=========================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ____________________ Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 ____________________________________ or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to _______________ Commission File No. 1-11596 _______________ PERMA-FIX ENVIRONMENTAL SERVICES, INC. (Exact name of registrant as specified in its charter) Delaware 58-1954497 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification Number) 1940 N.W. 67th Place, Gainesville, FL 32653 (Address of principal executive offices) (Zip Code) (352)373-4200 (Registrant's telephone number) N/A __________________________________________________ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______ ______ Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the close of the latest practical date. Class Outstanding at May 10, 2000 _____ ___________________________ Common Stock, $.001 Par Value 21,709,172 (excluding 988,000 shares held as treasury stock) ============================================================================= PERMA-FIX ENVIRONMENTAL SERVICES, INC. INDEX Page No. _______ PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 . . . . . . . . . . . . . . . . 2 Consolidated Statements of Operations - Three Months Ended March 31, 2000 and 1999. . . . . . 4 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2000 and 1999 . . . . . . . . . . . . 5 Consolidated Statements of Stockholder's Equity - Three Months Ended March 31, 2000 . . . . . . . . . . 6 Notes to Consolidated Financial Statements. . . . . . . . 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . .14 Item 3. Quantitative and Qualitative Disclosure about Market Risk. . . . . . . . . . . . . . . . . .22 PART II OTHER INFORMATION Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . .23 Item 5. Other Events . . . . . . . . . . . . . . . . . . . . . .23 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . .24 PERMA-FIX ENVIRONMENTAL SERVICES, INC. CONSOLIDATED FINANCIAL STATEMENTS PART I, ITEM 1 The consolidated financial statements included herein have been prepared by the Company (which may be referred to as we, us or our), without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures which are made are adequate to make the information presented not misleading. Further, the consolidated financial statements reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations as of and for the periods indicated. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. The results of operations for the three months ended March 31, 2000, are not necessarily indicative of results to be expected for the fiscal year ending December 31, 2000. 1
PERMA-FIX ENVIRONMENTAL SERVICES, INC. CONSOLIDATED BALANCE SHEETS March 31, 2000 December 31, (Amounts in Thousands, Except for Share Amounts) (Unaudited) 1999 _________________________________________________________________________________ ASSETS Current assets: Cash and cash equivalents $ 679 $ 771 Restricted cash equivalents and investments 22 73 Accounts receivable, net of allowance for doubtful accounts of $945 and $952, respectively 13,057 13,027 Inventories 223 229 Prepaid expenses 1,611 486 Other receivables 161 62 Assets of discontinued operations 320 377 _______ ________ Total current assets 16,073 15,025 Property and equipment: Buildings and land 12,557 12,555 Equipment 13,827 13,682 Vehicles 2,309 2,274 Leasehold improvements 16 16 Office furniture and equipment 1,278 1,223 Construction in progress 1,698 1,210 ___________ __________ 31,685 30,960 Less accumulated depreciation (8,336) (7,690) ___________ __________ Net property and equipment 23,349 23,270 Intangibles and other assets: Permits, net of accumulated amortization of $1,634 and $1,504, respectively 8,416 8,544 Goodwill, net of accumulated amortization of $1,087 and $1,009, respectively 7,076 7,154 Other assets 637 651 ___________ _________ Total assets $ 55,551 $ 54,644 =========== =========
The accompanying notes are an integral part of these consolidated financial statements. 2
PERMA-FIX ENVIRONMENTAL SERVICES, INC. CONSOLIDATED BALANCE SHEETS, CONTINUED March 31, 2000 December 31, (Amounts in Thousands, Except for Share Amounts) (Unaudited) 1999 _________________________________________________________________________________ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,697 $ 7,587 Accrued expenses 7,028 5,885 Revolving loan and term note facility 938 938 Current portion of long-term debt 1,488 1,427 Current liabilities of discontinued operations 413 588 ___________ __________ Total current liabilities 16,564 16,425 Environmental accruals 3,800 3,847 Accrued closure costs 967 962 Long-term debt, less current portion 13,349 12,937 Long term liabilities of discontinued operations 654 654 ___________ _________ Total long-term liabilities 18,770 18,400 ___________ _________ Total Liabilities 35,334 34,825 Commitments and contingencies (see Note 6) - - Stockholders' equity: Preferred Stock, $.001 par value; 2,000,000 shares authorized, 4,187 and 4,537 shares issued and outstanding, respectively - - Common Stock, $.001 par value; 50,000,000 shares authorized, 22,697,172 and 21,501,776 shares issued, including 988,000 shares held as treasury stock 23 21 Additional paid-in capital 43,254 42,367 Accumulated deficit (21,198) (20,707) _________ _________ 22,079 21,681 Less Common Stock in treasury at cost; 988,000 shares issued and outstanding (1,862) (1,862) _________ _________ Total stockholders' equity 20,217 19,819 _________ _________ Total liabilities and stockholders' equity $ 55,551 $ 54,644 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 3
PERMA-FIX ENVIRONMENTAL SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended March 31, (Amounts in Thousands, ________________________ Except for Share Amounts) 2000 1999 _____________________________________________________________________________ Net revenues $ 13,589 $ 7,812 Cost of goods sold 9,542 5,290 ________ ________ Gross profit 4,047 2,522 Selling, general and administrative expenses 3,253 1,838 Depreciation and amortization 862 519 ________ ________ Income (loss) from operations (68) 165 Other income (expense): Interest income 11 7 Interest expense (410) (27) Other 30 (14) _________ _________ Net income (loss) (437) 131 Preferred Stock dividends (54) (117) _________ _________ Net income (loss) applicable to Common Stock $ (491) $ 14 ======== ======== __________________________________________________________________ Basic net income (loss) per common share: $ (.02) $ - ======== ========= Diluted net income (loss) per common share $ (.02) $ - ======== ========= Weighted average number of shares and potential common shares used in computing net income (loss) per share: Basic 20,849 12,372 ======== ======= Diluted 20,849 25,247 ======== ======= The accompanying notes are an integral part of these consolidated financial statements. 4
