================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 Identification Number)
of incorporation or organization)
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 November 8, 2006
----------------------------- -------------------------------
Common Stock, $.001 Par Value 52,024,617
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PERMA-FIX ENVIRONMENTAL SERVICES, INC.
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Balance Sheets -
September 30, 2006 (unaudited) and December 31, 2005.........................2
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2006 and 2005 (unaudited)..........4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2006 and 2005 (unaudited)....................5
Consolidated Statement of Stockholders' Equity -
Nine Months Ended September 30, 2006 (unaudited).............................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 1A. Risk Factors.......................................................................39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........................39
Item 4. Submission of Matters to a Vote of Security Holders................................41
Item 6. Exhibits...........................................................................43
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 nine months ended September 30, 2006, are not
necessarily indicative of results to be expected for the fiscal year ending
December 31, 2006.
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(Amounts in Thousands, Except for Share Amounts) 2006 2005
--------------------------------------------------------------------- -------------- --------------
(Unaudited)
ASSETS
Current assets
Cash $ 2,549 $ 94
Restricted cash 65 511
Accounts receivable, net of allowance for doubtful
accounts of $520 and $512 13,591 16,609
Unbilled receivables 17,226 11,948
Inventories 851 842
Prepaid expenses 3,815 2,777
Other receivables 54 37
Current assets of discontinued operations, net of allowance for
doubtful accounts of $0 and $90 -- 60
-------------- --------------
Total current assets 38,151 32,878
Property and equipment:
Buildings and land 20,311 19,922
Equipment 31,768 31,120
Vehicles 4,670 4,452
Leasehold improvements 11,469 11,489
Office furniture and equipment 2,570 2,414
Construction-in-progress 3,448 850
-------------- --------------
74,236 70,247
Less accumulated depreciation and amortization (29,323) (25,767)
-------------- --------------
Net property and equipment 44,913 44,480
Property and equipment of discontinued operations, net of accumulated
depreciation of $28 and $80 706 806
Intangibles and other assets:
Permits, net 13,498 13,188
Goodwill 1,330 1,330
Finite Risk Sinking Fund 4,471 3,339
Other assets 1,923 2,504
-------------- --------------
Total assets $ 104,992 $ 98,525
============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
2
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
September 30, December 31,
(Amounts in Thousands, Except for Share Amounts) 2006 2005
--------------------------------------------------------------------- -------------- --------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,674 $ 6,053
Current environmental accrual 905 768
Accrued expenses 11,189 11,666
Unearned revenue 3,083 5,169
Current liabilities of discontinued operations 758 628
Current portion of long-term debt 2,445 2,678
-------------- --------------
Total current liabilities 23,054 26,962
Environmental accruals 1,915 1,572
Accrued closure costs 5,355 5,245
Other long-term liabilities 2,876 2,462
Long-term liabilities of discontinued operations 1,422 3,149
Long-term debt, less current portion 6,759 10,697
-------------- --------------
Total long-term liabilities 18,327 23,125
-------------- --------------
Total liabilities 41,381 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,
52,019,617 and 45,813,916 shares issued, including 988,000
shares retired in September 2006 and held as treasury stock as
of December 31, 2005 respectively 52 46
Additional paid-in capital
92,748 82,180
Stock Subscription Receivable (97)
Accumulated deficit (30,377) (33,211)
-------------- --------------
62,326 49,015
Less Common Stock in treasury at cost; 988,000 shares -- (1,862)
-------------- --------------
Total stockholders' equity 62,326 47,153
-------------- --------------
Total liabilities and stockholders' equity $ 104,992 $ 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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
(Amounts in Thousands, Except for Per Share Amounts) 2006 2005 2006 2005
------------------------------------------------------- ---------- ---------- ---------- ----------
Net revenues $ 21,266 $ 22,826 $ 65,899 $ 69,400
Cost of goods sold 14,938 16,106 44,589 49,791
---------- ---------- ---------- ----------
Gross profit 6,328 6,720 21,310 19,609
Selling, general and administrative expenses 5,621 4,643 17,654 14,984
Loss (gain) on disposal of property and equipment (4) 4 (3) (333)
---------- ---------- ---------- ----------
Income from operations 711 2,073 3,659 4,958
Other income (expense):
Interest income 100 4 195 6
Interest expense (331) (382) (1,074) (1,176)
Interest expense-financing fees (48) (48) (145) (269)
Other 3 (68) (114) (102)
---------- ---------- ---------- ----------
Income from continuing operations before taxes 435 1,579 2,521 3,417
Income tax expense (recovery) (26) 324 152 606
---------- ---------- ---------- ----------
Income from continuing operations 461 1,255 2,369 2,811
Income (loss) from discontinued operations, net of
tax (131) 751 465 322
---------- ---------- ---------- ----------
Net income 330 2,006 2,834 3,133
Preferred Stock dividends -- 30 -- 91
---------- ---------- ---------- ----------
Net income applicable to Common Stock $ 330 $ 1,976 $ 2,834 $ 3,042
========== ========== ========== ==========
Net income per common share - basic
Continuing operations $ .01 $ .03 $ .05 $ .07
Discontinued operations - .02 .01 .01
---------- ---------- ---------- ----------
Net income per common share $ .01 $ .05 $ .06 $ .08
========== ========== ========== ==========
Net income per common share - diluted
Continuing operations $ .01 $ .03 $ .05 $ .07
Discontinued operations -- .02 .01 .01
---------- ---------- ---------- ----------
Net income per common share $ .01 $ .05 $ .06 $ .08
========== ========== ========== ==========
Number of shares and potential common shares
used in net income per common share:
Basic 50,541 42,055 46,851 41,881
========== ========== ========== ==========
Diluted 51,430 44,152 47,414 43,138
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
4
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
------------------------
(Amounts in Thousands) 2006 2005
---------------------------------------------------------------- ---------- ----------
Cash flows from operating activities:
Net income $ 2,834 $ 3,133
Adjustments to reconcile net income to cash provided by
(used in) operations:
Depreciation and amortization 3,648 3,541
Provision for bad debt and other reserves 59 33
Gain on disposal of property and equipment (3) (332)
Issuance of Common Stock for services 150 160
Share based compensation 173 --
Discontinued operations (1,576) 995
Changes in operating assets and liabilities:
Accounts receivable 2,977 2,503
Unbilled receivables (5,277) (4,564)
Prepaid expenses, inventories and other assets (2,633) (350)
Accounts payable, accrued expenses, and unearned revenue (1,098) (1,420)
---------- ----------
Net cash (used in) provided by operations (746) 3,699
Cash flows from investing activities:
Purchases of property and equipment, net (3,990) (1,720)
Proceeds from sale of plant, property and equipment 12 702
Change in restricted cash, net 446 15
Change in finite risk sinking fund (1,133) (991)
Discontinued operations 117 (3)
---------- ----------
Net cash used in investing activities (4,548) (1,997)
Cash flows from financing activities:
Net borrowings (repayments) of revolving credit (2,447) (1,699)
Principal repayments of long-term debt (1,819) (5,516)
Borrowings of long-term debt -- 4,417
Proceeds from issuance of stock 12,007 1,000
Change in Note Receivable for Common Stock 8 --
---------- ----------
Net cash provided by (used in) financing activities 7,749 (1,798)
---------- ----------
Increase (decrease) in cash 2,455 (96)
Cash at beginning of period 94 215
Cash at end of period $ 2,549 $ 119
========== ==========
Supplemental disclosure
Interest paid $ 691 $ 971
Non-cash investing and financing activities:
Gain on interest rate swap -- 35
Long-term debt incurred for purchase of property and equipment 94 517
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 nine months ended September 30, 2006)
Common
Common Stock Additional Stock Total
(Amounts in thousands, -------------------- Paid-In Loan for Accumulated Held In Stockholders'
except for share amounts) Shares Amount Capital Equity Deficit Treasury Equity
----------------------------- ----------- ------ ---------- -------- ----------- --------- -------------
Balance at December 31, 2005 45,813,916 $ 46 $ 82,180 $ -- $ (33,211) $ (1,862) $ 47,153
Net income -- -- -- -- 2,834 2,834
Issuance of Common Stock for
cash and services 118,911 -- 195 -- -- 195
Issuance of Common Stock
upon exercise of Warrants
and options 7,074,790 7 12,061 -- -- 12,068
Share based compensation 173 173
Issue Stock Subscription
Receivable (105) (105)
Repayment of Stock
Subscription Receivable 8 8
Retirement of Treasury Stock (988,000) (1) (1,861) 1,862 --
----------- ------ ---------- -------- ----------- --------- -------------
Balance at September 30, 2006 52,019,617 $ 52 $ 92,748 $ (97) $ (30,377) $ -- $ 62,326
=========== ====== ========== ======== =========== ========= =============
The accompanying notes are an integral part of these consolidated
financial statements.
