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SECURITIES AND EXCHANGE COMMISSION Form 10-Q or Commission File No. 1-11596 PERMA-FIX ENVIRONMENTAL SERVICES, INC. Delaware
58-1954497 1940 N.W. 67th Place, Gainesville, FL 32653 (352) 373-4200 N/A 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 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 14, 2002 PERMA-FIX ENVIRONMENTAL SERVICES, INC. FINANCIAL INFORMATION OTHER INFORMATION PERMA-FIX ENVIRONMENTAL SERVICES, INC. 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, 2001. The results of operations for the nine months ended September 30, 2002, are not necessarily indicative of
results to be expected for the fiscal year ending December 31, 2002. -1- PERMA-FIX ENVIRONMENTAL SERVICES, INC. September 30, December 31,
2001 The accompanying notes are an integral part of
these consolidated financial statements. -2- PERMA-FIX ENVIRONMENTAL SERVICES, INC. September 30, December 31,
2001 The accompanying notes are an integral part of
these consolidated financial statements. -3- PERMA-FIX ENVIRONMENTAL SERVICES, INC. Three Months Ended Nine Months Ended 2002 2001 2002 The accompanying notes are an integral part of these
consolidated financial statements. -4- PERMA-FIX ENVIRONMENTAL SERVICES, INC. Nine Months Ended $ 83 The accompanying notes are an integral part of
these consolidated financial statements. -5- PERMA-FIX ENVIRONMENTAL SERVICES, INC. (Amounts in thousands, Common Stock Interest Common
Stock Total The accompanying notes are an integral part of
these consolidated financial statements. -6- 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, 2001. 1. Summary of Significant Accounting
Policies There is no provision for income taxes for the three and nine months ended September 30, 2002, as the taxes
are offset by prior year net operating loss carryforwards
2. Recently Adopted Accounting Standards The Company adopted the Financial Accounting Standards Board FASB Statements No. 141, Business
Combinations ("SFAS 141"), and No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), effective
January 1, 2002. SFAS 141 requires the use of the purchase method of accounting and prohibits the use of
the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS
141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30,
2001, and for purchase business combinations completed on or after July 1, 2001. It also requires, upon
adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill
based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test
goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify
reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful
lives of other existing recognized intangible assets, and cease amortization of intangible assets with an
indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is also required to reassess the
useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The
Company has completed its evaluation of intangible assets for impairment, and has determined that no
impairment existed as of January 1, 2002. The Company has discontinued amortizing its indefinite-life
intangible assets (goodwill and permits). Prior to January 1, 2002, goodwill and permits were amortized on
a straight-line basis over ten to forty years. Amortization expense for goodwill and permits for the three and
nine months ended September 30, 2001, was $451,000 and $1,035,000, respectively. Results for September 30, 2001, assuming the discontinuation of amortization would be as follows: Three Months Ended 1,035 .04 -7- Pursuant to the Company's adoption of SFAS 141 and 142, the Company changed its method of recording
acquired permits in connection with business combinations. For all acquisitions prior to July 2001, the
Company allocated the excess purchase price between goodwill and permits, based upon the percentage of
revenue generated through permitted activities. If all revenue/business base of an entity was derived from
and subject to the permit, then the full intangible amount was recorded to permits. The permits, therefore
were allocated this intangible value, and were generally amortized over a 20 year life. The Company will
expense as incurred any ongoing costs to maintain and renew its permits. These ongoing costs are
significantly less than the initial costs to obtain a permit. In conjunction with the final purchase price allocation as completed in June 2002, the Company reclassified
a portion of the permits recorded upon the acquisition of M&EC on June 25, 2001. Permits were originally
recorded at $10,553,000 when the Company recorded the acquisition in June 2001. During June 2002,
$9,149,000 was reclassified from permits to goodwill, and additional accrued liabilities were recognized
as goodwill in the
amount of $63,000. The amount remaining in permits of $1,403,000 represents the actual costs in obtaining the
permits. The Company is currently in discussions with the Securities and Exchange Commission relating to
SFAS 141 and 142. As of the date of this report, we do not know if the
Company will be required to make any changes and, if any changes are required, whether they will have a material adverse
effect on the Company's financial
statements for the nine months ended September 30, 2002.
Basic EPS is based on the weighted average number of shares of Common Stock outstanding during the
period. Diluted EPS includes the dilutive effect of potential common shares. Diluted loss per share for the
three and nine months ended September 30, 2001, does not include potential common shares as their effect
would be anti-dilutive. The following is a reconciliation of basic net income (loss) per share and diluted net income (loss) per share
for the three and nine months ended September 30, 2002 and 2001. Three Months Ended Nine Months Ended -8- 4. Long-term Debt Long-term debt consists of the following at September 30, 2002, and December 31, 2001: September 30, December 31,
2001 -9- 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 of $2,083,000 due on
December 22, 2005. Payments commenced on February 1, 2001. The Agreement also provided for a revolving
line of credit ("Revolving Credit") with a maximum principal amount outstanding at any one time of $15,000,000.
The Revolving Credit advances are subject to limitations of an amount up to the sum of a) up to 85% of
Commercial Receivables aged 90 days or less from invoice date, b) up to 85% of Commercial Broker Receivables
aged up to 120 days from invoice date, c) up to 85% of acceptable Government Agency Receivables aged up to
150 days from invoice date, and d) up to 50% of acceptable unbilled amounts aged up to 60 days, less e) reserves
Agent reasonably deems proper and necessary. The Revolving Credit advances shall be due and payable in full
on December 22, 2005. As of September 30, 2002, our excess availability under our Revolving Credit was
$5,612,000 based on our eligible receivables. 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 (1.82% at September 30, 2002). The value of the interest
rate swap at January 1, 2001, was deminimus. At September 30, 2002, the market value of the interest rate swap
was in an unfavorable value position of $226,000 and was recorded as a liability. During the nine months ended
September 30, 2002, the Company recorded a loss on the interest rate swap of $68,000 which offset against other
comprehensive income on the Statement of Stockholders' Equity. Effective as of June 2002, the Company and PNC entered into Amendment No. 1 to the Agreement, which,
among other things, increased the letter of credit commitment from $500,000 to $4,500,000 and provided for a
$4.0 million standby letter of credit. The standby letter of credit was issued to secure certain surety bond
obligations. Pursuant to the terms of Amendment No. 1, as partial collateral for the issuance of the standby letter
of credit, a reserve of approximately $66,000 will be recorded each month against the availability under the
Revolving Credit beginning July 15, 2002, until such time as the standby letter of credit is fully reserved. As a
condition precedent to this Amendment No. 1, the Company paid a $50,000 amendment fee to PNC. Pursuant to the terms of the Stock Purchase Agreements in connection with the acquisition of Perma-Fix of
Orlando, Inc. ("PFO"), Perma-Fix of South Georgia, Inc. ("PFSG") and Perma-Fix of Michigan, Inc. ("PFMI"),
a portion of the consideration was paid in the form of the Promissory Notes, in the aggregate amount of
$4,700,000 payable to the former owners of PFO, PFSG and PFMI. The Promissory Notes are paid in equal
monthly installments of principal and interest of approximately $90,000 over five years with the first installment
due on July 1, 1999, and having an interest rate of 5.5% for the first three years and 7% for the remaining two
years beginning June 1, 2002. The aggregate outstanding balance of the Promissory Notes total $1,779,000 at
September 30, 2002, of which $990,000 is in the current portion. Payments of such Promissory Notes are
guaranteed by PFMI under a non-recourse guaranty, which non-recourse guaranty is secured by certain real estate
owned by PFMI. These Promissory Notes are subject to subordination agreements with the Company's senior
and subordinated lenders. -10- 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 a previous short-term loan. Under the terms of the Purchase Agreement, the Company also issued to AMI and BEC Warrants to purchase
up to 1,281,731 shares of the Company's Common Stock ("Warrant Shares") at an initial exercise price of $1.50
per share (the "Warrants"), subject to adjustment under certain conditions, which were valued at $1,622,000 and
recorded as a debt discount and are being amortized over the term of the Notes. The Warrants, as issued, also
contain a cashless exercise provision. The holders of at least 25% of the Warrants or the Warrant Shares may,
at any time and from time to time during the term of the Warrants, request on two occasions registration with the
Securities and Exchange Commission ("SEC") of the Warrant Shares. In addition, the holders of the Warrants
are entitled, subject to certain conditions, to include the Warrant Shares in a registration statement covering other
securities which the Company proposes to register. On October 1, 2002, the Company filed an amended S-3
Registration Statement with the SEC covering the Warrants. The Registration Statement has not been declared
effective as of the date of this Form 10-Q. 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 the 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 has
selected to account for the changes in redemption value immediately as they occur and the Company will adjust
the carrying value of the security to equal the redemption value at the end of each reporting period. On September
30, 2002, the purchase price under the Put Option was in a negative position and as such no liability was recorded
for the redemption of the Put Option. In conjunction with the Company's acquisition of East Tennessee Materials and Energy Corporation ("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. -11- 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 a lump sum at the end of the installment
period. On September 30, 2002, the rate was 8%. On September 30, 2002, the outstanding balance was
$1,002,000 including accrued interest of approximately $104,000. M&EC also issued a promissory note for a principal amount of $3.7 million to Performance Development
Corporation (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% on September 30, 2002) and payable in a lump sum at the end of the loan
period. On September 30, 2002, the outstanding balance was $4,052,000 including accrued interest of
approximately $438,000. 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. 5. Commitments and Contingencies Hazardous Waste Legal During the second quarter of 2002 the Company's subsidiary, PFMI, and other PRPs entered into an agreement
in principle to settle the lawsuit filed by the federal government in connection with the Four County Landfill site
pending in the United States District Court for the Northern District of Indiana, South Bend Division. PFMI will
pay approximately $153,000 of the total settlement of which the total amount was accrued in September 2002.
