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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 March 31, 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. 1-11596
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-1954497
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
1940 N.W. 67th Place, Gainesville, FL 32653
(Address of principal executive offices) (Zip Code)
(352) 373-4200
(Registrant's telephone number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the close of the latest practical date.
Class Outstanding at May 12, 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.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 2003 and December 31, 2002 ................... 2
Consolidated Statements of Operations -
Three Months Ended March 31, 2003 and 2002 ............. 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2003 and 2002 ............. 5
Consolidated Statements of Stockholders' Equity -
Three Months Ended March 31, 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 ...................................... 27
Item 4. Controls and Procedures .................................... 28
PART II OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 29
Item 5. Other Information .......................................... 30
Item 6. Exhibits and Reports on Form 8-K ........................... 30
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 three months ended March 31, 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
March 31,
2003 December 31,
(Amounts in Thousands, Except for Share Amounts) (Unaudited) 2002
----------- ------------
ASSETS
Current assets:
Cash $ 93 $ 212
Restricted cash 20 20
Accounts receivable, net of allowance for doubtful 22,145 21,820
accounts of $1,277 and $1,212
Inventories 832 682
Prepaid expenses 3,149 2,722
Other receivables 83 113
--------- ---------
Total current assets 26,322 25,569
Property and equipment:
Buildings and land 20,737 16,161
Equipment 29,410 29,125
Vehicles 2,712 2,616
Leasehold improvements 10,963 10,963
Office furniture and equipment 1,996 1,954
Construction-in-progress 5,089 4,325
--------- ---------
70,907 65,144
Less accumulated depreciation and amortization (16,359) (15,219)
--------- ---------
Net property and equipment 54,548 49,925
Intangibles and other assets:
Permits, net 16,578 20,759
Goodwill, net 6,216 6,525
Other assets 2,823 3,047
--------- ---------
Total assets $ 106,487 $ 105,825
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
March 31,
2003 December 31,
(Amounts in Thousands, Except for Share Amounts) (Unaudited) 2002
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,899 $ 9,759
Current environmental accrual 786 982
Accrued expenses 11,473 10,724
Current portion of long-term debt 3,412 3,373
--------- ---------
Total current liabilities 25,570 24,838
Environmental accruals 1,714 1,714
Accrued closure costs 4,929 4,929
Other long-term liabilities 1,414 1,332
Long-term debt, less current portion 26,743 27,142
--------- ---------
Total long-term liabilities 34,800 35,117
--------- ---------
Total liabilities 60,370 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,
35,687,254 and 35,326,734 shares issued, including 988,000
shares held as treasury stock, respectively 35 35
Additional paid-in capital 67,463 66,799
Accumulated deficit (20,603) (20,172)
Interest rate swap (201) (215)
--------- ---------
46,694 46,447
Less Common Stock in treasury at cost; 988,000 shares (1,862) (1,862)
--------- ---------
Total stockholders' equity 44,832 44,585
--------- ---------
Total liabilities and stockholders' equity $ 106,487 $ 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
March 31,
----------------------
(Amounts in Thousands, Except for Per Share Amounts) 2003 2002
-------- --------
Net revenues $ 19,518 $ 16,451
Cost of goods sold 14,457 13,311
-------- --------
Gross profit 5,061 3,140
Selling, general and administrative expenses 4,380 4,155
-------- --------
Income (loss) from operations 681 (1,015)
Other income (expense):
Interest income 2 5
Interest expense (702) (705)
Interest expense-financing fees (301) (257)
Other (65) (27)
-------- --------
Net loss (385) (1,999)
Preferred Stock dividends (46) (31)
