 1,046 768
Accrued expenses 11,749 11,666
Unearned revenue 2,960 5,169
Current liabilities of discontinued operations 534 628
Current portion of long-term debt 2,497 2,678
------------ ------------
Total current liabilities 24,489 26,962
Environmental accruals 1,958 1,572
Accrued closure costs 5,318 5,245
Other long-term liabilities 2,709 2,462
Long-term liabilities of discontinued operations 1,705 3,149
Long-term debt, less current portion 10,816 10,697
------------ ------------
Total long-term liabilities 22,506 23,125
------------ ------------
Total liabilities 46,995 50,087
Commitments and Contingencies (see Note 4) -- --
Preferred Stock of subsidiary, $1.00 par value;
1,467,396 shares authorized, 1,284,730 shares issued
and outstanding, liquidation value $1.00 per share 1,285 1,285
Stockholders' equity:
Common Stock, $.001 par value; 75,000,000 shares
authorized, 46,770,500 and 45,813,916 shares
issued, including 988,000 shares held as
treasury stock, respectively 47 46
Additional paid-in capital 83,787 82,180
Accumulated deficit (30,708) (33,211)
------------ ------------
53,126 49,015
Less Common Stock in treasury at cost; 988,000 shares (1,862) (1,862)
------------ ------------
Total stockholders' equity 51,264 47,153
------------ ------------
Total liabilities and stockholders' equity $ 99,544 $ 98,525
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
(Amounts in Thousands, Except for Per Share Amounts) 2006 2005 2006 2005
------------------------------------------------------- ---------- ---------- ---------- ----------
Net revenues $ 23,514 $ 25,144 $ 44,632 $ 46,574
Cost of goods sold 15,362 17,790 29,650 33,683
---------- ---------- ---------- ----------
Gross profit 8,152 7,354 14,982 12,891
Selling, general and administrative expenses 6,792 5,677 12,033 10,342
Loss (gain) on disposal of property and equipment (2) (337) 1 (337)
---------- ---------- ---------- ----------
Income from operations 1,362 2,014 2,948 2,886
Other income (expense):
Interest income 62 1 95 2
Interest expense (386) (381) (743) (793)
Interest expense-financing fees (48) (110) (97) (221)
Other (104) (6) (117) (34)
---------- ---------- ---------- ----------
Income from continuing operations before taxes 886 1,518 2,086 1,840
Income tax expense 107 70 179 283
---------- ---------- ---------- ----------
Income from continuing operations 779 1,448 1,907 1,557
Income (loss) from discontinued operations 1,046 (183) 596 (429)
---------- ---------- ---------- ----------
Net income 1,825 1,265 2,503 1,128
Preferred Stock dividends -- 30 -- 61
---------- ---------- ---------- ----------
Net income applicable to Common Stock $ 1,825 $ 1,235 $ 2,503 $ 1,067
========== ========== ========== ==========
Net income per common share - basic
Continuing operations $ .02 $ .03 $ .04 $ .04
Discontinued operations .02 -- .01 (.01)
---------- ---------- ---------- ----------
Net income per common share $ .04 $ .03 $ .05 $ .03
========== ========== ========== ==========
Net income per common share - diluted
Continuing operations $ .02 $ .03 $ .04 $ .04
Discontinued operations .02 -- .01 (.01)
---------- ---------- ---------- ----------
Net income per common share $ .04 $ .03 $ .05 $ .03
========== ========== ========== ==========
Number of shares and potential common shares
used in net income per common share:
Basic 45,117 41,805 44,975 41,792
========== ========== ========== ==========
Diluted 46,380 44,476 45,805 44,508
========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
4
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
----------------------------
(Amounts in Thousands) 2006 2005
------------------------------------------------------- ------------ ------------
Cash flows from operating activities:
Net income $ 2,503 $ 1,128
Adjustments to reconcile net income to cash
provided by (used in) operations:
Depreciation and amortization 2,414 2,363
Provision for bad debt and other reserves (12) 25
Loss (gain) on disposal of property and equipment 1 (337)
Issuance of Common Stock for services 22 18
Share based compensation 85 --
Discontinued operations (1,510) 959
Changes in assets and liabilities:
Accounts receivable 1,943 2,313
Unbilled receivables (3,605) (1,967)
Prepaid expenses, inventories and other assets 2,712 1,370
Accounts payable, accrued expenses, and
unearned revenue (3,037) (1,750)
------------ ------------
Net cash provided by operations 1,516 4,122
Cash flows from investing activities:
Purchases of property and equipment, net (1,739) (1,103)
Proceeds from sale of plant, property and equipment 4 700
Change in restricted cash, net 471 (2)
Change in finite risk sinking fund (1,080) (991)
Discontinued operations 104 --
------------ ------------
Net cash used in investing activities (2,240) (1,396)
Cash flows from financing activities:
Net borrowings (repayments) of revolving credit 1,297 (2,318)
Principal repayments of long-term debt (1,455) (4,986)
Borrowings of long-term debt -- 4,416
Proceeds from issuance of stock 1,501 47
------------ ------------
Net cash provided by (used in) financing activities 1,343 (2,841)
------------ ------------
Increase (decrease) in cash 619 (115)
Cash at beginning of period 94 215
------------ ------------
Cash at end of period $ 713 $ 100
============ ============
Supplemental disclosure
Interest paid $ 501 $ 594
Non-cash investing and financing activities:
Gain on interest rate swap -- 27
Long-term debt incurred for purchase of
property and equipment 94 465
The accompanying notes are an integral part of these
consolidated financial statements.
5
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited, for the six months ended June 30, 2006)
Common
Common Stock Additional Stock Total
(Amounts in thousands, ------------------------- Paid-In Accumulated Held In Stockholder's
except for share amounts) Shares Amount Capital Deficit Treasury Equity
-------------------------------- ------------ ---------- ---------- ----------- ---------- -------------
Balance at December 31, 2005 45,813,916 $ 46 $ 82,180 $ (33,211) $ (1,862) $ 47,153
Net income -- -- -- 2,503 -- 2,503
Issuance of Common Stock for
cash and services 31,123 -- 65 -- -- 65
Issuance of Common Stock upon
exercise of Warrants and
options 925,461 1 1,457 -- -- 1,458
Share based compensation -- -- 85 -- -- 85
------------ ---------- ---------- ----------- ---------- -------------
Balance at June 30, 2006 46,770,500 $ 47 $ 83,787 $ (30,708) $ (1,862) $ 51,264
============ ========== ========== =========== ========== =============
The accompanying notes are an integral part of these
consolidated financial statements.
6
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(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, 2005.
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 July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes."
FIN 48 prescribes detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
"Accounting for Income Taxes." Tax positions must meet a more-likely-than-not
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal years
beginning after December 15, 2006 and the provisions of FIN 48 will be applied
to all tax positions upon initial adoption of the Interpretation. The cumulative
effect of applying the provisions of this Interpretation will be reported as an
adjustment to the opening balance of retained earnings for that fiscal year. We
are currently evaluating the potential impact of FIN 48 on our financial
statements.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the current
period presentation.
STOCK-BASED COMPENSATION
On January 1, 2006, we adopted Financial Accounting Standards Board ("FASB")
Statement No. 123 (revised) ("SFAS 123R"), Share-Based Payment, a revision of
FASB Statement No. 123, Accounting for Stock-Based Compensation, superseding APB
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. This Statement establishes accounting standards for
entity exchanges of 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 all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative upon adopting SFAS
123R.
We adopted SFAS 123R utilizing the modified prospective method in which
compensation cost is recognized beginning with the effective date based on SFAS
123R requirements for all (a) share-based payments granted after the effective
date and (b) awards granted to employees prior to the effective date of SFAS
123R that remain unvested on the effective date. In accordance with the modified
prospective method, the consolidated financial statements for prior periods have
not been restated to reflect, and do not include, the impact of SFAS 123R.
Prior to our adoption of SFAS 123R, on July 28, 2005, the Compensation and Stock
Option Committee of the Board of Directors approved the acceleration of vesting
for all the outstanding and unvested options to purchase Common Stock awarded to
employees as of the approval date. The Board of Directors approved the
accelerated vesting of these options based on the belief that it was in the best
interest of our stockholders to reduce future compensation expense that would
otherwise be required in
7
the statement of operations upon adoption of SFAS 123R, effective beginning
January 1, 2006. The accelerated vesting triggered the re-measurement of
compensation cost under current accounting standards. In the event a holder of
an accelerated vesting option terminates employment with us prior to the end of
the original vesting term of such options, we will recognize the compensation
expense at the time of termination.
As of June 30, 2006, we had 3,114,250 employee stock options outstanding, which
included 2,136,250 that were outstanding and fully vested at December 31, 2005,
878,000 employee stock options approved and granted on March 2, 2006, and
100,000 employee stock options approved and granted on May 15, 2006. The
employee stock options outstanding at December 31, 2005 are ten year options,
issuable at exercise prices from $1.25 to $3.00 per share, and expiration dates
from April 8, 2007 to February 27, 2013. The employee stock option grants in
March and May 2006 are six year options with a three year vesting period, with
exercise prices from $1.85 to $1.86 per share. Additionally, we had 434,000
director stock options outstanding, of which 72,000 became fully vested in
January 2006.
Pursuant to the adoption of SFAS 123R, during the three-month period ended March
31, 2006, we recorded stock-based compensation expense for the director stock
options granted prior to, but not yet vested, as of January 1, 2006, as if the
fair value method required for pro forma disclosure under SFAS 123 were in
effect for expense recognition purposes. This resulted in an expense of
approximately $11,000. For the stock option grants on March 2, 2006 and May 15,
2006, we have estimated compensation expense based on the fair value at grant
date using the Black-Scholes valuation model, and will recognize compensation
expense using a straight-line amortization method over the three year vesting
period. As SFAS 123R requires that stock-based compensation expense be based on
options that are ultimately expected to vest, stock-based compensation for the
three and six month period ended June 30, 2006 has been reduced for estimated
forfeitures at a rate of 5.7%. When estimating forfeitures, we consider trends
of actual option forfeitures. For the three and six months ended June 30, 2006,
we recorded approximately $56,000 and $74,000 in employee compensation expense
from the 2006 grants, respectively, which included with the director
compensation expense, impacted our results of operations by $56,000 and $85,000,
for stock-based compensation expense for the three and six month periods ended
June 30, 2006, respectively.
We calculated a fair value of $0.868 for each March 2, 2006 option grant on the
date of grant using the Black-Scholes option pricing model with the following
assumptions: no dividend yield; an expected life of four years; expected
volatility of 54.0%; and a risk free interest rate of 4.70%. We calculated a
fair value of $0.877 for the May 15, 2006 option grant on the date of grant with
the following assumptions: no dividend yield; an expected life of four years; an
expected volatility of 54.6%; and a risk-free interest rate of 5.03%. No options
were granted in the corresponding periods of 2005.
