UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended December
31, 2007
or
o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period from _____ to _____
Commission
File No. 1-11596
PERMA-FIX
ENVIRONMENTAL SERVICES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
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58-1954497
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State
or other jurisdiction
of
incorporation or organization
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(IRS
Employer Identification Number)
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8302
Dunwoody Place, #250, Atlanta, GA
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30350
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(Address
of principal executive offices)
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(Zip
Code)
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(770)
587-9898
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(Registrant's telephone number)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, $.001 Par Value
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NASDAQ
Capital Markets
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Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
o No
x
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes x
No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained to the best
of
the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company
(as
defined in Rule 12b-2 of the Act) Large accelerated filer o Accelerated
filer x Non-accelerated
filer o Smaller
reporting company o
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes
o No
x
The
aggregate market value of the Registrant's voting and non-voting common equity
held by nonaffiliates of the Registrant computed by reference to the closing
sale price of such stock as reported by NASDAQ as of the last business day
of
the most recently completed second fiscal quarter (June 30, 2007), was
approximately $152,855,000. For the purposes of this calculation, all executive
officers and directors of the Registrant (as indicated in Item 12) are deemed
to
be affiliates. Such determination should not be deemed an admission that such
directors or officers, are, in fact, affiliates of the Registrant. The Company's
Common Stock is listed on the NASDAQ Capital Markets.
As
of
March 10, 2008, there were 53,704,516 shares of the registrant's Common Stock,
$.001 par value, outstanding.
Documents
incorporated by reference: none
PERMA-FIX
ENVIRONMENTAL SERVICES, INC.
INDEX
PART I
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Page No.
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Item
1.
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Business
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1
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Item 1A.
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Risk
Factors
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12
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Item 1B.
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Unresolved
Staff Comments
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19
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Item
2.
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Properties
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19
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Item
3.
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Legal
Proceedings
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20
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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22
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Item 4A.
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Executive
Officers of the Registrant
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22
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PART II
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Item
5.
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Market
for Registrant’s Common Equity and Related Stockholder
Matters
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24
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Item
6.
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Selected
Financial Data
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26
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Item
7.
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Management's
Discussion and Analysis of Financial Condition
And
Results of Operations
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28
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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54
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Special
Note Regarding Forward-Looking Statements
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55
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Item
8.
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Financial
Statements and Supplementary Data
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58
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Item
9.
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Changes
in and Disagreements with Accountants on
Accounting
and Financial Disclosure
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110
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Item 9A.
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Controls
and Procedures
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110
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Item 9B.
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Other
Information
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114
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PART III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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114
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Item
11.
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Executive
Compensation
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117
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder
Matters
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129
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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133
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Item
14.
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Principal
Accounting Fees and Services
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135
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PART IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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137
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PART
I
Company
Overview and Principal Products and Services
Perma-Fix
Environmental Services, Inc. (the Company, which may be referred to as we,
us,
or our), an environmental and technology know-how company, is a Delaware
corporation organized in 1990, and is engaged through its subsidiaries,
in:
· |
Nuclear
Waste Management Services (“Nuclear Segment”), which
includes:
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|
o |
Treatment,
storage, processing and disposal of mixed waste (which is waste that
contains both low-level radioactive and hazardous waste) including
on and
off-site waste remediation and
processing;
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o |
Nuclear,
low-level radioactive, and mixed waste treatment, processing and
disposal;
and
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o |
Research
and development of innovative ways to process low-level radioactive
and
mixed waste.
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· |
Consulting
Engineering Services (“Engineering Segment”), which
includes:
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|
o |
Consulting
services regarding broad-scope environmental issues, including
environmental management programs, regulatory permitting, compliance
and
auditing, landfill design, field testing and
characterization.
|
On
May
18, 2007, our Board of Directors authorized the divestiture of our Industrial
Segment. Our Industrial Segment provides treatment, storage, processing, and
disposal of hazardous and non-hazardous waste, wastewater management services,
and environmental services, which includes emergency response, vacuum services,
marine environmental and other remediation services. The decision to sell our
Industrial Segment is based on our belief that our Nuclear Segment represents
a
sustainable long-term growth driver of our business. During 2007, we have
entered into several letters of intent to sell various portions of our
Industrial Segment. All of the letters of intent have expired or terminated
without being completed, except: we completed, on January 8, 2008, the sale
of
substantially all of the assets of Perma-Fix Maryland, Inc. (“PFMD”) for
$3,825,000 in cash, subject to a working capital adjustment during 2008, and
assumption by the buyer of certain liabilities of PFMD, and during March 2008,
we completed the sale of substantially all of the assets of Perma-Fix of Dayton,
Inc. (“PFD”) for approximately $2,143,000 in cash, subject to certain working
capital adjustments after the closing, plus assumption by the buyer of certain
of PFD’s liabilities and obligations, (including, without limitation, certain
obligations under the Settlement Agreement entered into by PFD in connection
with the settlement of plaintiff’s claims under the Fisher Lawsuit, as discussed
and defined in “Legal Proceedings”, and approximately $562,000 in PFD’s
obligations for and relating to supplemental environmental projects that PFD
is
obligated to perform under the Consent Decree entered into with the federal
government in settlement of the Government’s Lawsuit as discussed and defined in
“Legal Proceedings”) in connection with the Fisher Lawsuit. We are negotiating
the sale of Perma-Fix South Georgia, Inc. (“PFSG”). We anticipate that the sale
of PFSG will be completed by end of May 2008. The terms of the sale of PFSG
are
subject to being finalized. We are attempting to sell the other companies and/or
operations within our Industrial Segment, but as of the date of this report,
we
have not entered into any agreements regarding these other companies or
operations within our Industrial Segment.
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 reclassified as discontinued
operations in the Consolidated Balance Sheets, and we have ceased depreciation
of the Industrial Segment’s long-lived assets classified as held for sale. The
results 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
believe that the divestiture of certain facilities within our Industrial Segment
has not occurred within the anticipated time period due to the current state
of
our economy which has impacted potential buyers’ ability to obtain financing. In
addition, the original letter of intent entered between us and a potential
buyer
included the majority of the companies within our Industrial Segment. This
sale
did not materialize, leading
us
to
pursue the potential sale of each company individually. Although this process
has taken more time than anticipated for numerous reasons, we continue to market
the facilities within our Industrial Segment for eventual sale.
Our
present objective is to focus on the efficient operation of our existing
facilities within our Nuclear and Engineering Segments, evaluate strategic
acquisitions within the Nuclear Segments, and to continue the research and
development of innovative technologies for the treatment of nuclear waste,
mixed
waste and industrial waste. On June 13, 2007, we completed the acquisition
of
Nuvotec USA, Inc. (k/n/a Perma-Fix of Northwest, Inc. – “PFNW”) and its
wholly owned subsidiary, Pacific EcoSolutions, Inc (PEcoS) (k/n/a Perma-Fix
of
Northwest Richland, Inc. – “PFNWR”) for $17.3 million. PFNWR is a hazardous
waste, low level radioactive waste and mixed waste (containing both hazardous
waste and low level radioactive waste) management company based in Richland,
Washington, adjacent to the Department of Energy’s (“DOE”) Hanford facility.
This acquisition provides us with a number of strategic benefits. Foremost,
this
acquisition secured PFNWR’s radioactive and hazardous waste permits and
licenses, which further solidified our position within the mixed waste industry.
Additionally, the PFNWR facility is located adjacent to the Hanford site, which
represents one of the largest environmental clean-up projects in the nation
and
is expected to be one of the most expansive of DOE’s nuclear weapons’ facilities
to remediate. In addition, the acquisition of PFNWR facility introduced our
west
coast presence and increases our treatment capacity for radioactive only waste.
For 2007, PFNWR generated $8,439,000 in revenue, which represents 15.6% of
our
consolidated revenue from continuing operations.
We
service research institutions, commercial companies, public utilities and
governmental agencies nationwide. The distribution channels for our services
are
through direct sales to customers or via intermediaries.
We
were
incorporated in December of 1990. Our executive offices are located at 8302
Dunwoody Place, Suite 250, Atlanta, Georgia 30350.
Website
access to Company's reports
Our
internet website address is www.perma-fix.com. Our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments
to
those reports filed or furnished pursuant to section 13(a) or 15(d) of the
Exchange Act are available free of charge through our website as soon as
reasonably practicable after they are electronically filed with, or furnished
to, the Securities and Exchange Commission (“Commission”). Additionally, we make
available free of charge on our internet website:
|
·
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the
charter of our Corporate Governance and Nominating
Committee;
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·
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the
charter of our Audit Committee.
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Segment
Information and Foreign and Domestic Operations and Export
Sales
During
2007, we were engaged in two operating segments. 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 president and chief
operating officer to make decisions about resources to be allocated
and
assess its performance; and
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· |
for
which discrete financial information is
available.
|
We
therefore define our operating segments as each business line that we operate.
These segments, however, exclude the corporate and operation headquarters,
which
do not generate revenue and our Industrial Segment, our discontinued operations,
as discussed above.
Most
of
our activities are conducted nationwide. We do not own any foreign operations
and we had no export sales during 2007.
Operating
Segments
We
have
two operating segments, which represent each business line that we operate.
The
Nuclear Segment, which operates four facilities (including our newly acquired
PFNWR facility, as mentioned below), and the Consulting Engineering Services
Segment as described below:
NUCLEAR
WASTE MANAGEMENT SERVICES, which includes nuclear, low-level radioactive, mixed
(waste containing both hazardous and low-level radioactive constituents)
hazardous and non-hazardous waste treatment, processing and disposal services
through four uniquely licensed (Nuclear Regulatory Commission or state
equivalent) and permitted (Environmental Protection Agency or state equivalent)
treatment and storage facilities. The presence of nuclear and low-level
radioactive constituents within the waste streams processed by this segment
creates different and unique operational, processing and permitting/licensing
requirements, as discussed below.
Perma-Fix
of Florida, Inc. (“PFF”), located in Gainesville, Florida, specializes in the
storage, processing, and treatment of certain types of wastes containing both
low-level radioactive and hazardous wastes, which are known in the industry
as
mixed waste (“mixed waste”). PFF is one of the first facilities nationally to
operate under both a hazardous waste permit and a radioactive materials license,
from which it has built its reputation based on its ability to treat difficult
waste streams using its unique processing technologies and its ability to
provide related research and development services. PFF has substantially
increased the amount and type of mixed waste and low level radioactive waste
that it can store and treat. Its mixed waste services have included the
treatment and processing of waste Liquid Scintillation Vials (LSVs) since the
mid 1980's. LSVs are used for the counting of certain radionuclides. The LSVs
are generated primarily by institutional research agencies and biotechnical
companies. The business has expanded into receiving and handling other types
of
mixed waste, primarily from the nuclear utilities, commercial generators,
prominent pharmaceutical companies, the Department of Energy (“DOE”) and other
government facilities as well as select mixed waste field remediation projects.
PFF also continues to receive and process certain hazardous and non-hazardous
waste streams as a compliment to its expanded nuclear and mixed waste processing
activities.
Diversified
Scientific Services, Inc. (“DSSI”) located in Kingston, Tennessee, specializes
in the storage, processing, and destruction of certain types of mixed waste.
DSSI, like PFF, is one of only a few facilities nationally to operate under
both
a hazardous waste permit and a radioactive materials license. Additionally,
DSSI
is the only commercial facility of its kind in the U.S. that is currently
operating and licensed to destroy liquid organic mixed waste, through such
a
treatment unit. DSSI provides mixed waste disposal services for nuclear
utilities, commercial generators, prominent pharmaceutical companies, and
agencies and contractors of the U.S. government, including the DOE and the
Department of Defense (“DOD”). We are currently working toward permitting the
facility for Polychlorinated Biphenyls (PCB) destruction.
East
Tennessee Materials & Energy Corporation (“M&EC”), located in Oak Ridge,
Tennessee, is another mixed waste facility. M&EC also operates under both a
hazardous waste permit and radioactive materials license. M&EC represents
the largest of our four mixed waste facilities, covering 150,000 sq. ft., and
is
located in leased facilities at the DOE East Tennessee Technology Park. In
addition to providing mixed waste treatment services to commercial generators,
nuclear utilities and various agencies and contractors of the U.S. Government,
including the DOD, M&EC was awarded three contracts to treat DOE mixed waste
by Bechtel-Jacobs Company, LLC, DOE’s Environmental Program Manager, which
covers the treatment of mixed waste throughout all DOE facilities. Two of these
contracts have been extended through September 2009. In 2007, M&EC completed
its facility expansion (“SouthBay”) to treat DOE special process wastes from the
DOE Portsmouth Gaseous Diffusion Plant located in Piketon, Ohio under the
subcontract awarded by LATA/Parallax Portsmouth LLC to our Nuclear Segment
in
2006. LATA/Parallax performs
environmental
remediation services, including groundwater cleanup and waste management
activities, under contract to DOE at the Portsmouth site.
PFNWR,
which we acquired in June 2007, is located in Richland, Washington. PFNWR is
a
permitted hazardous, low level radioactive and mixed waste treatment, storage
and disposal facility located at the Hanford U.S. DOE site in the eastern part
of the state of Washington. The DOE’s Hanford site is subject to one of the
largest, most complex, and most costly DOE clean up plans. The strategic
addition of PFNWR facility provides the Company with immediate access to treat
some of the most complex nuclear waste streams in the nation. PFNWR
predominately provides waste treatment services to contractors of government
agencies, in addition to commercial generators.
For
2007,
the Nuclear business (including $8,439,000 in revenue of our PFNWR facility)
accounted for $51,704,000 (or 95.6%) of total revenue from continuing
operations, as compared to $49,423,000 (or 93.6%) of total revenue for 2006.
See
“ - Dependence Upon a Single or Few Customers” and “Financial Statements and
Supplementary Data” for further details and a discussion as to our Nuclear
Segment's contracts with the federal government or with others as a
subcontractor to the federal government.
CONSULTING
ENGINEERING SERVICES, which provides environmental engineering and regulatory
compliance consulting services through one subsidiary, as discussed
below.
Schreiber,
Yonley & Associates (“SYA”) is located in Ellisville, Missouri. SYA
specializes in environmental management programs, permitting, compliance and
auditing, in addition to landfill design, field investigation, testing and
monitoring. SYA clients are primarily industrial, including many within the
cement manufacturing industry. SYA also provides the necessary support,
compliance and training as required by our operating facilities.
During
2007, environmental engineering and regulatory compliance consulting services
accounted for approximately $2,398,000 (or 4.4%) of our total revenue from
continuing operations, as compared to approximately $3,358,000 (or 6.4%) in
2006. See “Financial Statements and Supplementary Data” for further
details.
Discontinued
Operations
As
stated
above, our Industrial Segment, which provides management of hazardous waste,
non-hazardous waste, and waste water, are classified as discontinued operations.
At the beginning of 2007, the Industrial Segment consisted of six (6) operating
companies, as well as two non-operational companies. As stated above, during
the
first quarter of 2008, we sold PFMD and PFD and are attempting to sell the
remaining companies/operations within the Industrial Segment.
Our
discontinued operations generated $30,407,000, $35,148,000 and $41,489,000
of
revenue in 2007, 2006, and 2005, respectively.
Importance
of Patents, Trademarks and Proprietary Technology
We
do not
believe we are dependent on any particular trademark in order to operate our
business or any significant segment thereof. We have received registration
to
the year 2010 and 2012 for the service marks “Perma-Fix” and “Perma-Fix
Environmental Services,” respectively, by the U.S. Patent and Trademark
Office.
We
are
active in the research and development (“R&D”) of technologies that allow us
to address certain of our customers' environmental needs. To date, our R&D
efforts have resulted in the granting of six active patents and the filing
of
several pending patent applications. Our flagship technology, the Perma-Fix
Process, is a proprietary, cost effective, treatment technology that converts
hazardous waste into non-hazardous material. Subsequently, we developed the
Perma-Fix II process, a multi-step treatment process that converts hazardous
organic components into non-hazardous material. The Perma-Fix II process
is
particularly
important to our mixed waste strategy. We believe that at least one third of
DOE
mixed waste contains organic components.
The
Perma-Fix II process is designed to remove certain types of organic hazardous
constituents from soils or other solids and sludges (“Solids”) through a
water-based system. Until development of this Perma-Fix II process, we were
not
aware of a relatively simple and inexpensive process that would remove the
organic hazardous constituents from Solids without elaborate and expensive
equipment or expensive treating agents. Due to the organic hazardous
constituents involved, the disposal options for such materials are limited,
resulting in high disposal cost when there is a disposal option available.
By
reducing the organic hazardous waste constituents in the Solids to a level
where
the Solids meet Land Disposal Requirements, the generator's disposal options
for
such waste are substantially increased, allowing the generator to dispose of
such waste at substantially less cost. We began commercial use of the Perma-Fix
II process in 2000. However, changes to current environmental laws and
regulations could limit the use of the Perma-Fix II process or the disposal
options available to the generator. See “—Permits and Licenses” and “—Research
and Development.”
Permits
and Licenses
Waste
management companies are subject to extensive, evolving and increasingly
stringent federal, state and local environmental laws and regulations. Such
federal, state and local environmental laws and regulations govern our
activities regarding the treatment, storage, processing, disposal and
transportation of hazardous, non-hazardous and radioactive wastes, and require
us to obtain and maintain permits, licenses and/or approvals in order to conduct
certain of our waste activities. Failure to obtain and maintain our permits
or
approvals would have a material adverse effect on us, our operations and
financial condition. The permits and licenses have a term ranging from one
to
ten years and, provided that we maintain a reasonable level of compliance,
renew
with minimal effort and cost. Historically, there have been no compelling
challenges to the permit and license renewals. Such permits and licenses,
however, represent a potential barrier to entry for possible competitors.
Operating
Segments:
PFF
operates its hazardous, mixed and low-level radioactive waste activities under
a
RCRA Part B permit and a radioactive materials license issued by the State
of
Florida.
DSSI
operates hazardous, mixed and low-level radioactive waste activities under
a
RCRA Part B permit and a radioactive materials license issued by the State
of
Tennessee. We are working toward permitting our DSSI facility for PCB
destruction. The permit is expected by mid year 2008.
M&EC
operates hazardous and low-level radioactive waste activities under a RCRA
Part
B permit and a radioactive materials license issued by the State of
Tennessee.
PFNWR
operates its hazardous, mixed and low-level radioactive waste activities under
a
RCRA Part B permit and a radioactive materials license issued by the State
of
Washington.
The
combination of a RCRA Part B hazardous waste permit and a radioactive materials
license, as held by PFF, DSSI and M&EC, and PFNWR are very difficult to
obtain for a single facility and make these facilities very unique.
Perma-Fix
of South Georgia, Inc (“PFSG”)
Our
internal consulting firm, SYA, concluded that a certain air permit at PFSG
had
expired. PFSG is part of the Industrial Segment, which has been classified
as a
discontinued operation. An inquiry to the Georgia Environmental Protection
Division (“GaEPD”) resulted in their determination that the permit was still
valid. However, since changes to the operations of the facility had occurred
since approval of the air permit, the Company submitted a revised permit
application in January 2008. The review of the submitted revised permit
application with GaEPD indicated that the changes were deemed relatively minor,
as determined by
GaEPD.
GaEPD has subsequently notified PFSG that the application would be given a
low
priority for review.
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 government budgets are still being finalized, planning for the new year
is occurring and we enter the holiday season. Since 2005, due to our efforts
to
work with the various government customers to smooth these shipments more evenly
throughout the year, we have seen less fluctuation in the quarters. In 2007,
the
US Congress did not pass the fiscal year 2007 budget which resulted in no
increase of funding to DOE from the previous years 2006 budget allocation.
This
resulted in a decrease of the start up of new projects; however, we continued
to
see shipments at expected levels as compared to 2006. The 2008 budget was signed
by the President in December 2007 which provides funding for the start of new
projects in 2008. We do not anticipate big fluctuations within 2008 even with
the passing of the 2008 budget; however, we cannot provide assurance this will
be the case.
Backlog
The
Nuclear Segment of our Company maintains a backlog of stored waste, which
represents waste that has not been processed. The backlog is principally a
result of the timing and complexity of the waste being brought into the
facilities and the selling price per container. As of December 31, 2007, our
Nuclear Segment had a backlog of approximately $14.6 million, which includes
$4.7 million for our newly acquired PFNWR facility, as compared to approximately
$12.5 million, as of December 31, 2006. Additionally the time it takes to
process mixed waste from the time it arrives may increase due to the types
and
complexities of the waste we are currently receiving. We typically process
our
backlog during periods of low waste receipts, which historically has been in
the
first or fourth quarter.
