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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
Or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission File No. 111596
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-1954497
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
1940 N.W. 67th Place, Gainesville, FL 32653
(Address of principal executive offices) (Zip Code)
(352) 373-4200
(Registrant's telephone number)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the close of the latest practical date.
Class Outstanding at November 4, 2004
Common Stock, $.001 Par Value 41,761,117
(excluding 988,000 shares
held as treasury stock)
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PERMA-FIX ENVIRONMENTAL SERVICES, INC.
INDEX
PART I FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2004 and December 31, 2003 ................. 2
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2004
and 2003 ................................................. 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2004 and 2003 ............ 5
Consolidated Statement of Stockholders' Equity -
Nine Months Ended September 30, 2004 ..................... 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 ........................................ 35
Item 4. Controls and Procedures .................................... 36
PART II OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 37
Item 4. Submission of Matters to a Vote of Security Holders ........ 38
Item 6. Exhibits and Reports on Form 8-K ........................... 39
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
PART I, ITEM 1
The consolidated financial statements included herein have been prepared by the
Company (which may be referred to as we, us or our), without an audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes the disclosures which are made are adequate to make the
information presented not misleading. Further, the consolidated financial
statements reflect, in the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position and results of operations as of and for the periods indicated.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2003.
The results of operations for the nine months ended September 30, 2004, are not
necessarily indicative of results to be expected for the fiscal year ending
December 31, 2004.
1
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
September 30,
2004 December 31,
(Amounts in Thousands, Except for Share Amounts) (Unaudited) 2003
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 458 $ 411
Restricted cash 61 30
Accounts receivable, net of allowance
for doubtful accounts of $601 and $661 31,391 23,576
Inventories 787 544
Prepaid expenses 3,957 2,274
Other receivables 40 92
Current assets of discontinued operations 802 1,454
--------- ---------
Total current assets 37,496 28,381
Property and equipment:
Buildings and land 18,594 17,629
Equipment 30,498 28,513
Vehicles 3,233 2,709
Leasehold improvements 11,624 11,082
Office furniture and equipment 1,825 1,654
Construction in progress 2,363 2,621
--------- ---------
68,137 64,208
Less accumulated depreciation and
amortization (20,607) (16,897)
--------- ---------
Net property and equipment 47,530 47,311
Property and equipment of discontinued
operations, net of accumulated
depreciation of $0 and $2,298 600 5,758
Intangibles and other assets:
Permits 13,723 16,150
Goodwill 1,330 5,817
Finite risk sinking fund 2,225 1,234
Other assets 3,406 4,635
Long-term assets of discontinued operations -- 929
--------- ---------
Total assets $ 106,310 $ 110,215
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
2
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
September 30,
2004 December 31,
(Amounts in Thousands, Except for Share Amounts) (Unaudited) 2003
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,111 $ 5,518
Current environmental accrual 395 1,054
Accrued expenses 11,573 11,138
Unearned revenue 5,207 2,271
Current liabilities of discontinued
operations 3,214 1,345
Current portion of long-term debt 6,074 2,896
--------- ---------
Total current liabilities 32,574 24,222
Environmental accruals 2,434 1,432
Accrued closure costs 5,006 4,874
Other long-term liabilities 1,705 1,677
Long-term liabilities of discontinued operations 1,804 91
Long-term debt, less current portion 19,338 26,192
--------- ---------
Total long-term liabilities 30,287 34,266
--------- ---------
Total liabilities 62,861 58,488
Commitments and Contingencies (see Note 5) -- --
Preferred Stock of subsidiary, $1.00 par
value; 1,467,396 shares authorized,
1,284,730 shares issued and
outstanding, liquidation
value $1.00 per share 1,285 1,285
Stockholders' equity:
Preferred Stock, $.001 par value;
2,000,000 shares authorized,
2,500 shares issued and outstanding -- --
Common Stock, $.001 par value;
75,000,000 shares authorized,
42,708,117 and 37,241,881 shares
issued, including 988,000 shares
held as treasury stock, respectively 43 37
Additional paid-in capital 80,843 69,640
Accumulated deficit (36,798) (17,243)
Interest rate swap (62) (130)
--------- ---------
44,026 52,304
Less Common Stock in treasury at
cost; 988,000 shares (1,862) (1,862)
--------- ---------
Total stockholders' equity 42,164 50,442
--------- ---------
Total liabilities and stockholders' equity $ 106,310 $ 110,215
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
3
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
(Amounts in Thousands, Except for Per Share Amounts) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 24,337 $ 23,781 $ 60,277 $ 60,425
Cost of goods sold 16,808 14,110 43,195 41,725
-------- -------- -------- --------
Gross profit 7,529 9,671 17,082 18,700
Selling, general and administrative expenses 4,419 4,610 12,832 13,008
Loss (gain) on disposal or impairment of fixed assets 1,014 (14) 996 (15)
Impairment loss on intangible assets 7,101 -- 7,101 --
-------- -------- -------- --------
Income (loss) from operations (5,005) 5,075 (3,847) 5,707
Other income (expense):
Interest income -- 2 2 7
Interest expense (294) (735) (1,535) (2,107)
Interest expense-financing fees (1,566) (256) (2,079) (814)
Other (92) (42) (354) (82)
-------- -------- -------- --------
Income (loss) from continuing operations before Preferred (6,957) 4,044 (7,813) 2,711
stock dividends
Preferred Stock dividends (48) (48) (142) (142)
-------- -------- -------- --------
Income (loss) from continuing operations (7,005) 3,996 (7,955) 2,569
Discontinued operations:
Income (loss) from discontinued operations (740) 29 (1,765) (226)
Loss on disposals from discontinued operations (9,835) -- (9,835) --
-------- -------- -------- --------
Total income (loss) on discontinued operations (10,575) 29 (11,600) (226)
-------- -------- -------- --------
Net Income (loss) applicable to Common Stock $(17,580) $ 4,025 $(19,555) $ 2,343
======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share-basic:
Continuing operations $ (.17) $ .12 $ (.20) $ .08
Discontinued operations (.25) -- (.29) (.01)
-------- -------- -------- --------
Net income (loss) per common share $ (.42) $ .12 $ (.49) $ .07
======== ======== ======== ========
Net income (loss) per common share-diluted:
Continuing operations $ (.17) $ .11 $ (.20) $ .07
Discontinued operations (.25) -- (.29) (.01)
-------- -------- -------- --------
Net income (loss) per common share $ (.42) $ .11 $ (.49) $ .06
======== ======== ======== ========
Number of shares and potential common shares used in net
income (loss) per common share:
Basic 41,648 34,885 40,051 34,764
======== ======== ======== ========
Diluted 41,648 38,247 40,051 39,089
======== ======== ======== ========
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) 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income (loss) from continuing operations before preferred stock dividends $ (7,813) $ 2,711
Adjustments to reconcile net income (loss) from continuing operations to cash
provided by (used in) operations:
Depreciation and amortization 3,540 3,146
Debt discount amortization 838 243
Provision for bad debt and other reserves 123 192
Loss (gain) on disposal or impairment of plant, property and equipment 996 (15)
Intangible asset impairment 7,101 --
Changes in assets and liabilities:
Accounts receivable (5,735) (5,237)
Prepaid expenses, inventories and other assets 590 (1,421)
Accounts payable and accrued expenses 1,852 1,942
-------- --------
Net cash provided by continuing operations 1,492 1,561
Net cash used by discontinued operations (1,465) (490)
Cash flows from investing activities:
Purchases of property and equipment, net (2,318) (1,615)
Proceeds from sale of plant, property and equipment 31 14
Change in restricted cash, net (1) (2)
Change in finite risk sinking fund (991) (1,234)
Funds used for acquisitions (net of cash acquired) (2,903) --
Discontinued operations -- (47)
-------- --------
Net cash used in investing activities (6,182) (2,884)
Cash flows from financing activities:
Net borrowings of revolving credit 3,168 3,221
Principal repayments of long-term debt (7,866) (2,620)
Proceeds from issuance of stock 10,900 1,194
-------- --------
Net cash provided by financing activities 6,202 1,795
-------- --------
Increase (decrease) in cash 47 (18)
Cash at beginning of period 411 212
-------- --------
Cash at end of period $ 458 $ 194
======== ========
Supplemental disclosure:
Interest paid $ 1,629 $ 1,855
Non-cash investing and financing activities:
Issuance of Common Stock for services 184 25
Issuance of Common Stock for payment of dividends 125 125
Gain on interest rate swap 68 55
Long-term debt incurred for purchase of property and equipment 184 1,250
The accompanying notes are integral part of these consolidated
financial statements.