-------- --------
Net loss applicable to Common Stock $ (431) $ (2,030)
======== ========
Net loss per common share
Basic $ (.01) $ (.06)
======== ========
Diluted $ (.01) $ (.06)
======== ========
Number of shares and potential common shares
used in computing net loss per common share:
Basic 34,605 34,057
======== ========
Diluted 34,605 34,057
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-----------------------
(Amounts in Thousands) 2003 2002
------- -------
Cash flows from operating activities:
Net loss $ (385) $(1,999)
Adjustments to reconcile net loss to cash provided by (used in)
operations:
Depreciation and amortization 1,140 1,027
Provision for bad debt and other reserves 52 44
Changes in assets and liabilities, net of effects from business
acquisitions:
Accounts receivable (376) 705
Prepaid expenses, inventories and other assets (243) (679)
Accounts payable and accrued expenses 749 2,127
------- -------
Net cash provided by operations 937 1,225
------- -------
Cash flows from investing activities:
Purchases of property and equipment, net (896) (1,522)
Change in restricted cash, net (1) (2)
------- -------
Net cash used in investing activities (897) (1,524)
------- -------
Cash flows from financing activities:
Net repayments on revolving credit facility (258) (81)
Principal repayments of long-term debt (492) (494)
Proceeds from issuance of stock 591 289
------- -------
Net cash used in financing activities (159) (286)
------- -------
Decrease in cash (119) (585)
Cash at beginning of period 212 860
------- -------
Cash at end of period $ 93 $ 275
======= =======
Supplemental disclosure:
Interest paid $ 540 $ 608
Non-cash investing and financing activities:
Issuance of Common Stock and Warrants for services 10 8
Issuance of Common Stock for payment of dividends 63 63
Gain on interest rate swap 14 38
Long-term debt incurred for purchase of property and equipment 308 164
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 three months ended March 31, 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 -- -- -- -- -- (431) -- -- (431)
Other Comprehensive loss:
Gain on interest rate
swap -- -- -- -- -- -- 14 -- 14
-------
Comprehensive loss (417)
Issuance of Common Stock for -- -- 25,165 -- 63 -- -- -- 63
Preferred Stock dividend
Issuance of stock for cash -- -- 335,355 -- 601 -- -- -- 601
and services
----- ----- ---------- ---- -------- --------- ------ -------- -------
Balance at March 31, 2003 2,500 $ -- 35,687,254 $ 35 $ 67,463 $ (20,603) $ (201) $ (1,862) $ 44,832
===== ===== ========== ==== ======== ========= ====== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
-6-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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.
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 directors 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. During the
first quarter of 2003, the Company awarded to certain employees 973,000 stock
options, under the 1993 Non-qualified Stock Option Plan.
Under the accounting provisions of SFAS 123, our net loss and net loss per share
would have been reduced to the pro forma amounts indicated below (in thousands
except for per share amounts):
Three Months Ended
March 31,
----------------------
2003 2002
------- --------
Net (loss) applicable to Common Stock, as reported $ (431) $ (2,030)
Deduct: Total Stock-based employee compensation expense determined
under fair value based method for all awards, net of related
tax effects (77) (68)
------- --------
Pro forma (loss) applicable to Common Stock $ (508) $ (2,098)
======= ========
Earnings per share:
Basic - as reported $ (.01) $ (.06)
======= ========
Basic - pro-forma $ (.01) $ (.06)
======= ========
Diluted - as reported $ (.01) $ (.06)
======= ========
Diluted - pro forma $ (.01) $ (.06)
======= ========
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.
-7-
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 quarter of 2003, nor would it have had a material impact
in the first quarter 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 months ended March
31, 2003 and 2002, does not include potential common shares as their effect
would be anti-dilutive.
