Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
Form
10-Q
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the quarterly period ended June 30,
2007
|
o
|
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
(State
or other jurisdiction
of
incorporation or organization)
|
58-1954497
(IRS
Employer Identification Number)
|
|
|
8302
Dunwoody Place, Suite 250, Atlanta, GA
(Address
of principal executive offices)
|
30350
(Zip
Code)
|
(770)
587-9898
(Registrant’s
telephone number)
|
(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
T
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 T 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
T
|
|
Indicate
the number of shares outstanding of each of the issuer’s classes of Common
Stock, as of the close of the latest practical
date.
|
Class
|
Outstanding
at August 6, 2007
|
Common
Stock, $.001 Par Value
|
53,035,257
|
PERMA-FIX
ENVIRONMENTAL SERVICES, INC.
INDEX
PART
I
|
FINANCIAL
INFORMATION
|
Page
No.
|
|
|
|
|
|
Item
1.
|
Financial
Statements |
|
|
|
|
|
|
|
Consolidated
Balance Sheets -
June
30, 2007 (unaudited) and December 31, 20061
|
1
|
|
|
|
|
|
|
Consolidated
Statements of Operations -
Three
and Six Months Ended June 30, 2007 and 2006 (unaudited)
|
3
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows -
Six
Months Ended June 30, 2007 and 2006 (unaudited)
|
4
|
|
|
|
|
|
|
Consolidated
Statement of Stockholders’ Equity -
Six
Months Ended June 30, 2007 (unaudited)
|
5
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
6
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations
|
26
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures
About
Market Risk
|
49
|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
50
|
|
|
|
|
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
52
|
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
53
|
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
53
|
|
|
|
|
|
Item
5.
|
Other
Information
|
53
|
|
|
|
|
|
Item
6.
|
Exhibits
|
54
|
PART
I - FINANCIAL INFORMATION
ITEM
1. - FINANCIAL STATEMENTS
PERMA-FIX
ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED
BALANCE SHEETS
(Amounts
in Thousands, Except for Share Amounts)
|
|
June
30, 2007 (Unaudited)
|
|
December
31, 2006
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
|
|
$
|
60
|
|
$
|
2,528
|
|
Restricted
cash
|
|
|
35
|
|
|
35
|
|
Investment
trading securities
|
|
|
121
|
|
|
¾
|
|
Accounts
receivable, net of allowance for doubtful
|
|
|
10,547
|
|
|
9,488
|
|
account
of $73 and $168
|
|
|
|
|
|
|
|
Unbilled
receivables
|
|
|
11,758
|
|
|
12,313
|
|
Inventories
|
|
|
312
|
|
|
325
|
|
Prepaid
expenses
|
|
|
1,920
|
|
|
2,855
|
|
Other
receibables |
|
|
74
|
|
|
1,596
|
|
Current
assets included in assets for sale, net of allowance for
|
|
|
|
|
|
|
|
doubtful
accounts of $330 and $247
|
|
|
9,014
|
|
|
7,100
|
|
Total
current assets
|
|
$
|
33,841
|
|
$
|
36,240
|
|
|
|
|
|
|
|
|
|
Property
and equipment:
|
|
|
|
|
|
|
|
Buildings
and land
|
|
|
20,428
|
|
|
11,244
|
|
Equipment
|
|
|
29,929
|
|
|
20,599
|
|
Vehicles
|
|
|
141
|
|
|
141
|
|
Leasehold
improvements
|
|
|
11,458
|
|
|
11,452
|
|
Office
furniture and equipment
|
|
|
2,256
|
|
|
1,930
|
|
Construction-in-progress
|
|
|
1,295
|
|
|
4,609
|
|
|
|
|
65,507
|
|
|
49,975
|
|
Less
accumulated depreciation and amortization
|
|
|
(17,985
|
)
|
|
(16,630
|
)
|
Net
property and equipment
|
|
|
47,522
|
|
|
33,345
|
|
|
|
|
|
|
|
|
|
Property
and equipment included in assets for sale, net of accumulated depreciation
of $13,641 and $13,341
|
|
|
13,194
|
|
|
13,281
|
|
|
|
|
|
|
|
|
|
Intangibles
and other assets:
|
|
|
|
|
|
|
|
Permits
|
|
|
11,110
|
|
|
11,025
|
|
Goodwill
|
|
|
12,769
|
|
|
1,330
|
|
Unbilled
receivable - non-current
|
|
|
3,275
|
|
|
2,600
|
|
Finite
Risk Sinking Fund
|
|
|
5,633
|
|
|
4,518
|
|
Other
assets
|
|
|
1,699
|
|
|
1,954
|
|
Intangibles
and other assets included in assets held for sale
|
|
|
2,369
|
|
|
2,369
|
|
Total
assets
|
|
$
|
131,412
|
|
$
|
106,662
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
PERMA-FIX
ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED
BALANCE SHEETS, CONTINUED
(Amounts
in Thousands, Except for Share Amounts)
|
|
June
30, 2007 (Unaudited)
|
|
December
31, 2006
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Accounts
payable
|
|
$
|
5,109
|
|
$
|
2,456
|
|
Current
environmental accrual
|
|
|
447
|
|
|
453
|
|
Accrued
expenses
|
|
|
12,348
|
|
|
8,118
|
|
Unearned
revenue
|
|
|
3,758
|
|
|
3,575
|
|
Current
liabilities related to assets held for sale
|
|
|
7,525
|
|
|
6,737
|
|
Current
portion of long-term debt
|
|
|
4,080
|
|
|
2,092
|
|
Total
current liabilities
|
|
|
33,267
|
|
|
23,431
|
|
|
|
|
|
|
|
|
|
Environmental
accruals
|
|
|
296
|
|
|
348
|
|
Accrued
closure costs
|
|
|
8,665
|
|
|
4,825
|
|
Other
long-term liabilities
|
|
|
3,275
|
|
|
3,018
|
|
Long-term
liabilities related to assets held for sale
|
|
|
3,746
|
|
|
3,895
|
|
Long-term
debt, less current portion
|
|
|
13,549
|
|
|
5,407
|
|
Total
long-term liabilities
|
|
|
29,531
|
|
|
17,493
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
62,798
|
|
|
40,924
|
|
|
|
|
|
|
|
|
|
Preferred
Stock of subsidiary, $1.00 par value; 1,467,396
|
|
|
1,285
|
|
|
1,285
|
|
shares
authorized, 1,284,730 shares issued and
|
|
|
|
|
|
|
|
outstanding,
liquidation value $1.00 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Preferred
Stock, $.001 par value; 2,000,000 shares authorized,
|
|
|
|
|
|
|
|
no
shares issued and outstanding
|
|
|
¾
|
|
|
¾
|
|
Common
Stock, $.001 par value; 75,000,000 shares authorized,
|
|
|
|
|
|
|
|
52,252,363
and 52,053,744 shares issued, including 0 shares held
|
|
|
|
|
|
|
|
and
988,000 shares of treasury stock retired in 2006,
respectively
|
|
|
52
|
|
|
52
|
|
Additional
paid-in capital
|
|
|
95,691
|
|
|
92,980
|
|
Stock
subscription receivable
|
|
|
(52
|
)
|
|
(79
|
)
|
Accumulated
deficit
|
|
|
(28,362
|
)
|
|
(28,500
|
)
|
Total
stockholders' equity
|
|
|
67,329
|
|
|
64,453
|
|
Total
liabilities and stockholders' equity
|
|
$
|
131,412
|
|
$
|
106,662
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
PERMA-FIX
ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
(Amounts
in Thousands, Except for Per Share Amounts)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
13,537
|
|
$
|
14,040
|
|
$
|
26,458
|
|
$
|
26,936
|
|
Cost
of goods sold
|
|
|
8,733
|
|
|
8,107
|
|
|
17,054
|
|
|
15,950
|
|
Gross
profit
|
|
|
4,804
|
|
|
5,933
|
|
|
9,404
|
|
|
10,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
3,759
|
|
|
3,689
|
|
|
7,474
|
|
|
7,090
|
|
Loss
on disposal of property and equipment
|
|
|
2
|
|
|
¾
|
|
|
2
|
|
|
1
|
|
Income
from operations
|
|
|
1,043
|
|
|
2,244
|
|
|
1,928
|
|
|
3,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
78
|
|
|
58
|
|
|
166
|
|
|
89
|
|
Interest
expense
|
|
|
(272
|
)
|
|
(389
|
)
|
|
(473
|
)
|
|
(719
|
)
|
Interest
expense-financing fees
|
|
|
(48
|
)
|
|
(48
|
)
|
|
(96
|
)
|
|
(96
|
)
|
Other
|
|
|
9
|
|
|
(17
|
)
|
|
(7
|
)
|
|
(32
|
)
|
Income
from continuing operations before taxes
|
|
|
810
|
|
|
1,848
|
|
|
1,518
|
|
|
3,137
|
|
Income
tax expense
|
|
|
58
|
|
|
107
|
|
|
183
|
|
|
179
|
|
Income
from continuing operations
|
|
|
752
|
|
|
1,741
|
|
|
1,335
|
|
|
2,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations, net of taxes
|
|
|
470
|
|
|
84
|
|
|
(1,197
|
)
|
|
(455
|
)
|
Net
income
|
|
|
1,222
|
|
|
1,825
|
|
|
138
|
|
|
2,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock dividends
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
Net
income applicable to Common Stock
|
|
$
|
1,222
|
|
$
|
1,825
|
|
$
|
138
|
|
$
|
2,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share - basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
.01
|
|
$
|
.04
|
|
$
|
.02
|
|
$
|
.06
|
|
Discontinued
operations
|
|
|
.01
|
|
|
¾
|
|
|
(.02
|
)
|
|
(.01
|
)
|
Net
income (loss) per common share
|
|
$
|
.02
|
|
$
|
.04
|
|
|
¾
|
|
$
|
.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
.01
|
|
$
|
.04
|
|
$
|
.02
|
|
$
|
.06
|
|
Discontinued
operations
|
|
|
.01
|
|
|
¾
|
|
|
(.02
|
)
|
|
(.01
|
)
|
Net
income (loss) per common share
|
|
$
|
.02
|
|
$
|
.04
|
|
|
¾
|
|
$
|
.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of common shares used in computing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
52,131
|
|
|
45,117
|
|
|
52,097
|
|
|
44,975
|
|
Diluted
|
|
|
53,601
|
|
|
46,380
|
|
|
53,333
|
|
|
45,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
PERMA-FIX
ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
(Amounts
in Thousands)
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
138
|
|
$
|
2,503
|
|
Loss
on discontinued operations
|
|
|
1,197
|
|
|
455
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
1,335
|
|
|
2,958
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income (loss) to cash provided by (used in)
operations:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,628
|
|
|
1,510
|
|
Provision
(credit) for bad debt and other reserves
|
|
|
(41
|
)
|
|
(144
|
)
|
Loss
on disposal of property and equipment
|
|
|
2
|
|
|
1
|
|
Issuance
of Common Stock for services
|
|
|
25
|
|
|
22
|
|
Share
based compensation
|
|
|
162
|
|
|
85
|
|
Changes
in operating assets and liabilities of continuing operations, net
of
|
|
|
|
|
|
|
|
effects
from business acquisitions:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,276
|
|
|
1,849
|
|
Unbilled
receivables
|
|
|
(121
|
)
|
|
(3,141
|
)
|
Prepaid
expenses, inventories and other assets
|
|
|
2,926
|
|
|
2,821
|
|
Accounts
payable, accrued expenses, and unearned revenue
|
|
|
(596
|
)
|
|
(3,017
|
)
|
Cash
provided by continuing operations
|
|
|
6,596
|
|
|
2,944
|
|
Cash
used in discontinued operations
|
|
|
(1,815
|
)
|
|
(1,428
|
)
|
Cash
provided by Operating Activities
|
|
|
4,781
|
|
|
1,516
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment, net
|
|
|
(1,627
|
)
|
|
(1,294
|
)
|
Proceeds
from sale of plant, property and equipment
|
|
|
4
|
|
|
¾
|
|
Change
in restricted cash, net
|
|
|
¾
|
|
|
¾
|
|
Change
in finite risk sinking fund
|
|
|
(1,115
|
)
|
|
(1,080
|
)
|
Cash
used for acquisition consideration, net of cash acquired
|
|
|
(2,341
|
)
|
|
¾
|
|
Cash
used in investing activities of continuing operations
|
|
|
(5,079
|
)
|
|
(2,374
|
)
|
Cash
(used in) provided by investing activities of discontinued
operations
|
|
|
(322
|
)
|
|
134
|
|
Cash
used in Investing Activities
|
|
|
(5,401
|
)
|
|
(2,240
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
borrowings of revolving credit
|
|
|
4,452
|
|
|
1,297
|
|
Principal
repayments of long-term debt
|
|
|
(6,482
|
)
|
|
(1,208
|
)
|
Proceeds
from issuance of stock
|
|
|
359
|
|
|
1,501
|
|
Repayment
of stock subscription receivable
|
|
|
27
|
|
|
¾
|
|
Cash
(used in) provided by financing activities of continuing
operations
|
|
|
(1,644
|
)
|
|
1,590
|
|
Principal
repayment of long-term debt for discontinued operations
|
|
|
(204
|
)
|
|
(247
|
)
|
Cash
(used in) provided by financing activities
|
|
|
(1,848
|
)
|
|
1,343
|
|
|
|
|
|
|
|
|
|
(Decrease)
Increase in cash
|
|
|
(2,468
|
)
|
|
619
|
|
Cash
at beginning of period
|
|
|
2,528
|
|
|
94
|
|
Cash
at end of period
|
|
$
|
60
|
|
$
|
713
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
420
|
|
$
|
501
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Long-term
debt incurred for purchase of property and equipment
|
|
|
603
|
|
|
94
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
PERMA-FIX
ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited,
for the six months ended June 30, 2007)
(Amounts
in thousands,
|
|
|
Common
Stock
|
|
|
Additional
Paid-
|
|
|
Loan
for
|
|
|
Accumulated
|
|
|
Total
Stockholders'
|
|
except
for share amounts)
|
|
|
Shares
|
|
|
Amount
|
|
|
In
Capital
|
|
|
Equity
|
|
|
Deficit
|
|
|
Equity
|
|
Balance
at December 31, 2006
|
|
|
52,053,744
|
|
$
|
52
|
|
$
|
92,980
|
|
$
|
(79
|
)
|
$
|
(28,500
|
)
|
$
|
64,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
138
|
|
|
138
|
|
Issuance
of Common Stock for cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
services
|
|
|
¾
|
|
|
¾
|
|
|
25
|
|
|
¾
|
|
|
¾
|
|
|
25
|
|
Issuance
of Common Stock upon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercise
of Warrants & Options
|
|
|
198,619
|
|
|
¾
|
|
|
359
|
|
|
¾
|
|
|
¾
|
|
|
359
|
|
Common
Stock Issuable in conjunction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
with
acquisition
|
|
|
¾
|
|
|
|
|
|
2,165
|
|
|
|
|
|
|
|
|
2,165
|
|
Share
based compensation
|
|
|
¾
|
|
|
¾
|
|
|
162
|
|
|
¾
|
|
|
¾
|
|
|
162
|
|
Repayment
of stock subscription receivable
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
27
|
|
|
¾
|
|
|
27
|
|
Balance
at June 30, 2007
|
|
|
52,252,363
|
|
$
|
52
|
|
$
|
95,691
|
|
$
|
(52
|
)
|
$
|
(28,362
|
)
|
$
|
67,329
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
PERMA-FIX
ENVIRONMENTAL SERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2007
(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, 2006.
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 in the
United States of America 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,
2006.
On
May
18, 2007, our Board of Directors authorized management to consider the
divestiture of all or a part of our Industrial Segment. On May 25, 2007, we
entered into a letter of intent to sell our Industrial Segment to The
Environmental Quality Company (EQ), excluding our facility in Pittsburgh,
Pennsylvania, owned by our subsidiary, Perma-Fix of Pittsburgh, Inc. (“PFP), and
our facility in Detroit, Michigan, owned by our subsidiary, Perma-Fix of
Michigan, Inc. (“PFMI”), two facilities which have been approved as discontinued
operations by our Board of Directors effective November, 8, 2005, and October
4,
2004, respectively. Subsequent to entering into the letter of intent with EQ,
the EQ has advised us that they will be unable to proceed with the transaction
as contemplated by the letter of intent. As a result, we are in the process
of
considering additional offers that we have received to purchase all or portions
of our Industrial Segment. Management considers the sale of the Industrial
Segment before June 30, 2008 to be probable. At May 25, 2007, the Industrial
Segment met the held for sale criteria under Statement of Financial Accounting
Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”, and therefore, certain assets and liabilities of the
Industrial Segment are presented as held for sale, and we have ceased
depreciation of the Industrial Segment’s long-lived assets classified as held
for sale. The result of operations and cash flows of the Industrial Segment
have
been reported in the Consolidated Financial Statements as discontinued
operations for all periods presented.
The
results of operations for the six months ended June 30, 2007, are not
necessarily indicative of results to be expected for the fiscal year ending
December 31, 2007.
2.
|
Summary
of Significant Accounting
Policies
|
Our
accounting policies are as set forth in the notes to consolidated financial
statements referred to above, with the exception of investment as discussed
below, which was added to our balance sheet as of June 30, 2007, as result
of
the acquisition of Nuvotec (n/k/a Perma-Fix Northwest, Inc.) and its wholly
owned subsidiary Pacific EcoSolutions, Inc (PEcoS) (n/k/a Perma-Fix Northwest
Richland, Inc.). See “Note 10 - Acquisition” in “Notes to “Consolidated
Financial Statements” on terms and accounting treatment of the
acquisition.
Investment
Management
determines the appropriate classification of its investments at the time of
acquisition and reevaluates such determination at each balance sheet date.
The
Company accounts for its investments in debt and equity securities under
Statement of Financial Accounting Standards, (“SFAS”) 115, “Accounting for
Certain Investments in Debt and Equity Securities” which requires certain
securities to be categorized as either trading, available-for-sale, or
held-to-maturity. Available-for-sale securities are carried at fair value,
with
unrealized gains and losses, net of tax, reported as a separate component of
stockholders’ equity. Investments classified as held-to-maturity are carried at
amortized cost. The Company currently has only trading securities with
unrealized gains and losses included in earnings. The Company reviews its
investments quarterly for declines in market value that are other than
temporary. Investments that have declined in market value that are determined
to
be other than temporary, are charged to other income by writing that investment
down to market value.
Recently
Adopted Accounting Pronouncements
FIN
48
Effective
January 1, 2007, we adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48),
which supplements Statement of Financial Accounting Standards No. 109,
“Accounting for Income Taxes”, by defining the confidence level that a tax
position must meet in order to be recognized in the financial statements. FIN
48
requires that the tax effects of a position be recognized only if it is
“more-likely-than-not” to be sustained based solely on its technical merits as
of the reporting date. The more-likely-than-not threshold represents a positive
assertion by management that a company is entitled to the economic benefits
of a
tax position. If a tax position is not considered more-likely-than-not to be
sustained based solely on its technical merits, no benefits of the tax position
are to be recognized. Moreover, the more-likely-than-not threshold must continue
to be met in each reporting period to support continued recognition of a
benefit. With the adoption of FIN 48, companies are required to adjust their
financial statements to reflect only those tax positions that are
more-likely-than-not to be sustained. Any necessary adjustments would be
recorded directly to retained earnings and reported as a change in accounting
principle. We adopted FIN 48 as of January 1, 2007, and concluded that we have
not taken any uncertain tax positions on any of our open returns filed through
the period ended December 31, 2005, that would
materially distort our financial statements.