5
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited, for the nine months ended September 30, 2004)
Common
Preferred Stock Common Stock Additional Stock Total
(Amounts in thousands, --------------- ----------------- Paid-In Accumulated Interest Held In Stockholders'
except for share amounts) Shares Amount Shares Amount Capital Deficit Rate Swap Treasury Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 2,500 $ -- 37,241,881 $ 37 $69,640 $(17,243) $ (130) $(1,862) $ 50,442
Comprehensive loss:
Net loss -- -- -- -- -- (19,413) -- -- (19,413)
Other Comprehensive income:
Gain on interest rate swap -- -- -- -- -- -- 68 -- 68
Comprehensive loss (19,345)
Preferred Stock dividends -- -- -- -- -- (142) -- -- (142)
Issuance of Common Stock for
Preferred Stock dividend -- -- 54,581 -- 125 -- -- -- 125
Issuance of Common Stock
for cash and services -- -- 795,542 1 1,213 -- -- -- 1,214
Issuance of Common Stock
in private placement -- -- 4,616,113 5 9,865 -- -- -- 9,870
----- ------ ---------- ------ ------- -------- ------ ------- --------
Balance at September 30, 2004 2,500 $ -- 42,708,117 $ 43 $80,843 $(36,798) $ (62) $(1,862) $ 42,164
===== ====== ========== ====== ======= ======== ====== ======= ========
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, 2004
(Unaudited)
Reference is made herein to the notes to consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2003.
1. Summary of Significant Accounting Policies
Our accounting policies are as set forth in the notes to consolidated financial
statements referred to above.
Reclassifications
Certain prior period amounts have been reclassified to conform with the current
period presentation.
Stock-Based Compensation
We account for our stock-based employee compensation plans under the accounting
provisions of APB Opinion 25, Accounting for Stock Issued to Employees, and have
furnished the pro forma disclosures required under Statement of Financial
Accounting Standards ("SFAS") 123, Accounting for Stock-Based Compensation, and
SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure.
SFAS 123 requires pro forma information regarding net income and earnings per
share as if compensation cost for our employee and director stock options had
been determined in accordance with the fair market value-based method prescribed
in SFAS 123. We estimate the fair value of each stock option at the grant date
by using the Black-Scholes option-pricing model with the following assumptions
used for grants in 2004 and 2003: no dividend yield; an expected life of ten
years; expected volatility between 21.7 and 23.8%; and risk free interest rates
between 2.75% and 3.82%.
Under the accounting provisions of SFAS 123, our net income (loss) and net
income (loss) per share would have been decreased (increased) to the pro forma
amounts indicated below (in thousands except for per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ---------
Net income (loss) from continuing operations, as reported $ (7,005) $ 3,996 $ (7,955) $ 2,569
Deduct: Total Stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects (98) (129) (279) (328)
---------- ---------- ---------- ---------
Pro forma net income (loss) from continuing operations $ (7,103) $ 3,867 $ (8,234) $ 2,241
========== ========== ========== =========
Loss per share:
Basic - as reported $ (.17) $ .12 $ (.20) $ .08
========== ========== ========== =========
Basic - pro-forma $ (.17) $ .11 $ (.21) $ .06
========== ========== ========== =========
Diluted - as reported $ (.17) $ .11 $ (.20) $ .07
========== ========== ========== =========
Diluted - pro-forma $ (.17) $ .10 $ (.21) $ .06
========== ========== ========== =========
7
2. Earnings Per Share
Basic EPS is based on the weighted average number of shares of Common Stock
outstanding during the period. Diluted EPS includes the dilutive effect of
potential common shares. Diluted loss per share for the three and nine months
ended September 30, 2004, do not include potential common shares as their effect
would be anti-dilutive.
The following is a reconciliation of basic net income (loss) per share and
diluted net income (loss) per share for the three and nine months ended
September 30, 2004, and 2003.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
(Amounts in thousands except per share amounts) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per share from continuing operations
Income (loss) -basic $ (7,005) $ 3,996 $ (7,955) $ 2,569
-------- ------- -------- --------
Effect of dilutive securities - Preferred
Stock dividends -- 48 -- 142
-------- ------- -------- --------
Income (loss)- diluted $ (7,005) $ 4,044 $ (7,955) $ 2,711
======== ======= ======== ========
Basic income (loss) per share $ (.17) $ .12 $ (.20) $ .08
======== ======= ======== ========
Diluted income (loss) per share $ (.17) $ .11 $ (.20) $ .07
======== ======= ======== ========
Earnings per share from discontinued operations
Income (loss) - basic and diluted $(10,575) $ 29 $(11,600) $ (226)
======== ======= ======== ========
Basic income (loss) per share $ (.25) $ -- $ (.29) $ (.01)
======== ======= ======== ========
Diluted income (loss) per share $ (.25) $ -- $ (.29) $ (.01)
======== ======= ======== ========
Weighted average shares outstanding - basic 41,648 34,885 40,051 34,764
Potential shares exercisable under stock option plans -- 344 -- 450
Potential shares upon exercise of Warrants -- 1,351 -- 2,208
Potential shares upon conversion of Preferred Stock -- 1,667 -- 1,667
-------- ------- -------- --------
Weighted average shares outstanding - diluted 41,648 38,247 40,051 39,089
======== ======= ======== ========
Potential shares excluded from above
weighted average share calculations due
to their anti-dilutive effect include:
Upon exercise of Options 2,932 1,641 2,932 1,551
Upon exercise of Warrants 12,791 625 12,791 95
Upon conversion of Preferred Stock 1,667 -- 1,667 --
3. Goodwill and Other Intangible Assets
Statement of Financial Accounting Standards ("SFAS") 142 "Goodwill and Other
Intangible Assets" requires us to test goodwill and other intangible assets for
impairment on an annual basis, and upon certain events that indicate a possible
impairment. In conjunction with our third quarter financial reporting process,
as a result of a disparity of our Industrial reporting unit's actual operating
results to long-term projections and the discontinuation of operations at our
Industrial segment facility in Detroit, Michigan as of September 30, 2004, (See
Note 8) we engaged an independent appraisal firm to perform preliminary
impairment tests of permits and goodwill, separately, for the Industrial
reporting unit. The preliminary impairment tests of the Industrial reporting
unit resulted in an estimated impairment to permits of $2,215,000 and an
estimated impairment to goodwill of approximately $4,886,000. The aggregate
impairment of $7,101,000 is our best estimate and was recorded in the third
quarter as a component of Income (loss) from operations in the Consolidated
Statements of Operations. The preliminary impairment tests of the Industrial
reporting unit will be finalized, along with the annual impairment tests, during
the fourth quarter of 2004, thus our estimated impairment loss is subject to
8
refinement and may be adjusted, if necessary. The appraisers estimate the fair
value of our reporting units using a discounted cash flow valuation approach.
4. Long Term Debt
Long-term debt consists of the following at September 30, 2004, and December 31,
2003:
September 30,
2004 December 31,
(Amounts in Thousands) (Unaudited) 2003
- ---------------------------------------------------------------------------------------------------------------------------
Revolving Credit facility dated December 22, 2000, borrowings based upon
eligible accounts receivable, subject to monthly borrowing base calculation,
variable interest paid monthly at prime rate plus 1% (5.75% at September 30,
2004), balance due in December 2005. $12,404 $ 9,235
Term Loan dated December 22, 2000, payable in equal monthly installments of
principal of $83, balance due in December 2005, variable interest paid
monthly at prime rate plus 1 1/2 % (6.25% at September 30, 2004). 3,333 4,083
Three promissory notes dated May 27, 1999, payable in equal monthly installments
of principal and interest of $90 over 60 months, interest at 7.0%, paid in
full in June 2004.
Unsecured promissory note dated August 31, 2000, payable in lump sum in August
2005, interest paid annually at 7.0%. -- 531
Senior subordinated notes dated July 31, 2001, payable in lump sum on July 31,
2006, interest payable quarterly at an annual interest rate of 13.5%, net of
unamortized debt discount of $838 at December 31, 2003. Paid in full in
August 2004. 3,500 3,500
Promissory note dated June 25, 2001, payable in semiannual installments on June
30 and December 31 through December 31, 2008, variable interest accrues at
the applicable law rate determined under the IRS Code Section (7.0% on
September 30, 2004) and is payable in one lump sum at the end of installment
period. -- 4,787
Installment agreement dated June 25, 2001, payable in semiannual installments on
June 30 and December 31 through December 31, 2008, variable interest accrues
at the applicable law rate determined under the IRS Code Section (7.0% on
September 30, 2004) and is payable in one lump sum at the end of installment
period. 3,194 3,354
Various capital lease and promissory note obligations, payable 2004 to 2009,
interest at rates ranging from 5.2% to 17.9%. 793 833
Less current portion of long-term debt 2,188 2,765
------- -------
25,412 29,088
6,074 2,896
------- -------
$19,338 $26,192
======= =======
Revolving Credit and Term Loan
On December 22, 2000, we entered into a Revolving Credit, Term Loan and Security
Agreement ("Agreement") with PNC Bank, National Association, a national banking
association ("PNC") acting as agent ("Agent") for lenders, and as issuing bank.
