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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ____________________
Commission File No. 111596
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-1954497
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
1940 N.W. 67th Place, Gainesville, FL 32653
(Address of principal executive offices) (Zip Code)
(352) 373-4200
(Registrant's telephone number)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act).
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the close of the latest practical date.
Class Outstanding at November 6, 2003
Common Stock, $.001 Par Value 35,436,209
(excluding 988,000 shares
held as treasury stock)
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PERMA-FIX ENVIRONMENTAL SERVICES, INC.
INDEX
PART I FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2003 and December 31, 2002.................2
Consolidated Statements of Operations -
Three and Nine Months Ended September 30,
2003 and 2002..........................................4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2003 and 2002............5
Consolidated Statements of Stockholders' Equity -
Nine Months Ended September 30, 2003.....................6
Notes to Consolidated Financial Statements........................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.......................................29
Item 4. Controls and Procedures..........................................30
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................31
Item 2. Changes in Securities and Use of Proceeds........................31
Item 4. Submission of Matters to a Vote of Security Holders..............31
Item 5. Other Information................................................32
Item 6. Exhibits and Reports on Form 8-K.................................33
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 nine months ended September 30, 2003, are not
necessarily indicative of results to be expected for the fiscal year ending
December 31, 2003.
-1-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
September
30, 2003 December 31,
(Amounts in Thousands, Except for Share Amounts) (Unaudited) 2002
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 194 $ 212
Restricted cash 20 20
Accounts receivable, net of allowance
for doubtful accounts of $1,200 and $1,212 27,236 21,820
Inventories 523 682
Prepaid expenses 3,340 2,722
Other receivables 367 113
-------- --------
Total current assets 31,680 25,569
Property and equipment:
Buildings and land 21,048 16,161
Equipment 32,693 29,125
Vehicles 2,885 2,616
Leasehold improvements 11,082 10,963
Office furniture and equipment 2,130 1,954
Construction-in-progress 2,721 4,325
-------- --------
72,559 65,144
Less accumulated depreciation and amortization (18,781) (15,219)
-------- --------
Net property and equipment 53,778 49,925
Intangibles and other assets:
Permits, net 16,666 20,759
Goodwill, net 6,216 6,525
Finite Risk Sinking Fund 1,234 --
Other assets 4,875 3,047
-------- --------
Total assets $114,449 $105,825
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
-2-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
September 30,
2003 December 31,
(Amounts in Thousands, Except for Share Amounts) (Unaudited) 2002
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,604 $ 9,759
Current environmental accrual 551 982
Accrued expenses 13,186 10,528
Unearned revenue 1,816 196
Current portion of long-term debt 3,118 3,373
--------- ---------
Total current liabilities 27,275 24,838
Environmental accruals 1,669 1,714
Accrued closure costs 4,931 4,929
Other long-term liabilities 1,470 1,332
Long-term debt, less current portion 29,492 27,142
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Total long-term liabilities 37,562 35,117
--------- ---------
Total liabilities 64,837 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, 36,274,209 and
35,326,734 shares issued, including 988,000
shares held as treasury stock, respectively 36 35
Additional paid-in capital 68,142 66,799
Accumulated deficit (17,829) (20,172)
Interest rate swap (160) (215)
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50,189 46,447
Less Common Stock in treasury at
cost; 988,000 shares (1,862) (1,862)
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Total stockholders' equity 48,327 44,585
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Total liabilities and stockholders' equity $ 114,449 $ 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 Nine Months Ended
September 30, September 30,
-------------------------- ------------------------
(Amounts in Thousands, Except for Per Share Amounts) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 25,463 $ 24,232 $ 64,890 $ 63,168
Cost of goods sold 15,223 16,988 45,071 44,835
-------- -------- -------- --------
10,240 19,819
Gross profit 7,244 18,333
Selling, general and administrative
expenses 4,971 4,422 14,137 12,697
-------- -------- -------- --------
Income from operations 5,269 2,822 5,682 5,636
Other income (expense):
Interest income 2 4 7 13
Interest expense (744) (723) (2,137) (2,150)
Interest expense-financing fees (256) (262) (814) (779)
Other (198) (285) (253) (366)
-------- -------- -------- --------
Net income 4,073 1,556 2,485 2,354
Preferred Stock dividends (48) (48) (142) (111)
-------- -------- -------- --------
Net income applicable to Common Stock $ 4,025 $ 1,508 $ 2,343 $ 2,243
======== ======== ======== ========
Net income per common share:
Basic $ .12 $ .04 $ .07 $ .07
======== ======== ======== ========
Diluted $ .11 $ .04 $ .06 $ .06
======== ======== ======== ========
Number of shares and potential common
shares used in net income per common share:
Basic 34,885 34,275 34,764 34,181
======== ======== ======== ========
Diluted 38,247 42,617 39,089 42,992
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
-4-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
----------------------
(Amounts in Thousands) 2003 2002
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 2,485 $ 2,354
Adjustments to reconcile net income
to cash provided by (used in)
operations:
Depreciation and amortization
Debt discount amortization 3,619 3,143
Provision for bad debt and other reserves 243 243
(Gain) loss on sale of plant, 216 263
property and equipment (15) 11
Changes in assets and liabilities:
Accounts receivable (5,632) (4,405)
Prepaid expenses, inventories
and other assets (1,827) 388
Accounts payable and accrued expenses 1,982 3,300
------- -------
Net cash provided by operations 1,071 5,297
Cash flows from investing activities:
Purchases of property and equipment, net (1,663) (3,705)
Proceeds from sale of plant,
property and equipment 15 9
Change in restricted cash, net (2) (4)
Change in finite risk sinking fund (1,234) --
------- -------
Net cash used in investing activities (2,884) (3,700)
Cash flows from financing activities:
Net borrowings (repayments) of revolving credit 3,221 (607)
Principal repayments of long-term debt (2,620) (2,279)
Proceeds from issuance of stock 1,194 512
------- -------
Net cash provided by (used in)
financing activities 1,795 (2,374)
------- -------
Decrease in cash (18) (777)
Cash at beginning of period 212 860
------- -------
Cash at end of period $ 194 $ 83
======= =======
Supplemental disclosure:
Interest paid $ 1,855 $ 2,022
Non-cash investing and financing activities:
Issuance of Common Stock for services 25 32
Issuance of Common Stock for payment
of dividends 125 125
Gain (loss) on interest rate swap Gain
(loss) on interest rate swap 55 (68)
Long-term debt incurred for purchase
of property and equipment 1,250 644
The accompanying notes are integral part of these
consolidated financial statements.
-5-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, for the nine months ended September 30, 2003)
Common
Preferred Stock Common Stock Additional Stock Total
(Amounts in thousands, Paid-In Accumulated Interest Held In Stockholders'
except for share amounts) Shares Amount Shares Amount Capital Deficit Rate Swap Treasury Equity
- -------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2002 2,500 $ -- 35,326,734 $ 35 $66,799 $(20,172) $ (215) $ (1,862) $44,585
Comprehensive income:
Net income -- -- -- -- -- 2,485 -- -- 2,485
Other Comprehensive
income:
Gain on interest
rate swap -- -- -- -- -- -- 55 -- 55
-------
Comprehensive income 2,540
Preferred Stock dividends -- -- -- -- -- (142) -- -- (142)
Issuance of Common Stock for
Preferred Stock dividend -- -- 59,000 -- 125 -- -- -- 125
Issuance of stock for cash
and services -- -- 888,475 1 1,218 -- -- -- 1,219
------ ----- ---------- ----- ------- -------- ------ -------- -------
Balance at September 30, 2003 2,500 $ -- 36,274,209 $ 36 $68,142 $(17,829) $ (160) $ (1,862) $48,327
====== ===== ========== ===== ======= ======== ====== ======== =======
The accompanying notes are an integral part of these
consolidated financial statements.
-6-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Reference is made herein to the notes to consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2002.
1. Summary of Significant Accounting Policies
Our accounting policies are as set forth in the notes to consolidated financial
statements referred to above.
Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
The adoption of SFAS did not have an impact on the Company's consolidated
financial statements.
Stock-Based Compensation
The Company accounts for, and plans to continue accounting for, its stock-based
employee compensation plans under the accounting provisions of APB Opinion 25,
Accounting for Stock Issued to Employees, and has furnished the pro forma
disclosures required under Statement of Financial Accounting Standards ("SFAS")
123, Accounting for Stock-Based Compensation, and SFAS 148, Accounting for
Stock-Based Compensation - Transition and Disclosure.
SFAS 123 requires pro forma information regarding net income and earnings per
share as if compensation cost for our employee and director stock options had
been determined in accordance with the fair market value-based method prescribed
in SFAS 123. We estimate the fair value of each stock option at the grant date
by using the Black-Scholes option-pricing model with the following assumptions
used for grants in 2003 and 2002: no dividend yield; an expected life of ten
years; expected volatility between 30.5% and 23.2%; and risk free interest rates
between 2.75% and 3.33%.