The following are the potential shares excluded from weighted average share
calculations due to their anti-dilutive effect for the three months ended March
31, 2003 and 2002:
Three Months Ended
March 31,
--------------------------
2003 2002
---------- ----------
Upon exercise of Options 3,675,000 2,867,300
Upon exercise of Warrants 13,749,827 14,468,052
Upon conversion of Preferred Stock 1,666,667 1,666,667
-8-
4. Long-term Debt
Long-term debt consists of the following at March 31, 2003, and December
31, 2002:
March 31,
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% (5.25% at March 31, 2003),
balance due in December 2005. $ 8,734 $ 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% (5.75% at March 31, 2003). 4,833 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%. 1,293 1,538
Unsecured promissory note dated August 31, 2000, payable in lump sum in August
2005, interest paid annually at 7%. 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 $1,081. 4,544 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 March 31,
2003 and is payable in one lump sum at the end of installment period. 3,594 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 March 31,
2003) and is payable in one lump sum at the end of installment period. 893 893
Various capital lease and promissory note obligations, payable 2003 to 2008,
interest at rates ranging from 5.2% to 17.9%. 2,764 2,703
-------- --------
30,155 30,515
Less current portion of long-term debt 3,412 3,373
-------- --------
$ 26,743 $ 27,142
======== ========
-9-
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 March 31, 2003, our excess
availability under our revolving credit facility was $3,033,000 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 (1.31% at March 31, 2003). At March 31, 2003, the market value of the
interest rate swap was in an unfavorable value position of $201,000 and was
recorded as a liability. During the three months ended March 31, 2003, the
Company recorded a gain on the interest rate swap of $14,000 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. Pursuant to the terms of Amendment No. 1, as partial
collateral for the issuance of the standby letter of credit, PNC will charge a
reserve of approximately $66,000 each month against the availability under the
Revolving Credit beginning July 15, 2002, until such time as the standby letter
of credit is fully reserved. As of March 31, 2003, $600,000 has been charged
against availability. As a condition precedent to this Amendment No. 1, the
Company paid a $50,000 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 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 $1,293,000 at March 31, 2003,
of which $1,013,000 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.
-10-
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 March 31, 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. Interest is accrued at the applicable rate (8.00% on March 31, 2003) and
payable in one lump sum at the end of the loan period. On March 31, 2003, the
outstanding balance is $4,210,000 including accrued interest of approximately
$616,000. 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.
-11-
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 March 31, 2003, the
rate was 8%. On March 31, 2003, the outstanding balance is $1,041,000 including
accrued interest of approximately $148,000.
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
litigation. 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, except as stated below. We are not a party to any litigation or
governmental proceeding which our management believes could result in any
judgements or fines against us that would have a material adverse affect on the
Company's financial position, liquidity or results of operations.
In April, 2003, the plaintiffs, hundreds of individuals residing in or around
Bayou Sorrel, Louisiana, filed their Fifth Supplemental and Amending Complaint
naming, inter alia, Perma-Fix of Michigan, Inc. ("PFMI") and Perma-Fix of South
Georgia ("PFSG") as defendants, both of which are subsidiaries of the Company
and acquired by the Company in 1999. The lawsuit, which has been pending since
1999, includes as defendants hundreds of entities (and their insurers) which
allegedly disposed of hazardous and toxic substances at a hazardous waste
disposal site and hazardous waste injection well in Bayou Sorrel, Louisiana,
both of which were permitted by the appropriate governmental authorities to
treat and dispose of hazardous and toxic waste. The plaintiffs allege that the
defendant entities, other than the insurers, including PFMI and PFSG, were
negligent in their selection of the sites for the treatment and/or disposal of
hazardous and toxic substances, that the plaintiffs have suffered physical
injuries, property damage and diminished property values as a result of the
escape or migration of contaminants from the sites, and that the defendants are
liable for the damages allegedly suffered by the plaintiffs. The plaintiffs seek
unspecified amounts of compensatory and exemplary damages, interest, costs and
attorney's fees.
The Company is investigating the alleged claim in this lawsuit. PFMI and PFSG
will defend themselves vigorously in connection with this matter. However, at
this point, we are unable to determine with any degree of certainty what
exposure, if any, PFMI and/or PFSG may have in this regard. The Company is also
in the process of determining whether this lawsuit is covered by its insurers
and/or the insurers of PFMI and PFSG prior to their acquisition by the Company.
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.
-12-
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.
Since PFD just received the letter, it is investigating 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.
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, that 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 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.
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. These segments however, excludes Corporate headquarters, which does not
generate revenue.