6
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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.
In September 2006, the FASB issued SFAS 157, "Fair Value Measurements." SFAS 157
simplifies and codifies guidance on fair value measurements under generally
accepted accounting principles. This standard defines fair value, establishes a
framework for measuring fair value and prescribes expanded disclosures about
fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years, with early adoption permitted. We are currently evaluating
the effect, if any, the adoption of SFAS 157 will have on our financial
condition, results of operations and cash flows.
In September 2006, the FASB issued SFAS 158, "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plan - an amendment of FASB Statement
No. 87, 88, 106 and 132(R)." SFAS 158 requires an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan as an
asset or liability in its statement of financial position and recognize changes
in the funded status in the year in which the changes occur. SFAS 158 is
effective for fiscal years ending after December 15, 2006. We are currently
evaluating the effect, if any, the adoption of SFAS 158 will have on our
financial condition, results of operations and cash flows.
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.
7
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 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 September 30, 2006, we had 2,764,750 employee stock options outstanding,
which included 1,796,750 that were outstanding and fully vested at December 31,
2005, 868,000 employee stock options approved and granted on March 2, 2006, and
100,000 employee stock options approved and granted on May 15, 2006. The
weighted average exercise price of the 1,796,750 outstanding and fully vested
employee stock options is $1.96 with a weighted contractual life of 4.52 years.
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 July 30, 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 also had 524,000 director stock options outstanding, of which
72,000 became fully vested in January 2006, and 90,000 newly granted shares, ten
year options with an exercise price of $2.15, with vesting period of six months,
resulting from the re-election of our Board of Directors on July 27, 2006. The
weighted average exercise price of the 434,000 exercisable director stock
options outstanding as of September 30, 2006 is $1.92 with a weighted average
contractual life of 5.8 years.
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. We recorded $28,000 additional stock-based compensation
expense in the third quarter as result of the 90,000 director stock option
grant. For the employee 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
nine month period ended September 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 nine months ended September 30,
2006, we recorded approximately $60,000 and $134,000 in employee compensation
expense from the 2006 grants, respectively, which included with the director
compensation expense, impacted our results of operations by $88,000 and
$173,000, for stock-based compensation expense for the three and nine month
periods ended September 30, 2006, respectively. In total, we had $845,000 of
total unrecognized compensation cost related to unvested options as of
September 30, 2006.
8
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
employee options were granted in the corresponding periods of 2005. We
calculated a fair value of $1.742 for each July 27, 2006 director option grant
on the date of the grant with the following assumptions: no dividend yield; an
expected life of ten years; an expected volatility of 73.31%; and a risk free
interest rate of 4.98%.
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 employee grants. We utilized contractual term for the
expected term of the director option grants in July 2006. 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 nine month periods ended September 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.
Under the accounting provisions of SFAS 123, our net income and net income per
share, for the three and nine months ended September 30, 2005 would have been
decreased to the pro forma amounts indicated below (in thousands except for per
share amounts):
Three Months Ended Nine Months Ended
(Unaudited) September 30, 2005 September 30, 2005
------------------------------------------------------------------ -------------------- --------------------
Net income from continuing operations applicable to Common
Stock, as reported $ 1,225 $ 2,720
Deduct: Total Stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects (523) (688)
-------------------- --------------------
Pro forma net income from continuing operations applicable to
Common Stock $ 702 $ 2,032
==================== ====================
Income per share
Basic and diluted - as reported $ .03 $ .06
==================== ====================
Basic and diluted - pro-forma $ .02 $ .05
==================== ====================
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 nine months ended Sept 30,
2006 and 2005:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
(Amounts in thousands except per share amounts) 2006 2005 2006 2005
--------------------------------------------------------------- ---------- ---------- ---------- ----------
Earnings per share from continuing operations
---------------------------------------------
Income from continuing operations $ 461 $ 1,255 $ 2,369 $ 2,811
Preferred stock dividends -- (30) -- (91)
---------- ---------- ---------- ----------
Income from continuing operations applicable to Common Stock 461 1,225 2,369 2,720
Effect of dilutive securities:
Preferred Stock dividends -- 30 -- 91
---------- ---------- ---------- ----------
Income- diluted $ 461 $ 1,255 $ 2,369 $ 2,811
========== ========== ========== ==========
Basic income per share $ .01 $ .03 $ .05 $ .07
========== ========== ========== ==========
Diluted income per share $ .01 $ .03 $ .05 $ .07
========== ========== ========== ==========
Earnings per share from discontinued operations
-----------------------------------------------
Income (loss) - basic and diluted $ (131) $ 751 $ 465 $ 322
========== ========== ========== ==========
Basic income (loss) per share $ -- $ .02 $ .01 $ .01
========== ========== ========== ==========
Diluted income (loss) per share $ -- $ .02 $ .01 $ .01
========== ========== ========== ==========
Weighted average shares outstanding - basic 50,541 42,055 46,851 41,881
Potential shares exercisable under stock option plans 479 404 253 288
Potential shares upon exercise of Warrants 410 1,693 310 969
Potential shares upon conversion of Preferred Stock -- -- -- --
---------- ---------- ---------- ----------
Weighted average shares outstanding - diluted 51,430 44,152 47,414 43,138
========== ========== ========== ==========
Potential shares excluded from above weighted average
share calculations due to their anti-dilutive effect include:
Upon exercise of options 385 1,082 1,190 1,317
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 September 30, 2006, and December 31,
2005:
September 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 plus1/2%
(8.75% at September 30, 2006), balance due in May 2008. $ -- $ 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 September 30,
2006). 5,750 6,500
Promissory Note dated June 25, 2001, payable in semiannual installments
on September 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 September 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 September 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%. 1,167 1,641
------------- -------------
9,204 13,375
Less current portion of long-term debt 2,445 2,678
------------- -------------
$ 6,759 $ 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
September 30, 2006, the excess availability under our Revolving Credit was
$12,154,000 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.
11
PROMISSORY NOTE
In conjunction with our acquisition of M&EC, M&EC issued a promissory note for a
principal amount of $3.7 million to Performance Development Corporation ("PDC"),
dated June 25, 2001, for monies advanced to M&EC for certain services performed
by PDC. The promissory note is payable over eight years on a semiannual basis on
June 30 and December 31. The principal repayments for 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 September 30, 2006) and payable in one
lump sum at the end of the loan period. On September 30, 2006, the outstanding
balance was $3,512,000 including accrued interest of approximately $1,678,000.