We
have
not yet filed our income tax returns for the tax year ended December 31, 2006;
however, we expect that the actual income tax returns will mirror tax positions
taken within our income tax provision for 2006. As we believe that all such
positions are fully supportable by existing Federal law and related
interpretations, there are no uncertain income tax positions to consider in
accordance with FIN 48.
We
reassess the validity of our conclusions regarding uncertain income tax
positions on a quarterly basis to determine if facts or circumstances have
arisen that might cause us to change our judgment regarding the likelihood
of a
tax position's sustainability under audit. The impact of this reassessment
for
the second quarter of 2007 did not have any impact on our results of operations,
financial condition or liquidity.
Reclassifications
Certain
prior period amounts have been reclassified to conform with the current period
presentation. Additionally, prior period balances and results have been
reclassified for the retroactive effect of discontinued operations. Refer to
Note 7.
3.
|
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 statement of operations based on their
fair values. Pro forma disclosure is no longer an alternative upon adopting
SFAS 123R.
We
adopted SFAS 123R utilizing the modified prospective method in which
compensation cost is recognized beginning with the effective date based on
SFAS 123R requirements for all (a) share-based payments granted after the
effective date and (b) awards granted to employees prior to the effective
date of SFAS 123R that remain unvested on the effective date. In accordance
with the modified prospective method, the consolidated financial statements
for
prior periods have not been restated to reflect, and do not include, the impact
of SFAS 123R.
Prior
to
our adoption of SFAS 123R, on
July 28, 2005, the Compensation and Stock Option Committee of the Board of
Directors approved the acceleration of vesting for all the outstanding and
unvested options to purchase Common Stock awarded to employees as of the
approval date. The Board of Directors approved the accelerated vesting of these
options based on the belief that it was in the best interest of our stockholders
to reduce future compensation expense that would otherwise be required in the
statement of operations upon adoption of SFAS 123R, effective beginning January
1, 2006. The accelerated vesting triggered the re-measurement of compensation
cost under current accounting standards. In the event a holder of an
accelerated vesting option terminates employment with us prior to the end of
the
original vesting term of such options, we will recognize the compensation
expense at the time of termination.
As
of
June 30, 2007, we had 2,419,833 employee stock options outstanding, which
included 1,558,500 that were outstanding and fully vested at December 31, 2005,
794,666 of the 833,000 employee stock options approved and granted on March
2,
2006, of which 242,666 are vested, and 66,667 of the 100,000 employee stock
options approved and granted on May 15, 2006, of which 33,333 became vested
and
were exercised on May 15, 2007. The weighted average exercise price of the
1,801,166 outstanding and fully vested employee stock options is $1.96 with
a
weighted contractual life of 3.79 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 October 14, 2008 to October
28, 2014. 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 have 489,000 outstanding and fully vested
director stock options, of which 90,000 became fully vested in January 2007,
with exercise price ranging from $1.2188 to $2.98 per share and expiration
dates
from December 8, 2007 to July 27, 2016. The 90,000 director stock options were
granted on July 27, 2006, resulting from the reelection of our Board of
Directors. The weighted average exercise price of the 489,000 outstanding and
fully vested director stock option is $1.97 with a weighted contractual life
of
6.17 years. We have not granted any employee or director stock options for
the
six months ended June 30, 2007.
For
the
three and six months ended June 30, 2007, we recognized share based compensation
expense of approximately $51,000 and $138,000, respectively, for the employee
stock options grants of March 2, 2006 and May 15, 2006, as compared to $56,000
and $74,000 for the same period ended June 30, 2006. For the stock option grants
on March 2, 2006 and May 15, 2006, we have estimated compensation expense based
on the fair value at grant date using the Black-Scholes valuation model, and
have recognized 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,
approximately $30,000 of the $138,000 share based compensation expense
recognized above for the six months ended June 30, 2007, was the result of
the
difference between our estimated forfeiture rate of 5.7% and the actual
forfeiture rate of 1.7% for the first year vesting of our March 2, 2006 employee
option grant. When estimating forfeitures, we consider
trends
of
actual option forfeitures. The forfeiture rates are evaluated, and revised
as
necessary. We had no share based compensation expense and recognized $24,000
for
the three and six months ended June 30, 2007, respectively, for the 90,000
director option grant made on July 27, 2006, which became vested in January
2007, as compared to no share based compensation expense and $11,000 for the
corresponding period ended June 30, 2006. The $11,000 in share based
compensation recognized for the six months ended June 30, 2006, resulted from
our director stock options granted prior to but not yet vested as of January
1,
2006, pursuant to the adoption of SFAS 123R. In total, the share compensation
expense for the three and six months ended June 30, 2007 for our director and
employee stock option impacted our results of operations by $51,000 and
$162,000, respectively, as compared to $56,000 and $85,000 for the corresponding
period ended June 30, 2006. We have approximately $518,000 of total unrecognized
compensation cost related to unvested options as of June 30, 2007, of which
approximately $109,000 will be recognized in remaining 2007, $219,000 will
be
recognized in 2008, and the remaining $190,000 in 2009.
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%. 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
computation of expected volatility is based on historical volatility from our
traded common stock. Due to our change in the contractual term and vesting
period, we utilized the
simplified method, defined in the Securities and Exchange Commission’s Staff
Accounting Bulletin No. 107, to calculate the expected term for our 2006 grants.
The
interest rate for periods within the contractual life of the award is based
on
the U.S. Treasury yield curve in effect at the time of grant.
Basic
EPS
is based on the weighted average number of shares of Common Stock outstanding
during the period. Diluted EPS includes the dilutive effect of potential common
shares.
The
following is a reconciliation of basic net income (loss) per share to diluted
net income (loss) per share for the three and six months ended June 30, 2007
and
2006:
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
(Amounts
in thousands except per share amounts)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Earnings
per share from continuing operations
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
752
|
|
$
|
1,741
|
|
$
|
1,335
|
|
$
|
2,958
|
|
Preferred
stock dividends
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
Income
from continuing operations applicable to
|
|
|
752
|
|
|
1,741
|
|
|
1,335
|
|
|
2,958
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock dividends
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
Income-
diluted
|
|
$
|
752
|
|
$
|
1,741
|
|
$
|
1,335
|
|
$
|
2,958
|
|
Basic
income per share
|
|
$
|
.01
|
|
$
|
.04
|
|
$
|
.02
|
|
$
|
.06
|
|
Diluted
income per share
|
|
$
|
.01
|
|
$
|
.04
|
|
$
|
.02
|
|
$
|
.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) - basic and diluted
|
|
$
|
470
|
|
$
|
84
|
|
$
|
(1,197
|
)
|
$
|
(455
|
)
|
Basic
income (loss) per share
|
|
$
|
.01
|
|
$
|
¾
|
|
$
|
(.02
|
)
|
$
|
(.01
|
)
|
Diluted
income (loss) per share
|
|
$
|
.01
|
|
$
|
¾
|
|
$
|
(.02
|
)
|
$
|
(.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
52,131
|
|
|
45,117
|
|
|
52,097
|
|
|
44,975
|
|
Potential
shares exercisable under stock option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plan
|
|
|
882
|
|
|
284
|
|
|
711
|
|
|
184
|
|
Potential
shares upon exercise of Warrants
|
|
|
588
|
|
|
979
|
|
|
525
|
|
|
646
|
|
Weighted
average shares outstanding - diluted
|
|
|
53,601
|
|
|
46,380
|
|
|
53,333
|
|
|
45,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential
shares excluded from above weighted average share calculations
due to
their anti-dilutive effect include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upon
exercise of options
|
|
|
115
|
|
|
1,293
|
|
|
155
|
|
|
1,293
|
|
Upon
exercise of Warrants
|
|
|
¾
|
|
|
1,776
|
|
|
¾
|
|
|
1,776
|
|
Long-term
debt consists of the following at June 30, 2007, and December 31,
2006:
(Amounts
in Thousands)
|
|
June
30, 2007 (Unaudited)
|
|
December
31, 2006
|
|
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 ½%
|
|
|
|
|
|
(8.75%
at June 30, 2007), balance due in August 2008.
|
|
|
4,452
|
|
|
¾
|
|
Term
Loan
dated December 22, 2000, payable in equal monthly
|
|
|
|
|
|
|
|
installments
of principal of $83, balance due in August 2008, variable
|
|
|
|
|
|
|
|
interest
paid monthly at prime rate plus 1% (9.25% at June 30,
2007).
|
|
|
5,000
|
|
|
5,500
|
|
Promissory
Note dated
June 25, 2001, payable in semiannual installments
|
|
|
|
|
|
|
|
on
June 30 and December 31 through December 31, 2008,
variable
|
|
|
|
|
|
|
|
interest
accrues at the applicable law rate determined under the
IRS
|
|
|
|
|
|
|
|
Code
Section (10.0% on June 30, 2007) and is payable in one lump
|
|
|
|
|
|
|
|
sum
at the end of installment period.
|
|
|
1,034
|
|
|
1,434
|
|
Promissory Note
dated June 25,2007, payable in monthly installments
|
|
|
|
|
|
|
|
of
principal of $160 starting July 2007 and $173 starting July
2008,
|
|
|
|
|
|
|
|
variable
interest paid monthly at prime rate plus 1.125%
|
|
|
4,000
|
|
|
¾
|
|
Installment
Agreement in
the Agreement and Plan of Merger with
|
|
|
|
|
|
|
|
Nuvotec
and PEcoS, dated April 27, 2007, payable in three equal yearly
|
|
|
|
|
|
|
|
installment
of principal of $833 beginning June 2009. Interest accrues
at
|
|
|
|
|
|
|
|
annual
rate of 8.25% on outstanding principal balance starting
|
|
|
|
|
|
|
|
June
2007 and payable yearly starting June 2008
|
|
|
2,500
|
|
|
¾
|
|
Installment
Agreement
dated June 25, 2001, payable in semiannual IRS
|
|
|
|
|
|
|
|
installments
on June 30 and December 31 through December 31, 2008,
|
|
|
|
|
|
|
|
variable
interest accrues at the applicable law rate determined under
the
|
|
|
|
|
|
|
|
Code
Section (10.0% on June 30, 2007) and is payable in one
|
|
|
|
|
|
|
|
lump
sum at the end of installment period.
|
|
|
253
|
|
|
353
|
|
Various
capital lease and promissory note obligations, payable 2007
to
|
|
|
|
|
|
|
|
2012,
interest at rates ranging from 5.0% to 15.7%.
|
|
|
1,372
|
|
|
1,042
|
|
|
|
|
18,611
|
|
|
8,329
|
|
Less
current portion of long-term debt
|
|
|
4,080
|
|
|
2,092
|
|
Less
long-term debt related to assets held for sale
|
|
|
982
|
|
|
830
|
|
|
|
$
|
13,549
|
|
$
|
5,407
|
|
Revolving
Credit and Term Loan Agreement
On
December 22, 2000, we entered into a Revolving Credit, Term Loan and Security
Agreement (“Agreement”) with PNC Bank, National Association, a national banking
association (“PNC”) acting as agent (“Agent”) for lenders, and as issuing bank,
as amended. The Agreement provides for a term loan (“Term Loan”) in the amount
of $7,000,000, which requires monthly installments of $83,000 with the remaining
unpaid principal balance due on May 31, 2008. The Agreement also provides for
a
revolving line of credit (“Revolving Credit”) with a maximum principal amount
outstanding at any one time of $18,000,000, as amended. The Revolving Credit
advances are subject to limitations of an amount up to the sum of (a) up to
85%
of Commercial Receivables aged 90 days or less from invoice date, (b) up to
85%
of Commercial Broker Receivables aged up to 120 days from invoice date, (c)
up
to 85% of acceptable Government Agency Receivables aged up to 150 days from
invoice date, and (d) up to 50% of acceptable unbilled amounts aged up to 60
days, less (e) reserves the Agent reasonably deems proper and necessary. As
of
June 30, 2007, the excess availability under our Revolving Credit was $7,006,000
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 ½%. The Agreement was subject to a prepayment fee
of 1% until March 25, 2006, and ½% until March 25, 2007, had we elected to
terminate the Agreement with PNC.
On
June
12, 2007, we entered into Amendment No. 6 with PNC Bank. Pursuant to Amendment
No. 6, PNC provided Consent to the Company’s acquisition of Nuvotec (n/k/a
Perma-Fix Northwest, Inc.) and its wholly owned subsidiary, PEcoS (k/n/a
Perma-Fix of Northwest Richland, Inc.), which was completed on June 13, 2007.
See “Note 10 - Acqusition” in “Notes to Consolidated Financial Statements” for
terms and accounting treatment of the acquisition. PNC also provided consent
for
the Company to issue a corporate guaranty for a portion of the debt being
assumed as result of the acquisition. In addition, the Amendment provided us
with an additional $2,000,000 of availability via a sub-facility within our
secured revolver loan. The availability from this sub-facility will be amortized
at a rate of $83,333 per month.
On
July
18, 2007, we entered into Amendment No. 7 with PNC Bank, which extended the
due
date of the $25 million credit facility entered into on December 22, 2000 from
May 31, 2008 to August 29, 2008. Pursuant to the term of the Amendment, we
may
terminate the agreement upon 60 days’ prior written notice upon payment in full
of the obligation.
Promissory
Notes
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 2007
will be approximately $400,000 semiannually. Interest is accrued at the
applicable law rate (“Applicable Rate”) pursuant to the provisions of section
6621 of the Internal Revenue Code of 1986 as amended (10% on June 30, 2007)
and
payable in one lump sum at the end of the loan period. On June 30, 2007, the
outstanding balance was $2,951,000 including accrued interest of approximately
$1,917,000. 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.
In
conjunction with our acquisition of Nuvotec (n/k/as Perma-Fix Northwest, Inc.)
and PEcoS (n/k/a as Perma-Fix Northwest Richland, Inc.), which was completed
on
June 13, 2007, we entered into a promissory note for a principal amount of
$4.0
million to KeyBank National Association, dated June 13, 2007, which represents
debt assumed by us as result of the acquisition. The promissory note is payable
over a two years period with monthly principal repayment of $160,000 starting
July 2007 and $173 starting July 2008, along with accrued interest. Interest
is
accrued at prime rate plus 1.125%.
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 2007
will be approximately $100,000 semiannually. Interest is accrued at the
Applicable Rate, and is adjusted on a quarterly basis and payable in lump sum
at
the end of the installment period. On June 30, 2007, the rate was 10%. On June
30, 2007, the outstanding balance was $715,000 including accrued interest of
approximately $462,000. 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.
In
conjunction with our acquisition of Nuvotec (n/k/as Perma-Fix Northwest, Inc.)
and PEcoS (n/k/a as Perma-Fix Northwest Richland, Inc.), which was completed
on
June 13, 2007, pursuant to the Agreement and Plan of Merger, dated April 27,
2007, which was subsequently amended on June 13, 2007, we agreed to pay
shareholders of Nuvotec that qualified as accredited investors pursuant to
Rule
501 of Regulation D promulgated under the Securities Act of 1933, $2.5 million,
with principal payable in equal installment of $833,333 on June 30, 2009, June
30, 2010, and June 30, 2011. Interest is accrued on outstanding principal
balance at 8.25% starting in June 2007 and is payable on June 30, 2008, June
30,
2009, June 30, 2010, and June 30, 2011.
6.
|
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 litigation.
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, 2006,
and
our
Form 10-Q for the period ended March 31, 2007, except as follows:
We
have
previously disclosed that in December 2004, our Dayton, Ohio subsidiary,
Perma-Fix of Dayton, Inc. (PFD) was sued under the citizen’s suit provisions of
the Clean Air Act in the United States District Court for the Southern District
of Ohio, Western District, styled Barbara
Fisher v. Perma-Fix of Dayton, Inc.
The suit
alleges violation by PFD of a number of state and federal clean air statutes
in
connection with the operation of PFD’s facility, primarily due to PFD’s
operating its facility without a Title V air permit. The complaint further
alleges that PFD failed to install appropriate air pollution control equipment,
conduct appropriate recordkeeping, properly monitor and report, and further
alleges that air emissions from PFD’s facility injured persons, endangered the
health of the public and constituted a nuisance in violation of Ohio law. The
action seeks remediation, injunctive relief, imposition of civil penalties,
attorney fees, and costs and other forms of relief. On
or
about May 19, 2006, the U.S. Department of Justice (“DOJ”), on behalf of the
EPA, intervened in the case seeking injunctive relief and civil penalties
against PFD for alleged violations which parallel certain claims asserted in
the
citizen’s suit, including claims PFD’s failure to have obtained, and to have
operated its facility without, a Title V air permit, failure to install
appropriate air pollution control equipment and conduct appropriate
recordkeeping, monitoring and reporting was in violation of the Clean Air Act
and applicable regulations. The federal complaint also alleges that PFD failed
to respond to a formal request for information from the EPA in a timely manner
and request civil penalties.
On
April
25, 2007, PFD reached an agreement in principle (“AIP”) with DOJ/USEPA
representatives to settle all of the United States’ claims. In addition to
taking specific actions to address relevant air pollution control regulations
and permit requirements, the AIP states that PFD will pay a civil penalty of
$800,000. However, at this time, PFD expects the $800,000 may consist of as
many
as three components: 1) cash payment to the appropriate regulatory authority;
2)
supplemental environmental project(s) consisting of cash equivalent
investment(s) in PFD’s facility and/or the local community; and 3) supplemental
environmental project(s) consisting of one or more capital projects. Completing
a formal settlement agreement (consent decree) and meeting the DOJ/EPA official
approval requirements (including public notice and comment) is on-going. Cost
estimates associated with taking action to address air pollution control
regulations and permit requirements will depend on specific details of the
consent decree. Absent agreement on all terms and format of such a final consent
decree is not reached, then the AIP will be null and void and no party may
seek
to enforce it. The AIP does not address the citizen’s suit. We therefore, expect
the citizen’s suit to continue after settlement with the federal government. PFD
continues to mount a vigorous defense against, and seek an acceptable resolution
of, the claims and requests for relief of the citizen’s group.
As
of
June 30, 2007, we have incurred approximately $2.9 million in costs in
vigorously defending against the lawsuits above. About $1.2 million was incurred
in the first quarter of 2007. On April 12, 2007, our insurer, American
International Group (“AIG”), withdrew
its prior coverage denial and has agreed to defend and indemnify PFD in the
above lawsuit described, subject to AIG’s reservation of rights as discussed
below.
AIG
has
agreed to reimburse PFD for reasonable defense costs of litigation prior to
its
assumption of the defense, but this agreement to defend and indemnify PFD is
subject to the AIG’s reservation of its rights to deny indemnity pursuant to
various policy provisions and exclusions, including, without limitation, payment
of any civil penalties and fines, as well as and AIG’s right to recoup any
defense cost it has advanced if AIG later determines that its policy provides
no
coverage. At this time, the amount of AIG’s reimbursement for legal and out of
pocket defense costs incurred to date is estimated to be $2.5 million, which
AIG
has agreed to reimburse and which we have recorded as a recovery within our
discontinued operations for the quarter ended June 30, 2007. Partial
reimbursement from AIG of $750,000 was received on July 11, 2007. The balance
of
the reimbursement is currently expected to be received during the third quarter
of 2007.