Under the accounting provisions of SFAS 123, our net income and net income per
share would have been reduced to the pro forma amounts indicated below (in
thousands except for per share amounts):
-7-
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
------------------------- -------------------------
Net income applicable to Common Stock, as reported $ 4,025 $ 1,508 $ 2,343 $ 2,243
Deduct: Total Stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects (131) (78) (331) (252)
-------- -------- -------- --------
Pro forma net income applicable to Common Stock $ 3,894 $ 1,430 $ 2,012 $ 1,991
======== ======== ======== ========
Earnings per share:
Basic - as reported $ .12 $ .04 $ .07 $ .07
======== ======== ======== ========
Basic - pro-forma $ .11 $ .04 $ .06 $ .06
======== ======== ======== ========
Diluted - as reported $ .11 $ .04 $ .06 $ .06
======== ======== ======== ========
Diluted - pro-forma $ .10 $ .03 $ .06 $ .05
======== ======== ======== ========
Change in Accounting Estimate
Effective September 1, 2003 we refined our percentage of completion methodology
for purposes of revenue recognition in the Nuclear Waste Management Services
segment. As we accept more complex waste streams in this segment, the treatment
of those waste streams becomes more complicated and more time consuming. The
Company has continued to enhance its waste tracking capabilities and systems,
which has enabled the Company to better match the revenue earned to the
processing milestones achieved. The refined methodology more closely represents
the timing of the treatment process. We treated the change in methodology as a
change in accounting estimate, according to APB Opinion 20 Accounting Changes
and accounted for such changes prospectively. The impact of the change was a
reduction in net income by approximately $1,038,000 or $.03 per share for the
three and nine months ended September 30, 2003.
2. Recently Adopted Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 143,
Accounting for Asset Retirement Obligations, which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and normal use of the asset.
SFAS 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made, and that the associated asset retirement
costs be capitalized as part of the carrying amount of the long-lived asset. In
conjunction with the state mandated permit and licensing requirements, the
Company is obligated to determine its best estimate of the cost to close, at
some undetermined future date, it's permitted and/or licensed facilities. The
Company recorded this liability at the date of acquisition, with its offsetting
entry being to goodwill and/or permits and has subsequently increased this
liability as a result of changes to the facility and/or for inflation. The
Company's current accrued closure costs reflect the current fair value of the
cost of asset retirement. The Company adopted SFAS 143 as of January 1, 2003,
and pursuant to the adoption the Company reclassified from goodwill and permits
approximately $4,559,000, which represents the fair value of the Company's
closing costs as recorded to goodwill or permits at the time each facility was
acquired, into an asset retirement obligations account. The asset retirement
obligation account is recorded as property and equipment (buildings). The
Company will depreciate the asset retirement obligation on a straight-line basis
over a period of 50 years. The new standard did not have a material impact on
net income in the first nine months of 2003, nor would it have had a material
impact in the first nine months of 2002 assuming an adoption of this accounting
standard on January 1, 2002.
-8-
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.
The following is a reconciliation of basic net income per share and diluted net
income per share for the three and nine months ended September 30, 2003 and
2002.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
(Amounts in thousands except per share amounts) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to Common Stock - basic $ 4,025 $ 1,508 $ 2,343 $ 2,243
Effect of dilutive securities - Preferred Stock dividends 48 48 142 111
-------- -------- -------- --------
Net income applicable to Common Stock - diluted $ 4,073 $ 1,556 $ 2,485 $ 2,354
======== ======== ======== ========
Basic net income per share $ .12 $ .04 $ .07 $ .07
======== ======== ======== ========
Diluted net income per share $ .11 $ .04 $ .06 $ .06
======== ======== ======== ========
Weighted average shares outstanding - basic 34,885 34,275 34,764 34,181
Potential shares exercisable under stock option plans 344 1,055 450 1,119
Potential shares upon exercise of Warrants 1,351 5,620 2,208 6,025
Potential shares upon conversion of Preferred Stock 1,667 1,667 1,667 1,667
-------- -------- -------- --------
Weighted average shares outstanding - diluted 38,247 42,617 39,089 42,992
======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
Potential shares excluded from above
weighted average share calculations due
to their anti-dilutive effect include:
Upon exercise of Options 1,641 287 1,551 257
Upon exercise of Warrants 625 175 95 175
-9-
4. Long Term Debt
Long-term debt consists of the following at September 30, 2003, and December 31,
2002:
September 30, December
(Amounts in Thousands) 2003 (Unaudited) 31, 2003
- -----------------------------------------------------------------------------------------------------------------------
Revolving Credit facility dated December 22, 2000, borrowings based
upon eligible accounts receivable, subject to monthly borrowing base
calculation, variable interest paid monthly at prime rate plus 1% (5.00%
at September 30, 2003), balance due in December 2005. $ 11,963 $ 8,742
Term Loan dated December 22, 2000, payable in equal monthly installments
of principal of $83, balance due in December 2005, variable interest paid
monthly at prime rate plus 1 1/2 % (5.50% at September 30, 2003). 4,333 5,083
Three promissory notes dated May 27, 1999, payable in equal monthly
installments of principal and interest of $90 over 60 months, due June
2004, interest at 7.0%. 789 1,538
Unsecured promissory note dated August 31, 2000, payable in lump sum in August
2005, interest paid annually at 7.0%. 3,500 3,500
Senior subordinated notes dated July 31, 2001, payable in lump sum on July
31, 2006, interest payable quarterly at an annual interest rate of 13.5%,
net of unamortized debt discount of $919 at September 30, 2003 and $1,163
at December 31, 2002. 4,706 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 September 30, 2003) and is payable in one lump sum at the end of
installment period. 3,474 3,594
Installment agreement dated June 25, 2001, payable in semiannual installments
on June 30 and December 31 through December 31, 2008, variable interest
accrues at the applicable law rate determined under the IRS Code Section
(8.0% on September 30, 2003) and is payable in one lump sum at the end of
installment period. 863 893
Various capital lease and promissory note obligations, payable 2003 to
2008, interest at rates ranging from 5.2% to 17.9%. 2,982 2,703
--------- ---------
32,610 30,515
Less current portion of long-term debt 3,118 3,373
--------- ---------
$ 29,492 $ 27,142
========= =========
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. 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,
-10-
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 September
30, 2003, the excess availability under our Revolving Credit was $8,547,000
based on our eligible receivables. However, during the third quarter of 2003,
the Company's borrowings approached the maximum line capacity under the
Revolving Credit, thereby reducing the line availability from which the Company
could borrow to $2,848,000 as of September 30, 2003. (See Amendment No. 3 below,
which explains the increase in the Revolving Credit).
Pursuant to the Agreement the Term Loan bears interest at a floating rate equal
to the prime rate plus 1 1/2 %, and the Revolving Credit at a floating rate
equal to the prime rate plus 1%. The loans are subject to a prepayment fee of 1
1/2 % in the first year, 1% in the second and third years and 3/4 % after the
third anniversary until termination date.
In December 2000, the Company entered into an interest rate swap agreement
related to its Term Loan. This hedge, has effectively fixed the interest rate on
the notional amount of $3,500,000 of the floating rate $7,000,000 PNC Term Loan.
The Company will pay the counterparty interest at a fixed rate equal to the base
rate of 6.25%, for a period from December 22, 2000, through December 22, 2005,
in exchange for the counterparty paying the Company one-month LIBOR rate for the
same term (1.12% at September 30, 2003). At September 30, 2003, the market value
of the interest rate swap was in an unfavorable value position of $160,000 and
was recorded as a liability. During the nine months ended September 30, 2003,
the Company recorded a gain on the interest rate swap of $55,000, which was
included in other comprehensive income on the Statement of Stockholders' Equity.
Effective as of June 10, 2002, the Company and PNC entered into Amendment No. 1
to the Agreement, which, among other things, increased the letter of credit
commitment from $500,000 to $4,500,000 and provided for a $4.0 million standby
letter of credit. The standby Letter of Credit was issued to secure certain
surety bond obligations. As a condition precedent to this Amendment No. 1, the
Company paid a $50,000 amendment fee to PNC.
On May 23, 2003, the Company and PNC entered into Amendment No. 2 to the
Agreement, which among other things reduced the letter of credit commitment from
$4,500,000 to $500,000 and terminated the $4.0 million standby letter of credit.
The standby letter of credit was previously issued to secure certain surety bond
obligations, which provided financial assurance closure guarantees to the
applicable states pursuant to the Company's permits and licenses. The financial
assurance has been satisfied with a newly established 25-year finite risk
insurance policy (see Note 5). This finite risk insurance policy required an
upfront payment of $4.0 million, which was funded through the Revolving Credit
with PNC, utilizing the collateral that previously supported the $4.0 million
letter of credit. As a condition precedent to this Amendment No. 2, the Company
paid a $25,000 amendment fee to PNC.
Effective October 31, 2003, the Company and PNC entered into Amendment No. 3 to
the Agreement, which, among other things, increased the maximum principal amount
outstanding at any one time under the Revolving Credit from $15,000,000 to
$18,000,000. As a condition precedent to this Amendment No. 3, the Company paid
a $30,000 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 $789,000 at September 30,
2003. Such amount is included in current portion of long term debt. Payments of
such Promissory Notes are guaranteed by PFMI under a non-recourse guaranty,
which non-recourse guaranty is secured by certain real estate owned by PFMI.
These Promissory Notes are subject to subordination agreements with the
Company's senior and subordinated lenders.
-11-
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. As of September 30, 2003, the unamortized portion of the debt
discount was $919,000. The Warrants, as issued, also contain a cashless exercise
provision. The Warrant Shares are registered under an S-3 Registration Statement
that was declared effective on November 27, 2002.