PERMA-FIX ENVIRONMENTAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, (Amounts in Thousands, _________________________ Except for Share Amounts) 2000 1999 ________________________________________________________________________________ Cash flows from operating activities: Net income (loss) from continuing operations $ (437) $ 131 Adjustments to reconcile net income (loss) to cash provided by continuing operations: Depreciation and amortization 862 519 Provision for bad debt and other reserves 11 4 Gain on sale of plant, property and equipment (10) (2) Changes in assets and liabilities: Accounts receivable (41) (101) Prepaid expenses, inventories and other assets (216) (82) Accounts payable and accrued expenses (715) (156) _______ _______ Net cash provided by (used in) continuing operations (546) 313 _______ _______ Net cash used in discontinued operations (157) (276) _______ _______ Cash flows from investing activities: Purchases of property and equipment (570) (374) Proceeds from sale of plant, property and equipment 65 5 Change in restricted cash, net 46 (5) Net cash used by discontinued operations - (40) ______ ______ Net cash used in investing activities (459) (414) ______ ______ Cash flows from financing activities: Net Borrowings (Repayments) of revolving loan & term note facility 600 (263) Principal repayments on long-term debt (345) (70) Proceeds from issuance of stock 776 43 Net cash used by discontinued operations (3) (15) _______ _______ Net cash provided by (used in) financing activitie 1028 (305) _______ _______ Decrease in cash and cash equivalents (134) (682) Cash and cash equivalents at beginning of period, including discontinued operations of $45, and $0, respectively 816 776 ________ _______ Cash and cash equivalents at end of period, including discontinued operations of $3, and $10, respectively $ 682 $ 94 ========= ======== __________________________________________________________________________________ Supplemental disclosure: Interest paid $ 417 $ 215 Non-cash investing and financing activities: Issuance of Common Stock for services 49 12 Issuance of stock for payment of dividends 112 115 Long-term debt incurred for purchase of property and equipment 216 89 The accompanying notes are an integral part of these consolidated financial statements. 5
PERMA-FIX ENVIRONMENTAL SERVICES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited, for the three months ended March 31, 2000) Common Additional Stock (Amounts in Thousands Preferred Stock Common Stock Paid-In Accumulated Held in ___________________________________________________________________________________________________________________ Except for Share Amounts) Shares Amount Shares Amount Capital Deficit Treasury Balance at December 31, 1999 4,537 $ - 21,501,776 $ 21 $ 42,367 $(20,707) $ (1,862) Net loss - - - - - (437) - Preferred Stock dividend - - - - - (54) - Issuance of Common Stock for Preferred Stock dividend - - 97,841 - 112 - - Conversion of Preferred Stock to Common (350) - 322,351 1 - - - Issuance of stock under Employee Stock Purchase Plan - - 48,204 - 49 - - Exercise of warrants - - 727,000 1 726 - - ______ ______ __________ _____ _______ _______ _______ Balance at March 31, 2000 4,187 $ - 22,697,172 $ 23 $ 43,254 $(21,198) $ (1,862) ====== ====== ========== ===== ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 6 PERMA-FIX ENVIRONMENTAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) Reference is made herein to the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 1999. 1. Summary of Significant Accounting Policies __________________________________________ Our accounting policies are as set forth in the notes to consolidated financial statements referred to above. 2. Earnings Per Share __________________ Basic EPS is based on the weighted average number of shares of Common Stock outstanding during the period. Diluted EPS includes the dilutive effect of potential common shares. Diluted loss per share for the three months ended March 31, 2000, 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 to diluted net income (loss) per share for the three months ended March 31, 2000 and 1999: Three Months Ended March 31, (Amounts in Thousands _____________________ Except for Share Amounts) 2000 1999 ________________________________________________________________________ Net income (loss) applicable to Common Stock - basic $ (491) $ 14 Effect of dilutive securities - Preferred Stock dividends - 117 _______ ________ Net income (loss) applicable to Common Stock - diluted $ (491) $ 131 ======== ======== Basic net income (loss) per share $ (.02) $ - ======= ======= Diluted net income (loss) per share $ (.02) $ - ======== ======== Weighted average shares outstanding-basic 20,849 12,372 Potential shares exercisable under stock option plans - 171 Potential shares upon exercise of warrants - 63 Potential shares upon conversion of Preferred Stock - 12,641 _______ _________ Weighted average shares outstanding-diluted 20,849 25,247 ======= =========
The above reconciliation for the three months ended March 31, 2000, excludes 1,302,949 options, 4,839,963 warrants and 2,880,147 potential shares upon conversion of Preferred Stock since their effect would be anti- dilutive. 7 3. Discontinued Operations _______________________ On January 27, 1997, an explosion and resulting tank fire occurred at the Perma-Fix of Memphis, Inc. ("PFM") facility, a hazardous waste storage,processing and blending facility, which resulted in damage to certain hazardous waste storage tanks located on the facility and caused certain limitedcontamination at the facility. As a result of the significant disruption and the cost to rebuild and operate this segment, the Company made a strategic decision, in February 1998, to discontinue its fuel blending operations at PFM.The fuel blending operations represented the principal line of business for PFM prior to this event, which included a separate class of customers, and its discontinuance has required PFM to attempt to develop new markets and customers, through the utilization of the facility as a storage facility under its RCRA permit and as a transfer facility. The accrued environmental and closure costs related to PFM total $1,008,000 as of March 31, 2000, a decrease of $166,000 from the December 31, 1999, accrual balance. This reduction was principally a result of the specific costs related to general closure and remedial activities, including groundwater remediation, and agency and investigative activities, ($101,000), and the general operating losses, including indirect labor, materials and supplies, incurred in conjunction with the above actions ($65,000). The general operating losses do not reflect management fees charged by the corporation. The remaining environmental and closure liability represents the best estimate of the cost to complete the groundwater remediation at the site of approximately $633,000, the costs to complete the facility closure activities over the next five (5) year period (including agency and investigative activities, and future operating losses during such closure period) totaling approximately $338,000, and the potential PRP liability of $37,000. 