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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _______________________
to ____________________
Commission File No. 111596
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-1954497
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
1940 N.W. 67th Place, Gainesville, FL 32653
(Address of principal executive offices) (Zip Code)
(352) 373-4200
(Registrant's telephone number)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No ___
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act).
Yes |X| No ___
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the close of the latest practical date.
Class Outstanding at August 11, 2003
----- ------------------------------
Common Stock, $.001 Par Value 34,799,254
(excluding 988,000 shares
held as treasury stock)
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PERMA-FIX ENVIRONMENTAL SERVICES, INC.
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2003 and December 31, 2002..............2
Consolidated Statements of Operations -
Three and Six Months Ended June 30, 2003
and 2002.........................................4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2003 and 2002..........5
Consolidated Statements of Stockholders' Equity -
Six Months Ended June 30, 2003...................6
Notes to Consolidated Financial Statements................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations...................................16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk...............................30
Item 4. Controls and Procedures..................................31
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................32
Item 5. Other Information........................................32
Item 6. Exhibits and Reports on Form 8-K.........................32
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
PART I, ITEM 1
The consolidated financial statements included herein have been prepared by the
Company (which may be referred to as we, us or our), without an audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes the disclosures which are made are adequate to make the
information presented not misleading. Further, the consolidated financial
statements reflect, in the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position and results of operations as of and for the periods indicated.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2002.
The results of operations for the six months ended June 30, 2003, are not
necessarily indicative of results to be expected for the fiscal year ending
December 31, 2003.
-1-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
2003 December 31,
(Amounts in Thousands, Except for Share Amounts) (Unaudited) 2002
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 50 $ 212
Restricted cash 20 20
Accounts receivable, net of allowance for
doubtful accounts of $1,257 and $1,212 20,964 21,820
Inventories 801 682
Prepaid expenses 2,317 2,722
Other receivables 364 113
--------- ---------
Total current assets 24,516 25,569
Property and equipment:
Buildings and land 20,901 16,161
Equipment 32,306 29,125
Vehicles 2,701 2,616
Leasehold improvements 11,057 10,963
Office furniture and equipment 2,070 1,954
Construction-in-progress 2,710 4,325
--------- ---------
71,745 65,144
Less accumulated depreciation and amortization (17,576) (15,219)
--------- ---------
Net property and equipment 54,169 49,925
Intangibles and other assets:
Permits, net 16,633 20,759
Goodwill, net 6,216 6,525
Finite Risk Sinking Fund 1,234 --
Other assets 4,455 3,047
--------- ---------
Total assets $ 107,223 $ 105,825
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
-2-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
June 30,
2003 December 31,
(Amounts in Thousands, Except for Share Amounts) (Unaudited) 2002
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,525 $ 9,759
Current environmental accrual 576 982
Accrued expenses 11,197 10,724
Current portion of long-term debt 3,530 3,373
-------- --------
Total current liabilities 25,828 24,838
Environmental accruals 1,714 1,714
Accrued closure costs 4,925 4,929
Other long-term liabilities 1,491 1,332
Long-term debt, less current portion 28,382 27,142
-------- --------
Total long-term liabilities 36,512 35,117
-------- --------
Total liabilities 62,340 59,955
Commitments and Contingencies (see Note 5) -- --
Preferred Stock of subsidiary, $1.00 par value;
1,467,396 shares authorized, 1,284,730
shares issued and outstanding, liquidation
value $1.00 per share 1,285 1,285
Stockholders' equity:
Preferred Stock, $.001 par value; 2,000,000
shares authorized, 2,500 shares issued and
outstanding -- --
Common Stock, $.001 par value; 75,000,000 shares
authorized, 35,787,254 and 35,326,734 shares
issued, including 988,000 shares held as
treasury stock, respectively 36 35
Additional paid-in capital 67,470 66,799
Accumulated deficit (21,854) (20,172)
Interest rate swap (192) (215)
-------- --------
45,460 46,447
Less Common Stock in treasury at cost;
988,000 shares (1,862) (1,862)
-------- --------
Total stockholders' equity 43,598 44,585
-------- --------
Total liabilities and stockholders' equity $107,223 $105,825
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
-3-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
(Amounts in Thousands, Except for Per Share Amounts) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------
Net revenues $ 19,909 $ 22,485 $ 39,427 $ 38,936
Cost of goods sold 15,391 14,536 29,848 27,847
-------- -------- -------- --------
Gross profit 4,518 7,949 9,579 11,089
Selling, general and administrative expenses 4,786 4,120 9,166 8,275
-------- -------- -------- --------
Income (loss) from operations (268) 3,829 413 2,814
Other income (expense):
Interest income 3 4 5 9
Interest expense (691) (722) (1,393) (1,427)
Interest expense-financing fees (257) (260) (558) (517)
Other 10 (54) (55) (81)
-------- -------- -------- --------
Net income (loss) (1,203) 2,797 (1,588) 798
Preferred Stock dividends (48) (32) (94) (63)
-------- -------- -------- --------
Net income (loss) applicable to Common Stock $ (1,251) $ 2,765 $ (1,682) $ 735
======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------
Net income (loss) per common share:
Basic $ (.04) $ .08 $ (.05) $ .02
======== ======== ======== ========
Diluted $ (.04) $ .06 $ (.05) $ .02
======== ======== ======== ========
Number of shares and potential common shares
used in net income (loss) per common share:
Basic 34,798 34,210 34,702 34,134
======== ======== ======== ========
Diluted 34,798 43,556 34,702 43,216
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
-4-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
(Amounts in Thousands) -------------------
2003 2002
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $(1,588) $ 798
Adjustments to reconcile net income (loss)
to cash provided by (used in) operations:
Depreciation and amortization 2,379 2,076
Provision for bad debt and other reserves 82 91
(Gain) Loss on sale of plant, property and equipment (1) 3
Changes in assets and liabilities:
Accounts receivable 774 (761)
Prepaid expenses, inventories and other assets (1,932) (364)
Accounts payable and accrued expenses 1,596 1,904
------- -------
Net cash provided by operations 1,310 3,747
------- -------
Cash flows from investing activities:
Purchases of property and equipment, net (1,337) (2,616)
Proceeds from sale of plant, property and equipment 1 --
Change in restricted cash, net (2) (3)
Change in finite risk sinking fund (1,234) --
------- -------
Net cash used in investing activities (2,572) (2,619)
------- -------
Cash flows from financing activities:
Net borrowings (repayments) of revolving loan
and term note facility 1,678 (1,292)
Principal repayments of long-term debt (1,169) (1,024)
Proceeds from issuance of stock 591 418
------- -------
Net cash provided by (used in)
financing activities 1,100 (1,898)
------- -------
Decrease in cash
(162) (770)
Cash at beginning of period 212 860
------- -------
Cash at end of period $ 50 $ 90
======= =======
Supplemental disclosure:
Interest paid $ 1,051 $ 1,232
Non-cash investing and financing activities:
Issuance of Common Stock for services 17 23
Issuance of Common Stock for payment of dividends 63 63
Gain (Loss) on interest rate swap 23 (9)
Long-term debt incurred for purchase of
property and equipment 726 414
The accompanying notes are an integral part of these consolidated
financial statements.
-5-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, for the six months ended June 30, 2003)
Common
Preferred Stock Common Stock Additional Stock Total
(Amounts in thousands, --------------- --------------- Paid-In Accumulated Interest Held In Stockholders'
except for share amounts) Shares Amount Shares Amount Capital Deficit Rate Swap Treasury Equity
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 2,500 $ -- 35,326,734 $ 35 $ 66,799 $(20,172) $ (215) $ (1,862) $ 44,585
Comprehensive loss:
Net loss -- -- -- -- -- (1,588) -- -- (1,588)
Other Comprehensive
loss:
Gain on interest
rate swap -- -- -- -- -- -- 23 -- 23
--------
Comprehensive loss (1,565)
Preferred Stock dividends -- -- -- -- -- (94) -- -- (94)
Issuance of Common Stock for
Preferred Stock dividend -- -- 25,165 -- 63 -- -- -- 63
Issuance of stock for cash and
services -- -- 435,355 1 608 -- -- -- 609
----- ----- ---------- ---- -------- -------- ------ --------- --------
Balance at June 30, 2003 2,500 $ -- 35,787,254 $ 36 $ 67,470 $(21,854) $ (192) $ (1,862) $ 43,598
===== ===== ========== ==== ======== ======== ====== ========= ========
The accompanying notes are an integral part of these consolidated
financial statements.
-6-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
Reference is made herein to the notes to consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2002.
1. Summary of Significant Accounting Policies
Our accounting policies are as set forth in the notes to consolidated financial
statements referred to above.
Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends SFAS No. 133 to
provide clarification on the financial accounting and reporting of derivative
instruments and hedging activities and requires that contracts with similar
characteristics be accounted for on a comparable basis. The provisions of SFAS
149 are effective for contracts entered into or modified after June 30, 2003,
and for hedging relationships designated after June 30, 2003. The adoption of
SFAS No. 149 is not expected to have an impact on the Company's consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
The adoption of SFAS did not have an impact on the Company's consolidated
financial statements.
Stock-Based Compensation
The Company accounts for, and plans to continue accounting for, its stock-based
employee compensation plans under the accounting provisions of APB Opinion 25,
Accounting for Stock Issued to Employees, and has furnished the pro forma
disclosures required under Statement of Financial Accounting Standards ("SFAS")
123, Accounting for Stock-Based Compensation, and SFAS 148, Accounting for
Stock-Based Compensation - Transition and Disclosure.
SFAS 123 requires us to provide pro forma information regarding net income and
earnings per share as if compensation cost for our employee and director stock
options had been determined in accordance with the fair market value-based
method prescribed in SFAS 123. We estimate the fair value of each stock option
at the grant date by using the Black-Scholes option-pricing model.
Under the accounting provisions of SFAS 123, our net income (loss) and net
income (loss) per share would have been reduced to the pro forma amounts
indicated below (in thousands except for per share amounts):
-7-
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
2003 2002 2003 2002
--------------------------------------------
Net income (loss) applicable to Common Stock, as reported $ (1,251) $ 2,765 $ (1,682) $ 735
Deduct: Total Stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects (107) (77) (184) (145)
-------- ------- -------- ------
Pro forma net income (loss) applicable to Common Stock $ (1,358) $ 2,688 $ (1,866) $ 590
======== ======= ======== ======
Earnings per share:
Basic - as reported $ (.04) $ .08 $ (.05) $ .02
======== ======= ======== ======
Basic - pro-forma $ (.04) $ .08 $ (.05) $ .02
======== ======= ======== ======
Diluted - as reported $ (.04) $ .06 $ (.05) $ .02
======== ======= ======== ======
Diluted - pro-forma $ (.04) $ .06 $ (.05) $ .01
======== ======= ======== ======
2. Recently Adopted Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 143,
Accounting for Asset Retirement Obligations, which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and normal use of the asset.