Our computations of expected volatility for 2006 are based on historical
volatility from our traded common stock, as was the computation of expected
volatility on grants prior to 2006. Due to our change in the contractual term
and vesting period, we utilized the simplified method, defined in the Securities
and Exchange Commission's Staff Accounting Bulletin No. 107, to calculate the
expected term for our 2006 grants. The interest rate for periods within the
contractual life of the award is based on the U.S. Treasury yield curve in
effect at the time of grant.
Prior to the adoption of SFAS 123R, we furnished the pro forma disclosures
required under SFAS No. 123, as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosures." Employee stock-based
compensation expense recognized under SFAS 123R was not reflected in our results
of operations for the three and six month periods ended June 30, 2005 for
employee stock option grants as all options were granted with an exercise price
equal to the market value of the underlying common stock on the date of grant.
Previously reported amounts have not been restated.
8
Under the accounting provisions of SFAS 123, our net income and net income per
share, for the three and six months ended June 30, 2005 would have been
decreased to the pro forma amounts indicated below (in thousands except for per
share amounts):
Three Months Six Months
Ended Ended
(Unaudited) June 30, 2005 June 30, 2005
---------------------------------------------------------------------- ------------- -------------
Net income from continuing operations applicable to Common
Stock, as reported $ 1,418 $ 1,496
Deduct: Total Stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects (74) (165)
------------- -------------
Pro forma net income from continuing operations applicable to
Common Stock $ 1,344 $ 1,331
============= =============
Income per share
Basic and diluted - as reported $ .03 $ .03
============= =============
Basic and diluted - pro-forma $ .03 $ .03
============= =============
9
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.
The following is a reconciliation of basic net income (loss) per share to
diluted net income (loss) per share for the three and six months ended June 30,
2006 and 2005:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
(Amounts in thousands except per share amounts) 2006 2005 2006 2005
-------------------------------------------------------------- ---------- ---------- ---------- ----------
Earnings per share from continuing operations
---------------------------------------------
Income from continuing operations $ 779 $ 1,448 $ 1,907 $ 1,557
Preferred stock dividends -- (30) -- (61)
---------- ---------- ---------- ----------
Income from continuing operations applicable to Common Stock 779 1,418 1,907 1,496
Effect of dilutive securities:
Preferred Stock dividends -- 30 -- 61
---------- ---------- ---------- ----------
Income- diluted $ 779 $ 1,448 $ 1,907 $ 1,557
========== ========== ========== ==========
Basic income per share $ .02 $ .03 $ .04 $ .04
========== ========== ========== ==========
Diluted income per share $ .02 $ .03 $ .04 $ .04
========== ========== ========== ==========
Earnings per share from discontinued operations
-----------------------------------------------
Income (loss) - basic and diluted $ 1,046 $ (183) $ 596 $ (429)
========== ========== ========== ==========
Basic income (loss) per share $ .02 $ -- $ .01 $ (.01)
========== ========== ========== ==========
Diluted income (loss) per share $ .02 $ -- $ .01 $ (.01)
========== ========== ========== ==========
Weighted average shares outstanding - basic 45,117 41,805 44,975 41,792
Potential shares exercisable under stock option plans 284 239 184 244
Potential shares upon exercise of Warrants 979 765 646 805
Potential shares upon conversion of Preferred Stock -- 1,667 -- 1,667
---------- ---------- ---------- ----------
Weighted average shares outstanding - diluted 46,380 44,476 45,805 44,508
========== ========== ========== ==========
Potential shares excluded from above weighted average
share calculations due to their anti-dilutive effect include:
Upon exercise of options 1,293 1,339 1,293 1,339
Upon exercise of Warrants 1,776 1,776 1,776 1,776
10
3. LONG TERM DEBT
--------------
Long-term debt consists of the following at June 30, 2006, and December 31,
2005:
June 30, December 31,
(Amounts in Thousands) 2006 2005
----------------------------------------------------------------------------- ------------ ------------
(Unaudited)
Revolving Credit facility dated December 22, 2000, borrowings based upon
eligible accounts receivable, subject to monthly borrowing base
calculation, variable interest paid monthly at prime rate plus 1/2% (8.75%
at June 30, 2006), balance due in May 2008. $ 3,744 $ 2,447
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% (9.25% at June 30, 2006). 6,000 6,500
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
(10.0% on June 30, 2006) and is payable in one lump sum at the end of
installment period. 1,834 2,234
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 (10.0% on June 30, 2006) and is payable in one lump sum
at the end of installment period. 453 553
Various capital lease and promissory note obligations, payable 2006 to 2010,
interest at rates ranging from 5.0% to 15.7%. 1,282 1,641
------------ ------------
13,313 13,375
Less current portion of long-term debt 2,497 2,678
------------ ------------
$ 10,816 $ 10,697
============ ============
REVOLVING CREDIT AND TERM LOAN AGREEMENT
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,
as amended. The Agreement provides for a term loan ("Term Loan") in the amount
of $7,000,000, which requires monthly installments of $83,000 with the remaining
unpaid principal balance due on May 31, 2008. The Agreement also provides 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 the Agent reasonably deems proper and necessary. As of
June 30, 2006, the excess availability under our Revolving Credit was $9,380,000
based on our eligible receivables.
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.
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
11
years on a semiannual basis on June 30 and December 31. The principal repayments
for 2006 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 (10% on June 30, 2006) and
payable in one lump sum at the end of the loan period. On June 30, 2006, the
outstanding balance was $3,412,000 including accrued interest of approximately
$1,578,000. Pursuant to the agreement the accrued interest is to be paid at the
end of the term, and as such, is recorded as a long-term liability. PDC has
directed M&EC to make all payments under the promissory note directly to the
Internal Revenue Service ("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 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 2006
will be approximately $100,000 semiannually. Interest is accrued at the
Applicable Rate, and is adjusted on a quarterly basis and payable in lump sum at
the end of the installment period. On June 30, 2006, the rate was 10%. On June
30, 2006, the outstanding balance was $833,000 including accrued interest of
approximately $380,000. The accrued interest is to be paid at the end of the
term, and as such, is recorded as a long-term liability, pursuant to the terms
of the agreement.
4. COMMITMENTS AND CONTINGENCIES
-----------------------------
HAZARDOUS WASTE
In connection with our waste management services, we handle both hazardous and
non-hazardous waste, which we transport to our own, or other facilities for
destruction or disposal. As a result of disposing of hazardous substances, in
the event any cleanup is required, we could be a potentially responsible party
for the costs of the cleanup notwithstanding any absence of fault on our part.
LEGAL
In the normal course of conducting our business, we are involved in various
litigations. 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,
2005, and our Form 10-Q for the period ended March 31, 2006, except as follows:
We have previously disclosed that the U.S. Environmental Protection Agency
("EPA") had issued to Perma-Fix of Dayton, Inc, ("PFD"), one of our
subsidiaries, a Finding of Violation and a Notice of Violation alleging that PFD
was a "major source" of potential hazardous air pollutants, and, as a major
source, PFD operated its facility without having obtained a Title V air permit,
was in violation of the Clean Air Act (the "Act") and was subject to penalties
as a result thereof. In addition, we previously reported that in December, 2004,
PFD was sued under the citizen's suit provisions of the Act in the United States
District Court for the Southern District of Ohio, in a case styled Fisher v.
Perma-Fix of Dayton, Inc. (the "Citizen's Suit"). The Citizen's Suit alleges
violation by PFD of a number of state and federal clean air requirements in
connection with the operation of PFD's facility and seeks injunctive relief,
civil penalties, attorney fees and costs and other forms of relief. We further
previously reported that EPA has referred enforcement of the Notice of Violation
to the U.S. Department of Justice ("DOJ") for enforcement. On or about May 19,
2006, the DOJ, on behalf of the EPA, filed a Motion for Leave to Intervene as a
plaintiff in the Citizen's Suit, which motion was granted on May 22, 2006. The
government's intervention is seeking injunctive relief and civil penalties
against PFD for, among other things, alleged violations which parallel certain
claims asserted in the Citizen's Suit relating to alleged violations of the Act,
failure of PFD to operate its facility without a Title V air permit, and
installing new and/or modifying certain portions of the facility without proper
permits. The complaint filed by the DOJ alleges that PFD could be liable for
penalties for each alleged violation up to $27,500 to $32,500 per day,
12
depending on the violation. As previously reported, we and PFD have been
attempting to negotiate a resolution of the above referenced matters with the
EPA/DOJ and the citizens group. We have been advised by the DOJ that the DOJ
does not believe that the federal government's intervention in the Citizen's
Suit should result in the parties not continuing their negotiations in an
attempt to settle all issues. As a result, we and PFD intend to continue our
negotiations with the government and the citizens group in an attempt to resolve
these matters, but at this time we cannot determine the outcome.
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 million of
financial assurance coverage of which the coverage amount totals $28,766,000 at
June 30, 2006, 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
represented the full premium for the 25-year term of the policy, and the
remaining $1,234,000, was deposited in a sinking fund account representing a
restricted cash account. In February 2006, we paid our third of nine required
annual installments of $1,004,000, of which $991,000 was deposited in the
sinking fund account, the remaining $13,000 represents a terrorism premium. As
of June 30, 2006, we have recorded $4,419,000 in our sinking fund on the balance
sheet, which includes interest earned of $212,000 on the sinking fund as of June
30, 2006. Interest income for the three and six months ended June 30, 2006, was
$58,000 and 89,000 respectively.
5. DISCONTINUED OPERATIONS
-----------------------
PFP
Effective November 8, 2005, our Board of Directors approved the discontinuation
of operations at the facility in Pittsburgh, Pennsylvania, owned by our
subsidiary, Perma-Fix of Pittsburgh, Inc. ("PFP"). The decision to discontinue
operations at PFP was due to our reevaluation of the facility and our ability to
achieve profitability at the facility in the near term. During February 2006, we
completed the remediation of the leased property and the equipment, and released
the property back to the owner. The operating results for the current and prior
periods have been reclassified to discontinued operations in our Consolidated
Statements of Operations.
PFP recognized a loss of $4,000 for the three months ended June 30, 2006, as
compared to an operating loss of $61,000 and revenues of $216,000 during the
three months ended June 30, 2005. PFP recorded a loss of $346,000 for the six
months ended June 30, 2006, and revenue of $393,000 and an operating loss of
$140,000 for the six months ended June 30, 2005. The loss in 2006, was partially
due to early termination costs of $200,000 associated with our early termination
of our leased property. The assets and liabilities related to PFP have been
reclassified into separate categories in the Consolidated Balance Sheets as of
June 30, 2006 and December 31, 2005. The assets are recorded at their net
realizable value, and consist of equipment of $116,000. PFP has no liabilities
on the books as of June 30, 2006.