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 September 30, 2006, the rate was 10%. On
September 30, 2006, the outstanding balance was $854,000 including accrued
interest of approximately $401,000. 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 Forms 10-Qs for the quarterly periods ended March 31, 2006 and
June 30, 2006.
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 $29,211,000 at
September 30, 2006, and has available capacity to allow for annual inflation and
other performance and surety bond requirements.
12
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 September 30, 2006, we have recorded $4,471,000 in our sinking
fund on the balance sheet, which includes interest earned of $264,000 on the
sinking fund through September 30, 2006. Interest income for the three and nine
months ended September 30, 2006, was $52,000 and $141,000, 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 $6,000 for the three months ended September 30, 2006,
as compared to an operating loss of $109,000 and revenues of $214,000 during the
three months ended September 30, 2005. PFP recorded a loss of $352,000 for the
nine months ended September 30, 2006, and revenue of $607,000 and an operating
loss of $249,000 for the nine months ended September 30, 2005. The loss in 2006,
was partially due to early termination costs of $187,000 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 September 30, 2006 and December 31, 2005. The assets are recorded
at their recoverable values as defined by SFAS 144, "Accounting for the
Impairment on Disposal of Long-lived Assets", and consist of equipment of
$106,000. PFP has no liabilities on the books as of September 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 loss of $125,000 for the three months ended September 30, 2006,
and a income of $860,000 for the three months ended September 30, 2005. PFMI
recognized a income of $817,000 for the nine months ended September 30, 2006 and
a income of $571,000 for the same period in 2005. Our income for the nine 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.
13
Assets and liabilities related to the discontinued operation have been
reclassified to separate categories in the Consolidated Balance Sheets as of
September 30, 2006 and December 31, 2005. As of September 30, 2006, assets are
recorded at their recoverable values, and consist of property and equipment of
$600,000. Liabilities as of September 30, 2006, consist of accounts payable and
current accrued expenses of $92,000, environmental accruals of $656,000, and a
pension payable of $1,434,000. 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 $146,418 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
$627,000 for closure costs since September 30, 2004, of which approximately
$72,000 has been spent during the first nine months of 2006, and $439,000 was
spent in 2005. We have $656,000 accrued for the closure, as of September 30,
2006, and we anticipate spending $43,000 in the fourth quarter of 2006 with the
remainder over the next two to five years.
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.
14
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 nine months ended September 30, 2006 and
2005.
SEGMENT REPORTING FOR THE QUARTER ENDED SEPTEMBER 30, 2006
Segments Consolidated
Industrial Nuclear Engineering Total Corporate (2) Total
------------ ------------ ------------ ------------ ------------- ------------
Revenue from external customers $ 9,178 $ 11,023(3) $ 1,065 $ 21,266 $ -- $ 21,266
Inter-company revenues 579 383 172 1,134 -- 1,134
Gross profit 1,960 4,127 241 6,328 -- 6,328
Interest income -- -- -- -- 100 100
Interest expense 55 127 - 182 149 331
Interest expense-financing fees -- -- -- -- 48 48
Depreciation and amortization 422 784 10 1,216 14 1,230
Segment profit (loss) (355) 2,248 95 1,988 (1,553) 435
Segment assets(1) 22,807 67,653 2,407 92,867 11,419(4) 104,286
Expenditures for segment assets 221 1,994 8 2,223 25 2,248
Total long-term debt 922 2,515 17 3,454 5,750(5) 9,204
SEGMENT REPORTING FOR THE QUARTER ENDED SEPTEMBER 30, 2005
Segments Consolidated
Industrial Nuclear Engineering Total Corporate (2) Total
------------ ------------ ------------ ------------ ------------- ------------
Revenue from external customers $ 10,884 $ 11,258(3) $ 684 $ 22,826 $ -- $ 22,826
Intercompany revenues 21 573 130 724 -- 724
Gross profit 2,373 4,162 185 6,720 -- 6,720
Interest income 3 1 -- 4 -- 4
Interest expense 19 202 5 226 156 382
Interest expense-financing fees -- -- -- -- 48 48
Depreciation and amortization 456 701 10 1,167 11 1,178
Segment profit (loss) 470 2,369 61 2,900 (1,321) 1,579
Segment assets(1) 24,791 63,671 2,136 90,598 9,178(4) 99,776
Expenditures for segment assets 289 375 5 669 3 672
Total long-term debt 1,319 3,800 25 5,144 11,531(5) 16,675
SEGMENT REPORTING FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
Segments Consolidated
Industrial Nuclear Engineering Total Corporate (2) Total
------------ ------------ ------------ ------------ ------------- ------------
Revenue from external customers $ 26,874 $ 36,288(3) $ 2,737 $ 65,899 $ -- $ 65,899
Intercompany revenues 1,257 1,848 413 3,518 -- 3,518
Gross profit 5,956 14,662 692 21,310 -- 21,310
Interest income 6 -- -- 6 189 195
Interest expense 79 362 1 442 632 1,074
Interest expense-financing fees 1 -- -- 1 144 145
Depreciation and amortization 1,326 2,254 30 3,610 38 3,648
Segment profit (loss) (1,562) 8,451 246 7,135 (4,766) 2,369
Segment assets(1) 22,807 67,653 2,407 92,867 11,419(4) 104,286
Expenditures for segment assets 760 3,212 59 4,031 50 4,081
Total long-term debt 922 2,515 17 3,454 5,750(5) 9,204
SEGMENT REPORTING FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
Segments Consolidated
Industrial Nuclear Engineering Total Corporate (2) Total
------------ ------------ ------------ ------------ ------------- ------------
Revenue from external customers $ 31,293 $ 35,962(3) $ 2,145 $ 69,400 $ -- $ 69,400
Intercompany revenues 1,103 2,012 353 3,468 -- 3,468
Gross profit 5,177 13,950 482 19,609 -- 19,609
Interest income 5 1 -- 6 -- 6
Interest expense 383 549 11 943 233 1,176
Interest expense-financing fees -- 2 -- 2 267 269
Depreciation and amortization 1,389 2,090 30 3,509 32 3,541
Segment profit (loss) (638) 8,268 134 7,764 (4,347) 3,417
Segment assets(1) 24,791 63,671 2,136 90,598 9,178(4) 99,776
Expenditures for segment assets 949 1249 15 2,213 27 2,240
Total long-term debt 1.319 3,800 25 5,144 11,531(5) 16,675
16
(1) Segment assets have been adjusted for intercompany accounts to reflect
actual assets for each segment, and exclude assets of discontinued
operations of $706,000 for the quarter ending September 30, 2006.
(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 nine months ended September 30,
2006, which total $2,672,000 or 12.6% and $7,344,124 or 11.1% 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 $1,629,000 or 7.7% and $4,892,000 or 7.5% for
the three and nine months ended September 30, 2006, respectively. Bechtel
Jacobs revenues for the same periods in 2005 were $4,950,000 or 21.7% and
$11,358,000 or 16.4%.
(4) Amount includes assets from Perma-Fix of Michigan, Inc., and Perma-Fix of
Pittsburgh, Inc., that will be transferred to facilities in "continuing"
operations.
(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
-------------
During the nine months ended September 30, 2006, we issued 6,673,290 shares of
our Common Stock upon exercise of certain warrants, at exercise prices from
$1.44 to $1.75 per share, of which 73,797 were issued on a cashless basis.