4. Proposed Acquisition ____________________ The Company has entered into a stock purchase agreement dated May 16, 2000, to purchase Diversified Scientific Systems, Inc. ("DSSI") from Waste Management, Inc.("Seller"), subject to certain conditions being met. Under the terms of the agreement, upon completion of the purchase of DSSI, the Company is to pay the Seller $8.5 million, subject to the purchase price being increased or decreased under certain conditions, with $5 million payable in cash at closing and the balance evidenced by a promissory note (the "Note"). The Note is to be for a term of five years, will bear an annual rate of interest of 7%, with accrued interest payable annually and the principal amount payable in one lump sum at the end of the five-year term. DSSI's facility, located in Kingston, Tennessee, is permitted to transport, store and treat hazardous waste and mixed waste (waste containing both low level radioactive and hazardous waste) and to dispose of or recycle mixed waste in DSSI's incinerator located at DSSI's facility. In order to assist the Company in raising the funds to fund the cash portion of the purchase price and to assist the Company in providing additional liquidity, the Company has retained Ryan, Beck & Co. and Larkspur Capital Corporation (collectively, the "Agents") as financial advisors to the Company, and has granted the Agents or their permitted designees a five-year warrant to purchase up to 150,000 shares of the Company's Common Stock ("Retainer Warrants"). If the Company is successful in finalizing the private placement as discussed in the "Management's Discussion and Analysis of Financial Condition and Results of Operation Liquidity" prior to termination of the agreement with the Agents or within twelve months following termination of the agreement with the Agents and the placement involves a party contacted by the Agents prior to the termination, the Company has agreed to pay the Agents certain cash fees and certain additional warrants. 8 5. Long-term Debt ______________
Long-term debt consists of the following at March 31, 2000, and December 31, 1999 (in thousands): March 31, 2000 December 31, (Unaudited) 1999 ___________ ____________ Revolving loan facility dated January 15, 1998, as amended May 27, 1999, borrowings based upon by eligible accounts receivable, subject to monthly borrowing base calculation, variable interest paid monthly at prime rate plus 1 3/4 (10.50% at March 31, 2000). $ 6,726 $ 5,891 Term loan agreement dated January 15, 1998, as amended May 27, 1999, payable in monthly principal installments of $78, balance due in June 2002, variable interest paid monthly at prime rate plus 1 3/4 (10.50% at March 31, 2000). 2,969 3,203 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. 4,070 4,283 Various capital lease and promissory note obligations, payable 2000 to 2005, interest at rates ranging from 7.5% to 13.0%. 2,010 1,925 __________ ___________ 15,775 15,302 Less current portion of revolving loan and term note facility 938 938 Less current portion of long-term debt 1,488 1,427 __________ ___________ $ 13,349 $ 12,937 ========== ===========
On January 15, 1998, the Company, as parent and guarantor, and all direct and indirect subsidiaries of the Company, as co-borrowers and cross-guarantors, entered into a Loan and Security Agreement ("Agreement") with Congress as lender. The Agreement initially provided for a term loan in the amount of $2,500,000, which required principal repayments based on a four-year level principal amortization over a term of 36 months, with monthly principal payments of $52,000. Payments commenced on February 1, 1998, with a final balloon payment in the amount of approximately $573,000 due on January 14, 2001. The Agreement also provided for a revolving loan facility in the amount of $4,500,000. At any point in time the aggregate available borrowings under the facility are subject to the maximum credit availability as determined through a monthly borrowing base calculation, as updated for certain information on a weekly basis, equal to 80% of eligible accounts receivable accounts of the Company as defined in the Agreement. The termination date on the revolving loan facility was also the third anniversary of the closing date. The Company incurred approximately $230,000 in financing fees relative to the solicitation and closing of this original loan agreement (principally commitment, legal and closing fees) which are being amortized over the term of the Agreement. Pursuant to the Agreement, the term loan and revolving loan both bear interest at a floating rate equal to the prime rate plus 1 3/4%. The loans also contain certain closing, management and unused line fees 9 payable throughout the term. The loans are subject to a 3.0% prepayment fee in the first year, 1.5% in the second and 1.0% in the third year of the original Agreement dated January 15, 1998. In connection with the acquisition of Chemical Conservation Corporation (CCC), Chemical Conservation of Georgia, Inc. (CCG) and Chem-Met Services, Inc. (CM) on May 27, 1999, Congress, the Company, and the Company's subsidiaries, including CCC, CCG and CM entered into an Amendment and Joinder to Loan and Security Agreement (the "Loan Amendment") dated May 27, 1999, pursuant to which the Loan and Security Agreement ("Original Loan Agreement") among Congress, the Company and the Company's subsidiaries were amended to provide, among other things, (i) the credit line being increased from $7,000,000 to $11,000,000, with the revolving line of credit portion being determined as the maximum credit of $11,000,000, less the term loan balance, with the exact amount that can be borrowed under the revolving line of credit not to exceed eighty percent (80%) of the Net Amount of Eligible Accounts (as defined in the Original Loan Agreement) less certain reserves; (ii) the term loan portion of the Original Loan Agreement being increased from its current balance of approximately $1,600,000 to $3,750,000 and it shall be subject to a four-year amortization schedule payable over three years at an interest rate of 1.75% over prime; (iii) the term