13
PFMI
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
PFMI 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.
PFMI recorded a gain of $1,050,000 for the three months ended June 30, 2006, and
a loss of $122,000 for the three months ended June 30, 2005. PFMI recognized a
gain of $942,000 for the six months ended June 30, 2006 and a loss of $289,000
for the same period in 2005. Our gain for the three and six months in 2006 was a
result of a reduction of $1,181,000 in our environmental accrual due to our
re-evaluation of the accrual we have recorded for the closure and remediation
activities we are performing. During the last half of 2005 we settled the three
insurance claims we submitted 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 2004, we recorded a receivable of $1,585,000 based
on negotiations with the insurance carrier on the business interruption claim.
The income from recording this receivable was recorded as a reduction of "loss
from discontinued operations" and reduced the operating losses for 2004. During
2005, we received insurance proceeds and claim settlements of $3,253,000 for
settlement of all three claims. Of these proceeds, $1,476,000 was recorded as
income from discontinued operations during the third quarter of 2005, which is
net of $192,000 paid for public adjustor fees.
Assets and liabilities related to the discontinued operation have been
reclassified to separate categories in the Consolidated Balance Sheets as of
June 30, 2006 and December 31, 2005. As of June 30, 2006, assets are recorded at
their estimated net realizable values, and consist of property and equipment of
$600,000. Liabilities as of June 30, 2006, consist of accounts payable and
current accrued expenses of $65,000, environmental accruals of $664,000, and a
pension payable of $1,510,000. The pension plan withdrawal liability is a result
of the termination of the union employees of PFMI. The former 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. The recorded liability is based
upon a demand letter received from CST in August 2005 that provided for the
payment of $22,000 per month over an eight year period. This obligation is
recorded as a long-term liability, with a current portion of $76,000 that we
expect to pay over the next year.
As a result of the discontinuation of operations at the PFMI facility, we are
required to complete certain closure and remediation activities pursuant to our
RCRA permit. Also, in order to close and dispose of the facility, we may have to
complete certain additional remediation activities related to the land,
building, and equipment. The level and cost of the clean-up and remediation will
be determined by state mandated requirements, the extent to which, are not known
at this time. Also, impacting this estimate is the level of contamination
discovered, as we begin remediation, and the related clean-up standards which
must be met in order to dispose of or sell the facility. We engaged our
engineering firm, SYA, to perform an analysis and related estimate of the cost
to complete the RCRA portion of the closure/clean-up costs and the potential
long-term remediation costs. Based upon this analysis, we originally estimated
the cost of this environmental closure and remediation liability to be
$2,464,000. During 2006 we re-evaluated our estimated environmental accrual and
the required activities to close and remediate the facility, and during the
quarter ended June 30, 2006, we began implementing a modified methodology to
remediate the facility. As a result of the reevaluation and the change in
methodology we reduced the accrual by $1,181,000. We have spent approximately
$619,000 for closure costs since September 30, 2004, of which approximately
$64,000 has been spent during the first half of 2006, and $439,000 was spent in
2005. We have $664,000 accrued for the closure, as of June 30, 2006, and we
anticipate spending $129,000 in 2006 with the remainder over the next two to
five years.
14
6. 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 operations, PFMI and PFP.
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 six 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., and Perma-Fix of
Maryland, Inc. We provide through certain of our facilities various waste
management services to certain governmental agencies.
The Nuclear Waste Management Services segment provides treatment, storage,
processing and disposal of nuclear, low-level radioactive, mixed (waste
containing both hazardous and non-hazardous constituents), hazardous and
non-hazardous waste through our three facilities; Perma-Fix of Florida, Inc.,
Diversified Scientific Services, Inc. and East Tennessee Materials and Energy
Corporation.
The Consulting Engineering Services segment provides environmental engineering
and regulatory compliance services through Schreiber, Yonley & Associates, Inc.
which includes oversight management of environmental restoration projects, air
and soil sampling and compliance and training activities to industrial and
government customers, as well as, engineering and compliance support needed by
our other segments.
15
The table below presents certain financial information in thousands by business
segment as of and for the three and six months ended June 30, 2006 and 2005.
SEGMENT REPORTING FOR THE QUARTER ENDED JUNE 30, 2006
Segments Consolidated
Industrial Nuclear Engineering Total Corporate (2) Total
------------ ------------ ------------ ------------ ------------- -------------
Revenue from external customers $ 9,474 $ 13,106(3) $ 934 $ 23,514 $ -- $ 23,514
Inter-company revenues 483 596 130 1,209 -- 1,209
Gross profit 2,219 5,714 219 8,152 -- 8,152
Interest income 4 -- -- 4 58 62
Interest expense (3) 123 -- 120 266 386
Interest expense-financing fees -- -- -- -- 48 48
Depreciation and amortization 463 735 10 1,208 12 1,220
Segment profit (loss) (1,118) 3,581 60 2,523 (1,637) 886
Segment assets(1) 23,474 64,593 2,483 90,550 8,994(4) 99,544
Expenditures for segment assets 345 954 26 1,325 12 1,337
Total long-term debt 988 2,562 19 3,569 9,744(5) 13,313
SEGMENT REPORTING FOR THE QUARTER ENDED JUNE 30, 2005
Segments Consolidated
Industrial Nuclear Engineering Total Corporate (2) Total
------------ ------------ ------------ ------------ ------------- -------------
Revenue from external customers $ 10,638 $ 13,807(3) $ 699 $ 25,144 $ -- $ 25,144
Intercompany revenues 540 694 107 1,341 -- 1,341
Gross profit 970 6,242 142 7,354 -- 7,354
Interest income 1 -- -- 1 -- 1
Interest expense 157 173 4 334 47 381
Interest expense-financing fees -- -- -- -- 110 110
Depreciation and amortization 462 693 10 1,165 11 1,176
Segment profit (loss) (942) 4,056 42 3,156 (1,638) 1,518
Segment assets(1) 24,535 61,230 2,218 87,983 8,967(4) 96,950
Expenditures for segment assets 217 574 3 794 18 812
Total long-term debt 1,476 3,867 27 5,370 11,162(5) 16,532
SEGMENT REPORTING FOR THE SIX MONTHS ENDED JUNE 30, 2006
Segments Consolidated
Industrial Nuclear Engineering Total Corporate (2) Total
------------ ------------ ------------ ------------ ------------- -------------
Revenue from external customers $ 17,696 $ 25,264(3) $ 1,672 $ 44,632 $ -- $ 44,632
Intercompany revenues 874 1,269 240 2,383 -- 2,383
Gross profit 3,996 10,535 451 14,982 -- 14,982
Interest income 6 -- -- 6 89 95
Interest expense 24 235 1 260 483 743
Interest expense-financing fees 1 -- -- 1 96 97
Depreciation and amortization 904 1,467 20 2,391 23 2,414
Segment profit (loss) (1,207) 6,321 151 5,265 (3,179) 2,086
Segment assets(1) 23,474 64,593 2,483 90,550 8,994(4) 99,544
Expenditures for segment assets 539 1,218 51 1,808 25 1,833
Total long-term debt 988 2,562 19 3,569 9,744(5) 13,313
SEGMENT REPORTING FOR THE SIX MONTHS ENDED JUNE 30, 2005
Segments Consolidated
Industrial Nuclear Engineering Total Corporate (2) Total
------------ ------------ ------------ ------------ ------------- -------------
Revenue from external customers $ 20,409 $ 24,703(3) $ 1,462 $ 46,574 $ -- $ 46,574
Intercompany revenues 1,082 1,440 222 2,744 -- 2,744
Gross profit 2,806 9,787 298 12,891 -- 12,891
Interest income 2 -- -- 2 -- 2
Interest expense 364 347 6 717 76 793
Interest expense-financing fees -- 1 -- 1 220 221
Depreciation and amortization 933 1,389 20 2,342 21 2,363
Segment profit (loss) (1,108) 5,900 73 4,865 (3,025) 1,840
Segment assets(1) 24,535 61,230 2,218 87,983 8,967(4) 96,950
Expenditures for segment assets 660 874 10 1,544 24 1,568
Total long-term debt 1,476 3,867 27 5,370 11,162(5) 16,532
16
(1) Segment assets have been adjusted for intercompany accounts to reflect
actual assets for each segment.
(2) Amounts reflect the activity for corporate headquarters not included in the
segment information.
(3) The consolidated revenues within the Nuclear segment include the
LATA/Parallax revenues for the three and six months ended June 30, 2006,
which total $4,214,000 or 17.9% and $4,401,000 or 9.9%of total revenues,
respectively. No revenues from LATA/Parallax were recorded in 2005.
Consolidated revenues within the Nuclear segment also include Bechtel
Jacobs revenues of $1,250,000 or 5.3% and $3,263,000 or 7.3% for the three
and six months ended June 30, 2006, respectively. Bechtel Jacobs revenues
for the same periods in 2005 were $4,761,000 or 19.0% and $6,407,000 or
13.7%.
(4) Amount includes assets from Perma-Fix of Michigan, Inc., and Perma-Fix of
Pittsburgh, Inc. two discontinued operations from the Industrial segment,
of approximately $716,000 and $1,309,000 as of June 30, 2006 and 2005,
respectively.
(5) Includes the balance outstanding from our revolving line of credit and term
loan, which is utilized by all of our segments.
7. CAPITAL STOCK AND SUBSEQUENT EVENTS
-----------------------------------
During the six months ended June 30, 2006, we issued 673,461 shares of our
Common Stock upon exercise of certain warrants, at exercise prices from $1.44 to
$1.75 per share, of which 57,774 were issued on a cashless basis. Additionally,
we issued 252,000 shares of our Common Stock upon exercises of employee stock
options, at exercise prices from $1.00 to $1.75 per share. Total proceeds
received during the six months for the warrant and option exercises were
$1,458,000. Subsequent to June 30, 2006, we have processed exercises of warrants
for the purchase of 5,999,829 shares of Common Stock at exercise prices of $1.44
to $1.75 per share and options for the purchase of 70,000 shares of Common Stock
at an exercise price of $1.75 per share, which resulted in total proceeds of
$10,387,000. Year to date we have processed warrants and options to issue
6,995,290 shares of Common Stock, and received proceeds of $11,845,000 for those
exercises.
On July 28, 2006, our Board of Directors has authorized a common stock
repurchase program to purchase up to $2,000,000 of our Common Stock, through
open market and privately negotiated transactions, with the timing, the amount
of repurchase transactions and the prices paid under the program as deemed
appropriate by management and dependent on market conditions and corporate and
regulatory considerations. We plan to fund any repurchases under this program
through our internal cash flow and/or borrowings under our line of credit.