The Agreement provided, at inception, for a term loan ("Term Loan") in the
amount of $7,000,000, which requires principal repayments based upon a
seven-year amortization, payable over five years, with monthly installments of
$83,000 and the remaining unpaid principal balance due on December 22, 2005. The
Agreement also provided for a revolving line of credit ("Revolving Credit") with
a maximum principal amount outstanding at any one time of $18,000,000, as
amended. The Revolving Credit advances are subject to limitations of an amount
up to the sum of (a) up to 85% of Commercial Receivables aged 90 days or less
from invoice date, (b) up to 85% of Commercial Broker Receivables aged up to 120
days from invoice date, (c) up to 85% of acceptable Government Agency
Receivables aged up to 150 days from invoice date, and (d) up to 50% of
9
acceptable unbilled amounts aged up to 60 days, less (e) reserves Agent
reasonably deems proper and necessary. The Revolving Credit advances are due and
payable in full on December 22, 2005. As of September 30, 2004, the excess
availability under our Revolving Credit was $10,127,000 based on our eligible
receivables. However, during the third quarter of 2004, our borrowings
approached the maximum line capacity under the Revolving Credit, thereby
reducing the line availability from which we could borrow to $5,294,000.
Pursuant to the Agreement the Term Loan bears interest at a floating rate equal
to the prime rate plus 1 1/2%, and the Revolving Credit at a floating rate equal
to the prime rate plus 1%. The loans are subject to a prepayment fee of 1 1/2%
in the first year, 1% in the second and third years and 3/4% after the third
anniversary until termination date.
Three Promissory Notes
Pursuant to the terms of the Stock Purchase Agreements in connection with the
acquisition of Perma-Fix of Orlando, Inc. ("PFO"), Perma-Fix of South Georgia,
Inc. ("PFSG") and Perma-Fix of Michigan, Inc. ("PFMI"), a portion of the
consideration was paid in the form of the Promissory Notes, in the aggregate
amount of $4,700,000 payable to the former owners of PFO, PFSG and PFMI. The
Promissory Notes were paid in full in June 2004.
Unsecured Promissory Note
On August 31, 2000, as part of the consideration for the purchase of Diversified
Scientific Services, Inc. ("DSSI"), we issued to Waste Management Holdings a
long-term unsecured promissory note (the "Unsecured Promissory Note") in the
aggregate principal amount of $3,500,000, bearing interest at a rate of 7% per
annum and having a five-year term with interest to be paid annually and
principal due in one lump sum at the end of the term of the Unsecured Promissory
Note (August 2005).
Senior Subordinated Notes
On July 31, 2001, we issued approximately $5,625,000 of our 13.50% Senior
Subordinated Notes due July 31, 2006 (the "Notes"). The Notes were issued
pursuant to the terms of a Note and Warrant Purchase Agreement, dated July 31,
2001 (the "Purchase Agreement"), between the Company, Associated Mezzanine
Investors - PESI, L.P. ("AMI"), and Bridge East Capital, L.P. ("BEC"). The Notes
were unsecured and were unconditionally guaranteed by our subsidiaries. The
notes were paid in full in August 2004. We also paid early termination fees of
$190,000 and recorded a non-cash expense of $1,217,000 for the write-off of
prepaid financing fees and a debt discount.
Under the terms of the Purchase Agreement, we also issued to AMI and BEC
Warrants to purchase up to 1,281,731 shares of our Common Stock ("Warrant
Shares") at an initial exercise price of $1.50 per share (the "Warrants"),
subject to adjustment under certain conditions, which were valued at $1,622,000.
The Warrants, as issued, also contain a cashless exercise provision. The Warrant
Shares are registered under an S-3 Registration Statement that was declared
effective on November 27, 2002.
In connection with the sale of the Notes, the Company, AMI, and BEC entered into
an Option Agreement, dated July 31, 2001 (the "Option Agreement"). Pursuant to
the Option Agreement, the Company granted each purchaser an irrevocable option
requiring the Company to purchase any of the Warrants or Warrant Shares then
held by the purchaser (the "Put Option"). The Put Option may be exercised at any
time commencing July 31, 2004, and ending July 31, 2008. In addition, each
purchaser granted to the Company an irrevocable option to purchase all the
Warrants or the Warrant Shares then held by the purchaser (the "Call Option").
The Call Option may be exercised at any time commencing July 31, 2005, and
ending July 31, 2008. The purchase price under the Put Option and the Call
Option is based on the quotient obtained by dividing (a) the sum of six times
the Company's consolidated EBITDA for the period of the 12 most recent
consecutive months minus Net Debt plus the Warrant Proceeds by (b) the Company's
Diluted Shares (as the terms EBITDA, Net Debt, Warrant Proceeds, and Diluted
Shares are defined in the Option Agreement). We account for the changes in
redemption value immediately as they
10
occur and adjust the carrying value of the security to equal the redemption
value at the end of each reporting period. On September 30, 2004, the Put Option
had no value and no liability was recorded.
Promissory Note
In conjunction with our acquisition of East Tennessee Materials and Energy
Corporation ("M&EC"), M&EC issued a promissory note for a principal amount of
$3,714,000 to PDC, dated June 25, 2001, for monies advanced to M&EC for certain
services performed by PDC. The promissory note is payable over eight years on a
semiannual basis on June 30 and December 31. Interest is accrued at the
applicable law rate ("Applicable Rate") pursuant to the provisions of section
6621 of the Internal Revenue Code of 1986 as amended, (7.0% on September 30,
2004) and payable in lump sum at the end of the loan period. On September 30,
2004, the outstanding balance was $4,184,000 including accrued interest of
approximately $990,000. PDC has directed M&EC to make all payments under the
promissory note directly to the IRS to be applied to PDC's obligations under its
installment agreement with the IRS.
Installment Agreement
Additionally, M&EC entered into an installment agreement with the Internal
Revenue Service ("IRS") for a principal amount of $923,000 effective June 25,
2001, for certain withholding taxes owed by M&EC. The installment agreement is
payable over eight years on a semiannual basis on June 30 and December 31.
Interest is accrued at the Applicable Rate and is adjusted on a quarterly basis
and payable in lump sum at the end of the installment period. On September 30,
2004, the Applicable Rate was 7.0%. On September 30, 2004, the outstanding
balance was $1,033,000 including accrued interest of approximately $240,000.
5. Commitments and Contingencies
Hazardous Waste
In connection with our waste management services, we handle both hazardous and
non-hazardous waste, which we transport to our own, or other facilities for
destruction or disposal. As a result of disposing of hazardous substances, in
the event any cleanup is required, we could be a potentially responsible party
for the costs of the cleanup notwithstanding any absence of fault on our part.
Legal
In the normal course of conducting our business, we are involved in various
litigations. Except as stated below, there has been no material change in legal
proceedings from those disclosed previously in the Company's Form 10-K for the
year ended December 31, 2003 and the Company's Form 10-Q for the quarters ended
March 31, 2004 and June 30, 2004.
We previously disclosed that during January 2004, the U.S. Environmental
Protection Agency ("EPA") issued to Perma-Fix of Dayton, Inc. ("PFD"), our
wholly owned subsidiary, a Notice of Findings of Violations ("Findings")
alleging that PFD committed numerous violations of the Clean Air Act (the "Act")
or regulations thereunder, and, although EPA did not assert any penalties or
fines in the Findings, they did, however, specify that EPA had several
enforcement options, including issuing an administrative penalty order or
bringing judicial action against PFD. PFD has had numerous meetings with EPA
regarding this matter. On September 28, 2004, PFD received an Administrative
Compliance Order ("Order"), dated September 21, 2004, from EPA alleging that PFD
was a "major source" of hazardous air pollutants and, as a major source, PFD was
required to have obtained a Title V air permit, and thereby was not in
compliance with provisions of the Act and/or regulations thereunder applicable
to a major source. The Order further provides that PFD has six months from the
effective date of the Order, to develop, submit, obtain and comply with numerous
costly and burdensome compliance initiatives applicable to one that is a major
source of hazardous air pollutants and to submit an application to the State of
Ohio for a Title V Air permit. The Order does not assert any penalties or fines
but provides that PFD is not absolved of any liabilities, including liability
for penalties, for the alleged violations cited in the Order, and that failure
to comply with the Order may subject PFD to penalties up to $32,500 per day
11
for each violation. PFD had 10 days from the receipt of the Order to request a
conference with EPA regarding the Order and PFD timely scheduled such a
conference for the first week of November. The conference was subsequently
postponed indefinitely by the EPA, and the EPA and PFD are exchanging
information in an effort to resolve this matter. We have retained environmental
consultants who have advised us that, based on the tests that they have
performed, they do not believe that PFD is a major source of hazardous air
pollutants. We have been further advised by counsel that if PFD is not a major
source of hazardous air pollutants, PFD would not be required to obtain a Title
V air permit, would not have violated the provisions of the Act alleged in the
Order and would not be required to comply with the costly and burdensome
compliance initiatives contained in the Order. Also, we have been further
advised that the Order may be in violation of certain constitutional issues
involving due process based on a recent decision by the United States Court of
Appeals, 11th Circuit. A determination that PFD was a major source of hazardous
air pollutants and required to comply with the Order, such could have a material
adverse effect on us. We intend that PFD will vigorously defend itself in
connection with this matter.
In October 2004, Perma-Fix of South Georgia, Inc. ("PFSG") and Perma-Fix of
Orlando, Inc. ("PFO") were notified that they are PRPs at the Malone Service
Company Superfund site in Texas City, Texas ("Site"). The EPA designated both
PFSG and PFO as de minimis parties, which is determined as a generator that
contributed less than 0.6% of the total hazardous materials at the Site. The EPA
has made a settlement offer to all de minimis parties, that requires response
within 45 days of receipt of the notice. If we accept the settlement offer our
liability would be approximately $229,000. We are in the process of reviewing
this claim and our potential exposure in connection with this Site.