The settlement agreement was finalized in October 2002, and provides that the Company will pay its portion of
the settlement over a twelve month period beginning in November 2002. The son, Patrick Sullivan ("P. Sullivan"), of a member of our Board of Directors, Thomas P. Sullivan ("Mr.
Sullivan"), was employed by a subsidiary of the Company, Perma-Fix of Orlando, Inc. ("PFO"), as an executive
and/or general manager from the date of the Company's acquisition of PFO in June 1999 to June 2002, when he
terminated his employment to go to work for a competitor of PFO in Orlando, Florida. P. Sullivan is subject to
an agreement with the Company that provides, in part, that P. Sullivan would not solicit customers, suppliers or
employees of the Company or PFO for a period of two years after termination of his employment. The Company
has been advised that P. Sullivan violated the agreement and his duties to the Company and PFO prior to and after
he terminated his employment with PFO. The Company is currently investigating these claims against P.
Sullivan. P. Sullivan reimbursed the Company for certain personal expenses charged to, and paid by, the
Company after the Company notified P. Sullivan of the claims. Mr. Sullivan has denied committing any breach
of his fiduciary duties to the Company in connection with these alleged actions by his son. In October 2002, the Company's subsidiary Perma-Fix of Memphis, Inc. ("PFM"), a discontinued operation,
entered into a settlement agreement with Mid-South Industrial, Inc. and CNA Insurance Company to settle a
lawsuit PFM filed seeking damages resulting from an explosion and fire which occurred in January 1997. Under
the settlement agreement PFM received approximately $233,000, in October 2002, which will be recorded
as other income in the fourth quarter of 2002. -12- Permits Accrued Closure Costs and Environmental Liabilities Insurance We have eleven operating segments which are defined as each separate facility or location that we operate. These
segments however, exclude the Corporate headquarters which does not generate revenue. Pursuant to FAS 131 we have aggregated two or more operating segments into three reportable segments to ease
in the presentation and understanding of our business. We used the following criteria to aggregate our segments:
-13- Our reportable segments are defined as follows: The Industrial Waste Management Services segment provides on-and-off site treatment, storage, processing and
disposal of hazardous and nonhazardous industrial waste, commercial waste and wastewater through our six 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 provides treatment, storage, processing and disposal services,
including research, development, on and off-site waste remediation of nuclear mixed and low-level radioactive
waste through our three TSD facilities; Perma-Fix of Florida, Inc., Diversified Scientific Services, Inc., and East
Tennessee Materials and Energy Corporation. The Consulting Engineering Services segment provides environmental engineering and regulatory compliance
services through Schreiber, Yonley & Associates, Inc. which includes oversight management of environmental
restoration projects, air and soil sampling and compliance and training activities, as well as, engineering support
as needed by our other segments. -14- The table below presents certain financial information by business segment for the three and nine months ended
September 30, 2002 and 2001. Segment Reporting for the Quarter Ended September 30, 2002 (1) Segment assets have been adjusted for intercompany accounts to reflect actual assets for each segment. -15- PERMA-FIX ENVIRONMENTAL SERVICES, INC. Forward-looking Statements 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:
-16- * 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 and Estimates 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 and determined that no impairment
existed as of January 1, 2002. Effective January 1, 2002, the Company discontinued amortizing indefinite
life intangible assets (goodwill and permits) as required by SFAS 142. Amortization expense for goodwill
and permits for the three and nine months ended September 30, 2001, was $451,000 and $1,035,000,
respectively. For further discussion of SFAS 141 and 142 see Note 2 to Notes
to Consolidated Financial Statements and "Recently Adopted Accounting Standards" in this section. Accrued Closure Costs. The accrued closure costs are estimates based on guidelines developed by federal
and/or state regulatory authorities overseeing the Company's RCRA permits and radioactive materials
licenses. Such costs are evaluated annually and adjusted for inflationary factors and for approved changes
or expansions to the facilities. Increases due to inflationary factors for the years ended December 31, 2002,
2001, 2000 and 1999 have been approximately 2.2%, 2.1%, 1.5% and 1.1%, respectively, and based on the
historical information, the Company does not expect future inflationary changes to differ materially from the
last four 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, which are based on current market conditions.
Accrued closure costs represent a contingent environmental liability to clean up a facility in the event the -17- Company ceases operations in an existing facility. However, the Company has no intention, at this time, to
close any of its facilities. Accrued Environmental Liabilities. The Company has four remediation projects currently in progress. The
current and long-term accrual amounts for the projects are the Company's best estimates determined 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 that 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 the costs to remediate existing sites or potential future sites,
which cannot be reasonably quantified. For further discussion on the Company's environmental liabilities
see "Environmental Contingencies," in this section. 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 the actual costs for disposal. As there
are limited disposal sites available to the Company, 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. The Company has 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 Three Months Ended Nine Months Ended 2002 % 2001 % 2002 % 2001 -18- Summary -- Three and Nine Months Ended September 30, 2002 and 2001 Net Revenues Consolidated net revenues increased to $63,168,000 from $53,938,000 for the nine-month period ended
September 30, 2002. This increase of $9,230,000 or 17.1% is principally attributable to an increase in the
Nuclear Waste Management Services segment of approximately $12,048,000 resulting from the favorable
negotiation of certain contract changes, the completion of a large offsite mixed waste remediation project and
from growth in mixed waste revenues driven by the continued expansion within the new and unique mixed
waste market. The Company recognized during the second quarter of 2002 approximately $2.2 million of
additional revenue for work completed during the first six months of 2002, as a result of the favorable
resolution of certain contract changes under the Oak Ridge contracts. The pricing structure under the Oak
Ridge contracts was amended to allow East Tennessee Materials & Energy
Corporation ("M&EC") to charge additional amounts for certain waste drums received
primarily in connection with drum density and chemical content. The amended pricing structure applies to
all waste received by M&EC under the Oak Ridge contracts from January 1, 2002, and on all
future waste
received under the Oak Ridge contracts. The Company continues to negotiate certain other surcharges under
the Oak Ridge contracts, which as of this time, the Company has not completed negotiations and is unable
to determine the final negotiated amount, if any. Additionally, the Consulting Engineering Services segment
experienced an increase of approximately $217,000 which was primarily due to new projects that were
awarded by nationally known cement companies. Offsetting these increases was a decrease in the Industrial
Waste Management Services segment -19- of approximately $3,035,000 resulting from the downturn in the
economy, the expiration of certain government contracts and the effect of the start-up of the new wastewater
treatment system, which occurred over the first five months of 2002. Also contributing to this decrease is
the effect of increased revenues during 2001 due to the completion of certain event business or special
projects not awarded during 2002. Cost of Goods Sold Cost of goods sold increased $4,848,000 or 13.1% for the nine-month period ended September 30, 2002, as
compared to the nine-month period ended September 30, 2001. This consolidated increase in cost of goods
sold reflects an increase in cost of goods sold in the Nuclear Waste Management Services segment of
$5,169,000 which corresponds to the growth in mixed waste revenues and an increase in cost of goods sold
in the Consulting Engineering Services segment of $224,000 primarily due to increased staffing associated
with the new projects, as noted above. Offsetting this increase was a decrease in the Industrial Waste
Management Services segment of $545,000 which directly corresponds to the decrease in revenues for this
segment, partially offset by additional operating costs associated with the development and installation of its
new wastewater treatment technology. Gross Profit The resulting gross profit for the nine months of 2002 increased $4,382,000 to $21,249,000, which as a
percentage of revenue is 33.6%, reflecting an increase over the corresponding nine months in 2001
percentage of revenue of 31.3%. This increase in gross profit percentage was principally recognized in the
Nuclear Waste Management Services segment which experienced an increase from 32.9% in 2001 to 41.9%
in 2002. This increase reflects the progress of the newly expanded mixed waste facilities, increased activities
under the Oak Ridge contracts and the impact of the favorable negotiation of certain contract changes related
to the Oak Ridge contracts which were recorded in the second quarter of 2002. Furthermore, the gross profit
percentage for 2001 was negatively affected by the low margin subcontract work performed by this segment
during the completion of the M&EC facility. Offsetting this increase in gross profit percentage was a
decrease in the Industrial Waste Management Services segment from 29.6% in 2001 to 23.9% in 2002
reflecting the impact of the high fixed cost nature of the facilities in conjunction with -20- reduced revenues in
this segment, and the additional operating costs associated with the development and installation of the new
wastewater treatment technology. Additionally, the Consulting Engineering Services segment experienced
a decrease from 38.9% in 2001 to 35.3% in 2002. This decrease reflects the impact of additional staffing
associated with the new projects, as noted above. Selling, General and Administrative Selling general and administrative expenses increased $2,008,000 or 19.2% for the nine months ended
September 30, 2002, as compared to the same period in 2001. This increase reflects the impact of the
acquisition of M&EC during June 2001, which resulted in an increase of $1,203,000. Additionally, these
expenses increased due to the impact of increasing the sales and marketing efforts within the Nuclear Waste
Management Services segment in anticipation of the growth of this segment. As a percentage of revenue,