Dependence
Upon a Single or Few Customers
Our
Nuclear Segment is not dependent upon a single customer, or a few customers;
however, our Nuclear Segment has a significant relationship with the federal
government, and continues to enter into, contracts with (directly or indirectly
as a subcontractor) the federal government. The contracts that we are a party
to
with the federal government or with others as a subcontractor to the federal
government generally provide that the government may terminate on 30 days notice
or renegotiate the contracts, at the government's election. Our inability to
continue under existing contracts that we have with the federal government
(directly or indirectly as a subcontractor) could have a material adverse effect
on our operations and financial condition.
We
performed services relating to waste generated by the federal government, either
directly or indirectly as a subcontractor to the federal government, which
represented approximately $30,000,000 (includes approximately $5,568,000 from
PFNWR facility) or 55.5% of our total revenue from continuing operations during
2007, as compared to $33,226,000 or 63.0% of our total revenue from continuing
operations during 2006, and $29,555,000 or 59.0% of our total revenue from
continuing operations during 2005.
Included
in the amounts discussed above, are revenues from LATA/Parallax Portsmouth
LLC
(“LATA/Parallax”). LATA/Parallax is a manager for environmental programs for
various agencies of the federal government. Our revenues from LATA/Parallax,
as
a subcontractor to perform remediation services at certain federal sites,
contributed $8,784,000 or 16.2% and $10,341,000 or 19.6% of our revenues from
continuing operations for 2007 and 2006, respectively. Our contract with
LATA/Parallax is expected to be completed in September 2008. As with most
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.
Our
Nuclear Segment has had a significant relationship with Bechtel Jacobs Company,
LLC. (“Bechtel Jacobs”). Bechtel Jacobs is the government-appointed manager of
the environmental program for Oak Ridge, Tennessee to perform certain treatment
and disposal services relating to Oak Ridge, and our Nuclear Segment has been
awarded three subcontracts by Bechtel Jacobs to perform certain environmental
services at DOE’s Oak Ridge, Tennessee sites. Two of our Oak Ridge contracts
have been amended for pricing modifications in 2007 and have been extended
through September 2009. Our revenues from Bechtel Jacobs have continued to
decrease as the DOE site in Oak Ridge continues to complete certain of its
clean-up milestones and moves toward completing its closure efforts. As with
most such blanket processing agreements, the Oak Ridge contracts contain no
minimum or maximum processing guarantees, and may be terminated at any time
pursuant to federal contracting terms and conditions. The Nuclear Segment
continues to pursue other similar or related services for environmental programs
at other DOE and government sites. Consolidated revenues from Bechtel Jacobs
for
2007, total $1,812,000 or 3.3% of total revenues from continuing operations,
as
compared to $6,705,000 or 12.6% for the year ended December 31, 2006 and
$14,940,000 or 29.8% for the year ended December 31, 2005.
Our
Nuclear Segment has provided treatment of mixed low-level waste, as a
subcontractor, for Fluor Hanford since 2004. However, with the acquisition
of
our PFNWR facility, we now have a significant relationship with Fluor Hanford,
a
prime contractor to the DOE since 1996. Fluor Hanford manages several major
activities at the DOE’s Hanford Site, including dismantling former nuclear
processing facilities, monitoring and cleaning up the site’s contaminated
groundwater, and retrieving and processing transuranic waste for off-site
shipment. The Hanford site is one of DOE’s largest nuclear weapon environmental
remediation projects. Our PFNWR facility is located adjacent to the Hanford
site
and provides treatment of low level radioactive and mixed wastes. We currently
have three contracts with Fluor Hanford at our PFNWR facility, with the initial
contract dating back to 2003. These three contracts have since been extended to
September 2008. As the DOE is currently in the process of re-bidding its
contracts with current prime contractors, our future revenue beyond September
2008 from Fluor Hanford is uncertain at this time. Revenues from Fluor Hanford
totaled $6,985,000 (approximately $3,100,000 from PFNWR) or 12.9%, $1,229,000
or
2.3%, and $1,732,000 or 3.5% of consolidated revenue from continuing operations
for the year ended December 31, 2007, 2006, and 2005, respectively. As with
most
contracts relating to the federal government, Fluor Hanford can terminate the
contracts with us at any time for convenience, which could have a material
adverse effect on our operations. See “Management's Discussion and Analysis of
Financial Conditions and Results of Operations” — “Significant Customers” for
discussion on our relationship with Bechtel Jacobs, LATA/Parallax, Fluor
Hanford, and our government contract or subcontracts involving the federal
government.
Competitive
Conditions
The
Nuclear Segment has few competitors and in some niche area does not currently
experience significant competitive pressures. This segment’s largest competitor
is EnergySolutions, which provides treatment and disposal at its Clive, Utah
disposal facility and presents the largest challenge in the market. At present,
EnergySolutions’ Clive, Utah facility is one of the few radioactive disposal
sites in the country in which our Nuclear Segment can dispose of its nuclear
waste. If EnergySolutions should refuse to accept our waste or cease operations
at its Clive, Utah facility, such would have a material adverse effect on us.
Our Nuclear Segment solicits business on a nationwide basis.
The
permitting and licensing requirements, and the cost to obtain such permits,
are
barriers to the entry of hazardous waste TSD facilities and radioactive and
mixed waste activities as presently operated by our subsidiaries. We believe
that there are no formidable barriers to entry into certain of the on-site
treatment businesses, and certain of the non-hazardous waste operations, which
do not require such permits. If the permit requirements for hazardous waste
storage, treatment, and disposal activities and/or the licensing requirements
for the handling of low level radioactive matters are eliminated or if such
licenses or permits
were
made
less rigorous to obtain, such would allow companies to enter into these markets
and provide greater competition.
Environmental
engineering and consulting services provided by us through SYA involve
competition with larger engineering and consulting firms. We believe that we
are
able to compete with these firms based on our established reputation in these
market areas and our expertise in several specific elements of environmental
engineering and consulting such as environmental applications in the cement
industry.
Capital
Spending, Certain Environmental Expenditures and Potential Environmental
Liabilities
Capital
Spending
During
2007, our purchases of capital equipment totaled approximately $3,988,000 of
which $2,982,000 and $1,006,000 was for our continuing and discontinued
operations, respectively. Of the total capital spending, $258,000 and $356,000
was financed for our continuing and discontinued operations, respectively,
resulting in total net purchases of $3,374,000 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 have budgeted approximately $3.1
million for 2008 capital expenditures for our operating segments to expand
our
operations into new markets, reduce the cost of waste processing and handling,
expand the range of wastes that can be accepted for treatment and processing,
and to maintain permit compliance requirements. 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.
Environmental
Liabilities
We
have
various remediation projects, which are currently in progress at certain of
our
permitted facilities. These remediation projects principally entail the
removal/remediation of contaminated soil and, in some cases, the remediation
of
surrounding ground water.
In
June
1994, we acquired PFD. PFD is part of our Industrial Segment, which we have
classified as discontinued operation. The former owners of PFD had merged
Environmental Processing Services, Inc. (“EPS”) with PFD. The party that sold
PFD to us agreed to indemnify us for costs associated with remediating the
property leased by EPS (“Leased Property”). Such remediation involves soil
and/or groundwater restoration. The Leased Property used by EPS to operate
its
facility is separate and apart from the property on which PFD's facility is
located. The contamination of the Leased Property occurred prior to PFD being
acquired by us. During 1995, in conjunction with the bankruptcy filing by the
selling party, we recognized an environmental liability of approximately $1.2
million for remedial activities at the Leased Property. We have accrued
approximately $702,000, at December 31, 2007, for the estimated, remaining
costs
of remediating the Leased Property used by EPS, which will extend over the
next
five years. This liability was retained by the Company upon the sale of PFD
in
March 2008. See “Business-Company Overview and Principal Products and Services”
for a discussion of certain obligations that the buyer of PFD assumed when
we
sold substantially all of the assets of PFD.
In
conjunction with the acquisition of Perma-Fix of Memphis, Inc. (“PFM”), we
assumed and recorded certain liabilities to remediate gasoline contaminated
groundwater and investigate, under the hazardous and solid waste amendments,
potential areas of soil contamination on PFM's property. Prior to our ownership
of PFM, the owners installed monitoring and treatment equipment to restore
the
groundwater to acceptable standards in accordance with federal, state and local
authorities. We have accrued approximately $476,000 at December 31, 2007, for
the estimated, remaining costs of remediating the groundwater contamination,
which will extend over the next five years. This environmental liability is
included in our continuing operations and will remain the financial obligation
of the Company.
In
conjunction with the acquisition of PFSG, a subsidiary within our Industrial
Segment that has been classified as a discontinued operation, we initially
recognized an environmental accrual of $2.2 million for estimated long-term
costs to remove contaminated soil and to undergo ground water remediation
activities at the acquired facility in Valdosta, Georgia. Initial valuation
has
been completed, along with the selection of the remedial process, and the
planning and approval process. The remedial activities began in 2003. We have
accrued approximately $704,000, at December 31, 2007, to complete remediation
of
the facility, which we anticipate spending over the next six years. If we
complete the sale of PFSG facility, we anticipate that the buyer will assume
our
obligation to remediate the facility.
In
conjunction with an oil spill at PFTS, a subsidiary within our Industrial
Segment that has been classified as a discontinued operation, we accrued
approximately $69,000 to remediate the contaminated soil and ground water at
this location. As of December 31, 2007, we have accrued approximately $37,000,
for the estimated remaining cost to remediate the area. We expect to complete
spending on this remedial project over the next five years.
In
conjunction with the acquisition of PFMD in March 2004, we accrued for long-term
environmental liabilities of $391,000 as a best estimate of the cost to
remediate the hazardous and/or non-hazardous contamination on certain properties
owned by PFMD. As previously discussed, we sold substantially all of the assets
of the Maryland facility during the first part of 2008. In connection with
this
sale, the buyer agreed to assume all obligations and liabilities for
environmental conditions at the Maryland facility except for fines, assessments,
or judgments to governmental authorities prior to the closing of the transaction
or third party tort claims existing prior to the closing of the sale.
As
a
result of the discontinued operations at the PFMI facility, a non-operational
facility which is also part of our discontinued operations, we were required
to
complete certain closure and remediation activities pursuant to our RCRA permit,
which were completed in January 2006. In September 2006, PFMI signed a
Corrective Action Consent Order with the State of Michigan, requiring
performance of studies and development and execution of plans related to the
potential clean-up of soils in portions of the property. The level and cost
of
the clean-up and remediation are determined by state mandated requirements.
Upon
discontinuation of operations in 2004, 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, based on
state-mandated criteria, 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 $710,000 for closure costs since September 30, 2004,
of
which $81,000 has been spent during 2007 and $74,000 was spent in 2006. In
the
4th
quarter of 2007, we reduced our reserve by $9,000 as a result of our
reassessment of the cost of remediation. We have $563,000 accrued for the
closure, as of December 31, 2007, and we anticipate spending $401,000 in 2008
with the remainder over the next five years. Based on the current status of
the
Corrective Action, we believe that the remaining reserve is adequate to cover
the liability.
No
insurance or third party recovery was taken into account in determining our
cost
estimates or reserves, nor do our cost estimates or reserves reflect any
discount for present value purposes.
The
nature of our business exposes us to significant risk of liability for damages.
Such potential liability could involve, for example, claims for cleanup costs,
personal injury or damage to the environment in cases where we are held
responsible for the release of hazardous materials; claims of employees,
customers or third parties for personal injury or property damage occurring
in
the course of our operations; and claims alleging negligence or professional
errors or omissions in the planning or performance of our services. In addition,
we could be deemed a responsible party for the costs of required cleanup of
any
property, which may be contaminated by hazardous substances generated or
transported by us to a site we selected,
including
properties owned or leased by us (see “Legal Proceedings” in Part I, Item 3). We
could also be subject to fines and civil penalties in connection with violations
of regulatory requirements.
Research
and Development
Innovation
and technical know-how by our operations is very important to the success of
our
business. Our goal is to discover, develop and bring to market innovative ways
to process waste that address unmet environmental needs. We conduct research
internally, and also through collaborations with other third parties. The
majority of our research activities are performed as we receive new and unique
waste to treat; as such, we recognize these expenses as a part of our processing
costs. We feel that our investments in research have been rewarded by the
discovery of the Perma-Fix Process and the Perma-Fix II process. Our competitors
also devote resources to research and development and many such competitors
have
greater resources at their disposal than we do. We have estimated that during
2005, 2006, and 2007, we spent approximately $489,000, $422,000, and $715,000
respectively, in Company-sponsored research and development
activities.
Number
of Employees
In
our
service-driven business, our employees are vital to our success. We believe
we
have good relationships with our employees. As of December 31, 2007, we employed
approximately 522 full time persons, of which approximately 16 were assigned
to
our corporate office, approximately 23 were assigned to our Operations
Headquarters, approximately 23 to our Engineering Segment, approximately 286
to
the Nuclear Segment, and approximately 174 to the Industrial Segment. We have
no
union employees at any of our segments.
Governmental
Regulation
Environmental
companies and their customers are subject to extensive and evolving
environmental laws and regulations by a number of national, state and local
environmental, safety and health agencies, the principal of which being the
EPA.
These laws and regulations largely contribute to the demand for our services.
Although our customers remain responsible by law for their environmental
problems, we must also comply with the requirements of those laws applicable
to
our services. We cannot predict the extent to which our operations may be
affected by future enforcement policies as applied to existing laws or by the
enactment of new environmental laws and regulations. Moreover, any predictions
regarding possible liability are further complicated by the fact that under
current environmental laws we could be jointly and severally liable for certain
activities of third parties over whom we have little or no control. Although
we
believe that we are currently in substantial compliance with applicable laws
and
regulations, we could be subject to fines, penalties or other liabilities or
could be adversely affected by existing or subsequently enacted laws or
regulations. The principal environmental laws affecting our customers and us
are
briefly discussed below.
The
Resource Conservation and Recovery Act of 1976, as amended (“RCRA”)
RCRA
and
its associated regulations establish a strict and comprehensive permitting
and
regulatory program applicable to hazardous waste. The EPA has promulgated
regulations under RCRA for new and existing treatment, storage and disposal
facilities including incinerators, storage and treatment tanks, storage
containers, storage and treatment surface impoundments, waste piles and
landfills. Every facility that treats, stores or disposes of hazardous waste
must obtain a RCRA permit or must obtain interim status from the EPA, or a
state
agency, which has been authorized by the EPA to administer its program, and
must
comply with certain operating, financial responsibility and closure
requirements
The
Safe Drinking Water Act,
as amended (the “SDW Act”)
SDW
Act
regulates, among other items, the underground injection of liquid wastes in
order to protect usable groundwater from contamination. The SDW Act established
the Underground Injection Control Program (“UIC Program”) that provides for the
classification of injection wells into five classes. Class I wells are those
which inject industrial, municipal, nuclear and hazardous wastes below all
underground sources of drinking water in an area. Class I wells are divided
into
non-hazardous and hazardous categories with more
stringent
regulations imposed on Class I wells which inject hazardous wastes. PFTS' permit
to operate its underground injection disposal wells is limited to non-hazardous
wastewaters.
The
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(“CERCLA,” also referred to as the “Superfund Act”)
CERCLA
governs the cleanup of sites at which hazardous substances are located or at
which hazardous substances have been released or are threatened to be released
into the environment. CERCLA authorizes the EPA to compel responsible parties
to
clean up sites and provides for punitive damages for noncompliance. CERCLA
imposes joint and several liabilities for the costs of clean up and damages
to
natural resources.
Health
and Safety Regulations
The
operation of our environmental activities is subject to the requirements of
the
Occupational Safety and Health Act (“OSHA”) and comparable state laws.
Regulations promulgated under OSHA by the Department of Labor require employers
of persons in the transportation and environmental industries, including
independent contractors, to implement hazard communications, work practices
and
personnel protection programs in order to protect employees from equipment
safety hazards and exposure to hazardous chemicals.
Atomic
Energy Act
The
Atomic Energy Act of 1954 governs the safe handling and use of Source, Special
Nuclear and Byproduct materials in the U.S. and its territories. This act
authorized the Atomic Energy Commission (now the Nuclear Regulatory Commission
“USNRC”) to enter into “Agreements with States to carry out those regulatory
functions in those respective states except for Nuclear Power Plants and federal
facilities like the VA hospitals and the DOE operations.” The State of Florida
(with the USNRC oversight), Office of Radiation Control, regulates the
radiological program of the PFF facility, and the State of Tennessee (with
the
USNRC oversight), Tennessee Department of Radiological Health, regulates the
radiological program of the DSSI and M&EC facilities. The State of
Washington (with the USNRC oversight) Department of Ecology, regulates the
radiological operations of the Perma-Fix Northwest Richland, Inc.
facility.
Other
Laws
Our
activities are subject to other federal environmental protection and similar
laws, including, without limitation, the Clean Water Act, the Clean Air Act,
the
Hazardous Materials Transportation Act and the Toxic Substances Control Act.
Many states have also adopted laws for the protection of the environment which
may affect us, including laws governing the generation, handling, transportation
and disposition of hazardous substances and laws governing the investigation
and
cleanup of, and liability for, contaminated sites. Some of these state
provisions are broader and more stringent than existing federal law and
regulations. Our failure to conform our services to the requirements of any of
these other applicable federal or state laws could subject us to substantial
liabilities which could have a material adverse effect on us, our operations
and
financial condition. In addition to various federal, state and local
environmental regulations, our hazardous waste transportation activities are
regulated by the U.S. Department of Transportation, the Interstate Commerce
Commission and transportation regulatory bodies in the states in which we
operate. We cannot predict the extent to which we may be affected by any law
or
rule that may be enacted or enforced in the future, or any new or different
interpretations of existing laws or rules.
Insurance
We
believe we maintain insurance coverage adequate for our needs and similar to,
or
greater than, the coverage maintained by other companies of our size in the
industry. There can be no assurances, however, that liabilities, which we may
incur 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 million per occurrence and
$2
million 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, and at all times while
operating under our 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, and thus far has provided $30.1
million in financial assurance.
In
August
2007, we entered into a second finite risk insurance policy for our Perma-Fix
Northwest Richland, Inc. facility, which was acquired on June 13, 2007. The
policy provides an initial $7.8 million of financial assurance coverage with
annual growth rate of 1.5%, which at the end of the four year term policy,
will
provide maximum coverage of $8.2 million. The policy will renew automatically
on
an annual basis at the end of the four year term and will not be subject to
any
renewal fees.
The
following are certain risk factors that could affect our business, financial
performance, and results of operations. These risk factors should be considered
in connection with evaluating the forward-looking statements contained in this
Form 10-K, as the forward-looking statements are based on current expectations,
and actual results and conditions could differ materially from the current
expectations. Investing in our securities involves a high degree of risk, and
before making an investment decision, you should carefully consider these risk
factors as well as other information we include or incorporate by reference
in
the other reports we file with the Securities and Exchange Commission (“SEC”).
Risk
Factors Regarding Our Business:
Our
Industrial Segment (discontinued operations) has sustained losses for the past
eight years, including 2007.
Our
Industrial Segment has sustained losses in each year since 2000. On May 18,
2007, our Board of Directors authorized management to sell all, or a part of,
our Industrial Segment. During the first quarter of 2008, we completed the
sale
of PFMD and sale of PFD and are negotiating the sale of PFSG within our
Industrial Segment. We are also attempting to sell the remaining operations
within the Industrial Segment. If we fail to divest the majority of our
remaining facilities within our Industrial Segment and the majority of our
Industrial Segment facilities fails to become profitable on an annualized basis
in the foreseeable future, this could have a material adverse effect on our
results of operations, liquidity and our potential growth.
The
inability to maintain existing government contracts or win new government
contracts over an extended period could have a material adverse effect on our
operations and adversely affect our future revenues.
A
material amount of our Nuclear Segment's revenues are generated through various
U.S. government contracts or subcontracts involving the U.S. government. Our
revenues from government sources were approximately $30,000,000 and $33,226,000,
representing 55.5% and 63.0%, respectively, of our consolidated operating
revenues from continuing operations for 2007 and 2006. Most
of
our government contracts or our subcontracts granted under government contracts
are awarded through a regulated competitive bidding process. Some government
contracts are awarded to multiple competitors, which increase overall
competition and pricing pressure and may require us to make sustained post-award
efforts to realize revenues under these government contracts. In addition,
government clients can generally terminate or modify their contracts at their
convenience. If
we
fail to maintain or replace these relationships, our revenues and future
operations could be adversely affected.
If
we cannot maintain our governmental permits or cannot obtain required permits,
we may not be able to continue or expand our operations.