During September 2004, PFMI received a letter alleging that PFMI owed Reliance
Insurance Company, in liquidation, the sum of $525,000 as a result of
retrospective premiums under a retroactive premium agreement. Our counsel
responded and advised that PFMI had numerous defenses to the demand, including,
but not limited to, that the policy expired almost eight years ago and failure
to adjust the premiums in a timely manner violated the agreement between the
Company and Reliance and that under Michigan law it is deemed to be an unfair
and deceptive act or practice in the business of insurance for an insurer to
fail to complete a final audit within 120 days after termination of the policy.
The Company and PFMI intend to vigorously defend this matter. However, we have
accrued approximately $217,000 for this contingent liability.
See Note 8 for a discussion as to certain contingent liabilities due to the
discontinuation of operations at the facility in Detroit, Michigan, owned by our
subsidiary, Perma-Fix of Michigan, Inc.
Insurance
We believe we maintain insurance coverage adequate for our needs and which is
similar to, or greater than, the coverage maintained by other companies of our
size in the industry. There can be no assurances, however, those liabilities,
which may be incurred by us, will be covered by our insurance or that the dollar
amount of such liabilities, which are covered, will not exceed our policy
limits. Under our insurance contracts, we usually accept self-insured
retentions, which we believe is appropriate for our specific business risks. We
are required by EPA regulations to carry environmental impairment liability
insurance providing coverage for damages on a claims-made basis in amounts of at
least $1,000,000 per occurrence and $2,000,000 per year in the aggregate. To
meet the requirements of customers, we have exceeded these coverage amounts.
In June 2003, we entered into a 25-year finite risk insurance policy, which
provides financial assurance to the applicable states for our permitted
facilities in the event of unforeseen closure. Prior to obtaining or renewing
operating permits we are required to provide financial assurance that guarantee
to the states that, in the event of closure, our permitted facilities will be
closed in accordance with the regulations. The policy provides $35,000,000 of
financial assurance coverage and has available capacity to allow for annual
inflation and other performance and surety bond requirements. On the fourth and
subsequent anniversaries of the contract inception, the Company may elect to
terminate this contract. During the
12
second quarter of 2003 we made an upfront payment of $4,000,000, of which
$2,766,000 represents the full premium for the 25-year term of the policy, and
the remaining $1,234,000, was deposited in a sinking fund account. Additionally,
in February 2004 we paid the first of nine required annual installments of
$1,004,000, of which $991,000 was deposited in the sinking fund account, the
remaining $13,000 represents a terrorism premium. As of September 30, 2004, we
have recorded $2,225,000 in our Finite Risk Sinking Fund on the balance sheet.
6. Acquisitions
On March 23, 2004, our subsidiary, Perma-Fix of Maryland, Inc. ("PFMD")
completed it's acquisition of certain assets of USL Environmental Services, Inc.
d/b/a A&A Environmental ("A&A"), primarily located in Baltimore, Md., and our
subsidiary, Perma-Fix of Pittsburgh, Inc. ("PFP") completed its acquisition of
certain assets of US Liquids of Pennsylvania, Inc. d/b/a EMAX ("EMAX"). Both A&A
and EMAX are wholly owned subsidiaries of US Liquids Inc. ("USL"). PFMD is using
the acquired assets of A&A to provide a full line of environmental, marine and
industrial maintenance services. PFMD offers expert environmental services such
as 24-hour emergency response, vacuum services, hazardous and non-hazardous
waste disposal, marine environmental and other remediation services. PFP is
utilizing the acquired assets of EMAX to provide a variety of environmental
services such as transportation of drums and bulk loads, tank cleaning,
industrial maintenance, dewatering, drum management and chemical packaging. PFP
also has a wastewater treatment group, which provides for the treatment of
non-hazardous wastewaters such as leachates, oily waters, industrial process
waters and off-spec products.
We paid $2,915,000 in cash for the acquired assets and assumed certain
liabilities of A&A and EMAX. The acquisitions were accounted for using the
purchase method effective March 23, 2004, and accordingly, the estimated fair
values of the assets acquired and liabilities assumed of A&A and EMAX as of this
date, and the results of operations since this date, are included in the
accompanying consolidated financial statements. As of March 23, 2004, we
performed preliminary purchase price allocations based upon information
available as of this date, and we are in the process of obtaining third party
evaluations of certain assets, thus, the allocation of the purchase prices are
subject to refinement. Accordingly, the purchase prices were preliminarily
allocated to the net assets and net liabilities so acquired and assumed based on
their estimated fair values. Included in these preliminary allocations were
current assets of $2,481,000, property and equipment of $2,066,000, current
liabilities of approximately $1,141,000 and long-term environmental liability of
$491,000. Based on the preliminary purchase price allocations no goodwill was
recorded.
7. Private Placement
On March 22, 2004, we completed a private placement for gross proceeds of
approximately $10,386,000 through the sale of 4,616,113 shares of our Common
Stock at $2.25 per share and Warrants to purchase an additional 1,615,638 shares
of our Common Stock exercisable at $2.92 per share and a term of three years.
The private placement was sold to fifteen accredited investors. The net cash
proceeds received of $9,946,000, after paying placement agent fees, were used in
connection with the acquisitions of certain acquired assets of A&A and EMAX
discussed above, and to initially pay down the Revolving Credit, while
finalizing the prepayment of other higher interest debt. We have incurred an
additional $76,000 for expenses related to the private placement. During the
third quarter of 2004, we used a portion of our availability under our Revolving
Credit, to repay our Senior Subordinated Notes with an interest rate of 13.5%
(See Note 4). We also issued Warrants to purchase an aggregate of 160,000 shares
of our Common Stock, exercisable at $2.92 per share and with a three year term,
for consulting services related to the private placement.
13
8. Discontinued Operations
On October 4, 2004, our Board of Directors approved the discontinuation of
operations at the facility in Detroit, Michigan, owned by our subsidiary,
Perma-Fix of Michigan, Inc. ("PFMI"). The decision to discontinue operations at
the Detroit facility was principally as a result of two fires that significantly
disrupted operations at the facility in 2003, and the facility's critical 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 revenues of $1,569,000 and $4,465,000, and operating losses of
$1,765,000 and $226,000 for the nine months ended September 30, 2004 and 2003,
respectively. Our estimated loss on disposals from discontinued operations of
$9,835,000 for the three and nine months ended September 30, 2004, consisted of
asset impairments, pension costs, environmental remediation and other expenses
as described in the following table:
Total
Noncash Charges
(Amounts in thousands) Charges Accruals (Credits)
- --------------------------------------------------------------------------------
Pension plan withdrawal liability $ -- $1,474 $1,474
Severance liability -- 47 47
Environmental closure and remediation accrual -- 2,733 2,733
Tangible asset impairment 4,591 -- 4,591
Goodwill and permit impairment 929 -- 929
Other -- 61 61
- --------------------------------------------------------------------------------
Loss on disposal from discontinued operations $5,520 $4,315 $9,835
===========================================================================+====
The pension plan withdrawal liability is a result of terminating our union
employees at PFMI. The liability is an estimate, and we are in the process of
completing an actuarial study of the withdrawal liability under the pension
plan. The tangible asset impairment is our best estimate of the write down of
tangible assets to fair value. The goodwill and permit impairment is our best
estimate of the portion of our goodwill and permits of the Industrial reporting
unit allocated to PFMI. Other costs consist of estimated amounts to be paid to
close the facility and remediate the property. The environmental closure and
remediation accrual is based on our estimate at the time of this report and
could change based on the final remediation costs.
Assets and liabilities related to the discontinued operation have been
reclassified to separate categories in the Consolidated Balance Sheets as of
September 30, 2004 and December 31, 2003. As of September 30, 2004, assets are
recorded at their net realizable value, and consist of land and buildings of
$600,000, accounts receivable of $347,000, and estimated insurance proceeds
receivable of $455,000. The insurance receivable is an estimate of the direct
costs from the first fire at PFMI. We have submitted insurance claims for both
fires at PFMI, and are currently negotiating settlements for those claims, but
at this time we cannot estimate actual proceeds to be received. If the proceeds
exceed the estimated insurance receivable we will recognize a gain for the
additional proceeds. Liabilities as of September 30, 2004, consist of accounts
payable and current accruals of $2,554,000 and environmental and closure
accruals of $2,464,000.
14
9. Operating Segments
Pursuant to FAS 131, we define an operating segment as:
o A business activity from which we may earn revenue and incur
expenses;
o Whose operating results are regularly reviewed by the chief
operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance; and
o For which discrete financial information is available.
We have three operating segments, which are defined as each business line that
we operate. This however, excludes corporate headquarters, which does not
generate revenue, and Perma-Fix of Michigan, Inc., a discontinued operation. See
Note 8 for further information on discontinued operations.
Our operating segments are defined as follows:
The Industrial Waste Management Services segment, which provides on-and-off site
treatment, storage, processing and disposal of hazardous and non-hazardous
industrial waste, commercial waste and wastewater through our seven facilities;
Perma-Fix Treatment Services, Inc., Perma-Fix of Dayton, Inc., Perma-Fix of Ft.