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 a maximum $35 million of financial
assurance coverage of which the coverage amount totals $30,096,000 at June
30,
2007, 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 2007, we paid our fourth of nine required annual installments of
$1,004,000, of which $991,000 was deposited in the sinking fund account, the
remaining $13,000 represents a terrorism premium. As of June 30, 2007, we have
recorded $5,633,000 in our sinking fund on the balance sheet, which includes
interest earned of $436,000 on the sinking fund as of June 30, 2007. Interest
income for the three and six months ended June 30, 2007, was $67,000 and
$124,000, respectively.
7.
|
Discontinued
Operations
|
Our
Industrial Segment has sustained losses in each year since 2000. The facilities
in our Industrial Segment provide on-and-off site treatment, storage, processing
and disposal of hazardous and non-hazardous industrial waste, and wastewater.
Certain of our facilities within the Industrial Segment provide waste management
services to governmental agencies. On May 18, 2007, our Board of Directors
authorized management to consider the divestiture of all or a part of our
Industrial Segment. On May 25, 2007, we entered into a letter of intent to
sell
our Industrial Segment to The Environmental Quality Company (EQ), excluding
our
facility in Pittsburgh, Pennsylvania,
owned
by
our subsidiary, Perma-Fix of Pittsburgh, Inc. (“PFP), and our facility in
Detroit, Michigan, owned by our subsidiary, Perma-Fix of Michigan, Inc.
(“PFMI”), two facilities which have been approved as discontinued operations by
our Board of Directors effective November, 8, 2005, and October 4, 2004,
respectively. Subsequent to entering into the letter of intent with EQ, EQ
has
advised us that they will be unable to proceed with the transaction as
contemplated by the letter of intent. As a result, we are in the process of
considering additional offers that we have received to purchase all or portions
of our Industrial Segment. Management considers the sale of the Industrial
Segment before June 30, 2008 to be probable.
At
May
25, 2007, the Industrial Segment met the held for sale criteria under Statement
of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”, and therefore, certain assets and
liabilities of the Industrial Segment are presented as held for sale, and we
have ceased depreciation of the Industrial Segment’s long-lived assets
classified as held for sale. The result of operations and cash flows of the
Industrial Segment have been reported in the Consolidated Financial Statements
as discontinued operations for all periods presented.
We
performed an updated internal analysis on the tangible and intangible assets
to
test for impairment in the Industrial Segment, as required by Statement of
Financial Accounting Standard (SFAS) 144, “Accounting for the Impairment or
disposal of Long-Lived Assets” and SFAS 142, “Goodwill and Other Intangible
Assets”. Our analysis included the comparison of the offered sale price to the
carrying value of the investment in the Industrial Segment. Based on our
analysis of recent development and consideration of our most recent October
1,
2006 report which was conducted by an independent appraiser, we concluded that
no impairment existed as of June 30, 2007.
The
following table summarizes the results of discontinued operations for the three
and six months ended June 20, 2007, and 2006. These results are included in
our
Consolidated Statements of Operations as part of our “Income (loss) from
discontinued operations, net of taxes”.
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
(Amounts
in Thousands)
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
8,152
|
|
$
|
9,474
|
|
$
|
15,387
|
|
$
|
17,696
|
|
Operating
income (loss) from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discontinued
operations
|
|
$
|
470
|
|
$
|
84
|
|
$
|
(1,197
|
)
|
$
|
(455
|
)
|
Income
tax provision
|
|
|
¾
|
|
|
¾
|
|
$
|
¾
|
|
|
¾
|
|
Income
(loss) from discontinued operations
|
|
$
|
470
|
|
$
|
84
|
|
$
|
(1,197
|
)
|
$
|
(455
|
)
|
As
previously disclosed, the Company’s insurer recently withdrew its prior denial
of coverage and agreed to defend and indemnify Perma-Fix and its Dayton, Ohio
subsidiary in the previously disclosed lawsuit brought against the Dayton,
Ohio
subsidiary by a citizens’ group and the federal government alleging, among other
things, that our Dayton subsidiary was operating without appropriate air
permits. Our insurer’s agreement is subject to a reservation of rights to deny
indemnity pursuant to various provisions and exclusions under the policy,
including, without limitation, payment of any civil penalties and fines, and
the
insurer’s right to recoup any defense cost it has advanced in the event that the
policy provides no coverage. Perma-Fix has recently been advised that its
insurer will reimburse the Company for approximately $2.5 million previously
spent to defend this litigation. As a result, the Company recorded a recovery
within discontinued operations of $2.5 million for the quarter ended June 30,
2007. In accordance with EITF (Emerging Issues Task Force) 01-10, Perma-Fix
has
received $750,000 of the $2.5 million anticipated cash reimbursement from its
insurer and anticipates recovering the balance during the third quarter of
2007.
This was partially offset by $800,000 of reserves recorded in discontinued
operations for the anticipated settlement (see “Note 6 - Commitments and
Contingencies - Legal”).
Asset
and
liabilities related to discontinued operations total $24,577,000 and $11,271,000
as of June 30, 2007, respectively and $22,750,000 and $10,632,000 as of December
31, 2006, respectively.
The
following table presents Industrial Segment’s major classes of assets and
liabilities classified as held for sale as of June 30, 2007, and December 31,
2006:
(Amounts
in Thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Account
receivable, net
|
|
$
|
5,036
|
|
$
|
5,768
|
|
Inventories
|
|
|
543
|
|
|
522
|
|
Other
assets
|
|
|
5,804
|
|
|
3,179
|
|
Property,
plant and equipment, net
|
|
|
13,194
|
|
|
13,281
|
|
Total
assets held for sale
|
|
$
|
24,577
|
|
$
|
22,750
|
|
Account
payable
|
|
$
|
2,096
|
|
$
|
2,132
|
|
Accrued
expenses and other liabilities
|
|
|
4,433
|
|
|
3,760
|
|
Deferred
revenue
|
|
|
¾
|
|
|
¾
|
|
Note
payable
|
|
|
982
|
|
|
830
|
|
Environmental
liabilities
|
|
|
1,094
|
|
|
1,094
|
|
Total
liabilities held for sale
|
|
$
|
8,605
|
|
$
|
7,816
|
|
The
table
above represents the respective assets and liabilities that are held for sale
as
of June 30, 2007, and December 31, 2006 which excludes certain liabilities,
consisting of the pension liability at Perma-Fix Michigan (see discussion below)
and the environmental liabilities at Perma-Fix of Michigan and Perma-Fix Dayton.
Pension liability of $1,352,000 and environmental liabilities of $1,314,000
are
excluded from liabilities held for sale as of June 30, 2007, and pension
liability of $1,433,000 and environmental liabilities of $1,383,000 are excluded
from liabilities held for sale as of December 31, 2006. The held for sale asset
and liabilities balances as of June 30, 2007 may differ from the respective
balances at closing.
Non
Operational Facilities
The
Industrial Segment includes two previously shut-down facilities which were
presented as discontinued operations in prior years. These facilities include
Perma-Fix of Pittsburgh (PFP) and Perma-Fix of Michigan (PFMI). Our decision
to
discontinue operations at PFP was due to our reevaluation of the facility and
our inability to achieve profitability at the facility. During February 2006,
we
completed the remediation of the leased property and the equipment at PFP,
and
released the property back to the owner. Our 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. As a result of the discontinued
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 is 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 estimated the cost of this environmental closure and
remediation liability to be $2,464,000. During 2006 we re-evaluated our required
activities to close and remediate the facility, and during the quarter ended
June 30, 2006, we began implementing the modified methodology to remediate
the
facility. As a result of the reevaluation and the change in methodology, we
reduced the accrual by $1,182,000. We
have spent approximately $689,000 for closure costs since September 30, 2004,
of
which $60,000 has been spent during the six months of 2007 and $74,000 was
spent
in 2006. We have $593,000 accrued for the closure, as of June 30, 2007, and
we
anticipate spending $346,000 in 2007 with the remainder over the next five
years.
As
of June 30, 2007, PFMI has a pension payable of $1,352,000. The
pension plan withdrawal liability, is a result of the termination of the union
employees of PFMI. The PFMI union employees participate in the Central States
Teamsters Pension Fund ("CST"), which provides that a partial or full
termination of union employees may result in a withdrawal liability, due from
PFMI to CST. 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 $158,000 that we expect to pay over the next
year.
Pursuant
to FAS 131, we define an operating segment as a business activity:
·
|
from
which we may earn revenue and incur expenses;
|
·
|
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
|
·
|
For
which discrete financial information is
available.
|
We
currently have two 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, which include our facilities
in our Industrial Segment. (See “Note 7 - Discontinued Operations” to “Notes to
Consolidated Financial Statements”.
Our
operating segments are defined as follows:
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 four facilities; Perma-Fix of Florida, Inc.,
Diversified Scientific Services, Inc., East Tennessee Materials and Energy
Corporation, and our newly acquired facility, Perma-Fix of Northwest (See “Note
10 - Acquisition” to “Notes to Consolidated Financial Statements”).
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.
Our
discontinued operations encompass our facilities in our Industrial Waste
Management Services Segment which 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. Our discontinued operations also include
PFMI
and PFP, two non-operational facilities.
The
following table presents certain financial information in thousands by business
segment as of and for the three and six months ended June 30, 2007 and 2006,
for
our operating segments.
Segment
Reporting for the Quarter Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Nuclear
|
|
|
|
Engineering
|
|
Segments
Total
|
|
Corporate
(2)
|
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$
|
13,005
|
|
|
|
|
$
|
532
|
|
$
|
13,537
|
|
|
|
|
|
|
|
$
|
13,537
|
|
Intercompany
revenues
|
|
|
737
|
|
|
|
|
|
308
|
|
|
1,045
|
|
|
¾
|
|
|
|
|
|
1,045
|
|
Gross
profit
|
|
|
4,639
|
|
|
|
|
|
165
|
|
|
4,804
|
|
|
¾
|
|
|
|
|
|
4,804
|
|
Interest
income
|
|
|
¾
|
|
|
|
|
|
¾
|
|
|
¾
|
|
|
78
|
|
|
|
|
|
78
|
|
Interest
expense
|
|
|
131
|
|
|
|
|
|
¾
|
|
|
131
|
|
|
141
|
|
|
|
|
|
272
|
|
Interest
expense-financing fees
|
|
|
¾
|
|
|
|
|
|
¾
|
|
|
¾
|
|
|
48
|
|
|
|
|
|
48
|
|
Depreciation
and amortization
|
|
|
832
|
|
|
|
|
|
9
|
|
|
841
|
|
|
16
|
|
|
|
|
|
857
|
|
Segment
profit (loss)
|
|
|
2,295
|
|
|
|
|
|
43
|
|
|
2,338
|
|
|
(1,586
|
)
|
|
|
|
|
752
|
|
Segment
assets(1)
|
|
|
95,572
|
|
|
|
|
|
2,008
|
|
|
97,580
|
|
|
33,832
|
|
|
(4)
|
|
|
131,412
|
|
Expenditures
for segment assets
|
|
|
496
|
|
|
|
|
|
2
|
|
|
498
|
|
|
10
|
|
|
|
|
|
508
|
|
Total
long-term debt
|
|
|
8,166
|
|
|
|
|
|
11
|
|
|
8,177
|
|
|
9,452
|
|
|
(5)
|
|
|
17,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Reporting for the Quarter Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nuclear
|
|
|
|
|
|
Engineering
|
|
|
Segments
Total
|
|
|
Corporate
(2)
|
|
|
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$
|
13,106
|
|
|
(3)
|
|
$
|
934
|
|
$
|
14,040
|
|
|
|
|
|
|
|
$
|
14,040
|
|
Intercompany
revenues
|
|
|
596
|
|
|
|
|
|
130
|
|
|
726
|
|
|
¾
|
|
|
|
|
|
726
|
|
Gross
profit
|
|
|
5,714
|
|
|
|
|
|
219
|
|
|
5,933
|
|
|
¾
|
|
|
|
|
|
5,933
|
|
Interest
income
|
|
|
¾
|
|
|
|
|
|
¾
|
|
|
¾
|
|
|
58
|
|
|
|
|
|
58
|
|
Interest
expense
|
|
|
123
|
|
|
|
|
|
¾
|
|
|
123
|
|
|
266
|
|
|
|
|
|
389
|
|
Interest
expense-financing fees
|
|
|
¾
|
|
|
|
|
|
¾
|
|
|
¾
|
|
|
48
|
|
|
|
|
|
48
|
|
Depreciation
and amortization
|
|
|
735
|
|
|
|
|
|
10
|
|
|
745
|
|
|
12
|
|
|
|
|
|
757
|
|
Segment
profit (loss)
|
|
|
3,375
|
|
|
|
|
|
60
|
|
|
3,435
|
|
|
(1,694
|
)
|
|
|
|
|
1,741
|
|
Segment
assets(1)
|
|
|
64,593
|
|
|
|
|
|
2,483
|
|
|
67,076
|
|
|
32,468
|
|
|
(4)
|
|
|
99,544
|
|
Expenditures
for segment assets
|
|
|
954
|
|
|
|
|
|
26
|
|
|
980
|
|
|
12
|
|
|
|
|
|
992
|
|
Total
long-term debt
|
|
|
2,562
|
|
|
|
|
|
19
|
|
|
2,581
|
|
|
9,744
|
|
|
(5)
|
|
|
12,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Reporting for the Six Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Nuclear
|
|
|
|
|
|
Engineering
|
|
|
Segments
Total
|
|
|
Corporate(2)
|
|
|
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$
|
25,349
|
|
|
|
|
$
|
1,109
|
|
$
|
26,458
|
|
|
|
|
|
|
|
$
|
26,458
|
|
Intercompany
revenues
|
|
|
1,292
|
|
|
|
|
|
543
|
|
|
1,835
|
|
|
¾
|
|
|
|
|
|
1,835
|
|
Gross
profit
|
|
|
9,071
|
|
|
|
|
|
333
|
|
|
9,404
|
|
|
¾
|
|
|
|
|
|
9,404
|
|
Interest
income
|
|
|
¾
|
|
|
|
|
|
¾
|
|
|
¾
|
|
|
166
|
|
|
|
|
|
166
|
|
Interest
expense
|
|
|
222
|
|
|
|
|
|
1
|
|
|
223
|
|
|
250
|
|
|
|
|
|
473
|
|
Interest
expense-financing fees
|
|
|
¾
|
|
|
|
|
|
¾
|
|
|
¾
|
|
|
96
|
|
|
|
|
|
96
|
|
Depreciation
and amortization
|
|
|
1,575
|
|
|
|
|
|
18
|
|
|
1,593
|
|
|
35
|
|
|
|
|
|
1,628
|
|
Segment
profit (loss)
|
|
|
4,305
|
|
|
|
|
|
92
|
|
|
4,397
|
|
|
(3,062
|
)
|
|
|
|
|
1,335
|
|
Segment
assets(1)
|
|
|
95,572
|
|
|
|
|
|
2,008
|
|
|
97,580
|
|
|
33,832
|
|
|
(4)
|
|
|
131,412
|
|
Expenditures
for segment assets
|
|
|
1,849
|
|
|
|
|
|
13
|
|
|
1,862
|
|
|
13
|
|
|
|
|
|
1,875
|
|
Total
long-term debt
|
|
|
8,166
|
|
|
|
|
|
11
|
|
|
8,177
|
|
|
9,452
|
|
|
(5)
|
|
|
17,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Reporting for the Six Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Nuclear
|
|
|
|
|
|
Engineering
|
|
|
Segments
Total
|
|
|
Corporate(2)
|
|
|
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$
|
25,264
|
|
|
(3)
|
|
$
|
1,672
|
|
$
|
26,936
|
|
|
|
|
|
|
|
$
|
26,936
|
|
Intercompany
revenues
|
|
|
1,269
|
|
|
|
|
|
240
|
|
|
1,509
|
|
|
¾
|
|
|
|
|
|
1,509
|
|
Gross
profit
|
|
|
10,535
|
|
|
|
|
|
451
|
|
|
10,986
|
|
|
¾
|
|
|
|
|
|
10,986
|
|
Interest
income
|
|
|
¾
|
|
|
|
|
|
¾
|
|
|
¾
|
|
|
89
|
|
|
|
|
|
89
|
|
Interest
expense
|
|
|
235
|
|
|
|
|
|
1
|
|
|
236
|
|
|
483
|
|
|
|
|
|
719
|
|
Interest
expense-financing fees
|
|
|
¾
|
|
|
|
|
|
¾
|
|
|
¾
|
|
|
96
|
|
|
|
|
|
96
|
|
Depreciation
and amortization
|
|
|
1,467
|
|
|
|
|
|
20
|
|
|
1,487
|
|
|
23
|
|
|
|
|
|
1,510
|
|
Segment
profit (loss)
|
|
|
6,082
|
|
|
|
|
|
151
|
|
|
6,233
|
|
|
(3,275
|
)
|
|
|
|
|
2,958
|
|
Segment
assets(1)
|
|
|
64,593
|
|
|
|
|
|
2,483
|
|
|
67,076
|
|
|
32,468
|
|
|
(4)
|
|
|
99,544
|
|
Expenditures
for segment assets
|
|
|
1,218
|
|
|
|
|
|
51
|
|
|
1,269
|
|
|
25
|
|
|
|
|
|
1,294
|
|
Total
long-term debt
|
|
|
2,562
|
|
|
|
|
|
19
|
|
|
2,581
|
|
|
9,744
|
|
|
(5)
|
|
|
12,325
|
|
(1) |
Segment
assets have been adjusted for intercompany accounts to reflect
actual
assets for each segment.
|
(2) |
Amounts
reflect the activity for corporate headquarters not included in the
segment information.
|
(3)
|
The
consolidated revenues within the Nuclear segment include the LATA/Parallax
revenues for the three and six months ended June 30, 2007, which
total
$2,056,000 or 15.2% and $4,010,000 or 15.2% of total revenues,
respectively. LATA/Parallax revenues for same periods in 2006 were
$4,214,000 or 30.0% and $4,401,000 or 16.3%.
|
(4)
|
Amount
includes assets from our discontinued operations of $24,577,000 and
$24,191,000 as of June 30, 2007 and 2006, respectively.
|
(5)
|
Includes
the balance outstanding from our revolving line of credit and term
loan,
which is utilized by all of our
segments.
|
In
July
2006, the Financial Accounting Standard Board (FASB) issued FASB Interpretation
No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, “Accounting
for Income Taxes”. FIN 48 requires a company to evaluate whether the tax
position taken by a company will more likely than not be sustained upon
examination by the appropriate taxing authority. It also provides guidance
on
how a company should measure the amount of benefit that the company is to
recognize in its financial statements. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006.
We
adopted FIN 48 as of January 1, 2007. As a result of the implementation of
FIN
48, we have concluded that we have not taken any uncertain tax positions on
any
of our open income tax returns filed through the period ended December 31,
2005
that would materially distort our financial statement. Our methods of accounting
are based on established income tax principles approved in the Internal Revenue
Code (IRC) and are properly calculated and reflected within our income tax
returns. In addition, we have filed income tax returns in all applicable
jurisdictions in which we had material nexus warranting an income tax return
filing.
We
have
not yet filed our income tax returns for the tax year ended December 31, 2006;
however, we expect that the actual income tax returns will mirror tax positions
taken within our income tax provision for 2006. As we believe that all such
positions are fully supportable by existing Federal law and related
interpretations, there are no uncertain income tax positions to consider in
accordance with FIN 48.
We
reassess the validity of our conclusions regarding uncertain income tax
positions on a quarterly basis to determine if facts or circumstances have
arisen that might cause us to change our judgment regarding the likelihood
of a
tax position's sustainability under audit. The impact of this reassessment
for
the second quarter of 2007 did not have any impact on our results of operations,
financial condition or liquidity.