SFAS 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made, and that the associated asset retirement
costs be capitalized as part of the carrying amount of the long-lived asset. In
conjunction with the state mandated permit and licensing requirements, the
Company is obligated to determine its best estimate of the cost to close, at
some undetermined future date, its permitted and/or licensed facilities. The
Company recorded this liability at the date of acquisition, with its offsetting
entry being to goodwill and/or permits and has subsequently increased this
liability as a result of changes to the facility and/or for inflation. The
Company's current accrued closure costs reflect the current fair value of the
cost of asset retirement. The Company adopted SFAS 143 as of January 1, 2003,
and pursuant to the adoption the Company reclassified from goodwill and permits
approximately $4,559,000, which represents the fair value of the Company's
closing costs as recorded to goodwill or permits at the time each facility was
acquired, into an asset retirement obligations account. The asset retirement
obligation account is recorded as property and equipment (buildings). The
Company will depreciate the asset retirement obligation on a straight-line basis
over a period of 50 years. The new standard did not have a material impact on
net income in the first six months of 2003, nor would it have had a material
impact in the first six months of 2002 assuming an adoption of this accounting
standard on a pro forma basis.
3. Earnings Per Share
Basic EPS is based on the weighted average number of shares of Common Stock
outstanding during the period. Diluted EPS includes the dilutive effect of
potential common shares. Diluted loss per share for the three and six months
ended June 30, 2003, does not include potential common shares as their effect
would be anti-dilutive.
-8-
The following is a reconciliation of basic net income (loss) per share and
diluted net income (loss) per share for the three and six months ended June 30,
2003 and 2002.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
(Amounts in thousands except per share amounts) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------
Net income (loss) applicable to Common Stock - basic $(1,251) $ 2,765 $ (1,682) $ 735
Effect of dilutive securities - Preferred Stock dividends -- 32 -- 63
------- ------- -------- -------
Net income (loss) applicable to Common Stock - diluted $(1,251) $ 2,797 $ (1,682) $ 798
======= ======= ======== =======
Basic net income (loss) per share $ (.04) $ .08 $ (.05) $ .02
======= ======= ======== =======
Diluted net income (loss) per share $ (.04) $ .06 $ (.05) $ .02
======= ======= ======== =======
Weighted average shares outstanding - basic 34,798 34,210 34,702 34,134
Potential shares exercisable under stock option plans -- 1,237 -- 1,197
Potential shares upon exercise of Warrants -- 6,442 -- 6,218
Potential shares upon conversion of Preferred Stock -- 1,667 -- 1,667
------- ------- -------- -------
Weighted average shares outstanding - diluted 34,798 43,556 34,702 43,216
======= ======= ======== =======
- ---------------------------------------------------------------------------------------------------
Potential shares excluded from above weighted
average share calculations due to
their anti-dilutive effect include:
Upon exercise of Options 3,682 42 3,682 172
Upon exercise of Warrants 12,893 -- 12,893 --
Upon conversion of Preferred Stock 1,667 -- 1,667 --
-9-
4. Long Term Debt
Long-term debt consists of the following at June 30, 2003, and December 31,
2002:
June 30,
2003 December 31,
(Amounts in Thousands) (Unaudited) 2002
- ----------------------------------------------------------------------------------------------------------------------
Revolving Credit facility dated December 22, 2000, borrowings based upon
eligible accounts receivable, subject to monthly borrowing base
calculation, variable interest paid monthly at prime rate plus 1%
(5.00% at June 30, 2003), balance due in December 2005. $ 10,920 $ 8,742
Term Loan dated December 22, 2000, payable in equal monthly installments
of principal of $83, balance due in December 2005, variable interest
paid monthly at prime rate plus 1 1/2% (5.50% at June 30, 2003). 4,583 5,083
Three promissory notes dated May 27, 1999, payable in equal monthly
installments of principal and interest of $90 over 60 months, due
June 2004, interest at 7.0%. 1,043 1,538
Unsecured promissory note dated August 31, 2000, payable in lump
sum in August 2005, interest paid annually at 7.0%. 3,500 3,500
Senior subordinated notes dated July 31, 2001, payable in lump sum on July
31, 2006, interest payable quarterly at an annual interest rate of
13.5%, net of unamortized debt discount of $1,000. 4,625 4,462
Promissory note dated June 25, 2001, payable in semiannual installments on
June 30 and December 31 through December 31, 2008, variable interest
accrues at the applicable law rate determined under the IRS Code
Section (8.0% on June 30, 2003) and is payable in one lump sum at the
end of installment period. 3,474 3,594
Installment agreement dated June 25, 2001, payable in semiannual
installments on June 30 and December 31 through December 31, 2008,
variable interest accrues at the applicable law rate determined under
the IRS Code Section (8.0% on June 30, 2003) and is payable in one
lump sum at the end of installment period. 863 893
Various capital lease and promissory note obligations, payable
2003 to 2008, interest at rates ranging from 5.2% to 17.9%. 2,904 2,703
--------- --------
31,912 30,515
Less current portion of long-term debt 3,530 3,373
--------- --------
$ 28,382 $ 27,142
========= ========
-10-
Revolving Credit and Term Loan
On December 22, 2000, the company 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 provides for a term loan ("Term Loan") in the amount
of $7,000,000, which requires principal repayments based upon a seven-year
amortization, payable over five years, with monthly installments of $83,000 and
the remaining unpaid principal balance due on December 22, 2005. Payments
commenced on February 1, 2001. The Agreement also provided for a revolving line
of credit ("Revolving Credit") with a maximum principal amount outstanding at
any one time of $15,000,000. 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 Agent reasonably deems proper and necessary. The Revolving Credit
advances shall be due and payable in full on December 22, 2005. As of June 30,
2003, our excess availability under our revolving credit facility was $4,243,000
based on our eligible receivables.
Pursuant to the Agreement the Term Loan bears interest at a floating rate equal
to the prime rate plus 1 1/2 %, and the Revolving Credit at a floating rate
equal to the prime rate plus 1%. The loans are subject to a prepayment fee of 1
1/2 % in the first year, 1% in the second and third years and 3/4 % after the
third anniversary until termination date.
In December 2000, the Company entered into an interest rate swap agreement
related to its Term Loan. This hedge, has effectively fixed the interest rate on
the notional amount of $3,500,000 of the floating rate $7,000,000 PNC Term Loan.
The Company will pay the counterparty interest at a fixed rate equal to the base
rate of 6.25%, for a period from December 22, 2000, through December 22, 2005,
in exchange for the counterparty paying the Company one-month LIBOR rate for the
same term (1.12% at June 30, 2003). At June 30, 2003, the market value of the
interest rate swap was in an unfavorable value position of $192,000 and was
recorded as a liability. During the six months ended June 30, 2003, the Company
recorded a gain on the interest rate swap of $23,000, which offset other
comprehensive loss on the Statement of Stockholders' Equity.
Effective as of June 2002, the Company and PNC entered into Amendment No. 1 to
the Agreement, which, among other things, increased the letter of credit
commitment from $500,000 to $4,500,000 and provided for a $4.0 million standby
letter of credit. The standby Letter of Credit was issued to secure certain
surety bond obligations. As a condition precedent to this Amendment No. 1, the
Company paid a $50,000 amendment fee to PNC.
On May 23, 2003, the Company and PNC entered into Amendment No. 2 to the
Agreement, which among other things reduced the letter of credit commitment from
$4,500,000 to $500,000 and terminated the $4.0 million standby letter of credit.
The standby letter of credit was previously issued to secure certain surety bond
obligations, which provided financial assurance closure guarantees to the
applicable states pursuant to the Company's permits and licenses. The financial
assurance has been satisfied with a newly established 25-year finite risk
insurance policy (see Note 5). This finite risk insurance policy required an
upfront payment of $4.0 million, which was funded through the Revolving Credit
with PNC, utilizing the collateral that previously supported the $4.0 million
letter of credit. As a condition precedent to this Amendment No. 2, the Company
paid a $25,000 amendment fee to PNC.
Three Promissory Notes
Pursuant to the terms of the Stock Purchase Agreements in connection with the
acquisition of Perma-Fix of Orlando, Inc. ("PFO"), Perma-Fix of South Georgia,
Inc. ("PFSG") and Perma-Fix of Michigan, Inc. ("PFMI"), a portion of the
consideration was paid in the form of Promissory Notes, in the aggregate amount
of $4,700,000 payable to the former owners of PFO, PFSG and PFMI. The Promissory
Notes are paid in equal monthly installments of principal and interest of
approximately $90,000 over five years and having an
-11-
interest rate of 5.5% for the first three years and 7% for the remaining two
years. The aggregate outstanding balance of the Promissory Notes total
$1,043,000 at June 30, 2003. Such amount is included in current portion of long
term debt. Payments of such Promissory Notes are guaranteed by PFMI under a
non-recourse guaranty, which non-recourse guaranty is secured by certain real
estate owned by PFMI. These Promissory Notes are subject to subordination
agreements with the Company's senior and subordinated lenders.
Unsecured Promissory Note
On August 31, 2000, as part of the consideration for the purchase of Diversified
Scientific Services, Inc. ("DSSI"), the Company issued to Waste Management
Holdings a long-term unsecured promissory note (the "Unsecured Promissory Note")
in the aggregate principal amount of $3,500,000, bearing interest at a rate of
7% per annum and having a five-year term with interest to be paid annually and
principal due in one lump sum at the end of the term of the Unsecured Promissory
Note (August 2005).
Senior Subordinated Notes
On July 31, 2001, the Company issued approximately $5.6 million of its 13.50%
Senior Subordinated Notes due July 31, 2006 (the "Notes"). The Notes were issued
pursuant to the terms of a Note and Warrant Purchase Agreement dated July 31,
2001 (the "Purchase Agreement"), between the Company, Associated Mezzanine
Investors - PESI, L.P. ("AMI"), and Bridge East Capital, L.P. ("BEC"). The Notes
are unsecured and are unconditionally guaranteed by the subsidiaries of the
Company. The Company's payment obligations under the Notes are subordinate to
the Company's payment obligations to its primary lender and to certain other
debts of the Company up to an aggregate amount of $25 million. The net proceeds
from the sale of the Notes were used to repay the Company's previous short-term
loan.