of the Original Loan Agreement, as amended, was extended for three years from the date of the acquisition, subject to earlier termination pursuant to the terms of the Original Loan Agreement, as amended; (iv) CCC, CCG and CM being added as co-borrowers under the Original Loan Agreement, as amended; (v) the interest rate on the revolving line of credit will continue at 1.75% over prime, with a rate adjustment to 1.5% if net income applicable to Common Stock of the Company is equal to or greater than $1,500,000 for fiscal year ended December 31, 2000; (vi) the monthly service fee shall increase from $1,700 to $2,000; (vii) government receivables will be limited to 20% of eligible accounts receivable; and (viii) certain obligations of CM shall be paid at closing of the acquisition of CCC, CCG and CM. The Loan Amendment became effective on June 1, 1999, when the Stock Purchase Agreements were consummated. Payments under the term loan commenced on June 1, 1999, with monthly principal payments of approximately $78,000 and a final balloon payment in the amount of $938,000 on June 1, 2002. The Company incurred approximately $40,000 in additional financing fees relating to the closing of this amendment, which is being amortized over the remaining term of the agreement. The interest rate on the revolving loan and term loan was 10.50% at March 31, 2000. Under the terms of the Original Loan Agreement, as amended, the Company has agreed to maintain an Adjusted Net Worth (as defined in the Original Loan Agreement) of not less than $3,000,000 throughout the term of the Original Loan Agreement, which was amended, pursuant to the above noted acquisition. The adjusted net worth covenant requirement ranges from a low of $1,200,000 at June 1, 1999, to a high of $3,000,000 from July 1, 2000, through the remaining term of the Loan Agreement. The covenant requirement at March 31,2000, was $2,000,000, which the Company was in compliance with. The Company has agreed that it will not pay any dividends on any shares of capital stock of the Company, except that dividends may be paid on the Company's shares of Preferred Stock outstanding as of the date of the Loan Amendment (collectively, "Excepted Preferred Stock") under the terms of the applicable Excepted Preferred Stock and if and when declared by the Board of Directors of the Company pursuant to Delaware General Corporation Law. As security for the payment and performance of the Original Loan Agreement, as amended, the Company and its subsidiaries (including CCC, CCG and CM) have granted a first security interest in all accounts receivable, inventory, general intangibles, equipment and certain of their other assets, as well as the mortgage on two facilities owned by subsidiaries of the Company, except for certain real property owned by CM, for which a first security interest is held by the TPS Trust and the ALS Trust as security for CM's non-recourse guaranty of the payment of the Promissory Notes. All other terms and conditions of the original loan remain unchanged. As of March 31, 2000, borrowings under the revolving loan agreement were approximately $6,726,000, an increase of $835,000 over the December 31, 1999, balance of $5,891,000. The balance under the term loan at March 31, 2000, was $2,969,000, a decrease of $234,000 from the December 31, 1999, balance of $3,203,000. 10 As of March 31, 2000, the Company's borrowing availability under the Congress credit facility, based on its then outstanding eligible accounts receivable, was approximately $1,627,000. Pursuant to the terms of the Stock Purchase Agreements in connection with the acquisition of CCC, CCG and CM, 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 CCC, CCG and CM. The Promissory Notes are paid in equal monthly installments of principal and interest of approxi- mately $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 $4,070,000 at March 31, 2000, of which $881,000 is in the current portion. Payments of such Promissory Notes are guaranteed by CM under a non-recourse guaranty, which non-recourse guaranty is secured by certain real estate owned by CM. As further discussed in Note 3, the long-term debt, other than revolving and term loan debt, associated with the discontinued PFM operation is excluded from the above and is recorded in the Liabilities of Discontinued Operations total. The PFM debt obligations total $1,000, all of which is current. 6. Commitments and Contingencies _____________________________ Hazardous Waste In connection with our waste management services, we handle both hazardous and non-hazardous waste which we transport to our own or other facilities for destruction or disposal. As a result of disposing of hazardous substances, in the event any cleanup is required, we could be a potentially responsible party for the costs of the cleanup notwithstanding any absence of fault on our part. Legal In the normal course of conducting our business, we are involved in various litigation. There has been no material change in legal proceedings from those disclosed previously in the Company's Form 10-K for year ended December 31, 1999. 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. Permits We are subject to various regulatory requirements, including the procurement of requisite licenses and permits at our facilities. These licenses and permits are subject to periodic renewal without which our operations would be adversely affected. We anticipate that, once a license or permit is issued with respect to a facility, the license or permit will be renewed at the end of its term if the facility's operations are in compliance with the applicable regulatory requirements. Accrued Closure Costs and Environmental Liabilities We maintain closure cost funds to insure the proper decommissioning of our RCRA facilities upon cessation of operations. Additionally, in the course of owning and operating on-site treatment, storage and disposal facilities, we are subject to corrective action proceedings to restore soil and/or groundwater to its original state. These activities are governed by federal, state and local regulations and we maintain the appropriate accruals for restoration. We have recorded accrued liabilities for estimated closure costs and identified environmental remediation costs. Insurance We believe we maintain insurance coverage adequate for our needs and which is similar to, or greater than, the coverage maintained by other companies of our size in the industry. There can be no assurances, however, that liabilities which may be incurred by us will be covered by our insurance or that the dollar amount of such liabilities which are covered will not exceed our policy limits. Under our insurance contracts, we usually accept self-insured retentions which we believe 11 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. 