10.
|
Acquisition
of Nuvotec
|
On
June
13, 2007, the Company completed its acquisition of Nuvotec and its wholly owned
subsidiary, Pacific Ecosolutions, Inc (PEcoS), pursuant to the terms of the
Merger Agreement, between Perma-Fix, Perma-Fix’s wholly owned subsidiary,
Transitory, Nuvotec, and PEcoS, dated April 27, 2007, which was subsequently
amended on June 13, 2007. The Company acquired 100% of the voting shares of
Nuvotec. The acquisition was structured as a reverse subsidiary merger, with
Transitory being merged into Nuvotec, and Nuvotec being the surviving
corporation. As a result of the merger, Nuvotec became a wholly owned subsidiary
of Perma-Fix Environmental Services Inc. (PESI). Nuvotec’s name was changed to
Perma-Fix Northwest, Inc. (“PFNW”). PEcoS, whose name was changed to Perma-Fix
Northwest Richland, Inc. (“PFNWR”) on August 2, 2007, is a wholly-owned
subsidiary of PFNW. PEcoS is a permitted hazardous, low level radioactive and
mixed waste treatment, storage and disposal facility located in the Hanford
U.S.
Department of Energy site in the eastern part of the state of Washington. The
strategic addition of Nuvotec provides the Company with immediate access to
treat some of the most complex nuclear waste streams in the nation should
provide significant growth opportunity in the coming years.
Under
the
terms of the Merger Agreement, the purchase price paid by the Company in
connection with the acquisition was $16.7 million, consisting of as follows:
(a) |
$2.3
million in cash at closing of the merger, with $1.5 million payable
to
unaccredited shareholders and $0.8 million payable to shareholders
of
Nuvotec that qualified as accredited investors pursuant to Rule 501
of
Regulation D promulgated under the Securities Act of 1933, as amended
(the
“Act”):accredited shareholders.
|
(b) |
Also
payable only to the shareholders of Nuvotec that qualified as accredited
investors:
|
· |
$2.5
million, payable over a four year period, unsecured and nonnegotiable
and
bearing an annual rate of interest of 8.25%, with (i) accrued interest
only payable on June 30, 2008, (ii) $833,333.33, plus accrued and
unpaid
interest, payable on June 30, 2009, (iii) $833,333.33, plus accrued
and
unpaid interest, payable on June 30, 2010, and (iv) the remaining
unpaid
principal balance, plus accrued and unpaid interest, payable on June
30,
2011 (collectively, the “Installment Payments”). The Installment Payments
may be prepaid at any time by Perma-Fix without penalty; and
|
· |
709,207
shares of Perma-Fix common stock, which were issued on July 23, 2007,
with
such number of shares determined by dividing $2.0 million by 95%
of
average of the closing price of the common stock as quoted on the
Nasdaq
during the 20 trading days period ending five business days prior
to the
closing of the merger. The value of these shares on June 13, 2007
was $2.2
million, which was determined by the average closing price of the
common
stock as quoted on the Nasdaq four days prior to and following the
completion date of the acquisition, which was June 13, 2007.
|
(c) |
The
assumption of $9.4 million of debt, $8.9 million of which was payable
to
KeyBank National Association which represents debt owed by PFNW
under a
credit facility. As part of the closing, the Company paid down
$5.4
million of this debt resulting in debt remaining of $4.0
million.
|
(d) |
Transaction
costs totaling $0.3 million.
|
In
addition to the above, an agreement to a contingency of an earn-out amount
not
to exceed $4.4 million over a four year period (“Earn-Out Amount”). The earn-out
amounts will be earned if certain annual revenue targets are met by the
Company’s combined Nuclear Segment. The first $1.0 million of the earn-out
amount, when earned, will be placed in an escrow account to satisfy certain
indemnification obligations under the Merger Agreement of Nuvotec, PEcoS, and
the shareholders of Nuvotec to Perma-Fix that are identified by Perma-Fix within
the escrow period as provided in the Merger Agreement. As of June 30, 2007
the
Company has not made or accrued any earn-out payments to Nuvotec shareholders
because such revenue targets have not been met.
The
acquisition was accounted for using the purchase method of accounting, pursuant
to SFAS 141, “Business Combinations”. The consideration for the acquisition was
attributed to net assets on the basis of the fair value of assets acquired
and
liabilities assumed as of June 13, 2007. The results of operations after June
13, 2007 have been included in the consolidated financial statements. The excess
of the cost of the acquisition over the fair value of the net tangible assets
and intangible assets on the acquisition date, which amounted to $11.4 million,
was allocated to goodwill. The Company has not yet finalized the allocation
of
the purchase price to the net assets acquired in this acquisition. As such
the
estimated purchase price allocation is preliminary and subject to further
revision. The following table summarizes the preliminary purchase price to
the
net assets acquired in this acquisition as of June 30, 2007.
(Amounts
in thousands)
|
|
|
|
Cash
|
|
$
|
2,300
|
|
Assumed
debt
|
|
|
9,412
|
|
Installment
payments
|
|
|
2,500
|
|
Stock
|
|
|
2,165
|
|
Transaction
costs
|
|
|
290
|
|
Total
consideration
|
|
$
|
16,667
|
|
The
following table presents the allocation of the preliminary acquisition cost,
including professional fees and other related acquisition costs, to the assets
and liabilities assumed based on their fair values:
(Amounts
in thousands)
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
2,676
|
|
Property,
plant and equipment
|
|
|
13,978
|
|
Goodwill
|
|
|
11,471
|
|
Other
assets
|
|
|
409
|
|
Total
assets acquired
|
|
|
28,534
|
|
Current
liabilities
|
|
|
(4,927
|
)
|
Long-term
debt
|
|
|
(6,940
|
)
|
Total
liabilities assumed
|
|
|
(11,867
|
)
|
|
|
|
|
|
Net
assets acquired
|
|
$
|
16,667
|
|
The
results of operations of Nuvotec (n/k/a Perma-Fix Northwest, Inc.) and PEcoS
(n/k/a Perma-Fix Northwest Richland, Inc.) have been included in Perma-Fix’s
consolidated financial statements from the date of the closing of the
acquisition, which was June 13, 2007. The following unaudited pro forma
financial information presents the combined results of operations of combining
Nuvotec and PEcoS and Perma Fix as through the acquisition had occurred as
of
the beginning of the periods presented. As Perma-Fix provides a valuation
allowance on substantially all of its deferred tax assets, any deferred tax
impact resulting from the reevaluation of the fixed assets has not been
recognized. The pro forma financial information does not necessarily represent
the results of operations that would have occurred had Nuvotec and PEcoS and
Perma Fix been a single company during the periods presented, nor does Perma
Fix
believe that the pro forma financial information presented is necessarily
representative of future operating results.
(Amounts
in Thousands, Except Shares)
|
|
|
|
|
|
|
|
Three
Months Ended June 30
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
2007
|
|
2006
|
|
Revenue
|
|
$
|
16,144
|
|
$
|
17,382
|
|
Net
Income (loss)
|
|
$
|
116
|
|
$
|
2,462
|
|
Net
Income (loss) per share - basic
|
|
|
¾
|
|
$
|
.05
|
|
Net
Income (loss) per share - diluted
|
|
|
¾
|
|
$
|
.05
|
|
Weighted
average shares outstanding - basic
|
|
|
52,131
|
|
|
45,117
|
|
Weighted
average shares outstanding - diluted
|
|
|
53,601
|
|
|
46,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
2007
|
|
|
2006
|
|
Revenue
|
|
$
|
30,896
|
|
$
|
33,155
|
|
Net
Income (loss)
|
|
$
|
757
|
|
$
|
3,482
|
|
Net
Income (loss) per share - basic
|
|
|
.01
|
|
$
|
.08
|
|
Net
Income (loss) per share - diluted
|
|
|
.01
|
|
$
|
.08
|
|
Weighted
average shares outstanding - basic
|
|
|
52,097
|
|
|
44,975
|
|
Weighted
average shares outstanding - diluted
|
|
|
53,333
|
|
|
45,805
|
|
During
the six months ended June 30, 2007, we issued 198,619 shares of our Common
Stock
upon exercise of 200,917 employee stock options, at exercise prices from $1.25
to $2.19 per share. An optionee surrendered 2,298 shares of personally held
Common Stock of the Company as payment for the exercise of the 4,000 options.
We
also had 1,775,638 warrants to purchase shares of our Common Stocks expiring
on
March 22, 2007. Total proceeds received during the six months ended June 30,
2007 related to warrant and option exercises totaled approximately $386,000,
which includes $359,000 from employee stock option exercises and $27,000 from
repayment of stock subscription resulting from exercise of warrants to purchase
60,000 shares of our Common Stock on a loan by the Company at an arms length
basis in 2006.
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. 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.
The
summary of the Company’s total Plans as of June 30, 2007 as compared to June 30,
2006 and changes during the period then ended are presented as
follows:
|
|
Shares
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
Options
outstanding Janury 1, 2007
|
|
|
2,816,750
|
|
$
|
1.86
|
|
|
|
|
|
|
|
Granted
|
|
|
¾
|
|
|
¾
|
|
|
|
|
|
|
|
Exercised
|
|
|
200,917
|
|
|
1.82
|
|
|
|
|
$
|
238,763
|
|
Forfeited
|
|
|
7,000
|
|
|
1.72
|
|
|
|
|
|
|
|
Options
outstanding End of Period
|
|
|
2,608,833
|
|
|
1.86
|
|
|
4.9
|
|
$
|
3,145,530
|
|
Options
Exercisable at June 30, 2007
|
|
|
1,990,166
|
|
$
|
1.87
|
|
|
4.9
|
|
$
|
2,396,276
|
|
Options
Vested and expected to be vested at June 30, 2007
|
|
|
2,561,913
|
|
$
|
1.86
|
|
|
4.9
|
|
$
|
3,088,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
Options
outstanding January 1, 2006
|
|
|
2,546,750
|
|
$
|
1.79
|
|
|
|
|
|
|
|
Granted
|
|
|
978,000
|
|
|
1.86
|
|
|
|
|
|
|
|
Exercised
|
|
|
252,000
|
|
|
1.14
|
|
|
|
|
$
|
—
|
|
Forfeited
|
|
|
24,500
|
|
|
1.92
|
|
|
|
|
|
|
|
Options
outstanding End of Period
|
|
|
3,248,250
|
|
|
1.86
|
|
|
5.6
|
|
$
|
968,411
|
|
Options
Exercisable at June 30, 2006
|
|
|
2,270,250
|
|
$
|
1.86
|
|
|
5.6
|
|
$
|
703,351
|
|
Options
Vested and expected to be vested at June 30, 2006
|
|
|
3,198,204
|
|
$
|
1.92
|
|
|
5.3
|
|
$
|
954,898
|
|
The
following tables summarize information about options under the plans outstanding
at June 30, 2007 and 2006:
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Description
and Range of Exercise Prices at June 30, 2007
|
|
Number
Outstanding
|
|
Weighted
Average Remaining Contractual Life
|
|
Weighted
Average Exercise Price
|
|
Number
Outstanding
|
|
Weighted
Average Remaining Contractual Life
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Equity Plan
|
|
|
9,000
|
|
|
1.3
|
|
$
|
1.25
|
|
|
9,000
|
|
|
1.3
|
|
$
|
1.25
|
|
($1.25)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Qualified
Stock Option Plan
|
|
|
1,192,000
|
|
|
4.3
|
|
|
1.85
|
|
|
1,192,000
|
|
|
4.3
|
|
|
1.85
|
|
($1.25
- $2.19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
Stock Option Plan
|
|
|
918,000
|
|
|
4.9
|
|
|
1.83
|
|
|
300,166
|
|
|
5.2
|
|
|
1.78
|
|
($1.44
- $1.86)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1992
Outside Director Stock Option Plan
|
|
|
165,000
|
|
|
3.4
|
|
|
2.05
|
|
|
165,000
|
|
|
3.4
|
|
|
2.05
|
|
($1.21880
- $2.98)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
Outside Director Stock Option Plan
|
|
|
324,000
|
|
|
7.6
|
|
|
1.94
|
|
|
324,000
|
|
|
7.6
|
|
|
1.94
|
|
($1.70-
$2.15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Description
and Range of Exercise Prices at June 30, 2006
|
|
Number
Outstanding
|
|
Weighted
Average Remaining Contractual Life
|
|
Weighted
Average Exercise Price
|
|
Number
Outstanding
|
|
Weighted
Average Remaining Contractual Life
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Equity Plan
|
|
|
17,000
|
|
|
2.3
|
|
$
|
1.25
|
|
|
17,000
|
|
|
2.3
|
|
$
|
1.25
|
|
($1.25)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Qualified
Stock Option Plan
|
|
|
1,730,250
|
|
|
5.4
|
|
|
1.88
|
|
|
1,730,250
|
|
|
5.4
|
|
|
1.88
|
|
($1.00-
$2.19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
Stock Option Plan
|
|
|
1,067,000
|
|
|
5.9
|
|
|
1.82
|
|
|
89,000
|
|
|
8.3
|
|
|
1.44
|
|
($1.44
- $1.86)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1992
Outside Director Stock Option Plan
|
|
|
200,000
|
|
|
3.9
|
|
|
2.00
|
|
|
200,000
|
|
|
3.9
|
|
|
2.00
|
|
($1.21880
- $2.98)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
Outside Director Stock Option Plan
|
|
|
234,000
|
|
|
8.0
|
|
|
1.85
|
|
|
234,000
|
|
|
8.0
|
|
|
1.85
|
|
($1.70-
$1.99)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
connection with the acquisition of Nuvotec (n/k/a Perma-Fix Northwest, Inc.)
and
PEcoS (n/k/a Perma-Fix Northwest Richland, Inc.), the Company owns 24,000 shares
of Common Stock of IsoRay Inc. The amount owned represents less than 1% of
the
issued and outstanding shares of IsoRay, Inc. as of May 9, 2007. The Company
has
no unique voting rights and no ability to exercise significant influence over
IsoRay, Inc.
13.
|
Related
Party Transaction
|
On
August
2, 2007, the compensation committee of our board of directors unanimously
recommended to the full board of directors, and, based on such recommendation,
our board of directors approved on the same day, that Joe R. Reeder, a member
of
our board of directors, with Mr. Reeder abstaining, be issued 60,000 shares
of
our common stock as compensation for his services as the board’s representative
in negotiating the agreement in principle to settle the claims brought by the
United States, on behalf of the EPA, against PFD, our Dayton, Ohio, subsidiary,
and resolution of certain other matters relating to that lawsuit as more fully
discussed under Note 6 “Commitments and Contingencies - Legal” of the “Notes to
Consolidated Financial Statements” . Issuance of these shares are subject to Mr.
Reeder agreeing that the shares are issued in a private placement exempt from
registration under Section 4(2) of the Act and/or Regulation D promulgated
under
the Act and that he will not sell or dispose of such shares except pursuant
to
an effective registration statement or pursuant to an exemption from
registration.
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,
·
|
improve
our operations and liquidity;
|
·
|
anticipated
improvement in the financial performance of the
Company;
|
·
|
ability
to comply with the Company’s general working capital requirements;
|
·
|
ability
to be able to continue to borrow under the Company’s revolving line of
credit;
|
·
|
anticipate
a full repayment of our Term Loan by August 2008;
|
·
|
we
anticipate the environmental liabilities for all the Industrial Segment
facilities noted above will be part of the divestiture with the exception
of PFM, PFD, and PFMI, which will remain the financial obligations
of the
Company. While no assurances can be made that we will be able to
do so, we
expect to fund the expenses to remediate the three sites from funds
generated internally;
|
·
|
under
our insurance contracts, we usually accept self-insured retentions,
which
we believe is appropriate for our specific business
risks;
|
·
|
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;
|
·
|
LATA/Parallax
can terminate the contract with us at any time for convenience, which
could have a material adverse effect on our operations;
|
·
|
we
could be a potentially responsible party for the costs of the cleanup
notwithstanding any absence of fault on our part;
|
·
|
we
anticipate full repayment of our Revolver in December 2007 from proceeds
from the sale of our Industrial Segment;
|
·
|
ability
to remediate certain contaminated sites for projected
amounts;
|
·
|
ability
to fund budgeted capital expenditures during 2007;
|
·
|
we
anticipate funding these capital expenditures by a combination of
lease
financing and internally generated funds.
|
·
|
expanding
within the mixed waste market, as well as more complex waste
streams;
|
·
|
growth
of our Nuclear segment;
|
·
|
our
ability to negotiate a final consent decree with the U.S Department
of
Justice with respect to the Dayton facility or the approval of such
consent decree by the appropriate assistant attorney
general;
|
·
|
the
process for formalizing the details of a settlement agreement (consent
decree) and meeting the DOJ/EPA official approval requirements (including
public notice and comment) is currently ongoing;
|
·
|
the
agreement in principle (“AIP”) states that PFD will pay a civil penalty of
$800,000; however, at this time, PFD expects the $800,000 will consist
of
as many as three components;
|
·
|
The
AIP does not address the citizen’s suit. We therefore, expect the
citizen’s suit to continue after settlement with the federal government is
finalized;
|
·
|
AIG
has agreed to reimburse PFD for reasonable defense costs of litigation
prior to its assumption of the defense in the sum of $2.5 million;
|
·
|
we
anticipate most of these reserves being paid off when the Industrial
Segment is sold, but should that not take place in the short term
future,
these reserves would have an adverse effect on our liquidity position;
|
·
|
the
balance of the reimbursement is currently expected to be received
during
the third quarter of 2007; and
|
·
|
we
expect backlog levels to continue to fluctuate within acceptable
levels
throughout 2007, 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.
|
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:
·
|
general
economic conditions;
|
·
|
material
reduction in revenues;
|
·
|
inability
to collect in a timely manner a material amount of receivables;
|
·
|
increased
competitive pressures;
|
·
|
the
ability to maintain and obtain required permits and approvals to
conduct
operations;
|
·
|
the
ability to develop new and existing technologies in the conduct of
operations;
|
·
|
ability
to retain or renew certain required permits;
|
·
|
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;
|
·
|
changes
in federal, state and local laws and regulations, especially environmental
laws and regulations, or in interpretation of such;
|
·
|
potential
increases in equipment, maintenance, operating or labor
costs;
|
·
|
management
retention and development;
|
·
|
financial
valuation of intangible assets is substantially less than
expected;
|
·
|
the
requirement to use internally generated funds for purposes not presently
anticipated;
|
·
|
inability
to continue to be profitable on an annualized basis;
|
·
|
the
inability of the Company to maintain the listing of its Common Stock
on
the NASDAQ;
|
·
|
the
determination that PFMI and PFSG was responsible for a material amount
of
remediation at certain superfund sites;
|
·
|
Execution
of final agreement with EPA with regard to PFD lawsuit;
|
·
|
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;
|
·
|
AIG’s
agreement to defend and Indemnify us in connection with the PFD litigation
is subject to the AIG’s reservation of its rights to deny indemnity
pursuant to various policy provisions and exclusions, including without
limitation, payment of any civil penalties and fines, as well as
AIG’s
right to recoup any defense costs it has advanced if AIG later determines
that its policy provides no coverage; and
|
·
|
the
factors listed in our 2006 Form 10-K under “Special Notes Regarding
Forward-Looking Statements”.
|
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 two reportable operating segments. The Nuclear Waste
Management Services segment (“Nuclear segment”) provides treatment, storage,
processing and disposal services of mixed waste (waste containing both hazardous
and low-level radioactive materials) and low-level radioactive wastes, including
research, development and on-site and off-site waste remediation. The presence
of nuclear and low-level radioactive constituents within the waste streams
processed by this segment create different and unique
operational,
processing and permitting/licensing requirements from those contained within
the
Industrial segment. Our Consulting Engineering Services segment (“Engineering
segment”) provides a wide variety of environmental related consulting and
engineering services to both industry and government. These services include
oversight management of environmental restoration projects, air and soil
sampling, compliance reporting, surface and subsurface water treatment design
for removal of pollutants, and various compliance and training
activities.