17
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART I, ITEM 2
FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be deemed "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(collectively, the "Private Securities Litigation Reform Act of 1995"). All
statements in this report other than a statement of historical fact are
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors, which could cause actual results and
performance of the Company to differ materially from such statements. The words
"believe," "expect," "anticipate," "intend," "will," and similar expressions
identify forward-looking statements. Forward-looking statements contained herein
relate to, among other things,
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; and Tulsa, Oklahoma;
o ability to remediate certain contaminated sites for projected
amounts;
o ability to fund budgeted capital expenditures during 2006;
o expanding within the mixed waste market, as well as more complex
waste streams;
o growth of our Nuclear segment;
o ability to close and remediate the Michigan facility for the
estimated amounts; and
o no expectation to close any facilities, other than the Michigan and
Pittsburgh facilities.
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; 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;
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;
18
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 the 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 second quarter of 2006 reflected a revenue decrease of $1,630,000 or 6.5%
from the same period of 2005. The Industrial segment experienced a decrease of
10.9% due to the loss of the home improvement chain contract, in November 2005,
and the expiration of a government contract in the spring of 2005. The Nuclear
segment also experienced a 5.1% decrease due to an unusually strong second
quarter of 2005 and the results of our efforts to streamline the receipt of
waste. The second quarter 2006 gross profit increased by $798,000 or 10.9% from
the same period of 2005. Gross profit as a percentage of revenue increased from
29.2% to 34.7%. The improvement in gross profit was due primarily to the
improvement in the Industrial segment resulting from the streamlining of
operations and elimination of last year's adverse affect of oil contamination to
one of our waste streams. The Nuclear segment gross profit fell 8.5% reflecting
an unusually strong second quarter in 2005 and our efforts to receive shipments
more evenly throughout 2006. In both segments we continue to pursue beneficial
contracts and revenues, as well as, evaluating additional cost savings. During
the second quarter, SG&A was unusually high, due to an adjustment to accruals
for environmental liabilities and other items. We continue to pursue growth
within the Nuclear segment by, among other things, expansion within the mixed
waste market, as well as more complex waste streams. This growth is demonstrated
by the contract our Nuclear segment received for $9.4 million during the first
quarter of 2006 for new mixed waste streams not previously handled by our
Nuclear segment, which such contract is scheduled to continue through September
2007. We recognized approximately $668,000 in revenue from this contract during
the quarter ended June 2006. Our interest expense continues to decrease as our
operations and cash flow improve and we are able to reduce our long
19
term debt. Cash flow was further improved by the proceeds from the issuance of
867,687 shares of stock related to the exercise of warrants and options. Overall
net income available to common shareholders was $1,825,000 for the three months
ended June 30, 2006, compared to $1,235,000 from the same period of 2005 or an
increase of 47.8%. Our net income available to common shareholders for the three
months ended June 30, 2006, included a gain from discontinued operations
resulting from an adjustment to the environmental reserve for the closed
facility in Detroit.
RESULTS OF OPERATIONS
The reporting of financial results and pertinent discussions are tailored to
three reportable segments: Industrial, Nuclear and Engineering. The table below
should be used when reviewing management's discussion and analysis for the three
and six months ended June 30, 2006 and 2005:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------- -----------------------------------------
Consolidated (amounts in thousands) 2006 % 2005 % 2006 % 2005 %
------------------------------------------ -------- -------- -------- -------- -------- -------- -------- --------
Net revenues $ 23,514 100.0 $ 25,144 100.0 $ 44,632 100.0 $ 46,574 100.0
Cost of goods sold 15,362 65.3 17,790 70.8 29,650 66.4 33,683 72.3
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 8,152 34.7 7,354 29.2 14,982 33.6 12,891 27.7
Selling, general and administrative 6,792 28.9 5,677 22.6 12,033 27.0 10,342 22.2
Loss (gain) on disposal of property &
equipment (2) -- (337) (1.3) 1 -- (337) (.7)
-------- -------- -------- -------- -------- -------- -------- --------
Income from operations $ 1,362 5.8 $ 2,014 7.9 $ 2,948 6.6 $ 2,886 6.2
======== ======== ======== ======== ======== ======== ======== ========
Interest expense $ (386) (1.6) $ (381) (1.5) $ (743) (1.7) $ (793) (1.7)
Interest expense-financing fees (48) (.2) (110) (.4) (97) (.2) (221) (.5)
Other income (expense) (104) (.4) (6) -- (117) (.3) (34) (.1)
Income from continuing operations 779 3.3 1,448 5.7 1,907 4.3 1,557 3.3
Preferred Stock dividends -- -- (30) (.1) -- -- (61) (.1)
SUMMARY - THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
Net Revenue
Consolidated revenues decreased for the three months ended June 30, 2006,
compared to the three months ended June 30, 2005, as follows:
% % %
(In thousands) 2006 Revenue 2005 Revenue Change Change
------------------------------ -------- -------- -------- -------- -------- --------
Nuclear
-------
Government waste $ 3,288 14.0 $ 3,285 13.1 $ 3 .1
Hazardous/Non-hazardous 909 3.9 1,234 4.9 (325) (26.3)
Other nuclear waste 3,445 14.6 4,527 17.9 (1,082) (23.9)
LATA/Parallax 4,214 17.9 -- -- 4,214 --
Bechtel Jacobs 1,250 5.3 4,761 19.0 (3,511) (73.7)
-------- -------- -------- -------- --------
Total 13,106 55.7 13,807 54.9 (701) (5.1)
Industrial Revenues
-------------------
Commercial waste 6,937 29.5 7,839 31.1 (902) (11.5)
Government services 1,140 4.9 1,477 5.9 (337) (22.8)
Oil sales 1,397 5.9 1,322 5.3 75 5.7
-------- -------- -------- -------- --------
Total 9,474 40.3 10,638 42.3 (1,164) (10.9)
Engineering 934 4.0 699 2.8 235 33.6
----------- -------- -------- -------- -------- --------
Total $ 23,514 100.0 $ 25,144 100.0 $ (1,630) (6.5)
======== ======== ======== ======== ========
20
The Nuclear segment experienced a slight decline in revenue for the three months
ended June 30, 2006 over the same period in 2005, which was principally offset
by an increase in the revenues from the government and its contractors. We have
earned significant revenues from numerous work releases received from
LATA/Parallax during the quarter as a result of their assumption of certain
federal projects previously managed by Bechtel Jacobs, and from the contract we
received for $9,400,000 during the first quarter of 2006. Revenues from the
contract contributed approximately $668,000 of the LATA/Parallax revenues for
the quarter. Our revenues from Bechtel Jacobs have been greatly reduced due to
their project at Oak Ridge, Tennessee nearing its conclusion. The Nuclear
segment experienced a decrease in their hazardous and non-hazardous revenues due
to the completion in 2005 of a special event soil project performed for existing
industrial customers. The segment also experienced a slight decrease in other
nuclear waste revenues as a result of the completion of a contract with a
Fortune 500 company during 2005. See "Known Trends and Uncertainties -
Significant Customers" later in this Managements' Discussion and Analysis for
further discussion on our revenues and contracts with the government and their
contractors. The backlog of stored waste at June 30, 2006, was $11,558,000
compared to $16,374,000 at December 31, 2005. This decrease reflects our
improved efforts to process and dispose of waste streams, including the
increased waste receipts received during the last quarter of 2005. We expect
backlog levels to continue to fluctuate within acceptable levels throughout
2006, subject to the complexity of the waste streams and timing of receipts and
processing of materials. This level of backlog material continues to position
the Nuclear segment well, from a processing revenue perspective, as it provides
for continued and more consistent processing during slower seasons. The
Industrial segment experienced a decrease in revenues for the quarter partially
as a result of the loss of our contract with a national home improvement chain
in November 2005. The segment could see continued reduction in revenue in 2006
as the segment works to replace the loss of the retail customer with other
sources of revenue. The Industrial segment also saw a decrease in revenue from
government services due to the expiration of one of our government contracts, in
the spring of 2005, and the rebid and subsequent lower revenues related to
another government contract. Used oil sales for the Industrial segment have
increased due to the segment's focus on improving sales in that area, as well as
the rising oil prices and heightened demand for used oils. Revenues from the
Engineering segment increased during the second quarter of 2006, as a result of
an event project that was started during the first quarter of 2006.
Consolidated revenues decreased for the six months ended June 30, 2006, compared
to the six months ended June 30, 2005, as follows:
% % %
(In thousands) 2006 Revenue 2005 Revenue Change Change
------------------------------ -------- -------- -------- -------- -------- --------
Nuclear
-------
Government waste $ 8,106 18.2 $ 8,451 18.2 $ (345) (4.0)
Hazardous/Non-hazardous 1,709 3.8 2,785 6.0 (1,076) (38.6)
Other nuclear waste 7,785 17.4 7,060 15.2 725 10.2
LATA/Parallax 4,401 9.9 -- -- 4,401 --
Bechtel Jacobs 3,263 7.3 6,407 13.7 (3,144) (49.0)
-------- -------- -------- -------- --------
Total 25,264 56.6 24,703 53.1 561 2.2
Industrial Revenues
-------------------
Commercial waste 13,101 29.4 15,710 33.7 (2,609) (16.6)
Government services 2,167 4.9 2,797 6.0 (630) (22.5)
Oil sales 2,428 5.4 1,902 4.1 526 27.6
-------- -------- -------- -------- --------
Total 17,696 39.7 20,409 43.8 (2,713) (13.2)
Engineering 1,672 3.7 1,462 3.1 210 14.3
----------- -------- -------- -------- -------- --------
Total $ 44,632 100.0 $ 46,574 100.0 $ (1,942) (4.1)
======== ======== ======== ======== ========
21
The Nuclear segment realized revenue growth for the six months ended June 30,
2006 over the same period in 2005. The increase is principally due to the
segment's continued expansion within the mixed waste market, which includes an
increase in receipts of higher activity waste liquids, a more complex and
difficult waste stream that requires greater technical expertise. We saw
significant revenues from LATA/Parallax as a result of their assumption of
certain federal projects previously managed by Bechtel Jacobs, as well as,
revenue from the new contract we entered into with LATA/Parallax during the
first quarter of 2006. Revenues from the contract contributed approximately
$668,000 of the LATA/Parallax revenues for the six months. Our revenues from
Bechtel Jacobs decreased due to their nearing completion of the project at Oak
Ridge, as discussed above. We continue our efforts to process the backlog of
their waste, and assist them in completing their milestones. The Nuclear segment
experienced a decrease in their hazardous and non-hazardous revenues due to the
completion in 2005 of a special event soil project performed for existing
industrial customers. The segment additionally experienced a slight decrease in
government waste revenues, as they focused on other projects. The Industrial
segment experienced a decrease in revenues for the six months partially as a
result of the loss of our contract with a national home improvement chain in
November 2005. The segment could see continued reduction in revenue in 2006 as
the segment works to replace the loss of the retail customer with other sources
of revenue. The Industrial segment also saw a decrease in revenue from
government services due to the expiration of one of our government contracts, in
the spring of 2005, and the rebid and subsequent lower revenues related to
another government contract. Used oil sales for the Industrial segment have
increased due to the segment's focus on improving sales in that area, as well as
the rising oil prices and heightened demand for used oils. The Engineering
segment experienced an increase in revenue during the first six months of 2006,
as a result of an event project that was started during the first quarter of
2006.