7. Business Segment Information ____________________________ 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 our chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and * For which discrete financial information is available. We have eleven operating segments which are defined as each separate facility or location that we operate. We clearly view each facility as a separate segment and make decisions based on the activity and profitability of that particular location. These segments however, exclude the Corporate headquarters which does not generate revenue and Perma-Fix of Memphis, Inc. which is reported elsewhere as a discontinued operation. See Note 3 regarding discontinued operations. Pursuant to FAS 131 we have aggregated two or more operating segments into two reportable segments to ease in the presentation and understanding of our business. We used the following criteria to aggregate our segments: * 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. Our reportable segments are defined as follows: The Waste Management Services segment, which provides on-and-off site treatment, storage, processing and disposal of hazardous and non-hazardous industrial and commercial, mixed waste, radioactive waste, and wastewater through our seven TSD facilities; Perma-Fix Treatment Services, Inc., Perma-Fix of Dayton, Inc., Perma-Fix of Ft. Lauderdale, Inc., Perma-Fix of Florida, Inc., Chemical Conservation Corporation, Chemical Conservation of Georgia, Inc., and Chem-Met Services, Inc. We provide through Perma-Fix Inc. and Perma-Fix of New Mexico, Inc. on-site waste treatment services to convert certain types of characteristic hazardous and mixed wastes into non-hazardous waste and various waste management services to certain governmental agencies through Chem-Met Government Services. 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 segment. During 1999, the business and operations of Mintech, Inc., our second engineering company, located in Tulsa, Oklahoma, was merged into and consolidated with the SY&A operations. The table below shows certain financial information by business segment for the quarter ended March 31, 2000 and quarter ended March 31, 1999 and excludes the results of operations of the discontinued operations. 12
Segment Reporting 03/31/00 Waste Segments Consolidated Services Engineering Total Corp(2) Memphis(3) Total ________ ___________ ________ ________ __________ ___________ Revenue from external customers $ 12,622 $ 967 $ 13,589 $ - $ - $ 13,589 Intercompany revenues 1,127 51 1,178 - - 1,178 Interest income 7 - 7 4 - 11 Interest expense 326 13 339 71 - 410 Depreciation and amortization 825 20 845 17 - 862 Segment profit (loss) (36) 124 88 (579) - (491) Segment assets(1) 50,638 2,633 53,271 1,960 320 55,551 Expenditures for segment assets 741 12 753 33 - 786 Segment Reporting 03/31/99 Waste Segments Consolidated Services Engineering Total Corp(2) Memphis(3) Total ________ ___________ ________ _______ __________ ____________ Revenue from external customers $ 6,601 $ 1,211 $ 7,812 $ - $ - $ 7,812 Intercompany revenues 93 93 186 - - 186 Interest income 5 - 5 2 - 7 Interest expense 41 20 61 (34) - 27 Depreciation and amortization 494 20 514 5 - 519 Segment profit (loss) 270 77 347 (333) - 14 Segment assets(1) 24,725 2,432 27,157 1,310 456 28,923 Expenditures for segment assets 445 13 458 5 - 463 (1) Segment assets have been adjusted for intercompany accounts to reflect actual assets for each segment. (2) Amounts reflect the activity for corporate headquarters. (3) Amounts reflect the activity for Perma-Fix of Memphis, Inc., which is a discontinued operation, not included in the segment information (See Note 2).
13 PERMA-FIX ENVIRONMENTAL SERVICES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART I, ITEM 2 Forward-looking Statements Certain statements contained with 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, (i) ability or inability to continue and improve operations and remain profitable on an annualized basis, (ii) the Company's ability to develop or adopt new and existing technologies in the conduct of its operations, (iii) anticipated financial performance, (iv) ability to comply with the Company's general working capital requirements, (v) ability to retain or receive certain permits or patents, (vi) ability to be able to continue to borrow under the Company's revolving line of credit, (vii) 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, (viii) ability to remediate certain contaminated sites for projected amounts, (ix) completion of the acquisition of DSSI, (x) ability to obtain new sources of financing, and (xi) all other statements which are not statements of historical fact. 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, (i) general economic conditions, (ii) material reduction in revenues, (iii) inability to collect in a timely manner a material amount of receivables, (iv) increased competitive pressures, (v) the ability to maintain and obtain required permits and approvals to conduct operations, (vi) the ability to develop new and existing technologies in the conduct of operations, (vii) inability of the "New Process" (as defined) to perform as anticipated or to develop such for commercial, (viii) ability to receive or retain certain required permits, (ix) 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, (x) determination that PFM is the source of chlorinated compounds at the Allen Well Field, (xi) changes in federal, state and local laws and regulations, especially environmental regulations, or in interpretation of such, (xii) potential increases in equipment, maintenance, operating or labor costs, (xiii) management retention and development, (xiv) the requirement to use internally generated funds for purposes not presently anticipated, (xv) inability to become profitable, (xvi) the inability to secure additional liquidity in the form of additional equity or debt, (xvii) the commercial viability of our on-site treatment process, (xviii) the inability of the Company to obtain under certain circumstances shareholder approval of the transaction in which the Series 10 Preferred and certain warrants were issued, (xix) the inability of the Company to maintain the listing of its Common Stock on the NASDAQ, (xx) the determination that CM or CCC was responsible for a material amount of remediation at certain Superfund sites, and (xxi) inability to finalize the acquisition of DSSI. The Company undertakes no obligations to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise. 14 Results of Operations