Under the terms of the Purchase Agreement, the Company also issued to AMI and
BEC Warrants to purchase up to 1,281,731 shares of the Company's Common Stock
("Warrant Shares") at an initial exercise price of $1.50 per share (the
"Warrants"), subject to adjustment under certain conditions which were valued at
$1,622,000 and recorded as a debt discount and are being amortized over the term
of the Notes. The Warrants, as issued, also contain a cashless exercise
provision. The Warrant Shares are registered under an S-3 Registration Statement
that was declared effective on November 27, 2002.
In connection with the sale of the Notes, the Company, AMI, and BEC entered into
an Option Agreement, dated July 31, 2001 (the "Option Agreement"). Pursuant to
the Option Agreement, the Company granted each purchaser an irrevocable option
requiring the Company to purchase any of the Warrants or Warrant Shares then
held by the purchaser (the "Put Option"). The Put Option may be exercised at any
time commencing July 31, 2004, and ending July 31, 2008. In addition, each
purchaser granted to the Company an irrevocable option to purchase all the
Warrants or the Warrant Shares then held by the purchaser (the "Call Option").
The Call Option may be exercised at any time commencing July 31, 2005, and
ending July 31, 2008. The purchase price under the Put Option and the Call
Option is based on the quotient obtained by dividing (a) the sum of six times
the Company's consolidated EBITDA for the period of the 12 most recent
consecutive months minus Net Debt plus the Warrant Proceeds by (b) the Company's
Diluted Shares (as the terms EBITDA, Net Debt, Warrant Proceeds, and Diluted
Shares are defined in the Option Agreement). Pursuant to the guidance under EITF
00-19 on accounting for and financial presentation of securities that could
potentially be settled in a Company's own stock, the put warrants would be
classified outside of equity based on the ability of the holder to require cash
settlement. Also, EITF Topic D-98 discusses the accounting for a security that
will become redeemable at a future determinable date and its redemption is
variable. This is the case with the Warrants as the date is fixed, but the put
or call price varies. The EITF gives two possible methodologies for valuing the
securities. The Company accounts for the changes in redemption value as they
occur and the Company adjusts the carrying value of the security to equal the
redemption value at the end of each reporting period. On June 30, 2003, the Put
Option had no value and no liability was recorded.
Promissory Note
East Tennessee Materials and Energy Corporation ("M&EC") issued a promissory
note for a principal amount of $3.7 million to PDC, dated June 7, 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.
-12-
Interest is accrued at the applicable rate (8.00% on June 30, 2003) and payable
in one lump sum at the end of the loan period. On June 30, 2003, the outstanding
balance was $4,185,000 including accrued interest of approximately $711,000. PDC
has directed M&EC to make all payments under the promissory note directly to the
IRS to be applied to PDC's obligations under its installment agreement with the
IRS.
Installment Agreement
In conjunction with the Company's acquisition of M&EC, M&EC entered into an
installment agreement with the Internal Revenue Service ("IRS") for a principal
amount of $923,000 dated June 7, 2001, for certain withholding taxes owed by
M&EC. The installment agreement is payable over eight years on a semiannual
basis on June 30 and December 31. Interest is accrued at the applicable law rate
("Applicable Rate") pursuant to the provisions of section 6621 of the Internal
Revenue Code of 1986 as amended. Such rate is adjusted on a quarterly basis and
payable in lump sum at the end of the installment period. On June 30, 2003, the
rate was 8.00%. On June 30, 2003, the outstanding balance was $1,036,000
including accrued interest of approximately $173,000.
5. Commitments and Contingencies
Hazardous Waste
In connection with our waste management services, we handle both hazardous and
non-hazardous waste, which we transport to our own, or other facilities for
destruction or disposal. As a result of disposing of hazardous substances, in
the event any cleanup is required, we could be a potentially responsible party
for the costs of the cleanup notwithstanding any absence of fault on our part.
Legal
In the normal course of conducting our business, we are involved in various
litigations. There has been no material change in legal proceedings from those
disclosed previously in the Company's Form 10-K for year ended December 31,
2002, and the Company's Form 10-Q for the quarter ended March 31, 2003, except
as stated below. 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 the Company's financial position,
liquidity or results of operations.
In connection with the lawsuit styled Bryson Adams, et. al. v. Environmental
Purification Advancement Corporation, et. al., pending in the United Stated
District Court, Western District of Louisiana, previously reported by the
Company in its Form 10-Q for the first quarter of 2003, the Company's insurance
carrier is defending the Company in this litigation under a reservation of
rights.
Permits
We are subject to various regulatory requirements, including the procurement of
requisite licenses and permits at our facilities. These licenses and permits are
subject to periodic renewal without which our operations would be adversely
affected. We anticipate that, once a license or permit is issued with respect to
a facility, the license or permit will be renewed at the end of its term if the
facility's operations are in compliance with the applicable regulatory
requirements.
Accrued Closure Costs and Environmental Liabilities
We maintain closure cost funds to insure the proper decommissioning of our RCRA
facilities upon cessation of operations. Additionally, in the course of owning
and operating on-site treatment, storage and disposal facilities, we are subject
to corrective action proceedings to restore soil and/or groundwater to its
original state. These activities are governed by federal, state and local
regulations and we maintain the appropriate accruals for restoration. We have
recorded accrued liabilities for estimated closure costs and identified
environmental remediation costs.
Insurance
We believe we maintain insurance coverage adequate for our needs and which is
similar to, or greater than, the coverage maintained by other companies of our
size in the industry. There can be no assurances, however,
-13-
those liabilities, which may be incurred by us, will be covered by our insurance
or that the dollar amount of such liabilities, which are covered, will not
exceed our policy limits. Under our insurance contracts, we usually accept
self-insured retentions, which we believe is appropriate for our specific
business risks. We are required by EPA regulations to carry environmental
impairment liability insurance providing coverage for damages on a claims-made
basis in amounts of at least $1 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, the Company entered into a 25-year finite risk insurance policy,
which provides financial assurance to the applicable states for our permitted
facilities in the event of unforeseen closure. Prior to obtaining or renewing
operating permits we are required to provide financial assurance that guarantee
to the states that in the event of closure our permitted facilities will be
closed in accordance with the regulations. The policy provides $35 million of
financial assurance coverage and has available capacity to allow for annual
inflation and other performance and surety bond requirements. On the fourth and
subsequent anniversaries of the contract inception, the Company may elect to
terminate this contract.
6. Operating Segments
Pursuant to FAS 131, we define an operating segment as:
o A business activity from which we may earn revenue and incur expenses;
o Whose operating results are regularly reviewed by the chief operating
decision maker to make decisions about resources to be allocated to
the segment and assess its performance; and
o For which discrete financial information is available.
We have three operating segments, which are defined as each business line that
we operate. This however, excludes corporate headquarters, which does not
generate revenue.
Our operating segments are defined as follows:
The Industrial Waste Management Services segment, which provides on-and-off site
treatment, storage, processing and disposal of hazardous and nonhazardous
industrial waste, commercial waste and wastewater through our six treatment,
storage and disposal ("TSD") facilities; Perma-Fix Treatment Services, Inc.,
Perma-Fix of Dayton, Inc., Perma-Fix of Ft. Lauderdale, Inc., Perma-Fix of
Orlando, Inc., Perma-Fix of South Georgia, Inc., and Perma-Fix of Michigan, Inc.
We provide through Perma-Fix Government Services various waste management
services to certain governmental agencies.
The Nuclear Waste Management Services segment, which provides treatment,
storage, processing and disposal services for waste which is both hazardous and
low-level radioactive ("Mixed Waste"). Included in such is research,
development, on and off-site waste remediation of nuclear mixed and low-level
radioactive waste through our three TSD facilities; Perma-Fix of Florida, Inc.,
Diversified Scientific Services, Inc., and East Tennessee Materials and Energy
Corporation.
The Consulting Engineering Services segment provides environmental engineering
and regulatory compliance services through Schreiber, Yonley & Associates, Inc.
which includes oversight management of environmental restoration projects, air
and soil sampling and compliance and training activities, as well as,
engineering support as needed by our other segments.
-14-
The table below presents certain financial information in thousands by business
segment for the three and six months ended June 30, 2003 and 2002.
Segment Reporting for the Quarter Ended June 30, 2003
Industrial Nuclear
Waste Waste Segments Consolidated
Services Services Engineering Total Corporate Total
-------- -------- ----------- ----- --------- ------------
Revenue from external customers $11,265 $ 7,880 $ 764 $ 19,909 $ -- $ 19,909
Intercompany revenues 1,132 900 141 2,173 -- 2,173
Interest income 1 -- -- 1 2 3
Interest expense 192 458 (3) 647 44 691
Interest expense-financing fees -- 1 -- 1 256 257
Depreciation and amortization 578 634 8 1,220 19 1,239
Segment profit (loss) (579) (747) 75 (1,251) -- (1,251)
Segment assets(1) 42,318 55,583 2,179 100,080 7,143 107,223
Expenditures for segment assets 390 399 6 795 65 860
Segment Reporting for the Quarter Ended June 30, 2002
Industrial Nuclear
Waste Waste Segments Consolidated
Services Services Engineering Total Corporate Total
-------- -------- ----------- ----- --------- ------------
Revenue from external customers $ 9,721 $11,843 $ 921 $ 22,485 $ -- $ 22,485
Intercompany revenues 2,318 1,504 33 3,855 -- 3,855
Interest income 4 -- -- 4 -- 4
Interest expense 166 555 1 722 -- 722
Interest expense-financing fees -- 2 -- 2 258 260
Depreciation and amortization 491 528 9 1,028 21 1,049
Segment profit (loss) (601) 3,261 105 2,765 -- 2,765
Segment assets(1) 40,822 53,534 2,233 96,589 4,175 100,764
Expenditures for segment assets 644 696 4 1,344 -- 1,344
Segment Reporting for the Six Months Ended June 30, 2003
Industrial Nuclear
Waste Waste Segments Consolidated
Services Services Engineering Total Corporate Total
-------- -------- ----------- ----- --------- ------------
Revenue from external customers $21,508 $16,266 $ 1,653 $ 39,427 $ -- $ 39,427
Intercompany revenues 2,275 1,307 274 3,856 -- 3,856
Interest income 3 -- -- 3 2 5
Interest expense 374 943 (6) 1,311 82 1,393
Interest expense-financing fees -- 3 -- 3 555 558
Depreciation and amortization 1,112 1,211 18 2,341 38 2,379
Segment profit (loss) (1,407) (431) 156 (1,682) -- (1,682)
Segment assets(1) 42,318 55,583 2,179 100,080 7,143 107,223
Expenditures for segment assets 836 1,068 8 1,912 152 2064
Segment Reporting for the Six Months Ended June 30, 2002
Industrial Nuclear
Waste Waste Segments Consolidated
Services Services Engineering Total Corporate Total
-------- -------- ----------- ----- --------- ------------
Revenue from external customers $18,059 $19,037 $1,840 $38,936 $ -- $ 38,936
Intercompany revenues 3,563 2,907 44 6,514 -- 6,514
Interest income 8 -- -- 8 1 9
Interest expense 332 1,095 4 1,431 (4) 1,427
Interest expense-financing fees -- 4 -- 4 513 517
Depreciation and amortization 977 1,037 20 2,034 42 2,076
Segment profit (loss) (1,918) 2,426 227 735 -- 735
Segment assets(1) 40,822 53,534 2,233 96,589 4,175 100,764
Expenditures for segment assets 1,340 1,682 4 3,026 4 3,030
(1) Segment assets have been adjusted for intercompany accounts to reflect
actual assets for each segment.