The
second quarter of 2007 reflected a revenue decrease of $503,000 or 3.6% from
the
same period of 2006. The Nuclear segment experienced a modest decrease of 0.8%
due to additional revenue received from our acquisition of Perma-Fix Northwest
Richland, Inc., which totaled $1,200,000. We also saw a 43.0% decrease in
revenue at our Engineering Segment. The second quarter 2007 gross profit
decreased by $1,129,000 or 19.0% from the same period of 2006. Gross profit
as a
percentage of revenue decreased from 42.3% to 35.5%. The reduction in gross
profit was due primarily due the Nuclear Segment experiencing a slow quarter
for
receipts of waste coupled with a change in revenue mix to lower margin waste
streams. The Nuclear segment gross profit fell 18.8%. During the second quarter,
SG&A was relatively consistent with prior year increasing by 1.9%. 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 acquisition of Nuvotec USA Inc. (n/k/a
Perma-Fix Northwest, Inc.) and its wholly owned subsidiary Pacific EcoSolutions
Inc. (n/k/a Perma-Fix Northwest Richland, Inc.) on June 13, 2007. For fiscal
year ending September 30, 2006, Perma-Fix Northwest Richland, Inc. had net
revenue and net income of approximately $13 million and $628,000, respectively.
Our
interest expense was lower in the quarter as we did not require funding from
our
revolver until we purchased Nuvotec on June 13, 2007. Overall net income
available to common shareholders was $1,222,000 for the three months ended
June
30, 2007, compared to $1,825,000 for the same period of 2006 or a decrease
of
33.0%. Our net income available to common shareholders for the three months
ended June 30, 2007, included
a large
recovery from discontinued operations related to an insurance receivable from
our insurance provider.
Results
of Operations
The
reporting of financial results and pertinent discussions are tailored to two
reportable segments: Nuclear and Engineering. The table below should be used
when reviewing management’s discussion and analysis for the three and six months
ended June 30, 2007 and 2006:
|
|
|
Three
Months Ending June 30,
|
|
|
Six
Months Ending June 30,
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts
in thousands)
|
|
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
|
Net
revenues
|
|
$
|
13,537
|
|
|
100.0
|
|
$
|
14,040
|
|
|
100.0
|
|
$
|
26,458
|
|
|
100.0
|
|
$
|
26,936
|
|
|
100.0
|
|
Cost
of goods sold
|
|
|
8,733
|
|
|
64.5
|
|
|
8,107
|
|
|
57.7
|
|
|
17,054
|
|
|
64.5
|
|
|
15,950
|
|
|
59.2
|
|
Gross
profit
|
|
|
4,804
|
|
|
35.5
|
|
|
5,933
|
|
|
42.3
|
|
|
9,404
|
|
|
35.5
|
|
|
10,986
|
|
|
40.8
|
|
Selling,
general and administrative
|
|
|
3,759
|
|
|
27.8
|
|
|
3,689
|
|
|
26.3
|
|
|
7,474
|
|
|
28.2
|
|
|
7,090
|
|
|
26.3
|
|
Loss
(gain) on disposal of property & equipment
|
|
|
2
|
|
|
―
|
|
|
―
|
|
|
―
|
|
|
2
|
|
|
―
|
|
|
1
|
|
|
―
|
|
Income
from operations
|
|
$
|
1,043
|
|
|
7.7
|
|
$
|
2,244
|
|
|
16.0
|
|
$
|
1,928
|
|
|
7.3
|
|
$
|
3,895
|
|
|
14.5
|
|
Interest
expense
|
|
$
|
(272
|
)
|
|
(2.0
|
)
|
$
|
(389
|
)
|
|
(2.8
|
)
|
$
|
(473
|
)
|
|
(1.8
|
)
|
$
|
(719
|
)
|
|
(2.7
|
)
|
Interest
expense-financing fees
|
|
|
(48
|
)
|
|
(.4
|
)
|
|
(48
|
)
|
|
(.3
|
)
|
|
(96
|
)
|
|
(.4
|
)
|
|
(96
|
)
|
|
(.4
|
)
|
Other
income (expense)
|
|
|
78
|
|
|
.6
|
|
|
58
|
|
|
.4
|
|
|
166
|
|
|
.6
|
|
|
89
|
|
|
.3
|
|
Income
from continuing operations
|
|
|
752
|
|
|
5.6
|
|
|
1,741
|
|
|
12.4
|
|
|
1,335
|
|
|
5.0
|
|
|
2,958
|
|
|
11.0
|
|
Preferred
Stock dividends
|
|
|
―
|
|
|
―
|
|
|
―
|
|
|
―
|
|
|
―
|
|
|
―
|
|
|
―
|
|
|
―
|
|
Summary
-
Three and Six Months Ended June 30, 2007 and 2006
Net
Revenue
Consolidated
revenues decreased $503,000 for the three months ended June 30, 2007, compared
to the three months ended June 30, 2006, as follows:
(In
thousands)
|
|
2007
|
|
%
Revenue
|
|
2006
|
|
%
Revenue
|
|
Change
|
|
%
Change
|
|
Nuclear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
waste
|
|
$
|
5,731
|
|
|
42.3
|
|
$
|
3,288
|
|
|
23.4
|
|
$
|
2,443
|
|
|
74.3
|
|
Hazardous/Non-hazardous
|
|
|
1,682
|
|
|
12.4
|
|
|
909
|
|
|
6.5
|
|
|
773
|
|
|
85.0
|
|
Other
nuclear waste
|
|
|
3,119
|
|
|
23.1
|
|
|
3,445
|
|
|
24.5
|
|
|
(326
|
)
|
|
(9.5
|
)
|
Bechtel
Jacobs
|
|
|
417
|
|
|
3.1
|
|
|
1,250
|
|
|
8.9
|
|
|
(833
|
)
|
|
(66.6
|
)
|
LATA/Parallax
|
|
|
2,056
|
|
|
15.2
|
|
|
4,214
|
|
|
30.0
|
|
|
(2,158
|
)
|
|
(51.2
|
)
|
Total
|
|
|
13,005
|
|
|
96.1
|
|
|
13,106
|
|
|
93.3
|
|
|
(101
|
)
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering
|
|
|
532
|
|
|
3.9
|
|
|
934
|
|
|
6.7
|
|
|
(402
|
)
|
|
(43.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,537
|
|
|
100.0
|
|
$
|
14,040
|
|
|
100.0
|
|
$
|
(503
|
)
|
|
(3.6
|
)
|
The
Nuclear Segment experienced a slight decline in revenue for the three months
ended June 30, 2007 over the same period in 2006. Revenue from government
generators increased by $2,443,000, including $775,000 from the acquisition
of
our Perma-Fix Northwest Richland, Inc. facility. This increase offset the
reduction in revenue from Bechtel Jacobs and LATA/Parallax. The
Bechtel Jacobs contract in Oak Ridge
is
continuing at reduced waste volumes due to the large legacy waste clean-up
project completion in 2005. Bechtel Jacobs will continue to ship lower volumes
of newly generated wastes until final contract expiration of year 2009 to 2010.
Revenue
from LATA/Parallax continuing
clean-up operations remains consistent, however our large Special Waste Project
is nearing completion and thus overall revenues from this Project will decline
over the next year. Receipts
are lower
than projected
as US
Congress did not pass the fiscal year 2007 budget and thus are providing funding
through a continuing resolution that sets budgets to the previous year and
restricts start up of new projects. We typically receive DOE waste from both
longer term clean-up projects which are typically 5 years and more, and from
event projects, which are generally shorter in duration. The Nuclear Segment
experienced an increase in hazardous and non hazardous revenue due to two large
soil projects completed in at our Florida facility. This increase offset the
reduction in other miscellaneous waste streams earned during the
quarter. The
backlog of stored waste at June 30, 2007 was $16,062,000 compared to $12,492,000
as of December 31, 2006. Excluding the backlog at Perma-Fix Northwest Richland,
Inc.’s facility, the backlog was down $1,191,000 reflecting the decrease in
receipts that occurred in the second quarter. We expect backlog levels to
continue to fluctuate within acceptable levels throughout 2007, 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. Revenue from
the
Engineering Segment decreased during the second quarter of 2007. Billable hours
were lower due in part to a large event project in 2006 of $200,000 which did
not repeat in 2007. In addition more hours were spent supporting the due
diligence requirement related to the acquisition of Perma-Fix Northwest, Inc.
and Perma-Fix Northwest Richland, Inc. and the review of the Industrial Segment
facilities that are being considered for sale.
Consolidated
revenues decreased $478,000 for the six months ended June 30, 2007, compared
to
the six months ended June 30, 2006, as follows:
(In
thousands)
|
|
2007
|
|
%
Revenue
|
|
2006
|
|
%
Revenue
|
|
Change
|
|
%
Change
|
|
Nuclear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
waste
|
|
$
|
9,540
|
|
|
36.1
|
|
$
|
8,106
|
|
|
30.1
|
|
$
|
1,434
|
|
|
17.7
|
|
Hazardous/Non-hazardous
|
|
|
3,168
|
|
|
12.0
|
|
|
1,709
|
|
|
6.4
|
|
|
1,459
|
|
|
85.4
|
|
Other
nuclear waste
|
|
|
7,818
|
|
|
29.5
|
|
|
7,785
|
|
|
28.9
|
|
|
33
|
|
|
0.4
|
|
Bechtel
Jacobs
|
|
|
813
|
|
|
3.0
|
|
|
3,263
|
|
|
12.1
|
|
|
(2,450
|
)
|
|
(75.1
|
)
|
LATA/Parallax
|
|
|
4,010
|
|
|
15.2
|
|
|
4,401
|
|
|
16.3
|
|
|
(391
|
)
|
|
(8.9
|
)
|
Total
|
|
|
25,349
|
|
|
95.8
|
|
|
25,264
|
|
|
93.8
|
|
|
85
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering
|
|
|
1,109
|
|
|
4.2
|
|
|
1,672
|
|
|
6.2
|
|
|
(563
|
)
|
|
(33.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,458
|
|
|
100.0
|
|
$
|
26,936
|
|
|
100.0
|
|
$
|
(478
|
)
|
|
(1.8
|
)
|
The
Nuclear Segment experienced a slight increase in revenue for the six months
ended June 30, 2007 over the same period in 2006. Revenue from government
generators increased by $1,434,000, including $775,000 from the new acquisition
of our Perma-fix Northwest Richland, Inc. facility. We saw significant revenues
from hazardous and non hazardous waste streams due to two large soil remediation
projects in the second quarter. Revenues from the LATA/Parallax Portsmouth
contract awarded in the first quarter of 2006 contributed approximately
$2,867,000 revenues for the six months ended June 30, 2007, compared to $668,000
for the same period of 2006. Our revenues from Bechtel Jacobs decreased due
to
their nearing completion of the project at Oak Ridge, as discussed above. We
continue our efforts to process the backlog of their waste, and assist them
in
completing their milestones. The Engineering Segment experienced a decrease
in
revenue during the first six months of 2006, as a result of lower billable
hours, increased internal work supporting corporate objectives, and the large
event project in 2006 which did not repeat.
Cost
of Goods Sold
Cost
of
goods sold increased $626,000 for the quarter ended June 30, 2007, compared
to
the quarter ended June 30, 2006, as follows:
(In
thousands)
|
|
2007
|
|
%
Revenue
|
|
2006
|
|
%
Revenue
|
|
Change
|
|
Nuclear
|
|
$
|
8,366
|
|
|
64.3
|
|
$
|
7,392
|
|
|
56.4
|
|
|
974
|
|
Engineering
|
|
|
367
|
|
|
69.0
|
|
|
715
|
|
|
76.6
|
|
|
(348
|
)
|
Total
|
|
$
|
8,733
|
|
|
65.3
|
|
$
|
8,107
|
|
|
57.7
|
|
|
626
|
|
We
saw an
increase in cost of goods sold in the Nuclear Segment and a decrease in the
Engineering Segment, as revenue mix had a significant impact on our costs.
The
Nuclear Segment costs increased by $974,000, which included $872,000 from the
newly acquired Perma-Fix of Northwest Richland, Inc. facility. Higher margin
waste streams received and processed in 2006 decreased and were replaced by
lower margin field service type work in 2007. This change in revenue mix
resulted in increased costs related to materials, labor, and sub contractor
costs. The Engineering Segment saw a decrease in their cost of goods sold as
the
large event project in 2006 included approximately $186,000 of pass through
expenses for materials and sub contractors that did not repeat in 2007. Included
within cost of goods sold is depreciation and amortization expense of $828,000
and $726,000 for the three months ended June 30, 2007, and 2006, respectively.
Cost
of
goods sold increased $1,104,000 for the six months ended June 30, 2007, compared
to the six months ended June 30, 2006, as follows:
(In
thousands)
|
|
2007
|
|
%
Revenue
|
|
2006
|
|
%
Revenue
|
|
Change
|
|
Nuclear
|
|
$
|
16,279
|
|
|
64.2
|
|
$
|
14,729
|
|
|
58.3
|
|
|
1,550
|
|
Engineering
|
|
|
775
|
|
|
69.9
|
|
|
1,221
|
|
|
73.0
|
|
|
(446
|
)
|
Total
|
|
$
|
17,054
|
|
|
64.5
|
|
$
|
15,950
|
|
|
59.2
|
|
|
1,104
|
|
We
saw an
increase in cost of goods sold in the Nuclear Segment, and a decrease in the
Engineering Segment. The Nuclear Segment costs included $832,000 of expense
related to our new Perma-Fix Northwest Richland, Inc. facility. The remainder
of
the increase relates the mix of waste streams processed as more field service
work occurred both from our industrial customers and the Portsmouth project.
These projects included higher cost for materials, labor and sub contract costs.
The Engineering Segment saw a decrease in their cost of goods sold as a result
of their decreased revenues for the six months. Included within cost of goods
sold is depreciation and amortization expense of $1,568,000 and $1,448,000
for
the six months ended June 30, 2007, and 2006, respectively.
Gross
Profit
Gross
profit for the quarter ended June 30, 2007, decreased over 2006, as
follows:
(In
thousands)
|
|
2007
|
|
%
Revenue
|
|
2006
|
|
%
Revenue
|
|
Change
|
|
Nuclear
|
|
$
|
4,639
|
|
|
35.7
|
|
$
|
5,714
|
|
|
43.6
|
|
$
|
(1,075
|
)
|
Engineering
|
|
|
165
|
|
|
31.0
|
|
|
219
|
|
|
23.4
|
|
|
(54
|
)
|
Total
|
|
$
|
4,804
|
|
|
35.5
|
|
$
|
5,933
|
|
|
42.3
|
|
$
|
(1,129
|
)
|
The
Nuclear Segment gross profit, which included $366,000 from the new Perma-Fix
Northwest Richland, Inc. facility, saw a decrease from prior year primarily
due
to a shift in the mix of waste streams handled. High activity waste streams
such
as mercury and thermal waste were lower in 2007. They were replaced by lower
margin field service work from the LATA/Parallax Portsmouth contract and two
industrial soil projects. In addition, surcharges were significantly lower
in
2007 which had a large impact on gross profit and gross margin. The Engineering
Segment gross profit decreased though their gross profit percentage increased.
The sizable portion of the large event project in 2006 included low margin
pass
through expenses. Though this increased gross profit, it had a downward effect
on gross margin.
Gross
profit for the six months ended June 30, 2007, decreased $1,582,000 over 2006,
as follows:
(In
thousands)
|
|
2007
|
|
%
Revenue
|
|
2006
|
|
%
Revenue
|
|
Change
|
|
Nuclear
|
|
$
|
9,071
|
|
|
35.8
|
|
$
|
10,535
|
|
|
41.7
|
|
$
|
(1,464
|
)
|
Engineering
|
|
|
333
|
|
|
30.0
|
|
|
451
|
|
|
27.0
|
|
|
(118
|
)
|
Total
|
|
$
|
9,404
|
|
|
70.8
|
|
$
|
10,986
|
|
|
40.8
|
|
$
|
(1,582
|
)
|
As
with
the second quarter, the Nuclear Segment gross profit and gross margin were
down
as compared to 2006. The gross profit included $366,000 from our Richland,
Washington acquisition. The decrease in gross profit in the Nuclear Segment
is a
result of the lower margin revenue processed. Lower volume of high activity
waste was replaced with lower margin field work. The Engineering Segment gross
profit decreased though their gross profit percentage increased. As with second
quarter, the decrease was from lower margin pass through revenue which improved
gross profits.
Selling,
General and Administrative
Selling,
general and administrative (“SG&A”)
expenses
increased $70,000 for the three months ended June 30, 2007, as compared to
the
corresponding period for 2006, as follows:
(In
thousands)
|
|
2007
|
|
%
Revenue
|
|
2006
|
|
%
Revenue
|
|
Change
|
|
Administrative
|
|
$
|
1,459
|
|
|
¾
|
|
$
|
1,381
|
|
|
¾
|
|
$
|
78
|
|
Nuclear
|
|
|
2,177
|
|
|
16.7
|
|
|
2,149
|
|
|
16.4
|
|
|
28
|
|
Engineering
|
|
|
123
|
|
|
23.1
|
|
|
159
|
|
|
17.0
|
|
|
(36
|
)
|
Total
|
|
$
|
3,759
|
|
|
27.8
|
|
$
|
3,689
|
|
|
26.3
|
|
$
|
70
|
|
Our
SG&A expenses increased slightly within the administrative area and the
Nuclear Segment, and decreased in the Engineering Segment. The increase in
the
administrative area relates primarily to internal costs incurred related to
the
acquisition of our new Perma-Fix Northwest Richland, Inc. facility and certain
public company fee increases. The increase in the Nuclear Segment reflects
the
increased SG&A costs related to the Richland, Washington facility. The
Engineering Segment decrease was the result lower headcount and the reduction
of
bad debt expense. Included in SG&A expenses is depreciation and amortization
expense of $29,000 and $31,000 for the three months ended June 30, 2007, and
2006, respectively.
SG&A
expenses
increased $384,000 for the six months ended June 30, 2007, as compared to the
corresponding period for 2006, as follows:
(In
thousands)
|
|
2007
|
|
%
Revenue
|
|
2006
|
|
%
Revenue
|
|
Change
|
|
Administrative
|
|
$
|
2,804
|
|
|
¾
|
|
$
|
2,688
|
|
|
¾
|
|
$
|
116
|
|
Nuclear
|
|
|
4,428
|
|
|
17.5
|
|
|
4,103
|
|
|
16.2
|
|
|
325
|
|
Engineering
|
|
|
242
|
|
|
21.8
|
|
|
299
|
|
|
17.9
|
|
|
(57
|
)
|
Total
|
|
$
|
7,474
|
|
|
28.2
|
|
$
|
7,090
|
|
|
26.3
|
|
$
|
384
|
|
Our
SG&A expenses increased in the administrative area and Nuclear Segment but
decreased in the Engineering Segment. 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 administrative area relates to internal costs
related to the acquisition of our new Perma-Fix Northwest Richland, Inc.
facility and increased public company expenses. The Engineering Segment decrease
was the result of lower bad debt and lower bank fees. Included in SG&A
expenses is depreciation and amortization expense of $60,000 and $62,000 for
the
six months ended June 30, 2007, and 2006, respectively.