We
are a
waste management company. Our business is subject to extensive, evolving, and
increasingly stringent federal, state, and local environmental laws and
regulations. Such federal, state, and local environmental laws and regulations
govern our activities regarding the treatment, storage, recycling, disposal,
and
transportation of hazardous and non-hazardous waste and low-level radioactive
waste. We must obtain and maintain permits or licenses to conduct these
activities in compliance with such laws and regulations. Failure to obtain
and
maintain the required permits or licenses would have a material adverse effect
on our operations and financial condition. If any of our facilities are unable
to maintain currently held permits or licenses or obtain any additional permits
or licenses which may be required to conduct its operations, we may not be
able
to continue those operations at these facilities, which could have a material
adverse effect on us.
Loss
of certain key personnel could have a material adverse effect on
us.
Our
success depends on the contributions of our key management, environmental and
engineering personnel, especially Dr. Louis F. Centofanti, Chairman, President,
and Chief Executive Officer. The loss of Dr. Centofanti could have a material
adverse effect on our operations, revenues, prospects, and our ability to raise
additional funds. Our future success depends on our ability to retain and expand
our staff of qualified personnel, including environmental specialists and
technicians, sales personnel, and engineers. Without qualified personnel, we
may
incur delays in rendering our services or be unable to render certain services.
We cannot be certain that we will be successful in our efforts to attract and
retain qualified personnel as their availability is limited due to the demand
for hazardous waste management services and the highly competitive nature of
the
hazardous waste management industry. We do not maintain key person insurance
on
any of our employees, officers, or directors.
We
believe our proprietary technology is important to us.
We
believe that it is important that we maintain our proprietary technologies.
There can be no assurance that the steps taken by us to protect our proprietary
technologies will be adequate to prevent misappropriation of these technologies
by third parties. Misappropriation of our proprietary technology could have
an
adverse effect on our operations and financial condition. Changes to current
environmental laws and regulations also could limit the use of our proprietary
technology.
Changes
in environmental regulations and enforcement policies could subject us to
additional liability and adversely affect our ability to continue certain
operations.
We
cannot
predict the extent to which our operations may be affected by future
governmental enforcement policies as applied to existing laws, by changes to
current environmental laws and regulations, or by the enactment of new
environmental laws and regulations. Any predictions regarding possible liability
under such laws are complicated further by current environmental laws which
provide that we could be liable, jointly and severally, for certain activities
of third parties over whom we have limited or no control.
The
refusal to accept our waste for disposal by, or a closure of, the end disposal
site that our Nuclear Segment utilizes to dispose of its waste could subject
us
to significant risk and limit our operations.
Our
Nuclear Segment has limited options available for disposal of its waste. If
this
disposal site ceases to accept waste or closes for any reason or refuses to
accept the waste of our Nuclear Segment, for any reason, we could have nowhere
to dispose of our Nuclear waste or have significantly increased costs from
disposal alternatives. With nowhere to dispose of our nuclear waste, we would
be
subject to significant risk from the implications of storing the waste on our
site, and we would have to limit our operations to accept only waste that we
can
dispose of.
Our
Nuclear Segment and Industrial Segment (discontinued operations) subject us
to
substantial potential environmental liability.
Our
business of rendering services in connection with management of waste, including
certain types of hazardous waste, low-level radioactive waste, and mixed waste
(waste containing both hazardous and low-
level
radioactive waste), subjects us to risks of liability for damages. Such
liability could involve, without limitation:
· |
claims
for clean-up costs, personal injury or damage to the environment
in cases
in which we are held responsible for the release of hazardous or
radioactive materials;
|
· |
claims
of employees, customers, or third parties for personal injury or
property
damage occurring in the course of our operations;
and
|
· |
claims
alleging negligence or professional errors or omissions in the planning
or
performance of our services.
|
Our
operations are subject to numerous environmental laws and regulations. We have
in the past, and could in the future, be subject to substantial fines,
penalties, and sanctions for violations of environmental laws and substantial
expenditures as a responsible party for the cost of remediating any property
which may be contaminated by hazardous substances generated by us and disposed
at such property, or transported by us to a site selected by us, including
properties we own or lease.
As
our operations expand, we may be subject to increased litigation, which could
have a negative impact on our future financial results.
Our
operations are highly regulated and we are subject to numerous laws and
regulations regarding procedures for waste treatment, storage, recycling,
transportation, and disposal activities, all of which may provide the basis
for
litigation against us. In recent years, the waste treatment industry has
experienced a significant increase in so-called “toxic-tort” litigation as those
injured by contamination seek to recover for personal injuries or property
damage. We believe that, as our operations and activities expand, there will
be
a similar increase in the potential for litigation alleging that we have
violated environmental laws or regulations or are responsible for contamination
or pollution caused by our normal operations, negligence or other misconduct,
or
for accidents, which occur in the course of our business activities. Such
litigation, if significant and not adequately insured against, could adversely
affect our financial condition and our ability to fund our operations.
Protracted litigation would likely cause us to spend significant amounts of
our
time, effort, and money. This could prevent our management from focusing on
our
operations and expansion.
If
we cannot maintain adequate insurance coverage, we will be unable to continue
certain operations.
Our
business exposes us to various risks, including claims for causing damage to
property and injuries to persons that may involve allegations of negligence
or
professional errors or omissions in the performance of our services. Such claims
could be substantial. We believe that our insurance coverage is presently
adequate and similar to, or greater than, the coverage maintained by other
companies in the industry of our size. If we are unable to obtain adequate
or
required insurance coverage in the future, or if our insurance is not available
at affordable rates, we would violate our permit conditions and other
requirements of the environmental laws, rules, and regulations under which
we
operate. Such violations would render us unable to continue certain of our
operations. These events would have a material adverse effect on our financial
condition.
Breach
of financial covenants in existing credit facility could result in a default,
triggering repayment of outstanding debt under the credit
facility.
Our
credit facility with our bank contains financial covenants. A breach of any
of
these covenants could result in a default under our credit facility triggering
our lender to immediately require the repayment of all outstanding debt under
our credit facility and terminate all commitments to extend further credit.
In
the past, none of our covenants have been restrictive to our operations;
however, in 2007, our fixed charge coverage ratio fell below the minimum
requirement pursuant to the covenant. We have obtained a waiver from our lender
for this non-compliance as of December 31, 2007. We do not expect to be in
compliance with the fixed charge coverage ratio as of the end of the first
and
second quarters of 2008 and, as a result, we were required under generally
accepted accounting principles to reclassify the long term portion of this
debt
to current. Furthermore, we have a cross default provision on our 8.625%
promissory note with a separate bank and have reclassified the long term portion
of that debt to current as well. If we are unable to
meet
the
fixed charge coverage ratio, we believe that our lender will waive this
non-compliance or will revise this covenant so that we are in compliance, but
there is no assurance that we will be able to secure a waiver or revision from
our lender. If we fail to meet our fixed charge coverage ratio in the future
and
our lender does not waive the non-compliance or revise this covenant so that
we
are in compliance, our lender could accelerate the repayment of borrowings
under
our credit facility. In the event that our lender accelerates the payment of
our
borrowing, we may not have sufficient liquidity to repay our debt under our
credit facility and other indebtedness. In addition to the waiver that we have
obtained from our lender for our non-compliance of our fixed charge coverage
ratio as of December 31, 2007, our lender has amended our present covenant
to
exclude certain allowable charges in determining our minimum fixed charge
coverage ratio. This amendment may improve our ability to maintain compliance
of
the fixed charge coverage ratio in the future.
Due
to
our inability to demonstrate that we will comply with the fixed charge
coverage ratio in our loan agreement as of the end of the first and second
quarters of 2008, resulting in the long-term portion of our indebtedness to
certain of our lenders of approximately $11.4 million being reclassified to
current, our working capital deficit of approximately $17.2 million and certain
of our lenders’ ability to accelerate our indebtedness under our credit
facilities, there is substantial doubt as to our ability to continue as a going
concern. Consequently, our independent registered public accounting firm has
included an explanatory paragraph addressing this uncertainty in their report.
Although we believe our lender will waive our failure or potential failure
to
meet this financial covenant or revise the covenant so that we are in
compliance, as of the date of this report our lender has not issued this waiver
or revision. There are no assurances that our lender will waive or revise this
covenant.
Failure
of our Nuclear Segment to be profitable could have a material adverse
effect.
Our
Nuclear Segment has historically been profitable. With the divestiture and
impending divestiture of certain facilities within our Industrial Segment and
the acquisition of our PFNWR facility in June 2007, the Nuclear Segment
represents the Company’s largest revenue segment. The Company’s main objectives
are to increase focus on the efficient operation of our existing facilities
within our Nuclear Segment and to further evaluate strategic acquisitions within
the Nuclear Segment. If our Nuclear Segment fails to continue to be profitable
in the future, this could have a material adverse effect on the Company’s
results of operations, liquidity and our potential growth.
Our
operations are subject to seasonal factors, which cause our revenues to
fluctuate.
We
have
historically experienced reduced revenues and losses during the first and fourth
quarters of our fiscal years due to a seasonal slowdown in operations from
poor
weather conditions, overall reduced activities during these periods resulting
from holiday periods, and finalization of government budgets during the fourth
quarter of each year. During our second and third fiscal quarters there has
historically been an increase in revenues and operating profits. If we do not
continue to have increased revenues and profitability during the second and
third fiscal quarters, this will have a material adverse effect on our results
of operations and liquidity.
If
environmental regulation or enforcement is relaxed, the demand for our services
will decrease.
The
demand for our services is substantially dependent upon the public's concern
with, and the continuation and proliferation of, the laws and regulations
governing the treatment, storage, recycling, and disposal of hazardous,
non-hazardous, and low-level radioactive waste. A decrease in the level of
public concern, the repeal or modification of these laws, or any significant
relaxation of regulations relating to the treatment, storage, recycling, and
disposal of hazardous waste and low-level radioactive waste would significantly
reduce the demand for our services and could have a material adverse effect
on
our operations and financial condition. We are not aware of any current federal
or state government or agency efforts in which a moratorium or limitation has
been, or will be, placed upon the creation of new hazardous or radioactive
waste
regulations that would have a material adverse effect on us; however, no
assurance can be made that such a moratorium or limitation will not be
implemented in the future.
Our
amount of debt and floating rates of interest could adversely affect our
operations.
At
December 31, 2007, our aggregate consolidated debt was approximately $18.8
million. If our floating rates of interest experienced an upward increase of
1%,
our debt service would increase by approximately $189,000 annually. Our secured
revolving credit facility (the “Credit Facility”) provides for an aggregate
commitment of $25 million, consisting of an $18 million revolving line of credit
and a term loan of $7 million. The maximum we can borrow under the revolving
part of the Credit Facility is based on a percentage of the amount of our
eligible receivables outstanding at any one time. The Credit Facility is due
September 30, 2009. As of December 31, 2007, we have borrowings under the
revolving part of our Credit Facility of $6.9 million and borrowing availability
of up to an additional $5.7 million based on our outstanding eligible
receivables. A forecast of our first quarter and second quarter 2008 results
indicates the possibility that we could be in default of our fixed charge
coverage ratio covenant. We expect that this will place us in “technical
default” of our covenant and thus our debt under our credit facility has been
classified as current. If we become in default under this covenant, our lenders
could accelerate approximately $14.4 million of indebtness. See “Risk Factor -
Breach of financial covenants in existing credit facility could result in a
default, triggering repayment of outstanding debt under the credit facility.” A
lack of operating results could have material adverse consequences on our
ability to operate our business. Our
ability to make principal and interest payments, or to refinance indebtedness,
will depend on both our and our subsidiaries' future operating performance
and
cash flow. Prevailing economic conditions, interest rate levels, and financial,
competitive, business, and other factors affect us. Many of these factors are
beyond our control.
We
may be unable to utilize loss carryforwards in the future.
We
have
approximately $22.7 million in net operating loss carryforwards which will
expire from 2008 to 2024 if not used against future federal income tax
liabilities. Our net loss carryforwards are subject to various limitations.
We
anticipate the net loss carryforwards will be used to reduce the federal income
tax payments which we would otherwise be required to make with respect to
income, if any, generated in future years.
We
and our customers operate in a politically sensitive environment, and the public
perception of nuclear power and radioactive materials can affect our customers
and us.
We
and
our customers operate in a politically sensitive environment. Opposition by
third parties to particular projects can limit the handling and disposal of
radioactive materials. Adverse public reaction to developments in the disposal
of radioactive materials, including any high profile incident involving the
discharge of radioactive materials, could directly affect our customers and
indirectly affect our business. Adverse public reaction also could lead to
increased regulation or outright prohibition, limitations on the activities
of
our customers, more onerous operating requirements or other conditions that
could have a material adverse impact on our customers’ and our
business.
We
may not be successful in winning new business mandates from our government
and
commercial customers.
We
must
be successful in winning mandates from our government and commercial customers
to replace revenues from projects that are nearing completion and to increase
our revenues. Our business and operating results can be adversely affected
by
the size and timing of a single material contract.
The
elimination or any modification of the Price-Anderson Acts indemnification
authority could have adverse consequences for our
business.
The
Atomic Energy Act of 1954, as amended, or the AEA, comprehensively regulates
the
manufacture, use, and storage of radioactive materials. The Price-Anderson
Act
supports the nuclear services industry by offering broad indemnification to
DOE
contractors for liabilities arising out of nuclear incidents at DOE nuclear
facilities. That indemnification protects DOE prime contractor, but also similar
companies that work under contract or subcontract for a DOE prime contract
or
transporting radioactive material to or from a site. The indemnification
authority of the DOE under the Price-Anderson Act was extended through 2025
by
the Energy Policy Act of 2005.
The
Price-Anderson Act’s indemnification provisions generally do not apply to our
processing of radioactive waste at governmental facilities, and do not apply
to
liabilities that we might incur while performing services as a contractor for
the DOE and the nuclear energy industry. If an incident or evacuation is not
covered under Price-Anderson Act indemnification, we could be held liable for
damages, regardless of fault, which could have an adverse effect on our results
of operations and financial condition. If such indemnification authority is
not
applicable in the future, our business could be adversely affected if the owners
and operators of new facilities fail to retain our services in the absence
of
commercial adequate insurance and indemnification.
Our
existing and future customers may reduce or halt their spending on nuclear
services from outside vendors, including us.
A
variety
of factors may cause our existing or future customers to reduce or halt their
spending on nuclear services from outside vendors, including us. These factors
include, but are not limited to:
·
|
accidents,
terrorism, natural disasters or other incidents occurring at nuclear
facilities or involving shipments of nuclear
materials;
|
·
|
failure
of the federal government to approve necessary budgets, or to reduce
the
amount of the budget necessary, to fund remediation of DOE and DOD
sites;
|
·
|
civic
opposition to or changes in government policies regarding nuclear
operations; or
|
·
|
a
reduction in demand for nuclear generating
capacity.
|
These
events also could adversely affect us to the extent that they result in the
reduction or elimination of contractual requirements, lower demand for nuclear
services, burdensome regulation, disruptions of shipments or production,
increased operational costs or difficulties or increased liability for actual
or
threatened property damage or personal injury.
Economic
downturns and reductions in government funding could have a negative impact
on
our businesses.
Demand
for our services has been, and we expect that demand will continue to be,
subject to significant fluctuations due to a variety of factors beyond our
control, including economic conditions, inability of the federal government
to
adopt its budget or reductions in the budget for spending to remediate federal
sites. During economic downturns, the ability of private and government entities
to spend on nuclear services may decline significantly. We cannot be certain
that economic or political conditions will be generally favorable or that there
will not be significant fluctuations adversely affecting our industry as a
whole. In addition, our operations depend, in part, upon government funding,
particularly funding levels at the DOE. Significant changes in the level of
government funding (for example, the annual budget of the DOE) or specifically
mandated levels for different programs that are important to our business could
have an unfavorable impact on our business, financial position, results of
operations and cash flows.
The
loss of one or a few customers could have an adverse effect on
us.
One
or a
few governmental customers have in the past, and may in the future, account
for
a significant portion of our revenue in any one year or over a period of several
consecutive years. Because customers generally contract with us for specific
projects, we may lose these significant customers from year to year as their
projects with us are completed. Our inability to replace the business with
other
projects could have an adverse effect on our business and results of
operations.
As
a government contractor, we are subject to extensive government regulation,
and
our failure to comply with applicable regulations could subject us to penalties
that may restrict our ability to conduct our business.
Our
government contracts, which are primarily with the DOE, are a significant part
of our business. Allowable costs under U.S. government contracts are subject
to
audit by the U.S. government. If these audits result in determinations that
costs claimed as reimbursable are not allowed costs or were not
allocated
in
accordance with applicable regulations, we could be required to reimburse the
U.S. government for amounts previously received.
Government
contracts are often subject to specific procurement regulations, contract
provisions and a variety of other requirements relating to the formation,
administration, performance and accounting of these contracts. Many of these
contracts include express or implied certifications of compliance with
applicable regulations and contractual provisions. If we fail to comply with
any
regulations, requirements or statutes, our existing government contracts could
be terminated or we could be suspended from government contracting or
subcontracting. If one or more of our government contracts are terminated for
any reason, or if we are suspended or debarred from government work, we could
suffer a significant reduction in expected revenues and profits. Furthermore,
as
a result of our government contracting, claims for civil or criminal fraud
may
be brought by the government or violations of these regulations, requirements
or
statutes.
We
are engaged in highly competitive businesses and typically must bid against
other competitors to obtain major contracts.
We
are
engaged in highly competitive business in which most of our government contracts
and some of our commercial contracts are awarded through competitive bidding
processes. We compete with national and regional firms with nuclear services
practices, as well as small or local contractors. Some of our competitors have
greater financial and other resources than we do, which can give them a
competitive advantage. In addition, even if we are qualified to work on a new
government contract, we might not be awarded the contract because of existing
government policies designed to protect certain types of businesses and
underrepresented minority contractors. Competition also places downward pressure
on our contract prices and profit margins. Intense competition is expected
to
continue for nuclear service contracts. If we are unable to meet these
competitive challenges, we could lose market share and experience on overall
reduction in our profits.
Our
failure to maintain our safety record could have an adverse effect on our
business.
Our
safety record is critical to our reputation. In addition, many of our government
and commercial customers require that we maintain certain specified safety
record guidelines to be eligible to bid for contracts with these customers.
Furthermore, contract terms may provide for automatic termination in the event
that our safety record fails to adhere to agreed-upon guidelines during
performance of the contract. As a result, our failure to maintain our safety
record could have a material adverse effect on our business, financial condition
and results of operations.
We
have a material weakness in our Internal Controls over Financial Reporting
(“ICFR”) as of December 31, 2007.
During
our evaluation of our ICFR, we noted that the monitoring of pricing, invoicing,
and the corresponding inventory for transportation and disposal process controls
at certain facilities within the Company's Industrial Segment were ineffective
and were not being applied consistently, which resulted in a material weakness
to our ICFR, and could result in sales being priced and invoiced at amounts
which were not approved by the customer, or the appropriate level of management,
and inaccurate, corresponding transportation and disposal expense. This
has resulted in our disclosure that our ICFR were ineffective as of December
31,
2007. Although this material weakness did not result in an adjustment to
our quarterly or annual financial statements, if we are unable to remediate
this
material weakness, there is a reasonable possibility that a misstatement of
our
annual or interim financial statements will not be prevented or detected on
a
timely basis.
Delaware
law, certain of our charter provisions, our stock option plans and outstanding
warrants and our preferred stock may inhibit a change of control under
circumstances that could give you an opportunity to realize a premium over
prevailing market prices.
We
are a
Delaware corporation governed, in part, by the provisions of Section 203 of
the
General Corporation Law of Delaware, an anti-takeover law. In general, Section
203 prohibits a Delaware public corporation from engaging in a “business
combination” with an “interested stockholder” for a period of
three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
As a result of Section 203, potential acquirers may be discouraged from
attempting to effect acquisition transactions with us, thereby possibly
depriving our security holders of certain opportunities to sell, or otherwise
dispose of, such securities at above-market prices pursuant to such
transactions. Further, certain of our option plans provide for the immediate
acceleration of, and removal of restrictions from, options and other awards
under such plans upon a “change of control” (as defined in the respective
plans). Such provisions may also have the result of discouraging acquisition
of
us.
We
have
authorized and unissued 21,295,484 shares of Common Stock and 2,000,000 shares
of Preferred Stock as of December 31, 2007. These unissued shares could be
used
by our management to make it more difficult, and thereby discourage, an attempt
to acquire control of us.
Risk
Factors Regarding our Common Stock:
The
significant amount of outstanding options could affect our stock
performance.
As
of
December 31, 2007, we had outstanding options to purchase 2,590,026 shares
of
Common Stock at exercise prices from $1.22 to $2.98 per share. The existence
of
this quantity of rights to purchase our Common Stock could result in a
significant dilution in the percentage ownership interest of our stockholders
and the dilution in ownership value. Future sales of the shares issuable could
also depress the market price of our Common Stock.