-15-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART I, ITEM 2
Forward-looking Statements
Certain statements contained within this report may be deemed "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(collectively, the "Private Securities Litigation Reform Act of 1995"). All
statements in this report other than a statement of historical fact are
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors, which could cause actual results and
performance of the Company to differ materially from such statements. The words
"believe," "expect," "anticipate," "intend," "will," and similar expressions
identify forward-looking statements. Forward-looking statements contained herein
relate to, among other things,
o Improve our operations and liquidity;
o anticipated improvement in the financial performance of the Company;
o ability to comply with the Company's general working capital
requirements;
o ability to be able to continue to borrow under the Company's revolving
line of credit;
o ability to generate sufficient cash flow from operations to fund all
costs of operations and remediation of certain formerly leased
property in Dayton, Ohio, and the Company's facilities in Memphis,
Tennessee; Valdosta, Georgia; and Detroit Michigan;
o ability to remediate certain contaminated sites for projected amounts;
o ability to fund up to $4 million of budgeted capital expenditures for
2003;
o as the M&EC facility continues to enhance its processing capabilities
and completes certain expansion projects, the Company could see higher
total revenues under Oak Ridge Contracts;
o finalize surcharge issues relating to Oak Ridge Contracts;
o PFD being required to have a Title V air permit;
o PFD being able to treat the hydrolysate by-product;
o the volume of hydrolysate expected to be treated under the subcontract
relating to the Newport Chemical Agent Disposal Facility;
o expectation that during one of our strongest periods of the year our
working capital position will begin to improve;
o increasing other sources of revenue at M& EC; and
o management expects seasonal trend to continue that revenues and
profits will increase in the third quarter.
While the Company believes the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance such expectations will prove
to have been correct. There are a variety of factors, which could cause future
outcomes to differ materially from those described in this report, including,
but not limited to:
o general economic conditions;
o material reduction in revenues;
o inability to collect in a timely manner a material amount of
receivables;
o increased competitive pressures;
o the ability to maintain and obtain required permits and approvals to
conduct operations;
o the ability to develop new and existing technologies in the conduct of
operations;
o ability to retain or renew certain required permits;
o discovery of additional contamination or expanded contamination at a
certain Dayton, Ohio, property formerly leased by the Company or the
Company's facilities at Memphis, Tennessee; Valdosta, Georgia and
Detroit Michigan, which would result in a material increase in
remediation expenditures;
o changes in federal, state and local laws and regulations, especially
environmental laws and regulations, or in interpretation of such;
-16-
o potential increases in equipment, maintenance, operating or labor
costs;
o management retention and development;
o financial valuation of intangible assets is substantially less than
expected;
o termination of the Oak Ridge Contracts as a result of our lawsuit
against Bechtel Jacobs or otherwise;
o continued inability or reduced levels of mixed waste shipments by the
government;
o the requirement to use internally generated funds for purposes not
presently anticipated;
o inability to continue to become profitable on an annualized basis;
o the inability of the Company to maintain the listing of its Common
Stock on the NASDAQ;
o inability of the Company to process hydrolysate at our PFD facility;
o the determination that PFMI or PFO was responsible for a material
amount of remediation at certain Superfund sites; and
o terminations of contracts with federal agencies or subcontracts
involving federal agencies, or reduction in amount of waste delivered
to the Company under these contracts or subcontracts.
The Company undertakes no obligations to update publicly any forward-looking
statement, whether as a result of new information, future events or otherwise.
Critical Accounting Policies
In preparing the consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as, the reported amounts of revenues and expenses during the reporting
period. The Company believes the following critical accounting policies affect
the more significant estimates used in preparation of the consolidated financial
statements:
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 will not be
collected. During the six months ended June 30, 2003 and 2002 the allowance for
doubtful accounts was increased, through a charge to bad debt expense, by
$82,000 and $91,000, respectively, which remained consistent at 0.2% of net
revenues. Management regularly reviews all accounts receivable balances that
exceed 60 days from the invoice date and based on an assessment of current
credit worthiness, estimates the portion, if any, of the balance that will not
be collected, and writes off any uncollectible portion. These write-offs were
approximately 0.9% and 0.8% of revenue and approximately 4.2% and 3.9% of
accounts receivable for 2002 and 2001, respectively.
Intangible Assets. Intangible assets relating to acquired businesses consist
primarily of the cost of purchased businesses in excess of the estimated fair
value of net assets acquired ("goodwill") and the recognized permit value of the
business. The Company continually reevaluates the propriety of the carrying
amount of permits and goodwill to determine whether current events and
circumstances warrant adjustments to the carrying value. Effective January 1,
2002, the Company adopted SFAS 142. The Company hired an independent appraisal
firm to test goodwill and permits, separately, for impairment. The report
provided by the appraiser indicated that no impairment existed as of January 1,
2002. Goodwill and permits were again tested as of October 1, 2002, which also
indicated no impairment. Effective January 1, 2002, the Company discontinued
amortizing indefinite life intangible assets (permits) and goodwill as required
by SFAS 142.
Accrued Closure Costs. Accrued closure costs represent a contingent
environmental liability to clean up a facility in the event the Company ceases
operations in an existing facility. The accrued closure costs are estimates
based on guidelines developed by federal and/or state regulatory authorities
under RCRA. Such costs are evaluated annually and adjusted for inflationary
factors and for approved changes or expansions to the facilities. Increases due
to annual inflationary factors for 2003, 2002, and 2001 are approximately 1.1%,
2.2% and 2.1%, respectively, and based on the historical information, the
Company does not expect future inflationary changes to differ materially from
the previous 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
-17-
labor, analytical costs and processing costs, which are based on current market
conditions. However, the Company has no intention, at this time, to close any of
its facilities.
Accrued Environmental Liabilities. The Company has four remediation projects
currently in progress. The current and long-term accrual amounts for the
projects are our best estimates based on proposed or approved processes for
clean up. The circumstances that could affect the outcome range from new
technologies that are being developed every day to reduce the Company's overall
costs, to increased contamination levels that could arise as the Company
completes remediation which could increase the Company's costs, neither of which
the Company anticipates 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.
Disposal Costs. The Company accrues 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.
Self Insurance. We have a self-insurance program for certain health benefits.
The cost of such benefits is recognized as expense in the period in which the
claim occurred and includes an estimate of claims incurred but not reported
("IBNR"), with such estimates based upon historical trends. Actual health
insurance claims may differ materially from the estimates, as a result of the
nature and extent of the actual IBNR claims paid. The Company maintains separate
insurance to cover the excess liability over an established specific single
claim amount and also an aggregate annual claim total.
Results of Operations
The table below should be used when reviewing management's discussion and
analysis for the three and six months ended June 30, 2003 and 2002:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- ------------------------------------
Consolidated (amounts in thousands) 2003 % 2002 % 2003 % 2002 %
-----------------------------------------------------------------------------------------------------------------
Net revenues $19,909 100.0 $ 22,485 100.0 $ 39,427 100.0 $38,936 100.0
Cost of goods sold 15,391 77.3 14,536 64.6 29,848 75.7 27,847 71.5
------- ----- --------- ----- -------- ----- ------- -----
4,518 22.7 35.4 9,579 24.3 28.5
Gross profit 7,949 11,089
Selling, general and administrative 4,786 24.0 4,120 18.4 9,166 23.2 8,275 21.3
------- ----- --------- ----- -------- ----- ------- -----
Income (loss) from operations $ (268) (1.3) $ 3,829 17.0 $ 413 1.1 $ 2,814 7.2
======= ===== ========= ===== ======== ===== ======= =====
Interest expense (691) (3.4) (722) (3.2) (1,393) (3.5) (1,427) (3.7)
Interest expense-financing fees (257) (1.3) (260) (1.2) (558) (1.4) (517) (1.3)
Preferred Stock dividends (48) (0.2) (32) (0.1) (94) (0.2) (63) (0.2)
-18-
Summary - Three and Six Months Ended June 30, 2003 and 2002
The Company provides services through three reportable operating segments. The
Industrial Waste Management Services segment is engaged in on-and off-site
treatment, storage, disposal and processing of a wide variety of by-products and
industrial, hazardous and non-hazardous wastes. This segment competes for
materials and services with numerous regional and national competitors to
provide comprehensive and cost-effective waste management services to a wide
variety of customers nationwide. The Company operates and maintains facilities
and businesses in the waste by-product brokerage, on-site treatment and
stabilization, and off-site blending, treatment and disposal industries. The
Nuclear Waste Management Services segment provides treatment, storage,
processing and disposal services of mixed waste (waste containing both hazardous
and low-level radioactive materials) and low-level radioactive wastes, including
research, development and on-site and off-site waste remediation. The presence
of nuclear and low-level radioactive constituents within the waste streams
processed by this segment create different and unique operational, processing
and permitting/licensing requirements from those contained within the Industrial
Waste Management Services segment. The Company's Consulting Engineering Services
segment provides a wide variety of environmental related consulting and
engineering services to industry and government. The Consulting Engineering
Services segment provides oversight management of environmental restoration
projects, air and soil sampling, compliance reporting, surface and subsurface
water treatment design for removal of pollutants, and various compliance and
training activities.