Interest
Income
Interest
income increased $20,000 and $77,000 for the three and six months ended June
30,
2007, as compared to the same period ended June 30, 2006, respectively. The
company earns interest on the finite risk sinking fund which was increased
by
$1,000,000 in February of 2007. In addition, the company had additional cash
in
a sweep account which earned interest in much of 2007. The sweep account did
not
exist in 2006.
Interest
Expense
Interest
expense decreased $117,000 for the quarter ended June 30, 2007, and decreased
$473,000 for the six months ended June 30, 2007, as compared to the
corresponding periods of 2006.
|
|
Three
Months
|
|
Six
Months
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
Change
|
|
2007
|
|
2006
|
|
Change
|
|
PNC
interest
|
|
$
|
139
|
|
$
|
254
|
|
$
|
(115
|
)
|
$
|
247
|
|
$
|
450
|
|
$
|
(203
|
)
|
Other
|
|
|
133
|
|
|
135
|
|
|
(2
|
)
|
|
226
|
|
|
269
|
|
|
(43
|
)
|
Total
|
|
$
|
272
|
|
$
|
389
|
|
$
|
(117
|
)
|
$
|
473
|
|
$
|
719
|
|
$
|
(246
|
)
|
The
decrease for both periods is the result of positive cash flow which was used
to
pay our down our revolver. The revolver was not used until early June 2007
when
funds were drawn from it as part of our new Perma-Fix Northwest facility
acquisition. The revolver was utilized throughout the first six months of 2006
with an average balance of $4,067,000.
Interest
Expense - Financing Fees
Interest
expense-financing fees remained constant for the three and six months ended
June
30, 2007, as compared to the corresponding period of 2006.
Discontinued
Operations
Our
Industrial Segment has sustained losses in each year since 2000. The facilities
in our Industrial Segment provide on-and-off site treatment, storage, processing
and disposal of hazardous and non-hazardous industrial waste, and wastewater.
Certain of our facilities within the Industrial Segment provide waste management
services to governmental agencies. On May 18, 2007, our Board of Directors
authorized management to consider the divestiture of all or a part of our
Industrial Segment. On May 25, 2007, we entered into a letter of intent to
sell
our Industrial Segment to The Environmental Quality Company (EQ), excluding
our
facility in Pittsburgh, Pennsylvania, owned by our subsidiary, Perma-Fix of
Pittsburgh, Inc. (“PFP), and our facility in Detroit, Michigan, owned by our
subsidiary, Perma-Fix of Michigan, Inc. (“PFMI”), two facilities which have been
approved as discontinued operations by our Board of Directors effective
November, 8, 2005, and October 4, 2004, respectively. Subsequent to entering
into the letter of intent with EQ, EQ has advised us that they will be unable
to
proceed with the transaction as contemplated by the letter of intent. As a
result, we are in the process of considering additional offers that we have
received to purchase all or portions of our Industrial Segment. Management
considers the sale of the Industrial Segment before June 30, 2008 to be
probable.
At
May
25, 2007, the Industrial Segment met the held for sale criteria under Statement
of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”, and therefore, certain assets and
liabilities of the Industrial Segment are presented as held for sale, and we
have ceased depreciation of the Industrial Segment’s long-lived assets
classified as held for sale. The result of operations and cash flows of the
Industrial Segment have been reported in the Consolidated Financial Statements
as discontinued operations for all periods presented.
We
performed an updated internal analysis on the tangible and intangible assets
to
test for impairment in the Industrial Segment, as required by Statement of
Financial Accounting Standard (SFAS) 144, “Accounting for the Impairment or
disposal of Long-Lived Assets” and SFAS 142, “Goodwill and Other Intangible
Assets”. Our analysis included the comparison of the offered sale price to the
carrying value of the investment in the Industrial Segment. Based on our
analysis of recent development and consideration of our most recent October
1,
2006 report which was conducted by an independent appraiser, we concluded that
no impairment existed as of June 30, 2007.
The
following table summarizes the results of discontinued operations for the three
and six months ended June 20, 2007, and 2006. These results are included in
our
Consolidated Statements of Operations as part of our “Income (loss) from
discontinued operations, net of taxes”.
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
(Amunts
in Thousands)
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
8,152
|
|
$
|
9,474
|
|
$
|
15,387
|
|
$
|
17,696
|
|
Operating
income (loss) from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discontinued
operations
|
|
$
|
470
|
|
$
|
84
|
|
$
|
(1,197
|
)
|
$
|
(455
|
)
|
Income
tax provision
|
|
$
|
¾
|
|
|
¾
|
|
$
|
¾
|
|
|
¾
|
|
Income
(loss) from discontinued operations
|
|
$
|
470
|
|
$
|
84
|
|
$
|
(1,197
|
)
|
$
|
(455
|
)
|
As
previously disclosed, the Company’s insurer recently withdrew its prior denial
of coverage and agreed to defend and indemnify Perma-Fix and its Dayton, Ohio
subsidiary in the previously disclosed lawsuit brought against the Dayton,
Ohio
subsidiary by a citizens’ group and the federal government alleging, among other
things, that our Dayton subsidiary was operating without appropriate air
permits. Our insurer’s agreement is subject to a reservation of rights to deny
indemnity pursuant to various provisions and exclusions under the policy,
including, without limitation, payment of any civil penalties and fines, and
the
insurer’s right to recoup any defense cost it has advanced in the event that the
policy provides no coverage. Perma-Fix has recently been advised that its
insurer will reimburse the Company for approximately $2.5 million previously
spent to defend this litigation. As a result, the Company recorded a recovery
within discontinued operations of $2.5 million for the quarter ended June 30,
2007. In accordance with EITF (Emerging Issues Task Force) 01-10, Perma-Fix
has
received $750,000 of the $2.5 million anticipated cash reimbursement from its
insurer and anticipates recovering the balance during the third quarter of
2007.
This was partially offset by $800,000 of reserves recorded in discontinued
operations for the anticipated settlement (see “Note 6 - Commitments and
Contingencies - Legal”).
Asset
and
liabilities related to discontinued operations total $24,577,000 and $11,271,000
as of June 30, 2007, respectively and $22,750,000 and $10,632,000 as of December
31, 2006, respectively.
The
following table presents Industrial Segment’s major classes of assets and
liabilities classified as held for sale as of June 30, 2007, and December 31,
2006:
(Amounts
in Thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Account
receivable, net
|
|
$
|
5,036
|
|
$
|
5,768
|
|
Inventories
|
|
|
543
|
|
|
522
|
|
Other
assets
|
|
|
5,804
|
|
|
3,179
|
|
Property,
plant and equipment, net
|
|
|
13,194
|
|
|
13,281
|
|
Total
assets held for sale
|
|
$
|
24,577
|
|
$
|
22,750
|
|
Account
payable
|
|
$
|
2,096
|
|
$
|
2,132
|
|
Accrued
expenses and other liabilities
|
|
|
4,433
|
|
|
3,760
|
|
Deferred
revenue
|
|
|
¾
|
|
|
¾
|
|
Note
payable
|
|
|
982
|
|
|
830
|
|
Environmental
liabilities
|
|
|
1,094
|
|
|
1,094
|
|
Total
liabilities held for sale
|
|
$
|
8,605
|
|
$
|
7,816
|
|
The
table
above represents the respective assets and liabilities that are held for sale
as
of June 30, 2007, and December 31, 2006 which excludes certain liabilities,
consisting of the pension liability at Perma-Fix Michigan (see discussion below)
and the environmental liabilities at Perma-Fix of Michigan and Perma-Fix Dayton.
Pension liability of $1,352,000 and environmental liabilities of $1,314,000
are
excluded from liabilities held for sale as of June 30, 2007, and pension
liability of $1,433,000 and environmental liabilities of $1,383,000 are excluded
from liabilities held for sale as of December 31, 2006. The held for sale asset
and liabilities balances as of June 30, 2007 may differ from the respective
balances at closing.
Non
Operational Facilities
The
Industrial Segment includes two previously shut-down facilities which were
presented as discontinued operations in prior years. These facilities include
Perma-Fix of Pittsburgh (PFP) and Perma-Fix of Michigan (PFMI). Our decision
to
discontinue operations at PFP was due to our reevaluation of the facility and
our inability to achieve profitability at the facility. During February 2006,
we
completed the remediation of the leased property and the equipment at PFP,
and
released the property back to the owner. Our 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. As a result of the discontinued
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 is not known at this time. Also, impacting this estimate
is
the level of contamination discovered, as we remediate, 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 estimated
the cost of this environmental closure and remediation liability to be
$2,464,000. During 2006 we re-evaluated our required activities to close and
remediate the facility, and during the quarter ended June 30, 2006, we began
implementing the modified methodology to remediate the facility. As a result
of
the reevaluation and the change in methodology, we reduced the accrual by
$1,182,000. We
have spent approximately $689,000 for closure costs since September 30, 2004,
of
which $60,000 has been spent during the six months of 2007 and $74,000 was
spent
in 2006. We have $593,000 accrued for the closure, as of June 30, 2007, and
we
anticipate spending $346,000 in 2007 with the remainder over the next five
years.
As
of June 30, 2007, PFMI has a pension payable of $1,352,000. The
pension plan withdrawal liability, is a result of the termination of the union
employees of PFMI. The PFMI union employees participate in the Central States
Teamsters Pension Fund ("CST"), which provides that a partial or full
termination of union employees may result in a withdrawal liability, due from
PFMI to CST. 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 $158,000 that we expect to pay over the next
year.
Liquidity
and Capital Resources of the Company
Our
capital requirements consist of general working capital needs, scheduled
principal payments on our debt obligations and capital leases, remediation
projects and planned capital expenditures. Our capital resources consist
primarily of cash generated from operations, funds available under our revolving
credit facility and proceeds from issuance of our Common Stock. Our capital
resources are impacted by changes in accounts receivable as a result of revenue
fluctuation, economic trends, collection activities, and the profitability
of
the segments.
At
June
30, 2007, we had cash of $60,000. The following table reflects the cash flow
activities during the first six months of 2007.
(In
thousands)
|
|
2007
|
|
Cash
provided by continuing operations
|
|
$
|
6,596
|
|
Cash
used by discontinued operations
|
|
|
(1,815
|
)
|
Cash
used in investing activities of continuing operations
|
|
|
(5,079
|
)
|
Cash
used in investing activities of discontinued operations
|
|
|
(322
|
)
|
Cash
provided by financing activities of continuing operations
|
|
|
(1,644
|
)
|
Principal
repayment of long-term debt for discontinued operations
|
|
|
(204
|
)
|
Decrease
in cash
|
|
$
|
(2,468
|
)
|
We
are in
a net borrowing position and therefore attempt to move all excess cash balances
immediately to the revolving credit facility, so as to reduce debt and interest
expense. We utilize a centralized cash management system, which includes
remittance lock boxes and is structured to accelerate collection activities
and
reduce cash balances, as idle cash is moved without delay to the revolving
credit facility. The cash balance at June 30, 2007, primarily represents minor
petty cash and local account balances used for miscellaneous services and
supplies.
Operating
Activities
Accounts
receivable, net of allowances for doubtful accounts, totaled $10,547,000, an
increase of $1,059,000 over the December 31, 2006, balance of $9,488,000.
Perma-Fix Northwest Richland, Inc. accounted for $503,000 of the increase.
The
remainder of the increase relates to increased invoicing as the Nuclear Segment
continues to work toward reduction of its unbilled revenue targets. Invoicing
is
affected by timing issues related to the final shipment of wastes to end
disposal sites that can be delayed due to the complexity of the documentation
required for invoicing and the approvals to ship from our generators. The
Engineering Segment also experienced a decrease of $222,000 which relates to
lower revenue in 2007.
Unbilled
receivables are generated by differences between invoicing timing and the
percentage of completion methodology used for revenue recognition purposes.
As
major processing phases are completed and the costs incurred, we recognize
the
corresponding percentage of revenue. We experience delays in processing invoices
due to the complexity of the documentation that is required for invoicing,
as
well as, the difference between completion of revenue recognition milestones
and
agreed upon invoicing terms, which results in unbilled receivables. The timing
differences occur for several reasons. Partially from delays in the final
processing of all wastes associated with certain work orders and partially
from
delays for analytical testing that is required after we have processed waste
but
prior to our release of waste for disposal. The difference also occurs due
to
our end disposal sites requirement of pre-approval prior to our shipping waste
for disposal and our contract terms with the customer that we dispose of the
waste prior to invoicing. These delays usually take several months to complete.
As of June 30, 2007, unbilled receivables totaled $15,033,000, an increase
of
$120,000 from the December 31, 2006, balance of $14,913,000. Perma-Fix Northwest
Richland, Inc. facility accounted for $1,595,000 of this increase. The net
reduction of $1,475,000 was the result of continued efforts to reduce this
balance. Our ability to invoice is impacted by delays related to the final
shipment of wastes to end disposal sites that are due to shipment approvals
needed from generators, and the complexity of the current contracts, which
requires greater levels of documentation and additional testing for final
invoicing. These delays usually take several months to resolve but are normally
considered collectible within twelve months. However, as we now have historical
data to review the timing of these delays, we realize that certain issues can
exacerbate collection of some of these receivables greater than twelve months.
Therefore, we have segregated the unbilled receivables between current and
long
term. The current portion of the unbilled receivables as of June 30, 2007 is
$11,758,000, a decrease of $555,000 from the balance of $12,313,000 as of
December 31, 2006. The long term portion as of June 30, 2007 is $3,275,000,
an
increase of $675,000 from the balance of $2,600,000 as of December 31,
2006.
As
of
June 30, 2007, total consolidated accounts payable was $5,109,000, an increase
of $2,653,000 from the December 31, 2006, balance of $2,456,000. Perma-Fix
Northwest Richland, Inc. accounted for $1,039,000 of this increase. Accounts
payable can increase in conjunction with decreases in accrued expenses depending
on the timing of vendor invoices. We continue to manage payment terms with
our
vendors to maximize our cash position throughout all segments.
Accrued
Expenses as of June 30, 2007, totaled $12,348,000, an increase of $4,230,000
over the December 31, 2006, balance of $8,118,000. Accrued expenses are made
up
of disposal and processing cost accruals, accrued compensation, interest
payable, insurance payable and certain tax accruals. Perma-Fix Northwest
Richland, Inc. accounted for $ 5,417,000 of this balance. The remainder of
this
change is consistent with the increase in Accounts Payable which varies based
on
timing of vendor invoices as discussed above.
The
working capital position at June 30, 2007, was $574,000, which includes the
working capital of our discontinued operations, as compared to a working capital
position of $12,809,000 at December 31, 2006. Working capital related to
Perma-Fix Northwest Richland, Inc. totaled a negative $6,315,000 and was heavily
impacted by the current portion of a short term loan of $2,000,000 which was
set
up for the acquisition as a “bridge” until we restructure our credit facility.
In addition, a large disposal accrual related to the legacy waste acquired
increase our current liabilities by $5,200,000. Other reductions to our current
assets which impacted our working capital was the reclass of $ $675,000 from
current unbilled to long term unbilled reflecting our revised collection
expectations, our annual cash payment to the finite risk sinking fund of
$1,000,000, our semi-annual payment to the IRS related to our note at our
M&EC facility, and additional cash requirements related to the acquisition
of Perma-Fix Northwest Richland, Inc. and Perma-Fix Northwest, Inc. Our working
capital position continues to experience the negative impact of certain
liabilities associated with discontinued operations.
Investing
Activities
Our
purchases of capital equipment for the six-month period ended June 30, 2007,
totaled approximately $2,622,000 of which $1,875,000 and $747,000 was for our
continuing and discontinuing operations, respectively. Of the total capital
spending, $248,000 and $355,000 was financed for our continuing and discontinued
operations, respectively, resulting in total net purchases of $2,019,000 funded
out of cash flow. These expenditures were for expansion and improvements to
the
operations principally within the Nuclear and Industrial Segments. These capital
expenditures were funded by the cash provided by operations. We budgeted capital
expenditures of approximately $4,137,000 for fiscal year 2007, which includes
an
estimated $2,929,000 to complete certain current projects committed at December
31, 2006, as well as other identified capital and permit compliance purchases.
Our purchases during the first six months of 2007 include approximately
$1,106,000 of those projects committed at December 31, 2006. 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 the 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 and internally
generated funds.
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 a maximum $35 million of financial
assurance coverage of which the coverage amount totals $30,096,000 at June
30,
2007, 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 2007, we paid our fourth of nine required annual installments of
$1,004,000, of which $991,000 was deposited in the sinking fund account, the
remaining $13,000 represents a terrorism premium. As of June 30, 2007, we have
recorded $5,633,000 in our sinking fund on the balance
sheet,
which includes interest earned of $436,000 on the sinking fund as of June 30,
2007. Interest income for the three and six months ended June 30, 2007, was
$67,000 and $124,000, 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.
Financing
Activities
On
December 22, 2000, we entered into a Revolving Credit, Term Loan and Security
Agreement (“Agreement”) with PNC Bank, National Association, a national banking
association (“PNC”) acting as agent (“Agent”) for lenders, and as issuing bank,
as amended. The Agreement provides for a term loan (“Term Loan”) in the amount
of $7,000,000, which requires monthly installments of $83,000 with the remaining
unpaid principal balance due on May 31, 2008. The Agreement also provides for
a
revolving line of credit (“Revolving Credit”) with a maximum principal amount
outstanding at any one time of $18,000,000, as amended. The Revolving Credit
advances are subject to limitations of an amount up to the sum of (a) up to
85%
of Commercial Receivables aged 90 days or less from invoice date, (b) up to
85%
of Commercial Broker Receivables aged up to 120 days from invoice date, (c)
up
to 85% of acceptable Government Agency Receivables aged up to 150 days from
invoice date, and (d) up to 50% of acceptable unbilled amounts aged up to 60
days, less (e) reserves the Agent reasonably deems proper and necessary. As
of
June 30, 2007, the excess availability under our Revolving Credit was $7,006,000
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 ½%. The Agreement was subject to a prepayment fee
of 1% until March 25, 2006, and ½% until March 25, 2007, had we elected to
terminate the Agreement with PNC.
On
June
12, 2007, we entered into Amendment No. 6 with PNC Bank. Pursuant to Amendment
No. 6, PNC provided Consent to the Company’s acquisition of Nuvotec (n/k/a
Perma-Fix Northwest, Inc.) and its wholly owned subsidiary, PEcoS (n/k/a
Perma-Fix Northwest Richland, Inc.), which was completed on June 13, 2007.
See
“Note 10 - Acqusition” in “Notes to Consolidated Financial Statements” for terms
of the acquisition. PNC also provided consent for the Company to issue a
corporate guaranty for a portion of the debt being assumed as result of the
acquisition. In addition, the Amendment provided us with an additional
$2,000,000 of availability via a sub-facility within our secured revolver loan.
The availability from this sub-facility will be amortized at a rate of $83,333
per month.
On
July
18, 2007, we entered into Amendment No. 7 with PNC Bank, which extended the
due
date of the $25 million credit facility entered into on December 22, 2000 from
May 31, 2008 to August 29, 2008. Pursuant to the term of the Amendment, we
may
terminate the agreement upon 60 days’ prior written notice upon payment in full
of the obligation.