In connection with the sale of the Notes, the Company, AMI, and BEC entered into
an Option Agreement, dated July 31, 2001 (the "Option Agreement"). Pursuant to
the Option Agreement, the Company granted each purchaser an irrevocable option
requiring the Company to purchase any of the Warrants or Warrant Shares then
held by the purchaser (the "Put Option"). The Put Option may be exercised at any
time commencing July 31, 2004, and ending July 31, 2008. In addition, each
purchaser granted to the Company an irrevocable option to purchase all the
Warrants or the Warrant Shares then held by the purchaser (the "Call Option").
The Call Option may be exercised at any time commencing July 31, 2005, and
ending July 31, 2008. The purchase price under the Put Option and the Call
Option is based on the quotient obtained by dividing (a) the sum of six times
the Company's consolidated EBITDA for the period of the 12 most recent
consecutive months minus Net Debt plus the Warrant Proceeds by (b) the Company's
Diluted Shares (as the terms EBITDA, Net Debt, Warrant Proceeds, and Diluted
Shares are defined in the Option Agreement). 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 September 30, 2003, the
Put Option had no value and no liability was recorded.
Promissory Note
East Tennessee Materials and Energy Corporation ("M&EC") issued a promissory
note for a principal amount of $3.7 million to PDC, dated June 7, 2001, for
monies advanced to M&EC for certain services performed by PDC. The promissory
note is payable over eight years on a semiannual basis on June 30 and December
31. Interest is accrued at the applicable rate (8.00% on September 30, 2003) and
payable in one lump sum at the end of the loan period. On September 30, 2003,
the outstanding balance was $4,282,000 including accrued interest of
approximately $808,000. 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.
-12-
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 September 30, 2003,
the rate was 8.00%. On September 30, 2003, the outstanding balance was
$1,060,000 including accrued interest of approximately $197,000.
5. Commitments and Contingencies
Hazardous Waste
In connection with our waste management services, we handle both hazardous and
non-hazardous waste, which we transport to our own, or other facilities for
destruction or disposal. As a result of disposing of hazardous substances, in
the event any cleanup is required, we could be a potentially responsible party
for the costs of the cleanup notwithstanding any absence of fault on our part.
Legal
In the normal course of conducting our business, we are involved in various
litigations. Except as stated below, there has been no material change in legal
proceedings from those disclosed previously in the Company's Form 10-K for the
year ended December 31, 2002, and the Company's Form 10-Q for the quarters ended
March 31, 2003 and June 30, 2003. We are not a party to any litigation or
governmental proceeding which our management believes could result in any
judgments or fines against us that would have a material adverse affect on the
Company's financial position, liquidity or results of operations.
PFD and the defendants have finalized the settlement of the lawsuit that was
filed by the Company in the United States District Court, for the Southern
District of Ohio, styled Perma-Fix of Dayton, Inc. v. R.D. Baker Enterprises,
Inc., case no. C-3-99-469. In October 2003, the defendants paid PFD $400,000,
and PFD will use the funds to remediate a parcel of leased property ("Leased
Property"), which was formerly used as a Resource Conservation and Recovery Act
of 1976 storage facility that was operated as a storage and solvent recycling
facility by a company that was merged with PFD prior to the Company's
acquisition of PFD.
We have entered into an oral agreement with Patrick Sullivan, a former employee
of our subsidiary Perma-Fix of Orlando, Inc., to settle a lawsuit we filed
against Mr. Sullivan in the circuit court of the Ninth Judicial Circuit in
Orange County, Florida, for injunction relief and damages related to his alleged
violation of his employment agreement and other duties to the Company. Under the
oral agreement, we are to receive $30,000 and an agreement from Mr. Sullivan not
to solicit our customers. The settlement is subject to the parties entering into
a definitive settlement agreement.
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 various closure cost financial assurance instruments to guarantee
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.
-13-
Insurance
We believe we maintain insurance coverage adequate for our needs and which is
similar to, or greater than, the coverage maintained by other companies of our
size in the industry. There can be no assurances, however, those liabilities,
which may be incurred by us, will be covered by our insurance or that the dollar
amount of such liabilities, which are covered, will not exceed our policy
limits. Under our insurance contracts, we usually accept self-insured
retentions, which we believe is appropriate for our specific business risks. We
are required by EPA regulations to carry environmental impairment liability
insurance providing coverage for damages on a claims-made basis in amounts of at
least $1 million per occurrence and $2 million per year in the aggregate. To
meet the requirements of customers, we have exceeded these coverage amounts.
In June 2003, the Company entered into a 25-year finite risk insurance policy,
which provides financial assurance to the applicable states for our permitted
facilities in the event of unforeseen closure. Prior to obtaining or renewing
operating permits we are required to provide financial assurance that guarantee
to the states that, in the event of closure, our permitted facilities will be
closed in accordance with the regulations. The policy provides $35 million of
financial assurance coverage and has available capacity to allow for annual
inflation and other performance and surety bond requirements. On the fourth and
subsequent anniversaries of the contract inception, the Company may elect to
terminate this contract.
6. Operating Segments
Pursuant to FAS 131, we define an operating segment as:
o A business activity from which we may earn revenue and incur
expenses;
o Whose operating results are regularly reviewed by the chief
operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance; and
o For which discrete financial information is available.
We have three operating segments, which are defined as each business line that
we operate. This however, excludes corporate headquarters, which does not
generate revenue.
Our operating segments are defined as follows:
The Industrial Waste Management Services segment, which provides on-and-off site
treatment, storage, processing and disposal of hazardous and nonhazardous
industrial waste, commercial waste and wastewater through our six treatment,
storage and disposal ("TSD") facilities; Perma-Fix Treatment Services, Inc.,
Perma-Fix of Dayton, Inc., Perma-Fix of Ft. Lauderdale, Inc., Perma-Fix of
Orlando, Inc., Perma-Fix of South Georgia, Inc., and Perma-Fix of Michigan, Inc.
We provide through Perma-Fix Government Services various waste management
services to certain governmental agencies.
The Nuclear Waste Management Services segment, which provides treatment,
storage, processing and disposal services for waste which is both hazardous and
low-level radioactive ("Mixed Waste"). Included in such is research,
development, on and off-site waste remediation of nuclear mixed and low-level
radioactive waste through our three TSD facilities; Perma-Fix of Florida, Inc.,
Diversified Scientific Services, Inc., and East Tennessee Materials and Energy
Corporation.
The Consulting Engineering Services segment provides environmental engineering
and regulatory compliance services through Schreiber, Yonley & Associates, Inc.
which includes oversight management of environmental restoration projects, air
and soil sampling and compliance and training activities, as well as,
engineering support as needed by our other segments.
-14-
The table below presents certain financial information in thousands by business
segment for the three and nine months ended September 30, 2003 and 2002.
Segment Reporting for the Quarter Ended September 30, 2003
Industrial Nuclear
Waste Waste Segments Consolidated
Services Services Engineering Total Corporate Total
---------- ------------ ------------- ---------- ---------- ------------
Revenue from external customers $ 12,211 $ 12,487 $ 765 $ 25,463 $ -- $ 25,463
Intercompany revenues 936 702 143 1,781 -- 1,781
Interest income 1 -- -- 1 1 2
Interest expense 191 505 (2) 694 50 744
Interest expense-financing fees -- -- -- -- 256 256
Depreciation and amortization 576 637 9 1,222 18 1,240
Segment profit 100 3,831 94 4,025 -- 4,025
Segment assets(1) 42,665 60,841 2,130 105,636 8,813 114,449
Expenditures for segment assets 245 425 44 714 135 849
Segment Reporting for the Quarter Ended September 30, 2002
Industrial Nuclear
Waste Waste Segments Consolidated
Services Services Engineering Total Corporate Total
---------- ------------ ------------- ---------- ---------- ------------
Revenue from external customers $ 9,902 $ 13,552 $ 778 $ 24,232 $ -- $ 24,232
Intercompany revenues 984 521 45 1,550 -- 1,550
Interest income 4 -- -- 4 -- 4
Interest expense 175 546 (2) 719 4 723
Interest expense-financing fees -- 3 -- 3 259 262
Depreciation and amortization 487 549 10 1,046 21 1,067
Segment profit (loss) (1,149) 2,607 50 1,508 -- 1,508
Segment assets(1) 40,237 57,612 2,123 99,972 4,944 104,916
Expenditures for segment assets 793 451 3 1,247 72 1,319
Segment Reporting for the Nine Months Ended September 30, 2003
Industrial Nuclear
Waste Waste Segments Consolidated
Services Services Engineering Total Corporate Total
---------- ------------ ------------- ---------- ---------- ------------
Revenue from external customers $ 33,719 $ 28,753 $ 2,418 $ 64,890 $ -- $ 64,890
Intercompany revenues 3,211 2,009 417 5,637 -- 5,637
Interest income 4 -- -- 4 3 7
Interest expense 565 1,448 (8) 2,005 132 2,137
Interest expense-financing fees -- 3 -- 3 811 814
Depreciation and amortization 1,688 1,848 27 3,563 56 3,619
Segment profit (loss) (1,307) 3,400 250 2,343 -- 2,343
Segment assets(1) 42,665 60,841 2,130 105,636 8,813 114,449
Expenditures for segment assets 1,081 1,493 52 2,626 287 2,913
Segment Reporting for the Nine Months Ended September 30, 2002
Industrial Nuclear
Waste Waste Segments Consolidated
Services Services Engineering Total Corporate Total
---------- ------------ ------------- ---------- ---------- ------------
Revenue from external customers $ 27,961 $ 32,589 $ 2,618 $ 63,168 $ -- $ 63,168
Intercompany revenues 4,547 3,428 89 8,064 -- 8,064
Interest income 12 -- -- 12 1 13
Interest expense 507 1,641 2 2,150 -- 2,150
Interest expense-financing fees -- 7 -- 7 772 779
Depreciation and amortization 1,464 1,586 30 3,080 63 3,143
Segment profit (loss) (3,067) 5,033 277 2,243 -- 2,243
Segment assets(1) 40,237 57,612 2,123 99,972 4,944 104,916
Expenditures for segment assets 2,133 2,133 7 4,273 76 4,349
(1) Segment assets have been adjusted for intercompany accounts to reflect
actual assets for each segment.