The
price of our Common Stock is volatile.
The
trading price of our Common Stock has historically been volatile, and subject
to
large swings over short periods of time. As a result of the volatility of our
Common Stock, an investment in our stock holds significant risk.
We
do not intend to pay dividends on our Common Stock in the foreseeable
future.
Since
our
inception, we have not paid cash dividends on our Common Stock, and we do not
anticipate paying any cash dividends in the foreseeable future. Our credit
facility prohibits us from paying cash dividends on our Common
Stock.
ITEM
1B. |
UNRESOLVED
STAFF COMMENTS
|
None
Our
principal executive office is in Atlanta, Georgia. Our Operations headquarters
is located in Oak Ridge, Tennessee. Our Nuclear Segment facilities are located
in Gainesville, Florida; Kingston, Tennessee; Oak Ridge, Tennessee, and our
newly acquired facility in Richland, Washington. Our Consulting Engineering
Services is located in Ellisville, Missouri. Our Industrial Segment facilities
are located in Orlando and Ft. Lauderdale, Florida; Dayton, Ohio; Tulsa,
Oklahoma; Valdosta, Georgia; and Baltimore, Maryland. Our Industrial Segment
also has two non-operational facilities: Brownstown, Michigan, where we still
maintain the property; and Pittsburgh, Pennsylvania, for which the leased
property was released back to the owner in 2006 upon final remedation of the
leased property. We also maintain Field Service offices in Stafford, Virginia;
and Salisbury, Maryland.
We
operate eleven facilities, five within our continuing operations with the
remaining facilities within our discontinued operations. All of the facilities
are in the United States. Five of our facilities are subject to mortgages as
placed by our senior lender, with two (Kingston, Tennessee and Gainesville,
Florida) within our continuing operations and three (Dayton, Ohio; Orlando,
Florida; and Baltimore, Maryland) within our discontinued operations. On January
8, 2008, and March 14, 2008, we completed the sale of our Perma-Fix of Maryland,
Inc. and Perma-Fix of Dayton, Inc. facilities, respectively, resulting in the
release of the
mortgages
as placed by our senior lender for these facilities. As a result, four of our
facilities now are subject to mortgages as placed by our senior lender. With
the
sale of our Perma-Fix Maryland, Inc., we no longer maintain Field Service
offices.
We
also
lease properties for office space, all of which are located in the United States
as described above. Included in our leased properties is M&EC's 150,000
square-foot facility, located on the grounds of the DOE East Tennessee
Technology Park located in Oak Ridge, Tennessee.
We
believe that the above facilities currently provide adequate capacity for our
operations and that additional facilities are readily available in the regions
in which we operate, which could support and supplement our existing
facilities.
ITEM
3. |
LEGAL
PROCEEDINGS
|
Perma-Fix
of Dayton, Inc. (“PFD”)
A
subsidiary within our Industrial Segment, PFD was defending a lawsuit styled
Barbara
Fisher v. Perma-Fix of Dayton, Inc.,
in the
United States District Court, Southern District of Ohio (the “Fisher Lawsuit”).
This citizen’s suit was brought under the Clean Air Act alleging, among other
things, violations by PFD of state and federal clean air statutes connected
with
the operation of PFD’s facility located in Dayton, Ohio. As further previously
disclosed, the U.S. Department of Justice, on behalf of the Environmental
Protection Agency, intervened in the Fisher Lawsuit alleging, among other
things, substantially similar violations alleged in the Fisher Lawsuit (the
“Government’s Lawsuit”).
During
December, 2007, PFD and the federal government entered into a Consent Decree
formalizing settlement of the government’s portion of the above described
lawsuit, which Consent Decree was approved by the federal court during the
first
quarter of 2008. Pursuant to the Consent Decree, the settlement with the federal
government resolved the government’s claims against PFD and requires PFD
to:
|
·
|
pay
a civil penalty of $360,000;
|
|
·
|
complete
three supplemental environmental projects costing not less than $562,000
to achieve air emission controls that go above and beyond those required
by any current environmental
regulations.
|
|
·
|
implement
a variety of state and federal air permit pollution control measures;
and
|
|
·
|
take
a variety of voluntary steps to reduce the potential for emissions
of air
pollutants.
|
During
December 2007, PFD and Plaintiff, Fisher, entered into a Settlement Agreement
formalizing settlement of the Plaintiff’s claims in the above lawsuit. The
settlement with Plaintiff Fisher resolved the Plaintiff’s claims against PFD
and, subject to certain conditions set forth in the Settlement Agreement,
requires PFD to pay a total of $1,325,000. Our insurer has agreed to contribute
$662,500 toward the settlement cost of the citizen’s suit portion of the
litigation, which we received on March 13, 2008. Based on discussion with our
insurer, our insurer will not pay any portion of the settlement with the federal
government in the Government Lawsuit.
In
connection with PFD’s sale of substantially all of its assets during March,
2008, as discussed in “Business” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”, the buyer has agreed to assume
certain of PFD’s obligations under the Consent Decree and Settlement Agreement,
including, without limitation, PFD’s obligation to implement supplemental
environmental projects costing not less than $562,000, implement a variety
of
state and federal air permit control measures and reduce the potential for
emissions of air pollutants.
As
previously reported, on April 12, 2007 our insurer agreed to reimburse PFD
for
reasonable defense costs of litigation incurred prior to our insurer’s
assumption of the defense, but this agreement to defend and indemnify PFD was
subject to the our insurer’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 our insurer’s right to recoup any defense
cost it has advanced if our insurer later determines that its policy provides
no
coverage. When, our
insurer withdrew
its prior coverage denial and agreed to defend and indemnify PFD in the above
described lawsuits, subject to certain reservation of rights, we had incurred
more than $2.5
million in costs in vigorously defending against the Fisher and the Government
Lawsuits. To date, our insurer has reimbursed PFD approximately $2.5
million for legal defense fees and disbursements, which we recorded as a
recovery within our discontinued operations in the second quarter of 2007.
Partial reimbursement from our insurer of $750,000 was received on July 11,
2007. A second reimbursement of approximately $1.75 million was received on
August 17, 2007. Our insurer has advised us that they will reimburse us for
approximately another $82,000 in legal fees and disbursements, which we recorded
as a recovery within our discontinued operations in the 4th
quarter
2007. This reimbursement is subject to our insurer’s reservation of rights as
noted above. On February 12, 2008, we received reimbursement of approximately
$24,000 from our insurer. We anticipate receiving the remaining reimbursement
by
the end of the second quarter of 2008.
Perma-Fix
of Orlando, Inc. (“PFO”)
In
2007,
PFO was named as a defendant in four cases related to a series of toxic tort
cases, the “Brottem Litigation” that are pending in the Circuit Court of
Seminole County, Florida. All of the cases involve allegations of toxic chemical
exposure at a former telecommunications manufacturing facility located in Lake
Mary, Florida, known generally as the “Rinehart Road Plant”. PFO is presently a
defendant, together with numerous other defendants, in the following four cases:
Brottem
v. Siemens, et al.; Canada v. Siemens et al.; Bennett v. Siemens et
al.
and the
recently filed Culbreath
v. Siemens et al.
All of
the cases seek unspecified money damages for alleged personal injuries or
wrongful death. With the exception of PFO, the named defendants are all present
or former owners of the subject property, including several prominent
manufacturers that operated the Rinehart Road Plant. The allegations in all
of
the cases are essentially identical.
The
basic
allegations are that PFO provided “industrial waste management services” to the
Defendants and that PFO negligently “failed to prevent” the discharge of toxic
chemicals or negligently “failed to warn” the plaintiffs about the dangers
presented by the improper handling and disposal of chemicals at the facility.
The complaints make no attempt to specify the time and manner of the alleged
exposures in connection with PFO’s “industrial waste management services.” PFO
has moved to dismiss for failure to state a cause of action.
At
this
time, the cases involve a large number of claims involving personal injuries.
At
this very early stage, it is not possible to accurately assess PFO’s potential
liability. Our insurer has agreed to defend and indemnify us in these lawsuits,
excluding our deductible of $250,000, subject to a reservation of rights to
deny
indemnity pursuant to various provisions and exclusions under our policy.
Perma-Fix
of Dayton (“PFD”), Perma-Fix of Florida (“PFF”), Perma-Fix of Orlando (“PFO”),
Perma-Fix of South Georgia (“PFSG”), and Perma-Fix of Memphis
(“PFM”)
In
May
2007, the above facilities were named Partially Responsible Parties (“PRPs”) at
the Marine Shale Superfund site in St. Mary Parish, Louisiana (“Site”).
Information provided by the EPA indicates that, from 1985 through 1996, the
Perma-Fix facilities above were responsible for shipping 2.8% of the total
waste
volume received by Marine Shale. Subject to finalization of this estimate by
the
PRP group, PFF, PFO and PFD could be considered de-minimus at .06%, .07% and
.28% respectively. PFSG and PFM would be major at 1.12% and 1.27% respectively.
However, at this time the contributions of all facilities are
consolidated.
As
of the
date of this report, Louisiana DEQ (“LDEQ”) has collected approximately $8.4
million for the remediation of the site and is proceeding with the remediation
of the site. The EPA’s unofficial estimate to remediate the site is between $9
and $12 million; however, based on preliminary outside consulting work hired
by
the PRP group, which we are a party to, the remediation costs can be below
EPA’s
estimation. As
part
of
the PRP Group, we have paid an initial assessment of $10,000 in the fourth
quarter of 2007, which was allocated among the facilities. As of the date of
this report, we cannot accurately access our liability.
In
addition to the above matters and in the normal course of conducting our
business, we are involved in various other litigations. We are not a party
to
any litigation or governmental proceeding which our management believes could
result in any judgments or fines against us that would have a material adverse
affect on our financial position, liquidity or results of future
operations.
ITEM
4. |
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None
ITEM
4A. |
EXECUTIVE
OFFICERS OF THE
REGISTRANT
|
The
following table sets forth, as of the date hereof, information concerning our
executive officers:
NAME
|
|
AGE
|
|
POSITION
|
Dr.
Louis F. Centofanti
|
|
64
|
|
Chairman
of the Board, President and Chief Executive Officer
|
Mr.
Steven T. Baughman
|
|
49
|
|
Chief
Financial Officer, Vice President, and Secretary
|
Mr.
Larry McNamara
|
|
58
|
|
Chief
Operating Officer
|
Mr.
Robert Schreiber, Jr.
|
|
57
|
|
President
of SYA, Schreiber, Yonley & Associates, a subsidiary of the Company,
and Principal Engineer
|
Dr.
Louis F. Centofanti
Dr.
Centofanti has served as Chairman of the Board since he joined the Company
in
February 1991. Dr. Centofanti also served as President and Chief Executive
Officer of the Company from February 1991 until September 1995 and again in
March 1996 was elected to serve as President and Chief Executive Officer of
the
Company. From 1985 until joining the Company, Dr. Centofanti served as Senior
Vice President of USPCI, Inc., a large hazardous waste management company,
where
he was responsible for managing the treatment, reclamation and technical groups
within USPCI. In 1981 he founded PPM, Inc., a hazardous waste management company
specializing in the treatment of PCB contaminated oils, which was subsequently
sold to USPCI. From 1978 to 1981, Dr. Centofanti served as Regional
Administrator of the U.S. Department of Energy for the southeastern region
of
the United States. Dr. Centofanti has a Ph.D. and a M.S. in Chemistry from
the
University of Michigan, and a B.S. in Chemistry from Youngstown State
University.
Mr.
Steven T. Baughman
Mr.
Baughman was appointed as Vice President and Chief Financial Officer of the
Company by the Company’s Board of Directors in May 2006. Mr. Baughman was
previously employed by Waste Management, Inc. from 1994 to 2005, serving in
various capacities, including: Vice President Finance, Control and Analysis
from
2001 to 2005, and Vice President, International Controller from 1999 to 2001.
Mr. Baughman has BS degrees in Accounting and Finance from Miami University
(Ohio), and is a Certified Public Accountant.
Mr.
Larry McNamara
Mr.
McNamara has served as Chief Operating Officer since October 2005. From October
2000 to October 2005, he served as President of the Nuclear Waste Management
Services segment. From December 1998 to October 2000, he served as Vice
President of the Company's Nuclear Waste Management Services Segment. Between
1997 and 1998, he served as Mixed Waste Program Manager for Waste Control
Specialists (WCS) developing plans for the WCS mixed waste processing
facilities, identifying markets and directing proposal activities. Between
1995
and 1996, Mr. McNamara was the single point of contact for the DOD to all state
and federal regulators for issues related to disposal of Low Level Radioactive
Waste and served on various National Committees and advisory groups. Mr.
McNamara served, from 1992 to 1995, as Chief of the Department of Defense Low
Level Radioactive Waste office. Between 1986 and
1992,
he
served as the Chief of Planning for the Department of Army overseeing project
management and program policy for the Army program. Mr. McNamara has a B.S.
from
the University of Iowa.
Mr.
Robert Schreiber, Jr.
Mr.
Schreiber has served as President of SYA since the Company acquired the
environmental engineering firm in 1992. Mr. Schreiber co-founded the predecessor
of SYA, Lafser & Schreiber in 1985, and served in several executive roles in
the firm until our acquisition of SYA. From 1978 to 1985, Mr. Schreiber served
as Director of Air programs and all environmental programs for the Missouri
Department of Natural Resources. Mr. Schreiber provides technical expertise
in
wide range of areas including the cement industry, environmental regulations
and
air pollution control. Mr. Schreiber has a B.S. in Chemical Engineering from
the
University of Missouri – Columbia.
Certain
Relationships
There
are
no family relationships between any of our Directors or executive officers.
Dr.
Centofanti is the only Director who is our employee.
PART
II
ITEM
5. |
MARKET
FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
Our
Common Stock, is traded on the NASDAQ Capital Markets (“NASDAQ”) under the
symbol “PESI” on NASDAQ. The following table sets forth the high and low market
trade prices quoted for the Common Stock during the periods shown. The source
of
such quotations and information is the NASDAQ online trading history
reports.
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
Low
|
|
High
|
|
Low
|
|
High
|
|
Common
Stock
|
|
|
1st
Quarter
|
|
$
|
2.07
|
|
$
|
2.57
|
|
$
|
1.31
|
|
$
|
2.15
|
|
|
|
|
2nd Quarter
|
|
|
2.13
|
|
|
3.25
|
|
|
1.70
|
|
|
2.20
|
|
|
|
|
3rd
Quarter
|
|
|
1.74
|
|
|
3.40
|
|
|
2.01
|
|
|
2.60
|
|
|
|
|
4th
Quarter
|
|
|
2.25
|
|
|
3.05
|
|
|
1.90
|
|
|
2.40
|
|
As
of
March 10, 2008, there were approximately 300 stockholders of record of our
Common Stock, including brokerage firms and/or clearing houses holding shares
of
our Common Stock for their clientele (with each brokerage house and/or clearing
house being considered as one holder). However, the total number of beneficial
stockholders as of March 10, 2008, was approximately 3,472.
Since
our
inception, we have not paid any cash dividends on our Common Stock and have
no
dividend policy. Our loan agreement prohibits paying any cash dividends on
our
Common Stock without prior approval from the lender. We do not anticipate paying
cash dividends on our outstanding Common Stock in the foreseeable
future.
No
sales
of unregistered securities, other than the securities sold by us during 2007,
as
reported in our Forms 10-Q for the quarters ended March 31, 2007, June 30,
2007,
September 30, 2007, and Form 8-K filed with the SEC on January 2, 2008, which
were not registered under the Securities Act of 1933, as amended, were issued
during 2007. There were no purchases made by us or on behalf of us or any of
our
affiliated members of shares of our Common Stock during the last quarter of
2007.
Common
Stock Price Performance Graph
The
following Common Stock price performance graph compares the yearly change in
the
Company’s cumulative total stockholders’ returns on the Common Stock during the
years 2003 through 2007, with the cumulative total return of the NASDAQ Market
Index and the published industry index prepared by Hemscott and known as
Hemscott Industry Group 637-Waste Management Index (“Industry Index”) assuming
the investment of $100 on January 1, 2003.
The
stockholder returns shown on the graph below are not necessarily indicative
of
future performance, and we will not make or endorse any predications as to
future stockholder returns.
Assumes
$100 invested in the Company on January 1, 2003, the Industry Index and the
NASDAQ Market Index, and the reinvestment of dividends. The above five-year
Cumulative Total Return Graph shall not be deemed to be “soliciting material” or
to be filed with the Securities and Exchange Commission, nor shall such
information be incorporated by reference by any general statement incorporating
by reference this Form 10-K into any filing under the Securities Act of 1933
or
the Securities Exchange Act of 1934 (collectively, the “Acts”), except to the
extent that the Company specifically incorporates this information by reference,
and shall not be deemed to be soliciting material or to be filed under such
Acts.
ITEM
6. |
SELECTED
FINANCIAL DATA
|
The
financial data included in this table has been derived from our audited
consolidated financial statements, which have been audited by BDO Seidman,
LLP.
As a result of the Company’s Industrial Segment meeting the held for sale
criteria under Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company’s
previously reported consolidated statement of operations data for the years
noted below have been reclassified to present discontinued operations separately
from continuing operations. Certain prior year amounts have been reclassified
to
conform with current year presentations. Amounts are in thousands, except for
per share amounts. The information set forth below should be read in conjunction
with “Management’s Discussion Analysis of Financial Condition and Results of
Operations” and the consolidated financial statements of the Company and the
notes thereto included elsewhere herein.
Statement
of Operations Data:
|
|
2007(1)(2)
|
|
2006(1)
|
|
2005
|
|
2004(3)
|
|
2003
|
|
Revenues
|
|
$
|
54,102
|
|
$
|
52,781
|
|
$
|
50,098
|
|
$
|
45,883
|
|
$
|
40,641
|
|
Income
from continuing operations
|
|
|
517
|
|
|
5,644
|
|
|
4,501
|
|
|
3,322
|
|
|
3,500
|
|
Loss
from discontinued operations
|
|
|
(9,727
|
)
|
|
(933
|
)
|
|
(762
|
)
|
|
(22,683
|
)
|
|
(382
|
)
|
Net
(loss) income
|
|
|
(9,210
|
)
|
|
4,711
|
|
|
3,739
|
|
|
(19,361
|
)
|
|
3,118
|
|
Preferred
stock dividends
|
|
|
¾
|
|
|
¾
|
|
|
(156
|
)
|
|
(190
|
)
|
|
(189
|
)
|
Net
(loss) income applicable to Common Stock
|
|
|
(9,210
|
)
|
|
4,711
|
|
|
3,583
|
|
|
(19,551
|
)
|
|
2,929
|
|
Income
(loss) per common share - Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
.01
|
|
|
.12
|
|
|
.10
|
|
|
.08
|
|
|
.09
|
|
Discontinued
operations
|
|
|
(.19
|
)
|
|
(.02
|
)
|
|
(.02
|
)
|
|
(.56
|
)
|
|
(.01
|
)
|
Net
income (loss) per share
|
|
|
(.18
|
)
|
|
.10
|
|
|
.08
|
|
|
(.48
|
)
|
|
.08
|
|
Income
(loss) per common share - Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
.01
|
|
|
.12
|
|
|
.10
|
|
|
.07
|
|
|
.08
|
|
Discontinued
operations
|
|
|
(.18
|
)
|
|
(.02
|
)
|
|
(.02
|
)
|
|
(.51
|
)
|
|
(.01
|
)
|
Net
income (loss) per share
|
|
|
(.17
|
)
|
|
.10
|
|
|
.08
|
|
|
(.44
|
)
|
|
.07
|
|
Basic
number of shares used in computing net income (loss) per
share
|
|
|
52,549
|
|
|
48,157
|
|
|
42,605
|
|
|
40,478
|
|
|
34,982
|
|
Diluted
number of shares and potential common shares used in computing
net income
(loss) per share
|
|
|
53,294
|
|
|
48,768
|
|
|
44,804
|
|
|
44,377
|
|
|
39,436
|
|
Balance
Sheet Data:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Working
capital (deficit)
|
|
$
|
(5,751
|
)
|
$
|
12,810
|
|
$
|
5,916
|
|
$
|
(497
|
)
|
$
|
4,159
|
|
Total
assets
|
|
|
126,031
|
|
|
106,662
|
|
|
98,525
|
|
|
100,455
|
|
|
110,215
|
|
Current
and long-term debt
|
|
|
18,836
|
|
|
8,329
|
|
|
13,375
|
|
|
18,956
|
|
|
29,088
|
|
Total
liabilities
|
|
|
66,018
|
|
|
40,924
|
|
|
50,087
|
|
|
56,922
|
|
|
58,488
|
|
Preferred
Stock of subsidiary
|
|
|
1,285
|
|
|
1,285
|
|
|
1,285
|
|
|
1,285
|
|
|
1,285
|
|
Stockholders'
equity
|
|
|
58,728
|
|
|
64,453
|
|
|
47,153
|
|
|
42,248
|
|
|
50,442
|
|
(1) |
Includes
recognized stock option expense of $457,000 and $338,000 for 2007
and
2006, respectively pursuant to the adoption of SFAS 123R which became
effective January 1, 2006.
|
(2)
|
Includes
financial data of PFNWR acquired during 2007 and accounted for using
the
purchase method of accounting in which the results of operations
are
reported from the date of acquisition, June 13, 2007 (see “Note 5 –
Acquisition” in “Notes to Consolidated Financial Statement” for accounting
treatment).
|
(3)
|
Includes
financial data of PFMD and PFP acquired during 2004 and accounted
for
using the purchase method of accounting in which the results of operations
are reported from the date of acquisition, March 23,
2004.
|
ITEM
7. |
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Certain
statements contained within this “Management's Discussion and Analysis of
Financial Condition and Results of Operations” 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”). See
“Special Note regarding Forward-Looking Statements” contained in this
report.