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 2007
will be approximately $400,000 semiannually. Interest is accrued at the
applicable law rate (“Applicable Rate”) pursuant to the provisions of section
6621 of the Internal Revenue Code of 1986 as amended (10% on June 30, 2007)
and
payable in one lump sum at the end of the loan period. On June 30, 2007, the
outstanding balance was $2,951,000 including accrued interest of approximately
$1,917,000. 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 2007
will be approximately $100,000 semiannually. Interest is accrued at the
Applicable Rate, and is adjusted on a quarterly basis and payable in lump sum
at
the end of the installment period. On June 30, 2007, the rate was 10%. On June
30, 2007, the outstanding balance was $715,000 including accrued interest of
approximately $462,000. 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.
In
conjunction with our acquisition of Nuvotec (n/k/a Perma-Fix of Northwest,
Inc.)
and PEcoS (n/k/a Perma-Fix of Northwest Richland, Inc.), which was completed
on
June 13, 2007, we entered into a promissory note for a principal amount of
$4.0
million to KeyBank National Association, dated June 13, 2007, which represents
debt assumed by us as result of the acquisition. The promissory note is payable
over a two years period with monthly principal repayment of $160,000 starting
July 2007 and $173 starting July 2008, along with accrued interest. Interest
is
accrued at prime rate plus 1.125%.
Additionally,
In conjunction with our acquisition of Nuvotec (n/k/a Perma-Fix of Northwest,
Inc.) and PEcoS (n/k/a Perma-Fix Northwest Richland, Inc.), pursuant to the
Agreement and Plan of Merger, dated April 27, 2007, which was subsequently
amended on June 13, 2007, we agreed to pay shareholders of Nuvotec that
qualified as accredited investors pursuant to Rule 501 of Regulation D
promulgated under the Securities Act of 1933, $2.5 million, with principal
payable in equal installment of $833,333 on June 30, 2009, June 30, 2010, and
June 30, 2011. Interest is accrued on outstanding principal balance at 8.25%
starting in June 2007 and is payable on June 30, 2008, June 30, 2009, June
30,
2010, and June 30, 2011.
During
the six months ended June 30, 2007, we issued 198,619 shares of our Common
Stock
upon exercise of 200,917 employee stock options, at exercise prices from $1.25
to $2.19 per share. An optionee surrendered 2,298 shares of personally held
Common Stock of the Company as payment for the exercise of the 4,000 options.
We
also had 1,775,638 warrants to purchase shares of our Common Stocks expiring
on
March 22, 2007. Total proceeds received during the six months ended June 30,
2007 related to warrant and option exercises totaled approximately $386,000,
which includes $359,000 from employee stock option exercises and $27,000 from
repayment of stock subscription resulting from exercise of warrants to purchase
60,000 shares of our Common Stock on a loan by the Company at an arms length
basis in 2006.
In
summary, the acquisition of Nuvotec (n/k/a Perma-Fix Northwest, Inc.) and its
wholly owned subsidiary PEcoS (n/k/a Perma-Fix Northwest Richland, Inc.)
significantly impacted our liquidity in the second quarter. Excess cash in
the
sweep account were diminished, and funds were drawn from our revolver to make
the payments required in the purchase and to reduce a portion of the debt that
we assumed. We continue to take steps to improve our operations and liquidity
and to invest working capital into our facilities to fund capital additions
in
the Nuclear Segment. We also continue to have a negative impact related to
reserves from our discontinued operations and assets held for sale. We
anticipate most of these reserves being paid off when the Industrial Segment
is
sold, but should that not take place in the short term future, these reserves
would have an adverse effect on our liquidity position.
Acquisition
of Nuvotec
On
June
13, 2007, the Company completed its acquisition of Nuvotec and its wholly owned
subsidiary, Pacific Ecosolutions, Inc (PEcoS), pursuant to the terms of the
Merger Agreement, between Perma-Fix, Perma-Fix’s wholly owned subsidiary,
Transitory, Nuvotec, and PEcoS, dated April 27, 2007, which was subsequently
amended on June 13, 2007. The Company acquired 100% of the voting shares of
Nuvotec. The acquisition was structured as a reverse subsidiary merger, with
Transitory being merged into Nuvotec, and Nuvotec being the surviving
corporation. As a result of the merger, Nuvotec became a wholly owned subsidiary
of Perma-Fix Environmental Services Inc. (PESI). Nuvotec’s name was changed to
Perma-Fix Northwest, Inc. (“PFNW”). PEcoS, whose name was changed to Perma-Fix
Northwest Richland, Inc. (“PFNWR”) on August 2, 2007, is a wholly-owned
subsidiary of PFNW. PEcoS is a permitted hazardous, low level
radioactive
and mixed waste treatment, storage and disposal facility located in the Hanford
U.S. Department of Energy site in the eastern part of the state of Washington.
The strategic addition of Nuvotec provides the Company with immediate access
to
treat some of the most complex nuclear waste streams in the nation should
provide significant growth opportunity in the coming years.
Under
the
terms of the Merger Agreement, the purchase price paid by the Company in
connection with the acquisition was $16.7 million, consisting of as follows:
(a) |
$2.3
million in cash at closing of the merger, with $1.5 million payable
to
unaccredited shareholders and $0.8 million payable to shareholders
of
Nuvotec that qualified as accredited investors pursuant to Rule 501
of
Regulation D promulgated under the Securities Act of 1933, as amended
(the
“Act”):accredited shareholders.
|
(b) |
Also
payable only to the shareholders of Nuvotec that qualified as accredited
investors:
|
· |
$2.5
million, payable over a four year period, unsecured and nonnegotiable
and
bearing an annual rate of interest of 8.25%, with (i) accrued interest
only payable on June 30, 2008, (ii) $833,333.33, plus accrued and
unpaid
interest, payable on June 30, 2009, (iii) $833,333.33, plus accrued
and
unpaid interest, payable on June 30, 2010, and (iv) the remaining
unpaid
principal balance, plus accrued and unpaid interest, payable on June
30,
2011 (collectively, the “Installment Payments”). The Installment Payments
may be prepaid at any time by Perma-Fix without penalty; and
|
· |
709,207
shares of Perma-Fix common stock, which were issued on July 23, 2007,
with
such number of shares determined by dividing $2.0 million by 95%
of
average of the closing price of the common stock as quoted on the
Nasdaq
during the 20 trading days period ending five business days prior
to the
closing of the merger. The value of these shares on June 13, 2007
was $2.2
million, which was determined by the average closing price of the
common
stock as quoted on the Nasdaq four days prior to and following the
completion date of the acquisition, which was June 13, 2007.
|
(c)
|
The
assumption of $9.4 million of debt, $8.9 million of which was payable
to
KeyBank National Association which represents debt owed by PFNW under
a
credit facility. As part of the closing, the Company paid down $5.4
million of this debt resulting in debt remaining of $4.0 million.
|
(d) |
Transaction
costs totaling $0.3 million.
|
In
addition to the above, an agreement to a contingency of an earn-out amount
not
to exceed $4.4 million over a four year period (“Earn-Out Amount”). The earn-out
amounts will be earned if certain annual revenue targets are met by the
Company’s combined Nuclear Segment. The first $1.0 million of the earn-out
amount, when earned, will be placed in an escrow account to satisfy certain
indemnification obligations under the Merger Agreement of Nuvotec, PEcoS, and
the shareholders of Nuvotec to Perma-Fix that are identified by Perma-Fix within
the escrow period as provided in the Merger Agreement. As of June 30, 2007
the
Company has not made or accrued any earn-out payments to Nuvotec shareholders
because such revenue targets have not been met.
See
“Note
10” to “Notes to Consolidated Financial Statements” on our accounting treatment
of the acquisition.
Contractual
Obligations
The
following table summarizes our contractual obligations at June 30, 2007, and
the
effect such obligations are expected to have on our liquidity and cash flow
in
future periods, (in thousands):
|
|
|
|
Payments
due by period
|
|
Contractual
Obligations
|
|
Total
|
|
2007
|
|
2008
-
2010
|
|
2011
-
2012
|
|
After
2012
|
|
Long-term
debt
|
|
$
|
18,611
|
|
$
|
2,514
|
|
$
|
15,074
|
|
$
|
1,021
|
|
$
|
2
|
|
Interest
on long-term debt (1)
|
|
|
3,005
|
|
|
—
|
|
|
2,936
|
|
|
69
|
|
|
—
|
|
Interest
on variable rate debt (2)
|
|
|
1,116
|
|
|
704
|
|
|
412
|
|
|
¾
|
|
|
¾
|
|
Operating
leases
|
|
|
3,742
|
|
|
879
|
|
|
2,196
|
|
|
627
|
|
|
40
|
|
Finite
risk policy (3)
|
|
|
5,019
|
|
|
¾
|
|
|
3,011
|
|
|
2,008
|
|
|
¾
|
|
Pension
withdrawal liability (4)
|
|
|
1,352
|
|
|
65
|
|
|
517
|
|
|
448
|
|
|
322
|
|
Environmental
contingencies (5)
|
|
|
3,151
|
|
|
1,024
|
|
|
1,110
|
|
|
526
|
|
|
491
|
|
Purchase
obligations (6)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
contractual obligations
|
|
$
|
35,996
|
|
$
|
5,186
|
|
$
|
25,256
|
|
$
|
4,699
|
|
$
|
855
|
|
(1) |
Our
IRS Note and PDC Note agreements call for interest to be paid at
the end
of the term, December 2008. In conjunction with our acquisition of
Nuvotec
and PEcoS (now known as Perma-fix of Northwest, Inc.), which was
completed
on June 13, 2007, pursuant to the Agreement and Plan of Merger, dated
April 27, 2007, we agreed to pay shareholders of Nuvotec that qualified
as
accredited investors pursuant to Rule 501 of Regulation D promulgated
under the Securities Act of 1933, $2.5 million, with principal payable
in
equal installment of $833,333 on June 30, 2009, June 30, 2010, and
June
30, 2011. Interest is accrued on outstanding principal balance at
8.25%
starting in June 2007 and is payable on June 30, 2008, June 30, 2009,
June
30, 2010, and June 30, 2011.
|
(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 2007 through 2008. We anticipate a full
repayment of our Term Loan by August 2008. In addition, we anticipate
a
full repayment of our Revolver by December 2007 from proceeds from
the
sale of our Industrial Segment. As result of the acquisition of our
new
Perma-Fix Northwest facility on June 13, 2007, we have entered into
a
promissory note for a principal amount $4.0 million to KeyBank National
Association which has variable interest rate of 1.125% over the prime
rate, and as such, we also have assumed an increase in prime rate
of 0.25%
through July 2009, when the note is
due.
|
(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 in the United States of America, 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:
Revenue
Recognition Estimates:
Nuclear
revenues.
The
processing of mixed waste is complex and may take several months or more to
complete, as such we recognize revenues on a percentage of completion basis
with
our measure of progress towards completion determined based on output measures
consisting of milestones achieved and completed. We have waste tracking
capabilities, which we continue to enhance, to allow us to better match the
revenues earned to the processing phases achieved. The revenues are recognized
as each of the following three processing phases are completed: receipt,
treatment/processing and shipment/final disposal. However, based on the
processing of certain waste streams, the treatment/processing and shipment/final
disposal phases may be combined as they are completed concurrently. 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. As the waste moves through these processing phases
and
revenues are recognized, the correlating costs are incurred. Although we use
our
best estimates and all available information to accurately determine these
disposal expenses, the risk does exist that the accrual could prove to be
inadequate in the event the waste requires re-treatment. Furthermore, should
the
waste be returned to the generator, the related receivables could be
uncollectible; however, historical experience has not indicated this to be
a
material uncertainty. Changes to total estimated revenues, contract costs and
percent complete, if any, are recorded in the period they are first determined.
Estimated losses, if any, on uncompleted contracts are recorded in the period
in
which it is first determined a loss is apparent.
Industrial
waste revenues (Discontinued Operations).
Since
industrial waste streams are much less complicated than mixed waste streams
and
they require a short processing period, we recognize revenues for industrial
services at the time the services are substantially rendered, which generally
happens upon receipt of the waste, or shortly thereafter. These large volumes
of
bulk waste are received and immediately commingled with various customers'
wastes, which transfers the legal and regulatory responsibility and liability
to
us upon receipt. As we continue to enhance our waste tracking systems within
the
segment we will continue to review and reevaluate our revenue recognition
policy.
Consulting
revenues.
Consulting revenues are recognized as services are rendered, as is consistent
with industry standards. The services provided are based on billable hours
and
revenues are recognized in relation to incurred labor and consulting costs.
Out
of pocket costs reimbursed by customers are also included in
revenues.
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 0.3%, and 0.6% of revenue and
approximately 1.7%, and 2.7% of accounts receivable for 2006, and 2005,
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
identifiable assets acquired (“goodwill”) and the recognized permit value of the
business. Prior to our adoption of SFAS 142, effective January 1, 2002, goodwill
had been amortized over 20 to 40 years and permits amortized over 10 to 20
years. Effective January 1, 2002, we discontinued amortizing our indefinite
life
intangible assets (goodwill and permits). Goodwill and intangible assets that
have indefinite useful lives are tested annually for impairment, and are tested
for impairment more frequently if events and circumstances indicate that the
asset might be impaired. An impairment loss is recognized to the extent that
the
carrying amount exceeds the asset’s fair value. For goodwill the impairment
determination is made at the reporting unit level and consists of two steps.
First, the Company determines the fair value of a reporting unit and compares
it
to its carrying amount. Second, if the carrying amount of a reporting unit
exceeds its fair value, an impairment loss is recognized for any excess of
the
carrying amount of the reporting unit’s goodwill over the implied fair value of
the goodwill. The implied value of goodwill is determined by allocating the
fair
value of the reporting unit in a manner similar to a purchase price allocation,
in accordance with FASB Statement No. 141, Business
Combinations.
The
residual fair value after this allocation is the impaired fair value of the
reporting unit goodwill. On January 1, 2002, upon adopting SFAS 142 we obtained
an initial financial valuation of our intangible assets, which indicated no
impairment to our indefinite life intangible assets. Our annual financial
valuations performed as of October 1, 2006 and October 1, 2005 indicated no
impairments.
On
May
25, 2007, the Company’s Board of Directors approved the sale divestiture of our
Industrial Segment. We performed financial valuations on the tangibles on the
Industrial Segment to test for impairment as required by Statement of Financial
Accounting Standards 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”. We also performed financial valuations on the intangible
assets of the Industrial Segment to test for impairment as required by Statement
of Financial Accounting Standards 142, “Goodwill and Other Intangible Assets”.
The results of these test indicated no impairments as of June 30,
2007.
Accrued
Closure Costs.
Accrued
closure costs represent a contingent environmental liability to clean up a
facility in the event we cease operations in an existing facility. The accrued
closure costs are estimates based on guidelines developed by federal and/or
state regulatory authorities under Resource Conservation and Recovery Act
("RCRA"). Such costs are evaluated annually and adjusted for inflationary
factors and for approved changes or expansions to the facilities. Increases
due
to inflationary factors for 2007 and 2006, have been approximately 2.9%, and
2.7%, 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.
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.
Share-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. 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.
We
recognize compensation expense based on the fair value at grant date using
the
Black-Scholes valuation model, using a straight-line amortization method over
the option’s vesting period. As SFAS 123R requires that stock-based
compensation expense be based on options that are ultimately expected to vest,
stock-based compensation has been reduced for estimated forfeitures, which
is
estimated using historical trends of actual option forfeitures.
FIN
48
In
July
2006, the Financial Accounting Standard Board (FASB) issued FASB Interpretation
No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, “Accounting
for Income Taxes”. FIN 48 requires a company to evaluate whether the tax
position taken by a company will more likely than not be sustained upon
examination by the appropriate taxing authority. It also provides guidance
on
how a company should measure the amount of benefit that the company is to
recognize in its financial statements. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for
fiscal
years beginning after December 15, 2006. We adopted FIN 48 as of January 1,
2007. The impact of our reassessment of our tax positions in accordance with
FIN
48 did not have any impact on the result of operations, financial condition
or
liquidity. See Note “Income Taxes” in “Notes to Consolidated Financial
Statements” for impact of FIN 48 on our financial statement.
Known
Trends and Uncertainties
Seasonality.
Historically, we have experienced reduced activities and related billable hours
throughout the November and December holiday periods within our Engineering
Segment. The DOE and DOD represent major customers for the Nuclear Segment.
In
conjunction with the federal government's September 30 fiscal year-end, the
Nuclear segment historically experienced seasonably large shipments during
the
third quarter, leading up to this government fiscal year-end, as a result of
incentives and other quota requirements. Correspondingly for a period of
approximately three months following September 30, the Nuclear segment is
generally seasonably slow, as the governmental budgets are still being
finalized, planning for the new year is occurring and we enter the holiday
season. More recently, due to our efforts to work with the various government
customers to smooth these shipment more evenly throughout the year, we have
seen
much less fluctuation in the quarters, with receipts in the fourth quarter
2006
actually higher than the third quarter. In 2007, the US Congress did not pass
the fiscal year 2007 budget which resulted in providing funding through a
continuing resolution that sets budgets to the previous year and restricts
start
up of new projects; as such, receipts for second quarter 2007 were lower as
compared to the second quarter of 2006. In addition, our revenue recognition
policy further reduces this impact on our revenue. See “Revenue Recognition
Estimates” in this “Management Discussion and Analysis of Financial Condition
and Results of Operations”.
Economic
Conditions. With
much
of our Nuclear Segment customer base being government or prime contractors
treating government waste, economic upturns or downturns do not usually have
a
significant impact on the demand for our services. Our Engineering Segment
relies more on commercial customers though this segment makes up a very small
percentage of our revenue.
Significant
Customers.
While
our revenues are principally derived from numerous and varied customers, we
have
a significant relationship with the federal government and its contractors.
During the three and six months ended June 30, 2007, our Nuclear segment
performed services relating to waste generated by the federal government, either
directly or indirectly as a subcontractor to the federal government,
representing approximately $8,204,000 or 60.6%, and $14,363,000 or 54.3% of
our
consolidated revenues for the respective periods as compared to $8,752,000
or
62.3%, and $15,770,000 or 58.5% for the respective periods of 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 the contracts
for convenience at any time.
Included
in the amounts discussed above, are revenues from LATA/Parallax Portsmouth
LLC
(“LATA/Parallax”). In first quarter of 2006, our Nuclear segment was awarded a
$9.4 million contract by LATA/Parallax to remove and treat U.S Department of
Energy (DOE) special process waste from the DOE Portsmouth Gaseous Diffusion
Plant located in Piketon, Ohio. LATA/Parallax performs environmental remediation
services, including groundwater cleanup and waste management activities, under
contract to DOE at the Portsmouth site. The subcontract requires treatment
and
disposal of mixed waste that was generated during Gaseous Diffusion Plant
operations at the Piketon, Ohio plant and includes materials used to trap
impurities, decontamination wastes, and wastes generated during system upgrades.
Since signing the initial contract, the scope of our work has increased and
the
value of the contract has increased to approximately $11.5 million, with the
period of performance expected to be completed by September 30, 2008. Our
revenues from LATA/Parallax contributed $2,056,000 or 15.2% and $4,010,000
or
15.2% of our consolidated revenues of our continuing operations for the three
and six months ended June 30, 2007, respectively, as compared to $4,214,000
or
30.0% and $4,401,000 or 16.3% for the same period ended 2006. As with contracts
relating to the federal government, LATA/Parallax can terminate the contract
with us at any time for convenience, which could have a material adverse effect
on our operations.