Additionally, we issued 401,500 shares of our Common Stock upon exercises of
employee stock options, at exercise prices from $1.00 to $2.19 per share. Total
proceeds received during the nine months for the warrant and option exercises
were $11,971,000.
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.
8. SUBSEQUENT EVENT
----------------
The Company signed a letter of intent to acquire Nuvotec USA, Inc. and its
wholly owned subsidiary, Pacific EcoSolutions, Inc. (PEcoS), a mixed waste
management company, based in Richland, Washington. The acquisition is subject
to, among other things, execution of definitive agreements, assessment of
liabilities, and registration of the shares of the Company's common stock to be
issued in connection with the transaction. Under the letter of intent, as
consideration for the purchase, the Company would issue up to $7 million of its
shares of common stock; assume certain debts and obligations of Nuvotec and
PEcosS; and, based on the amount of debts and obligations assumed, pay a certain
amount in cash. If this transaction is completed, at the time of closing,
Nuvotec's principal asset will be PEcoS. PEcoS' facility is permitted to treat,
store and process hazardous, low level radioactive, and mixed waste, and is
located adjacent to the Department of Energy's (DOE) Hanford site.
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 no expectation to close any facilities, other than the Michigan and
Pittsburgh facilities;
o expect backlog levels to continue to fluctuate within acceptable levels
throughout 2006;
o continue to position the Nuclear segment well, from a processing revenue
perspective;
o accrued $656,000 of closure cost for our Michigan facility as of
September 30, 2006, and we anticipate spending $43,000 in the fourth
quarter of 2006 with the remainder over the next two to five years;
o continue to invest our working capital back into our facilities to fund
capital additions within both the Nuclear and industrial segments;
o to remain profitable in the foreseeable future;
o anticipate that substantial additional capital expenditures will be
required in order to bring PFD or PFTS facility in compliance with the
requirements of a Title V air permit;
o expect to fund the expenses to remediate the sites from funds generated
internally;
o entered into a letter of intent to acquire Nuvotec USA, Inc. and its
wholly owned subsidiary, Pacific EcoSoultions, Inc. ("PEco'S").
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;
18
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;
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;
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;
o risk factors contained in our 2005 Annual Report on Form 10-K and Form
10-Qs for quarters ended March 31, 2006 and June 30, 2006; and
o the acquisition is subject to, among other things, execution of
definitive agreements, completion of due diligence and registration of
the shares of the company's common stock to be issued in connection with
the transaction
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 recent
acquisitions, added 24-hour emergency response, vacuum services and marine and
industrial maintenance services. The segment operates and maintains facilities
and businesses in the waste by-product brokerage, on-site treatment and
stabilization, and off-site blending, treatment and disposal industries. The
Nuclear Waste Management Services segment ("Nuclear segment") provides
treatment, storage, processing and disposal services of mixed waste (waste
containing both hazardous and low-level radioactive materials) and low-level
radioactive wastes, including research, development and on-site and off-site
waste remediation. The presence of nuclear and low-level radioactive
constituents within the waste streams processed by this segment create different
and unique operational, processing and permitting/licensing requirements from
those contained within the Industrial segment. Our Consulting Engineering
Services segment ("Engineering segment") provides a wide variety of
environmental related consulting and engineering services to both industry and
government. These services include oversight management of environmental
restoration projects, air and soil sampling, compliance reporting, surface and
subsurface water treatment design for removal of pollutants, and various
compliance and training activities.
19
The third quarter of 2006 reflected a decrease in revenue of $1,560,000 or 6.8%
from the same period of 2005. The Industrial segment experienced a decrease of
15.7% due to the loss of the home improvement chain contract in November 2005,
and the elimination of non-profitable income streams. The Nuclear segment also
experienced a 2.1% decrease due to decreased waste receipts. These reductions
were offset by an increase in the Engineering segment of 55.7% from a large
non-recurring event project. The third quarter 2006 gross profit decreased by
$392,000 or 5.8% from the same period of 2005. Gross profit as a percentage of
revenue increased slightly from 29.4% to 29.8%. The Industrial Segment gross
profit fell 17.4% reflecting the lower revenue. Third quarter, SG&A was
significantly higher than third quarter of 2005 due to costs related to the
relocation of the corporate office, costs related to expensing employee and
director stock options, and legal fees associated with the Dayton air emission
issues. 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 contract is
scheduled to continue through September 2007. We recognized approximately
$1,483,000 revenue from this contract during the quarter ended September 2006.
Cash flow was significantly impacted with the addition of $10,505,000 from the
issuance of 6,149,329 shares of common stock related to the exercise of warrants
and options in the third quarter of 2006. This cash flow had positive impact on
both interest income and interest expense. Overall net income available to
common shareholders was $330,000 for the three months ended September 30, 2006,
compared to $1,976,000 from the same period of 2005 or a decrease of 83.2%. Net
income available to common shareholders for the three months ended September 30,
2005, included income from discontinued operations of $860,000 resulting from
the receipt of insurance proceeds for business interruption at 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 nine months ended September 30, 2006 and 2005:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------- -----------------------------------------
Consolidated (amounts in thousands) 2006 % 2005 % 2006 % 2005 %
--------------------------------------- -------- -------- -------- -------- -------- -------- -------- --------
Net revenues $ 21,266 100.0 $ 22,826 100.0 $ 65,899 100.0 $ 69,400 100.0
Cost of goods sold 14,938 70.2 16,106 70.6 44,589 67.7 49,791 71.8
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 6,328 29.7 6,720 29.4 21,310 32.3 19,609 28.3
Selling, general and administrative 5,621 26.4 4,643 20.3 17,654 26.8 14,984 21.6
Loss (gain) on disposal of property &
equipment (4) -- 4 -- (3) -- (333) (.5)
-------- -------- -------- -------- -------- -------- -------- --------
Income from operations $ 711 3.3 $ 2,073 9.1 $ 3,659 5.6 $ 4,958 7.1
======== ======== ======== ======== ======== ======== ======== ========
Interest expense $ (331) (1.6) $ (382) (1.7) $(1074) (1.6) $ (1,176) (1.7)
Interest expense-financing fees (48) (.2) (48) (.2) (145) (.2) (269) (.4)
Other income (expense) 129 (.6) (388) 1.7 (71) (.3) (702) (.1)
Income from continuing operations 461 2.2 1,255 5.5 2,369 3.6 2,811 4.9
Preferred Stock dividends -- -- (30) (.1) -- -- (91) (.1)
20
SUMMARY - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
Net Revenue Consolidated revenues decreased for the three months ended September
30, 2006, compared to the three months ended September 30, 2005, as follows: %
% %
(In thousands) 2006 Revenue 2005 Revenue Change % Change
------------------------- -------- -------- -------- -------- -------- --------
Nuclear
-------
Government waste $ 3,973 18.6 $ 2,294 10.1 $ 1,679 73.1
Hazardous/Non-hazardous 829 3.9 830 3.6 (1) --
Other nuclear waste 1,920 9.0 3,184 13.9 (1,264) (39.7)
LATA/Parallax 2,672 12.6 -- -- 2,672 --
Bechtel Jacobs 1,629 7.7 4,950 21.7 (3,321) (67.1)
-------- -------- -------- -------- --------
Total 11,023 51.8 11,258 49.3 (235) (2.1)
Industrial Revenues
-------------------
Commercial waste 6,714 31.6 8,659 37.9 (1,945) (22.5)
Government services 1,262 5.9 716 3.2 546 76.3
Oil sales 1,202 5.7 1,509 6.6 (307) (20.3)
-------- -------- -------- -------- --------
Total 9,178 43.2 10,884 47.7 (1,706) (15.7)
Engineering 1,065 5.0 684 3.0 381 55.7
----------- -------- -------- -------- -------- --------
Total $ 21,266 100.0 $ 22,826 100.0 $ (1,560) (6.8)
======== ======== ======== ======== ========
The Nuclear segment experienced a slight decline in revenue for the three months
ended September 30, 2006 over the same period in 2005. Waste receipts were down
from last year reflecting our continued efforts to streamline waste receipts
throughout the year. Offsetting this reduction in receipts revenue was increased
production revenue for material in inventory. We have earned significant
revenues from numerous work releases under our subcontracts relating to
remediation of DOE projects during the quarter. Revenues during the third
quarter of 2006 under subcontracts relating to federal /DOE projects contributed
approximately $8,274,000 revenues for the quarter. 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 September 30, 2006, was $10,048,000
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
the decision to eliminate unprofitable revenue and replace it with higher margin
income. Used oil sales decreased by $307,000 from the prior years due to
reductions in the cost of natural gas, which is a common alternative for many of
our larger customers. Revenues from the Engineering segment increased during the
third quarter of 2006, as a result of an event project that was started during
the second quarter of 2006.