Management's
discussion and analysis is based, among other things, upon our audited
consolidated financial statements and includes our accounts and the accounts
of
our wholly-owned subsidiaries, after elimination of all significant intercompany
balances and transactions.
The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the notes thereto included in Item 8
of
this report.
Overview
2007
has
been a year of many changes for us starting with the decision of the Company
to
divest our Industrial Segment and the acquisition of Nuvotec USA, Inc. and
its
subsidiary, which we now call Perma-Fix Northwest Richland, Inc. (“PFNWR”), on
June 13, 2007. Excluding the results of our discontinued operations, we reported
revenue of $54,102,000 and income from continuing operations applicable to
Common Stock of $517,000 for the year ended December 31, 2007. Excluding
the revenue of our newly acquired PFNWR facility of $8,439,000, our Nuclear
Segment revenue decreased $6,158,000 or 12.5% from 2006. The primary driver
of
this decrease was reduction in waste receipts from the federal government and
brokers. The acquisition of our PFNWR facility positions the Nuclear Segment’s
future revenue stream well as the facility is located adjacent to the Hanford
site, which represents one of the most expansive of DOE’s nuclear weapons’
facilities to remediate. Our Engineering Segment had revenues of $2,398,000,
a
decrease of $960,000 from 2006, representing a 28.6% decrease from the previous
year. The decrease was due to lower billable hours as more resources were
internalized to support the acquisition of the PFNWR facility and the
divestiture of the Industrial Segment. The backlog of stored waste within the
Nuclear Segment was reduced to $9,964,000, which excludes $4,683,000 in backlog
from our PFNWR facility at December 31, 2007, down from $12,492,000 in 2006,
reflecting our emphasis on improved processing and disposal.
In
2007,
our balance sheet was heavily impacted by the acquisition of the PFNWR facility,
as well as the reclassification of approximately $11,403,000 of debt owed to
certain of our lenders from long term to current. Working capital at December
31, 2007 is a negative $17,154,000 as compared to positive $12,810,000 at
December 31, 2006. As of December 31, 2007, our fixed charge coverage ratio
contained in our PNC loan agreement fell below the minimum requirement. Although
we have obtained a waiver from our lender for this non-compliance as of December
31, 2007, we do not expect to be in compliance with this fixed charge coverage
ratio as of the end of the first and second quarters of 2008 and, as a result,
we were required under generally accepted accounting principles to reclassify
the long term portion of this debt to current due to this likelihood of future
default. Furthermore, we have a cross default provision on our 8.625% promissory
note with a separate bank and have reclassified the long term portion of that
debt to current as well. These reclassifications negatively impacted our working
capital. If we are unable to meet the fixed charge coverage ratio in the future,
we believe that our lender will waive this non-compliance or will revise this
covenant so that we are in compliance; however, there is no assurance that
we
will be able to secure a waiver or revision from our lender. If we fail to
meet
our fixed charge coverage ratio in the future and our lender does not waive
the
non-compliance or revise this covenant so that we are in compliance, our lenders
could accelerate the repayment of borrowings under our credit facility. In
the
event that our lender accelerates the payment of our borrowings, we may not
have
sufficient liquidity to repay our debt under our credit facilities and other
indebtedness. Our working capital was also negatively impacted by the
pending
sale
of
certain facilities within our Industrial Segment and certain debt obligations,
in addition to the $11,403,000 mentioned above, which will become due in 2008
and were reclassify from long term to current. We anticipate restructuring
certain debt in 2008 to improve our working capital position. Our working
capital continues to be impacted by certain liabilities associated with our
discontinued operations.
Due
to
our inability to demonstrate that we will comply with the fixed charge coverage
ratio in our loan agreement as of the end of the first and second quarters
of
2008, resulting in the long-term portion of our indebtedness to certain of
our
lenders of approximately $11,403,000 being reclassified to current, our working
capital deficit of approximately $17,154,000 and certain of our lenders’ ability
to accelerate our indebtedness under our credit facilities, there is substantial
doubt as to our ability to continue as a going concern. Consequently, our
independent registered public accounting firm has included an explanatory
paragraph addressing this uncertainty. Although we believe our lender will
waive
our failure or potential failure to meet this financial covenant or revise
the
covenant so that we are in compliance, as of the date of this report our lender
has not issued this waiver or revision. There are no assurances that our lender
will waive or revise this covenant.
Results
of Operations
The
reporting of financial results and pertinent discussions are tailored to two
reportable segments: Nuclear Waste Management Services (“Nuclear”) and
Consulting Engineering Services (“Engineering”).
Below
are
the results of continuing operations for our years ended December 31, 2007,
2006, and 2005 (amounts in thousands):
(Consolidated)
|
|
2007
|
|
%
|
|
2006
|
|
%
|
|
2005
|
|
%
|
|
Net
Revenues
|
|
$
|
54,102
|
|
|
100.0
|
|
$
|
52,781
|
|
|
100.0
|
|
$
|
50,098
|
|
|
100.0
|
|
Cost
of goods sold
|
|
|
36,837
|
|
|
68.1
|
|
|
31,054
|
|
|
58.8
|
|
|
31,328
|
|
|
62.5
|
|
Gross
Profit
|
|
|
17,265
|
|
|
31.9
|
|
|
21,727
|
|
|
41.2
|
|
|
18,770
|
|
|
37.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
15,406
|
|
|
28.5
|
|
|
14,320
|
|
|
27.1
|
|
|
12,136
|
|
|
24.3
|
|
Loss
on disposal of property and equipment
|
|
|
71
|
|
|
.1
|
|
|
48
|
|
|
¾
|
|
|
6
|
|
|
¾
|
|
Income
from operations
|
|
|
1,788
|
|
|
3.3
|
|
|
7,359
|
|
|
14.1
|
|
|
6,628
|
|
|
13.2
|
|
Interest
income
|
|
|
312
|
|
|
.6
|
|
|
280
|
|
|
.5
|
|
|
126
|
|
|
.2
|
|
Interest
expense
|
|
|
(1,302
|
)
|
|
(2.4
|
)
|
|
(1,241
|
)
|
|
(2.4
|
)
|
|
(1,502
|
)
|
|
(3.0
|
)
|
Interest
expense – financing fees
|
|
|
(196
|
)
|
|
(.4
|
)
|
|
(192
|
)
|
|
(.4
|
)
|
|
(318
|
)
|
|
(.6
|
)
|
Other
|
|
|
(85
|
)
|
|
(.1
|
)
|
|
(55
|
)
|
|
(.1
|
)
|
|
(1
|
)
|
|
¾
|
|
Income
from continuing operations before taxes
|
|
|
517
|
|
|
1.0
|
|
|
6,151
|
|
|
11.7
|
|
|
4,933
|
|
|
9.8
|
|
Income
tax expense
|
|
|
¾
|
|
|
¾
|
|
|
507
|
|
|
1.0
|
|
|
432
|
|
|
.9
|
|
Income
from continuing operations
|
|
|
517
|
|
|
1.0
|
|
|
5,644
|
|
|
10.7
|
|
|
4,501
|
|
|
8.9
|
|
Preferred
Stock dividends
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
(156
|
)
|
|
(.3
|
)
|
Summary
- Years Ended December 31, 2007 and 2006
Net
Revenue
Consolidated
revenues from continuing operations increased $1,321,000 for the year ended
December 31, 2007, compared to the year ended December 31, 2006, as follows:
(In
thousands)
|
|
2007
|
|
% Revenue
|
|
2006
|
|
% Revenue
|
|
Change
|
|
% Change
|
|
Nuclear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bechtel
Jacobs
|
|
$
|
1,812
|
|
|
3.3
|
|
$
|
6,705
|
|
|
12.7
|
|
$
|
(4,893
|
)
|
|
(73.0
|
)
|
LATA/Parallax
|
|
|
8,784
|
|
|
16.2
|
|
|
10,341
|
|
|
19.6
|
|
|
(1,557
|
)
|
|
(15.1
|
)
|
Fluor
Hanford
|
|
|
3,885
|
(1)
|
|
7.2
|
|
|
1,229
|
|
|
2.3
|
|
|
2,656
|
|
|
216.1
|
|
Government
waste
|
|
|
9,951
|
|
|
18.5
|
|
|
14,951
|
|
|
28.3
|
|
|
(5,000
|
)
|
|
(33.4
|
)
|
Hazardous/non-hazardous
|
|
|
5,068
|
|
|
9.4
|
|
|
3,343
|
|
|
6.3
|
|
|
1,725
|
|
|
51.6
|
|
Other
nuclear waste
|
|
|
13,765
|
|
|
25.4
|
|
|
12,854
|
|
|
24.4
|
|
|
911
|
|
|
7.1
|
|
Recent
acquisition 6/07 (PFNWR)
|
|
|
8,439
|
(1)
|
|
15.6
|
|
|
¾
|
|
|
¾
|
|
|
8,439
|
|
|
100.0
|
|
Total
|
|
|
51,704
|
|
|
95.6
|
|
|
49,423
|
|
|
93.6
|
|
|
2,281
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering
|
|
|
2,398
|
|
|
4.4
|
|
|
3,358
|
|
|
6.4
|
|
|
(960
|
)
|
|
(28.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
54,102
|
|
|
100.0
|
|
$
|
52,781
|
|
|
100.0
|
|
$
|
1,321
|
|
|
2.5
|
|
(1)
Revenue
of $8,439,000 from PFNWR for 2007 includes approximately $5,568,000 relating
to
wastes generated by the federal government, either directly or indirectly as
a
subcontractor to the federal government. Of the $5,568,000 in revenue,
approximately $3,100,000 was from Fluor Hanford, a contractor to the federal
government. Revenue in 2007 from Fluor Hanford totaled approximately $6,985,000
or 12.9 % of total consolidated revenue.
The
Nuclear Segment experienced a $2,281,000 increase in revenue for the year ended
December 31, 2007 over the same period in 2006. Total revenue within the Nuclear
Segment included $8,439,000 of revenue from our PFNWR facility, which was
acquired on June 13, 2007. Excluding the revenue of our PFNWR facility, revenue
from our Nuclear Segment decreased approximately $6,158,000 or 12.5% as compared
to the same period of 2006. Revenue from government generators (which includes
Bechtel Jacobs, LATA/Parallax and Fluor Hanford) decreased $8,794,000 (excluding
government revenue of $5,568,000 from our PFNWR facility) or 26.5% due to
overall lower government receipts. Due to varying waste constituencies, waste
received and its related pricing can vary. 2007 saw a decline in average pricing
of 21.6% while volume increased 7.9%. Although our receipts were down, the
increase in volume was the result of the Company’s continued effort to process
and dispose more of its backlog. The backlog of stored waste within the Nuclear
Segment was reduced to $9,964,000, excluding the backlog of our PFNWR facility
of $4,683,000 at December 31, 2007, down from $12,492,000 in 2006, which
reflects increases in processing and disposal for the year. Waste backlog will
continue to fluctuate in 2008 depending on the complexity of waste streams
and
the timing of receipts and processing of materials. The high levels of backlog
material continue to position the segment well for increases in future
processing revenue prospective. 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. 2006 revenues of our Nuclear Segment include
approximately $1.1 million recognized from Bechel Jacobs as a result of a
settlement of a lawsuit in connection with a dispute over surcharges from waste
treated in 2003. The decrease for LATA/Parallax is due to significant progress
made by LATA/Parallax in completing legacy waste removal actions as part of
their clean-up project at Portsmouth for the Department of Energy. Fluor Hanford
revenue increased approximately $2,656,000 (excluding approximately $3,100,000
from PFNWR) or 216.1% due mainly to increased receipts at our DSSI facility.
Hazardous and non-hazardous revenue increased approximately $1,725,000 or 51.6%
as compared to the same period of 2006 due to a combination of increased volume
of 19.6% and price increases of 26.7% in per drum equivalent of waste processed.
Revenue from the Engineering Segment decreased $960,000 or 28.6% due to less
billable hours and related reimbursable costs in part to a large event project
in 2006 which did not repeat in 2007 and more hours spent supporting the
divestiture of the Industrial Segment facilities that are for sale.
Cost
of Goods Sold
Cost
of
goods sold increased $5,783,000 for the year ended December 31, 2007, as
compared to the year ended December 31, 2006, as follows:
(In
thousands)
|
|
2007
|
|
% Revenue
|
|
2006
|
|
% Revenue
|
|
Change
|
|
Nuclear
|
|
$
|
30,261
|
|
|
69.9
|
|
$
|
28,493
|
|
|
57.7
|
|
$
|
1,768
|
|
Engineering
|
|
|
1,638
|
|
|
68.3
|
|
|
2,561
|
|
|
76.3
|
|
|
(923
|
)
|
Acquisition
(PFNWR)
|
|
|
4,938
|
|
|
58.5
|
|
|
—
|
|
|
—
|
|
|
4,938
|
|
Total
|
|
$
|
36,837
|
|
|
68.1
|
|
$
|
31,054
|
|
|
58.8
|
|
$
|
5,783
|
|
Excluding
the cost of goods sold of approximately $4,938,000 for the PFNWR facility,
the
Nuclear Segment’s cost of goods sold for the year ending December 31, 2007 were
up approximately $1,768,000. Processing and disposal costs increased due
to
increased volume as well as different mix of waste. In addition, costs related
to the new “SouthBay” area at M&EC increased due to labor and analytical
expenses. In 2007, M&EC completed its facility expansion (“SouthBay”) to
treat DOE special process wastes from the DOE Portsmouth Gaseous Diffusion
Plant
located in Piketon, Ohio under the subcontract awarded by LATA/Parallax
Portsmouth LLC to our Nuclear Segment in 2006. The Engineering Segment costs
fell due to lower reimbursable expenses related to a large event project
in
2006. Included within cost of goods sold is depreciation and amortization
expense of $3,750,000 and $2,919,000 for the year ended December 31, 2007
and
2006, respectively, reflecting an increase of $831,000 over 2006 resulting
primarily from the completion of the “SouthBay” area and the acquisition of
PFNWR.
Gross
Profit
Gross
profit for the year ended December 31, 2007, decreased $4,462,000 over 2006,
as
follows:
(In
thousands)
|
|
2007
|
|
% Revenue
|
|
2006
|
|
% Revenue
|
|
Change
|
|
Nuclear
|
|
$
|
13,004
|
|
|
30.1
|
|
$
|
20,930
|
|
|
42.3
|
|
$
|
(7,926
|
)
|
Engineering
|
|
|
760
|
|
|
31.7
|
|
|
797
|
|
|
23.7
|
|
|
(37
|
)
|
Acquisition
(PFNWR)
|
|
|
3,501
|
|
|
41.5
|
|
|
—
|
|
|
—
|
|
|
3,501
|
|
Total
|
|
$
|
17,265
|
|
|
31.9
|
|
$
|
21,727
|
|
|
41.2
|
|
$
|
(4,462
|
)
|
The
Nuclear Segment gross profit, excluding approximately $3,501,000 from PFNWR
facility, saw a decrease of 13% from 2006 primarily due to lower volume of
waste
received. In addition, revenue mix shifted to processing and disposal of
higher
volumes of lower price waste resulting in higher costs of sales. In addition,
surcharges were significantly lower in 2007 which impacted gross profit and
gross margin. The Bechtel Jacobs surcharge of $1.1 million in 2006 had no
associated costs which increased prior year’s gross profit. The Engineering
Segment gross profit decreased though its gross profit percentage increased.
The
sizable portion of the large event project in 2006 included low margin pass
through expenses, resulting in higher gross profit and lower margins in 2006.
Selling,
General and Administrative
Selling,
general and administrative (“SG&A”)
expenses
increased $1,086,000 for the year ended December 31, 2007, as compared to
the
corresponding period for 2006, as follows:
(In
thousands)
|
|
2007
|
|
% Revenue
|
|
2006
|
|
% Revenue
|
|
Change
|
|
Administrative
|
|
$
|
5,457
|
|
|
¾
|
|
$
|
5,627
|
|
|
¾
|
|
$
|
(170
|
)
|
Nuclear
|
|
|
7,754
|
|
|
17.9
|
|
|
8,147
|
|
|
16.5
|
|
|
(393
|
)
|
Engineering
|
|
|
517
|
|
|
21.6
|
|
|
546
|
|
|
16.3
|
|
|
(29
|
)
|
Acquisition
(PFNWR)
|
|
|
1,678
|
|
|
19.9
|
|
|
¾
|
|
|
¾
|
|
|
1,678
|
|
Total
|
|
$
|
15,406
|
|
|
28.5
|
|
$
|
14,320
|
|
|
27.1
|
|
$
|
1,086
|
|
Excluding
the SG&A of our PFNWR facility, our 2007 SG&A expenses decreased
throughout the Company over 2006. The decrease in administrative SG&A was
the result of lower payroll related expense totaling approximately $688,000
related to a reduction in general labor and bonus expenses. This decrease
was
offset by higher public company expense totaling approximately $250,000 due
to
an increase in director fees for our Board of Director services and payment
of a
one time fee to a member of our Board of Directors as compensation for his
service in negotiating the agreement in principal to resolve a certain legal
matter with the EPA against our PFD facility. In addition, we had higher
outside
service fees of approximately $268,000 related to consulting and the adoption
of
FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes – An
Interpretation of FASB No.109” (FIN 48) and other tax related issues. The
Nuclear Segment’s SG&A decrease is due to lower payroll related expenses as
commissions were down consistent with reduced revenues and severance expense
was
down from 2006. The Engineering Segment decrease was the result of a decrease
in
payroll related expenses as commissions and headcount were down but were
offset
by an increase in bad debt expense. Included in SG&A expenses is
depreciation and amortization expense of $117,000 and $127,000 for the years
ended December 31, 2007 and 2006, respectively.
Loss
(Gain) on Disposal of Property and Equipment
The
loss
on fixed asset disposal for the year ended December 31, 2007, was $71,000,
as
compared to a loss of $48,000 for the same period in 2006. The loss for 2007
was
attributed mainly to the disposal of idle equipment at our M&EC and DSSI
facilities and the loss for 2006 was attributed mainly to the disposal of
idle
equipment at our DSSI facility.
Interest
Income
Interest
income increased $32,000 for the year ended December 31, 2007, as compared
to
2006. The increase is attributable to interest on the finite risk sinking
fund which was increased by $1,000,000 in February of 2007, as well as an
additional increase of $258,000 for our PFNWR facility closure policy. In
addition, the increase in 2007 is also attributed to interest earned from
additional cash in the Company’s sweep account during the first six months of
2007.
Interest
Expense
Interest
expense increased $61,000 for the year ended December 31, 2007, as compared
to
the corresponding period of 2006.
(In
thousands)
|
|
2007
|
|
2006
|
|
Change
|
|
%
|
|
PNC
interest
|
|
$
|
702
|
|
$
|
728
|
|
$
|
(26
|
)
|
|
(3.6
|
)
|
Other
|
|
|
600
|
|
|
513
|
|
|
87
|
|
|
17.0
|
|
Total
|
|
$
|
1,302
|
|
$
|
1,241
|
|
$
|
61
|
|
|
4.9
|
|
The
increase in 2007 is due primarily to increased external debt related to the
Nuvotec acquisition of approximately $272,000. In addition, revolver debt
at PNC
increased due to increased borrowings made necessary for the acquisition,
resulting in approximately $59,000 in additional interest expense. Offsetting
these increases were reduced interest expense of approximately $85,000 on
term
note, capitalized interest of approximately $144,000 related to the “SouthBay”
construction completed in 2007, and reduced interest expense from diminishing
principal on other equipment related loans.