selling, general and administrative expenses reflected an increase to 19.7% for the nine-month period ended
September 30, 2002, compared to 19.4% for the same period of 2001. Depreciation and Amortization Depreciation and amortization expense for the nine-month period ended September 30, 2002, reflects a
decrease of $30,000 as compared to the same period of 2001. This decrease is attributable to an amortization
expense decrease of approximately $1,035,000 company-wide due to the adoption of SFAS 142, which
eliminated the amortization expense on indefinite-life intangible assets (see "Recently Adopted Accounting
Standards" later in this section). Offsetting this decrease is an increase in depreciation expense of $882,000
resulting from the acquisition of M&EC during June 2001. Additionally, an increase in depreciation expense
of $120,000 in the Nuclear Waste Management Services segment was due to additions of new mixed waste
processing equipment. Depreciation expense also increased in the Industrial Waste Management Services
segment by $18,000 due to additions of new waste processing equipment. Offsetting this increase is a
decrease in depreciation expense of $15,000 resulting from older assets being fully depreciated. Interest Expense -21- Interest expense also decreased by $167,000 for the nine-month period ended September 30, 2002, as
compared to the corresponding period of 2001. This decrease is a result of lower interest rates and decreased
borrowing levels on our PNC revolving credit and term loan which resulted in a decrease in interest expense
of $183,000. Additionally, a decrease of $545,000 was due to the elimination of the above noted interim
financing related to the mixed waste construction activities and a decrease of $78,000 was due to the
reduction in debt with other creditors. These decreases were partially offset by an increase in interest expense
of $198,000 associated with the acquisition of M&EC and an increase of approximately $441,000 related to
the expansion of our mixed waste facilities. Interest Expense - Warrants Interest Expense - Financing Fees Interest expense-financing fees also decreased by $1,695,000 for the nine months ended September 30, 2002,
as compared to the corresponding period of 2001. This decrease is also due to the elimination of the above
discussed short-term debt in July 2001, offset by the new debt with AMI and BEC. Other Expense Other expense also increased by $319,000 for the nine months ended September 30, 2002, as compared to
the same period of 2001. This increase is also due to an increase in miscellaneous State income and franchise
taxes and the additional environmental remediation reserve. Preferred stock Dividends -22- Preferred Stock dividends decreased $3,000 during the nine months ended September 30, 2002 as compared
to the corresponding period of 2001. This decrease is due to the conversion of $1,730,000 (1,730 preferred
shares) of the Preferred Stock into our common stock in April 2001 pursuant to a conversion and exchange
agreement with Capital Bank. Partially offsetting the decrease was an increase due to the accrual of preferred
dividends on the Series B Preferred. Liquidity and Capital Resources of the Company At September 30, 2002, the Company had cash of $83,000. This cash total reflects a decrease of $777,000
from December 31, 2001, as a result of net cash provided by operations of $5,297,000 offset by cash used
in investing activities of $3,700,000 (principally net purchases of equipment, totaling $3,705,000) and cash
used in financing activities of $2,374,000 (principally repayments of long-term debt partially offset by
proceeds from the issuance of common stock). The Company is in a net borrowing position and therefore
attempts to move all excess cash balances immediately to the revolving credit facility, so as to reduce debt
and interest expense. During 2002 the Company implemented a centralized cash management system which
included new remittance lock boxes and resulted in accelerated collection activities and reduced cash
balances, as idle cash is able to be moved without delay to the revolving credit facility. Operating Activities As of September 30, 2002, total consolidated accounts payable was $9,747,000, an increase of $2,580,000
from the December 31, 2001, balance of $7,167,000. This increase in accounts payable reflects the impact
of increased revenues and operating activities during the second and third quarters, and the timing of
payments, as reflected by the decrease in the revolving credit facility loan balance. As noted above, cash
was
used to pay down the revolving credit facility and as of the end of the third quarter of 2002 had not yet been
utilized to reduce accounts payable. This increase is also reflective of unfinanced capital expenditures during
the quarter, additional operating costs associated with the upgraded wastewater treatment systems and the
impact of increased insurance premium payments for the 2002 policy year, which was recorded as accounts
payable rather than being financed and paid evenly over the full year. The working capital position at September 30, 2002, was $778,000, as compared to a working capital
position of $831,000 at December 31, 2001, which reflects a decrease of $53,000 during the first nine months
of 2002. This decrease in the working capital position was primarily due to the increased accounts payable,
as discussed above, and the related reduction in the revolving credit facility loan balance at the end of the
third quarter, which is a long term liability. The working capital position did however improve by $2,355,000
from the end of the first quarter of 2002 and by $1,246,000 from the end of the second quarter of 2002. -23- Investing Activities Financing Activities 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 1/2% 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 (1.82% at September 30, 2002).
The value of the interest rate swap at January 1, 2001, was deminimus. At September 30, 2002, the market
value of the interest rate swap was in an unfavorable value position of $226,000 and was recorded as a
liability. During the nine months ended September 30, 2002, the Company recorded a loss on the interest
rate swap of $68,000 which offset against other comprehensive income on the Statement of Stockholders'
Equity (see Note 4 to Notes to Consolidated Financial Statements). Effective as of June 2002, the Company and PNC entered into Amendment No. 1 to the Agreement, which,
among other things, increased the letter of credit commitment from $500,000 to $4,500,000 and provided for
a $4.0 million standby letter of credit. The standby Letter of Credit was issued to secure certain surety bond
obligations. Pursuant to the terms of Amendment No. 1, as partial collateral for the issuance of the standby
letter of credit, a reserve of approximately $66,000 will be recorded each month against the availability under
the Revolving Credit beginning July 15, 2002, until such time as the standby letter of credit is fully reserved.
At a condition precedent to this Amendment No. 1, the Company paid a $50,000 amendment fee to PNC.
-24-
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 with the first
installment due on July 1, 1999, and having an interest rate of 5.5% for the first three years and 7% for the
remaining two years. The aggregate outstanding balance of the Promissory Notes total $1,779,000 at
September 30, 2002, of which $990,000 is in the current portion. Payments of such Promissory Notes are
guaranteed by PFMI under a non-recourse guaranty, which non-recourse guaranty is secured by certain real
estate owned by PFMI. These Promissory Notes are subject to subordination agreements with the Company's
senior and subordinated lenders. On August 31, 2000, as part of the consideration for the purchase of 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 short term loan. Under the terms of the Purchase Agreement, the Company also issued to AMI and BEC Warrants to purchase
up to 1,281,731 shares of the Company's Common Stock ("Warrant Shares") at an initial exercise price of
$1.50 per share (the "Warrants"), subject to adjustment under certain conditions, which were valued at
$1,622,000 and recorded as a debt discount and are being amortized over the term of the Notes. The warrants,
as issued, also contain a cashless exercise provision. The holders of at least 25% of the Warrants or the
Warrant Shares may, at any time and from time to time during the term of the Warrants, request on two
occasions registration with the Securities and Exchange Commission ("SEC") of the Warrant Shares. In
addition, the holders of the Warrants are entitled, subject to certain conditions, to include the Warrant Shares
in a registration statement covering other securities which the Company proposes to register. On October
1, 2002, the Company filed an amended S-3 Registration Statement with the SEC covering the Warrants.
This Registration Statement has not been declared effective as of the date of this Form 10-Q. 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 the shares
of Common Stock issuable under the Warrants (the "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 -25- 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 has selected to account for the changes in redemption value immediately as they occur and
the Company will adjust the carrying value of the security to equal the redemption value at the end of each
reporting period. On September 30, 2002, the Put Option had no value and no liability was recorded. 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, 2002,
the rate was 8%. On September 30, 2002, the outstanding balance was $1,002,000 including accrued interest
of approximately $104,000. M&EC also 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%
on September 30, 2002) and payable in one lump sum at the end of the loan period. On September 30, 2002,
the outstanding balance was $4,052,000 including accrued interest of approximately $438,000. 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. The following table summarizes the Company's contractual obligations at September 30, 2002, and the effect
such obligations are expected to have on its liquidity and cash flow in future periods, (in thousands): 2002 2003-2005 2006-2007 2008 + The accrued dividends on the outstanding Series 17 Preferred Stock for the period July 1, 2001, through
December 31, 2001, in the amount of approximately $63,000 were paid in March 2002, in the form of 24,217
shares of Common Stock of the Company. The dividends for the period January 1, 2002, through June 30,
2002, total $62,000, which were paid in August 2002, in the form of 22,106 shares of Common Stock. The
accrued dividends on our Series 17 Preferred Stock for the period July 1, 2002, through September 30, 2002
total $32,000 and will be paid in January 2003, in the form of Common Stock or if approved by the lender,
at the Company's option in the form of cash. Under the Company's loan agreements, the Company is
prohibited from paying cash dividends on its outstanding capital stock. The accrued dividends for the Series
B Preferred issued by our subsidiary M&EC for the period of June 26, 2002, through September 30, 2002,
are approximately $17,000. Series B Preferred dividends are payable at the discretion of the Board out of
legally available funds. In summary, we have continued to take steps to improve our operations and liquidity as discussed above.