Lauderdale, Inc., Perma-Fix of Orlando, Inc., Perma-Fix of South Georgia, Inc.,
Perma-Fix of Maryland, Inc. (which acquired certain assets and assumed certain
liabilities of A&A) and Perma-Fix of Pittsburgh, Inc. (which acquired certain
assets of EMAX).
The Nuclear Waste Management Services segment, which provides treatment,
storage, processing and disposal services for waste which is both hazardous and
low-level radioactive ("Mixed Waste"). Included in such is research,
development, on and off-site waste remediation of nuclear mixed and low-level
radioactive waste through our three facilities; Perma-Fix of Florida, Inc.,
Diversified Scientific Services, Inc. and East Tennessee Materials and Energy
Corporation.
The Consulting Engineering Services segment provides environmental engineering
and regulatory compliance services through Schreiber, Yonley & Associates, Inc.
which includes oversight management of environmental restoration projects, air
and soil sampling and compliance and training activities, as well as,
engineering support as needed by our other segments.
15
The table below presents certain financial information in thousands by business
segment for the three and nine months ended September 30, 2004 and 2003.
Segment Reporting for the Quarter Ended September 30, 2004
Industrial Nuclear
Waste Waste Segments Corporate(2) Consolidated
Services Services Engineering Total and Other Total
---------- -------- ----------- -------- ------------ ------------
Revenue from external customers $ 10,606 $12,886(3) $ 845 $ 24,337 $ -- $ 24,337
Intercompany revenues 734 917 96 1,747 -- 1,747
Interest income -- -- -- -- -- --
Interest expense 199 102 -- 301 (7) 294
Interest expense-financing fees -- 191 -- 191 1,375 1,566
Depreciation and amortization 523 671 7 1,201 10 1,211
Segment profit (loss) (9,050) 3,219 43 (5,788) (1,217) (7,005)
Segment assets(1) 29,556 64,760 2,125 96,441 9,869(4) 106,310
Expenditures for segment assets 189 254 -- 443 6 449
Segment Reporting for the Quarter Ended September 30, 2003
Industrial Nuclear
Waste Waste Segments Corporate(2) Consolidated
Services Services Engineering Total and Other Total
---------- -------- ----------- -------- ------------ ------------
Revenue from external customers $ 10,529 $12,487(3) $ 765 $ 23,781 $ -- $ 23,781
Intercompany revenues 836 702 143 1,681 -- 1,681
Interest income 1 -- -- 1 1 2
Interest expense 182 505 (2) 685 50 735
Interest expense-financing fees -- -- -- -- 256 256
Depreciation and amortization 420 637 9 1,066 18 1,084
Segment profit 71 3,831 94 3,996 -- 3,996
Segment assets(1) 32,441 60,841 2,130 95,412 19,037(4) 114,449
Expenditures for segment assets 237 425 44 706 143(5) 849
Segment Reporting for the Nine Months Ended September 30, 2004
Industrial Nuclear
Waste Waste Segments Corporate(2) Consolidated
Services Services Engineering Total and Other Total
---------- -------- ----------- -------- ------------ ------------
Revenue from external customers $ 27,005 $30,871(3) $2,401 $ 60,277 $ -- $ 60,277
Intercompany revenues 1,782 2,766 316 4,864 -- 4,864
Interest income 2 -- -- 2 -- 2
Interest expense 544 971 -- 1,515 20 1,535
Interest expense-financing fees -- 192 -- 192 1,887 2,079
Depreciation and amortization 1,516 1,978 21 3,515 25 3,540
Segment profit (loss) (11,140) 4,333 69 (6,738) (1,217) (7,955)
Segment assets(1) 29,556 64,760 2,125 96,441 9,869(4) 106,310
Expenditures for segment assets 644 1,783 17 2,444 58 2,502
Segment Reporting for the Nine Months Ended September 30, 2003
Industrial Nuclear
Waste Waste Segments Corporate(2) Consolidated
Services Services Engineering Total and Other Total
---------- -------- ----------- -------- ------------ ------------
Revenue from external customers $ 29,254 $28,753(3) $2,418 $ 60,425 $ -- $ 60,425
Intercompany revenues 2,876 2,009 417 5,302 -- 5,302
Interest income 4 -- -- 4 3 7
Interest expense 535 1,448 (8) 1,975 132 2,107
Interest expense-financing fees -- 3 -- 3 811 814
Depreciation and amortization 1,215 1,848 27 3,090 56 3,146
Segment profit (loss) (1,081) 3,400 250 2,569 -- 2,569
Segment assets(1) 32,441 60,841 2,130 95,412 19,037(4) 114,449
Expenditures for segment assets 1,033 1,493 52 2,578 335(5) 2,913
16
(1) Segment assets have been adjusted for intercompany accounts to reflect
actual assets for each segment.
(2) Amounts reflect the activity for corporate headquarters not included in
the segment information.
(3) The consolidated revenues include revenues within the Nuclear Waste
Services segment from Bechtel Jacobs for the quarter and nine months ended
September 30, 2004, which total $2,627,000 or 10.8% and 6,752,000 or 11.2%
of consolidated revenues and $5,099,000 or 20.9% and $11,191,000 or 18.6%
of consolidated revenues for the same periods in 2003.
(4) Amount includes assets of approximately $1,416,000 and $10,224,000 of
assets from Perma-Fix of Michigan, Inc. a discontinued operation from the
Industrial segment as of September 30, 2004 and 2003, respectively. (see
Note 8).
(5) Amount includes asset expenditures from our discontinued operation of
$8,000 and $48,000 for the three and nine months ended September 30, 2003.
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 our financial performance;
o ability to comply with the general working capital requirements;
o ability to be able to continue to borrow under the revolving line of
credit;
o Ability to generate sufficient cash flow from operations to fund all
costs of operations and remediation of certain formerly leased
property in Dayton, Ohio, and our facilities in Memphis, Tennessee;
Detroit, Michigan; and Valdosta, Georgia;
o ability to remediate certain contaminated sites for projected
amounts;
o ability to fund up to the additional $1,100,000 of the $3,600,000
revised capital expenditure estimate during 2004;
o as the M&EC facility continues to enhance its processing
capabilities and completes certain expansion projects, we could see
higher total revenues with Bechtel Jacobs;
o increasing other sources of revenue at M&EC;
o Growth of our Nuclear segment;
o positive results in our Industrial segment from our strategy;
o improvement in the fourth quarter;
o ability under the joint ventures to win contract awards and perform
remedial activities;
o completion of the contract with the Fortune 500 company during the
first quarter of next year, and
o ability to remediate and close the Detroit, Michigan facility for
the estimated amount.
While the Company believes the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance such expectations will prove
to have been correct. There are a variety of factors, which could cause future
outcomes to differ materially from those described in this report, including,
but not limited to:
o general economic conditions;
o material reduction in revenues;
o inability to collect in a timely manner a material amount of
receivables;
o increased competitive pressures;
o the ability to maintain and obtain required permits and approvals to
conduct operations;
o the ability to develop new and existing technologies in the conduct
of operations;
o ability to retain or renew certain required permits;
o discovery of additional contamination or expanded contamination at a
certain Dayton, Ohio, property formerly leased by the Company or the
Company's facilities at Memphis, Tennessee; Valdosta, Georgia and
Detroit, Michigan, which would result in a material increase in
remediation expenditures;
18
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 impairment of intangible assets is substantially more 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 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; and
o terminations of contracts with federal agencies or subcontracts
involving federal agencies, or reduction in amount of waste
delivered to the Company under these contracts or subcontracts.
The Company undertakes no obligations to update publicly any forward-looking
statement, whether as a result of new information, future events or otherwise.
Overview
We provide services through three reportable operating segments. The Industrial
Waste Management Services segment ("Industrial segment") is engaged in on-site
and off-site treatment, storage, disposal and processing of a wide variety of
by-products and industrial, hazardous and non-hazardous wastes. 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. Our
Consulting Engineering Services segment provides a wide variety of environmental
related consulting and engineering services to both industry and government.
The results, for the third quarter of 2004 reflect the continued growth in
revenue and receipt of further contract awards within the Nuclear segment, which
resulted in increased revenue for both the three and nine months ended September
30, 2004, as compared to the same periods of 2003. We continue to enhance our
processing capabilities and efficiencies within the Nuclear segment, which has
led to the expansion of our services within additional governmental sites,
beyond the current Bechtel Jacobs Company Oak Ridge contracts, and from other
large Fortune 500 companies. We continue to work through the restructuring
efforts within the Industrial segment, which included the discontinued
operations of our Detroit, Michigan facility, the write down of certain fixed
assets and the impairment of certain goodwill and other intangible assets, all
of which resulted in non-recurring charges, which negatively impacted the
quarter. We continue to strengthen our balance sheet and borrowing position, and
reduce our debt, which should have a positive effect as we move into the final
quarter of the year.