Net Revenue
Consolidated net revenues decreased to $19,909,000 for the quarter ended June
30, 2003, as compared to $22,485,000 for the same quarter in 2002. This decrease
of $2,576,000 or 11.5% is principally attributable to a decrease in the Nuclear
Waste Management Services segment of approximately $3,963,000 resulting in part
from the government's inability to ship waste to our facilities due to the war
in Iraq and prolonged terrorism alerts. The Company also experienced a decrease
in shipments from certain nuclear utilities principally as a result of similar
security and transportation issues. From a comparative perspective, it is also
important to note that an event project of approximately $1.8 million was
included in the second quarter of 2002 and a surcharge of approximately $2.2
million was recorded in the second quarter of 2002, which applied to the first
six months of 2002. Consolidated revenues under the Oak Ridge Contracts totaled
$4,170,000 or 20.9% of total revenues for the three months ended June 30, 2003,
compared to $3,320,000 or 14.8% for the three months ended June 30, 2002. In
contrast to the above, under the Oak Ridge Contracts, Bechtel Jacobs was better
able to move waste within the K-25 DOE complex, as there are no transportation
issues due to our facility being located on the DOE site. The backlog of stored
waste within the nuclear segment at June 30, 2003, was approximately $5,600,000
compared to $7,517,000 and $9,000,000 at March 31, 2003 and December 31, 2002,
respectively. The Consulting Engineering Service segment experienced a decrease
of approximately $158,000, which reflects the impact a weaker economy has on our
client's expansion projects. Offsetting these decreases, was an increase in the
Industrial Waste Management Services segment of approximately $1,545,000
resulting from certain new or expanded product lines, such as lab packing,
overall improved waste volumes and improved pricing structure associated with
certain of our Defense Reutilization & Marketing Service ("DRMS") government
contracts and the revenues recognized for public outreach and treatability
studies related to the Army's Newport hydrolysate project. See "Known Trends and
Uncertainties and Significant Contracts" of this Management's Discussion and
Analysis as to a lawsuit involving the Oak Ridge Contracts, and a discussion as
to a complaint filed as to the hydrolysate project.
Consolidated net revenues increased to $39,427,000 from $38,936,000 for the
six-month period ended June 30, 2003. This increase of $491,000 or 1.3% is
primarily attributable to an increase in the Industrial Waste Management
Services segment of approximately $3,449,000 resulting from certain new product
lines, such as lab packing, improved waste volumes across all facilities,
improved pricing structure associated with certain DRMS government contracts,
the revenues recognized for public outreach and treatability studies related to
the Army's Newport hydrolysate project and improved volumes associated with the
implementation of the biological wastewater treatment system. Offsetting this
increase was a decrease in the Nuclear Waste Management Services segment of
approximately $2,770,000 resulting from the government's inability to ship waste
to our facilities due to the war in Iraq and prolonged terrorism alerts and the
impact of increased revenues during the same period of 2002 which included an
event project of approximately $2.4 million and a
-19-
surcharge of approximately $2.2 million which applied to the first six months of
2002. Consolidated revenues under the Oak Ridge Contracts totaled $8,991,000 or
22.8% of total revenues for the six months ending June 30, 2003, compared to
$4,325,000 or 11.1% for the six months ended June 30, 2002, which reflects
increased revenues under the Oak Ridge Contracts along with the benefit of our
facility being located within the DOE K-25 site. Additionally, the Consulting
Engineering Services segment experienced a decrease of approximately $188,000,
which reflects the impact a weaker economy has on our client's expansion
projects. See "Known Trends and Uncertainties-Significant Contracts" of this
Management's Discussion and Analysis as to a lawsuit involving the Oak Ridge
Contracts and a discussion as to a complaint filed as to the hydrolysate
project.
Cost of Goods Sold
Cost of goods sold for the Company increased $855,000 or 5.9% for the quarter
ended June 30, 2003, as compared to the quarter ended June 30, 2002. This
increase in cost of goods sold reflects an increase in the Industrial Waste
Management Services segment of approximately $1,284,000, primarily associated
with increased labor, disposal and transportation costs, which in part relates
to the increase in revenues. Additional costs for disposal and transportation
were incurred during the quarter due to operational and off specification waste
issues, which are currently being addressed. Additionally, this increase
reflects costs associated with the Army's Newport hydrolysate project.
Offsetting this increase, was a decrease in the Nuclear Waste Management
Services segment of $288,000 reflecting a decrease in disposal and treatment
costs associated with the continued refinement of our treatment processes,
partially offset by increased costs of operating the highly specialized
processing equipment at our facilities. Additionally, the Consulting Engineering
Services segment experienced a decrease of $141,000, which directly correlates
to the decrease in revenues. Included within cost of goods sold is depreciation
expense of $1,131,000 and $971,000 for the quarters ended June 30, 2003 and
2002, respectively, reflecting an increase of $160,000 over 2002.
Cost of goods sold increased $2,001,000 or 7.2% for the six-month period ended
June 30, 2003, as compared to the six-month period ended June 30, 2002. This
increase in cost of goods sold reflects an increase in the Industrial Waste
Management Services segment of $2,580,000, primarily associated with increased
labor, disposal and transportation costs, which correlates to the increase in
revenues for this segment and the additional operating costs as discussed above.
Costs associated with the Army's Newport hydrolysate project are also reflected
in this increase. Offsetting this increase, was a decrease in the Nuclear Waste
Management Services segment of $469,000 reflecting a decrease in disposal and
treatment costs associated with the continued refinement of our treatment
processes, partially offset by increased costs of operating the highly
specialized processing equipment. Additionally, the Consulting Engineering
Services segment experienced a decrease of $110,000, which directly correlates
to the decrease in revenues. Included within cost of goods sold is depreciation
expense of $2,167,000 and $1,921,000 for the six months ended June 30, 2003 and
2002, respectively, reflecting an increase of $246,000 over 2002.
Gross Profit
The resulting gross profit for the quarter ended June 30, 2003, decreased
$3,431,000 to $4,518,000, which as a percentage of revenue is 22.7%, reflecting
a decrease from the corresponding percentage of revenue of 35.4%. This decrease
in gross profit percentage principally reflects a decrease in the Nuclear Waste
Management Services segment from 47.0% in 2002 to 24.0% in 2003, reflecting the
impact of the surcharge of $2.2 million in 2002, which applied to the first six
months of 2002. Without the surcharge, the gross profit percentage for this
segment for 2002 would have been 28.4%. Additionally, these facilities are high
fixed cost facilities which due to regulatory, operational (health and safety)
and specialty processing requirements, negatively impact the gross profit
percentage when revenues are down. The Industrial Waste Management Services
segment experienced a decrease in gross profit percentage from 21.3% in 2002 to
20.7% in 2003, which reflects the impact of additional costs associated with the
Army's Newport hydrolysate project and other operational issues as discussed
above. Offsetting this, however, was an increase in the Consulting Engineering
Services segment from 34.3% in 2002 to 39.1% in 2003. This increase reflects the
impact of higher margin projects that were subcontracted out during the quarter.
-20-
The resulting gross profit for the six months ended June 30, 2003, decreased
$1,510,000 to $9,579,000, which as a percentage of revenue is 24.3%, reflecting
a decrease from the corresponding six months in the 2002 percentage of revenue
of 28.5%. This decrease in gross profit percentage principally reflects a
decrease in the Nuclear Waste Management Services segment from 36.8% in 2002 to
29.0% in 2003, reflecting the impact of the surcharge of $2.2 million in 2002.
Without the surcharge, the gross profit percentage for this segment for 2002
would have been 25.3%. Additionally, the Consulting Engineering Services segment
experienced a slight decrease from 36.3% in 2002 to 35.7% in 2003, reflecting
the impact of lower margin projects performed primarily in the first quarter of
2003. Offsetting these decreases, however, was an increase in the Industrial
Waste Management Services segment from 18.9% in 2002 to 19.9% in 2003. This
increase reflects the impact of improved waste volumes and pricing structure
associated with DRMS government contracts, the benefit of higher margin event
work performed in conjunction with DRMS government contracts and the positive
impact of cost savings and operational changes within the segment.
Selling, General and Administrative
Selling, general and administrative expenses increased $666,000 or 16.2% for the
quarter ended June 30, 2003, as compared to the quarter ended June 30, 2002.
This increase reflects the impact of increased sales and marketing efforts
within the Industrial Waste Management Services segment and the Nuclear Waste
Management Services segment, which combined accounted for $355,000 of this
increase, of which $300,000 was in payroll related expenses. In addition to the
increased sales and marketing efforts within both segments, the industrial
segment also enhanced its management infrastructure, established a centralized
office and incurred certain overhead costs during the second quarter of 2003
which should result in improved operations in future periods. Additionally, the
increase in the nuclear segment reflects the impact of a one-time write-off of
acquisition costs totaling $167,000 associated with a mixed waste facility. The
Company is no longer negotiating to acquire this facility. Included in selling,
general and administrative expenses is depreciation and amortization expense of
$107,000 and $78,000 for the second quarters of 2003 and 2002, respectively. As
a percentage of revenue, selling, general and administrative expenses increased
to 24.0% for the quarter ended June 30, 2003, compared to 18.4% for the same
period in 2002.
Selling, general and administrative expenses increased $891,000 or 10.8% for the
six months ended June 30, 2003, as compared to the same period in 2002. This
increase reflects the above discussed impact of increased sales and marketing
efforts within both the industrial and nuclear segments which accounted for
approximately $539,000 of this increase and certain other organizational changes
made within the Company. Additionally, this increase reflects the impact of a
one-time write-off of acquisition costs totaling $167,000 associated with a
mixed waste facility, which the Company is no longer negotiating to acquire.
Included in selling, general and administrative expenses is depreciation and
amortization expense of $211,000 and $155,000 for the six months ended June 30,
2003 and 2002, respectively. As a percentage of revenue, selling, general and
administrative expenses increased to 23.2% for the six months ended June 30,
2003, compared to 21.3% for the same period in 2002.
Interest Expense
Interest expense decreased $31,000 for the quarter ended June 30, 2003, as
compared to the corresponding period of 2002. This decrease reflects the impact
of lower interest rates and decreased borrowing levels on the revolving credit
and term loans with PNC Bank, National Association ("PNC"), which resulted in a
decrease in interest expense of $35,000 when compared to the prior year.
Additionally, the reduction in debt associated with past acquisitions resulted
in a decrease in interest expense of $9,000. Offsetting these decreases was an
increase in interest expense of $13,000 due to an increase in debt associated
with facility and computer upgrades.