However, with the acquisition of M&EC in 2001, the completion of M&EC's initial phase of construction
and the ramp-up of the mixed waste segment, we incurred and assumed certain debt obligations and long-term liabilities, which had a short-term impact on liquidity. Additionally, reduced revenue levels and start-up
of the new wastewater treatment technology within the Industrial Waste Management Services segment
contributed toward the negative impact on liquidity. However, as these projects became fully operational and
the mixed waste segment continues to expand, our liquidity position demonstrated improvement during the
second and third quarters of 2002. If we are unable to continue to improve our -26- operations, to successfully
expand our mixed waste activities, and to continue profitability in the foreseeable future, such would have
a material adverse effect on our liquidity position. Known Trends and Uncertainties 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 2001, and that this trend has continued into
2002. Significant contracts. The Company's revenues are principally derived from numerous and varied customers.
However, Perma-Fix Government Services ("PFGS") manages six contracts with the Defense Reutilization
& Marketing Service, a sub-agency of the Department of Defense which accounted for 8.3% of total
consolidated revenues during the nine months ended September 30, 2002, and M&EC operates under three
broad spectrum contracts ("Oak Ridge contracts") which contributed 14.6% of total consolidated revenues
during the nine months ended September 30, 2002. As the newly constructed M&EC facility continues to
enhance its processing capabilities and completes certain expansion projects and with the amended pricing
structure under the Oak Ridge contr acts, the Company could see higher total revenue under the Oak Ridge
contracts. There is no guarantee under the Oak Ridge contracts, as they can be terminated by either party at
any time. Termination of these contracts could have a material adverse effect on
the Company. The
Company is working towards increasing other sources of revenues at M&EC to reduce the risk of reliance
on one major source of revenues. 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 the downturn 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 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. Our operations, compared to certain of our competitors, dispose
of significantly less hazardous or industrial by-products from our operations due to rendering material
nonhazardous, discharging treated wastewaters to publicly-owned treatment works and/or processing wastes -27- 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 potential responsible party ("PRP") at a remedial
action site, which could have a material adverse effect on the Company. In addition to budgeted capital expenditures for 2002 at our treatment, storage and disposal ("TSD") facilities,
which are necessary to maintain permit compliance, improve operations and expand our business into new
markets, as discussed above under"Liquidity and Capital Resources of the Company" of this Management's
Discussion and Analysis, we have also budgeted for 2002 an additional $1.2 million 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 2002 to be approximately $287,000 at the EPS site,
$300,000 at the PFM location, $108,000 at the PFSG site and $507,000 at the PFMI site, of which $27,000,
$46,000, $72,000 and $661,000, respectively, were spent during the first nine months of 2002. Additionally,
we increased the reserve for the PFMI site by $170,000 due to increased volumes of waste that exceeded the
original remediation estimates. Additional funds will be required for the next two to seven years to properly
remediate these sites. We expect to fund these expenses to remediate these four sites from funds generated
internally, however, no assurances can be made that we will be able to do so. At September 30, 2002, the Company had accrued environmental liabilities totaling $2,898,000, which
reflects a decrease of $636,000 from the December 31, 2001, balance of $3,534,000. The decrease represents
payments and additional expense on remediation projects, as noted above. The September 30, 2002, current
and long-term accrued environmental balance is recorded as follows: Interest Rate Swap Recently Adopted Accounting Standards -28- requires, upon
adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill
based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test
goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify
reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful
lives of other existing recognized intangible assets, and cease amortization of intangible assets with an
indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is also required to reassess the
useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The
Company has completed the first step of its evaluation of intangible assets for impairment, and has
determined that no impairment existed as of January 1, 2002. The Company has discontinued amortizing its
indefinite-life intangible assets (goodwill and permits). Prior to January 1, 2002, goodwill and permits were
amortized on a straight-line basis over ten to forty years. Amortization expense for goodwill and permits for
the three and nine months ended September 30, 2001, was $451,000 and $1,035,000, respectively. Pursuant to the Company's adoption of SFAS 141 and 142, the Company changed its method of recording
acquired permits in connection with business combinations. For all acquisitions prior to July 2001, the
Company allocated the excess purchase price between goodwill and permits, based upon the percentage of
revenue generated through permitted activities. If all revenue/business base of an entity was derived from
and subject to the permit, then the full intangible amount was recorded to permits. The permits, therefore
were allocated this intangible value, and were generally amortized over a 20 year life. The Company will
expense as incurred any ongoing costs to maintain and renew its permits. These ongoing costs are
significantly less than the initial costs to obtain a permit. In conjunction with the final purchase price allocation as completed in June 2002, the Company reclassified
a portion of the permits recorded upon the acquisition of M&EC on June 25, 2001. Permits were originally
recorded at $10,553,000 when the Company recorded the acquisition in June 2001. During June 2002,
$9,149,000 was reclassified from permits to goodwill, and additional accrued liabilities were recognized
as goodwill in the
amount of $63,000. The amount remaining in permits of $1,403,000 represents the actual costs in obtaining the
permits. The Company is currently in discussions with the Securities and Exchange Commission relating to
SFAS 141 and 142. As of the date of this report, we do not know if the Company
will be required to make any changes and, if any changes are required, whether they will have a material adverse
effect on the Company's financial
statements for the nine months ended September 30,2002. Recent Accounting Pronouncements SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," issued in July 2002,
addresses financial accounting and reporting for costs associated with exit or disposal activities. It nullifies
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability -29- be recognized for the cost associated with an exit or disposal activity only when the liability is incurred, that
is, when it meets the definition of a liability in the FASB conceptual framework. SFAS No. 146 also
establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities.
The Statement is effective for exit or disposal activities that are initiated after December 31, 2002. The
Company believes the adoption of SFAS No. 146 will not have a material impact on the Company's financial
statements. -30- PERMA-FIX ENVIRONMENTAL SERVICES, INC. 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. -31- PERMA-FIX ENVIRONMENTAL SERVICES, INC. PART 1, ITEM 4 The Company maintains disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the periodic reports filed by the Company with the Securities and Exchange
Commission (the "SEC") is recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC and that such information is accumulated and communicated to the
Company's management. Based on their most recent evaluation, which was completed within 90 days of the
filing of this Quarterly Report on Form 10-Q, the Company's Chief Executive Officer and Chief Financial
Officer believe that the Company's disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) are effective. There were no significant changes in
the Company's internal controls or in other factors that could significantly affect these internal controls
subsequent to the date of the most recent evaluation. -32- PERMA-FIX ENVIRONMENTAL SERVICES, INC. Item 1. During the second quarter of 2002 the Company's subsidiary, PFMI, and other PRPs entered into
an agreement in principle to settle the lawsuit filed by the federal government in connection with
the Four County Landfill site pending in the United States District Court for the Northern District
of Indiana, South Bend Division. PFMI will pay approximately $153,000 of the total settlement
of which the total amount was accrued in September 2002. The settlement agreement was
finalized in October 2002, and provides that the Company will pay its portion of the settlement
over a twelve month period beginning in November 2002. The son, Patrick Sullivan ("P. Sullivan"), of a member of our Board of Directors, Thomas P.
Sullivan ("Mr. Sullivan"), was employed by a subsidiary of the Company, Perma-Fix of Orlando,
Inc. ("PFO"), as an executive and/or general manager from the date of the Company's acquisition
of PFO in June 1999 to June 2002, when he terminated his employment to go to work for a
competitor of PFO in Orlando, Florida. P. Sullivan is subject to an agreement with the Company
that provides, in part, that P. Sullivan would not solicit customers, suppliers or employees of the
Company or PFO for a period of two years after termination of his employment. The Company
has been advised that P. Sullivan violated the agreement and his duties to the Company and PFO
prior to and after he terminated his employment with PFO. The Company is currently
investigating these claims against P. Sullivan. P. Sullivan reimbursed the Company for certain
personal expenses charged to, and paid by, the Company after the Company notified P. Sullivan
of the claims. Mr. Sullivan has denied committing any breach of his fiduciary duties to the
Company in connection with these alleged actions by his son. In October 2002, the Company's subsidiary Perma-Fix of Memphis, Inc. ("PFM"), a
discontinued operation, entered into a settlement agreement with Mid-South Industrial, Inc. and
CNA Insurance Company to settle a lawsuit PFM filed seeking damages resulting from an
explosion and fire which occurred in January 1997. Under the settlement agreement PFM
received approximately $233,000, in October 2002, which will be recorded as other income in
the fourth quarter of 2002. -33- Item 6. (a) (b) -34-
WASHINGTON, D.C. 20549
____________________
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to _______________ to _______________
(Exact name of registrant as specified in its charter)
(State or other jurisdiction (IRS
Employer Identification Number)
of incorporation or organization)
(Address of principal executive offices) (Zip
Code)
(Registrant's telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Common Stock, $.001 Par Value 34,338,614
(excluding 988,000 shares
held as treasury stock)
PART I
Page No.