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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. 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 by business segment for
the three months ended March 31, 2003 and 2002.
Segment Reporting March 31, 2003
Industrial Nuclear
Waste Waste Segments Consolidated
Services Services Engineering Total Corporate(2) Total
-------- -------- ----------- -------- ------------ ------------
Revenue from external customers $ 10,243 $ 8,386(3) $ 889 $ 19,518 $ -- $ 19,518
Intercompany revenues 1,143 407 133 1,683 -- 1,683
Interest income 2 -- -- 2 -- 2
Interest expense 182 485 (3) 664 38 702
Interest expense-financing fees -- 2 -- 2 299 301
Depreciation and amortization 534 577 10 1,121 19 1,140
Segment profit (loss) (828) 316 81 (431) -- (431)
Segment assets (1) 41,597 58,176 2,155 101,928 4,559 106,487
Expenditures for segment assets 446 669 2 1,117 87 1,204
Segment Reporting March 31, 2002
Industrial Nuclear
Waste Waste Segments Consolidated
Services Services Engineering Total Corporate(2) Total
-------- -------- ----------- -------- ------------ ------------
Revenue from external customers $ 8,338 $ 7,194(3) $ 919 $16,451 $ -- $ 16,451
Intercompany revenues 1,245 1,403 11 2,659 -- 2,659
Interest income 4 -- -- 4 1 5
Interest expense 166 540 3 709 (4) 705
Interest expense-financing fees -- 2 -- 2 255 257
Depreciation and amortization 486 509 11 1,006 21 1,027
Segment profit (loss) (1,317) (835) 122 (2,030) -- (2,030)
Segment assets (1) 40,995 52,005 2,304 95,304 4,525 99,829
Expenditures for segment assets 696 986 -- 1,682 4 1,686
(1) Segment assets have been adjusted for intercompany accounts to reflect
actual assets for each segment.
(2) Amounts reflect the activity for corporate headquarters not included in
the segment information.
(3) The consolidated revenues within the Nuclear Waste Services segment
include the Oak Ridge Contracts for the quarter ended March 31, 2003,
which total $4,821,000 (or 24.7%) of total revenue and $1,005,000 (or
6.1%) for the same quarter in 2002.
-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 ability or inability to continue and improve operations and become
profitable;
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 pay expenses to remediate the four sites from funds
generated internally;
o no intention to close any facilities;
o ability to fund budgeted capital expenditures for 2003;
o significant higher revenue under the Oak Ridge Contracts;
o no expectation of material future inflationary changes
o the volume of hydrolysate expected to be treated under the
subcontract relating to the Newport Chemical Agent Disposal Facility
o potential acquisition of another permitted mixed waste facility
o increasing other sources of revenue at M&EC; and
o expectation that there will be an increase in revenues and operating
profits during the second and third quarters of 2003, as in the
past.