During the third quarter in 2004 we recorded impairment estimates to intangible
assets in the aggregate of $7,101,000, which is a charge against income from
operations. For further disclosure refer to the Results of Operations section of
this Management's Discussion and Analysis. Additionally, we discontinued our
operations at our facility in Detroit, Michigan. This resulted in an aggregate
loss from discontinued operations of $10,575,000 and $11,600,000 for the three
and nine months ended September 30, 2004. The discontinued operation is further
discussed in this Management's Discussion and Analysis.
19
Results of Operations
The table below should be used when reviewing management's discussion and
analysis for the three and nine months ended September 30, 2004 and 2003. The
results of operations for the discontinued operations have been reclassified for
all reported periods out of their respective revenue and expense categories and
are recorded in the aggregate under Net income (loss) from discontinued
operations.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- ---------------------------------------
Consolidated (amounts in thousands) 2004 % 2003 % 2004 % 2003 %
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 24,337 100.0 $ 23,781 100.0 $ 60,277 100.0 $ 60,425 100.0
Cost of goods sold 16,808 69.1 14,110 59.3 43,195 71.7 41,725 69.1
-------- ----- -------- ----- -------- ----- -------- -----
Gross profit 7,529 30.9 9,671 40.7 17,082 28.3 18,700 30.9
Selling, general and administrative 4,419 18.2 4,610 19.4 12,832 21.3 13,008 21.5
Loss (gain) on disposal/impairment of
fixed assets 1,014 4.1 (14) (.1) 996 1.7 (15) --
Impairment loss on intangible assets 7,101 29.2 -- -- 7,101 11.7 -- --
-------- ----- -------- ----- -------- ----- -------- -----
Income (loss) from operations $ (5,005) (20.6) $ 5,075 21.4 $ (3,847) (6.4) $ 5,707 9.4
======== ===== ======== ===== ======== ===== ======== =====
Interest expense $ (294) (1.2) $ (735) (3.1) $ (1,535) (2.5) $ (2,107) (3.5)
Interest expense-financing fees (1,566) (6.4) (256) (1.1) (2,079) (3.4) (814) (1.3)
Preferred Stock dividends (48) (.2) (48) (.2) (142) (.2) (142) (.2)
Net income (loss) from discontinued
operations (10,575) (43.5) 29 .1 (11,600) (19.2) (226) (.4)
Summary - Three and Nine Months Ended September 30, 2004 and 2003
Net Revenue
Consolidated net revenues increased to $24,337,000 for the quarter ended
September 30, 2004, as compared to $23,781,000 for the same quarter in 2003. The
increase of $556,000 or 2.3% is primarily attributable to an increase in the
Nuclear segment of approximately $399,000 or 3.2%, resulting from the continued
expansion within the mixed waste market as our facilities demonstrate their
ability to accept and process more complex waste streams, and we receive new
contracts for additional services. The third quarter of 2004 has revenue from a
contract awarded by a Fortune 500 company in late June 2004 to treat and dispose
of mixed waste from research and development activities. Revenues from Bechtel
Jacobs Company, which includes the Oak Ridge contracts, totaled $2,627,000 or
10.8% of total consolidated revenues for the three months ended September 30,
2004, compared to $5,099,000 or 20.9% for the three months ended September 30,
2003. See "Known Trends and Uncertainties - Significant Contracts" of this
Management's Discussion and Analysis. Adding to this increase, were both the
Consulting Engineering Service segment with an increase of $80,000 or 10.5% and
the Industrial segment with an increase of $77,000 or 0.7%. The increase in the
Industrial segment resulted principally from the $2,609,000 of revenue
contributed from the two facilities acquired as of March 23, 2004. See
"Acquisitions" in this Management's Discussion and Analysis for further
information on the acquired facilities. Primarily offsetting the increase within
the Industrial segment was $1,870,000 of revenue recognized in the third quarter
of 2003, from the Army's Newport Hydrolysate project, which was not duplicated
in the third quarter of 2004. The remaining decrease is attributable to a
reduction in government revenues and to the continued restructuring and the
strategic decision to eliminate low margin broker business and replace it with
higher margin generator direct revenue.
Consolidated net revenues decreased to $60,277,000 from $60,425,000 for the
nine-month period ended September 30, 2004. This decrease of $148,000 or 0.2% is
principally attributable to a decrease in the
20
Industrial segment of approximately $2,249,000 resulting primarily from the
continued restructuring of the segment as discussed above. Positively impacting
the first nine months of 2003 was the Army's Newport Hydrolysate project, from
which we recognized revenue of $3,055,000, which was not duplicated in 2004. The
decrease for the first nine months of 2004 is also attributable to the reduction
in government revenues of approximately $1,478,000. The remaining decrease of
$3,522,000 was a result of restructuring and strategic decision to focus on
higher margin generator direct revenue. Partially offsetting the decrease within
the Industrial segment is $5,806,000 of revenue contributed from two facilities
acquired as of March 23, 2004. See "Acquisitions" in this Management's
Discussion and Analysis for further information on the acquired facilities. The
Consulting Engineering Service segment also experienced a decrease of
approximately $17,000. Offsetting these decreases, was an increase in the
Nuclear segment of approximately $2,118,000, resulting from the continued
expansion within the mixed waste market as our facilities demonstrate their
ability to accept and process more complex waste streams and we receive new
contracts for additional services, including a Fortune 500 company as discussed
above. Additionally, the first and second quarters of 2003 were negatively
effected by the government's inability to ship waste to our facilities due to
the war in Iraq and prolonged terrorism alerts, which has not been an obstacle
during 2004. Consolidated revenues with Bechtel Jacobs Company, which includes
the Oak Ridge contracts, totaled $6,752,000 or 11.2% of total revenues for the
nine months ended September 30, 2004, compared to $11,191,000 or 18.6% for the
nine months ended September 30, 2003. See "Known Trends and Uncertainties -
Significant Contracts" of this Management's Discussion and Analysis. The backlog
of stored waste within the Nuclear segment at September 30, 2004, was
approximately $12,688,000, compared to $5,782,000 at December 31, 2003.
Cost of Goods Sold
Cost of goods sold increased $2,698,000 or 19.1% for the quarter ended September
30, 2004, as compared to the quarter ended September 30, 2003. This increase in
cost of goods sold predominantly reflects an increase in the Industrial segment
of approximately $1,361,000, which principally relates to additional costs
related to the revenue generated from the two facilities acquired, as of March
23, 2004, and the additional operating costs incurred as the segment completes
its restructuring and integration efforts. Partially offsetting this increase is
the reduction in costs from 2003 due to the Army's Newport Hydrolysate project,
not repeated in 2004, which carried significantly lower costs than the
replacement revenue from the acquired facilities. Additionally, the Nuclear
segment experienced an increase of approximately $1,171,000 due to an increase
in disposal and treatment costs associated with the particular waste streams
processed during the third quarter of 2004. The Consulting Engineering Services
segment accounted for approximately $166,000 of the increase in cost of goods
sold, which corresponds with the increase in revenue and higher materials and
personnel costs. Depreciation expense of $1,143,000 and $1,016,000 for the
quarters ended September 30, 2004 and 2003, respectively, is included in cost of
goods sold, which reflects an increase of $127,000. The acquisitions contributed
$126,000 to this increase.
Cost of goods sold increased $1,470,000 or 3.5% for the nine-month period ended
September 30, 2004, as compared to the nine-month period ended September 30,
2003. This increase in cost of goods sold primarily reflects an increase in the
Nuclear segment of $1,078,000, which correlates with the increase in revenue.
Additionally, the Consulting Engineering Services segment experienced an
increase in cost of goods sold of approximately $223,000, which relates to the
higher payroll and other direct costs of projects completed this year. The
Industrial segment experienced an increase of approximately $169,000, which
primarily reflects the additional operating costs incurred as the segment
completes its restructuring and integration efforts and increased costs related
to revenue generated from the two facilities acquired, as of March 23, 2004.
Partially offsetting this increase was the reduction in costs from 2003 due to
the Army's Newport Hydrolysate project, not repeated in 2004. Included within
cost of goods sold is depreciation expense of $3,349,000 and $2,946,000 for the
nine months ended September 30, 2004 and 2003, respectively, reflecting an
increase of $403,000 over 2003, of which $282,000 was a result of the acquired
facilities.
21
Gross Profit
The resulting gross profit for the quarter ended September 30, 2004, decreased
$2,142,000 to $7,529,000, which as a percentage of revenue is 30.9%, as compared
to 40.7% for the quarter ended September 30, 2003. The decrease in gross profit
percentage primarily reflects a decrease in the Industrial segment from 27.1% in
2003 to 14.8% in 2004. This segment's decrease principally reflects the decrease
in gross profit from the elimination of the Army's Newport Hydrolysate project,
a higher margin contract, included in the third quarter of 2003. The remaining
reduction in gross margin for the segment was the addition of the March 23,
2004, acquisitions and the on going restructuring. Additionally, the Nuclear
segment decreased from 52.2% in 2003 to 44.6% in 2004, reflecting mainly a less
favorable product mix during the quarter and increased disposal costs that
correspond with different contracts. There was a decrease in the Consulting
Engineering Services segment from 38.3% in 2003 to 24.4% in 2004, which reflects
the impact of lower margin projects being performed in the third quarter of
2004.