The table below should be used when reviewing management's discussion and analysis for the three months ended March 31, 2000 and 1999: Consolidated (amounts in thousands) ___________________________________ 2000 % 1999 % ________ ______ ________ ______ Net Revenues $13,589 100.0 $ 7,812 100.0 Cost of Goods Sold 9,542 70.2 5,290 67.7 _______ _____ _______ _____ Gross Profit 4,047 29.8 2,522 32.3 Selling, General & Administrative 3,253 23.9 1,838 23.6 Depreciation/Amortization 862 6.3 519 6.6 _______ _____ _______ _____ (Income) Loss from operations $ (68) (.4) $ 165 2.1 ======== ===== ======= ===== Interest Expense $ (410) (3.0) $ (27) (.3) Preferred Stock Dividend (54) (.4) (117) (1.5)
Summary - Quarter Ended March 31, 2000 and 1999 _______________________________________________ We provide services through two reportable operating segments. The 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 mixed 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 in the Midwest, Southeast and Southwest regions of the country. We operate and maintain facilities and businesses in the waste by-product brokerage, on-site treatment and stabilization, and off-site blending, treatment and disposal industries. Our Consulting Engineering segment provides a wide variety of environmental related consulting and engineering services to industry and government. The Consulting Engineering 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 $13,589,000 from $7,812,000 for the quarter ended March 31, 2000, as compared to the same quarter in 1999. This increase of $5,777,000 or 74.0% is principally attributable to the additional revenues resulting from the acquisition of Chemical Conservation Corporation (CCC), Chemical Conservation of Georgia, Inc. (CCG) and Chem-Met Services, Inc. (CM), effective June 1, 1999, which in the aggregate contributed approximately $6,746,000 to this increase. Partially offsetting this increase, were decreases within the Waste Management Services segment totaling approximately $410,000, principally from the Perma-Fix of Dayton wastewater facility, and decreases within the Consulting Engineering segment totaling approximately $559,000, principally from the Mintech, Inc. engineering company whose operations were reduced and merged with Schreiber, Yonley & Associates, Inc. during the second half of 1999. These reduced revenues are also a result of the seasonal decrease in market demand, which typically occurs during the first quarter of each year and appeared more dramatic in 2000. Cost of goods sold for the Company increased $4,252,000 or 80.4% for the quarter ended March 31, 2000, as compared to the quarter ended March 31, 1999. This consolidated increase in cost of goods sold reflect principally the increased operating, disposal and transportation costs, corresponding to the increased revenues from the acquisition of CCC, CCG and CM, as discussed above, which totaled $4,703,000. Increased operating costs were also recognized across most of the Waste Management Services facilities, as we increase certain fixed costs and began preparation for the processing of new wastewater streams at several facilities and the expanded mixed waste processing capabilities at the Gainesville, Florida, mixed waste facility. The resulting gross profit for the quarter ended March 31, 2000, increased $1,525,000 to $4,047,000, which as a percentage of revenue is 29.8%, reflecting a decrease over the corresponding quarter in 1999 percentage of revenue of 32.3%. This decrease in 15 gross profit as a percentage of revenue was principally recognized throughout the Waste Management Services segment which experienced a decrease from 33.1% in 1999 to 29.4% in 2000 reflecting the expansion and startup activities discussed above. Offsetting this however was an increase in the Consulting Engineering segment from 28.8% in 1999 to 35.1% in 2000, reflecting the benefits from the restructuring and consolidation of our engineering businesses, as discussed above. Selling, general and administrative expenses increased $1,415,000 or 77.0% for the quarter ended March 31, 2000, as compared to the quarter ended March 31, 1999. As a percentage of revenue, selling, general and administrative expense increased to 23.9% for the quarter ended March 31, 2000, compared to 23.6% for the same period in 1999. The increase reflects the expenses directly related to CCC, CCG and CM as acquired effective June 1, 1999, which totals $1,300,000 and the increased expenses associated with our additional sales and marketing efforts as we continue to refocus the business segments into new environmental markets, such as nuclear and mixed waste, and the additional administrative overhead associated with our research and development efforts. We have expensed in the current period all research and development costs associated with the development of various technologies and the increase administrative costs associated with the expansion of the Perma-Fix of Florida, Inc. ("PFF") mixed waste facility. Depreciation and amortization expense for the quarter ended March 31, 2000, reflects an increase of $343,000 as compared to the quarter ended March 31, 1999. This increase is attributable to a depreciation expense increase of $246,000 which is a result of the depreciation in 2000 from the CCC, CCG and CM facilities acquired effective June 1, 1999, totaling $194,000 and the additional depreciation related to the expanded facilities and an amortization expense increase of $97,000 for the quarter ended March 31, 2000, as compared to the quarter ended March 31, 1999. This increase in amortization expense is a result of the goodwill and permit amortization from the CCC, CCG and CM facilities acquired in 1999. Interest expense increased $383,000 from the quarter ended March 31, 2000, as compared to the corresponding period of 1999, excluding discontinued operations. This increase principally reflects the acquisition of CCC, CCG and CM effective June 1, 1999. The existing debt assumed in conjunction with the acquisition, along with the three promissory notes, which comprised $4,700,000 of the purchase price, resulted in approximately $74,000 of additional interest expense. The remaining increase in interest expense is a result of the increased borrowing levels on the Congress Financial Corporation revolving and term loan incurred in conjunction with the above noted acquisition, which totaled approximately $297,000. Preferred Stock dividends decreased $63,000 during the quarter ended March 31, 2000 as compared to the corresponding period of 1999. This decrease is due to the conversion of $4,563,000 (4,563 preferred shares) of the Preferred Stock into Common Stock on April 20, 1999, the redemption of $750,000 (750 preferred shares) of the Preferred Stock on July 15, 1999, and the conversion of $350,000 (350 preferred shares) of the Preferred Stock into Common Stock throughout the first quarter of 2000. Discontinued Operations On January 27, 1997, an explosion and resulting tank fire occurred at the Perma-Fix of Memphis, Inc. ("PFM") facility, a hazardous waste storage, processing and blending facility, which resulted in damage to certain hazardous waste storage tanks located on the facility and caused certain limited contamination at the facility. As a result of the significant disruption and the cost to rebuild and operate this segment, the Company made a strategic decision, in February 1998, to discontinue its fuel blending operations at PFM. The fuel blending operations represented the principal line of business for PFM prior to this event, which included a separate class of customers, and its discontinuance has required PFM to attempt to develop new markets and customers, through the utilization of the facility as a storage facility under its RCRA permit and as a transfer facility. 