Interest expense also decreased by $34,000 for the six-month period ended June
30, 2003, as compared to the corresponding period of 2002. This decrease
reflects the impact of lower interest rates and decreased borrowing levels on
the revolving credit and term loans with PNC, which resulted in a decrease in
interest expense of $39,000 when compared to prior year. Additionally, the
reduction in debt associated with past acquisitions resulted in a decrease in
interest expense of $18,000. Offsetting these decreases was an increase in
interest expense of $23,000 due to an increase in debt associated with facility
and computer upgrades.
-21-
Interest Expense - Financing Fees
Interest expense-financing fees decreased $3,000 for the three months ended June
30, 2003, as compared to the corresponding period for 2002. These financing fees
are principally associated with the credit facility and term loan with PNC and
the senior subordinated notes, and are amortized to expense over the term of the
loan agreements.
Interest expense-financing fees increased by $41,000 for the six months ended
June 30, 2003, as compared to the corresponding period of 2002. This increase
was primarily due to a one-time write-off of fees associated with other short
term financing.
Preferred Stock Dividends
Preferred Stock dividends increased $16,000 during the quarter ended June 30,
2003 as compared to the corresponding period of 2002. This increase was due to
the accrual of preferred dividends on the preferred stock of our subsidiary,
M&EC ("Series B Preferred"). The Series B Preferred was issued in conjunction
with the acquisition of M&EC in June 2001, and began accumulating dividends in
June 2002 at an annual interest rate of 5%.
Preferred stock dividends increased $31,000 during the six months ended June 30,
2003, as compared to the same period of 2002. This increase was also due to the
accrual of the Series B Preferred.
Liquidity and Capital Resources of the Company
Our capital requirements consist of general working capital needs, scheduled
principal payments on our debt obligations and capital leases, remediation
projects and planned capital expenditures. Our capital resources consist
primarily of cash generated from operations and funds available under our
revolving credit facility. Our capital resources are impacted by changes in
accounts receivable as a result of revenue fluctuation, economic trends, and
collection activities.
At June 30, 2003, the Company had cash of $50,000. This cash total reflects a
decrease of $162,000 from December 31, 2002, as a result of net cash provided by
operations of $1,310,000 and cash provided by financing activities of $1,100,000
(principally net borrowings of long-term debt partially offset by proceeds from
the issuance of Common Stock) offset by cash used in investing activities of
$2,572,000 (principally net purchases of equipment, totaling $1,337,000 and a
deposit to the finite risk sinking fund of $1,234,000). The Company is in a net
borrowing position and therefore attempts to move all excess cash balances
immediately to the revolving credit facility, so as to reduce debt and interest
expense. During 2002 the Company implemented a centralized cash management
system, which included new remittance lock boxes and resulted in accelerated
collection activities and reduced cash balances, as idle cash is moved without
delay to the revolving credit facility.
Operating Activities
Accounts receivable, net of allowances for doubtful accounts, totaled
$20,964,000, a decrease of $856,000 from the December 31, 2002 balance of
$21,820,000. This decrease reflects the impact of reduced revenues and better
collection efforts within the Nuclear Waste Management Services segment, which
resulted in a decrease of $2,879,000 and the Consulting Engineering Services
segment which resulted in a decrease of $5,000. Offsetting these decreases was
an increase in accounts receivable for the Industrial Waste Management Services
segment of $2,028,000 reflecting the impact of increased revenues within this
segment.
As of June 30, 2003, total consolidated accounts payable was $10,525,000, an
increase of $766,000 from the December 31, 2002, balance of $9,759,000. This
increase in accounts payable reflects the impact of increased revenues within in
the Industrial Waste Management Services segment, increased accounts payable
related to the Army's Newport hydrolysate project and unfinanced capital
expenditures of $1,337,000 that occurred during the six months of 2003.
-22-
The working capital deficit at June 30, 2003, was $1,312,000, as compared to a
working capital position of $731,000 at December 31, 2002, which reflects a
decrease of $2,043,000 during the six months of 2003. This working capital
decrease principally reflects the decreased accounts receivable balance at the
end of the period, which correlates with the weaker revenues and better
collection efforts, as discussed above. Additionally, increased accounts
payable, unfinanced capital spending and partial funding of the finite risk
insurance policy contributed to this deficit position.
Investing Activities
Our purchases of capital equipment for the six-month period ended June 30, 2003,
totaled approximately $2,063,000, including financed purchases of $726,000.
These expenditures were for expansion and improvements to the operations
principally within the waste management segments. These capital expenditures
were funded by the cash provided by operations and from proceeds from the
issuance of stock. We have budgeted capital expenditures of up to approximately
$6,500,000 for 2003, which included an estimated $1,393,000 for completion of
certain 2002 projects in process, as well as other identified capital purchases
for the expansion and improvement to the operations and for certain compliance
related enhancements. Our purchases during 2003 include approximately $1,047,000
to complete certain of the 2002 projects in process. However, based upon the
current status of the planning and evaluation of proposed projects, we believe
that we will be spending only up to approximately $4,000,000 for capital
expenditures for 2003. We anticipate funding capital expenditures by a
combination of lease financing, internally generated funds, and/or the proceeds
received from Option and Warrant exercises.
Financing Activities
On December 22, 2000, the company 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 provides for a term loan ("Term Loan") in the amount
of $7,000,000, which requires principal repayments based upon a seven-year
amortization, payable over five years, with monthly installments of $83,000 and
the remaining unpaid principal balance due on December 22, 2005. Payments
commenced on February 1, 2001. The Agreement also provided for a revolving line
of credit ("Revolving Credit") with a maximum principal amount outstanding at
any one time of $15,000,000. 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 Agent reasonably deems proper and necessary. The Revolving Credit
advances shall be due and payable in full on December 22, 2005. As of June 30,
2003, our excess availability under our revolving credit facility was $4,243,000
based on our eligible receivables.
Pursuant to the Agreement the Term Loan bears interest at a floating rate equal
to the prime rate plus 1 1/2 %, and the Revolving Credit at a floating rate
equal to the prime rate plus 1%. The loans are subject to a prepayment fee of 1
1/2 % in the first year, 1% in the second and third years and 3/4 % after the
third anniversary until termination date.
In December 2000, the Company entered into an interest rate swap agreement
related to its Term Loan. This hedge, has effectively fixed the interest rate on
the notional amount of $3,500,000 of the floating rate $7,000,000 PNC Term Loan.
The Company will pay the counterparty interest at a fixed rate equal to the base
rate of 6.25%, for a period from December 22, 2000, through December 22, 2005,
in exchange for the counterparty paying the Company one month LIBOR rate for the
same term (1.12% at June 30, 2003). At June 30, 2003, the market value of the
interest rate swap was in an unfavorable value position of $192,000 and was
recorded as a liability. During the six months ended June 30, 2003, the Company
recorded a gain on the interest rate swap of $23,000, which offset other
comprehensive loss on the Statement of Stockholders' Equity.
Effective as of June 2002, the Company and PNC entered into Amendment No. 1 to
the Agreement, which, among other things, increased the letter of credit
commitment from $500,000 to $4,500,000 and provided for
-23-
a $4.0 million standby letter of credit. The standby Letter of Credit was issued
to secure certain surety bond obligations. As a condition precedent to this
Amendment No. 1, the Company paid a $50,000 amendment fee to PNC.
On May 23, 2003, the Company and PNC entered into Amendment No. 2 to the
Agreement, which among other things reduced the letter of credit commitment from
$4,500,000 to $500,000 and terminated the $4.0 million standby letter of credit.
The standby letter of credit was previously issued to secure certain surety bond
obligations, which provided financial assurance closure guarantees to the
applicable states pursuant to the Company's permits and licenses. The financial
assurance has been satisfied with a newly established 25-year finite risk
insurance policy (see Contractual Obligations in this section). This finite risk
insurance policy required an upfront payment of $4.0 million, to be funded
through the Revolving Credit with PNC, utilizing the collateral that previously
supported the $4.0 million letter of credit. During the second quarter of 2003,
$3,300,000 was funded, and the remaining $700,000 was funded in July 2003. As a
condition precedent to this Amendment No. 2, the Company paid a $25,000
amendment fee to PNC.
Pursuant to the terms of the Stock Purchase Agreements in connection with the
acquisition of Perma-Fix of Orlando, Inc. ("PFO"), Perma-Fix of South Georgia,
Inc. ("PFSG") and Perma-Fix of Michigan, Inc. ("PFMI"), a portion of the
consideration was paid in the form of the Promissory Notes, in the aggregate
amount of $4,700,000 payable to the former owners of PFO, PFSG and PFMI. The
Promissory Notes are paid in equal monthly installments of principal and
interest of approximately $90,000 over five years and having an interest rate of
5.5% for the first three years and 7% for the remaining two years. The aggregate
outstanding balance of the Promissory Notes total $1,043,000 at June 30, 2003,
which is in the current portion. Payments of such Promissory Notes are
guaranteed by PFMI under a non-recourse guaranty, which non-recourse guaranty is
secured by certain real estate owned by PFMI. These Promissory Notes are subject
to subordination agreements with the Company's senior and subordinated lenders.
On August 31, 2000, as part of the consideration for the purchase of Diversified
Scientific Services, Inc. ("DSSI"), the Company issued to Waste Management
Holdings a long-term unsecured promissory note (the "Unsecured Promissory Note")
in the aggregate principal amount of $3,500,000, bearing interest at a rate of
7% per annum and having a five-year term with interest to be paid annually and
principal due in one lump sum at the end of the term of the Unsecured Promissory
Note (August 2005).
On July 31, 2001, the Company issued approximately $5.6 million of its 13.50%
Senior Subordinated Notes due July 31, 2006 (the "Notes"). The Notes were issued
pursuant to the terms of a Note and Warrant Purchase Agreement, dated July 31,
2001 (the "Purchase Agreement"), between the Company, Associated Mezzanine
Investors - PESI, L.P. ("AMI"), and Bridge East Capital, L.P. ("BEC"). The Notes
are unsecured and are unconditionally guaranteed by the subsidiaries of the
Company. The Company's payment obligations under the Notes are subordinate to
the Company's payment obligations to its primary lender and to certain other
debts of the Company up to an aggregate amount of $25 million. The net proceeds
from the sale of the Notes were used to repay the Company's previous short-term
loan.