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;
o potential increases in equipment, maintenance, operating or labor
costs;
o management retention and development;
-16-
o financial valuation of intangible assets is substantially less than
expected;
o termination of the Oak Ridge Contracts as a result of our lawsuit
against Bechtel Jacobs or otherwise;
o the requirement to use internally generated funds for purposes not
presently anticipated;
o inability to become profitable on an annualized basis;
o the inability of the Company to maintain the listing of its Common
Stock on the NASDAQ;
o the determination that PFMI 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 quarters ended March 31, 2003 and 2002 the allowance for
doubtful accounts was increased, through a charge to bad debt expense, by
$52,000 and $45,000, respectively, which remained consistent at 0.3% 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 2001are 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 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
-17-
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 months ended March 31, 2003 and 2002:
Consolidated (amounts in thousands) 2003 % 2002 %
-------- ----- -------- -----
Net Revenues $ 19,518 100.0 $ 16,451 100.0
Cost of Goods Sold 14,457 74.1 13,311 80.9
-------- ----- -------- -----
Gross Profit 5,061 25.9 3,140 19.1
Selling, General and Administrative 4,380 22.4 4,155 25.3
-------- ----- -------- -----
Income (Loss) from Operations $ 681 3.5 $ (1,015) (6.2)
======== ===== ======== =====
Interest Expense (702) (3.6) (705) (4.3)
Interest Expense - Finance Fees (301) (1.6) (257) (1.6)
Preferred Stock Dividend (46) (.3) (31) (.2)
Summary -- Quarters Ended March 31, 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
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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 increased to $19,518,000 for the quarter ended March
31, 2003, as compared to $16,451,000 for the same quarter in 2002. This increase
of $3,067,000 or 18.6% is partially attributable to an increase in the Nuclear
Waste Management Services segment of approximately $1,192,000 resulting from the
continued growth in mixed waste revenue driven by the greater volumes of waste
received under certain contacts, such as the Oak Ridge Contracts. Consolidated
revenues under the Oak Ridge Contracts totaled $4,821,000 or 24.7% of total
revenues for the three months ending March 31, 2003, compared to $1,005,000 or
6.1% for the three months ended March 31, 2002. The backlog of stored waste
within the nuclear segment at March 31, 2003, was approximately $7,517,000
compared to $9,000,000 at December 31, 2002. Additionally, the Industrial Waste
Management Services segment experienced an increase of approximately $1,904,000,
which reflected increases throughout the segment. Event work, improved waste
volumes and improved pricing structure associated with certain of our Defense
Reutilization & Marketing Service ("DRMS") government contracts and the start-up
of public relations and treatability studies related to the Army's Newport
hydrolysate project contributed to these increases. Offsetting these increases,
was a slight decrease in the Consulting Engineering Services segment of $29,000.
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.
Cost of Goods Sold
Cost of goods sold for the Company increased $1,146,000 or 8.6% for the quarter
ended March 31, 2003, as compared to the quarter ended March 31, 2002. This
increase in cost of goods sold reflects an increase in the Industrial Waste
Management Services segment of $1,296,000, primarily associated with increased
disposal and transportation costs which directly correlates to the increase in
revenues. Additionally, the Consulting Engineering Services Segment experienced
an increase in cost of goods sold of $30,000. Offsetting these increases was a
decrease in the Nuclear Waste Management Services segment of $180,000. This
decrease reflects a decrease in disposal and treatment costs associated with the
continued refinement of our treatment processes as the facilities continue their
ramp-up process. Included within cost of goods sold is depreciation expense of
$1,036,000 and $950,000 for the quarters ended March 31, 2003 and 2002,
respectively.
Gross Profit
The resulting gross profit for the quarter ended March 31, 2003, increased
$1,921,000 to $5,061,000, which as a percentage of revenue is 25.9%, reflecting
an increase over the corresponding quarter in 2002 percentage of revenue of
19.1%. This increase in gross profit percentage principally reflects an increase
in the Nuclear Waste Management Services segment from 20.1% in 2002 to 33.6% in
2003, reflecting the impact of higher margin revenue, increased volumes of waste
received under the Oak Ridge Contracts and continued refinement of our treatment
processes as the facilities continue their ramp-up process. Additionally, the
Industrial Waste Management Services segment experienced an increase from 16.1%
in 2002 to 19.0% in 2003. This increase reflects the impact of improved waste
volumes and pricing structure associated with government DRMS contracts, the
benefit of higher margin event work performed in conjunction with such
government DRMS contracts and the positive impact of cost savings and
operational changes within the segment. Offsetting this, however, was a decrease
in the Consulting Engineering Services segment from 38.2% in 2002 to 32.8% in
2003. This decrease reflects the impact of lower margin projects that were
subcontracted out during the quarter.
Selling, General and Administrative
Selling, general and administrative expenses increased $225,000 or 5.5% for the
quarter ended March 31, 2003, as compared to the quarter ended March 31, 2002.