16 Proposed Acquisition As provided in Note 4 to Notes to Consolidated Financial Statements, the Company has entered into a stock purchase agreement dated May 16, 2000, to purchase Diversified Scientific Systems, Inc. ("DSSI") from Waste Management, Inc. ("Seller"), subject to certain conditions being met. Under the terms of the agreement, upon completion of the purchase of DSSI, the Company is to pay the Seller $8.5 million, subject to the purchase price being increased or decreased under certain conditions, with $5 million payable in cash at closing and the balance evidenced by a promissory note to the Seller (the "Note"). The Note is to be for a term of five years, will bear an annual rate of interest of 7%, with the accrued interest payable annually and the principal amount payable in one lump sum payment at the end of the five-year term. The agreement also provides that if the acquisition is not completed within 90 days from May 16, 2000, or such longer period as is necessary to obtain approvals of applicable governmental authorities relating to the permits and licenses of DSSI necessary to consummate the transactions, the agreement may be terminated by either party, except under certain limited circumstances. See "Liquidity and Capital Resources of the Company" for a discussion as to the Company's proposal to fund the cash portion of the purchase price. Liquidity and Capital Resources of the Company At March 31, 2000, the Company had cash and cash equivalents of $682,000, including $3,000 from discontinued operations. This cash and cash equivalents total reflects a decrease of $134,000 from December 31, 1999, as a result of net cash used in continuing operations of $546,000 (principally the reduction of accounts payable), cash used by discontinued operation of $157,000, cash used in investing activities of $459,000 (principally purchases of equipment, net totaling $570,000), offset by cash provided by financing activities of $1,028,000 (net borrowings of the revolving loan and term note facility, proceeds from the issuance of stock, partially offset by principal repayments of long-term debt). Accounts receivable, net of allowances for continuing operations, totaled $13,057,000, an increase of $30,000 over the December 31, 1999, balance of $13,027,000. The receivable balance remained flat during this first quarter of 2000, due in large part to the reduced revenue levels of this typical slow quarter, offset by Government Services contracting activities, which increased for the quarter and represents slower paying receivables. The Company, as parent and guarantor, and all direct and indirect subsidiaries of the Company are co-borrowers and cross-guarantors under a Loan and Security Agreement ("Agreement") with Congress as lender. The Agreement initially provided for a term loan in the amount of $2,500,000, which required principal repayments based on a four-year level principal amortization over a term of 36 months, with monthly principal payments of $52,000. Payments commenced on February 1, 1998, with a final balloon payment in the amount of approximately $573,000 due on January 14, 2001. The Agreement also provided for a revolving loan facility in the amount of $4,500,000. At any point in time the aggregate available borrowings under the facility are subject to the maximum credit availability as determined through a monthly borrowing base calculation, as updated for certain information on a weekly basis, equal to 80% of eligible accounts receivable accounts of the Company as defined in the Agreement. The termination date on the revolving loan facility was also the third anniversary of the closing date. The Company incurred approximately $230,000 in financing fees relative to the solicitation and closing of this original loan agreement (principally commitment, legal and closing fees) which are being amortized over the term of the Agreement. Pursuant to the Agreement, the term loan and revolving loan both bear interest at a floating rate equal to the prime rate plus 1 3/4%. The loans also contain certain closing, management and unused line fees payable throughout the term. The loans are subject to a 3.0% prepayment fee in the first year, 1.5% in the second and 1.0% in the third year of the original Agreement dated January 15, 1998. In connection with the acquisition of CCC, CCG and CM on May 27, 1999, Congress, the Company, and the Company's subsidiaries, including CCC, CCG and CM entered into an Amendment and Joinder to Loan and Security Agreement (the "Loan Amendment") dated May 27, 1999, pursuant to which the Loan and Security Agreement ("Original Loan Agreement") among Congress, the Company and the Company's subsidiaries was amended to provide, among other things, (i) the credit line being increased from $7,000,000 to $11,000,000, with the revolving line of credit portion being 17 determined as the maximum credit of $11,000,000, less the term loan balance, with the exact amount that can be borrowed under the revolving line of credit not to exceed eighty percent (80%) of the Net Amount of Eligible Accounts (as defined in the Original Loan Agreement) less certain reserves; (ii) the term loan portion of the Original Loan Agreement being increased from its current balance of approximately $1,600,000 to $3,750,000 and it shall be subject to a four-year amortization schedule payable over three years at an interest rate of 1.75% over prime; (iii) the term of the Original Loan Agreement, as amended, was extended for three years from the date of the acquisition, subject to earlier termination pursuant to the terms of the Original Loan Agreement, as amended; (iv) CCC, CCG and CM being added as co-borrowers under the Original Loan Agreement, as amended; (v) the interest rate on the revolving line of credit will continue