Under the terms of the Purchase Agreement, the Company also issued to AMI and
BEC Warrants to purchase up to 1,281,731 shares of the Company's Common Stock
("Warrant Shares") at an initial exercise price of $1.50 per share (the
"Warrants"), subject to adjustment under certain conditions which were valued at
$1,622,000 and recorded as a debt discount and are being amortized over the term
of the Notes. The Warrants, as issued, also contain a cashless exercise
provision. The Warrant Shares are registered under an S-3 Registration Statement
that was declared effective on November 27, 2002.
In connection with the sale of the Notes, the Company, AMI, and BEC entered into
an Option Agreement, dated July 31, 2001 (the "Option Agreement"). Pursuant to
the Option Agreement, the Company granted each purchaser an irrevocable option
requiring the Company to purchase any of the Warrants or Warrant Shares then
held by the purchaser (the "Put Option"). The Put Option may be exercised at any
time commencing July 31, 2004, and ending July 31, 2008. In addition, each
purchaser granted to the Company an irrevocable option to purchase all the
Warrants or the Warrant Shares then held by the purchaser (the "Call Option").
The
-24-
Call Option may be exercised at any time commencing July 31, 2005, and ending
July 31, 2008. The purchase price under the Put Option and the Call Option is
based on the quotient obtained by dividing (a) the sum of six times the
Company's consolidated EBITDA for the period of the 12 most recent consecutive
months minus Net Debt plus the Warrant Proceeds by (b) the Company's Diluted
Shares (as the terms EBITDA, Net Debt, Warrant Proceeds, and Diluted Shares are
defined in the Option Agreement). Pursuant to the guidance under EITF 00-19 on
accounting for and financial presentation of securities that could potentially
be settled in a Company's own stock, the put warrants would be classified
outside of equity based on the ability of the holder to require cash settlement.
Also, EITF Topic D-98 discusses the accounting for a security that will become
redeemable at a future determinable date and its redemption is variable. This is
the case with the Warrants as the date is fixed, but the put or call price
varies. The EITF gives two possible methodologies for valuing the securities.
The Company accounts for the changes in redemption value as they occur and the
Company adjusts the carrying value of the security to equal the redemption value
at the end of each reporting period. On June 30, 2003, the Put Option had no
value and no liability was recorded.
East Tennessee Materials and Energy Corporation ("M&EC") issued a promissory
note for a principal amount of $3.7 million to PDC, dated June 7, 2001, for
monies advanced to M&EC for certain services performed by PDC. The promissory
note is payable over eight years on a semiannual basis on June 30 and December
31. Interest is accrued at the applicable rate (8.00% on June 30, 2003) and
payable in one lump sum at the end of the loan period. On June 30, 2003, the
outstanding balance is $4,185,000 including accrued interest of approximately
$711,000. 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.
In conjunction with the Company's acquisition of M&EC, M&EC entered into an
installment agreement with the Internal Revenue Service ("IRS") for a principal
amount of $923,000 dated June 7, 2001, for certain withholding taxes owed by
M&EC. The installment agreement is payable over eight years on a semiannual
basis on June 30 and December 31. Interest is accrued at the applicable law rate
("Applicable Rate") pursuant to the provisions of section 6621 of the Internal
Revenue Code of 1986 as amended. Such rate is adjusted on a quarterly basis and
payable in lump sum at the end of the installment period. On June 30, 2003, the
rate was 8%. On June 30, 2003, the outstanding balance is $1,036,000 including
accrued interest of approximately $173,000.
The following table summarizes the Company's contractual obligations at June 30,
2003, and the effect such obligations are expected to have on its liquidity and
cash flow in future periods, (in thousands):
Payments due by period
-------------------------------------------
Contractual Obligations Total 2003 2004-2006 2007-2008 After 2008
- --------------------------------------------------------------------------------
Long-term debt $31,912 $ 1,863 $28,069 $ 1,980 $ --
Operating leases 5,198 1,134 3,545 514 5
Finite risk policy 9,747 713 3,011 2,008 4,015
------- ------- ------- ------- -------
Total contractual
obligations $46,857 $ 3,710 $34,625 $ 4,502 $ 4,020
======= ======= ======= ======= =======
In June 2003, the Company entered into a 25-year finite risk insurance policy,
which provides financial assurance to the applicable states for our permitted
facilities in the event of unforeseen closure. Prior to obtaining or renewing
operating permits we are required to provide financial assurance that guarantee
to the states that in the event of closure our permitted facilities will be
closed in accordance with the regulations. The policy provides $35 million of
financial assurance coverage 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 represents the full premium for the 25-year term of the policy, and
the remaining $1,234,000, to be deposited in a sinking fund account. During the
second quarter of 2003, the Company made an initial payment of $3,300,000 and
the final payment of $700,000 was recorded and paid in July 2003. Additionally,
the policy requires nine annual installments of $1,004,000 that are due on the
anniversary date of the policy. These annual installments will also be
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deposited in the sinking fund account. In comparison, the Company paid
$1,121,000 of non-commutable premiums for the year 2002 financial assurance
program, along with an additional collateral requirement of $4.0 million in the
form of a letter of credit issued by PNC, at an annual fee of $160,000 per year.
On the fourth and subsequent anniversaries of the contract inception, the
Company may elect to terminate this contract. If the Company so elects, the
Insurer will pay the Company an amount equal to 100% of the sinking fund account
balance in return for complete releases of liability from both the Company and
any applicable regulatory agency using this policy as an instrument to comply
with financial assurance requirements.
The accrued dividends on the outstanding Preferred Stock for the period July 1,
2002, through December 31, 2002, in the amount of approximately $63,000 were
paid in January 2003 in the form of 25,165 shares of Common Stock of the
Company. The dividends for the period January 1, 2003, through June 30, 2003,
total $62,000, which will be paid in August 2003, in the form of 33,835 share of
Common Stock. Under the Company's loan agreements, the Company is prohibited
from paying cash dividends on its outstanding capital stock.
In summary, we have continued to take steps to improve our operations and
liquidity as discussed above. However, we continue to invest our working capital
back into our facilities to fund capital additions for expansion within both the
nuclear and industrial segments. Also, as discussed, with the continued downturn
in the economy and the impact of the war and prolonged terrorist alerts in the
first six months, our liquidity was negatively impacted. However, as we move
into one of our strongest periods of the year, our working capital position will
begin to improve. If we are unable to continue to improve our operations,
successfully finalize the surcharges on the Oak Ridge Contracts and become
profitable in the foreseeable future, such would have a material adverse effect
on our liquidity position.
Known Trends and Uncertainties
Seasonality. Historically the Company has experienced reduced revenues,
operating losses or decreased operating profits during the first and fourth
quarters of the Company's fiscal years due to a seasonal slowdown in operations
from poor weather conditions and overall reduced activities during the holiday
season. During the Company's second and third fiscal quarters there has
historically been an increase in revenues and operating profits. Management
expects this trend to continue in future years. However, the second quarter of
2003 was adversely affected by the war in Iraq, prolonged terrorism alerts and
the downturn in the economy.
Economic conditions. Economic downturns or recessionary conditions can adversely
affect the demand for the Company's services, principally within the Industrial
Waste Management Services segment. Reductions in industrial production generally
follow such economic conditions, resulting in reduced levels of waste being
generated and/or sent off for treatment. The Company believes that its revenues
and profits were negatively affected within this segment by the recessionary
conditions in 2002, and that this trend has continued into 2003.
Significant contracts. The Company's nuclear revenues are principally derived
from the Department of Defense, the Department of Energy (DOE), either directly
from each DOE site individually or through the broad-spectrum contracts, nuclear
utilities, pharmaceutical companies and other commercial generators. M&EC
operates under three broad-spectrum contracts ("Oak Ridge Contracts"), which
accounted for 20.9% and 22.8% of total consolidated revenues during the three
and six months ended June 30, 2003, respectively. As the M&EC facility continues
to enhance its processing capabilities and completes certain expansion projects,
the Company could see higher total revenue under the Oak Ridge Contracts. In
February 2003, M&EC commenced legal proceedings against the general contractor
under the Oak Ridge Contracts, seeking payment from Bechtel Jacobs of
approximately $4.3 million in surcharges relating to certain wastes that were
treated by M&EC in 2001 and 2002 under the Oak Ridge Contracts. Bechtel Jacobs
continues to deliver waste to M&EC for treatment, and M&EC continues to accept
such waste. There is no guarantee of future business under the Oak Ridge
Contracts, and either party may terminate the Oak Ridge Contracts at any time.
Termination of these contracts could have a material adverse effect on the
Company. The Company is working towards increasing other sources of revenues at
M&EC to reduce the risk of reliance on one major source of revenues.
-26-
Our subsidiary, PFD, has entered into a subcontract to perform treatability
studies to determine if its process can successfully and safely treat a
neutralized VX gas by-product called hydrolysate generated and/or handled by the
U.S. Army, and performs public outreach activities in the Dayton, Ohio area and
the transportation route to PFD's Dayton, Ohio facility. The subcontract also
provides, if the treatability studies are successful, for PFD to treat all or a
certain portion of the hydrolysate by-product, at the option of the general
contractor, subject to PFD receiving authorization from the general contractor
to treat the waste. Under the terms of the subcontract, PFD is to receive
approximately $1.8 million for the treatability studies; approximately $1.3
million for the public outreach activities, of which $260,000 is to be deposited
in an escrow account for the exclusive use in Dayton, Ohio for public outreach
activities, and approximately $10.1 million to transport and treat 30% of the
hydrolysate by-product. Under the subcontract, if the treatability studies are
successful, the general contractor has the option to select whether the Company
will treat either 30%, 70% or 100% of the hydrolysate by-products. It is
anticipated that if the general contractor determines that the Company should
treat 100% of the hydrolysate by-product, the total payments to be received by
the Company for transportation and treatment will be approximately $15 million.
This subcontract may be terminated by the general contractor if the prime
contract is terminated or at any other time upon 10 days notice.
During April 2003, certain groups filed a complaint against the EPA and U.S.
Army alleging that the EPA and U.S. Army are violating a certain executive order
shipping the hydrolysate by-product to PFD for processing and treating. The
complainants allege that the shipment of the hydrolysate to PFD for treatment by
PFD at its facility in Dayton, Ohio would be a violation of the executive order
since it would have a disparate impact on the minority and low income groups who
live in the vicinity of PFD's facility and that EPA is violating the executive
order by failing to require PFD to have a Title V air permit. Based on studies
performed by the Company, the Company does not believe that PFD is required to
have a Title V air permit. These studies have been supplied to the Ohio EPA, and
PFD is expecting the Ohio EPA's response to its studies in the near future. If
it is determined that a Title V air permit is required at PFD, it will apply for
the permit. Neither the Company nor PFD is a party to the complaint. An adverse
decision as to this complaint could result in this subcontract being terminated.