The resulting gross profit for the nine months ended September 30, 2004,
decreased $1,618,000 to $17,082,000, which as a percentage of revenue is 28.3%,
reflecting a decrease from the 2003 corresponding nine months percentage of
revenue of 30.9%. This decrease in gross profit percentage principally reflects
a decrease in the Industrial segment from 22.5% in 2003 to 15.4% in 2004. This
segment's decrease primarily reflects the fixed costs of operating the
facilities being spread over reduced revenues, relating in part to the
restructuring. Additionally, the decrease in gross profit percentage was
significantly affected by the elimination of the Army's Newport Hydrolysate
project included in the third quarter of 2003, which had a very high gross
margin. Additionally, there was a decrease in the Consulting Engineering
Services segment from 36.5% in 2003 to 26.8% in 2004, which reflects the impact
of lower margin projects being performed in the first nine months of 2004. The
decrease in gross profit percentage was partially offset by an increase in the
Nuclear segment from 39.1% in 2003 to 39.8% in 2004.
Selling, General and Administrative
Selling, general and administrative expenses decreased $191,000 or 4.1% for the
quarter ended September 30, 2004, as compared to the quarter ended September 30,
2003. This decrease was realized by both the Industrial and Consulting
Engineering segments, and included reductions in payroll related expenses and
outside services. Partially offsetting the decrease from the restructuring
within the Industrial segment was the additional expenses related to the two
facilities acquired effective March 23, 2004. Additionally, the Nuclear segment
had a slight increase in payroll and related expenses. Depreciation and
amortization expense of $68,000 was included within selling, general and
administrative expenses for both third quarters of 2004 and 2003. As a
percentage of revenue, selling, general and administrative expenses decreased to
18.2% for the quarter ended September 30, 2004, compared to 19.4% for the same
period in 2003.
Selling, general and administrative expenses decreased $176,000 or 1.4% for the
nine months ended September 30, 2004, as compared to the same period in 2003.
This decrease relates to all segments, but the largest of which is the
Consulting Engineering Services and Industrial segments reductions in payroll
and related expenses, with the decrease in the Industrial segment primarily due
to the restructuring of the segment. Partially offsetting the decrease within
the Industrial segment are the additional expenses related to the two facilities
acquired, effective March 23, 2004. Offsetting the company's decrease was an
increase in corporate administrative expenses and the Nuclear segment's payroll
related expenses, as stronger infrastructures are built as we comply with the
Sarbanes Oxley Act of 2002. Included in selling, general and administrative
expenses is depreciation and amortization expense of $191,000 and $200,000 for
the nine months ended September 30, 2004 and 2003, respectively. As a percentage
of revenue, selling, general and administrative expenses decreased to 21.3% for
the nine months ended September 30, 2004, compared to 21.5% for the same period
in 2003.
22
Loss (Gain) on Disposal/Impairment of Fixed Assets
The loss on fixed asset disposal/impairment for the quarter ended September 30,
2004, was $1,014,000, as compared to a gain of $14,000 for the same quarter in
2003. This loss is principally a result of the Industrial segment writing down
certain fixed assets, totaling $1,026,000, which have been determined to have no
fair value. As part of the restructuring process, management abandoned various
projects at certain facilities.
The loss on fixed asset disposal/impairment for the nine months ended September
30, 2004, was $996,000, as compared to a gain of $15,000 for the same nine-month
period in 2003. This loss is principally a result of the Industrial segment
writing down certain fixed assets, totaling $1,026,000, which have been
determined to have no fair value. As part of the restructuring process,
management abandoned various projects at certain facilities.
Impairment on Intangible Assets
In conjunction with our third quarter financial reporting process, as a result
of a disparity of our Industrial reporting unit's actual operating results to
long-term projections and the discontinuation of operations at our Industrial
segment facility in Detroit, Michigan, as of September 30, 2004, (see
Discontinued Operations in this Management's Discussion and Analysis), we
engaged an independent appraisal firm to perform preliminary impairment tests of
permits and goodwill, separately for the Industrial reporting unit. The
preliminary impairment tests of the Industrial reporting unit resulted in an
estimated impairment to permits of $2,215,000 and an estimated impairment to
goodwill of approximately $4,886,000. The aggregate impairment of $7,101,000 is
our best estimate and was recorded in the third quarter as a component of Income
(loss) from operations in the Consolidated Statements of Operations. The
preliminary impairment tests of the Industrial reporting unit will be finalized,
along with the annual impairment tests, during the fourth quarter of 2004, thus
our estimated impairment loss is subject to refinement and may be adjusted, if
necessary.
Interest Expense
Interest expense decreased $441,000 for the quarter ended September 30, 2004, as
compared to the corresponding period of 2003. This decrease reflects lower
borrowing levels and interest rates on our PNC revolving credit and term loan,
resulting in a decrease in interest expense of $92,000. In March 2004, we
received proceeds from the private placement that were used to temporarily
reduce the revolver resulting in this decrease in interest expense.
Additionally, as a result of the prepayment of the senior subordinated debt in
August 2004, interest expense decreased by $63,000. In June 2004, the final
repayment of debt associated with past acquisitions was completed resulting in a
decrease in interest expense of $36,000. The remainder of the decrease is
primarily due to an adjustment to the interest payable associated with the PDC
and IRS notes, which totaled $219,000.
Interest expense also decreased by $572,000 for the nine-month period ended
September 30, 2004, as compared to the corresponding period of 2003. This
decrease reflects the impact of lower interest rates and decreased borrowing
levels on the revolving credit and term loans with PNC, which resulted in a
decrease in interest expense of $203,000 when compared to prior year. In March
2004, we received proceeds related to the private placement that was used to
temporarily reduce the revolver, which resulted in a decrease in interest
expense. Additionally, the final repayment of debt associated with past
acquisitions resulted in a decrease in interest expense of $76,000.
Additionally, as a result of the prepayment of the senior subordinated debt in
August 2004, interest expense decreased by $63,000. The remainder of the
decrease is primarily due to an adjustment to the interest payable associated
with the PDC and IRS notes, which totaled $219,000.
23
Interest Expense - Financing Fees
Interest expense-financing fees increased by $1,310,000 during the three months
ended September 30, 2004, as compared to the same period in 2003. This increase
is primarily a result of the write-off of $1,217,000 of prepaid financing fees
and debt discount associated with the early termination of senior subordinated
notes, which were paid in full in August 2004. Additionally, we expensed an
early termination fee of $190,000, paid as a result of the pre-payment. These
financing fees are principally associated with the credit facility and term loan
with PNC and the senior subordinated notes, and are amortized to expense over
the term of the loan agreements.
Interest expense-financing fees increased by $1,265,000 for the nine months
ended September 30, 2004, as compared to the corresponding period of 2003. This
increase was primarily due to a one-time write-off of fees in March 2004,
associated with other short term financing and the write-off of $1,217,000 of
prepaid financing fees and debt discount associated with the early termination
of senior subordinated notes, which were paid in full in August 2004.
Additionally, we expensed an early termination fee of $190,000 paid as a result
of the pre-payment.
Preferred Stock Dividends
Preferred Stock dividends remained relatively constant at $48,000 for the
quarters ended September 30, 2004 and 2003. The Preferred Stock dividends are
comprised of approximately $31,000 accrued dividends from our Series 17
Preferred Stock, and $17,000 from the accrual of preferred dividends on the
Preferred Stock of our subsidiary, M&EC. Preferred dividends for the nine months
remained constant at $142,000 for 2004 and 2003.
Discontinued Operation
On October 4, 2004, our Board of Directors approved the discontinuation of
operations at the facility in Detroit, Michigan ("Detroit facility"), owned by
our subsidiary, Perma-Fix of Michigan, Inc. ("PFMI"). The decision to
discontinue operations at the Detroit facility was principally as a result of
two fires that significantly disrupted operations at the facility in 2003, and
the facility's critical 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 revenues of $1,569,000 and $4,465,000, and operating losses of
$1,765,000 and $226,000 for the nine months ended September 30, 2004 and 2003,
respectively. Our estimated loss on disposals from discontinued operations of
$9,835,000 for the three and nine months ended September 30, 2004, consisted of
asset impairments, pension costs, environmental remediation and other expenses.
We recorded $1,474,000 for a pension plan withdrawal liability as a result of
terminating our union employees at PFMI. The liability is an estimate, and we
are in the process of completing an actuarial study of the withdrawal liability
under the pension plan. Additionally, we recorded accruals for environmental
closure and remediation, costs of $2,733,000, severance costs of $47,000 and
miscellaneous costs of $61,000. We recorded a non-cash tangible asset impairment
of $4,591,000 and impairment to goodwill and permits of $929,000. The tangible
asset impairment is our best estimate write down of tangible assets to fair
value. The goodwill and permit impairment is our estimate of the portion of our
goodwill and permits for the Industrial segment allocated to PFMI. Other costs
consist of amounts to be paid to close the facility and remediate the property.
The environmental closure and remediation accrual is based on our estimate at
the time of this report and could change based on the final remediation costs.