Cost of Goods Sold
Cost of goods sold decreased for the quarter ended June 30, 2006, compared to
the quarter ended June 30, 2005, as follows:
% %
(In thousands) 2006 Revenue 2005 Revenue Change
--------------- -------- -------- -------- -------- --------
Nuclear $ 7,392 56.4 $ 7,565 54.8 $ (173)
Industrial 7,255 76.6 9,668 90.9 (2,413)
Engineering 715 76.5 557 79.6 158
-------- -------- -------- -------- --------
Total $ 15,362 65.3 $ 17,790 70.8 $ (2,428)
======== ======== ======== ======== ========
We saw a decrease in cost of goods sold in the Nuclear and Industrial segments,
as we continue to focus streamlining our costs. The Nuclear segment showed a
slight decrease in cost of goods sold as a result of the reduced revenues during
the quarter, however due to the mix of the waste streams treated and the startup
of the process with LATA/Parallax we experienced slightly higher cost
percentages during the three months. The decrease in the Industrial segment is
partially a result of the decrease in revenue, but is also reflective of various
changes made during the quarter to streamline operations to operate more
regionally, thus cutting transportation costs and other related expenses. The
decrease also reflects the elimination of last year's adverse affect of oil
contamination to one of our waste streams, as well as specific efforts to reduce
costs within the segment and focus on more profitable waste streams. The
Engineering segment saw an increase in their cost of goods sold as a result of
their increased revenues for the quarter, and lower direct costs from reduced
staffing levels. Included within cost of goods sold is depreciation and
amortization expense of $1,136,000 and $1,090,000 for the three months ended
June 30, 2006, and 2005, respectively.
Cost of goods sold decreased for the six months ended June 30, 2006, compared to
the six months ended June 30, 2005, as follows:
22
% %
(In thousands) 2006 Revenue 2005 Revenue Change
--------------- -------- -------- -------- -------- --------
Nuclear $ 14,729 58.3 $ 14,916 60.4 $ (187)
Industrial 13,700 77.4 17,603 86.3 (3,903)
Engineering 1,221 73.0 1,164 79.6 57
-------- -------- -------- -------- --------
Total $ 29,650 66.4 $ 33,683 72.3 $ (4,033)
======== ======== ======== ======== ========
We saw a decrease in cost of goods sold within both the Nuclear and Industrial
segments, as we focus to streamline costs. The Nuclear segment showed a slight
decrease in cost of goods sold despite the segment's increased revenue. This is
a result of the segment undertaking waste streams that are more complex in
nature and have higher radioactivity levels which contain greater processing
risk and the potential for higher margins. This reduction is evidence of the
segment's success in its efforts to process these more complex waste streams.
The decrease in the Industrial segment is partially a result of the decrease in
revenue, but is also reflective of various changes made during the six months to
streamline operations to operate more regionally, thus cutting transportation
costs and other related expenses. The decrease also reflects the elimination of
last year's adverse affect of oil contamination to one of our waste streams, as
well as specific efforts to reduce costs within the segment and focus on more
profitable waste streams. The Engineering segment saw an increase in their cost
of goods sold as a result of their improved revenues for the six months.
Included within cost of goods sold is depreciation and amortization expense of
$2,245,000 and $2,186,000 for the six months ended June 30, 2006, and 2005,
respectively.
Gross Profit
Gross profit for the quarter ended June 30, 2006, increased over 2005, as
follows:
% %
(In thousands) 2006 Revenue 2005 Revenue Change
--------------- -------- -------- -------- -------- --------
Nuclear $ 5,714 43.6 $ 6,242 45.2 $ (528)
Industrial 2,219 23.4 970 9.1 1,249
Engineering 219 23.5 142 20.4 77
-------- -------- -------- -------- --------
Total $ 8,152 34.7 $ 7,354 29.2 $ 798
======== ======== ======== ======== ========
The Nuclear segment saw a decrease in the gross profit primarily as a result of
the reduced revenue for the quarter as compared to 2005. Additionally, the gross
profit as a percentage of revenue decreased slightly, due to mix of the waste
streams being handled, as well as additional costs associated with the start up
of our project with LATA/Parallax. The Industrial segment saw a significant
increase in gross profit as a result of the segments focus on more profitable
waste streams, cutting costs and streamlining the processes and the elimination
of last year's adverse affect of oil contamination to one of our waste streams.
This was also reflected in the increase in the gross profit percentage. The
Engineering segment gross profit increased slightly, as did their gross profit
percentage, due to their increased sales and their reduction of fixed payroll
costs from the lower staffing levels discussed above.
Gross profit for the six months ended June 30, 2006, increased over 2005, as
follows:
% %
(In thousands) 2006 Revenue 2005 Revenue Change
--------------- -------- -------- -------- -------- --------
Nuclear $ 10,535 41.7 $ 9,787 39.6 $ 748
Industrial 3,996 22.6 2,806 13.7 1,190
Engineering 451 27.0 298 20.4 153
-------- -------- -------- -------- --------
Total $ 14,982 33.6 $ 12,891 27.7 $ 2,091
======== ======== ======== ======== ========
23
The resulting increase in gross profit in the Nuclear segment is a result of the
increased revenue, as well as the cost savings achieved. The cost savings is
also reflected in the increased gross profit as a percentage of revenue, which
was achieved by our becoming more efficient at the treatment of the waste, as
well as the type of waste streams being handled. The Industrial segment saw a
significant increase in gross profit as a result of the segment's focus on more
profitable waste streams, cutting costs and streamlining the processes and the
elimination of last year's adverse affect of oil contamination to one of our
waste streams. This was also reflected in increase in the gross profit
percentage. The Engineering segment gross profit increased slightly, as did
their gross profit percentage, due to their reduction of fixed payroll costs
from the lower staffing levels discussed above, and from their increased
revenues.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased for the three
months ended June 30, 2006, as compared to the corresponding period for 2005, as
follows:
% %
(In thousands) 2006 Revenue 2005 Revenue Change
--------------- -------- -------- -------- -------- --------
Administrative $ 1,381 -- $ 1,481 -- $ (100)
Nuclear 1,992 15.2 1,994 14.4 (2)
Industrial 3,260 34.4 2,105 19.8 1,155
Engineering 159 17.0 97 13.8 62
-------- -------- -------- -------- --------
Total $ 6,792 28.9 $ 5,677 22.6 $ 1,115
======== ======== ======== ======== ========
Our SG&A expenses remained relatively unchanged within the administrative area
and the Nuclear segment, however SGA expenses increased as a percentage of
revenue for the Nuclear segment. The increase predominately relates to the
segment's efforts to expand its management staff to more efficiently bid on new
contracts service and manage its facilities and increase its efforts towards
compliance with corporate policies and regulatory agencies. The increase in the
Industrial segment was a result of increased legal fees as we work to resolve
certain legal issues at our facilities, as well as costs incurred in connection
with environmental compliance of the facilities. The costs associated with
environmental compliance were a result of our reevaluation and additional
provisions made to certain of our environmental reserves. See Environmental
Contingencies later in this Management's Discussion and Analysis for further
discussion on our environmental reserves. The Engineering segment increase was
the result of the payroll cost for a new business development manager hired in
July 2005. Included in SG&A expenses is depreciation and amortization expense of
$84,000 and $86,000 for the three months ended June 30, 2006, and 2005,
respectively.
SG&A expenses increased for the six months ended June 30, 2006, as compared to
the corresponding period for 2005, as follows:
% %
(In thousands) 2006 Revenue 2005 Revenue Change
--------------- -------- -------- -------- -------- --------
Administrative $ 2,688 -- $ 2,729 -- $ (41)
Nuclear 3,947 15.6 3,491 14.1 456
Industrial 5,099 28.8 3,902 19.1 1,197
Engineering 299 17.9 220 15.0 79
-------- -------- -------- -------- --------
Total $ 12,033 27.0 $ 10,342 22.2 $ 1,691
======== ======== ======== ======== ========
Our SG&A expenses remained relatively stable in the administrative area, however
increased throughout the segments. The increase within the Nuclear segment was
due to their continued efforts to expand the management staff to more
efficiently bid on new contracts, service and manage its facilities and increase
24
the efforts towards compliance with corporate policies and regulatory agencies.
The increase in the Industrial segment was a result of increased legal fees as
we work to resolve certain legal issues at our facilities, as well as additional
provisions made to certain environmental reserves in connection with
environmental compliance of the facilities, as discussed above. The Engineering
segment increase was the result of the payroll cost for a new business
development manager hired in July 2005. Included in SG&A expenses is
depreciation and amortization expense of $169,000 and $177,000 for the six
months ended June 30, 2006, and 2005, respectively.
Gain on Disposal of Property and Equipment
During June 2005, we sold property at our facility in Maryland. The sale was for
net proceeds of $695,000, for land and building with a net book value of
$332,000. The resulting gain of $363,000 was included in income from operations,
and was partially offset by losses on disposal of other equipment of
approximately $26,000.
Interest Expense
Interest expense increased for the quarter ended June 30, 2006, and decreased
for the six months ended June 30, 2006, as compared to the corresponding periods
of 2005.
Three Months Six Months
------------------------------ ------------------------------
(In thousands) 2006 2005 Change 2006 2005 Change
-------------- -------- -------- -------- -------- -------- --------
PNC interest $ 254 $ 159 $ 95 $ 450 $ 354 $ 96
Other 132 222 (90) 293 439 (146)
-------- -------- -------- -------- -------- --------
Total $ 386 $ 381 $ 5 $ 743 $ 793 $ (50)
======== ======== ======== ======== ======== ========
The increase for the quarter ended June 30, 2006 is principally a result of
increased variable interest rates and the additional balance on our variable
rate debt. The increase was partially offset by a reduction in our debt to
various other sources as our overall debt position continues to improve.
The decrease for the six months ended June 30, 2006 is due to the full repayment
of a $3.5 million unsecured promissory note in August 2005, and from the final
repayment of various other debt obligations.
Interest Expense - Financing Fees
Interest expense-financing fees decreased approximately $62,000 for the quarter
ended June 30, 2006, as compared to the corresponding period of 2005, and
decreased by $124,000 for the six months ended June 30, 2006, from the same
period during 2005. The decrease was principally a result of entering into
Amendment No. 4 and Amendment No. 5 with PNC during 2005, which extended the
maturity date on the term loan and revolver agreements to May 2008. The
remaining financing fees are now amortized through May 2008. As of June 30,
2006, the unamortized balance of prepaid financing fees is $367,000, which is
comprised of unamortized financing fees from the original PNC debt and Amendment
No. 4 and Amendment No. 5. These prepaid financing dues will be amortized
through May 2008 at a rate of $16,000 per month.