21
Consolidated revenues decreased for the nine months ended September 30, 2006,
compared to the nine months ended September 30, 2005, as follows:
% %
(In thousands) 2006 Revenue 2005 Revenue Change % Change
------------------------- -------- -------- -------- -------- -------- --------
Nuclear
-------
Government waste $ 12,267 18.6 $ 10,746 15.5 $ 1,521 14.1
Hazardous/Non-hazardous 2,538 3.9 3,614 5.2 (1,076) (29.8)
Other nuclear waste 9,247 14 10,244 14.7 (997) (9.7)
LATA/Parallax 7,344 11.1 -- -- 7,344 --
Bechtel Jacobs 4,892 7.5 11,358 16.4 (6,466) (56.9)
-------- -------- -------- -------- --------
Total 36,288 55.1 35,962 51.8 326 .9
Industrial Revenues
-------------------
Commercial waste 19,815 30.0 23,967 34.5 (4,152) (17.3)
Government services 3,429 5.2 3,513 5.1 (84) (2.4)
Oil sales 3,630 5.5 3,813 5.5 (183) (4.8)
-------- -------- -------- -------- --------
Total 26,874 40.7 31,293 45.1 (4,419) (14.1)
Engineering 2,737 4.2 2,145 3.1 592 27
----------- -------- -------- -------- -------- --------
Total $ 65,899 100.0 $ 69,400 100.0 $ (3,501) (5.0)
======== ======== ======== ======== ========
The Nuclear segment realized modest revenue growth for the nine months ended
September 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.
Revenues under subcontracts relating to remediation of waste at various DOE
facilities contributed approximately $24,502,000 of the revenues for the nine
months. 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 nine months primarily due to 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 re-bid and subsequent lower revenues
related to another government contract. Used oil sales for the Industrial
segment were down $183,000 due to the impact of lower revenues in the third
quarter as previously discussed. The Engineering segment experienced an increase
in revenue during the first nine months of 2006, as a result of an event project
that was started during the second quarter of 2006.
Cost of Goods Sold
Cost of goods sold decreased for the quarter ended September 30, 2006, compared
to the quarter ended September 30, 2005, as follows:
% %
(In thousands) 2006 Revenue 2005 Revenue Change
--------------------- -------- -------- -------- -------- --------
Nuclear $ 6,896 62.6 $ 7,096 63.0 $ (200)
Industrial 7,218 78.6 8,511 78.2 (1,293)
Engineering 824 77.4 499 73.0 325
-------- -------- -------- -------- --------
Total $ 14,938 70.2 $ 16,106 70.6 $ (1,168)
======== ======== ======== ======== ========
22
The Nuclear segment showed a slight decrease in cost of goods sold as a result
of the reduced revenues during the quarter. 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 Engineering segment saw an increase in their cost of goods sold as a result
of pass through cost related to the increased event revenues for the quarter.
Included within cost of goods sold is depreciation and amortization expense of
$1,148,000 and $1,095,000 for the three months ended September 30, 2006, and
2005, respectively.
Cost of goods sold decreased for the nine months ended September 30, 2006,
compared to the nine months ended September 30, 2005, as follows:
% %
(In thousands) 2006 Revenue 2005 Revenue Change
--------------------- -------- -------- -------- -------- --------
Nuclear $ 21,626 59.6 $ 22,013 61.2 $ (387)
Industrial 20,918 77.8 26,116 83.5 (5,198)
Engineering 2,045 74.7 1,662 77.5 383
-------- -------- -------- -------- --------
Total $ 44,589 67.7 $ 49,791 71.7 $ (5,202)
======== ======== ======== ======== ========
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 consistent with the modest decrease in revenue.
The segment continues to pursue 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 nine months to streamline
operations to operate more regionally, thus cutting transportation costs and
other related expenses. The Engineering segment saw an increase in their cost of
goods sold as a result of their improved revenues for the nine months. Included
within cost of goods sold is depreciation and amortization expense of $3,397,000
and $3,281,000 for the nine months ended September 30, 2006, and 2005,
respectively.
Gross Profit
Gross profit for the quarter ended September 30, 2006, increased over 2005, as
follows:
% %
(In thousands) 2006 Revenue 2005 Revenue Change
--------------------- -------- -------- -------- -------- --------
Nuclear $ 4,127 37.4 $ 4,162 37.0 $ (35)
Industrial 1,960 21.4 2,373 21.8 (413)
Engineering 241 22.6 185 27.1 56
-------- -------- -------- -------- --------
Total $ 6,328 29.8 $ 6,720 29.4 $ (392)
======== ======== ======== ======== ========
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. The mix of the waste
streams being handled, as well as additional costs associated with the start up
of our project with LATA/Parallax also impacted the gross profit as a percent of
revenue. The Industrial segment saw a decrease in the gross profit primarily as
a result of the reduced revenue in the quarter. Additionally, the segment
continues to focus on more profitable waste streams, cutting costs and
streamlining the processes. The Engineering segment gross profit increased
slightly, while gross profit percentage fell, based on the event project, which
produced higher than normal pass through costs.
23
Gross profit for the nine months ended September 30, 2006, increased over 2005,
as follows:
% %
(In thousands) 2006 Revenue 2005 Revenue Change
--------------------- -------- -------- -------- -------- --------
Nuclear $ 14,662 40.4 $ 13,950 38.8 $ 712
Industrial 5,956 22.2 5,177 16.5 779
Engineering 692 25.3 482 22.5 210
-------- -------- -------- -------- --------
Total $ 21,310 32.3 $ 19,609 28.3 $ 1,701
======== ======== ======== ======== ========
The resulting increase in gross profit in the Nuclear segment is a result of the
increased revenue, as well as the mix of waste to higher margin material as
discussed above. 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, and from their increased
revenues.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased for the three
months ended September 30, 2006, as compared to the corresponding period for
2005, as follows:
% %
(In thousands) 2006 Revenue 2005 Revenue Change
--------------------- -------- -------- -------- -------- --------
Administrative $ 1,458 -- $ 1,117 -- $ 341
Nuclear 1,745 15.8 1,572 14.0 173
Industrial 2,273 24.8 1,832 16.8 441
Engineering 145 13.6 122 17.8 23
-------- -------- -------- -------- --------
Total $ 5,621 26.3 $ 4,643 20.3 $ 978
======== ======== ======== ======== ========
Our SG&A expenses in the administrative area increased as compared to the same
three months of 2005. Payroll and other expenses related to the relocation of
the Corporate office as well as expenses related to stock option expense
required under FAS 123R increased administrative expense. The Nuclear segment's
SG&A expenses increased as the segment has expanded its management staff to more
efficiently bid on new contracts service, 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 increased payroll and an adjustment to bad debt
reserve of $12,000. Included in SG&A expenses is depreciation and amortization
expense of $82,000 and $83,000 for the three months ended September 30, 2006,
and 2005, respectively.