-15-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART I, ITEM 2
Forward-looking Statements
Certain statements contained within this report may be deemed "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(collectively, the "Private Securities Litigation Reform Act of 1995"). All
statements in this report other than a statement of historical fact are
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors, which could cause actual results and
performance of the Company to differ materially from such statements. The words
"believe," "expect," "anticipate," "intend," "will," and similar expressions
identify forward-looking statements. Forward-looking statements contained herein
relate to, among other things,
o improve our operations and liquidity;
o anticipated improvement in the financial performance of the Company;
o ability to comply with the Company's general working capital
requirements;
o ability to be able to continue to borrow under the Company's
revolving line of credit;
o ability to generate sufficient cash flow from operations to fund all
costs of operations and remediation of certain formerly leased
property in Dayton, Ohio, and the Company's facilities in Memphis,
Tennessee; and Valdosta, Georgia;
o ability to remediate certain contaminated sites for projected
amounts;
o ability to fund up to $1 million of budgeted capital expenditures
during the fourth quarter of 2003;
o as the M&EC facility continues to enhance its processing
capabilities and completes certain expansion projects, the Company
could see higher total revenues under Oak Ridge Contracts;
o finalize surcharge issues relating to Oak Ridge Contracts; and
o increasing other sources of revenue at M&EC.
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;
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 continue to be profitable on an annualized basis;
o the inability of the Company to maintain the listing of its Common
Stock on the NASDAQ;
o PFD being required to have a Title V air permit;
o the determination that PFMI or PFO was responsible for a material
amount of remediation at certain superfund sites; and
-16-
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 nine months ended September 30, 2003 and 2002 the
allowance for doubtful accounts was increased, through a charge to bad debt
expense, by $216,000 and $263,000, respectively. 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 the years ended December
31, 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 separately test goodwill and permits for impairment. The report provided
by the appraiser indicated that no impairment existed as of January 1, 2002.
Goodwill and permits were again tested as of October 1, 2002, which also
indicated no impairment. Effective January 1, 2002, the Company discontinued
amortizing indefinite life intangible assets (permits) and goodwill as required
by SFAS 142.
Accrued Closure Costs. Accrued closure costs represent a contingent
environmental liability to clean up a facility in the event the Company ceases
operations in an existing facility. The accrued closure costs are estimates
based on guidelines developed by federal and/or state regulatory authorities
under RCRA. Such costs are evaluated annually and adjusted for inflationary
factors and for approved changes or expansions to the facilities. Increases due
to annual inflationary factors for 2003, 2002, and 2001 are approximately 1.1%,
2.2% and 2.1%, respectively, and based on the historical information, the
Company does not expect future inflationary changes to differ materially from
the previous years. Increases or decreases in accrued closure costs resulting
from changes or expansions at the facilities are determined based on specific
RCRA guidelines applied to the requested change. This calculation includes
certain estimates, such as disposal pricing, external 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 three remediation projects
currently in progress. The current and long-term accrual amounts for the
projects are our best estimates based on proposed or approved processes for
clean up. The circumstances that could affect the outcome range from new
technologies that are being developed every day to reduce the Company's overall
costs, to increased contamination levels that could arise as the Company
completes remediation which could increase the Company's costs, neither of which
the Company anticipates at this time. In addition, significant changes in
regulations could adversely or favorably affect our costs to remediate existing
sites or potential future sites, which cannot be reasonably quantified.
-17-
Disposal Costs. The Company accrues for waste disposal based upon a physical
count of the total waste at each facility at the end of each accounting period.
Current market prices for transportation and disposal costs are applied to the
end of period waste inventories to calculate the disposal accrual. Costs are
calculated using current costs for disposal, but economic trends could
materially affect our actual costs for disposal. As there are limited disposal
sites available to us, a change in the number of available sites or an increase
or decrease in demand for the existing disposal areas could significantly affect
the actual disposal costs either positively or negatively.
Self Insurance. We have a self-insurance program for certain health benefits.
The cost of such benefits is recognized as expense in the period in which the
claim occurred and includes an estimate of claims incurred but not reported
("IBNR"), with such estimates based upon historical trends. Actual health
insurance claims may differ materially from the estimates, as a result of the
nature and extent of the actual IBNR claims paid. The Company maintains separate
insurance to cover the excess liability over an established specific single
claim amount and also an aggregate annual claim total.
Results of Operations
The table below should be used when reviewing management's discussion and
analysis for the three and nine months ended September 30, 2003 and 2002:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- --------------------------------------
Consolidated (amounts in thousands) 2003 % 2002 % 2003 % 2002 %
- -----------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 25,463 100.0 $ 24,232 100.0 $ 64,890 100.0 $ 63,168 100.0
Cost of goods sold 15,223 59.8 16,988 70.1 45,071 69.5 44,835 71.0
-------- ----- -------- ----- -------- ----- -------- -----
10,240 40.2 7,244 29.9 19,819 30.5 18,333 29.0
Selling, general and administrative 4,971 19.5 4,422 18.3 14,137 21.8 12,697 20.1
-------- ----- -------- ----- -------- ----- -------- -----
Income from operations $ 5,269 20.7 $ 2,822 11.6 5,682 8.7 $ 5,636 8.9
======== ===== ======== ===== ======== ===== ======== =====
Interest expense (744) (2.9) (723) (3.0) (2,137) (3.3) (2,150) (3.4)
Interest expense-financing fees (256) (1.0) (262) (1.1) (814) (1.3) (779) (1.2)
Preferred Stock dividends (48) (.2) (48) (.2) (142) (.2) (111) (.2)
Summary - Three and Nine Months Ended September 30, 2003 and 2002
The Company provides services through three reportable operating segments. The
Industrial Waste Management Services segment is engaged in on-site and off-site
treatment, storage, disposal and processing of a wide variety of by-products and
industrial, hazardous and non-hazardous wastes. This segment competes for
materials and services with numerous regional and national competitors to
provide comprehensive and cost-effective waste management services to a wide
variety of customers nationwide. The Company operates and maintains facilities
and businesses in the waste by-product brokerage, on-site treatment and
stabilization, and off-site blending, treatment and disposal industries. The
Nuclear Waste Management Services segment provides treatment, storage,
processing and disposal services of mixed waste (waste containing both hazardous
and low-level radioactive materials) and low-level radioactive wastes, including
research, development and on-site and off-site waste remediation. The presence
of nuclear and low-level radioactive constituents within the waste streams
processed by this segment create different and unique operational, processing
and permitting/licensing requirements from those contained within the Industrial
Waste Management Services segment. The Company's Consulting Engineering Services
segment provides a wide variety of environmental
-18-
related consulting and engineering services to both industry and government.
This 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 $25,463,000 for the quarter ended
September 30, 2003, as compared to $24,232,000 for the same quarter in 2002. The
increase of $1,231,000 or 5.1% is attributable to an increase in the Industrial
Waste Management Services segment of approximately $2,309,000 resulting from
certain new or expanded product lines, such as lab packing, overall improved
waste volumes and approximately $1.8 million in revenues recognized for public
outreach and treatability studies related to the Army's Newport hydrolysate
project. See "Known Trends and Uncertainties and Significant Contracts" of this
Management's Discussion and Analysis for further discussion on the hydrolysate
project. Offsetting the increase, was a decrease in the Nuclear Waste Management
Services segment of approximately $1,065,000, resulting from a change in
accounting estimate for revenue recognition. (See Note 1 of Notes to
Consolidated Financial Statements.) The impact of this change on the quarter is
a deferral of revenues of approximately $3,790,000. However, this change in
estimate was partially offset by continued expansion within the mixed waste
market as our facilities demonstrate the ability to accept and process more
complex waste streams, thus increasing sales volumes. Additionally, certain
government shipments were delayed early in the quarter, which were largely
offset by a very strong September. Under the Oak Ridge Contracts, Bechtel Jacobs
continued to move waste without delay, within the K-25 DOE complex, throughout
the third quarter. Consolidated revenues under the Oak Ridge Contracts totaled
$4,921,000 or 19.3% of total revenues for the three months ended September 30,
2003, compared to $4,902,000 or 20.2% for the three months ended September 30,
2002. The backlog of stored waste within the nuclear segment at September 30,
2003, was approximately $8,228,000, compared to $9,000,000 at December 31, 2002.
The Consulting Engineering Service segment experienced a decrease of
approximately $13,000.