Interest
Expense - Financing Fees
Interest
expense-financing fees remained constant for the year ended December 31,
2007,
as compared to the corresponding period of 2006.
Income
Tax
We
have
provided a valuation allowance on substantially all of our deferred tax assets.
We will continue to monitor the realizability of these net deferred tax assets
and will reverse some or all of the valuation allowance as appropriate. In
making this determination, we consider a number of factors including whether
there is a historical pattern of consistent and significant profitability
in
combination with our assessment of forecasted profitability in the future
periods. Such patterns and forecasts allow us to determine whether our most
significant deferred tax assets such as net operating losses will be realizable
in future years, in whole or in part. These deferred tax assets in particular
will require us to generate taxable income in the applicable jurisdictions
in
future years in order to recognize their economic benefits. We do not believe
that we have sufficient evidence to conclude that some or all of the valuation
allowance on deferred tax assets should be reversed. However, facts and
circumstances could change in future years and at such point we may reverse
the
allowance as appropriate. For the years ended December 31, 2007 and 2006,
we had
$0 and approximately $83,000, respectively, in federal income tax expense,
as a
result of a 100% valuation allowance against the deferred tax asset and our
alternative minimum tax liability at December 31, 2007, and $0 and $424,000,
respectively, in state income taxes primarily for our subsidiary, M&EC, in
Oak Ridge, Tennessee. See “Note 12” to “Notes to Consolidated Financial
Statements” for a reconciliation between taxes at the statutory rate and the
provision for income taxes as reported.
Summary
- Years Ended December 31, 2006 and 2005
Net
Revenue
Consolidated
revenues from continuing operations increased for the year ended December
31,
2006, compared to the year ended December 31, 2005, as follows:
(In
thousands)
|
|
2006
|
|
% Revenue
|
|
2005
|
|
% Revenue
|
|
Change
|
|
% Change
|
|
Nuclear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bechtel
Jacobs
|
|
$
|
6,705
|
|
|
12.6
|
|
$
|
14,940
|
|
|
29.8
|
|
$
|
(8,235
|
)
|
|
(55.1
|
)
|
LATA/Parallax
|
|
|
10,341
|
|
|
19.6
|
|
|
¾
|
|
|
¾
|
|
|
10,341
|
|
|
100.0
|
|
Fluor
Hanford
|
|
|
1,229
|
|
|
2.3
|
|
|
1,732
|
|
|
3.5
|
|
|
(503
|
)
|
|
(29.0
|
)
|
Government
waste
|
|
|
14,951
|
|
|
28.3
|
|
|
12,883
|
|
|
25.7
|
|
|
2,068
|
|
|
16.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hazardous/non-hazardous
|
|
|
3,343
|
|
|
6.3
|
|
|
4,308
|
|
|
8.6
|
|
|
(965
|
)
|
|
(22.4
|
)
|
Other
nuclear waste
|
|
|
12,854
|
|
|
24.4
|
|
|
13,382
|
|
|
26.7
|
|
|
(528
|
)
|
|
(3.9
|
)
|
Total
|
|
|
49,423
|
|
|
93.6
|
|
|
47,245
|
|
|
94.3
|
|
|
2,178
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering
|
|
|
3,358
|
|
|
6.4
|
|
|
2,853
|
|
|
5.7
|
|
|
505
|
|
|
17.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,781
|
|
|
100.0
|
|
$
|
50,098
|
|
|
100.0
|
|
$
|
2,683
|
|
|
5.4
|
|
Nuclear
Segment revenue for the year ended December 31, 2006 improved over 2005 by
4.6%
of consolidated revenue or $2,178,000. Revenue of our Nuclear Segment under
contracts with Bechtel Jacobs is decreasing as projects at Oak Ridge are
near
completion and as a result of certain other projects with the federal government
in which we have been issued subcontracts previously managed by Bechtel Jacobs
being assumed by Latax/Parallax. 2006 revenues of our Nuclear Segment include
approximately $1.1 million recognized as a result of a settlement of a lawsuit
in connection with a dispute over surcharges from waste treated in 2003.
While
this settlement was finalized in January 2007, it was estimatable and probable
as of December 31, 2006. This amount did not exceed contract costs through
December 31, 2006 and no contingencies existed in regards to this matter
at
year-end. Waste received directly from the government increased as government
volume normally varies year over year due to funding, volume, and other factors.
Hazardous and non hazardous revenue was down reflecting the completion of
a
special event soil project from existing industrial customers in 2005 which
did
not repeat in 2006. See “Known Trends and Uncertainties – Significant
Customers” later in this Managements' Discussion and Analysis for further
discussion on our revenues and contracts with the government and their
contractors. The backlog of stored waste at December 31, 2006 was $12,492,000
compared to $16,374,000 at December 31, 2005. Waste receipts were consistent
with 2005, but the backlog reflects increases in processing and disposal
for the
year. The high levels of backlog material continue to position the segment
well
from future processing revenue prospective. The Engineering Segment experienced
an increase in revenue in 2006 as a result of a special event
project.
Cost
of Goods Sold
Cost
of
goods sold decreased $274,000 for the year ended December 31, 2006, as compared
to the year ended December 31, 2005, as follows:
(In
thousands)
|
|
2006
|
|
% Revenue
|
|
2005
|
|
%
Revenue
|
|
Change
|
|
Nuclear
|
|
$
|
28,493
|
|
|
57.7
|
|
$
|
29,144
|
|
|
61.7
|
|
$
|
(651
|
)
|
Engineering
|
|
|
2,561
|
|
|
76.3
|
|
|
2,184
|
|
|
76.6
|
|
|
377
|
|
Total
|
|
$
|
31,054
|
|
|
58.8
|
|
$
|
31,328
|
|
|
62.5
|
|
$
|
(274
|
)
|
The
Nuclear Segment’s cost of goods sold for the year ended December 31, 2006 was
down slightly from 2005 despite increased revenue. Transportation and disposal
costs were down due to increased government revenue, where disposal and
transportation costs are often paid for by the customer. In addition, we
recognized all costs related to the Bechtel Jacobs surcharge settlement when
they were incurred, and therefore we did not have any costs in the current
year
related to $1,119,000 in revenue in 2006. The Engineering Segment expense
increases reflected increased reimbursable expenses related to the large
event
project in 2006. Included within cost of goods sold is depreciation and
amortization expense of $2,919,000 and $2,765,000 for the year ended December
31, 2006 and 2005, respectively, reflecting an increase of $154,000 over
2005.
Gross
Profit
Gross
profit for the year ended December 31, 2006, increased $2,957,000 over 2005,
as
follows:
(In
thousands)
|
|
2006
|
|
% Revenue
|
|
2005
|
|
% Revenue
|
|
Change
|
|
Nuclear
|
|
$
|
20,930
|
|
|
42.3
|
|
$
|
18,101
|
|
|
38.3
|
|
$
|
2,829
|
|
Engineering
|
|
|
797
|
|
|
23.7
|
|
|
669
|
|
|
23.4
|
|
$
|
128
|
|
Total
|
|
$
|
21,727
|
|
|
41.2
|
|
$
|
18,770
|
|
|
37.5
|
|
$
|
2,957
|
|
The
gross
profit for the Nuclear Segment increased $2,829,000 in 2006 over 2005 as
we
received more government waste, which typically does not require transportation
and disposal expense, and produces higher margins. In addition, the surcharge
settlement with Bechtel Jacobs did not have any costs of goods sold, and
thus
increased the gross margin. The gross profit of the Engineering Segment
increased as a result of increased revenue.
Selling,
General and Administrative
Selling,
general and administrative (“SG&A”)
expenses
increased approximately $2,184,000 for the year ended December 31, 2006,
as
compared to the corresponding period for 2005, as follows:
(In
thousands)
|
|
2006
|
|
% Revenue
|
|
2005
|
|
% Revenue
|
|
Change
|
|
Administrative
|
|
$
|
5,627
|
|
|
¾
|
|
$
|
4,800
|
|
|
¾
|
|
$
|
827
|
|
Nuclear
|
|
|
8,147
|
|
|
16.5
|
|
|
6,863
|
|
|
14.5
|
|
|
1,284
|
|
Engineering
|
|
|
546
|
|
|
16.3
|
|
|
473
|
|
|
16.6
|
|
|
73
|
|
Total
|
|
$
|
14,320
|
|
|
27.1
|
|
$
|
12,136
|
|
|
24.2
|
|
$
|
2,184
|
|
We
experienced an increase in SG&A expenses throughout the Company over 2005.
The increase in corporate administrative overhead was primarily payroll related.
We incurred corporate expenses that were higher than 2005 for management
incentives, costs related to expensing of stock options under SFAS 123R (see
“Note 3 – Share Based Compensation” of Consolidated Financial Statements),
costs related to the relocation of the corporate office and internal costs
related to the due diligence of a potential acquisition.
The
Nuclear Segment increased its SG&A expenses to expand its management staff
to more effectively bid on new contracts, manage its facilities and increase
its
efforts towards compliance with corporate policies and regulatory agencies.
The
increase in SG&A costs in our Engineering Segment were payroll related.
Included in SG&A expenses is depreciation and amortization expense of
$127,000 and $135,000 for the years ended December 31, 2006 and 2005,
respectively.
Loss
(Gain) on Disposal of Property and Equipment
The
loss
on fixed asset disposal/impairment for the year ended December 31, 2006,
was
$48,000, as compared to a loss of $6,000 for the same period in 2005. The
losses for 2006 and 2005 were attributed mainly to the disposal of idle
equipment at our Nuclear facility, specifically our DSSI facility.
Interest
Income
Interest
income increased $154,000 for the year ended December 31, 2006, as compared
to
the 2005. The increase was due to proceeds from warrants and options
exercised and employee stock purchase plan proceeds which totaled $12,079,000.
Also, an additional funding of our finite risk insurance policy resulted
in
additional interest earned for the year. See later in this Management's
Discussion and Analysis – “Liquidity and Capital Resources” for further
discussion on the finite risk insurance policy.
Interest
Expense
Interest
expense decreased $261,000 for the year ended December 31, 2006, as compared
to
the corresponding period of 2005.
(In
thousands)
|
|
2006
|
|
2005
|
|
Change
|
|
%
|
|
PNC
interest
|
|
$
|
728
|
|
$
|
834
|
|
$
|
(106
|
)
|
|
(12.7
|
)
|
Other
|
|
|
513
|
|
|
668
|
|
|
(155
|
)
|
|
(23.2
|
)
|
Total
|
|
$
|
1,241
|
|
$
|
1,502
|
|
$
|
(261
|
)
|
|
(17.4
|
)
|
The
decrease in 2006 is principally a result of the overall improvement in
our debt
position accelerated by the exercise of warrants and options for purchase
of
7,106,790 shares of our Common Stock, as well as proceeds from our employee
stock purchase plan, which added $12,709,000 in cash. Reduced borrowing
on the
revolver, along with diminishing principal on other equipment related loans
continues to reduce our interest expense.
Interest
Expense - Financing Fees
Interest
expense-financing fees decreased $126,000 for the year ended December 31,
2006,
as compared to the corresponding period of 2005. Expenses in 2006 reflect
the
amortization of our prepaid financing fee for our term loan which expires
in May
of 2008. Expense for 2005 includes a fee paid to PNC for the increase in
the
term note by approximately $4,400,000 (See “Financing Activities” in this
Management Discussion & Analysis). The remaining financing fees are
principally associated with the PNC revolving credit and term loan and are
amortized to expense over the term of the loan agreements. As of December
31, 2006, the unamortized balance of prepaid financing fees is $267,000.
These prepaid financing fees will be amortized through May 2008 at a rate
of
$16,000 per month which approximates the rate using the effective interest
method.
Income
Tax
For
the
years ended December 31, 2006 and 2005, we had approximately $83,000 and
$50,000, respectively, in federal income tax expense, as a result of a 100%
valuation allowance against the deferred tax asset resulting from our
alternative minimum tax liability at December 31, 2006, and $424,000 and
$382,000, respectively, in state income taxes primarily for our subsidiary,
M&EC, in Oak Ridge, Tennessee. See “Note 12” to “Notes to Consolidated
Financial Statements” for a reconciliation between taxes at the statutory rate
and the provision for income taxes as reported.
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 divest all or a part of our Industrial Segment.
The
decision to consider the possible sale of all, or a part of, our Industrial
Segment is based on our belief that our Nuclear Segment represents a sustainable
long-term growth driver of our business. During 2007, we have entered into
several letters of intent to sell various portions of our Industrial Segment.
All of the letters of intent have expired or terminated without being completed,
except for the following: we completed, on January 8, 2008, the sale of
substantially all of the assets of Perma-Fix Maryland, Inc. (“PFMD”) for
$3,825,000 in cash, subject to a
working
capital adjustment during 2008, and assumption by the buyer of certain
liabilities of PFMD and during March 2008, we completed the sale of
substantially all of the assets of Perma-Fix of Dayton, Inc. (“PFD”) for
approximately $2,143,000 in cash, subject to certain working capital adjustments
after the closing, plus assumption of certain of PFD’s liabilities and
obligations by the buyer, (including, without limitation, certain obligations
under the Settlement Agreement entered into by PFD in connection with the
settlement of plaintiff’s claims under the Fisher Lawsuit, as discussed and
defined below, and approximately $562,000 in PFD’s obligations for and relating
to supplemental environmental projects that PFD is obligated to perform under
the Consent Decree entered into with the federal government in settlement
of the
Government’s Lawsuit as discussed and defined below) in connection with the
Fisher Lawsuit. We are negotiating the sale of Perma-Fix South Georgia, Inc.
(“PFSG”). We anticipate that the sale of PFSG will be completed by the end of
May 2008. The terms of the sale of PFSG are subject to being finalized. We
are
attempting to sell the other companies and/or operations within our Industrial
Segment, but as of the date of this report, we have not entered into any
agreements regarding these other companies or operations within our Industrial
Segment.
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 reclassified as discontinued operations
in
the Consolidated Balance Sheets, and we have ceased depreciation of the
Industrial Segment’s long-lived assets classified as held for sale. The results
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
believe that the divestiture of certain facilities within our Industrial
Segment
has not occurred within the anticipated time period due to the current state
of
our economy which has impacted potential buyers’ ability to obtain financing. In
addition, the original letter of intent entered between us and a potential
buyer
included the majority of the companies within our Industrial Segment. This
sale
did not materialize, leading us to pursue the potential sale of each company
individually. Although this process has taken more time than anticipated
for
numerous reasons, we continue to market the facilities within our Industrial
Segment for eventual sale.
Our
Industrial Segment generated revenues of $30,407,000, $35,148,000, and
$41,489,000 for the years ended December 31, 2007, 2006, and 2005, respectively,
and had net loss, net of taxes, of $9,727,000, $933,000 and $762,000 for
the
same periods, respectively. Our net loss, net of taxes, for 2007 was impacted
by
a number of items listed below. The decline in revenues since 2005 is due
to
termination of certain government and commercial contracts.
A
subsidiary within our Industrial Segment, PFD, was defending a lawsuit styled
Barbara
Fisher v. Perma-Fix of Dayton, Inc.,
in the
United States District Court, Southern District of Ohio (the “Fisher Lawsuit”).
This citizen’s suit was brought under the Clean Air Act alleging, among other
things, violations by PFD of state and federal clean air statutes connected
with
the operation of PFD’s facility located in Dayton, Ohio. As further previously
disclosed, the U.S. Department of Justice, on behalf of the Environmental
Protection Agency, intervened in the Fisher Lawsuit alleging, among other
things, substantially similar violations alleged in the Fisher Lawsuit (the
“Government’s Lawsuit”).
During
December, 2007, PFD and the federal government entered into a Consent Decree
formalizing settlement of the government’s portion of the above described
lawsuit, which Consent Decree was approved by the federal court during the
first
quarter of 2008. Pursuant to the Consent Decree, the settlement with the
federal
government resolved the government’s claims against PFD and requires PFD
to:
|
·
|
pay
a civil penalty of $360,000;
|
|
·
|
complete
three supplemental environmental projects costing not less than
$562,000
to achieve air emission controls that go above and beyond those
required
by any current environmental
regulations.
|
|
·
|
implement
a variety of state and federal air permit pollution control measures;
and
|
|
·
|
take
a variety of voluntary steps to reduce the potential for emissions
of air
pollutants.
|
During
December 2007, PFD and Plaintiff, Fisher, entered into a Settlement Agreement
formalizing settlement of the Plaintiff’s claims in the above lawsuit. The
settlement with Plaintiff Fisher resolved the Plaintiff’s claims against PFD
and, subject to certain conditions set forth in the Settlement Agreement,
requires PFD to pay a total of $1,325,000. Our insurer has agreed to contribute
$662,500 toward the settlement cost of the citizen’s suit portion of the
litigation, which we received on March 13, 2008. Based on discussion with
our
insurer, our insurer will not pay any portion of the settlement with the
federal
government in the Government Lawsuit.
As
of
December 31, 2007, we have recorded a total of $1,625,000 of charges in our
discontinued operations for settlement by PFD of the Fisher Lawsuit and the
Government Lawsuit.
In
connection with PFD’s sale of substantially all of its assets during March,
2008, as discussed in this “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”, the buyer has agreed to assume certain of
PFD’s obligations under the Consent Decree and Settlement Agreement, including,
without limitation, PFD’s obligation to implement supplemental environmental
projects costing not less than $562,000, implement a variety of state and
federal air permit control measures and reduce the potential for emissions
of
air pollutants.
As
previously reported, on April 12, 2007 our insurer agreed to reimburse PFD
for
reasonable defense costs of litigation incurred prior to our insurer’s
assumption of the defense, but this agreement to defend and indemnify PFD
was
subject to the our insurer’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 our insurer’s
right to recoup any defense cost it has advanced if our insurer later determines
that its policy provides no coverage. When, our
insurer withdrew
its prior coverage denial and agreed to defend and indemnify PFD in the above
described lawsuits, subject to certain reservation of rights, we had incurred
more than $2.5
million in costs in vigorously defending against the Fisher and the Government
Lawsuits. To date, our insurer has reimbursed PFD approximately $2.5
million for legal defense fees and disbursements, which we recorded as a
recovery within our discontinued operations in the second quarter of 2007.
Partial reimbursement from our insurer of $750,000 was received on July 11,
2007. A second reimbursement of approximately $1.75 million was received
on
August 17, 2007. Our insurer has advised us that they will reimburse us for
approximately another $82,000 in legal fees and disbursements, which we recorded
as a recovery within our discontinued operations in the 4th
quarter
2007. This reimbursement is subject to our insurer’s reservation of rights as
noted above. On February 12, 2008, we received reimbursement of approximately
$24,000 from our insurer. We anticipate receiving the remaining reimbursement
by
the end of the second quarter of 2008.
As
conditions warranted, 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, as required by SFAS 144, included the
comparison of the offered sale price less cost to sell to the carrying value
of
the investment under each LOI separately. Based on our analysis, we concluded
that the carrying value of the tangible assets for Perma-Fix Dayton, Inc.,
Perma-Fix of Treatment Services, Inc., Perma-Fix of Orlando, Inc., and Perma-Fix
of South Georgia, Inc. facilities exceeded its fair value, less cost to sell.
Consequently, in 2007, we recorded $2,727,000, $1,804,000, $507,000 and
$1,329,000, respectively, in tangible asset impairment loss for each of
the
facilities,
which are included in “Loss from discontinued operations, net of taxes” on our
Consolidated Statements of Operations for the year ended December 31, 2007.
We
also performed financial valuations on the intangible assets of the Industrial
Segment as a whole to test for impairment as required by SFAS 142. We concluded
that no other tangible and intangible impairments existed as of December
31,
2007.
Assets
related to discontinued operations total $14,341,000 and $22,750,000 as of
December 31, 2007, and 2006, respectively, and liabilities related to
discontinued operations total $11,949,000 and $10,632,000 as of December
31,
2007 and 2006, respectively (see “Note 6 – Discontinued Operations” in
“Notes to Consolidated Financial Statements” for assets and liabilities of
discontinued operations held for sale).
Non
Operational Facilities
The
Industrial Segment includes two previously shut-down facilities which were
and
continue to be presented as discontinued operations in prior years. These
facilities include Perma-Fix of Pittsburgh, Inc. (“PFP”) and Perma-Fix of
Michigan, Inc (“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 were
required to complete certain closure and remediation activities pursuant
to our
RCRA permit, which were completed in January 2006. In September 2006, PFMI
signed a Corrective Action Consent Order with the State of Michigan, requiring
performance of studies and development and execution of plans related to
the
potential clean-up of soils in portions of the property. The level and cost
of
the clean-up and remediation are determined by state mandated requirements.