This increase reflects the impact of increased sales and marketing efforts
within the Industrial Waste Management Services segment and certain other
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organizational changes made within the Company. Included in selling, general and
administrative expenses is depreciation and amortization expense of $104,000 and
$77,000 for the first quarters of 2003 and 2002, respectively. However, as a
percentage of revenue, selling, general and administrative expenses decreased to
22.4% for the quarter ended March 31, 2003, compared to 25.3% for the same
period in 2002.
Interest Expense
Interest expense decreased $3,000 for the quarter ended March 31, 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 $4,000 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 expenses of $10,000 due to an increase in debt associated
with facility and computer upgrades.
Interest Expense - Financing Fees
Interest expense-financing fees increased $44,000 for the three months ended
March 31, 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. This increase was primarily due to a one time
writeoff of fees associated with other short term financing.
Preferred Stock Dividends
Preferred Stock dividends increased $15,000 during the quarter ended March 31,
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%.
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 March 31, 2003, the Company had cash of $93,000. This cash total reflects a
decrease of $119,000 from December 31, 2002, as a result of net cash provided by
operations of $937,000 offset by cash used in investing activities of $897,000
(principally net purchases of equipment, totaling $896,000 and cash used by
financing activities of $159,000 (principally repayments of long-term debt
partially offset by proceeds from the issuance of common stock). 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
$22,145,000, an increase of $325,000 from the December 31, 2002 balance of
$21,820,000. This increase reflects the impact of increased revenues within the
Industrial Waste Management Services segment, which resulted in an increase of
$1,185,000. Offsetting this was a decrease in accounts receivable for the
Nuclear Waste Management Services segment of $826,000 and the Consulting
Engineering Services segment of $34,000. These decreases were a result of
increased collections from certain customers which occurred toward the end of
the quarter.
-20-
As of March 31, 2003, total consolidated accounts payable was $9,899,000, an
increase of $140,000 from the December 31, 2002, balance of $9,759,000. This
increase in accounts payable is reflective of the impact on liquidity which
occurs during the first quarter of each year, our seasonally slowest period.
The working capital position at March 31, 2003, was $752,000, as compared to a
working capital position of $731,000 at December 31, 2002, which reflects an
increase of $21,000 during the first quarter of 2003. This working capital
increase principally reflects the increased accounts receivable balance at the
end of the quarter, partially offset by the increased accounts payable balance.
Such an improvement in working capital during our seasonally slow first quarter
is favorable.
Investing Activities
Our purchases of capital equipment for the three-month period ended March 31,
2003, totaled approximately $1,204,000, including financed purchases of
$308,000. 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 $746,000 to complete certain of the 2002 projects in process. We
anticipate funding capital expenditures by a combination of lease financing,
internally generated funds, and/or the proceeds received from Option and Warrant
exercises.
Financing Activities
On December 22, 2000, 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 March 31, 2003, our excess
availability under our revolving credit facility was $3,033,000 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 (1.31% at March 31, 2003). At March 31, 2003, the market value of the
interest rate swap was in an unfavorable value position of $201,000 and was
recorded as a liability. During the three months ended March 31, 2003, the
Company recorded a gain on the interest rate swap of $14,000 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
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a $4.0 million standby letter of credit. The standby Letter of Credit was issued
to secure certain surety bond obligations. Pursuant to the terms of Amendment
No. 1, as partial collateral for the issuance of the standby letter of credit,
PNC will charge a reserve of approximately $66,000 each month against the
availability under the Revolving Credit beginning July 15, 2002, until such time
as the standby letter of credit is fully reserved. As of March 31, 2003,
$600,000 has been charged against availability. As a condition precedent to this
Amendment No. 1, the Company paid a $50,000 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 $1,293,000 at March 31, 2003,
of which $1,013,000 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 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
-22-
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 March 31, 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 March 31, 2003) and
payable in one lump sum at the end of the loan period. On March 31, 2003, the
outstanding balance is $4,210,000 including accrued interest of approximately
$616,000. 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 March 31, 2003, the
rate was 8%. On March 31, 2003, the outstanding balance is $1,041,000 including
accrued interest of approximately $148,000.