Preferred Stock Dividends
Preferred Stock dividends were $30,000 and $61,000 for the three and six months
ended June 30, 2005, respectively. The Preferred dividends were comprised of
dividends from our Series 17 Preferred Stock, which was converted to Common
Stock in September 2005.
DISCONTINUED OPERATIONS
PFP
Effective November 8, 2005, our Board of Directors approved the discontinuation
of operations at the facility in Pittsburgh, Pennsylvania, owned by our
subsidiary, Perma-Fix of Pittsburgh, Inc. ("PFP"). The
25
decision to discontinue operations at PFP was due to our reevaluation of the
facility and our ability to achieve profitability at the facility in the near
term. During February 2006, we completed the remediation of the leased property
and the equipment, and released the property back to the owner. The operating
results for the current and prior periods have been reclassified to discontinued
operations in our Consolidated Statements of Operations.
PFP recognized a loss of $4,000 for the three months ended June 30, 2006, as
compared to an operating loss of $61,000 and revenues of $216,000 during the
three months ended June 30, 2005. PFP recorded a loss of $346,000 for the six
months ended June 30, 2006, and revenue of $393,000 and an operating loss of
$140,000 for the six months ended June 30, 2005. The loss in 2006 was partially
due to early termination costs of $200,000 associated with our early termination
of our leased property. The assets and liabilities related to PFP have been
reclassified into separate categories in the Consolidated Balance Sheets as of
June 30, 2006 and December 31, 2005. The assets are recorded at their net
realizable value, and consist of equipment of $116,000. PFP has no liabilities
on the books as of June 30, 2006.
PFMI
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
PFMI 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.
PFMI recorded a gain of $1,050,000 for the three months ended June 30, 2006, and
a loss of $122,000 for the three months ended June 30, 2005. PFMI recognized a
gain of $942,000 for the six months ended June 30, 2006 and a loss of $289,000
for the same period in 2005. Our gain for the three and six months in 2006 was a
result of a reduction of $1,181,000 in our environmental accrual due to our
re-evaluation of the accrual we have recorded for the closure and remediation
activities we are performing. During the last half of 2005 we settled the three
insurance claims we submitted 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 2004, we recorded a receivable of $1,585,000 based
on negotiations with the insurance carrier on the business interruption claim.
The income from recording this receivable was recorded as a reduction of "loss
from discontinued operations" and reduced the operating losses for 2004. During
2005, we received insurance proceeds and claim settlements of $3,253,000 for
settlement of all three claims. Of these proceeds, $1,476,000 was recorded as
income from discontinued operations during the third quarter of 2005, which is
net of $192,000 paid for public adjustor fees.
Assets and liabilities related to the discontinued operation have been
reclassified to separate categories in the Consolidated Balance Sheets as of
June 30, 2006 and December 31, 2005. As of June 30, 2006, assets are recorded at
their estimated net realizable values, and consist of property and equipment of
$600,000. Liabilities as of June 30, 2006, consist of accounts payable and
current accrued expenses of $65,000, environmental accruals of $664,000, and a
pension payable of $1,510,000. The pension plan withdrawal liability is a result
of the termination of the union employees of PFMI. The former 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. The recorded liability is based
upon a demand letter received from CST in August 2005 that provided for the
payment of $22,000 per month over an eight year period. This obligation is
recorded as a long-term liability, with a current portion of $76,000 that we
expect to pay over the next year.
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
26
the facility, we may have to complete certain additional remediation activities
related to the land, building, and equipment. The level and cost of the clean-up
and remediation will be determined by state mandated requirements, the extent to
which, are not known at this time. Also, impacting this estimate is the level of
contamination discovered, as we begin remediation, and the related clean-up
standards which must be met in order to dispose of or sell the facility. We
engaged our engineering firm, SYA, to perform an analysis and related estimate
of the cost to complete the RCRA portion of the closure/clean-up costs and the
potential long-term remediation costs. Based upon this analysis, we originally
estimated the cost of this environmental closure and remediation liability to be
$2,464,000. During 2006 we re-evaluated our estimated environmental accrual and
the required activities to close and remediate the facility, and during the
quarter ended June 30, 2006, we began implementing a modified methodology to
remediate the facility. As a result of the reevaluation and the change in
methodology we reduced the accrual by $1,181,000. We have spent approximately
$619,000 for closure costs since September 30, 2004, of which approximately
$64,000 has been spent during the first half of 2006, and $439,000 was spent in
2005. We have $664,000 accrued for the closure, as of June 30, 2006, and we
anticipate spending $129,000 in 2006 with the remainder over the next two to
five years.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
Our capital requirements consist of general working capital needs, scheduled
principal payments on our debt obligations and capital leases, remediation
projects and planned capital expenditures. Our capital resources consist
primarily of cash generated from operations, funds available under our revolving
credit facility and proceeds from issuance of our Common Stock. Our capital
resources are impacted by changes in accounts receivable as a result of revenue
fluctuation, economic trends, collection activities, and the profitability of
the segments.
At June 30, 2006, we had cash of $713,000. The following table reflects the cash
flow activities during the first six months of 2006.
(In thousands) 2006
----------------------------------------------------- ----------
Cash provided by operations $ 1,516
Cash used in investing activities (2,240)
Cash provided by financing activities 1,343
----------
Increase in cash $ 619
==========
We are in a net borrowing position and therefore attempt to move all excess cash
balances immediately to the revolving credit facility, so as to reduce debt and
interest expense. We utilize a centralized cash management system, which
includes remittance lock boxes and is structured to accelerate collection
activities and reduce cash balances, as idle cash is moved without delay to the
revolving credit facility. The cash balance at June 30, 2006, primarily
represents payments received during June 2006 for warrant exercises, as well as,
minor petty cash and local account balances used for miscellaneous services and
supplies.
Operating Activities
Accounts receivable, net of allowances for doubtful accounts, totaled
$14,695,000, a decrease of $1,914,000 over the December 31, 2005, balance of
$16,609,000. The Nuclear segment experienced a decrease of $1,611,000 as a
result of increased collection efforts and improved turnaround of certain
government and commercial account receivables. This segment was also affected by
timing issues related to the final shipment of wastes to end disposal sites that
are delayed due to the complexity of the documentation required for invoicing
and the approvals to ship from our generators. The Engineering segment also
experienced a decrease of $94,000. Additionally, there was a decrease in the
accounts receivable from the Industrial segment of $209,000 primarily resulting
from increased collection efforts and the loss of a contract with a major home
improvement chain.
27
Unbilled receivables are generated by differences between invoicing timing and
the percentage of completion methodology used for revenue recognition purposes.
As major processing phases are completed and the costs incurred, we recognize
the corresponding percentage of revenue. We experience delays in processing
invoices due to the complexity of the documentation that is required for
invoicing, as well as, the difference between completion of revenue recognition
milestones and agreed upon invoicing terms, which results in unbilled
receivables. The timing differences occur for several reasons. Partially from
delays in the final processing of all wastes associated with certain work orders
and partially from delays for analytical testing that is required after we have
processed waste but prior to our release of waste for disposal. The difference
also occurs due to our end disposal sites requirement of pre-approval prior to
our shipping waste for disposal and our contract terms with the customer that we
dispose of the waste prior to invoicing. These delays usually take several
months to complete. As of June 30, 2006, unbilled receivables totaled
$15,554,000, an increase of $3,606,000 from the December 31, 2005, balance of
$11,948,000. This increase is principally due to timing issues related to the
final shipment of wastes to end disposal sites that are delayed due to shipment
approvals needed from generators, and the complexity of the current contracts,
which requires greater levels of documentation and additional testing for final
invoicing.
As of June 30, 2006, total consolidated accounts payable was $5,703,000, a
decrease of $350,000 from the December 31, 2005, balance of $6,053,000. Accounts
payable decreased in conjunction with decreased revenues in the Industrial
segment due to the loss of the contract with a major home improvement chain
effective November 2005. Additionally, accounts payable decreased as a result of
improved profitability.
Accrued Expenses as of June 30, 2006, totaled $11,749,000, an increase of
$83,000 over the December 31, 2005, balance of $11,666,000. Accrued expenses are
made up of disposal and processing cost accruals, accrued compensation, interest
payable, insurance payable and certain tax accruals. The increase was primarily
due to an increase in our disposal accrual of $1,341,000 related to the timing
of shipments of processed wastes from our Nuclear facilities, an excise tax
accrual for $211,000, and an accrual of $100,000 for estimated penalties on a
proposed consent order we received during 2005 at our facility in Tulsa,
Oklahoma. The increase was partially offset by a decrease to accrued expenses as
a result of payments made during the first six months for insurance payables of
$1,572,000.
The working capital position at June 30, 2006, was $9,256,000, as compared to a
working capital position of $5,916,000 at December 31, 2005. The increase in
this position of $3,340,000 is principally a result of the decrease in accounts
payable, as mentioned above, from the decrease in unearned revenue as a result
of increased processing in the Nuclear segment of backlog and legacy waste
during the first six months, and by the net increase in unbilled and accounts
receivable. The increase was partially offset by the increases in our accrued
expenses as was discussed 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 six-month period ended June 30,
2006, totaled approximately $1,833,000 of which, $94,000 was financed, resulting
in $1,739,000 funded out of cash flow. These expenditures were for expansion and
improvements to the operations principally within the Nuclear segment. These
capital expenditures were funded by the cash provided by operations. We budgeted
capital expenditures of approximately $6,800,000 for fiscal year 2006, which
includes an estimated $3,570,000 to complete certain current projects committed
at December 31, 2005, as well as other identified capital and permit compliance
purchases. Our purchases during the first six months of 2006 include
approximately $670,000 of those projects committed at December 31, 2005. 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
28
funds available for such capital projects. We anticipate funding these
capital expenditures by a combination of lease financing, internally generated
funds, and/or the proceeds received from Warrant exercises.
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 $28,766,000 at
June 30, 2006, 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
represented the full premium for the 25-year term of the policy, and the
remaining $1,234,000, was deposited in a sinking fund account representing a
restricted cash account. In February 2006, we paid our third of nine required
annual installments of $1,004,000, of which $991,000 was deposited in the
sinking fund account, the remaining $13,000 represents a terrorism premium. As
of June 30, 2006, we have recorded $4,419,000 in our sinking fund on the balance
sheet, which includes interest earned of $212,000 on the sinking fund as of June
30, 2006. Interest income for the three and six months ended June 30, 2006, was
$58,000 and $89,000, respectively. 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 July 28, 2006, our Board of Directors has authorized a common stock
repurchase program to purchase up to $2,000,000 of our Common Stock, through
open market and privately negotiated transactions, with the timing, the amount
of repurchase transactions and the prices paid under the program as deemed
appropriate by management and dependent on market conditions and corporate and
regulatory considerations. We plan to fund any repurchases under this program
through our internal cash flow and/or borrowings under our line of credit.