Upon
discontinuation of operations in 2004, 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, based on
state-mandated criteria, 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 $710,000 for closure costs since September 30, 2004,
of
which $81,000 has been spent during 2007 and $74,000 was spent in 2006. In
the
4th
quarter of 2007, we reduced our reserve by $9,000 as a result of our
reassessment of the cost of remediation. We have $563,000 accrued for the
closure, as of December 31, 2007, and we anticipate spending $401,000 in
2008
with the remainder over the next five years. Based on the current status
of the
Corrective Action, we believe that the remaining reserve is adequate to cover
the liability.
As
of December 31, 2007, PFMI has a pension payable of $1,287,000. 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
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
December 31, 2007, we had cash of $102,000. The following table reflects
the
cash flow activities during 2007.
(In
thousands)
|
|
2007
|
|
Cash
provided by continuing operations
|
|
$
|
5,927
|
|
Cash
provided by discontinued operations
|
|
|
771
|
|
Cash
used in investing activities of continuing operations
|
|
|
(7,218
|
)
|
Cash
used in investing activities of discontinued operations
|
|
|
(359
|
)
|
Cash
used in financing activities of continuing operations
|
|
|
(1,181
|
)
|
Principal
repayment of long-term debt for discontinued operations
|
|
|
(366
|
)
|
Decrease
in cash
|
|
$
|
(2,426
|
)
|
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 or the Money Market account, if applicable. The cash balance
at
December 31, 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 $13,536,000,
an
increase of $4,048,000 over the December 31, 2006, balance of $9,488,000.
Our
newly acquired PFNWR facility accounted for $1,373,000 of the increase.
Excluding the increase of PFNWR facility, the increase of approximately
$2,886,000 in account receivables in our Nuclear Segment relates to an increase
in billing of unbilled receivables of approximately $1,200,000 and a large
shipment received late in the year resulting in invoicing totaling approximately
$1,500,000. The Engineering Segment decreased by $211,000 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 December 31, 2007, unbilled
receivables totaled $14,093,000, a decrease of $820,000 from the December 31,
2006, balance of $14,913,000. Perma-Fix Northwest Richland, Inc. facility
accounted for $1,712,000 of the unbilled as of December 31, 2007. Excluding
the
unbilled receivables of our Perma-Fix Northwest Richland, Inc. facility,
the
reduction of $2,532,000 of the unbilled receivable was the result of continued
efforts to reduce this balance. The delays in processing invoices, as mentioned
above, usually take several months to complete 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, including
but
not limited to delays at our third party disposal site, 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 December 31, 2007 is
$10,321,000, a decrease of $1,992,000 from the balance of $12,313,000 as
of
December 31, 2006. The long term portion as of December 31, 2007 is $3,772,000,
an increase of $1,172,000 from the balance of $2,600,000 as of December 31,
2006.
As
of
December 31, 2007, total consolidated accounts payable was $5,010,000, an
increase of $2,555,000 from the December 31, 2006, balance of $2,455,000.
Perma-Fix Northwest Richland, Inc. accounted for $1,110,000 of this increase.
The remaining increase of $1,445,000 is the result of our continued efforts
to
manage payment terms with our vendors to maximize our cash position throughout
all segments. 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 December 31, 2007, totaled $9,207,000, an increase of $4,457,000
over the December 31, 2006, balance of $4,750,000. Accrued expenses are made
up
of accrued compensation, interest payable, insurance payable, certain tax
accruals, and other miscellaneous accruals. Perma-Fix Northwest Richland,
Inc.
accounted for $362,000 of this balance. The remainder of the increase is
primarily due to reclass of interests payable of approximately $2,568,000
from
long term to current for two notes due to the IRS payable by December 31,
2008,
resulting from the acquisition of M&EC in 2001 (see “Financing Activities in
this Management’s Discussion and Analysis of Financial Condition and Results of
Opeations”). The remaining increase is due primarily to our insurance payable
resulting from renewal of the Company’s general insurance policies.
Disposal/transportation
accrual as of December 31, 2007, totaled $6,677,000, an increase of $3,309,000
over the December 31, 2006 balance of $3,368,000. Perma-Fix Northwest Richland,
Inc. accounted for $4,118,000 of the accrual. Excluding the accrual of Perma-Fix
Northwest Richland, Inc., the decrease of $809,000 was attributable to the
Company’s continued efforts to dispose of waste at the lowest possible cost.
Disposal accrual can vary based on revenue mix as government waste generally
is
disposed of by the generator and is not an expense to us. In 2007, we
established a new disposal outlet at the Nevada Test Site which eliminated
our
disposal expense for certain waste streams.
Our
working capital position at December 31, 2007 was a negative $17,154,000,
which
includes the working capital of our discontinued operations, as compared
to our
positive working capital position of $12,810,000 at December 31, 2006. Our
working capital in 2007 was negatively impacted by the reclassification of
approximately $11,403,000 of debt owed to certain of our lenders from long
term
to current. As of December 31, 2007, the fixed charge coverage ratio contained
in our PNC loan agreement fell below the minimum requirement. We obtained
a
waiver from our lender for this non-compliance as of December 31, 2007. At
this
time however, we do not expect to be in compliance with the fixed charge
coverage ratio as of the end of the first and second quarters of 2008 and,
as a
result, we were required under generally accepted accounting principles to
reclassify the long term portion of this debt to current due to the likelihood
of future default. Furthermore, we have a cross default provision on our
8.625%
promissory note with a separate bank and have reclassified the long term
portion
of that debt to current as well. If we are unable to meet the fixed charge
coverage ratio in the future, we believe that our lender will waive this
non-compliance or will revise this covenant so that we are in compliance;
however, there is no assurance that we will be able to secure a waiver or
revision from our lender. If we fail to meet our fixed charge coverage ratio
in
the future and our lender does not waive the non-compliance or revise our
covenant so that we are in compliance, our lender could accelerate the repayment
of borrowings under our credit facility. In the event that our lender
accelerates the payment of our borrowings, we may not have sufficient liquidity
to repay our debt under our credit facilities and other indebtedness. In
addition to the waiver that we have obtained from our lender for the
non-compliance of our fixed charge coverage ratio as of December 31, 2007,
our
lender has amended our present covenant to exclude certain allowable charges
in
determining our minimum fixed charge coverage ratio. This amendment may improve
our ability to maintain compliance of the fixed charge coverage ratio in
the
future. Our working capital for the year was also impacted by approximately
$8,600,000 expended to acquire PFNWR. The working capital of PFNWR was also
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
increased our current liabilities by approximately $3,300,000. We are required
to dispose of this legacy waste on or before August 31, 2008. Other reductions
to our current assets or increases to our current liabilities which impacted
our
working
capital
was the annual cash payment to the finite risk sinking fund of $1,000,000,
our
semi-annual payment to the IRS related to our two notes at our M&EC facility
of approximately $1,000,000 and the reclass of interests on the two notes
from
long term to current of approximately $2,568,000. 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 year ended December 31, 2007 totaled
approximately $3,988,000 of which $2,982,000 and $1,006,000 was for our
continuing and discontinued operations, respectively. Of the total capital
spending, $258,000 and $356,000 was financed for our continuing and discontinued
operations, respectively, resulting in total net purchases of $3,374,000
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 have budgeted
capital expenditures of approximately $3,100,000 for fiscal year 2008 for
our
operating segments to expand our operations into new markets, reduce the
cost of
waste processing and handling, expand the range of wastes that can be accepted
for treatment and processing, and to maintain permit compliance requirements.
We
expect to fund these capital expenditures through our operations. 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 December
31, 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 December 31, 2007,
we
have recorded $5,772,000 in our sinking fund on the balance sheet, which
includes interest earned of $575,000 on the sinking fund as of December 31,
2007. We recorded $264,000 of interest income during 2007 on the sinking
fund
for 2007. 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.
In
August
2007, we entered into a second finite risk insurance policy for our Perma-Fix
Northwest Richland, Inc. facility, which was acquired on June 13, 2007. The
policy provides an initial $7.8 million of financial assurance coverage with
annual growth rate of 1.5%, which at the end of the four year term policy,
will
provide maximum coverage of $8.2 million. The policy will renew automatically
on
an annual basis at the end of the four year term and will not be subject
to any
renewal fees. The policy requires total payment of $4.4 million, consisting
of
an annual payment of $1.4 million, and two annual payments of $1.5 million,
starting July 31, 2007. In July 2007, we paid the first of our three annual
payments of $1.4 million, of which $1.1 million represented premium on the
policy and the remaining $258,000 was deposited into a sinking fund account.
Each of the two remaining $1.5 million payments will consist of $176,000
in
premium with the remaining $1.3 million to be deposited into a sinking fund.
As
of December 31, 2007, we
have
recorded $262,000 in our sinking fund on the balance sheet, which includes
interest earned of $4,000 on the sinking fund for the year ended December
31,
2007.
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 and its wholly owned subsidiary, PEcoS provides
the Company with immediate access to treat some of the most complex nuclear
waste streams in the nation and 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 $17.3 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”).
|
(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 $0.9 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 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. The earn-out amount, if and when paid, will increase goodwill.
As of
December 31, 2007 the Company has not made or accrued any earn-out payments
to
Nuvotec shareholders because such revenue targets have not been met.
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 borrowing 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.
Financing
Activities
We
entered into a Revolving Credit, Term Loan and Security Agreement (“Agreement”)
with PNC Bank, National Association, a national banking association (“PNC”)
acting as agent (“Agent”) for lenders, and as issuing bank. The Agreement
provided for a term loan (“Term Loan”) in the amount of $7,000,000, which
requires principal repayments based upon a seven-year amortization, payable
over
five years, with monthly installments of $83,000 and the remaining unpaid
principal balance due on November 27, 2008. The Agreement also provided for
a
revolving line of credit (“Revolving Credit”) with a maximum principal amount
outstanding at any one time of $18,000,000. 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 December
31,
2007, the excess availability under our revolving credit was $5,700,000 based
on
our eligible receivables.
On
March
26, 2008, we entered into an amendment with PNC, which extended the due date
of
the $25 million credit facility from November 27, 2008 to September 30, 2009.
Pursuant to the amendment, we may terminate the agreement upon 60 days’ prior
written notice upon payment in full of the obligation. The amendment also
waived
the Company’s violation of the fixed charge coverage ratio as of December 31,
2007, as discussed below. In addition, the amendment changed our present
covenant to exclude certain allowable charges in determining our minimum
fixed
charge coverage ratio. As a condition to this amendment, we have agreed to
pay
PNC a fee of $25,000.
Our
credit facility with PNC contains financial covenants. A breach of any of
these
covenants, unless waived by PNC, could result in a default under our credit
facility triggering our lender to immediately require the repayment of all
outstanding debt under our credit facility and terminate all commitments
to
extend further credit. In the past, none of our covenants have been restrictive
to our operations; however, in 2007, our fixed charge coverage ratio fell
below
the minimum requirement pursuant to the covenant. We have obtained a waiver
from
our lender for this non-compliance as of December 31, 2007. At this time
however, we do not expect to be in compliance with the fixed charge coverage
ratio as of the end of the first and second quarters of 2008 and as a result,
we
were required under generally accepted accounting principles to reclassify
the long term portion of debt to current. Furthermore, we have a cross default
provision on our 8.625% KeyBank National Association promissory note and
have
reclassified the long term portion of that debt to current as well. If we
are
unable to meet the fixed charge coverage ratio in the future, we believe
that
our lender will waive this non-compliance or will revise this covenant so
that
we are in compliance; however, there is no assurance that we will be able
to
secure a waiver or revision from our lender. If we fail to meet our fixed
charge
coverage ratio in the future and our lender does not waive the non-compliance
or
revise this covenant so that we are in compliance, our lender could accelerate
the repayment of borrowings under our credit facility. In the event that
our
lender accelerates the payment of
our
borrowing, we may not have sufficient liquidity to repay our debt under our
credit facility and other indebtedness. In addition to the waiver that we
have
obtained from our lender for our non-compliance of our fixed charge coverage
ratio as of December 31, 2007, our lender has amended our present covenant
to
exclude certain allowable charges in determining our minimum fixed charge
coverage ratio. This amendment may improve our ability to maintain compliance
of
the fixed charge coverage ratio in the future.
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 note is due on December
31,
2008, with principal repayment of $400,000 to be made in June 2008 and the
remaining $235,000 to be made by December 31, 2008. 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 December 31,
2007)
and payable in one lump sum at the end of the loan period. On December 31,
2007,
the outstanding balance was $2,704,000 including accrued interest of
approximately $2,069,000. PDC has directed M&EC to make all payments under
the promissory note directly to the IRS to be applied to PDC's obligations
under
its installment agreement with the IRS.
Additionally,
M&EC entered into an installment agreement with the Internal Revenue Service
(“IRS”) for a principal amount of $923,000 effective June 25, 2001, for certain
withholding taxes owed by M&EC. The installment agreement is payable over
eight years on a semiannual basis on June 30 and December 31. The agreement
is
due on December 31, 2008, with principal repayments of approximately $100,000
to
be made in June 2008 and the remaining $53,000 to be made by December 31,
2008.
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 December
31,
2007, the rate was 10%. On December 31, 2007, the outstanding balance was
$652,000 including accrued interest of approximately $499,000.
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.), (collectively called
“PFNWR”) 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 $173,000 starting July 2008,
along
with accrued interest. Interest is accrued at prime rate plus 1.125%. On
December 31, 2007, the outstanding principal balance was $3,039,000 and has
been
classified as current due to this note’s cross default provisions addressed
above.
Additionally,
in conjunction with our acquisition of PFNWR, 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. As of December 31, 2007, we had accrued interest
of
approximately $110,000.
During
2007, we issued 234,927 shares of our Common Stock upon exercise of 237,225
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 issued 563,633
shares
of our Common Stock upon exercise of 1,281,731 Warrants on a cashless basis
by
two investors, pursuant to the Note and Warrant Purchase Agreements issued
by
the Company on July 31, 2001, resulting in surrender of the remaining 718,098
Warrants. Total proceeds received during 2007 related to warrant and option
exercises totaled approximately $472,000, which includes $418,000 from employee
stock option exercises and $54,000 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 PFNWR and the reclassification of debts due to
certain of our lenders resulting from the non-compliance of our fixed charge
coverage ratio, pursuant to`our loan agreement with PNC have heavily impacted
our liquidity. We continue to draw funds from our revolver to make the payments
on debt that we assumed as result of the acquisition. Cash (net of
collateralized portion held by our credit facility) received from the sale
of
PFMD and PFD in the first quarter of 2008 was used to reduce our term note,
with
the remaining cash used to reduce our revolver. Cash to be received subject
from
the sale of any remaining facilities/operations within our Industrial Segment
(net of the collateralized portion held by our credit facility) will be used
to
reduce our term note, with any remaining cash used to reduce our revolver.
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. As a result of the Company’s uncertainty in its ability to comply with
its fixed charge coverage ratio in the first and second quarters of 2008
under
our loan agreement, there is substantial doubt as to the Company’s ability to
continue as a going concern. Though there can be no assurances, we anticipate
that we will be able to address these doubts by revising the covenant thresholds
with our lender to ensure that we will stay compliant with our covenants
in the
future.
Contractual
Obligations
The
following table summarizes our contractual obligations at December 31, 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
|
|
2008
|
|
2009- 2011
|
|
2012- 2013
|
|
After 2013
|
|
Long-term
debt
|
|
$
|
18,016
|
|
$
|
15,292
|
|
$
|
2,714
|
|
$
|
10
|
|
$
|
—
|
|
Interest
on long-term debt (1)
|
|
|
3,195
|
|
|
2,782
|
|
|
413
|
|
|
¾
|
|
|
¾
|
|
Interest
on variable rate debt (2)
|
|
|
595
|
|
|
422
|
|
|
173
|
|
|
¾
|
|
|
¾
|
|
Operating
leases
|
|
|
2,245
|
|
|
677
|
|
|
1,418
|
|
|
150
|
|
|
¾
|
|
Finite
risk policy (3)
|
|
|
10,814
|
|
|
5,278
|
|
|
4,532
|
|
|
1,004
|
|
|
¾
|
|
Pension
withdrawal liability (4)
|
|
|
1,287
|
|
|
158
|
|
|
574
|
|
|
483
|
|
|
72
|
|
Environmental
contingencies (5)
|
|
|
1,741
|
|
|
911
|
|
|
608
|
|
|
222
|
|
|
¾
|
|
Purchase
obligations (6)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
contractual obligations
|
|
$
|
37,893
|
|
$
|
25,520
|
|
$
|
10,432
|
|
$
|
1,869
|
|
$
|
72
|
|
(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 PFNWR,
which was completed 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.
(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 2008 through 2009. Pursuant to the terms
of our
credit facility, proceeds from the sale of our Industrial Segment
facilities must be used to pay down our term note first, with the
remaining to pay down our revolver. As such, we anticipate a full
repayment of our Term Loan by June 2008. In addition, we anticipate
a full
repayment of our Revolver by September 30, 2009. 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. The environmental contingencies noted are for Perma-Fix
of
Michigan, Inc., Perma-Fix of Memphis, Inc., and Perma-Fix of Dayton,
Inc.,
which are the financial obligations of the Company. The environmental
liability of PFD was retained by the Company upon the sale of PFD
in March
2008.
|
(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 the 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 in preparation
of
the consolidated financial statements:
Revenue
Recognition Estimates. We
utilize a percentage of completion methodology for purposes of revenue
recognition in our Nuclear Segment. As we accept more complex waste streams
in
this segment, the treatment of those waste streams becomes more complicated
and
time consuming. We have continued to enhance our waste tracking capabilities
and
systems, which has enabled us to better match the revenue earned to the
processing phases achieved. The major processing phases are receipt,
treatment/processing and shipment/final disposition. Upon receiving mixed
waste
we recognize a certain percentage (generally 33%) of revenue as we incur
costs
for transportation, analytical and labor associated with the receipt of mixed
wastes. As the waste is processed, shipped and disposed of we recognize the
remaining 67% revenue and the associated costs of transportation and burial.
The
waste streams in our Industrial Segment are much less complicated, and services
are rendered shortly after receipt, as such we do not use percentage
of
completion
estimates in our Industrial segment. We review and evaluate our revenue
recognition estimates and policies on a quarterly basis.
Allowance
for Doubtful Accounts.
The
carrying amount of accounts receivable is reduced by an allowance for doubtful
accounts, which is a valuation allowance that reflects management's best
estimate of the amounts that are uncollectible. We regularly review all accounts
receivable balances that exceed 60 days from the invoice date and based on
an
assessment of current credit worthiness, estimate the portion, if any, of the
balances that are uncollectible. Specific accounts that are deemed to be
uncollectible are reserved at 100% of their outstanding balance. The remaining
balances aged over 60 days have a percentage applied by aging category (5%
for
balances 61-90 days, 20% for balances 91-120 days and 40% for balances over
120
days aged), based on a historical valuation, that allows us to calculate the
total reserve required. This allowance was approximately 0.3% of revenue for
2007 and 1.0%, of accounts receivable as of December 31, 2007. Additionally,
this allowance was approximately 0.3% of revenue for 2006 and 1.7% of accounts
receivable as of December 31, 2006.
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. We continually reevaluate the propriety of the carrying amount of
permits and goodwill to determine whether current events and circumstances
warrant adjustments to the carrying value. We test goodwill and permits,
separately, for impairment, annually as of October 1. Our annual impairment
test
as of October 1, 2007 and 2006 resulted in no impairment of goodwill and
permits. The methodology utilized in performing this test estimates the fair
value of our operating segments using a discounted cash flow valuation approach.
This approach is dependent on estimates for future sales, operating income,
working capital changes, and capital expenditures, as well as, expected growth
rates for cash flows and long-term interest rates, all of which are impacted
by
economic conditions related to our industry as well as conditions in the U.S.
capital markets.
As
result
of classifying our Industrial Segment as discontinued operations in 2007, we
performed internal financial valuations on the intangible assets of the
Industrial Segment as a whole based on the LOIs and offers received to test
for
impairment as required by SFAS 142. We concluded that no intangible impairments
existed as of December 31, 2007.
Property
and Equipment
Property
and equipment expenditures are capitalized and depreciated using the
straight-line method over the estimated useful lives of the assets for financial
statement purposes, while accelerated depreciation methods are principally
used
for income tax purposes. Generally, annual depreciation rates range from ten
to
forty years for buildings (including improvements and asset retirement costs)
and three to seven years for office furniture and equipment, vehicles, and
decontamination and processing equipment. Leasehold improvements are capitalized
and amortized over the lesser of the term of the lease or the life of the asset.
Maintenance and repairs are charged directly to expense as incurred. The cost
and accumulated depreciation of assets sold or retired are removed from the
respective accounts, and any gain or loss from sale or retirement is recognized
in the accompanying consolidated statements of operations.