Item 1.
Financial Statements
Consolidated Balance Sheets -
September 30, 2002
and December 31, 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . .2
Consolidated Statements of Operations -
Three and
Nine Months Ended September 30, 2002 and 2001. . . . . . . . . . . . . . . . .
. . . . . 4
Consolidated Statements of Cash Flows -
Nine Months
Ended September 30, 2002 and 2001. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 5
Consolidated Statements of Stockholders' Equity -
Nine Months
Ended September 30, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . 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.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 31
Item 4.
Controls and Procedures . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . .32
PART II
Item 1.
Legal Proceedings . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 33
Item 6.
Exhibits and Reports on Form 8-K . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . 34
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except for Share Amounts)
2002
(Unaudited)
ASSETS
Current assets:
Cash
$ 83
$ 860
Restricted cash
20
20
Accounts receivable, net of allowance for doubtful
accounts of $399 and $72521,334
17,191 Inventories
622
756
Prepaid expenses
3,531
1,651
Other receivables
19
142
Total current assets
25,609
20,620
Property and equipment:
Buildings and land
16,010
15,210
Equipment
28,286
26,915
Vehicles
2,379
2,120
Leasehold improvements
10,348
10,029
Office furniture and equipment
1,544
1,657
Construction-in-progress
5,404
4,382
63,971
60,313
Less accumulated depreciation and amortization
(14,412
)
(11,940
)
Net property and equipment
49,559
48,373
Intangibles and other assets:
Permits, net
11,973
20,639
Goodwill, net
15,281
6,509
Other assets
2,494
2,996
Total assets
$ 104,916
$ 99,137
CONSOLIDATED BALANCE SHEETS, CONTINUED
(Amounts in Thousands, Except for Share Amounts)
2002
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$ 9,747
$ 7,167
Current environmental accrual
793
1,202
Accrued expenses
11,058
8,431
Current portion of long-term debt
3,233
2,989
Total current liabilities
24,831
19,789
Environmental accruals
2,105
2,332
Accrued closure costs
4,893
4,919
Other long-term liabilities
1,204
814
Long-term debt, less current portion
25,913
28,157
Total long-term liabilities
34,115
36,222
Total liabilities
58,946
56,011
Commitments and Contingencies (see Note 5)
--
--
Preferred Stock of subsidiary, $1.00 par value; 1,467,396
shares authorized, 1,284,730 shares issued and
outstanding, liquidation value $1.00 per share
1,285
1,285
Stockholders' equity:
Preferred Stock, $.001 par value; 2,000,000 shares
authorized, 2,500 shares issued and outstanding
--
-- Common Stock, $.001 par value; 75,000,000 shares
authorized, 35,286,382 and 35,008,005 shares
issued, including 988,000 shares held as treasury
stock, respectively
35
35 Additional paid-in capital
66,711
66,042
Accumulated deficit
(19,973
)
(22,216
) Interest rate swap
(226
)
(158
)
46,547
43,703
Less Common Stock in treasury at cost; 988,000
shares
issued and outstanding
(1,862
)
(1,862)
Total stockholders' equity
44,685
41,841
Total liabilities and stockholders' equity
$ 104,916
$ 99,137
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
September 30,
September 30,
(Amounts in Thousands, Except for Per Share Amounts)
2001
Net revenues$ 24,232
$ 17,386
$ 63,168
$ 53,938
Cost of goods sold
15,993
10,814
41,919
37,071
Gross profit
8,239
6,572
21,249
16,867
Selling, general and administrative expenses
4,350
3,557
12,470
10,462
Depreciation and amortization
1,067
1,141
3,143
3,173
Income from operations
2,822
1,874
5,636
3,232
Other income (expense):
Interest income
4
7
13
23
Interest expense
(723
)
(782
)
(2,150
)
(2,317
)
Interest expense-Warrants
--
--
--
(234
)
Interest expense-financing fees
(262
)
(1,651
)
(779
)
(2,474
)
Other
(285
)
(29
)
(366
)
(47
)
Net income (loss)
1,556
(581
)
2,354
(1,817
)
Preferred Stock dividends
(48
)
(32
)
(111
)
(114
)
Net income (loss) applicable to Common Stock
$ 1,508
$ (613
)
$ 2,243
$ (1,931
)
Net income (loss) per common share:
Basic
$ .04
$ (.02
)
$ .07
$ (.08
)
Diluted
$ .04
$ (.02
)
$ .06
$ (.08
)
Number of shares and potential common shares
used in computing net income (loss) per common share:
Basic
34,275
29,551
34,181
25,016
Diluted
42,617
29,551
42,992
25,016
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
September 30,
(Amounts in Thousands)
2002
2001
Cash flows from operating activities:
Net income (loss)
$ 2,354
$ (1,817
) Adjustments to reconcile net income (loss) to cash provided by
(used in) operations:
Depreciation and amortization
3,143
3,173
Provision for bad debt and other reserves
263
163
Loss on sale of plant, property and equipment
11
29
Issuance of Warrants for financing
--
234
Changes in assets and liabilities, net of effects from business acquisitions:
Accounts receivable
(4,405
)
(2,855
) Prepaid expenses, inventories and other assets
388
(763
) Accounts payable and accrued expenses
3,543
645
Net cash provided by (used in) operations
5,297
(1,191
)
Cash flows from investing activities:
Purchases of property and equipment, net
(3,705
)
(2,576
) Proceeds from sale of plant, property and equipment
9
144
Net cash used for acquisition consideration
--
(10,083
) Change in restricted cash, net
(4
)
(14
)
Net cash used in investing activities
(3,700
)
(12,529
)
Cash flows from financing activities:
Net repayments of revolving loan and term note facility
(1,357
)
(145
) Principal repayments of long-term debt
(1,529
)
(2,546
) Proceeds from issuance of long-term debt
--
6,254
Proceeds from issuance of stock
512
10,473
Net cash (used in) provided by financing activities
(2,374
)
14,036
(Decrease) increase in cash
(777
)
316
Cash at beginning of period
860
498
Cash at end of period
$ 814
Supplemental disclosure:
Interest paid
$ 2,022
$ 2,243
Non-cash investing and financing activities:
Issuance of Common Stock for services
32
15
Issuance of Common Stock for payment of dividends
125
184
Issuance of Common Stock for acquisition
--
2,916
Issuance of Preferred Stock of subsidiary for acquisition
--
1,285
Issuance of Warrants for services and financing, net
--
3,550
Loss on interest rate swap
(68
)
(198
) Long-term debt incurred for purchase of property and equipment
644
261
Long-term debt exchanged for Common Stock
--
3,144
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, for the nine months ended September 30, 2002)
except for share amounts)
Shares Amount
Paid-In
CapitalAccumulated
Deficit
Rate Swap
Held In
Treasury
Stockholders
Equity
Balance at December 31,
2001
2,500
$ --
35,008,005
$ 35
$ 66,042
$ ( 22,216
)
$ (158
)
$ (1,862
)
$ 41,841
Comprehensive income:
Net income
--
--
--
--
--
2,243
--
--
2,243
Other comprehensive
income:
Loss on interest rate
swap
--
--
--
--
--
--
(68
)
--
(68
) Comprehensive
income
--
--
--
--
--
--
--
--
2,175
Issuance of Common Stock
for Preferred Stock
dividend
--
--
46,323
--
125
--
--
--
125Issuance of stock for cash
and services
--
--
232,054
--
544
--
--
--
544
Balance at September 30,
2002
2,500
$ --
35,286,382
$ 35
$ 66,711
$ (19,973
)
$ (226
)
$ (1,862
)
$ 44,685
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
September 30, 2001
Nine Months Ended
September 30, 2001
(Amounts in thousands, except per share amount)
Total
Per Share
Total
Per Share
Net loss, as reported
$ (613)
$ (.02)
$ (1,931)
$ (.08)
Amortization of goodwill and permits
451
.01
Net loss, as adjusted
$ (162)
$ (.01)
$ (896)
$ (.04)
3. Earnings Per Share
September 30,
September 30,
(Amounts in thousands except per share amounts)
2002
2001
2002
2001
Net income (loss) applicable to Common Stock - basic
$ 1,508
$ (613
)
$ 2,243
$ (1,931
) Effect of dilutive securities - Preferred Stock dividends
48
--
111
--
Net income (loss) applicable to Common Stock - diluted
$ 1,556
$ (613
)
$ 2,354
$ (1,931
)
Basic net income (loss) per share
$
.04
$ (0.02
)
$ .07
$ (0.08
)
Diluted net income (loss) per share
$ .04
$ (0.02
)
$ .06
$ (0.08
)
Weighted average shares outstanding - basic
34,275
29,551
34,181
25,016
Potential shares exercisable under stock option plans
1,055
--
1,119
--
Potential shares upon exercise of Warrants
5,620
--
6,025
--
Potential shares upon conversion of Preferred Stock
1,667
--
1,667
--
Weighted average shares outstanding - diluted
42,617
29,551
42,992
25,016
Potential shares excluded from above weighted average
share calculations due to their anti-dilutive effect include
Upon exercise of options
287
2,105
257
2,105
Upon exercise of Warrants
175
15,914
175
15,914
Upon conversion of Preferred Stock
--
1,667
--
1,667
(Amounts in Thousands)
2002
(Unaudited)
Revolving loan 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%
(5.75% at
September 30, 2002), balance due in December 2005.