24
SG&A expenses increased for the nine months ended September 30, 2006, as
compared to the corresponding period for 2005, as follows:
% %
(In thousands) 2006 Revenue 2005 Revenue Change
--------------------- -------- -------- -------- -------- --------
Administrative $ 4,143 -- $ 3,846 -- $ 297
Nuclear 5,693 15.7 5,063 14.1 630
Industrial 7,373 27.4 5,734 18.3 1,639
Engineering 445 16.2 341 15.9 104
-------- -------- -------- -------- --------
Total $ 17,654 26.8 $ 14,984 21.6 $ 2,670
======== ======== ======== ======== ========
Our SG&A expenses increased both in the administrative area and throughout the
segments. The increase in the administrative area were primarily impacted by the
relocation of the Corporate office in the third quarter, and the year to date
impact of accounting for stock options as required under FAS 123R. 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 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, additional provisions made to certain environmental reserves in
connection with environmental compliance of the facilities, and payroll
increases in sales. The Engineering segment increase was the result of increased
payroll and commission expenses related to increases in revenue. Included in
SG&A expenses is depreciation and amortization expense of $251,000 and $260,000
for the nine months ended September 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 decreased for the quarter ended September 30, 2006, and
decreased for the nine months ended September 30, 2006, as compared to the
corresponding periods of 2005.
Three Months Nine Months
--------------------------- ---------------------------
(In thousands) 2006 2005 Change 2006 2005 Change
-------------- ------- ------- ------- ------- ------- -------
PNC interest $ 146 $ 199 $ (53) $ 596 $ 553 $ 43
Other 185 183 2 478 623 (145)
------- ------- ------- ------- ------- -------
Total $ 331 $ 382 $ (51) $ 1,074 $ 1,176 $ (102)
======= ======= ======= ======= ======= =======
The decrease for the quarter ended September 30, 2006 is principally a result
the overall improvement in our debt position accelerated by the exercise of
warrants and options for the purchase of 6,149,329 shares of our Common Stock
during the quarter, which added approximately $ 10,505,000 of cash. This cash
inflow allowed us to eliminate the use of the revolver debt at the end of July
2006.
The decrease for the nine months ended September 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.
25
Interest Expense - Financing Fees
Interest expense-financing fees remained consistent for the quarter ended
September 30, 2006, as compared to the corresponding period of 2005, and
decreased by $124,000 for the nine months ended September 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 September 30,
2006, the unamortized balance of prepaid financing fees is $315,000, which is
comprised of unamortized financing fees from the original PNC debt and Amendment
No. 4 and Amendment No. 5. These prepaid financing fees will be amortized
through May 2008 at a rate of $16,000 per month.
Preferred Stock Dividends
Preferred Stock dividends were $30,000 and $91,000 for the three and nine months
ended September 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 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 $6,000 for the three months ended September 30, 2006,
as compared to an operating loss of $109,000 and revenues of $214,000 during the
three months ended September 30, 2005. PFP recorded a loss of $352,000 for the
nine months ended September 30, 2006, and revenue of $607,000 and an operating
loss of $249,000 for the nine months ended September 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 September 30, 2006 and December 31, 2005. The assets are recorded
at their net realizable value, and consist of equipment of $106,000. PFP has no
liabilities on the books as of September 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 loss of $125,000 for the three months ended September 30, 2006,
and a gain of $860,000 for the three months ended September 30, 2005. PFMI
recognized a gain of $817,000 for the nine months ended September 30, 2006 and a
gain of $571,000 for the same period in 2005. Our gain for the nine 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. Our gain for the nine months of 2005
were the result of the settlement of 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.
26
Assets and liabilities related to the discontinued operation have been
reclassified to separate categories in the Consolidated Balance Sheets as of
September 30, 2006 and December 31, 2005. As of September 30, 2006, assets are
recorded at their estimated net realizable values, and consist of property and
equipment of $600,000. Liabilities as of September 30, 2006, consist of accounts
payable and current accrued expenses of $92,000, environmental accruals of
$656,000, and a pension payable of $1,434,000. 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 $125,000 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
$627,000 for closure costs since September 30, 2004, of which approximately
$72,000 has been spent during the first half of 2006, and $439,000 was spent in
2005. We have $656,000 accrued for the closure, as of September 30, 2006, and we
anticipate spending $43,000 in the fourth quarter of 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 September 30, 2006, we had cash of $2,549,000. The following table reflects
the cash flow activities during the first nine months of 2006.
(In thousands) 2006
------------------------------------------------ ------------
Cash used by operations $ (746)
Cash used in investing activities (4,548)
Cash provided by financing activities 7,749
------------
Increase in cash $ 2,455
=============
27
Due to the cash proceeds from the issuance of common stock in July 2006, we are
not currently in a net borrowing position. We attempt to move all excess funds
into a Money Market Sweep account. In order to maximize the interest earned.
When we are in a net borrowing position, we 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
Money Market account or the revolving credit facility if applicable. The cash
balance at September 30, 2006, primarily represents payments received during
July 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
$13,591,000, a decrease of $3,018,000 over the December 31, 2005, balance of
$16,609,000. The Nuclear segment experienced a decrease of $3,290,000 as a
result of increased collection efforts and improved turnaround of certain
government and commercial accounts receivable. The segment's invoicing was also
affected by timing issues related to the final sampling and 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 and Industrial segment showed minimal change
from December 31, 2005 balance.
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 September 30, 2006, unbilled receivables totaled
$17,226,000, an increase of $5,278,000 from the December 31, 2005, balance of
$11,948,000. This increase is principally due to a backlog for analytical
testing that is required after we have processed the waste but prior to
disposal, and the complexity of the current contracts, which requires greater
levels of documentation and additional testing for final invoicing.
As of September 30, 2006, total consolidated accounts payable was $4,764,000, a
decrease of $1,289,000 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 September 30, 2006, totaled $11,189,000, a decrease of
$477,000 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 decrease is
primarily due to the reduction in insurance payable reflecting the September
payment of our insurance premium. In 2005, we used external financing to pay the
premium. This decrease is partially offset by increases to disposal accrual from
Nuclear facilities related to the timing of our shipments of processed waste.
The working capital position at September 30, 2006, was $15,097,000, as compared
to a working capital position of $5,916,000 at December 31, 2005. The increase
in this position of $9,181,000 is principally a result of the cash inflow
provided from the issuance of 7,074,790 shares of common stock from the exercise
of warrants and options primarily in June and July 2006. Our working capital
position continues to experience the negative impact of certain liabilities
associated with discontinued operations.
28
Investing Activities
Our purchases of new capital equipment for the nine-month period ended September
30, 2006, totaled approximately $4,084,000 of which, $94,000 was financed,
resulting in $3,990,000 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 primarily from the proceeds from
the exercise of warrants and stock options as previously discussed. 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 nine months of 2006 include
approximately $1,343,000 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 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.