In
accordance with Statement 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”, long-lived assets, such as property, plant and equipment,
and purchased intangible assets subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized in the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposal group classified as held
for sale would be presented separately in the
appropriate
asset and liability sections of the balance sheet. As result of the approved
divestiture of our Industrial Segment by our Board of Directors and the
subsequent letters of intent entered and prospective interests received, we
performed updated 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”.
Our analysis included the comparison of the offered sale price less cost to
sell
to the carrying value of the investment under each LOI separately in the
Industrial Segment. Based on our analysis, we concluded that the carrying value
of the tangible assets for Perma-Fix Dayton, Inc., Perma-Fix of Treatment
Services, Inc., Perma-Fix of Orlando, Inc., and Perma-Fix of South Georgia,
Inc.
facilities exceeded its fair value, less cost to sell. Consequently, we recorded
$2,727,000, $1,804,000, $507,000 and $1,329,000, respectively, in tangible
asset
impairment loss for each of the facilities, which are included in “loss from
discontinued operations, net of taxes” on our Consolidated Statements of
Operations for the year ended December 31, 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
2.77%, 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 within our discontinued
operations. The current and long-term accrual amounts for the projects are
our
best estimates based on proposed or approved processes for clean-up. It is
contemplated that the remediation project at PFSG will be assumed by the buyer
of the facility if the proposed sale of the facility is completed. The
circumstances that could affect the outcome range from new technologies that
are
being developed every day to reduce our overall costs, to increased
contamination levels that could arise as we complete remediation which could
increase our costs, neither of which we anticipate at this time. In addition,
significant changes in regulations could adversely or favorably affect our
costs
to remediate existing sites or potential future sites, which cannot be
reasonably quantified. Our environmental liabilities also include $391,000
in
accrued long-term environmental liability for our Maryland facility acquired
in
March 2004. As previously discussed, we sold substantially all of the assets
of
the Maryland facility during the first part of 2008. In connection with this
sale, the buyer agreed to assume all obligations and liabilities for
environmental conditions at the Maryland facility except for fines, assessments,
or judgments to governmental authorities prior to the closing of the transaction
or third party tort claims existing prior to the closing of the sale.
Disposal/Transportation
Costs.
We
accrue for waste disposal based upon a physical count of the total waste at
each
facility at the end of each accounting period. Current market prices for
transportation and disposal costs are applied to the end of period waste
inventories to calculate the disposal accrual. Costs are calculated using
current costs for disposal, but economic trends could materially affect our
actual costs for disposal. As there are limited disposal sites available to
us,
a change in the number of available sites or an increase or decrease in demand
for the existing disposal areas could significantly affect the actual disposal
costs either positively or negatively.
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 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.
Pursuant
to the adoption of SFAS 123R, we recorded stock-based compensation expense
for
the director stock options granted prior to, but not yet vested, as of
January 1, 2006, using the fair value method required under SFAS 123R.
For the employee stock option grants on March 2, 2006 and May 15, 2006, and
the
director stock option grant on July 27, 2006 and August 2, 2007, 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 vesting period. As SFAS 123R
requires that stock-based compensation expense be based on options that are
ultimately expected to vest, stock-based compensation for the March 2, 2006
grant has been reduced for estimated forfeitures at a rate of 8.5% for the
second year of vesting. We estimated forfeiture rate of 5.7% for the first
year
of vesting on the March 2, 2006 grant, however, our actual rate of forfeiture
was approximately 1.7%, resulting in employee option expense of approximately
$30,000. We estimated 0% forfeiture rate for our March 15, 2006 employee option
grant and director
stock option grants of July 27, 2006 and August 2, 2007.
When
estimating forfeitures, we considered trends of actual option
forfeitures.
We
calculated a fair value of $0.868 for each March 2, 2006 option grant on the
date of grant using the Black-Scholes option pricing model with the following
assumptions:
no
dividend yield; an expected life of four years; expected volatility of 54.0%;
and a risk free interest rate of 4.70%. We calculated a fair value of $0.877
for
the May 15, 2006 option grant on the date of grant with the following
assumptions: no dividend yield; an expected life of four years; an expected
volatility of 54.6%; and a risk-free interest rate of 5.03%. No employee options
were granted 2005. We calculated a fair value of $1.742 for each July 27, 2006
director option grant on the date of the grant with the following assumptions:
no dividend yield; an expected life of ten years; an expected volatility of
73.31%; and a risk free interest rate of 4.98%. For
the
director option grant of August 2, 2007, we calculated a fair value of $2.30
for
each option grant with the following assumptions using the Black-Scholes option
pricing model: no dividend yield; an expected life of ten years; an expected
volatility of 67.60%; and a risk free interest rate of 4.77%.
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.
FIN
48
In
July
2006, the FASB issued FIN 48, Accounting
for Uncertainty in Income Taxes,
which
attempts to set out a consistent framework for preparers to use to determine
the
appropriate level of tax reserve to maintain for uncertain tax positions. This
interpretation of FASB Statement No. 109 uses a two-step approach wherein a
tax
benefit is recognized if a position is more-likely-than-not to be sustained.
The
amount of the benefit is then measured to be the highest tax benefit which
is
greater than 50% likely to be realized. FIN 48 also sets out disclosure
requirements to enhance transparency of an entity’s tax reserves. The Company
adopted this Interpretation as of January 1, 2007. The adoption of FIN 48 did
not have a material impact on our financial statements.
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 government budgets are still being finalized,
planning for the new year is occurring and we enter the holiday season. Since
2005, due to our efforts to work with the various government customers to smooth
these shipments more evenly throughout the year, we have seen smaller
fluctuation in the quarters. In 2007, the US Congress did not pass the fiscal
year 2007 budget which resulted in no increase of funding to DOE from the
previous years 2006 budget allocation. This resulted in a decrease of the start
up of new projects; however, we continued to see shipments at expected levels
as
compared to 2006. The 2008 budget was signed by the President in December 2007
which provides funding for the start of new projects in 2008. We do not
anticipate big fluctuations within 2008 even with the passing of the 2008
budget; however, we cannot provide assurance this will be the case. 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.
Our
revenues are principally derived from numerous and varied customers. However,
we
have a significant relationship with the federal government, and have continued
to enter into contracts with (directly or indirectly as a subcontractor) the
federal government. The contracts that we are a party to with the federal
government or with others as a subcontractor to the federal government generally
provide that the government may terminate on 30 days notice or renegotiate
the
contracts, at the government's election. Our inability to continue under
existing contracts that we have with the federal government (directly or
indirectly as a subcontractor) could have a material adverse effect on our
operations and financial condition.
We
performed services relating to waste generated by the federal government, either
directly or indirectly as a subcontractor (including LATA/Parallax, Bechtel
Jacobs, and Fluor Hanford as discussed below) to the federal government,
representing approximately $30,000,000 (includes approximately $5,568,000 from
PFNWR facility) or 55.5% of our total revenue from continuing operations during
2007, as compared to $33,226,000 or 63.0% of our total revenue from continuing
operations during 2006, and $29,555,000 or 59.0% of our total revenue from
continuing operations during 2005.
Included
in the amounts discussed above, are revenues from LATA/Parallax Portsmouth
LLC
(“LATA/Parallax”). LATA/Parallax is a manager for environmental programs for
various agencies of the
federal
government. Our revenues from LATA/Parallax, as a subcontractor to perform
remediation services at certain federal sites, contributed $8,784,000 or 16.2%
and $10,341,000 or 19.6% of our revenues from continuing operations for 2007
and
2006, respectively. Our contract with LATA/Parallax is expected to be completed
in September 2008. As with most 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.
Our
Nuclear Segment has had a significant relationship with Bechtel Jacobs Company,
LLC. (“Bechtel Jacobs”). Bechtel Jacobs is the government-appointed manager of
the environmental program for Oak Ridge, Tennessee to perform certain treatment
and disposal services relating to Oak Ridge, and our Nuclear Segment has been
awarded three subcontracts by Bechtel Jacobs to perform certain environmental
services at DOE’s Oak Ridge, Tennessee sites. Two of our Oak Ridge contracts
have been amended for pricing modifications in 2007 and have been extended
through September 2009. Our revenues from Bechtel Jacobs have continued to
decrease as the DOE site in Oak Ridge continues to complete certain of its
clean-up milestones and moves toward completing its closure efforts. As with
most such blanket processing agreements, the Oak Ridge contracts contain no
minimum or maximum processing guarantees, and may be terminated at any time
pursuant to federal contracting terms and conditions. The Nuclear Segment
continues to pursue other similar or related services for environmental programs
at other DOE and government sites. Consolidated revenues from Bechtel Jacobs
for
2007 total $1,812,000 or 3.3% of total revenues from continuing operations,
as
compared to $6,705,000 or 12.6% for the year ended December 31, 2006 and
$14,940,000 or 29.8% for the year ended December 31, 2005.
Our
Nuclear Segment has provided treatment of mixed low-level waste, as a
subcontractor, for Fluor Hanford since 2004. However, with the acquisition
of
our PFNWR facility, we now have a significant relationship with Fluor Hanford,
a
prime contractor to the DOE since 1996. Fluor Hanford manages several major
activities at the DOE’s Hanford Site, including dismantling former nuclear
processing facilities, monitoring and cleaning up the site’s contaminated
groundwater, and retrieving and processing transuranic waste for off-site
shipment. The Hanford site is one of DOE’s largest nuclear weapon environmental
remediation projects. Our PFNWR facility is located adjacent to the Hanford
site
and provides treatment of low level radioactive and mixed wastes. We currently
have three contracts with Fluor Hanford at our PFNWR facility, with the initial
contract dating back to 2003. These three contracts have since been extended
to
September 2008. As the DOE is currently in the process of re-bidding its
contracts with current prime contractors, our future revenue beyond September
2008 from Fluor Hanford is uncertain at this time. Revenues from Fluor Hanford
totaled $6,985,000 (approximately $3,100,000 from PFNWR) or 12.9%, $1,229,000
or
2.3%, and $1,732,000 or 3.5% of consolidated revenue for the year ended December
31, 2007, 2006, and 2005, respectively. As with most contracts relating to
the
federal government, Fluor Hanford can terminate the contracts 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 downturn in the economy and changes within the
environmental insurance market, we have no guarantee that we will be able to
obtain similar insurance in future years, or that the cost of such insurance
will not increase materially.
Environmental
Contingencies
We
are
engaged in the waste management services segment of the pollution control
industry. As a participant in the on-site treatment, storage and disposal market
and the off-site treatment and services market, we are subject to rigorous
federal, state and local regulations. These regulations mandate strict
compliance and therefore are a cost and concern to us. Because of their integral
role in providing quality environmental services, we make every reasonable
attempt to maintain complete compliance with these
regulations;
however, even with a diligent commitment, we, along with many of our
competitors, may be required to pay fines for violations or investigate and
potentially remediate our waste management facilities.
We
routinely use third party disposal companies, who ultimately destroy or secure
landfill residual materials generated at our facilities or at a client's site.
We, compared to certain of our competitors, dispose of significantly less
hazardous or industrial by-products from our operations due to rendering
material non-hazardous, discharging treated wastewaters to publicly-owned
treatment works and/or processing wastes into saleable products. In the past,
numerous third party disposal sites have improperly managed wastes and
consequently require remedial action; consequently, any party utilizing these
sites may be liable for some or all of the remedial costs. Despite our
aggressive compliance and auditing procedures for disposal of wastes, we could
further be notified, in the future, that we are a PRP at a remedial action
site,
which could have a material adverse effect.
We
have
budgeted for 2008, $1,168,000 in environmental remediation expenditures to
comply with federal, state and local regulations in connection with remediation
of certain contaminates at our facilities. As previously discussed under
“Business — Capital Spending, Certain Environmental Expenditures and Potential
Environmental Liabilities,” 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
December 31, 2007, we had total accrued environmental remediation liabilities
of
$2,873,000 of which $1,168,000 is recorded as a current liability, which
reflects a decrease of $405,000 from the December 31, 2006, balance of
$3,278,000. The decrease represents payments on remediation projects, increase
in our reserve in PFSG and decrease in our reserves at PFM and PFMI due to
reevaluation of our remediation estimates. As previously discussed, we sold
substantially all of the assets of the Maryland facility during the first part
of 2008. In connection with this sale, the buyer agreed to assume all
obligations and liabilities for environmental conditions at the Maryland
facility except for fines, assessments, or judgments to governmental authorities
prior to the closing of the transaction or third party tort claims existing
prior to the closing of the sale. The December 31, 2007, current and long-term
accrued environmental balance is recorded as follows:
|
|
Current
Accrual
|
|
Long-term
Accrual
|
|
Total
|
|
PFD
|
|
$
|
285,000
|
|
$
|
417,000
|
|
$
|
702,000
|
|
PFM
|
|
|
225,000
|
|
|
251,000
|
|
|
476,000
|
|
PFSG
|
|
|
250,000
|
|
|
454,000
|
|
|
704,000
|
|
PFTS
|
|
|
7,000
|
|
|
30,000
|
|
|
37,000
|
|
PFMD
|
|
|
—
|
|
|
391,000
|
|
|
391,000
|
|
PFMI
|
|
|
401,000
|
|
|
162,000
|
|
|
563,000
|
|
Total
Liability
|
|
$
|
1,168,000
|
|
$
|
1,705,000
|
|
$
|
2,873,000
|
|
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements”. SFAS 157
simplifies and codifies guidance on fair value measurements under generally
accepted accounting principles. This standard defines fair value, establishes
a
framework for measuring fair value and prescribes expanded disclosures about
fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years, with early adoption
permitted.
We are currently evaluating the effect, if any, the adoption of SFAS 157 will
have on our financial condition, results of operations and cash flows; however,
we do not expect the adoption of SFAS No. 157 to have a material impact on
our
financial position or results of operations.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities”. SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunities to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex
hedge
accounting provisions. SFAS 159 is expected to expand the use of fair value
measurement, which is consistent with the Board’s long-term measurement
objectives for accounting financial instruments. SFAS 159 is effective as of
the
beginning of an entity’s first fiscal year that begins after November, 15, 2007.
We are currently evaluating the effect, if any, the adoption of SFAS 159 will
have on our financial condition, results of operations and cash flow; however,
we do not expect the adoption of SFAS 159 to have a material impact on our
financial position or results of operations.
In
December 2007, the FASB issued SFAS No. 141R, Business
Combinations.
SFAS
No. 141R establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in
the
acquiree. The statement also provides guidance for recognizing and measuring
the
goodwill acquired in the business combination and determines what information
to
disclose to enable users of the financial statements to evaluate the nature
and
financial effects of the business combination. SFAS No. 141R is effective for
financial statements issued for fiscal years beginning after December 15, 2008.
Accordingly, any business combinations the Company engages in will be recorded
and disclosed following existing GAAP until December 31, 2008. The Company
expects SFAS No. 141R will have an impact on its consolidated financial
statements when effective, but the nature and magnitude of the specific effects
will depend upon the nature, terms and size of acquisitions it consummates
after
the effect date. The Company is still assessing the impact of this standard
on
its future consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB
51.
SFAS
No. 160 changes the accounting and reporting for minority interest. Minority
interest will be recharacterized as noncontrolling interest and will be reported
as a component of equity separate from the parent’s equity, and purchases or
sales of equity interest that do not result in a change in control will be
accounted for as equity transactions. In addition, net income attributable
to
the noncontrolling interest will be included in consolidated net income on
the
face of the income statement and upon a loss of control, the interest sold,
as
well as any interest retained, will be recorded at fair value with any gain
or
loss recognized in earnings. SFAS No. 160 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim period
within those fiscal years, except for the presentation and disclosure
requirements, which will apply retrospectively. This standard is not expected
to
have a material impact on the Company’s future consolidated financial
statements.
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
In
the
year 2007, we were 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 and variable rate promissory note
agreement with KeyBank National Association. The
interest rates payable to PNC and KeyBank National Association 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
$99,000
for the year ended December 31, 2007. As of December 31, 2007, we had no
interest swap agreements outstanding.
SPECIAL
NOTE REGARDING 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,
·
|
ability
or inability to continue and improve operations and achieve profitability
on an annualized basis;
|
·
|
ability
to comply with our general working capital
requirements;
|
·
|
ability
to retain or receive certain permits, licenses, or
patents;
|
·
|
ability
to renew permits and licenses with minimal effort and
costs;
|
·
|
ability
to be able to continue to borrow under our revolving line of
credit;
|
·
|
ability
to meet our fixed charge coverage ratio in the future;
|
·
|
in
the event that we are unable to meet our fixed charge coverage ration
in
the future and we are unable to obtain a waiver for this non-compliance,
our lender could accelerate the repayment of borrowing under our
credit
facility;
|
·
|
we
may not have sufficient liquidity to repay our debt under our credit
facilities and other indebtedness in the event that our lender accelerates
the repayment of borrowings under our credit facility;
|
·
|
ability
to generate sufficient cash flow from operations to fund all costs
of
operations;
|
·
|
ability
to close and remediate certain contaminated sites for projected
amounts;
|
·
|
our
ability to develop or adopt new and existing technologies in the
conduct
of our operations;
|
·
|
ability
to fund budgeted capital expenditures during 2008 through our operations
and lease financing;
|
·
|
we
are working toward permitting our DSSI facility for PCB destruction.
The
permit is expected by mid year 2008;
|
·
|
we
believe that there are no formidable barriers to entry into certain
of the
on-site treatment businesses, and certain of the non-hazardous waste
operations, which do not require such permits;
|
·
|
we
believe that we are able to compete in the market based on our established
reputation in these market areas and our expertise in several specific
elements of environmental engineering and consulting such as environmental
applications in the cement industry;
|
·
|
we
believe we maintain insurance coverage adequate for our needs and
similar
to, or greater than the coverage maintained by other companies of
our size
in the industry;
|
·
|
under
our insurance contracts, we usually accept self-insured retentions,
which
we believe is appropriate for our specific business
risks;
|
·
|
although
we believe that we are currently in substantial compliance with applicable
laws and regulations, we could be subject to fines, penalties or
other
liabilities or could be adversely affected by existing or subsequently
enacted laws or regulations;
|
·
|
due
to the downturn in the economy and changes within the environmental
insurance market, we have no guarantee that we will be able to obtain
similar insurance in future years, or that the cost of such insurance
will
not increase materially;
|
·
|
our
inability to continue under existing contracts that we have with
the
federal government (directly or indirectly as a subcontractor) could
have
a material adverse effect on our operations and financial
condition;
|
·
|
as
with most contracts relating to the federal government, LATA/Parallax
and/or Fluor Hanford can terminate the contract with us at any time
for
convenience, which could have a material adverse effect on our
operations;
|
·
|
Our
contract with LATA/Parallax is expected to be completed in September
2008;
|
·
|
we
believe that at least one third of DOE mixed waste contains organic
components;
|
·
|
if
EnergySolutions should refuse to accept our waste or cease operations
at
its Clive, Utah facility, such would have a material adverse effect
on
us;
|
·
|
we
do not anticipate big fluctuations in our government receipts within
2008
even with the passing of the 2008 budget; however, we cannot provide
assurance this will be the case;
|
·
|
we
believe that the range of waste management and environmental consulting,
treatment, processing, and remediation services we provide affords
us a
competitive advantage with respect to certain of our more specialized
competitors;
|
·
|
we
believe that the treatment processes we utilize offer a cost saving
alternative to more traditional remediation and disposal methods
offered
by certain of our competitors;
|
·
|
we
currently have interested parties and are negotiating to sell certain
facilities within our Industrial Segment, and we believe the material
weakness will inherently be remediated;
|
·
|
no
further impairment to intangible assets;
|
·
|
no
expectation of material future inflationary changes;
|
·
|
waste
backlog will continue to fluctuate in 2008 depending on the complexity
of
waste streams and the timing of receipts and processing
materials;
|
·
|
the
high levels of backlog material continue to position the segment
well for
increases in future processing revenue prospective;
|
·
|
we
do not believe we are dependent on any particular trademark in order
to
operate our business or any significant segment
thereof;
|
·
|
based
on the current status of Corrective Action for the PFMI facility,
we
believe that the remaining reserve is adequate to cover the
liability;
|
·
|
despite
our aggressive compliance and auditing procedure for disposal of
wastes,
we could further be notified, in the future, that we are a PRP at
a
remedial action site, which could have a material adverse
effect;
|
·
|
with
the impending divestiture of our Industrial Segment, we anticipate
the
environmental liabilities for all the facilities 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;
|
·
|
we
do not believe that any adverse changes to our estimates in environmental
accrual would be material;
|
·
|
we
anticipate receiving the remaining reimbursement from our insurer
by the
end of the second quarter of 2008;
|