$ 7,057
$ 7,663
Term Loan Agreement dated December 22, 2000, payable
in equal
monthly installments of principal of $83, balance
of $2,083,000 due
in December 2005, variable interest
paid monthly at prime rate plus 1 1/2% (6.25% at
September 30, 2002).
5,333
6,083
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 5.5% for first
three years and 7% for remaining two
years.
1,779
2,495
Promissory note dated August 31, 2000, payable in one
lump sum in
August 2005, interest paid annually at 7%.
3,500
3,500
Senior subordinated notes dated July 31, 2001, payable in
one lump sum
on July 31, 2006, interest payable quarterly
at an annual interest rate
of 13.5%, net of unamortized
debt discount of $1,244 and $1,487.
4,381
4,138
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 federal rate determined under the
IRS
Code Section (8.0% on September 30, 2002) and is
payable in
a lump sum on December 31, 2008.
3,614
3,634
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 federal rate determined under the
IRS Code
Section (8.0% on September 30, 2002) and is payable
in
a lump sum on December 31, 2008.
898
903
Various capital lease and promissory note obligations, payable
2002 to
2007, interest at rates ranging from 5.2 to 17.9%.
2,584
2,730
29,146
31,146
Less current portion of long-term debt
3,233
2,989
$ 25,913
$ 28,157
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 ("PRP") for the costs
of the cleanup notwithstanding any absence of fault on our part.
In the normal course of conducting our business, we are involved in various litigation. There has been no
material change in legal proceedings from those disclosed previously in the Company's Form 10-K for year ended
December 31, 2001, except as stated below. We are not a party to any litigation or governmental proceeding
which our management believes could result in any judgements or fines against us that would have a material
adverse affect on the Company's financial position, liquidity or results of operations.
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.
We maintain closure cost financial guarantees to insure the proper decommissioning of our RCRA facilities upon
cessation of operations. Additionally, in the course of owning and operating on-site treatment, storage and
disposal facilities, we are subject to corrective action proceedings to restore soil and/or groundwater to its original
state. These activities are governed by federal, state and local regulations and we maintain the appropriate
accruals for restoration. We have recorded accrued liabilities for estimated closure costs and identified
environmental remediation costs.
We believe we maintain insurance coverage adequate for our needs and which is similar to, or greater than, the
coverage maintained by other companies of our size in the industry. There can be no assurances, however, that
liabilities which may be incurred by us will be covered by our insurance or that the dollar amount of such
liabilities which are covered will not exceed our policy limits. Under our insurance contracts, we usually accept
self-insured retentions which we believe appropriate for our specific business risks. We are required by EPA
regulations to carry environmental impairment liability insurance providing coverage for damages on a claims-made basis in amounts of at least $1 million per occurrence and $2 million per year in the aggregate. To meet the
requirements of customers, we have exceeded these coverage amounts.
Pursuant to FAS 131, we define an operating segment as:
*
A business activity from which we may earn revenue and incur expenses;
*
Whose operating results are regularly reviewed by the President of the segment to make decisions about
resources to be allocated within the segment and assess its performance; and
*
For which discrete financial information is available.
*
The nature of our products and services;
*
The nature of the production processes;
*
The type or class of customer for our products and services;
*
The methods used to distribute our products or provide our services; and
*
The nature of the regulatory environment.
Industrial
Waste
Services
Nuclear
Waste
Services
Engineering
Segments
Total
Corporate
Consolidated
Total
Revenue from external
$ 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 Quarter Ended September 30, 2001
Industrial
Waste
Services
Nuclear
Waste
Services
Engineering
Segments
Total
Corporate
Other
Consolidated
Total
Revenue from external
$ 10,978
$ 5,643
$ 765
$ 17,386
$ --
$ 17,386
Intercompany revenues
853
2,124
102
3,079
--
3,079
Interest income
4
--
--
4
3
7
Interest expense
226
540
7
773
9
782
Interest expense-financing fees
--
2
--
2
1,649
1,651
Depreciation and amortization
664
434
23
1,121
20
1,141
Segment profit (loss)
372
407
48
827
(1,440
)
(3)
(613
) Segment assets(1)
41,335
50,804
2,284
94,423
4,757
99,180
Expenditures for segment assets
301
1,506
3
1,810
6
1,816
Segment Reporting for the Nine Months Ended September 30, 2002
Industrial
Waste
Services
Nuclear
Waste
Services
Engineering
Segments
Total
Corporate
Consolidated
Total
Revenue from external
$ 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
Segment Reporting for the Nine Months Ended
September 30, 2001
Industrial
Waste
Services
Nuclear
Waste
Services
Engineering
Segments
Total
Corporate
Other
Consolidated
Total
Revenue from external
$ 30,996
$
$ 2,401
$ 53,938
$ --
$ 53,938
Intercompany revenues
2,922
4,551
187
7,660
--
7,660
Interest income
16
--
--
16
7
23
Interest expense
739
1,362
30
2,131
186
2,317
Interest expense-Warrants
--
--
--
--
234
(2)
234
Interest expense-financing fees
6
602
--
608
1,866
2,474
Depreciation and amortization
1,996
1,049
68
3,113
60
3,173
Segment profit (loss)
(841
)
442
149
(250
)
(1,681
)
(3)
(1,931
) Segment assets(1)
41,335
50,804
2,284
94,423
4,757
99,180
Expenditures for segment assets
890
1,928
11
2,829
8
2,837
(2) Amount reflects interest expense-Warrants not allocated to the operating segments.
(3) Amount includes interest expense-financing fees of $1,440,000 representing the write-off of the fees associated with a prior
short-term note, not allocated
to the operating segments.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART I, ITEM 2
Certain statements contained within this report may be deemed "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (collectively, the "Private Securities Litigation Reform Act of 1995").
All statements in this report other than a statement of historical fact are forward-looking statements that are
subject to known and unknown risks, uncertainties and other factors which could cause actual results and
performance of the Company to differ materially from such statements. The words "believe," "expect,"
"anticipate," "intend," "will," and similar expressions identify forward-looking statements. Forward-looking
statements contained herein relate to, among other things,
*
ability or inability to continue and improve operations and profitability;
*
anticipated improvement in the financial performance of the Company;
*
ability to comply with the Company's general working capital requirements;
*
ability to be able to continue to borrow under the Company's revolving line of credit;
*
ability to generate sufficient cash flow from operations to fund all costs of operations and remediation
of certain formerly leased property in Dayton, Ohio, and the Company's facilities in Memphis,
Tennessee; Valdosta, Georgia and Detroit Michigan;
*
ability to remediate certain contaminated sites for projected amounts;
*
ability to pay expenses to remediate the four sites from funds generated internally;
*
no impairment to intangible assets;
*
no intention to close any facilities;
*
ability to fund budgeted capital expenditures for 2002;
*
ability to complete negotiations under the Oak Ridge contracts and complete the negotiations favorably
for the Company;
*
ability to develop new wastewater treatment technology;
*
higher revenue under the Oak Ridge contracts;
*
increasing other sources of revenue at M&EC;
*
expectation that there will be an increase in revenues and operating profits during 2002; and
*
ability of the Company's mixed waste facilities to continue to expand and demonstrate their processing
capabilities, increase sales and marketing efforts, and to receive greater volumes of waste.
*
general economic conditions;
*
material reduction in revenues;
*
inability to collect in a timely manner a material amount of receivables;
*
increased competitive pressures;
*
the ability to maintain and obtain required permits and approvals to conduct operations;
*
the ability to develop new and existing technologies in the conduct of operations;
*
ability to retain or renew certain required permits;
*
discovery of additional contamination or expanded contamination at a certain Dayton, Ohio, property
formerly leased by the Company or the Company's facilities at Memphis, Tennessee; Valdosta,
Georgia and Detroit Michigan, which would result in a material increase in remediation expenditures;
*
determination that PFM is the source of chlorinated compounds at the Allen Well Field;
*
changes in federal, state and local laws and regulations, especially environmental laws and regulations,
or in interpretation of such;
*
potential increases in equipment, maintenance, operating or labor costs;
*
management retention and development;
*
financial valuation of intangible assets is substantially less than expected;
*
the requirement to use internally generated funds for purposes not presently anticipated;
*
inability to continue to become profitable on an annualized basis;
*
the inability of the Company to maintain the listing of its Common Stock on the NASDAQ;
*
the determination that PFMI or PFO was responsible for a material amount of remediation at certain
Superfund sites;
*
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; and
negative impact resulting from the adoption of accounting standard SFAS 142.