We have obtained 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 $29,211,000 at September 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 September 30, 2006, we
have recorded $4,471,000 in our sinking fund on the balance sheet, which
includes interest earned of $264,000 on the sinking fund as of September 30,
2006. Interest income for the three and nine months ended September 30, 2006,
was $52,000 and $141,000, 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. As of the date of this report, we have not
repurchased any of our Common Stock under the program as we continue to evaluate
this repurchase program within 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
September 30, 2006, the excess availability under our Revolving Credit was
$12,154,000 based on our eligible receivables.
29
Pursuant to the Agreement, as amended, the Term Loan bears interest at a
floating rate equal to the prime rate plus 1%, and the Revolving Credit at a
floating rate equal to the prime rate plus 1/2%. The loans are subject to a
prepayment fee of 1% until March 25, 2006, and 1/2% until March 25, 2007.
In conjunction with our acquisition of M&EC, M&EC issued a promissory note for a
principal amount of $3.7 million to Performance Development Corporation ("PDC"),
dated June 25, 2001, for monies advanced to M&EC for certain services performed
by PDC. The promissory note is payable over eight years on a semiannual basis on
June 30 and December 31. The principal repayments for 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 September 30, 2006) and payable in one
lump sum at the end of the loan period. On September 30, 2006, the outstanding
balance was $3,512,000 including accrued interest of approximately $1,678,000.
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 September 30, 2006, the rate was 10%. On
September 30, 2006, the outstanding balance was $854,000 including accrued
interest of approximately $401,000. 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 nine months ended September 30, 2006, we issued 6,673,290 shares of
our Common Stock upon exercise of certain warrants, at exercise prices from
$1.44 to $1.75 per share, of which 73,797 were issued on a cashless basis.
Additionally, we issued 401,500 shares of our Common Stock upon exercises of
employee stock options, at exercise prices from $1.00 to $2.19 per share. Total
proceeds received during the nine months for the warrant and option exercises
were $11,971,000.
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 remain profitable in the
foreseeable future, such could have a material adverse effect on our liquidity
position.
30
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at September 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 $ 8,839 $ 1,595 $ 7,190 $ 54 $ --
Interest on long-term debt (1) 2,079 -- 2,079 -- --
Interest on variable rate debt (2) 781 131 650 -- --
Operating leases 3,587 595 2,268 632 92
Finite risk policy (3) 6,022 -- 3,011 2,008 1,003
Pension withdrawal liability (4) 1,434 -- 476 403 555
Environmental contingencies (5) 3,476 169 1,964 601 742
Purchase obligations (6) -- -- -- -- --
-------- -------- -------- -------- --------
Total contractual obligations $ 26,218 $ 2,490 $ 17,638 $ 3,698 $ 2,392
======== ======== ======== ======== ========
(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 full
repayment of our Term Loan by May 2008. Our Revolver balance was zero as
of September 30, 2006.
(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 an 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
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.
32
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. In the Industrial
Segment, our second and third fiscal quarters historically experienced increased
revenue and operating profits. In 2006, the Nuclear Segment has worked
diligently with the U.S Department of Energy ("DOE") to schedule shipments on a
more consistent basis throughout the year. 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 nine months ended September
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 $9,536,000
or 44.8%, and $27,932,000 or 42.4% 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.
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.
33
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.
ACQUISITION - LETTER OF INTENT
We have entered into a letter of intent to acquire Nuvotec USA, Inc. ("Nuvotec")
and its wholly owned subsidiary, Pacific EcoSolutions, Inc. ("PEcoS"). PEcoS is
a hazardous waste, low level radioactive waste and mixed waste (containing both
hazardous waste and low level radioactive waste) management company based in
Richard, Washington, adjacent to the DOE's Hanford facility. Under the letter of
intent, as consideration for the purchase, we would issue $7 million of our
shares of common stock, assume certain liabilities of Nuvotec and PEcoS, and
based on the amount of debt assumed, pay a certain amount of cash. The
acquisition is subject to, among other things, execution of definitive
agreements, completion of due diligence and registration of the shares of the
Company's common stock to be issued in connection with the transaction. If the
transaction is completed, at the closing, Nuvotec's principal asset will be
PEcoS. The PEcoS facility is permitted to treat, store, and process hazardous
waste, low level radioactive waste and mixed waste, and is located adjacent to
the DOE's Hanford site. If the transaction is completed, we intend to fund any
consideration consisting of cash payments from our working capital or from
borrowings under our Revolving Credit facility.
The Department of Energy's Hanford site was first utilized as part of the
Manhattan Project and throughout the Cold War to provide the plutonium and other
materials necessary for the development of nuclear weapons. Most of Hanford's
reactors were shut down in the 1970s, but vast quantities of nuclear waste still
remain at the site. Currently, the Hanford Site is engaged in one of the
nation's largest environmental cleanups, which is expected to continue until
2030.
The PEcoS facility is located on 45 acres adjacent to the Hanford site, and is
comprised of a low-level radioactive waste (LLRW) facility and a mixed waste
(MW) facility. The LLRW facility has a radioactive materials license, and
encompasses approximately 70,000 square feet. The MW facility has RCRA and TSCA
permits, a radioactive materials license, and encompasses approximately 80,000
square feet.
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.
34
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 September 30, 2006, we had total accrued environmental remediation
liabilities of $3,476,000, of which $1,447,000 is recorded as a current
liability, a decrease of $919,000 from the December 31, 2005, balance of
$4,395,000. During the quarter ended September 30, 2006, we decreased
environmental liabilities by $192,000 for payments on the remediation projects.
The September 30, 2006, current and long-term accrued environmental balance is
as follows:
Current Long-term
Accrual Accrual Total
--------------- --------------- ---------------
PFD $ 280,000 $ 464,000 $ 744,000
PFM 451,000 368,000 819,000
PFSG 167,000 662,000 829,000
PFTS 7,000 30,000 37,000
PFMD -- 391,000 391,000
--------------- --------------- ---------------
905,000 1,915,000 2,820,000
PFMI 542,000 114,000 656,000
--------------- --------------- ---------------
$ 1,447,000 $ 2,029,000 $ 3,476,000
=============== =============== ===============
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.
35
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
In September 2006, the FASB issued SFAS 157, "Fair Value Measurements." SFAS 157
simplifies and codifies guidance on fair value measurements under generally
accepted accounting principles. This standard defines fair value, establishes a
framework for measuring fair value and prescribes expanded disclosures about
fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years, with early adoption permitted. We are currently evaluating
the effect, if any, the adoption of SFAS 157 will have on our financial
condition, results of operations and cash flows.
In September 2006, the FASB issued SFAS 158, "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plan - an amendment of FASB Statement
No. 87, 88, 106 and 132(R)." SFAS 158 requires an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan as an
asset or liability in its statement of financial position and recognize changes
in the funded status in the year in which the changes occur. SFAS 158 is
effective for fiscal years ending after December 15, 2006. We believe that the
adoption of SFAS 158 will not have a material impact on our financial position,
results of operations or cash flows.
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 September 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 $67,000
for the nine months ended September 30, 2006.
37
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONTROLS AND PROCEDURES
PART I, 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 periods ended March 31, and June 30, 2006.which
are incorporated herein by reference.
Item1A. RISK FACTORS
------------
There have been no material changes from risk factors previously
disclosed in our Form 10-K for year ended December 31, 2005.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
------------------------------------------------------------
(c) During the quarter ended September 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:
On July 10, Paul Cronson exercised various warrants to purchase an
aggregate of 23,622 shares of our Common Stock, of which 7,599 were
issued at a total exercise price of approximately $13,300, or $1.75 per
share, and the remaining 16,023 shares were issued utilizing a cashless
exercise provision, in accordance with the terms of the warrants.