Consolidated net revenues increased to $64,890,000 from $63,168,000 for the
nine-month period ended September 30, 2003. The increase of $1,722,000 or 2.7%
is attributable to an increase in the Industrial Waste Management Services
segment of approximately $5,758,000 resulting from certain new product lines,
such as lab packing, improved waste volumes at all locations and approximately
$3.0 million in revenues recognized for public outreach and treatability studies
related to the Army's Newport hydrolysate project. Offsetting this increase was
a decrease in the Nuclear Waste Management Services segment of approximately
$3,836,000 resulting principally from a change in accounting estimate for
revenue recognition. The impact of the change for the year is a deferral of
revenues of approximately $3,790,000. The decrease is further explained by the
government's partial inability to ship waste to our facilities due to the war
and ongoing campaign in Iraq, prolonged terrorism alerts, the impact of
increased revenues during 2002 which included an event project of approximately
$2.4 million and a surcharge of approximately $2.2 million. These decreases were
partially offset by continued expansion within the mixed waste market as our
facilities demonstrate the ability to accept and process more complex waste
streams, thus increasing sales volumes. Consolidated revenues under the Oak
Ridge Contracts totaled $13,912,000 or 21.4% of total revenues for the nine
months ending September 30, 2003, compared to $9,227,000 or 14.6% for the nine
months ended September 30, 2002, which reflects increased revenues under the Oak
Ridge Contracts due in part to the benefit of our facility being located within
the DOE K-25 site. See "Known Trends and Uncertainties-Significant Contracts" of
this Management's Discussion and Analysis as to a lawsuit involving the Oak
Ridge Contracts. Additionally, the Consulting Engineering Services segment
experienced a decrease of approximately $200,000, which reflects the impact a
weaker economy has on our client's expansion projects and certain one-time
projects completed in 2002.
Cost of Goods Sold
Cost of goods sold for the Company decreased $1,765,000 or 10.4% for the quarter
ended September 30, 2003, as compared to the quarter ended September 30, 2002.
This decrease in cost of goods sold principally reflects a decrease in the
Nuclear Waste Management Services segment of $2,451,000 indicative of a
reduction in disposal and processing costs associated with the continued
refinement of our treatment processes. The remaining decrease in this segment
was due to the correlating decline in sales as a result of our change in
accounting estimate. Additionally, the Consulting Engineering Services segment
experienced a
-19-
decrease of $77,000, as a result of cost reductions, which were achieved in
excess of the corresponding revenue reduction. Partially offsetting these
decreases was an increase in the Industrial Waste Management Services segment of
approximately $763,000, primarily associated with increased labor and material
costs, which relates to the increase in revenues, including the expenses
associated with the Army's Newport hydrolysate project. Depreciation expense of
$1,134,000 and $995,000 for the quarters ended September 30, 2003 and 2002,
respectively, is included in cost of goods sold, which reflects an increase of
$139,000 over 2002.
Cost of goods sold increased $236,000 or 0.5% for the nine-month period ended
September 30, 2003, as compared to the nine-month period ended September 30,
2002. This increase in cost of goods sold reflects an increase in the Industrial
Waste Management Services segment of $3,342,000, primarily associated with
increased labor, materials, disposal and transportation costs, which correlates
to the increase in revenues for this segment. Also reflected in this increase
are additional operating and off-specification waste costs, along with costs
related to the Army's Newport hydrolysate project. Offsetting this increase, was
a decrease in the Nuclear Waste Management Services segment of $2,919,000
exhibiting a decrease in disposal costs and the impact from the change in
estimate. Additionally, the Consulting Engineering Services segment experienced
a decrease of $187,000, which in part correlates with the decrease in revenues
and a result of cost reductions within the segment. Included within cost of
goods sold is depreciation expense of $3,301,000 and $2,916,000 for the nine
months ended September 30, 2003 and 2002, respectively, reflecting an increase
of $385,000 over 2002.
Gross Profit
The resulting gross profit for the quarter ended September 30, 2003, increased
$2,996,000 to $10,240,000, which as a percentage of revenue is 40.2%, as
compared to 29.9% for the quarter ended September 30, 2002. This increase in
gross profit percentage reflects an increase in the Nuclear Waste Management
Services segment from 37.9% in 2002 to 52.2% in 2003, reflecting mainly the
favorable product mix and surcharges during the quarter, improvements within the
waste processing lines and the benefit from the fixed cost nature of these
facilities once revenues have exceeded breakeven. The Industrial Waste
Management Services segment experienced an increase in gross profit percentage
from 19.0% in 2002 to 28.1% in 2003. This increase reflects the fixed costs of
operating the facilities being spread over higher revenues as well as better
margins on the waste steams processed and approximately $1.3 million in margin
for the event work with the Army's Newport Project. Lastly, there was an
increase in the Consulting Engineering Services segment from 29.4% in 2002 to
38.3% in 2003. This increase reflects the impact of higher margin projects that
were subcontracted out during the quarter.
The resulting gross profit for the nine months ended September 30, 2003,
increased $1,486,000 to $19,819,000, which as a percentage of revenue is 30.5%,
as compared to 29.0% for the nine months ended September 30, 2002. This increase
in gross profit percentage principally reflects an increase in the Industrial
Waste Management Services segment from 18.9% in 2002 to 22.9% in 2003. This
increase reflects the impact of improved waste volumes and pricing structure,
the positive impact of cost savings and operational changes within the segment
and the favorable margins of approximately $1.6 million recognized on the Army's
Newport hydrolysate project. Additionally, the Consulting Engineering Services
segment experienced an increase from 34.2% in 2002 to 36.5% in 2003, reflecting
the impact of higher margin projects performed in the two most recent quarters
of 2003. The remaining increase in gross profit percentage was attributable to
the Nuclear Waste Management Services segment, which rose from 37.3% in 2002 to
39.1% in 2003, reflecting the improved margins during the third quarter of 2003.
The 2002 margins were positively impacted by the effect of the $2.2 million
surcharge in 2002. Without the surcharge, the gross profit percentage for this
segment for 2002 would have been 32.7%.
Selling, General and Administrative
Selling, general and administrative expenses increased $549,000 or 12.4% for the
quarter ended September 30, 2003, as compared to the quarter ended September 30,
2002. This increase reflects the intensified sales and marketing efforts within
the Industrial Waste Management Services segment, somewhat offset by a decline
in payroll and related marketing expenses for the Nuclear Waste Management
Services segment, which combined accounted for $27,000 of this increase.
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Administrative payroll and related expenses accounted for $261,000 of this
increase mainly due to the added management infrastructure, relocation and
severance costs, within the industrial segment as the Company completes its
restructuring of the segment, along with increased administrative support and
severance costs within the nuclear segment. The Company also experienced
increased legal fees associated with ongoing actions, as well as additional
costs pursuant to internal control evaluation requirements of Section 404 of the
Sarbanes-Oxley Act and other general expenses, which combined totaled $237,000.
Depreciation and amortization expense was included within selling, general and
administrative expenses of $106,000 and $72,000 for the third quarters of 2003
and 2002, respectively. As a percentage of revenue, selling, general and
administrative expenses increased to 19.5% for the quarter ended September 30,
2003, compared to 18.3% for the same period in 2002.
Selling, general and administrative expenses increased $1,440,000 or 11.3% for
the nine months ended September 30, 2003, as compared to the same period in
2002. This increase reflects the above-discussed impact of increased sales and
marketing efforts within the Industrial Waste Management Services segment along
with certain other organizational changes made within the Company, which
accounted for approximately $560,000 of the increase. Administrative payroll and
related expenses for the Company accounted for $170,000 of the increase.
Additionally, this increase reflects the impact of a one-time write-off of
acquisition costs totaling $167,000 associated with a mixed waste facility,
which the Company is no longer negotiating to acquire. Depreciation and
amortization expense was included within selling, general and administrative
expenses of $318,000 and $227,000 for the nine months ended September 30, 2003
and 2002, respectively. As a percentage of revenue, selling, general and
administrative expenses increased to 21.8% for the nine months ended September
30, 2003, compared to 20.1% for the same period in 2002.
Interest Expense
Interest expense increased $21,000 for the quarter ended September 30, 2003, as
compared to the corresponding period of 2002. This increase reflects the impact
of increased borrowing levels on the revolving credit loan with PNC Bank,
National Association ("PNC"), which resulted in an increase in interest expense
of $9,000 when compared to prior year. This increase in PNC interest reflects
the impact of additional borrowings of $4.0 million to finance the finite risk
insurance policy. Additionally, an increase in debt associated with facility and
computer upgrades resulted in an increase in interest expense of $29,000.
Offsetting these increases, was a decrease in interest expense of $17,000 due to
a reduction in debt associated with past acquisitions.
Interest expense decreased by $13,000 for the nine-month period ended September
30, 2003, as compared to the corresponding period of 2002. This decrease
reflects the impact of the reduction in debt associated with past acquisitions
resulting in a decrease in interest expense of $37,000 when compared to prior
year. Additionally, this decrease reflects the impact of lower interest rates on
the revolving credit and term loans with PNC and decreased borrowing levels on
the term loan with PNC resulting in a decrease of $24,000. Offsetting these
decreases was an increase in interest expense of $48,000 associated with an
increase in debt related to facility and computer upgrades.
Interest Expense - Financing Fees
Interest expense-financing fees decreased $6,000 for the three months ended
September 30, 2003, as compared to the corresponding period for 2002. These
financing fees are principally associated with the credit facility and term loan
with PNC and the senior subordinated notes, and are amortized to expense over
the term of the loan agreements.
Interest expense-financing fees increased by $35,000 for the nine months ended
September 30, 2003, as compared to the corresponding period of 2002. This
increase was primarily due to a one-time write-off of fees associated with other
short term financing.