It is unlikely that the hydrolysate by-product will be processed at PFD, due to
public acceptance issues. However, the Company is currently working with the
Army on several alternatives, including the possibility of onsite treatment
utilizing the Company's technologies.
A letter dated May 13, 2003, from the same counsel who filed the complaint
discussed above, representing some of the same parties on whose behalf the
complaint was filed, addressed to PFD, the U.S. EPA and the Ohio EPA, advised
that they intend to file a citizen suit against PFD for alleged violations of
the Clean Air Act and the Ohio Administration Code for allegedly not having a
certain air permit, emitting odors which endanger the health, safety and welfare
of the public living near the facility and failing to submit a control equipment
plan. The letter advises that under the Clean Air Act, suit will be filed
against PFD if within 60 days PFD fails to remedy the allegations in the letter.
The Company has continued to investigate these claims. As stated above, although
the Company does not believe PFD is required to have a Title V air permit, it is
currently performing studies to determine if a Title V air permit is required.
If a lawsuit is filed against PFD, PFD intends to vigorously defend itself.
Insurance. The Company maintains 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. The Company
evaluates its insurance policies annually to determine adequacy, cost
effectiveness and desired deductible levels. Due to downturns in the economy and
changes within the environmental insurance market, the Company has no guarantee
that it will be able to obtain similar insurance in future years, or that the
cost of such insurance will not increase materially.
Environmental Contingencies
The Company is 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, the Company is
subject to rigorous federal, state and local regulations. These regulations
mandate strict compliance and therefore are a cost and concern to the Company.
Because of their integral role in providing
-27-
quality environmental services, the Company makes every reasonable attempt to
maintain complete compliance with these regulations. However, even with a
diligent commitment, the Company, as with many of its competitors, may be
required to pay fines for violations or investigate and potentially remediate
its 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 nonhazardous, 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 that
subsequently required remedial action; consequently, any party utilizing these
sites may be liable for some or all of the remedial costs. Despite our
aggressive compliance and auditing procedures for disposal of wastes, we could,
in the future, be notified that we are a PRP at a remedial action site, which
could have a material adverse effect on the Company.
We have budgeted for 2003 approximately $982,000 in environmental expenditures
to comply with federal, state and local regulations in connection with
remediation of certain contaminates at four locations. The four locations where
these 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 and PFMI's
facility in Detroit, Michigan. We have estimated the expenditures for 2003 to be
approximately $211,000 at the EPS site, $338,000 at the PFM location, $126,000
at the PFSG site and $307,000 at the PFMI site of which $22,000; $29,000;
$51,000; and $304,000, respectively, were spent during the first six months of
2003. Additional funds will be required for the next one to seven years to
properly remediate these sites. We expect to fund the 2003 expenses to remediate
these four sites from funds generated internally and/or our revolving credit
facility.
At June 30, 2003, the Company had accrued environmental liabilities totaling
$2,290,000, which reflects a decrease of $406,000 from the December 31, 2002,
balance of $2,696,000. The decrease represents payments on remediation projects.
The June 30, 2003, current and long-term accrued environmental balance is
recorded as follows:
PFD PFM PFSG PFMI Total
-------- -------- ---------- ------ ----------
Current accrual $189,000 $309,000 $ 75,000 $3,000 $ 576,000
Long-term accrual -- 580,000 1,134,000 -- 1,714,000
-------- -------- ---------- ------ ----------
Total $189,000 $889,000 $1,209,000 $3,000 $2,290,000
======== ======== ========== ====== ==========
Interest Rate Swap
The Company entered into an interest rate swap agreement effective December 22,
2000, to modify the interest characteristics of its outstanding debt from a
floating basis to a fixed rate, thus reducing the impact of interest rate
changes on future income. This agreement involves the receipt of floating rate
amounts in exchange for fixed rate interest payments over the life of the
agreement without an exchange of the underlying principal amount. The
differential to be paid or received is accrued as interest rates change and
recognized as an adjustment to interest expense related to the debt. The related
amount payable to or receivable from counter parties is included in other assets
or liabilities. At June 30, 2003, the market value of the interest rate swap was
in an unfavorable value position of $192,000 and was recorded as a liability.
During the six months ended June 30, 2003, the Company recorded a gain on the
interest rate swap of $23,000 that offset other comprehensive loss in the
stockholders' equity section of the balance sheet (see Note 4 to Notes to
Consolidated Financial Statements).
Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends SFAS No. 133 to
provide clarification on the financial accounting and reporting of derivative
instruments and hedging activities and requires that contracts with similar
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characteristics be accounted for on a comparable basis. The provisions of SFAS
149 are effective for contracts entered into or modified after June 30, 2003,
and for hedging relationships designated after June 30, 2003. The adoption of
SFAS No. 149 is not expected to have an impact on the Company's consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
The adoption of SFAS 150 did not have an impact on the Company's consolidated
financial statements.
Recently Adopted Accounting Policies
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and normal use of the asset.
SFAS 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made, and that the associated asset retirement
costs be capitalized as part of the carrying amount of the long-lived asset. In
conjunction with the state mandated permit and licensing requirements, the
Company is obligated to determine its best estimate of the cost to close, at
some undetermined future date, its permitted and/or licensed facilities. The
Company recorded this liability at the date of acquisition, with its offsetting
entry being to goodwill and/or permits and has subsequently increased this
liability as a result of changes to the facility and/or for inflation. The
Company's current accrued closure costs reflect the current fair value of the
cost of asset retirement. The Company adopted SFAS 143 as of January 1, 2003,
and pursuant to the adoption the Company reclassified from goodwill and permits
approximately $4,559,000, which represents the fair value of the Company's
closing cost as recorded to goodwill or permits at the time each facility was
acquired, into an asset retirement obligations account. The asset retirement
obligation account is recorded as property and equipment (buildings). The
Company will depreciate the asset retirement obligation on a straight line basis
over a period of 50 years. The new standard did not have a material impact on
net income in the first six months of 2003, nor would it have had a material
impact in the first six months of 2002 assuming an adoption of this accounting
standard on a pro forma basis.
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PERMA-FIX ENVIRONMENTAL SERVICES, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PART I, ITEM 3
The Company is exposed to certain market risks arising from adverse changes in
interest rates, primarily due to the potential effect of such changes on the
Company's variable rate loan arrangements with PNC, as described under Note 4 to
Notes to Consolidated Financial Statements. As discussed therein, the Company
entered into an interest rate swap agreement to modify the interest
characteristics of $3.5 million of its $7.0 million term loan with PNC Bank,
from a floating rate basis to a fixed rate, thus reducing the impact of interest
rate changes on this portion of the debt.
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PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONTROLS AND PROCEDURES
PART 1, ITEM 4
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the periodic reports filed
by the Company with the Securities and Exchange Commission (the "SEC") is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC and that such information is accumulated and
communicated to the Company's management. Based on their most recent evaluation,
which was completed as of the end of the period covered by this Quarterly Report
on Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer
believe that the Company's disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) are
effective. There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these internal controls
subsequent to the date of the most recent evaluation.
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PERMA-FIX ENVIRONMENTAL SERVICES, INC.
PART II - Other Information
Item 1. Legal Proceedings
There are no additional material legal proceedings pending against the
Company and/or its subsidiaries not previously reported by the Company
in Item 3 of its Form 10-K for the year ended December 31, 2002, or in
Part II, Item 1 of its Form 10-Q for the quarter ended March 31, 2003,
which Item 3, of its Form 10-K and Part II, Item 1 of its Form 10-Q
are incorporated herein by reference, except as follows:
In connection with the lawsuit styled Bryson Adams, et. al. v.
Environmental Purification Advancement Corporation, et. al., pending
in the United Stated District Court, Western District of Louisiana,
previously reported by the Company in its Form 10-Q for the first
quarter of 2003, the Company's insurance carrier is defending the
Company in this litigation under a reservation of rights.
Item 5. Other Information
On July 29, 2003, the Company held its annual meeting of stockholders.
At the meeting the following items were approved:
o All nominees were elected to serve as directors until the
next annual meeting of stockholders;
o Approved the 2003 Outside Directors Stock Plan;
o Approved the 2003 Employee Stock Purchase Plan; and
o Ratified the appointment of BDO Seidman, LLC, as the
independent auditors of the Company for the fiscal year
2003.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Loan and Security Agreement between the Company, subsidiaries of the
Company and PNC Bank, incorporated by reference from Exhibit 99.1 to
the Company's Form 8-K dated, January 31, 2001.
4.2 First Amendment to Loan Agreement and Consent, dated January 30, 2001,
between the Company and PNC Bank, as incorporated by reference from
Exhibit 99.7 to the Company's Form 8-K, dated January 31, 2001.
4.3 Amendment No. 1 to Revolving Credit, Term Loan and Security Agreement,
dated as of June 10, 2002, between the Company and PNC Bank.
4.4 Amendment No. 2 to Revolving Credit, Term Loan and Security Agreement,
dated as of May 23, 2003, between the Company and PNC Bank.
31.1 Certification by Dr. Louis F. Centofanti, Chief Executive Officer of
the Company pursuant to Rule 13a-14(a) or 15d-14(a).
31.2 Certification by Richard T. Kelecy, Chief Financial Officer of the
Company pursuant to Rule 13a-14(a) or 15d-14(a).
32.1 Certification by Dr. Louis F. Centofanti, Chief Executive Officer of
the Company pursuant to 18 U.S.C. Section 1350.
32.2 Certification by Richard T. Kelecy, Chief Financial Officer of the
Company pursuant to 18 U.S.C. Section 1350.
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(b) Reports on Form 8-K
A current report on Form 8-K (Item 9 - Regulation FD Disclosure) was
filed by the Company on May 6, 2003, regarding the financial results
and conference call for the first quarter of 2003.
A current report on Form 8-K (Item 5 - Other Events and Regulation FD
Disclosures) was filed by the Company on June 16, 2003, disclosing
that the Company is no longer negotiating to acquire a facility.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
Date: August 14, 2003 By: /s/ Dr. Louis F. Centofanti
---------------------------
Dr. Louis F. Centofanti
Chairman of the Board Chief
Executive Officer
Date: August 14, 2003 By: /s/ Richard T. Kelecy
---------------------------
Richard T. Kelecy
Chief Financial Officer
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