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
subsidiary, PFD, is involved in certain legal proceedings with the DOJ, on
behalf of the EPA, and was sued under the citizen’s suit provision of the Clean
Air Act in the United States District Court for the Southern District of Ohio,
Western District, alleging, among other things, that it had not obtained a
Title
V air permits in order to operate its facility and is in violation of the Clean
Air Act and applicable state statutes and regulations. The legal proceedings
further allege that PFD failed to install appropriate air pollution control
equipment, conduct appropriate recordkeeping, properly monitor and report,
and
that air emissions from PFD’s facility injured persons, endangered the health of
the public and constituted a nuisance in violation of Ohio law.
On
April
25, 2007, PFD reached an agreement in principle (“AIP”) with DOJ/USEPA
representatives to settle all of the United States’ claims. In addition to
taking specific actions to address relevant air pollution control regulations
and permit requirements, the AIP states that PFD will pay a civil penalty of
$800,000 to be paid by PFD. PFD expects the $800,000 may consist of as many
as
three components: 1) cash payment to the appropriate regulatory authority;
2)
supplemental environmental project(s) consisting of cash equivalent
investment(s) in PFD’s facility and/or the local community; and 3) supplemental
environmental project(s) consisting of one or more capital projects. Completing
a formal settlement agreement (consent decree) and meeting the DOJ/EPA official
approval requirements (including public notice and comment) is ongoing. Cost
estimates associated with taking action to address air pollution control
regulations and permit requirements will depend on specific details of the
consent decree. Absent agreement on all terms and format of such a final consent
decree is not reached, then the AIP will be null and void and no party may
seek
to enforce it. The AIP does not address the citizen’s suit. We therefore, expect
the citizen’s suit to continue after settlement with the federal government is
finalized. PFD continues to mount a vigorous defense against, and seek an
acceptable resolution of, the claims and requests for relief of the citizen’s
group.
As
of
June 30, 2007, we have incurred approximately $2.9 million in costs in
vigorously defending against the lawsuits above. About $1.2 million was incurred
in the first quarter of 2007. On April 12, 2007, our insurer, American
International Group (“AIG”), withdrew
its prior coverage denial and has agreed to defend and indemnify PFD in the
above lawsuit described, subject to AIG’s reservation of rights as discussed
below.
AIG
has
agreed to reimburse PFD for reasonable defense costs of litigation prior to
its
assumption of the defense, but this agreement to defend and indemnify PFD is
subject to the AIG’s reservation of its rights to deny indemnity pursuant to
various policy provisions and exclusions, including without limitation, payment
of any civil penalties and fines, as well as AIG’s right to recoup any defense
costs it has advanced if AIG later determines that its policy provides no
coverage. At this time, the amount of AIG’s reimbursement for legal and out of
pocket defense costs incurred to date is estimated to be $2.5 million, which
AIG
has agreed to reimburse and which we have recorded as a recovery within our
discontinued operations for the quarter ended June 30, 2007. Partial
reimbursement from AIG of $750,000 was received on July 11, 2007. The balance
of
the reimbursement is currently expected to be received during the third quarter
of 2007.
Cost
estimates associated with taking action to address air pollution control
regulations and permit requirements are dependent upon the definitization of
the
consent decree. Nevertheless, these actions, including agreeing to operate
the
PFD facility as a “major source” in accordance with certain Clean Air Act
hazardous air pollutant control requirements is not expected to have a material
adverse affect on us or our liquidity.
Environmental
Contingencies
We
are
engaged in the waste management services segment of the pollution control
industry. As a participant in the on-site treatment, storage and disposal market
and the off-site treatment and services market, we are subject to rigorous
federal, state and local regulations. These regulations mandate strict
compliance and therefore are a cost and concern to us. Because of their integral
role in providing quality environmental services, we make every reasonable
attempt to maintain complete compliance with these regulations; however, even
with a diligent commitment, we, along with many of our competitors, may be
required to pay fines for violations or investigate and potentially remediate
our waste management facilities.
We
routinely use third party disposal companies, who ultimately destroy or secure
landfill residual materials generated at our facilities or at a client's site.
Compared with certain of our competitors, we dispose of significantly less
hazardous or industrial by-products from our operations due to rendering
material non-hazardous, discharging treated wastewaters to publicly-owned
treatment works and/or processing wastes into saleable products. In the past,
numerous third party disposal sites have improperly managed wastes and
consequently require remedial action; consequently, any party utilizing these
sites may be liable for some or all of the remedial costs. Despite our
aggressive compliance and auditing procedures for disposal of wastes, we could,
in the future, be notified that we are a PRP at a remedial action site, which
could have a material adverse effect.
For
2007,
$1,409,000 is budgeted in environmental remediation expenditures to comply
with
federal, state and local regulations in connection with remediation of certain
contaminates at our discontinued 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. With the impending divestiture of our
Industrial Segment, we anticipate the environmental liabilities for all the
facilities noted above will be part of the divestiture with the exception of
PFM, PFD, and PFMI, which will remain the financial obligations of the Company.
While no assurances can be made that we will be able to do so, we expect to
fund
the expenses to remediate the three sites from funds generated
internally.
At
June
30, 2007, we had total accrued environmental remediation liabilities of
$3,151,000, of which $1,385,000 is recorded as a current liability, a decrease
of $127,000 from the December 31, 2006, balance of $3,278,000. The decrease
represents payments on remediation projects. The June 30, 2007, current and
long-term accrued environmental balance is as follows:
|
|
Current
Accrual
|
|
Long-term
Accrual
|
|
Total
|
|
PFD
|
|
$
|
270,000
|
|
$
|
451,000
|
|
$
|
721,000
|
|
PFM
|
|
|
447,000
|
|
|
296,000
|
|
|
743,000
|
|
PFSG
|
|
|
172,000
|
|
|
494,000
|
|
|
666,000
|
|
PFTS
|
|
|
10,000
|
|
|
27,000
|
|
|
37,000
|
|
PFMD
|
|
|
¾
|
|
|
391,000
|
|
|
391,000
|
|
PFMI
|
|
|
486,000
|
|
|
107,000
|
|
|
593,000
|
|
|
|
$
|
1,385,000
|
|
$
|
1,766,000
|
|
$
|
3,151,000
|
|
Recently
Adopted Accounting Standards
In
July
2006, the Financial Accounting Standard Board (FASB) issued FASB Interpretation
No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, “Accounting
for Income Taxes”. FIN 48 requires a company to evaluate whether the tax
position taken by a company will more likely than not be sustained upon
examination by the appropriate taxing authority. It also provides guidance
on
how a company should measure the amount of benefit that the company is to
recognize in its financial statements. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006.
We
adopted FIN 48 as of January 1, 2007. As a result of the implementation of
FIN
48, we have concluded that we have not taken any uncertain tax positions on
any
of our open income tax returns filed through the period ended December 31,
2005
that would materially distort our financial statement. Our methods of accounting
are based on established income tax principles approved in the Internal Revenue
Code (IRC) and are properly calculated and reflected within our income tax
returns. In addition, we have filed income tax returns in all applicable
jurisdictions in which we had material nexus warranting an income tax return
filing.
We
have
not yet filed our income tax returns for the tax year ended December 31, 2006;
however, we expect that the actual income tax returns will mirror tax positions
taken within our income tax provision for 2006. As we believe that all such
positions are fully supportable by existing Federal law and related
interpretations, there are no uncertain income tax positions to consider in
accordance with FIN 48.
We
reassess the validity of our conclusions regarding uncertain income tax
positions on a quarterly basis to determine if facts or circumstances have
arisen that might cause us to change our judgment regarding the likelihood
of a
tax position's sustainability under audit. The impact of this reassessment
for
the second quarter of 2007 did not have any impact on our results of operations,
financial condition or liquidity.
PERMA-FIX
ENVIRONMENTAL SERVICES, INC.
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PART
I, ITEM 3
We
are
exposed to certain market risks arising from adverse changes in interest rates,
primarily due to the potential effect of such changes on our variable rate
loan
arrangements with PNC. As of June 30, 2007, 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
$28,000
for the six months ended June 30, 2007.
PERMA-FIX
ENVIRONMENTAL SERVICES, INC.
CONTROLS
AND PROCEDURES
PART
1, ITEM 4
(a)
|
Evaluation
of disclosure controls, and procedures.
|
|
We
maintain disclosure controls and procedures that are designed to
ensure
that information required to be disclosed in our periodic reports
filed
with the Securities and Exchange Commission (the "SEC") is recorded,
processed, summarized and reported within the time periods specified
in
the rules and forms of the SEC and that such information is accumulated
and communicated to our management. Based on their most recent evaluation,
which was completed as of the end of the period covered by this Quarterly
Report on Form 10-Q, we have evaluated, with the participation of
our
Chief Executive Officer and Chief Financial Officer the effectiveness
of
our disclosure controls and procedures (as defined in Rules 13a-15
and
15d-15 of the Securities Exchange Act of 1934, as amended) and believe
that such are not effective, as a result of the identified material
weaknesses in our internal control over financial reporting as set
forth
below (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)).
1.
The
monitoring of pricing and invoicing process controls at certain facilities
within the Company's Industrial Segment was ineffective and was not
being
applied consistently. This weakness could result in sales being priced
and
invoiced at amounts, which were not approved by the customer or the
appropriate level of management. Further, controls over non-routine
revenue streams in this segment, such as Bill & Hold transactions,
were ineffective and could result in revenue being prematurely recognized.
Although this material weakness did not result in an adjustment to
the
quarterly or annual financial statements, if not remediated, it has
a more
than remote potential to cause a material misstatement to be unprevented
or undetected. We are currently evaluating this control weakness
and
anticipate remediation of this control weakness in the third quarter
of
2007.
2.
The
Company lacks the technical expertise and processes to ensure compliance
with SFAS No. 109, “Accounting for Income Taxes”, and did not
maintain adequate controls with respect to accurate and timely tax
account reconciliations and analyses. This material weakness resulted
in
an audit adjustment and, if not remediated, it has a more than remote
potential to cause a material misstatement to be unprevented or
undetected. See below “Change in internal control over financial
reporting” for corrective action taken by the Company to remediate this
material weakness in our internal control over financial
reporting.
3.
The
Company lacks the technical expertise, controls and policies to ensure
that significant non-routine transactions are being appropriately
reviewed, analyzed, and monitored on a timely basis. Although this
material weakness did not result in an adjustment to the quarterly
or
annual financial statements, if not remediated, it has more than
a remote
potential to cause a material misstatement to be unprevented or
undetected. See below “Change in internal control over financial
reporting” for corrective action taken by the Company to remediate this
material weakness in our internal control over financial
reporting.
|
|
|
(b)
|
Changes
in internal control over financial reporting.
|
|
There
have been
no changes in our internal control over financial reporting, other
than ,
reported below: |
|
1.
As
previously reported in our Form 10-Q for the quarter ended March
31, 2007,
we have obtained the service of an outside tax firm which will provide
on-going technical expertise to ensure we accurately and timely complete
tax account reconciliations and analyses, in addition to ensuring
compliance with applicable tax laws and regulations.
2.
As
previously reported in our Form 10-Q for the quarter ended March
31, 2007,
we have obtained the service of an outside consulting firm which
will
provide the necessary on-going technical expertise to ensure that
non-routine transactions are being appropriately reviewed, analyzed,
accounted for and monitored on a timely and accurately basis.
3.
Effective
April 15, 2007, we centralized the processing of payroll for our
SYA
facility to our corporate office.
|
|
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, 2006, and Item 1, Part II, of our Form
10-Q
for the period ended March 31, 2007, which are incorporated herein
by
reference, except , as follows.
We
have previously reported that our subsidiary, PFD, is involved in
certain
legal proceedings with the DOJ, on behalf of the EPA, and sued under
the
citizen’s suit provision of the Clean Air Act in the United States
District Court for the Southern District of Ohio, Western District.
Allegations include failure to obtain Title V air permits for facility
operations, which if valid, could violate the Clean Air Act and other
applicable state statutes and regulations. The legal proceedings
further
allege that PFD failed to install appropriate air pollution control
equipment, conduct appropriate recordkeeping, properly monitor and
report,
and that air emissions from PFD’s facility injured persons, endangered the
health of the public and constituted a nuisance in violation of Ohio
law.
On
April 25, 2007, PFD reached an agreement in principle (“AIP”) with
DOJ/USEPA representatives to settle all of the United States’ claims. In
addition to taking specific actions to address relevant air pollution
control regulations and permit requirements, the AIP provides for
a civil
penalty of $800,000 to be paid by PFD. PFD expects the $800,000 may
consist of as many as three components: 1) cash payment to the appropriate
regulatory authority; 2) supplemental environmental project(s) consisting
of cash equivalent investment(s) in PFD’s facility and/or the local
community; and 3) supplemental environmental project(s) consisting
of one
or more capital projects. Completing a formal settlement agreement
(consent decree) and meeting the DOJ/EPA official approval requirements
(including public notice and comment) is ongoing. Cost estimates
associated with taking action to address air pollution control regulations
and permit requirements will depend on specific details of the consent
decree. Absent agreement on all terms and format of such a final
consent
decree is not reached, then the AIP will be null and void and no
party may
seek to enforce it. The AIP does not address the citizen’s suit. We
therefore, expect the citizen’s suit to continue after settlement with the
federal government is finalized. PFD continues to mount a vigorous
defense
against, and seek an acceptable resolution of, the claims and requests for
relief of the citizen’s group.
As
of June 30, 2007, we have incurred approximately $2.9 million in
costs in
vigorously defending against the lawsuits above. About $1.2 million
was
incurred in the first quarter of 2007. On April 12, 2007, our insurer,
American International Group (“AIG”), withdrew
its prior coverage denial and has agreed to defend and indemnify
PFD in
the above lawsuit described, subject to AIG’s reservation of rights as
discussed below.
AIG
has agreed to reimburse PFD for reasonable defense costs of litigation
prior to its assumption of the defense, but this agreement to defend
and
indemnify PFD is subject to the AIG’s reservation of its rights to deny
indemnity pursuant to various policy provisions and exclusions, including,
without limitation, payment of any civil penalties and fines, as
well as
AIG’s right to recoup any defense cost it has advanced if AIG later
determines that its policy provides no coverage. At this time, the
amount
of AIG’s reimbursement for legal and out of pocket defense costs incurred
to date is estimated to be $2.5 million, which AIG has agreed to
reimburse
and which we have recorded as a recovery within our discontinued
operations for the quarter ended June 30, 2007. Partial reimbursement
from
AIG of $750,000 was received on July 11, 2007. The balance of the
reimbursement is currently expected to be received during the third
quarter of 2007.
|
Item
1A.
|
Risk
Factors
|
|
There
has been no material changes from the risk factors previously disclosed
in
our Form 10-K for the year ended December 31, 2006 and Form 10-Q
for the
quarter ended March 31, 2007.
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
|
In
connection with our acquisition of Nuvotec (n/k/a Perma-Fix Northwest,
Inc.) and its wholly owned subsidiary, PEcoS (n/k/a Perma-Fix Northwest
Richland, Inc.) which closed on June 13, 2007, pursuant to the terms
of
the Merger Agreement, dated April 27, 2007, which was subsequently
amended
on June 13, 2007, Perma-Fix has issued during July 2007, a total
of
709,207 shares of Perma-Fix common stock to 81 former shareholders
of
Nuvotec that qualified as accredited investors (as defined in Rule
501 of
Regulation D). The number of shares issued was determined by dividing
$2.0
million by 95% of average of the closing price of the common stock
as
quoted on the Nasdaq during the 20 trading days period ending five
business days prior to the closing of the merger. Each of the investors
in
the common stock represented to Perma-Fix that the investor is
"accredited" for purposes of Rule 501 of Regulation D. The issuance
of the
common stock was made in a private placement exempt from registration
under Section 4(2) of the Act and/or Rule 506 of Regulation D promulgated
under the Act.
|
|
|
Item
5.
|
Other
Information
|
|
Letter
of Intent
On
May 18, 2007, our Board of Directors authorized management to consider
the
divestiture of all or a part of our Industrial Segment. On May 25,
2007,
we entered into a letter of intent to sell our Industrial Segment
to The
Environmental Quality Company (EQ), excluding our facility in Pittsburgh,
Pennsylvania, owned by our subsidiary, Perma-Fix of Pittsburgh, Inc.
(“PFP), and our facility in Detroit, Michigan, owned by our subsidiary,
Perma-Fix of Michigan, Inc. (“PFMI”), two facilities which have been
approved as discontinued operations by our Board of Directors effective
November, 8, 2005, and October 4, 2004, respectively. Subsequent
to
entering into the letter of intent with EQ, the EQ has advised us
that
they will be unable to proceed with the transaction as contemplated
by the
letter of intent. As a result, we are in the process of considering
additional offers that we have received to purchase all or portions
of our
Industrial Segment.
Related
Party Transaction
On
August 2, 2007, the compensation committee of our board of directors
unanimously recommended to the full board of directors, and, based
on such
recommendation, our board of directors approved on the same day,
that Joe
R. Reeder, a member of our board of directors, with Mr. Reeder abstaining,
be issued 60,000 shares of our common stock as compensation for his
services as the board’s representative in negotiating the agreement in
principle to settle the claims brought by the United States, on behalf
of
the EPA, against PFD, our Dayton, Ohio, subsidiary, and resolution
of
certain other matters relating to that lawsuit as more fully discussed
under Item 1, “Legal
Proceedings”,
of Part II of this report. Issuance of these shares are subject to
Mr.
Reeder agreeing that the shares are issued in a private placement
exempt
from registration under Section 4(2) of the Act and/or Regulation
D
promulgated under the Act and that he will not sell or dispose of
such
shares except pursuant to an effective registration statement or
pursuant
to an exemption from registration.
|
Item
6.
|
Exhibits
|
|
|
(a)
|
Exhibits
|
|
4.1
|
Amendment
No. 6 to Revolving Credit, Term Loan and Security Agreement, dated
as of
June 12, 2007, between the Company and PNC Bank.
|
|
4.2
|
Amendment
No. 7 to Revolving Credit Term Loan and Security Agreement, dated
as of
July 18, 2007, between the Company and PNC Bank.
|
|
10.1
|
Agreement
and Plan of Merger dated April 27, 2007, by and among Perma-Fix
Environmental Services, Inc., Nuvotec USA, Inc., Pacific EcoSolutions,
Inc., and PESI Transitory, Inc., which is incorporated by reference
from
Exhibit 2.1 to the Company’s Form 8-K, filed May 3, 2007. The Company will
furnish supplementally a copy of any omitted exhibit or schedule
to the
Commission upon request.
|
|
10.2
|
First
Amendment to Agreement and Plan of Merger, dated June 13, 2007, by
and
among Perma-Fix Environmental Services, Inc., Nuvotec USA, Inc.,
Pacific
EcoSolutions, Inc., and PESI Transitory, Inc., which is incorporated
by
reference from Exhibit 2.2 to the Company’s Form 8-K, filed June 19, 2007.
The Company will furnish supplementally a copy of any omitted exhibit
or
schedule to the Commission upon request.
|
|
31.1
|
Certification
by Dr. Louis F. Centofanti, Chief Executive Officer of the Company
pursuant to Rule 13a-14(a) or 15d-14(a).
|
|
31.2
|
Certification
by 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.
|
|
|
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
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Date:
August 13, 2007
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By:
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/s/
Dr. Louis F. Centofanti
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Dr.
Louis F. Centofanti
Chairman
of the Board
Chief
Executive Officer
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Date:
August 13, 2007
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By:
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/s/
Steven Baughman
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Steven
Baughman
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Vice
President and Chief Financial
Officer
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