On July 7, Herbert Strauss exercised warrants to purchase an aggregate
of 102,300 shares of Common Stock, of which 42,300 were issued at a
total exercise price of approximately $74,000 or $1.75 per share, and
the remaining 60,000 were issued in accordance with the terms of the
warrants at a total exercise price of $105,000. The funds utilized by
Mr. Strauss for the payment of the exercise price were loaned by the
Company to Mr. Strauss on an arms length basis.
On July 10, Joseph LaMotta exercised warrants to purchase an aggregate
of 28,571 shares of Common Stock, at a total exercise price of
approximately $50,000 or $1.75 per share, in accordance with the term
of the warrants.
On July 7, Harvey Gelfenbein exercised warrants to purchase an
aggregate of 28,571 shares of Common Stock, at a total exercise price
of approximately $50,000 or $1.75 per share, in accordance with the
term of the warrants.
On July 5, Jay Langner exercised warrants to purchase an aggregate of
28,571 shares of Common Stock, at a total exercise price of
approximately $50,000 or $1.75 per share, in accordance with the term
of the warrants.
On July 10, Ralph Richart exercised warrants to purchase an aggregate
of 225,000 shares of Common Stock, at a total exercise price of
approximately $394,000 or $1.75 per share, in accordance with the term
of the warrants.
39
On July 7, Craig Eckenthal exercised warrants to purchase an aggregate
of 57,143 shares of Common Stock, at a total exercise price of
approximately $100,000 or $1.75 per share, in accordance with the term
of the warrants.
On July 12, Yariv Sapir exercised warrants to purchase an aggregate of
85,714 shares of Common Stock, at a total exercise price of
approximately $150,000 or $1.75 per share, in accordance with the term
of the warrants.
Only July 7, Pamela Equities Corporation exercised warrants to purchase
an aggregate of 42,857 shares of Common Stock, at a total exercise
price of approximately $75,000 or $1.75 per share, in accordance with
the term of the warrants.
On July 5, 2006, Edward Rosenthal exercised warrants to purchase an
aggregate of 28,571 shares of Common Stock, at a total exercise price
of approximately 50,000 or $1.75 per share, in accordance with the term
of the warrants.
On July 7, Gerald Cramer exercised warrants to purchase an aggregate of
85,715 shares of Common Stock, at a total exercise price of
approximately $150,000 or $1.75 per share, in accordance with the term
of the warrants.
On July 7, CICI 1999 Qualified Annuity Trust exercised warrants to
purchase an aggregate of 85,715 shares of Common Stock, at a total
exercise price of approximately $150,000 or $1.75 per share, in
accordance with the term of the warrants.
On July 7, Jay Whitehall Properties, LLC exercised warrants to purchase
an aggregate of 42,857 shares of Common Stock, at a total exercise
price of approximately $75,000 or $1.75 per share, in accordance with
the term of the warrants.
On July 14, CRM 1999 Enterprise Fund exercised warrants to purchase an
aggregate of 200,000 shares of Common Stock, at a total exercise price
of approximately $350,000 or $1.75 per share, in accordance with the
term of the warrants.
On July 20, Kuekenhof Equity Fund, L.P. exercised warrants to purchase
an aggregate of 60,000 shares of Common Stock, at a total exercise
price of approximately $105,000 or $1.75 per share, in accordance with
the term of the warrants.
On July 20, Kuekenhof Partners L.P. exercised warrants to purchase an
aggregate of 40,000 shares of Common Stock, at a total exercise price
of approximately $70,000 or $1.75 per share, in accordance with the
term of the warrants.
On July 24, AC Israel Enterprises Inc. exercised warrants to purchase
an aggregate of 285,715 shares of Common Stock, at a total exercise
price of approximately $500,000 or $1.75 per share, in accordance with
the term of the warrants.
On July 21, Michael Kollender exercised warrants to purchase an
aggregate of 6,636 shares of Common Stock, at a total exercise price of
approximately $11,613 or $1.75 per share, in accordance with the term
of the warrants.
On July 21, Jeffrey Sherry exercised warrants to purchase an aggregate
of 936 shares of Common Stock, at a total exercise price of
approximately $1,640 or $1.75 per share, in accordance with the term of
the warrants.
On July 26, Robert Goodwin exercised warrants to purchase an aggregate
of 7,601 shares of Common Stock, at a total exercise price of
approximately $13,302 or $1.75 per share, in accordance with the term
of the warrants.
40
On July 20, The Danny Ellis Living Trust exercised warrants to purchase
an aggregate of 250,000 shares of Common Stock, at a total exercise
price of approximately $437,500 or $1.75 per share, in accordance with
the term of the warrants.
On July 27, Bruce Wrobel exercised warrants to purchase an aggregate of
150,000 shares of Common Stock, at a total exercise price of
approximately $262,500 or $1.75 per share, in accordance with the term
of the warrants.
On July 26, Meera Murdeshwar exercised warrants to purchase an
aggregate of 8,037 shares of Common Stock, with 1,200 shares @ $1.75
per share and 6,837 @ 1.44 per share, totaling exercise price of
approximately $11,950, in accordance with the term of the warrants.
On July 27, Joseph Paradis exercised warrants to purchase an aggregate
of 143,000 shares of Common Stock, at a total exercise price of
approximately $250,250 or $1.75 per share, in accordance with the term
of the warrants.
On July 21, David Avital exercised warrants to purchase an aggregate of
143,000 shares of Common Stock, at a total exercise price of
approximately $250,250 or $1.75 per share, in accordance with the term
of the warrants.
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.
The issuance of the above securities by the Company were deemed to be
exempt from registration under the Act in reliance upon section 4 (2)
of the Securities Act of 1933, as amended (the "Act"), or Regulation D
promulgated thereunder as transactions by an issuer not involving a
public offering. Recipients of the securities in each such transaction
represented their intentions to acquire such securities for investment
only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the
instruments issued in such transaction.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company's annual meeting of stockholders ("Annual Meeting") was
held on July 27, 2006. At the Annual Meeting, the following matters
were voted on and approved by the stockholders.
1. The election of seven directors to serve until the next
annual meeting of stockholders or until their respective
successors are duly elected and qualified.
2. Ratification of the appointment of BDO Seidman, LLP as the
independent auditors of the Company for fiscal 2006.
41
The Directors elected at the Annual Meeting and the votes cast for and
against or withheld authority for each director are as follows:
AGAINST OR WITHHOLD
DIRECTORS FOR AUTHORITY
------------------------- -------------- -------------------
Dr. Louis F. Centofanti 31,804,716 1,164,678
Jon Colin 31,962,137 1,007,257
Jack Lahav 31,946,837 1,022,557
Joe R. Reeder 30,078,402 2,890,992
Larry Shelton 32,087,435 881,959
Dr. Charles E. Young 30,306,376 2,663,018
Mark A. Zwecker 31,945,037 1,024,357
Also, at the Annual Meeting the stockholders ratified the appointment
of BDO Seidman, LLP as the independent auditors of the Company for
fiscal 2006 The votes for, against, abstentions and broker non-votes
are as follows:
AGAINST OR ABSTENTIONS
WITHHOLD AND BROKER
FOR AUTHORITY NON-VOTES
---------- ---------- -----------
Ratification of the Appointment
of BDO Seidman, LLP as the
Independent Auditors 32,939,998 14,198 15,198
42
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.
43
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: November 9, 2006 By: /s/ Dr. Louis F. Centofanti
------------------------------
Dr. Louis F. Centofanti
Chairman of the Board
Chief Executive Officer
Date: November 9, 2006 By: /s/ Steven Baughman
------------------------------
Steven Baughman
Vice President and
Chief Financial Officer
44