The following table summarizes the Company's contractual obligations at March
31, 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 $ 30,155 $ 2,709 $ 25,542 $ 1,904 $ --
Operating leases 5,455 1,458 3,502 490 5
-------- ------- -------- ------- -----
Total contractual obligations $ 35,610 $ 4,167 $ 29,044 $ 2,394 $ 5
======== ======= ======== ======= =====
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 March 31, 2003,
total $31,000, which will be paid in July 2003, in the form of Common Stock, or
if approved by the lender, at the Company's option, in the form of cash. 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, the first quarter is our
seasonally slowest period, and when combined with the continued downturn in the
economy and the impact of the war in the first quarter, our liquidity was
negatively impacted. However, given the above, we were still able to improve our
working capital position during the quarter. If we are unable to continue to
improve our operations, successfully finalize the surcharges on the Oak Ridge
Contracts and to 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 as this was evident in the first
quarter of 2003.
-23-
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 revenues are principally derived from
numerous varied customers. M&EC operates under three broad spectrum contracts
("Oak Ridge Contracts") which accounted for 24.7% of total consolidated revenues
during the three months ended March 31, 2003. As the newly constructed M&EC
facility continues to enhance its processing capabilities, completes certain
expansion projects and with the amended pricing structure under the Oak Ridge
Contracts, the Company could see significantly 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 the Oak Ridge Contracts may be terminated by either
party 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.
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 PFD will
treat either 30%, 70% or 100% of the hydrolysate by-products. It is anticipated
that if the general contractor determines that PFD should treat 100% of the
hydrolysate by-product, the total payments to be received by PFD 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.
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
-24-
days PFD fails to remedy the allegations in the letter. Since PFD just received
the letter, it is investigating 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.
Potential Acquisition
The Company is in the process of negotiating to acquire from a trustee another
mixed waste permitted facility which is currently in bankruptcy. As of the date
of this report, no agreements have been entered into with the seller, and the
Company does not know if it will be successful in acquiring this mixed waste
facility. If the Company is successful, it is anticipated that the purchase
price to be paid by the Company will be approximately $6,000,000, payable in
notes or a combination of notes and cash, with the notes secured by certain
assets of the acquired facility.
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 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 $10,000; $16,000;
$37,000; and $133,000, respectively, were spent during the first quarter 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.
-25-
At March 31, 2003, the Company had accrued environmental liabilities totaling
$2,500,000, which reflects a decrease of $196,000 from the December 31, 2002,
balance of $2,696,000. The decrease represents payments on remediation projects.
The March 31, 2003, current and long-term accrued environmental balance is
recorded as follows:
PFD PFM PFSG PFMI Total
--------- --------- ----------- --------- -----------
Current accrual $ 201,000 $ 322,000 $ 89,000 $ 174,000 $ 786,000
Long-term accrual -- 580,000 1,134,000 -- 1,714,000
--------- --------- ----------- --------- -----------
Total $ 201,000 $ 902,000 $ 1,223,000 $ 174,000 $ 2,500,000
========= ========= =========== ========= ===========
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 March 31, 2003, the market value of the interest rate swap
was in an unfavorable value position of $201,000 and was recorded as a
liability. During the three months ended March 31, 2003, the Company recorded a
gain on the interest rate swap of $14,000 which offset other comprehensive loss
in the stockholders' equity section of the balance sheet (see Note 4 to Notes to
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 quarter of 2003, nor would it have had a material impact
in the first quarter of 2002 assuming an adoption of this accounting standard on
a pro forma basis.
-26-
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.
-27-
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 within 90 days of the filing of 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.
-28-
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, which Item 3
is incorporated herein by reference, except as follows:
Bryson Adams, et al. v. Environmental Purification Advancement
Corporation, et al.; Civil Action No. 99-1998, United States District
Court, Western District of Louisiana
In April, 2003, the plaintiffs, hundreds of individuals residing in or
around Bayou Sorrel, Louisiana, filed their Fifth Supplemental and
Amending Complaint naming, inter alia, Perma-Fix of Michigan, Inc.