24
Assets and liabilities related to the discontinued operation have been
reclassified to separate categories in the Consolidated Balance Sheets as of
September 30, 2004 and December 31, 2003. As of September 30, 2004, assets are
recorded at their net realizable value, and consist of land and buildings of
$600,000, accounts receivable of $347,000, and estimated insurance proceeds
receivable of $455,000. The insurance receivable is an estimate of the direct
costs from the first fire at PFMI. We have submitted insurance claims for both
fires at PFMI, and are currently negotiating settlements for those claims, but
at this time we cannot estimate actual proceeds to be received. If the proceeds
exceed the estimated insurance receivable we will recognize a gain for the
additional proceeds. Liabilities as of September 30, 2004, consist of accounts
payable and current accruals of $2,554,000 and environmental and closure
accruals of $2,464,000.
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, 2004, we had cash of $458,000. This cash total reflects an
increase of $47,000 from December 31, 2003, as a result of net cash provided by
operations of $27,000 and cash provided by financing activities of $6,202,000
(principally proceeds from the issuance of Common Stock in connection with
Warrant and option exercises, issuances under our employee stock purchase plan
and the private placement completed in the first quarter, partially offset by
net repayments of our revolving credit facility and long-term debt) offset by
cash used in investing activities of $6,182,000 (principally funds used for
acquisitions, net purchases of equipment, and a deposit to the finite risk
sinking fund). We are in a net borrowing position and therefore attempt to move
all excess cash balances immediately to the revolving credit facility, so as to
reduce debt and interest expense. We utilize a centralized cash management
system, which includes remittance lock boxes and is structured to accelerate
collection activities and reduce cash balances, as idle cash is moved without
delay to the revolving credit facility. The cash balance at September 30, 2004,
represents payroll account fundings, which were not withdrawn until after
quarter-end.
Operating Activities
Accounts receivable, net of allowance for doubtful accounts, totaled
$31,391,000, an increase of $7,815,000 from the December 31, 2003 balance of
$23,576,000. This increase reflects the impact of additional accounts receivable
of $2,226,000 as a result of the assets purchased in the acquisitions discussed
below in this Management's Discussion and Analysis. Additionally, the Nuclear
segment experienced an increase of $5,633,000 as a result of the seasonal
increase in revenue that comes from DOE/DOD contractors. Offsetting these
increases, were slight decreases in the Industrial segment of $35,000 and the
Consulting Engineering segment of $9,000.
As of September 30, 2004, total consolidated accounts payable was $6,111,000, an
increase of $593,000 from the December 31, 2003, balance of $5,518,000. This
increase in accounts payable reflects the impact of the acquisitions, which
resulted in an increase of $864,000. Additionally, accounts payable increased
due to un-financed capital expenditures, offset by decreases in trade accounts
payable, which was achieved by improved cash flow.
Working capital at September 30, 2004, was $4,922,000, as compared to working
capital of $4,159,000 at December 31, 2003, reflecting an increase of $763,000.
This working capital increase reflects the increased accounts receivable balance
primarily due to the acquisitions, which contributed $1,514,000 of
25
this increase, net of the increased accounts payable balance at the end of the
period. Negatively impacting this September 30, 2004 working capital position
was the reclass of $3.5 million from long term debt to current portion, for the
unsecured promissory note due in full in August 2005, and the recording of
certain current liabilities of the discontinued operations.
Investing Activities
Our purchases of capital equipment for the nine-month period ended September 30,
2004, totaled approximately $2,502,000, including financed purchases of
$184,000. These expenditures were for expansion and improvements to the
operations principally within our Industrial and Nuclear segments. The capital
expenditures were funded by cash provided by operations and from proceeds from
the issuance of stock, upon exercise of Warrants, options and private placement
funds. We had budgeted capital expenditures of up to approximately $5,600,000
for 2004, which includes an estimated $1,675,000 for completion of certain 2003
projects in process, as well as other identified capital purchases for the
expansion and improvement to the operations and for certain compliance related
enhancements. We have revised our capital expenditures estimate for 2004, down
to approximately $3,600,000. Our purchases during 2004 include approximately
$994,000 to complete certain of the 2003 projects in process. We anticipate
funding capital expenditures by a combination of lease financing, internally
generated funds, and/or the proceeds received from Option and Warrant exercises.
Financing Activities
On December 22, 2000, we entered into a Revolving Credit, Term Loan and Security
Agreement ("Agreement") with PNC Bank, National Association, a national banking
association ("PNC") acting as agent ("Agent") for lenders, and as issuing bank.
The Agreement provided, at inception, for a term loan ("Term Loan") in the
amount of $7,000,000, which requires principal repayments based upon a
seven-year amortization, payable over five years, with monthly installments of
$83,000 and the remaining unpaid principal balance due on December 22, 2005. The
Agreement also provided for a revolving line of credit ("Revolving Credit") with
a maximum principal amount outstanding at any one time of $18,000,000, as
amended. The Revolving Credit advances are subject to limitations of an amount
up to the sum of (a) up to 85% of Commercial Receivables aged 90 days or less
from invoice date, (b) up to 85% of Commercial Broker Receivables aged up to 120
days from invoice date, (c) up to 85% of acceptable Government Agency
Receivables aged up to 150 days from invoice date, and (d) up to 50% of
acceptable unbilled amounts aged up to 60 days, less (e) reserves Agent
reasonably deems proper and necessary. The Revolving Credit advances are due and
payable in full on December 22, 2005. As of September 30, 2004, the excess
availability under our Revolving Credit was $10,127,000 based on our eligible
receivables. However, during the third quarter of 2004, our borrowings
approached the maximum line capacity under the Revolving Credit, thereby
reducing the line availability from which we could borrow to $5,294,000 as of
September 30, 2004.
Pursuant to the Agreement the Term Loan bears interest at a floating rate equal
to the prime rate plus 1 1/2%, and the Revolving Credit at a floating rate equal
to the prime rate plus 1%. The loans are subject to a prepayment fee of 1 1/2%
in the first year, 1% in the second and third years and 3/4% after the third
anniversary until termination date.
Pursuant to the terms of the Stock Purchase Agreements in connection with the
acquisition of Perma-Fix of Orlando, Inc. ("PFO"), Perma-Fix of South Georgia,
Inc. ("PFSG") and Perma-Fix of Michigan, Inc. ("PFMI"), a portion of the
consideration was paid in the form of the Promissory Notes, in the aggregate
amount of $4,700,000 payable to the former owners of PFO, PFSG and PFMI. The
Promissory Notes were paid in full in June 2004.
On August 31, 2000, as part of the consideration for the purchase of Diversified
Scientific Services, Inc. ("DSSI"), we issued to Waste Management Holdings a
long-term unsecured promissory note (the
26
"Unsecured Promissory Note") in the aggregate principal amount of $3,500,000,
bearing interest at a rate of 7% per annum and having a five-year term with
interest to be paid annually and principal due in one lump sum at the end of the
term of the Unsecured Promissory Note (August 2005).
On July 31, 2001, we issued approximately $5,625,000 of our 13.50% Senior
Subordinated Notes due July 31, 2006 (the "Notes"). The Notes were issued
pursuant to the terms of a Note and Warrant Purchase Agreement, dated July 31,
2001 (the "Purchase Agreement"), between the Company, Associated Mezzanine
Investors - PESI, L.P. ("AMI"), and Bridge East Capital, L.P. ("BEC"). The notes
were paid in full in August 2004. We also paid early termination fees of
$190,000 and recorded a non-cash expense of $1,217,000 for the write-off of
prepaid financing fees and a debt discount.
Under the terms of the Purchase Agreement, we also issued to AMI and BEC
Warrants to purchase up to 1,281,731 shares of our Common Stock ("Warrant
Shares") at an initial exercise price of $1.50 per share (the "Warrants"),
subject to adjustment under certain conditions, which were valued at $1,622,000.
The Warrants, as issued, also contain a cashless exercise provision. The Warrant
Shares are registered under an S-3 Registration Statement that was declared
effective on November 27, 2002.
In connection with the sale of the Notes, the Company, AMI, and BEC entered into
an Option Agreement, dated July 31, 2001 (the "Option Agreement"). Pursuant to
the Option Agreement, the Company granted each purchaser an irrevocable option
requiring the Company to purchase any of the Warrants or Warrant Shares then
held by the purchaser (the "Put Option"). The Put Option may be exercised at any
time commencing July 31, 2004, and ending July 31, 2008. In addition, each
purchaser granted to the Company an irrevocable option to purchase all the
Warrants or the Warrant Shares then held by the purchaser (the "Call Option").
The Call Option may be exercised at any time commencing July 31, 2005, and
ending July 31, 2008. The purchase price under the Put Option and the Call
Option is based on the quotient obtained by dividing (a) the sum of six times
the Company's consolidated EBITDA for the period of the 12 most recent
consecutive months minus Net Debt plus the Warrant Proceeds by (b) the Company's
Diluted Shares (as the terms EBITDA, Net Debt, Warrant Proceeds, and Diluted
Shares are defined in the Option Agreement). We account for the changes in
redemption value immediately as they occur and adjust the carrying value of the
security to equal the redemption value at the end of each reporting period. On
September 30, 2004, the Put Option had no value and no liability was recorded.
In conjunction with our acquisition of East Tennessee Materials and Energy
Corporation ("M&EC"), M&EC issued a promissory note f