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,
as amended. The Agreement provides for a term loan ("Term Loan") in the amount
of $7,000,000, which requires monthly installments of $83,000 with the remaining
unpaid principal balance due on May 31, 2008. The Agreement also provides 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 the Agent reasonably deems proper and necessary. As of
June 30, 2006, the excess availability under our Revolving Credit was $9,380,000
based on our eligible receivables.
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.
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
29
years on a semiannual basis on June 30 and December 31. The principal repayments
for 2006 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 (10% on June 30, 2006) and
payable in one lump sum at the end of the loan period. On June 30, 2006, the
outstanding balance was $3,412,000 including accrued interest of approximately
$1,578,000. Pursuant to the agreement the accrued interest is to be paid at the
end of the term, and as such, is recorded as a long-term liability. PDC has
directed M&EC to make all payments under the promissory note directly to the
Internal Revenue Service ("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 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 2006
will be approximately $100,000 semiannually. Interest is accrued at the
Applicable Rate, and is adjusted on a quarterly basis and payable in lump sum at
the end of the installment period. On June 30, 2006, the rate was 10%. On June
30, 2006, the outstanding balance was $833,000 including accrued interest of
approximately $380,000. The accrued interest is to be paid at the end of the
term, and as such, is recorded as a long-term liability, pursuant to the terms
of the agreement.
During the six months ended June 30, 2006, we issued 673,461 shares of our
Common Stock upon exercise of certain warrants, at exercise prices from $1.44 to
$1.75 per share, of which 57,774 were issued on a cashless basis. Additionally,
we issued 252,000 shares of our Common Stock upon exercises of employee stock
options, at exercise prices from $1.00 to $1.75 per share. Total proceeds
received during the six months for the warrant and option exercises were
$1,458,000. Subsequent to June 30, 2006, we have processed exercises of warrants
for the purchase of 5,999,829 shares of Common Stock at exercise prices of $1.44
to $1.75 per share and options for the purchase of 70,000 shares of Common Stock
at an exercise price of $1.75 per share, which resulted in total proceeds of
$10,387,000. Year to date we have processed warrants and options to issue
6,995,290 shares of Common Stock, and received proceeds of $11,845,000 for those
exercises.
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
remain profitable in the foreseeable future, such would have a material adverse
effect on our liquidity position.
30
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at June 30, 2006, and
the effect such obligations are expected to have on our liquidity and cash flow
in future periods, (in thousands):
Payments due by period
-------------------------------------------------
2007 - 2010 - After
Contractual Obligations Total 2006 2009 2011 2011
-------------------------------------- ---------- ---------- ---------- ---------- ----------
Long-term debt $ 13,313 $ 1,736 $ 11,519 $ 58 $ --
Interest on long-term debt (1) 1,958 -- 1,958 -- --
Interest on variable rate debt (2) 972 286 686 -- --
Operating leases 3,429 906 1,941 481 101
Finite risk policy (3) 6,022 -- 3,011 2,008 1,003
Pension withdrawal liability (4) 1,510 76 476 403 555
Environmental contingencies (5) 3,669 942 1,453 551 723
Purchase obligations (6) -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total contractual obligations $ 30,873 $ 3,946 $ 21,044 $ 3,501 $ 2,382
========== ========== ========== ========== ==========
(1) Our IRS Note and PDC Note agreements call for interest to be paid at the
end of the term, December 2008.
(2) We have variable interest rates on our Term Loan and Revolving Credit of 1%
and 1/2% over the prime rate of interest, respectively, and as such we have
made certain assumptions in estimating future interest payments on this
variable interest rate debt. We assume an increase in prime rate of 0.25%
in each of the years 2006 through 2008. We anticipate a full repayment of
our Revolving Credit by December 2006, and full repayment of our Term Loan
by May 2008.
(3) Our finite risk insurance policy provides financial assurance guarantees to
the states in the event of unforeseen closure of our permitted facilities.
See Liquidity and Capital Resources - Investing activities earlier in this
Management's Discussion and Analysis for further discussion on our finite
risk policy.
(4) The pension withdrawal liability is the estimated liability to us upon
termination of our union employees at our discontinued operation, PFMI. See
Discontinued Operations earlier in this section for discussion on our
discontinued operation.
(5) The environmental contingencies and related assumptions are discussed
further in the Environmental Contingencies section of this Management's
Discussion and Analysis, and are based on estimated cash flow spending for
these liabilities.
(6) We are not a party to any significant long-term service or supply contracts
with respect to our processes. We refrain from entering into any long-term
purchase commitments in the ordinary course of business.
CRITICAL ACCOUNTING ESTIMATES
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. We believe the following critical accounting policies affect the more
significant estimates used to prepare the consolidated financial statements:
31
Revenue Recognition Estimates. We use the 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 continue 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 generally rendered shortly after receipt, therefore, percentage
of completion estimates are not used in our Industrial segment. However, we
continue to 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 un-collectable amounts. All accounts
receivable balances after 60 days from the invoice date are regularly reviewed
based on current credit worthiness, and that portion, deemed un-collectable, if
any, are computed. Specific accounts 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
91-120 days, and 40% over 120 days), based on a historical valuation, that
allows us to calculate the total reserve required. This allowance was
approximately 0.6%, and 0.7% of revenue and approximately 3.1%, and 3.2% of
accounts receivable for 2005, and 2004, 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 reasonableness of the carrying amount of
permits and goodwill to determine whether current events and circumstances
warrant adjustments to the carrying value. We utilize an independent appraisal
firm to test goodwill and permits, separately, for impairment, annually as of
October 1. Our annual impairment test as of October 1, 2005, resulted in no
impairment of goodwill and permits. The appraisers estimate the fair value of
our operating segments using a discounted cash flow valuation approach. This
approach is dependent on estimates for future sales, operating income,
depreciation and amortization, working capital changes, and capital
expenditures, as well as, expected growth rates for cash flows and long-term
interest rates, all of which are impacted by economic conditions related to our
industry as well as conditions in the U.S. capital markets.
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 2006 and
2005, have been approximately 2.7%, and 2.1%, respectively, and based on the
historical information, we do not expect future inflationary changes to differ
materially from the last three years. Increases or decreases in accrued closure
costs resulting from changes or expansions at the facilities are determined
based on specific RCRA guidelines applied to the requested change. This
calculation includes certain estimates, such as disposal pricing, external
labor, analytical costs and processing costs, which are based on current market
conditions. However, except for the Michigan and Pittsburgh facilities, we have
no current intention to close any of our facilities.
Accrued Environmental Liabilities. We have five 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.
Circumstances that could affect the outcome include new technologies being
32
developed every day to reduce our overall costs, or increased contamination
levels that could arise as we complete remediation which could increase our
costs, neither of which we anticipate at this time. Significant changes in
regulations could also adversely or favorably affect our costs to remediate
existing sites or potential future sites, which cannot be reasonably quantified.
We have also accrued a long-term environmental liability for our PFMD facility
acquired in March 2004, which is not a permitted facility, so 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. Disposal sites available to us are limited. An
increase or decrease in available sites or 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 and/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 holiday season activities. During our second and
third fiscal quarters, there has historically been an increase in revenues and
operating profits. Management expects this trend to continue in future years.
The U.S. Department of Energy ("DOE") and U.S. Department of Defense ("DOD")
represent major customers for the Nuclear segment. In conjunction with the
federal government's September 30 fiscal year-end, the Nuclear segment has
experienced 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 has historically experienced a
seasonal slowdown, as the governmental budgets are still being finalized,
planning for the new year is occurring and we enter the holiday season. We
experienced limited success in 2005 in getting governmental customers to extend
the timing of their shipments of wastes typically received in the third quarter
over a longer period of time, which has helped smooth revenues over the second
and third quarters. However, as a result of our efforts to schedule shipments on
a more consistent basis, we may not experience this seasonality going forward.
The maturing process of our Nuclear segment continues to lessen the impact of
seasonal fluctuations in all quarters.
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 feel that recessionary conditions stabilized in 2005 as evidenced
by increases in commercial waste revenues, and continue to improve in the first
half of 2006.
Significant Customers. While our revenues are principally derived from numerous
and varied customers, we have a significant relationship with the federal
government and its contractors. During the three and six months ended June 30,
2006, our Nuclear and Industrial segment performed services relating to waste
generated by the federal government, either directly or indirectly as a
subcontractor to the federal government, representing approximately $9,892,000
or 42.1%, and $17,937,000 or 40.3% of our consolidated revenues for the
respective periods in 2006. Most, if not all, contracts with the federal
government or with others as a subcontractor to the federal government provide
that the government may terminate or renegotiate the contracts at the
government's option at any time.
Included in the amounts discussed above, are revenues from Bechtel Jacobs, DOE's
appointed manager of the environmental program to perform certain treatment and
disposal services in Oak Ridge, Tennessee, under contracts through August 2007,
and, as with all government contracts, may be terminated or renegotiated at any
time at the government's election. As DOE's Oak Ridge site continues to complete
33
certain of its clean-up milestones and moves toward completing its closure
efforts, the revenue from these contracts have begun to decline. Our revenues
from Bechtel Jacobs contributed 5.3% and 7.3% of total consolidated revenues for
the three and six months ended June 30, 2006, respectively, and 19.0% and 13.7%
during the corresponding periods in 2005. In February 2003, M&EC commenced legal
proceedings against Bechtel Jacobs, 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. Bechtel Jacobs continues to deliver waste to
M&EC for treatment, and M&EC continues to accept such waste. In addition, after
the lawsuit was filed, M&EC entered into a new contract with Bechtel Jacobs to
treat DOE waste.
During the first quarter of 2006, our Nuclear segment was awarded a $9.4 million
subcontract by LATA/Parallax Portsmouth LLC (LATA/Parallax) The subcontract
requires treatment and disposal of mixed waste that was generated during Gaseous
Diffusion Plant operations at the DOE's site in Piketon, Ohio. The subcontract's
period of performance is through September 30, 2007, and will require Perma-Fix
to treat a wide range of physical and chemical forms of the special mixed waste
to meet U.S. EPA RCRA land disposal regulations and the Nevada Test Site Waste
Acceptance Criteria. Additionally, LATA/Parallax has assumed certain other
projects and contracts, relating to work for the federal government, previously
managed by Bechtel Jacobs, under which we have received various work releases to
process mixed waste streams. During the three and six months ended June 30,
2006, we recognized 17.9% and 9.9% of consolidated revenues from LATA/Parallax,
respectively. The revenues from LATA/Parallax are also included above, in our
revenues from the federal government and their contractors.