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:
The table below should be used when reviewing management's discussion and analysis for the three and nine
months ended September 30, 2002 and 2001:
September 30,
September 30,Consolidated (amounts in thousands)
%
Net revenues$ 24,232
100.0
$ 17,386
100.0
$ 63,168
100.0
$ 53,938
100.0
Cost of Goods Sold
15,993
66.0
10,814
62.2
41,919
66.4
37,071
68.7
Gross Profit
8,239
34.0
6,572
37.8
21,249
33.6
16,867
31.3
Selling, General and Administrative
4,350
18.0
3,557
20.5
12,470
19.7
10,462
19.4
Depreciation/Amortization
1,067
4.4
1,141
6.6
3,143
5.0
3,173
5.9
Income from Operations
$ 2,822
11.6
$ 1,874
10.8
$ 5,636
8.9
$ 3,232
6.0
Interest Expense
$ (723
)
(3.0
)
$ (782
)
(4.5
)
$ (2,150
)
(3.4
)
$ (2,317
)
(4.3
) Interest Expense-Warrants
--
--
--
--
--
--
(234
)
(.4
) Interest Expense-Financing Fees
(262
)
(1.1
)
(1,651
)
(9.5
)
(779
)
(1.2
)
(2,474
)
(4.6
) Other Income (expense)
(285
)
(1.2
)
(29
)
(.2
)
(366
)
(.6
)
(47
)
(.1
) Preferred Stock Dividends
(48
)
(.2
)
(32
)
(.2
)
(111
)
(.2
)
(114
)
(.2
)
The Company provides services through three reportable operating segments. The Industrial Waste
Management Services segment is engaged in on-and off-site treatment, storage, disposal and processing of
a wide variety of by-products and industrial, hazardous and non-hazardous wastes. This segment competes
for materials and services with numerous regional and national competitors to provide comprehensive and
cost-effective waste management services to a wide variety of customers nationwide. The Company operates
and maintains facilities and businesses in the waste by-product brokerage, on-site treatment and stabilization,
and off-site blending, treatment and disposal industries. The Nuclear Waste Management Services segment
provides treatment, storage, processing and disposal services of nuclear mixed and low-level radioactive
wastes, including research, development and on-site and off-site waste remediation. The presence of nuclear
and low-level radioactive constituents within the waste streams processed by this segment create different
and unique operational, processing and permitting/licensing requirements from those contained within the
Industrial Waste Management Services segment. The Company's Consulting Engineering Services segment
provides a wide variety of environmental related consulting and engineering services to industry and
government. The Consulting Engineering Services segment provides oversight management of
environmental restoration projects, air and soil sampling, compliance reporting, surface and subsurface water
treatment design for removal of pollutants, and various compliance and training activities.
Consolidated net revenues increased to $24,232,000 for the quarter ended September 30, 2002, as compared
to $17,386,000 for the same quarter in 2001. This increase of $6,846,000 or 39.4% is principally attributable
to an increase in revenue in the Nuclear Waste Management Services segment of approximately $7,909,000
resulting from growth in mixed waste revenues, as these facilities continue to expand and demonstrate their
processing capabilities, increase their sales and marketing efforts, and continue to receive greater volumes
of waste under certain contracts, such as the Oak Ridge contracts. Mixed waste revenue from the Department
of Energy ("DOE"), including under the Oak Ridge contracts, comprised the largest part of this increase as
the DOE contractors increased shipments in order to meet fiscal year milestones. Additionally, the Consulting
Engineering Services segment experienced an increase of approximately $13,000 during the third quarter of
2002. Offsetting these increases was a decrease in the Industrial Waste Management Services segment of
approximately $1,076,000 resulting from the downturn in the economy, and the effect of increased revenues
during the same period of 2001 resulting from the completion of certain event business or special contracts,
many of which have not been awarded during 2002. However, partially offsetting the negative impact of the
economy were increased revenues resulting from the biological wastewater system and the "Bio-Fix" water
treatment process.
Cost of goods sold for the Company increased $5,179,000 or 47.9% for the quarter ended September 30,
2002, as compared to the quarter ended September 30, 2001. This consolidated increase in cost of goods sold
reflects an increase in the Nuclear Waste Management Services segment of $4,867,000, which directly
correlates to the increase in revenues, and an increase in the Consulting Engineering Services segment of
$73,000 reflects the increased staffing associated with the new projects awarded. Additionally, the Nuclear
Waste Management Services segment experienced increased costs as it starts up new processing lines,
develops new processing techniques and adds certain fixed costs in conjunction with its build-up. The
Industrial Waste Management Services segment experienced an increase of $239,000 as it continues to
develop its new wastewater treatment technology, which became fully operational in June 2002.
The resulting gross profit for the quarter ended September 30, 2002, increased $1,667,000 to $8,239,000
which as a percentage of revenue is 34.0%, reflecting a decrease over the corresponding quarter in 2001
percentage of revenue of 37.8%. The Nuclear Waste Management Services segment experienced a decrease
in gross profit percentage from 46.2% in 2001 to 41.7% in 2002. This decrease reflects the impact of
increased disposal and processing costs associated with mixed waste treatment development and the impact
of increased costs associated with the start-up of new processing lines, the development of new
processing techniques and additional fixed costs in conjunction with its overall build-up. The
Industrial Waste Management Services segment also experienced a decrease in gross profit percentage from
33.4% in 2001 to 23.7% in 2002. This decrease reflects the impact of the high fixed cost nature of the
facilities as revenues have been lower during the recent economic downturn and the loss of certain higher
margin contract work performed in the same period of 2001. Additionally, the Consulting Engineering
Services segment experienced a decrease in gross profit percentage from 39.0% in 2001 to 30.6% in 2002.
This decrease reflects the impact of increased staffing associated with the new projects that were awarded
by nationally known cement companies.
Selling, general and administrative expenses increased $793,000 or 22.3% for the quarter ended September 30, 2002, as compared to the quarter ended September 30, 2001. These expenses increased due to the impact
of increasing the sales and marketing efforts within the Nuclear Waste Management Services segment
contributing to the growth in revenue as we expand our capabilities in this segment. This segment requires
increased up front sales and marketing efforts due to the complexity of the waste streams and sophistication
of the customer base. As a percentage of revenue, selling, general and administrative expenses decreased to
18.0% for the quarter ended September 30, 2002, compared to 20.5% for the same period in 2001.
Depreciation and amortization expense for the quarter ended September 30, 2002, reflects a decrease of
$74,000 as compared to the quarter ended September 30, 2001. This decrease is attributable to an
amortization expense decrease across all segments by approximately $451,000 due to the adoption of SFAS
142, which eliminated the amortization expense on indefinite-life intangible assets (see "Recently Adopted
Accounting Standards" later in this section). Offsetting this decrease was an increase in depreciation expense
of $299,000 resulting from the M&EC facility acquired effective June 25, 2001. Additionally, an increase
in depreciation expense of $76,000 in the Nuclear Waste Management Services segment was due to additions
of new mixed waste processing equipment. Depreciation expense also increased in the Industrial Waste
Management Services segment by $2,000 due to additions of new waste processing equipment.
Interest expense decreased $59,000 for the quarter ended September 30, 2002, as compared to the
corresponding period of 2001. This decrease reflects the impact of lower interest rates and decreased
borrowing levels on the revolving credit and term loans with PNC Bank, National Association ("PNC"),
which resulted in a decrease in interest expense of $16,000 when compared to the same period prior year.
Additionally, interest expense decreased by $22,000 due to the elimination of interim financing related to the
mixed waste construction activities, and by $82,000 as a result of the reduction in debt with other creditors.
These decreases were offset by an increase in interest expense of approximately $61,000 related to the
expansion of our mixed waste facilities.
No Warrants were issued for the nine months ended September 30, 2002, and therefore no interest expense-Warrants was recorded during the nine months ended September 30, 2002, as compared to $234,000 for the
nine months ended September 30, 2001. This 2001 expense reflects the Black-Scholes pricing valuation for
certain Warrants issued to Capital Bank pursuant to a promissory note ("$3,000,000 Capital Promissory
Note") and an unsecured promissory note ("$750,000 Capital Promissory Note"). The notes required that
certain Warrants be issued upon the initial execution of the note and at monthly intervals if the debt
obligations to Capital Bank have not been repaid in full. During 2001, these debt obligations were repaid in
full by a debt to equity exchange agreement and through the payment of principal and interest with the use
of Warrant proceeds.
Interest expense-financing fees decreased approximately $1,389,000 to $262,000 for the three months ended
September 30, 2002, as compared to $1,651,000 for the same period of 2001. This decrease is principally
due to a write-off of prepaid financing fees of $1,440,000 during the third quarter in 2001 as related to the
short term construction financing within the mixed waste segment, which was paid in full in July 2001. This
decrease was partially offset by amortization of financing fees of approximately $49,000 during the quarter
ended September 30, 2002, principally associated with our Senior Subordinated Notes issued to Associated
Mezzanine Investors - PESI, L.P. ("AMI") and Bridge East Capital, L.P. ("BEC").