("PFMI") and Perma-Fix of South Georgia ("PFSG") as defendants, both of
which are subsidiaries of the Company and acquired by the Company in 1999.
The lawsuit, which has been pending since 1999, includes as defendants
hundreds of entities (and their insurers) which allegedly disposed of
hazardous and toxic substances at a hazardous waste disposal site and
hazardous waste injection well in Bayou Sorrel, Louisiana, both of which
were permitted by the appropriate governmental authorities to treat and
dispose of hazardous and toxic waste. The plaintiffs allege that the
defendant entities, other than the insurers, including PFMI and PFSG, were
negligent in their selection of the sites for the treatment and/or
disposal of hazardous and toxic substances, that the plaintiffs have
suffered physical injuries, property damage and diminished property values
as a result of the escape or migration of contaminants from the sites, and
that the defendants are liable for the damages allegedly suffered by the
plaintiffs. The plaintiffs seek unspecified amounts of compensatory and
exemplary damages, interest, costs and attorney's fees.
The Company is investigating the alleged claim in this lawsuit. PFMI and
PFSG will defend themselves vigorously in connection with this matter.
However, at this point, we are unable to determine with any degree of
certainty what exposure, if any, PFMI and/or PFSG may have in this regard.
The Company is also in the process of determining whether this lawsuit is
covered by its insurers and/or the insurers of PFMI and PFSG prior to
their acquisition by the Company.
Notice of Potential Litigation
A letter dated May 13, 2003, from the same counsel who filed the complaint
against the U.S. EPA and the U.S. Army discussed in "Known Trends and
Uncertainties - Significant contracts" of the Management Discussion and
Analysis contained in this report, 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. Since PFD just received the letter, it is investigating these
claims. Based on studies performed by the Company, the Company does not
believe 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 a lawsuit is filed against
PFD, PFD intends to vigorously defend itself.
-29-
Item 5. Other Information
See discussion in " Known Trends and Uncertainties" of the Management's
Discussion and Analysis contained in this report for a discussion as to a
recently entered into subcontract by our subsidiary, PFD, regarding
studies and treatment of certain product generated and/or handled by the
U.S. Army.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Subcontract between PFD and Parsons Infrastructure and Technology
Group, Inc.
99.1 Certification by Dr. Louis F. Centofanti, Chief Executive Officer of
the Company pursuant to 18 U.S.C. Section 1350. A signed original of
this written statement has been provided to Perma-Fix Environmental
Services, Inc., will be retained by Perma-Fix Environmental
Services, Inc. and furnished to the Securities & Exchange Commission
or its staff upon request.
99.2 Certification by Richard T. Kelecy, Chief Financial Officer of the
Company pursuant to A signed original of this written statement has
been provided to Perma-Fix Environmental Services, Inc., will be
retained by Perma-Fix Environmental Services, Inc. and furnished to
the Securities & Exchange Commission or its staff upon request.
(b) Reports on Form 8-K
A current report on Form 8-K (Item 5 - Other Events and Regulation
FD Disclosures) was filed by the Company on February 24, 2003,
disclosing the legal proceedings the Company commenced against
Bechtel Jacobs Company, LLC.
-30-
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: May 14, 2003 By: /s/ Dr. Louis F. Centofanti
----------------------------
Dr. Louis F. Centofanti
Chairman of the Board
Chief Executive Officer
By: /s/ Richard T. Kelecy
----------------------------
Richard T. Kelecy
Chief Financial Officer
-31-
CERTIFICATIONS
I, Dr. Louis F. Centofanti, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Perma-Fix
Environmental Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Dr. Louis F. Centofanti
- ----------------------------
Dr. Louis F. Centofanti
Chairman of the Board
Chief Executive Officer
-32-
CERTIFICATIONS
I, Richard T. Kelecy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Perma-Fix
Environmental Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Richard T. Kelecy
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Richard T. Kelecy
Chief Financial Officer
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