Preferred Stock Dividends
Preferred Stock dividends remained constant at $48,000 for the quarters ended
September 30, 2003 and 2002. Preferred Stock dividends increased $31,000 during
the nine months ended September 30, 2003, as compared to the same 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
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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 September 30, 2003, the Company had cash of $194,000. This cash total
reflects a decrease of $18,000 from December 31, 2002, as a result of net cash
provided by operations of $1,071,000 and cash provided by financing activities
of $1,795,000 (principally net borrowings under the revolving credit facility,
partially offset by repayments of long-term debt and proceeds from the issuance
of Common Stock) offset by cash used in investing activities of $2,884,000
(principally net purchases of equipment, totaling $1,663,000 and a deposit to
the finite risk sinking fund of $1,234,000). The Company is in a net borrowing
position and therefore attempts to move all excess cash balances immediately to
the revolving credit facility, so as to reduce debt and interest expense. During
2002 the Company implemented a centralized cash management system, which
included new remittance lock boxes and resulted in accelerated collection
activities and reduced cash balances, as idle cash is moved without delay to the
revolving credit facility.
Operating Activities
Accounts receivable, net of allowances for doubtful accounts, totaled
$27,236,000, an increase of $5,416,000 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
$2,732,000. Additionally, the Nuclear Waste Management Services segment
experienced an increase of $2,780,000, which was also due to increased billings
within the segment. Both segments experienced large billings at the end of the
quarter. Offsetting these increases, was a decrease in accounts receivable in
the Consulting Engineering Services segment of $96,000 reflecting the impact of
decreased revenues in this segment. Our days sales outstanding (DSO) ratio
calculated for the third quarter of 2003 was 98.4. The DSO ratios for our
segments for the third quarter in 2003 are: 69.6 for the industrial segment,
127.9 for the nuclear segment and 76.7 for the consulting engineering segment.
As of September 30, 2003, total consolidated accounts payable was $8,604,000, a
decrease of $1,155,000 from the December 31, 2002, balance of $9,759,000. This
decrease in accounts payable reflects the impact of increased billings during
the later part of the quarter, from which the Company was able to borrow
against, under its revolving line of credit, and from the improved margins and
profitability, all of which enabled the Company to reduce such accounts payable.
Working capital at September 30, 2003, was $4,405,000, as compared to working
capital of $731,000 at December 31, 2002, reflecting an increase of $3,674,000.
This working capital increase principally reflects the increased accounts
receivable balance net of the decreased accounts payable balance at the end of
the period.
Investing Activities
Our purchases of capital equipment for the nine-month period ended September 30,
2003, totaled approximately $2,913,000, including financed purchases of
$1,250,000. These expenditures were for expansion and improvements to the
operations principally within both our industrial and nuclear waste management
segments. The unfinanced capital expenditures were funded by cash provided by
operations and from proceeds from the issuance of stock. We had budgeted capital
expenditures of up to approximately $6,500,000 for 2003, which included an
estimated $1,393,000 for completion of certain 2002 projects in process, as well
as other identified capital purchases for the expansion and improvement to the
operations and for certain compliance related enhancements. Our purchases during
2003 include approximately $1,317,000 to complete certain of the 2002 projects
in process. However, based upon the current status of the planning and
evaluation of proposed projects, we believe that we will be spending an
additional $1,000,000 for capital
-22-
expenditures during the fourth quarter of 2003. We anticipate funding capital
expenditures by a combination of lease financing, internally generated funds,
and/or the proceeds received from Option and Warrant exercises.
Financing Activities
On December 22, 2000, the company entered into a Revolving Credit, Term Loan and
Security Agreement ("Agreement") with PNC Bank, National Association, a national
banking association ("PNC") acting as agent ("Agent") for lenders, and as
issuing bank. The Agreement provides for a term loan ("Term Loan") in the amount
of $7,000,000, which requires principal repayments based upon a seven-year
amortization, payable over five years, with monthly installments of $83,000 and
the remaining unpaid principal balance due on December 22, 2005. 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 September 30, 2003, the excess availability under our Revolving Credit was
$8,547,000 based on our eligible receivables. However, during the third quarter
of 2003, the Company's borrowings approached the maximum line capacity under the
Revolving Credit, thereby reducing the line availability from which the Company
could borrow to $2,848,000 as of September 30, 2003. (See Amendment No. 3 below,
explaining the increase in the Revolving Credit).
Pursuant to the Agreement the Term Loan bears interest at a floating rate equal
to the prime rate plus 1 1/2 %, and the Revolving Credit at a floating rate
equal to the prime rate plus 1%. The loans are subject to a prepayment fee of 1
1/2 % in the first year, 1% in the second and third years and 3/4 % after the
third anniversary until termination date.
In December 2000, the Company entered into an interest rate swap agreement
related to its Term Loan. This hedge, has effectively fixed the interest rate on
the notional amount of $3,500,000 of the floating rate $7,000,000 PNC Term Loan.
The Company will pay the counterparty interest at a fixed rate equal to the base
rate of 6.25%, for a period from December 22, 2000, through December 22, 2005,
in exchange for the counterparty paying the Company one month LIBOR rate for the
same term (1.12% at September 30, 2003). At September 30, 2003, the market value
of the interest rate swap was in an unfavorable value position of $160,000 and
was recorded as a liability. During the nine months ended September 30, 2003,
the Company recorded a gain on the interest rate swap of $55,000, which was
included in other comprehensive income on the Statement of Stockholders' Equity.
Effective as of June 10, 2002, the Company and PNC entered into Amendment No. 1
to the Agreement, which, among other things, increased the letter of credit
commitment from $500,000 to $4,500,000 and provided for a $4.0 million standby
letter of credit. The standby Letter of Credit was issued to secure certain
surety bond obligations. As a condition precedent to this Amendment No. 1, the
Company paid a $50,000 amendment fee to PNC.
On May 23, 2003, the Company and PNC entered into Amendment No. 2 to the
Agreement, which among other things reduced the letter of credit commitment from
$4,500,000 to $500,000 and terminated the $4.0 million standby letter of credit.
The standby letter of credit was previously issued to secure certain surety bond
obligations, which provided financial assurance closure guarantees to the
applicable states pursuant to the Company's permits and licenses. The financial
assurance has been satisfied with a newly established 25-year finite risk
insurance policy (see Contractual Obligations in this section). This finite risk
insurance policy required an upfront payment of $4.0 million, to be funded
through the Revolving Credit with PNC, utilizing the collateral that previously
supported the $4.0 million letter of credit. During the second quarter of 2003,
$3,300,000 was funded, and the remaining $700,000 was funded in July 2003. As a
condition precedent to this Amendment No. 2, the Company paid a $25,000
amendment fee to PNC.
-23-
Effective October 31, 2003, the Company and PNC entered into Amendment No. 3 to
the Agreement, which, among other things, increased the maximum principal amount
outstanding at any one time under the Revolving Credit from $15,000,000 to
$18,000,000. As a condition precedent to this Amendment No. 3, the Company paid
a $30,000 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 $789,000 at September 30,
2003, which is in the current portion. Payments of such Promissory Notes are
guaranteed by PFMI under a non-recourse guaranty, which non-recourse guaranty is
secured by certain real estate owned by PFMI. These Promissory Notes are subject
to subordination agreements with the Company's senior and subordinated lenders.
On August 31, 2000, as part of the consideration for the purchase of Diversified
Scientific Services, Inc. ("DSSI"), the Company issued to Waste Management
Holdings a long-term unsecured promissory note (the "Unsecured Promissory Note")
in the aggregate principal amount of $3,500,000, bearing interest at a rate of
7% per annum and having a five-year term with interest to be paid annually and
principal due in one lump sum at the end of the term of the Unsecured Promissory
Note (August 2005).
On July 31, 2001, the Company issued approximately $5.6 million of its 13.50%
Senior Subordinated Notes due July 31, 2006 (the "Notes"). The Notes were issued
pursuant to the terms of a Note and Warrant Purchase Agreement, dated July 31,
2001 (the "Purchase Agreement"), between the Company, Associated Mezzanine
Investors - PESI, L.P. ("AMI"), and Bridge East Capital, L.P. ("BEC"). The Notes
are unsecured and are unconditionally guaranteed by the subsidiaries of the
Company. The Company's payment obligations under the Notes are subordinate to
the Company's payment obligations to its primary lender and to certain other
debts of the Company up to an aggregate amount of $25 million. The net proceeds
from the sale of the Notes were used to repay the Company's previous short-term
loan.
Under the terms of the Purchase Agreement, the Company also issued to AMI and
BEC Warrants to purchase up to 1,281,731 shares of the Company's Common Stock
("Warrant Shares") at an initial exercise price of $1.50 per share (the
"Warrants"), subject to adjustment under certain conditions which were valued at
$1,622,000 and recorded as a debt discount and are being amortized over the term
of the Notes. As of September 30, 2003, the unamortized portion of the debt
discount was $919,000. The Warrants, as issued, also contain a cashless exercise
provision. The Warrant Shares are registered under an S-3 Registration Statement
that was declared effective on November 27, 2002.
In connection with the sale of the Notes, the Company, AMI, and BEC entered into
an Option Agreement, dated July 31, 2001 (the "Option Agreement"). Pursuant to
the Option Agreement, the Company granted each purchaser an irrevocable option
requiring the Company to purchase any of the Warrants or Warrant Shares then
held by the purchaser (the "Put Option"). The Put Option may be exercised at any
time commencing July 31, 2004, and ending July 31, 2008. In addition, each
purchaser granted to the Company an irrevocable option to purchase all the
Warrants or the Warrant Shares then held by the purchaser (the "Call Option").