Other expense increased by $256,000 for the quarter ended September 30, 2002, as compared to the same
period of 2001. This increase was primarily due to an increase in miscellaneous state income and franchise
taxes recorded during the quarter and from an additional remediation reserve for the
Perma-Fix of Michigan, Inc. site, which was recorded in the amount of $170,000. See "Environmental Contingencies" in this section for further discussion
on this reserve.
Preferred Stock dividends increased approximately $16,000 for the quarter ended September 30, 2002 as
compared to the quarter ended September 30, 2001. This increase was due to the accrual of preferred
dividends on the preferred stock of our subsidiary M&EC ("Series B Preferred"). The M&EC preferred
stock was issued in conjunction with the acquisition of M&EC in June 2001, and began accumulating
dividends in June 2002 at an annual interest rate of 5%.
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
and proceeds from issuance of our common stock. Our capital resources are impacted by changes in accounts
receivable as a result of revenue fluctuation, economic trends, and collection activities.
Accounts receivable, net of allowances for doubtful accounts, totaled $21,334,000, an increase of $4,143,000
from the December 31, 2001, balance of $17,191,000. This increase principally reflects the impact of the
higher third quarter 2002 revenues within the Nuclear Waste Management Services segment, which resulted
in an increase of $6,120,000. Offsetting this was a decrease in the accounts receivable of the Industrial Waste
Management Services segment, resulting from increased collection efforts, write-off of certain uncollectible
accounts and reduced revenue levels during the third quarter of 2002.
Our purchases of capital equipment for the nine-month period ended September 30, 2002, totaled
approximately $4,349,000, including financed purchases of $644,000. These expenditures were for expansion
and improvements to the operations principally within the waste management segments. These capital
expenditures were funded by the cash provided by operations and from proceeds from the exercise of
Warrants and options. We had initially budgeted capital expenditures of up to approximately $11,000,000
for 2002, which includes completion of certain current projects, as well as other identified capital purchases
for the expansion and improvement to the facilities and for certain compliance related enhancements.
However, based upon the current status of the planning and evaluation of the proposed projects, we believe
that we will be spending only up to approximately $6,000,000 for capital expenditures for 2002. We
anticipate funding these capital expenditures by a combination of lease financing, internally generated funds,
and/or the proceeds received from the exercise of outstanding options and warrants.
On December 22, 2000, the Company entered into a Revolving Credit, Term Loan and Security Agreement
("Agreement") with 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 of $2,083,000 due on December 22, 2005. Payments commenced on February 1,
2001. The Agreement also provided for a revolving line of credit ("Revolving Credit") with a maximum
principal amount outstanding at any one time of $15,000,000. The Revolving Credit advances are subject
to limitations of an amount up to the sum of a) up to 85% of Commercial Receivables aged 90 days or less
from invoice date, b) up to 85% of Commercial Broker Receivables aged up to 120 days from invoice date,
c) up to 85% of acceptable Government Agency Receivables aged up to 150 days from invoice date, and d)
up to 50% of acceptable unbilled amounts aged up to 60 days, less e) reserves Agent reasonably deems
proper and necessary. The Revolving Credit advances shall be due and payable in full on December 22,
2005. As of September 30, 2002, our excess availability under our revolving credit facility was $5,612,000
based on our eligible receivables.
Payments due by period
Contractual Obligations
Total
Long-term debt
$ 29,146
$ 794
$ 20,894
$ 6,519
$ 939 Operating leases
6,116
538
4,129
1,415
34
Total contractual obligations
$ 35,262
$ 1,332
$ 25,023
$ 7,934
$ 973
Seasonality. Historically the Company has experienced reduced revenues, operating losses or decreased
operating profits during the first and fourth quarters of the Company's fiscal years due to a seasonal
slowdown in operations from poor weather conditions and overall reduced activities during the holiday
season. During the Company's second and third fiscal quarters there has historically been an increase in
revenues and operating profits. Management expects this trend to continue in future years as this was evident
in the first, second and third quarters of 2002.
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.
PFD
PFM
PFSG
PFMI
Total
Current accrual
$ 273,000
$ 283,000
$ 108,000
$ 129,000
$ 793,000 Long-term accrual
241,000
644,000
1,220,000
--
2,105,000
Total
$ 514,000
$ 927,000
$ 1,328,000
$ 129,000
$ 2,898,000
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 counterparties is included in other assets or liabilities. The value of the interest rate swap at
January 1, 2001, was deminimus. At September 30, 2002, the market value of the interest rate swap was in
an unfavorable value position of $226,000 and was recorded as a liability. During the nine months ended
September 30, 2002, the Company recorded a loss on the interest rate swap of $68,000 which offset other
comprehensive income on the Statement of Stockholders' Equity (see Note 4 to Notes to Consolidated
Financial Statements).
The Company adopted the Financial Accounting Standards Board FASB Statements No. 141, Business
Combinations ("SFAS 141"), and No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), effective
January 1, 2002. SFAS 141 requires the use of the purchase method of accounting and prohibits the use of
the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS
141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria, SFAS 141 applies to all business combinations initiated after June 30,
2001, and for purchase business combinations completed on or after July 1, 2001. It also
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards
No. 143 ("FAS 143"), Accounting for Asset Retirement Obligations, effective for the fiscal years beginning
after June 15, 2002. This statement provides the accounting for the cost of legal obligations associated with
the retirement of long-lived assets. FAS 143 also requires that companies recognize the fair value of a
liability for asset retirement obligations in the period in which the obligations are incurred and capitalize that
amount as a part of the book value of the long-lived asset. That cost is then depreciated over the remaining
life of the underlying long-lived asset. The Company is currently evaluating the impact of the adoption of
FAS 143.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
CONTROLS AND PROCEDURES
PART II - Other Information
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, 2001, which Item 3 is incorporated herein by reference, except as follows:
Exhibits and Reports on Form 8-K
Exhibits
99.1
Certification by Dr. Louis F. Centofanti, Chief Executive Officer of the Company
99.2
Certification by Richard T. Kelecy, Chief Financial Officer of the Company
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
Current report on Form 8-K (Item 5-Other Events and Regulation FD Disclosure),
was filed by the Company on July 31, 2002, reporting pro forma effects of the
adoption of SFAS Nos. 141 and 142.
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 18, 2002 | By: /s/ Louis F. Centofanti Dr. Louis F. Centofanti Chairman of the Board Chief Executive Officer |
|
By: /s/ Richard T. Kelecy Richard T. Kelecy Chief Financial Officer |
-35-
I, Dr. Louis F. Centofanti, certify that: | ||
1. | I have reviewed this quarterly report on Form 10-Q of Perma-Fix Environmental Services, Inc.;
| |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this quarterly report;
| |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly report;
| |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
| |
a) | designed such disclosure controls and procedures to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly report is being prepared;
| |
b) | evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date
within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
| |
c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
| |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors (or persons performing the
equivalent function):
| |
a) | all significant deficiencies in the design or operation of internal controls which could adversely
affect the registrant's ability to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in internal controls; and
| |
b) | any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
| |
6. | The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
| |
Date: | November 18, 2002 | |
/s/ Louis F. Centofanti | ||
Dr. Louis F. Centofanti Chairman of the Board Chief Executive Officer |
-36-
I, Richard T. Kelecy, certify that: | ||
1. | I have reviewed this quarterly report on Form 10-Q of Perma-Fix Environmental Services, Inc.;
| |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this quarterly report;
| |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly report;
| |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
| |
a) | designed such disclosure controls and procedures to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly report is being prepared;
| |
b) | evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date
within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
| |
c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
| |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors (or persons performing the
equivalent function):
| |
a) | all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant's ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material weaknesses in internal controls;
and
| |
b) | any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant's internal controls; and
| |
6. | The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
| |
Date: | November 18, 2002 | |
/s/ Richard T. Kelecy |
||
Richard T. Kelecy Chief Financial Officer |
-37-
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Perma-Fix Environmental Services, Inc. ("PESI") on
Form 10-Q for the period ended September 30, 2002 as filed with the Securities and Exchange Commission
on the date hereof (the "Form 10-Q"), I Dr. Louis F. Centofanti, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of
the
Securities Exchange Act of 1934 (15 U.S.C. Section 78m or Section 78o(d)); and
(2) The information contained in the Form 10-Q fairly presents, in all material respects,
the
financial condition and results of operations of the Company.
Dated: November __, 2002
/s/ Louis F. Centofanti
Dr. Louis F. Centofanti
President and
Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Perma-Fix Environmental Services, Inc. ("PESI") on
Form 10-Q for the period ended September 30, 2002 as filed with the Securities and Exchange Commission
on the date hereof (the "Form 10-Q"), I Richard T. Kelecy, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of
the
Securities Exchange Act of 1934 (15 U.S.C. Section 78m or Section 78o(d)); and
(2) The information contained in the Form 10-Q fairly presents, in all material respects,
the
financial condition and results of operations of the Company.
Dated: November __, 2002
/s/ Richard T.
Kelecy
Richard T. Kelecy
Chief Financial Officer