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 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. Our subsidiaries, PFD and PFTS are involved in legal
proceedings alleging that they had not obtained certain air permits in order to
operate its facility in violation of the Clean Air Act and applicable state
statutes and regulations. If it is determined that PFD is or was required to
operate under a Title V air permit, this determination could result in
substantial fines and penalties being assessed against PFD, which could have a
material adverse effect on our financial conditions and liquidity. In addition,
a determination that either PFD or PFTS is in violation of the applicable Clean
Air Act and/or applicable state statutes could have a material adverse effect on
the operation of that particular facility. The above budgeted amounts for
capital expenditures relating to environmental contingencies assumes that
neither of our subsidiaries, PFD or PFTS, is required to obtain a Title V air
permit in connection with its operations. If it is determined that either PFD or
PFTS is required to have a Title V air permit in order to operate that facility,
we anticipate that substantial additional capital expenditures will be required
in order to bring that facility in compliance with the requirements of a Title V
air permit. We do not have reliable estimates of the cost of additional capital
expenditures to comply with Title V air permit.
In May 2006, Orange County, Florida filed a complaint against our subsidiary,
Perma-Fix of Orlando, Inc. ("PFO"), alleging that PFO owes hazardous waste taxes
on gross receipts from calendar years 2000 and 2001. We are investigating the
allegations and have accrued $211,000 as of June 30, 2006 as our best estimate
of our potential liability. Settlement discussions have been initiated with
county representatives. However, at this time, we cannot be certain as to the
outcome of the litigation, settlement discussions or the extent of any
liabilities we would incur as a result of the complaint.
34
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. Compared with certain of our competitors, we dispose of significantly less
hazardous or industrial by-products from our operations due to rendering
material non-hazardous, discharging treated wastewaters to publicly-owned
treatment works and/or processing wastes into saleable products. In the past,
numerous third party disposal sites have improperly managed wastes 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.
For 2006, $1,107,000 is budgeted 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, PFMD's facility in Baltimore, Maryland, and PFMI's
facility in Detroit, Michigan. While no assurances can be made that we will be
able to do so, we expect to fund the expenses to remediate the sites from funds
generated internally.
At June 30, 2006, we had total accrued environmental remediation liabilities of
$3,668,000, of which $1,439,000 is recorded as a current liability, a decrease
of $717,000 from the December 31, 2005, balance of $4,385,000. During the
quarter ended June 30, 2006, we began implementing a modified methodology to
remediate the facility and reduced environmental liabilities by $1,181,000 as a
result of our reevaluation of the extent of cleanup and the cost to close the
facility at PFMI. We increased the remediation liability by $322,000 for PFM and
by $409,000 for PFSG as a result of our reassessment of costs and methodology to
remediate the sites. We also decreased environmental liabilities by $267,000 for
payments on the remediation projects. The June 30, 2006, current and long-term
accrued environmental balance is as follows:
Current Long-term
Accrual Accrual Total
-------------- -------------- --------------
PFD $ 254,000 $ 495,000 $ 749,000
PFM 484,000 370,000 854,000
PFSG 292,000 681,000 973,000
PFTS 16,000 21,000 37,000
PFMD -- 391,000 391,000
-------------- -------------- --------------
1,046,000 1,958,000 3,004,000
PFMI 393,000 271,000 664,000
-------------- -------------- --------------
$ 1,439,000 $ 2,229,000 $ 3,668,000
============== ============== ==============
35
RECENTLY ADOPTED ACCOUNTING STANDARDS
On January 1, 2006, we adopted Financial Accounting Standards Board ("FASB")
Statement No. 123 (revised) ("SFAS 123R"), Share-Based Payment, a revision of
FASB Statement No. 123, Accounting for Stock-Based Compensation, superseding APB
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. This Statement establishes accounting standards for
entity exchanges of 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 all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative upon adopting SFAS
123R.
We adopted SFAS 123R utilizing the modified prospective method in which
compensation cost is recognized beginning with the effective date based on SFAS
123R requirements for all (a) share-based payments granted after the effective
date and (b) awards granted to employees prior to the effective date of SFAS
123R that remain unvested on the effective date. In accordance with the modified
prospective method, the consolidated financial statements for prior periods have
not been restated to reflect, and do not include, the impact of SFAS 123R.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes."
FIN 48 prescribes detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
"Accounting for Income Taxes." Tax positions must meet a more-likely-than-not
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal years
beginning after December 15, 2006 and the provisions of FIN 48 will be applied
to all tax positions upon initial adoption of the Interpretation. The cumulative
effect of applying the provisions of this Interpretation will be reported as an
adjustment to the opening balance of retained earnings for that fiscal year. We
are currently evaluating the potential impact of FIN 48 on our financial
statements
36
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. As of June 30, 2006, we have no interest swap
agreement outstanding, and we were exposed to variable interest rates under our
loan arrangements with PNC. The interest rates payable to PNC are based on a
spread over prime rate. If our floating rates of interest experienced an upward
increase of 1%, our debt service would have increased by approximately $49,000
for the six months ended June 30, 2006.
37
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 effective, as reported in
our Annual Report on Form 10-K for the year ended December 31, 2005, (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 that occurred during our last fiscal quarter that have
materially affected, or are likely to materially affect, our internal
control over financial reporting.
38
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, 2005, and Item 1, Part II, of
our Form 10-Q for the period ended March 31, 2006.which are incorporated
herein by reference,, except as follows.
We have previously disclosed that the U.S. Environmental Protection
Agency ("EPA") had issued to Perma-Fix of Dayton, Inc, ("PFD"), one of
our subsidiaries, a Finding of Violation and a Notice of Violation
alleging that PFD was a "major source" of potential hazardous air
pollutants, and, as a major source, PFD operated its facility without
having obtained a Title V air permit, was in violation of the Clean Air
Act (the "Act") and was subject to penalties as a result thereof. In
addition, we previously reported that in December, 2004, PFD was sued
under the citizen's suit provisions of the Act in the United States
District Court for the Southern District of Ohio, in a case styled
Fisher v. Perma-Fix of Dayton, Inc. (the "Citizen's Suit"). The
Citizen's Suit alleges violation by PFD of a number of state and federal
clean air requirements in connection with the operation of PFD's
facility and seeks injunctive relief, civil penalties, attorney fees and
costs and other forms of relief. We further previously reported that EPA
has referred enforcement of the Notice of Violation to the U.S.
Department of Justice ("DOJ") for enforcement. On or about May 19, 2006,
the DOJ, on behalf of the EPA, filed a Motion for Leave to Intervene as
a plaintiff in the Citizen's Suit, which motion was granted on May 22,
2006. The government's intervention is seeking injunctive relief and
civil penalties against PFD for, among other things, alleged violations
which parallel certain claims asserted in the Citizen's Suit relating to
alleged violations of the Act, failure of PFD to operate its facility
without a Title V air permit, and installing new and/or modifying
certain portions of the facility without proper permits. The complaint
filed by the DOJ alleges that PFD could be liable for penalties for each
alleged violation up to $27,500 to $32,500 per day, depending on the
violation. As previously reported, we and PFD have been attempting to
negotiate a resolution of the above referenced matters with the EPA/DOJ
and the citizens group. We have been advised by the DOJ that the DOJ
does not believe that the federal government's intervention in the
Citizen's Suit should result in the parties not continuing their
negotiations in an attempt to settle all issues. As a result, we and PFD
intend to continue our negotiations with the government and the citizens
group in an attempt to resolve these matters, but at this time we cannot
determine the outcome.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
------------------------------------------------------------
(c) During the quarter ended June 30, 2006, we sold equity securities, as
such term is defined under 12b-2 of the Exchange Act of 1934, as
amended, that were not registered under the Securities Act of 1933, as
amended, other than as previously reported in a Form 8-K, as follows:
During the six months ended June 30, 2006, Ryan Beck & Co. exercised
various warrants to purchase an aggregate of 29,528 shares of our Common
Stock, of which 9,600 were issued at a total exercise price of
approximately $17,000, or $1.75 per share, and the remaining 19,928
shares were issued utilizing a cashless exercise provision, in
accordance with the terms of the Warrants. The shares were issued under
the exemption from registration provided by Section 4(2) and/or Rule 506
of Regulation D.
39
During the six months ended June 30, 2006, Michael Kollender exercised
various warrants to purchase an aggregate of 18,110 shares of our Common
Stock, which were issued utilizing a cashless exercise provision, in
accordance with the terms of the Warrants. The shares were issued under
the exemption from registration provided by Section 4(2) and/or Rule 506
of Regulation D.
During the six months ended June 30, 2006, Jeffrey Sherry exercised
various warrants to purchase an aggregate of 2,554 shares of our Common
Stock, which were issued utilizing a cashless exercise provision, in
accordance with the terms of the Warrants. The shares were issued under
the exemption from registration provided by Section 4(2) and/or Rule 506
of Regulation D.
During the three months ended June 30, 2006, Michael Bergin exercised
two warrants to purchase an aggregate of 84,500 shares of our Common
Stock, at a total exercise price of approximately $143,000, in
accordance with the terms of the Warrants. The shares were issued under
the exemption from registration provided by Section 4(2) and/or Rule 506
of Regulation D.
During the three months ended June 30, 2006, Princeton Avenue Partners
exercised two warrants to purchase an aggregate of 94,682 shares of our
Common Stock, of which 77,500 were issued at a total exercise price of
approximately $136,000, or $1.75 per share, and the remaining 17,182
shares were issued utilizing a cashless exercise provision, in
accordance with the terms of the Warrants. The shares were issued under
the exemption from registration provided by Section 4(2) and/or Rule 506
of Regulation D.
During the three months ended June 30, 2006, Rocco LaVista exercised
warrant to purchase an aggregate of 13,000 shares of our Common Stock,
at a total exercise price of approximately $20,000, or $1.50 per share,
in accordance with the terms of the Warrants. The shares were issued
under the exemption from registration provided by Section 4(2) and/or
Rule 506 of Regulation D.
We used the proceeds from the exercise of the above Warrants to reduce
its debt and for general working capital. All of the shares of Common
Stock described above have been registered for resale by the holders of
such Common Stock under a Form S-3 Registration Statement, No.
333-70676.
40
Item 6. EXHIBITS
--------
(a) Exhibits
--------
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 Steven Baughman, Vice President and 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 Steven Baughman, Vice President and Chief
Financial Officer of the Company furnished pursuant to 18 U.S.C.
Section 1350.
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
PERMA-FIX ENVIRONMENTAL SERVICES
Date: August 9, 2006 By: /s/ Dr. Louis F. Centofanti
----------------------------
Dr. Louis F. Centofanti
Chairman of the Board
Chief Executive Officer
Date: August 9, 2006 By: /s/ Steven Baughman
----------------------------
Steven Baughman
Vice President and
Chief Financial Officer
42