The Call Option may be exercised at any time commencing July 31, 2005, and
ending July 31, 2008. The purchase price under the Put Option and the Call
Option is based on the quotient obtained by dividing (a) the sum of six times
the Company's consolidated EBITDA for the period of the 12 most recent
consecutive months minus Net Debt plus the Warrant Proceeds by (b) the Company's
Diluted Shares (as the terms EBITDA, Net Debt, Warrant Proceeds, and Diluted
Shares are defined in the Option Agreement). 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
-24-
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 September 30, 2003, the Put Option had no value and no liability was
recorded.
East Tennessee Materials and Energy Corporation ("M&EC") issued a promissory
note for a principal amount of $3.7 million to PDC, dated June 7, 2001, for
monies advanced to M&EC for certain services performed by PDC. The promissory
note is payable over eight years on a semiannual basis on June 30 and December
31. Interest is accrued at the applicable rate (8.00% on September 30, 2003) and
payable in one lump sum at the end of the loan period. On September 30, 2003,
the outstanding balance was $4,282,000 including accrued interest of
approximately $808,000. 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 September 30, 2003,
the rate was 8%. On September 30, 2003, the outstanding balance was $1,060,000
including accrued interest of approximately $197,000.
The following table summarizes the Company's contractual obligations at
September 30, 2003, and the effect such obligations are expected to have on its
liquidity and cash flow in future periods, (in thousands):
Payments due by period
-------------------------------------------------------
After
Contractual Obligations Total 2003 2004-2006 2007-2008 2008
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term debt $32,610 $ 933 $29,377 $2,300 $ --
Operating leases 4,546 487 3,525 529 5
Finite risk policy 9,034 -- 3,011 2,008 4,015
------- ------- ------- ------- -------
Total contractual obligations $46,190 $ 1,420 $35,913 $ 4,837 $ 4,020
======= ======= ======= ======= =======
In June 2003, the Company entered into a 25-year finite risk insurance policy,
which provides financial assurance to the applicable states for our permitted
facilities in the event of unforeseen closure. Prior to obtaining or renewing
operating permits we are required to provide financial assurance that guarantees
to the states that in the event of closure our permitted facilities will be
closed in accordance with the regulations. The policy provides $35 million of
financial assurance coverage and has available capacity to allow for annual
inflation and other performance and surety bond requirements. This finite risk
insurance policy required an upfront payment of $4.0 million, of which
$2,766,000 represents the full premium for the 25-year term of the policy, and
the remaining $1,234,000, to be deposited in a sinking fund account. During the
second quarter of 2003, the Company made an initial payment of $3,300,000 and
the final payment of $700,000 was recorded and paid in July 2003. Additionally,
the policy requires nine annual installments of $1,004,000 that are due on the
anniversary date of the policy. These annual installments will also be deposited
in the sinking fund account. In comparison, the Company paid $1,121,000 of
non-returnable insurance premiums for the year 2002 financial assurance program,
along with an additional collateral requirement of $4.0 million in the form of a
letter of credit issued by PNC, at an annual fee of $160,000 per year. On the
fourth and subsequent anniversaries of the contract inception, the Company may
elect to terminate this contract. If the Company so elects, the Insurer will pay
the Company an amount equal to 100% of the sinking fund account balance in
return for complete releases of liability from both the Company and any
applicable regulatory agency using this policy as an instrument to comply with
financial assurance requirements.
During the third quarter of 2003, Capital Bank Grawe Gruppe, AG ("Capital Bank")
exercised one of its outstanding warrants to purchase 150,000 shares of our
Common Stock at a total exercise price of $225,000,
-25-
or $1.50 per share, in accordance with the terms of the warrant. Additionally,
holders of certain outstanding options exercised their options to purchase
245,500 shares of our Common Stock for an aggregate purchase price of $286,000.
The proceeds of the warrant and options exercise were used to fund capital
expenditures and current remediation projects. We have also received
notification that Capital Bank has exercised one of its outstanding warrants
during the fourth quarter to purchase 150,000 shares of our Common Stock at a
total exercise price of $243,750, or $1.625 per share, in accordance with the
terms of the warrant. If completed, we also intend to use the proceeds to fund
capital expenditures and current remediation projects.
The accrued dividends on the outstanding Preferred Stock for the period July 1,
2002, through December 31, 2002, in the amount of approximately $63,000 were
paid in January 2003 in the form of 25,165 shares of Common Stock of the
Company. The dividends for the period January 1, 2003, through June 30, 2003,
total $62,000, which were paid in August 2003, in the form of 33,835 share of
Common Stock. The accrued dividends for the period July 1, 2003 through
September 30, 2003 total $32,000 and will be paid in January 2004. 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. The first half of the year was negatively
impacted by the downturn in the economy and the impact of the war and prolonged
terrorist alerts. However, our working capital position has improved during the
third quarter, as a result of the improved operating performance and revenues.
Known Trends and Uncertainties
Seasonality. Historically the Company has experienced reduced revenues,
operating losses or decreased operating profits during the first and fourth
quarters of the Company's fiscal years due to a seasonal slowdown in operations
from poor weather conditions and overall reduced activities during the holiday
season. During the Company's second and third fiscal quarters there has
historically been an increase in revenues and operating profits. Management
expects this trend to continue in future years. However, the second quarter of
2003 was adversely affected by the war in Iraq, prolonged terrorism alerts and
the downturn in the economy, while the third quarter returned to trend.
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. However, recent
months have shown that the economy is improving.
Significant contracts. The Company's nuclear revenues are principally derived
from the Department of Defense, the Department of Energy (DOE), either directly
from each DOE site individually or through the broad-spectrum contracts, nuclear
utilities, pharmaceutical companies and other commercial generators. M&EC
operates under three broad-spectrum contracts ("Oak Ridge Contracts"), which
accounted for 19.3% and 21.4% of total consolidated revenues during the three
and nine months ended September 30, 2003, respectively. As the M&EC facility
continues to enhance its processing capabilities and completes certain expansion
projects, the Company could see higher total revenue under the Oak Ridge
Contracts. In February 2003, M&EC commenced legal proceedings against the
general contractor under the Oak Ridge Contracts, seeking payment from Bechtel
Jacobs of approximately $4.3 million in surcharges relating to certain wastes
that were treated by M&EC in 2001 and 2002 under the Oak Ridge Contracts.
Bechtel Jacobs continues to deliver waste to M&EC for treatment, and M&EC
continues to accept such waste. There is no guarantee of future business under
the Oak Ridge Contracts, and either party may terminate the Oak Ridge Contracts
at any time. Termination of these contracts could have a material adverse effect
on the Company. The Company is working towards increasing other sources of
revenues at M&EC to reduce the risk of reliance on one major source of revenues.
-26-
Our subsidiary, PFD, had 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, if these studies were successful, to treat the hydrolysate at
PFD's Dayton facility. During the third quarter, PFD successfully completed the
treatability studies, demonstrating the ability to treat and destroy the
materials. However, as a result of complaints by certain public groups, in
October 2003, the subcontract for the treatment of the hydrolysate was
cancelled, which eliminated PFD as an alternative treatment and disposal site
for the hydrolysate.
Insurance. The Company maintains insurance coverage similar to, or greater than,
the coverage maintained by other companies of the same size and industry, which
complies with the requirements under applicable environmental laws. The Company
evaluates its insurance policies annually to determine adequacy, cost
effectiveness and desired deductible levels. Due to downturns in the economy and
changes within the environmental insurance market, the Company has no guarantee
that it will be able to obtain similar insurance in future years, or that the
cost of such insurance will not increase materially.
Environmental Contingencies
The Company is engaged in the waste management services segment of the pollution
control industry. As a participant in the on-site treatment, storage and
disposal market and the off-site treatment and services market, the Company is
subject to rigorous federal, state and local regulations. These regulations
mandate strict compliance and therefore are a cost and concern to the Company.
Because of their integral role in providing 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. Compared to certain of our competitors, we 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 $29,000; $45,000;
$95,000; and $307,000, respectively, were spent during the first nine months of
2003. Additional funds will be required for the next one to seven years to
properly remediate these sites. We expect to fund the 2003 expenses to remediate
these four sites from funds generated internally, our revolving credit facility
and from the exercise of warrants and options. In connection with the
remediation of the EPS site, we recently finalized settlement of a lawsuit that
we brought against the owners and former operators of the EPS site. As a result
of the settlement, in October we were paid $400,000 to be used in connection
with the remediation of the EPS site. We have completed remediation at the PFMI
facility and are awaiting verification of closure from the state that all
contaminated materials have been removed.
At September 30, 2003, the Company had accrued environmental liabilities
totaling $2,220,000, which reflects a decrease of $476,000 from the December 31,
2002, balance of $2,696,000. The decrease represents payments on remediation
projects and the completion of the PFMI remediation project. The September 30,
2003, current and long-term accrued environmental balance is recorded as
follows:
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PFD PFM PFSG Total
---------- ---------- ---------- ----------
Current accrual $ 182,000 $ 338,000 $ 31,000 $ 551,000
Long-term accrual -- 535,000 1,134,000 1,669,000
---------- ---------- ---------- ----------
Total $ 182,000 $ 873,000 $1,165,000 $2,220,000
========== ========== ========== ==========
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 September 30, 2003, the market value of the interest rate
swap was in an unfavorable value position of $160,000 and was recorded as a
liability. During the nine months ended September 30, 2003, the Company recorded
a gain on the interest rate swap of $55,000 that was included in other
comprehensive income in the stockholders' equity section of the balance sheet
(see Note 4 to Notes to Consolidated Financial Statements).
Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
The adoption of SFAS did not have an impact on the Company's consolidated
financial statements.
Recently Adopted Accounting Policies
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and normal use of the asset.
SFAS 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made, and that the associated asset retirement
costs be capitalized as part of the carrying amount of the long-lived asset. In
conjunction with the state mandated permit and licensing requirements, the
Company is obligated to determine its best estimate of the cost to close, at
some undetermined future date, its permitted and/or licensed facilities. The
Company recorded this liability at the date of acquisition, with its offsetting
entry being to goodwill and/or permits and has subsequently increased this
liability as a result of changes to the facility and/or for inflation. The
Company's current accrued closure costs reflect the current fair value of the
cost of asset retirement. The Company adopted SFAS 143 as of January 1, 2003,
and pursuant to the adoption the Company reclassified from goodwill and permits
approximately $4,559,000, which represents the fair value of the Company's
closing cost as recorded to goodwill or permits at the time each facility was
acquired, into an asset retirement obligations account. The asset retirement
obligation account is recorded as property and equipment (buildings). The
Company will depreciate the asset retirement obligation on a straight-line basis
over a period of 50 years. The new standard did not have a material impact on
net income in the first six months of 2003, nor would it have had a material
impact in the first six months of 2002 assuming an adoption of this accounting
standard on January 1, 2002.
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PERMA-FIX ENVIRONMENTAL SERVICES, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PART I, ITEM 3
The Company is exposed to certain market risks arising from adverse changes in
interest rates, primarily due to the potential effect of such changes on the
Company's variable rate loan arrangements with PNC, as described under Note 4 to
Notes to Consolidated Financial Statements. As discussed therein, the Company
entered into an interest rate swap agreement to modify the interest
characteristics of $3.5 million of its $7.0 million term loan with PNC Bank,
from a floating rate basis to a fixed rate, thus reducing the impact of interest
rate changes on this portion of the debt.
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PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONTROLS AND PROCEDURES
PART 1, ITEM 4
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the periodic reports filed
by the Company with the Securities and Exchange Commission (the "SEC") is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC and that such information is accumulated and
communicated to the Company's management. Based on their most recent evaluation,
which was completed as of the end of the period covered by this Quarterly Report
on Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer
believe that the Company's disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) are
effective. There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these internal controls
subsequent to the date of the most recent evaluation.
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PERMA-FIX ENVIRONMENTAL SERVICES, INC.
PART II - Other Information
1. Item Legal Proceedings
There are no additional material legal proceedings pending against the
Company and/or its subsidiaries not previously reported by the Company in
Item 3 of its Form 10-K for the year ended December 31, 2002, or in Part
II, Item 1 of its Form 10-Q for the quarters ended March 31, 2003, and
June 30, 2003 which Item 3, of its Form 10-K and Part II, Item 1 of its
Form 10-Q are incorporated herein by reference, except as follows:
PFD and the defendants have finalized the settlement of the lawsuit that
was filed by the Company in the United States District Court, for the
Southern District of Ohio, styled Perma-Fix of Dayton, Inc. v. R.D. Baker
Enterprises, Inc., case no. C-3-99-469. In October 2003, the defendants
paid PFD $400,000, and PFD will use the funds to remediate a parcel of
leased property ("Leased Property"), which was formerly used as a Resource
Conservation and Recovery Act of 1976 storage facility that was operated
as a storage and solvent recycling facility by a company that was merged
with PFD prior to the Company's acquisition of PFD.
We have entered into an oral agreement with Patrick Sullivan, a former
employee of our subsidiary Perma-Fix of Orlando, Inc., to settle a lawsuit
we filed against Mr. Sullivan in the circuit court of the Ninth Judicial
Circuit in Orange County, Florida, for injunction relief and damages
related to his alleged violation of his employment agreement and other
duties to the Company. Under the oral agreement, we are to receive $30,000
and an agreement from Mr. Sullivan not to solicit our customers. The
settlement is subject to the parties entering into a definitive settlement
agreement.
Item 2. Changes in Securities and Use of Proceeds
(c) During the quarter ended September 30, 2003, we sold equity securities, as
such term is defined under 12b-2 of the Exchange Act of 1934, as amended,
that were not registered under the Securities Act of 1933, as amended,
other than as previously reported, as follows:
On or about August 29, 2003, Capital Bank Grawe Gruppe, AG ("Capital
Bank"), exercised one of its outstanding warrants to purchase 150,000
shares of our Common Stock at a total exercise price of $225,000, or $1.50
per share, in accordance with the terms of the warrant. The shares were
issued under the exemption from registration provided by Section 4(2)
and/or Rule 506 of Regulation D based on Capital Bank's representations
contained in the warrant and prior dealings with the Company. The proceeds
were used to fund capital expenditures and current remediation projects.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders ("Annual Meeting") was held
on July 29, 2003. At the Annual Meeting, the following matters were voted
on and approved by the stockholders.
1. The election of seven directors to serve until the next annual
meeting of stockholders or until their respective successors
are duly elected and qualified.
2. Approval of the Company's 2003 Outside Directors Stock Plan.
3. Approval of the Company's 2003 Employee Stock Purchase Plan.
4. Ratification of the appointment of BDO Seidman, LLP as the
independent auditors of the Company for fiscal 2003.
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The Directors elected at the Annual Meeting and the votes cast for and
withheld authority for each director are as follows:
Withhold
Directors For Authority
- ----------------------- ---------- ----------
Dr. Louis F. Centofanti 25,987,581 50,006
Jon Colin 25,976,551 61,036
Jack Lahav 25,984,151 53,436
Joe R. Reeder 25,987,915 49,672
Alfred C. Warrington, IV 25,985,815 51,772
Dr. Charles E. Young 25,979,465 58,122
Mark A Zwecker 25,975,405 62,182
Also, at the Annual Meeting the stockholders approved the 2003 Outside
Directors Stock Plan, the 2003 Employee Stock Purchase Plan and ratified
the appointment of BDO Seidman, LLP as the independent auditors of the
Company for fiscal 2003. The votes for, against, abstentions and broker
non-votes are as follows:
Abstentions
and Broker
For Against Non-votes
---------- ------- -----------
Approval of 2003
Outside Director Stock Plan 17,216,255 685,187 8,136,145
Approval of 2003
Employee Stock Purchase Plan 17,347,552 555,172 8,134,863
Ratification of the Appointment
of BDO Seidman, LLP as
the Independent Auditors 25,963,822 47,659 26,106
Item 5. Other Information
Our subsidiary, PFD, had 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, if these studies were successful, to
treat the hydrolysate at PFD's Dayton facility. During the third quarter,
PFD successfully completed the treatability studies, demonstrating the
ability to treat and destroy the materials. However, as a result of
complaints by certain public groups, in October 2003, the subcontract for
the treatment of the hydrolysate was cancelled, which eliminated PFD as an
alternative treatment and disposal site for the hydrolysate.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Loan and Security Agreement between the Company, subsidiaries of the
Company and PNC Bank, incorporated by reference from Exhibit 99.1 to
the Company's Form 8-K dated, January 31, 2001.
4.2 First Amendment to Loan Agreement and Consent, dated January 30,
2001, between the Company and PNC Bank, as incorporated by reference
from Exhibit 99.7 to the Company's Form 8-K, dated January 31, 2001.
4.3 Amendment No. 1 to Revolving Credit, Term Loan and Security
Agreement, dated as of June 10, 2002, between the Company and PNC
Bank, as incorporated by reference from Exhibit 4.3 to the Company's
Form 10-Q for the quarter ended June 30, 2002, and filed on August
14, 2002.
4.4 Amendment No. 2 to Revolving Credit, Term Loan and Security
Agreement, dated as of May 23, 2003, between the Company and PNC
Bank, as incorporated by reference from Exhibit 4.4 to the Company's
Form 10-Q for the quarter ended June 30, 2002, and filed on August
14, 2002.
4.5 Amendment No. 3 to Revolving Credit, Term Loan, and Security
Agreement, dated as of October 31, 2003, between the Company and PNC
Bank.
31.1 Certification by Dr. Louis F. Centofanti, Chief Executive Officer of
the Company pursuant to Rule 13a-14(a) or 15d-14(a).
31.2 Certification by Richard T. Kelecy, Chief Financial Officer of the
Company pursuant to Rule 13a-14(a) or 15d-14(a).
32.1 Certification by Dr. Louis F. Centofanti, Chief Executive Officer of
the Company furnished pursuant to 18 U.S.C. Section 1350.
32.2 Certification by Richard T. Kelecy, Chief Financial Officer of the
Company furnished pursuant to 18 U.S.C. Section 1350.
Reports on Form 8-K
A current report on Form 8-K (Item 9 - Regulation FD Disclosure) was
filed by the Company on August 4, 2003, regarding the financial
results and conference call for the second quarter of 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
Date: November 10, 2003 By: /s/ Dr. Louis F. Centofanti
------------------------------
Dr. Louis F. Centofanti
Chairman of the Board
Chief Executive Officer
Date: November 10, 2003 By: /s/ Richard T. Kelecy
------------------------------
Richard T. Kelecy
Chief Financial Officer
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