at 1.75% over prime, with a rate adjustment to 1.5% if net income applicable to Common Stock of the Company is equal to or greater than $1,500,000 for fiscal year ended December 31, 2000; (vi) the monthly service fee shall increase from $1,700 to $2,000; (vii) government receivables will be limited to 20% of eligible accounts receivable; and (viii) certain obligations of CM shall be paid at closing of the acquisition of CCC, CCG and CM. The Loan Amendment became effective on June 1, 1999, when the Stock Purchase Agreements were consummated. Payments under the term loan commenced on June 1, 1999, with monthly principal payments of approximately $78,000 and a final balloon payment in the amount of $938,000 on June 1, 2002. The Company incurred approximately $40,000 in additional financing fees relating to the closing of this amendment, which is being amortized over the remaining term of the agreement. Under the terms of the Original Loan Agreement, as amended, the Company has agreed to maintain an Adjusted Net Worth (as defined in the Original Loan Agreement) of not less than $3,000,000 throughout the term of the Original Loan Agreement, which was amended, pursuant to the above noted acquisition. The adjusted net worth covenant requirement ranges from a low of $1,200,000 at June 1, 1999, to a high of $3,000,000 from July 1, 2000, through the remaining term of the Loan Agreement. The covenant requirement at March 31, 2000, was $2,000,000, which the Company was in compliance with. The Company has agreed that it will not pay any dividends on any shares of capital stock of the Company, except that dividends may be paid on the Company's shares of Preferred Stock outstanding as of the date of the Loan Amendment (collectively, "Excepted Preferred Stock") under the terms of the applicable Excepted Preferred Stock, if and when declared by the Board of Directors of the Company pursuant to Delaware General Corporation Law. If dividends on the Excepted Preferred Stock are paid, the loan agreement provides that the Company must pay the dividends in shares of Common Stock and not in cash, unless prior consent is obtained. As security for the payment and performance of the Original Loan Agreement, as amended, the Company and its subsidiaries (including CCC, CCG and CM) have granted a first security interest in all accounts receivable, inventory, general intangibles, equipment and certain of their other assets, as well as the mortgage on two facilities owned by subsidiaries of the Company, except for certain real property owned by CM, for which a first security interest is held by the TPS Trust and the ALS Trust as security for CM's non-recourse guaranty of the payment of the Promissory Notes. All other terms and conditions of the original loan remain unchanged. As of March 31, 2000, borrowings under the revolving loan agreement were approximately $6,726,000, an increase of $835,000 over the December 31, 1999, balance of $5,891,000. The balance under the term loan at March 31, 2000, was $2,969,000, a decrease of $234,000 from the December 31, 1999, balance of $3,203,000. As of March 31, 2000, the Company's borrowing availability under the Congress credit facility, based on its then outstanding eligible accounts receivable, was approximately $1,627,000. Pursuant to the terms of the Stock Purchase Agreements in connection with the acquisition of CCC, CCG and CM, 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 CCC, CCG and CM. 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 18 first three years and 7% for the remaining two years. The aggregate outstanding balance of the Promissory Notes total $4,070,000 at March 31, 2000, of which $881,000 is in the current portion. Payments of such Promissory Notes are guaranteed by CM under a non-recourse guaranty, which non-recourse guaranty is secured by certain real estate owned by CM. As of March 31, 2000, total consolidated accounts payable for continuing operations was $6,697,000, a decrease of $890,000 from the December 31, 1999, balance of $7,587,000. This decrease in accounts payable is partially reflective of the increased borrowing level under the revolving loan agreement, which funds were utilized to reduce certain payables. Our net purchases of new capital equipment for continuing operations for the three-month period ended March 31, 2000, totaled approximately $786,000. These expenditures were for expansion and improvements to the operations principally within the waste management industry segment. These capital expenditures were principally funded by the cash provided by continuing operations and $216,000 through various other lease financing sources. We have budgeted capital expenditures of approximately $4,000,000 for 2000, which includes completion of certain current projects, as well as other identified capital and permit compliance purchases. We anticipate funding these capital expenditures by a combination of lease financing with lenders other than the equipment financing arrangement discussed above, and/or internally generated funds. The working capital deficit position at March 31, 2000, was $491,000, as compared to a deficit position of $1,400,000 at December 31, 1999, which reflects an improvement in this position of $909,000 during the first quarter of 2000. The working capital deficit position is principally a result of the impact of the CCC, CCG and CM acquisition, effective June 1, 1999. The consideration was paid in the form of cash, debt and equity, with the cash portion being $1,000,000, funded out of current working capital and the debt portion being $4,700,000 in the form of three promissory notes, paid over five years. The Congress term loan was also increased by $2,083,000 pursuant to this acquisition, which resulted in an increase in the current portion of the term loan debt. We also assumed certain other liabilities pursuant to this acquisition, including the accrued environmental liability related to the CM facility in Detroit, Michigan, and the CCG Facility in Valdosta, Georgia, both of which are long term remedial projects, with increased spending in this first year. These two remedial projects contributed $1,007,000 to this working capital deficit. Additionally, we continue to invest current cash proceeds into the long term capital improvements of our operating facilities as discussed above. However, we were able to improve on this working capital position during the first quarter, principally from cash flow from operations, borrowings on the revolving loan and proceeds from the issuance of stock. During January 1998, PFM was notified by the EPA that it believed that PFM was a PRP regarding the remediation of a site owned and operated by W.R. Drum, Inc. ("WR Drum") in Memphis, Tennessee (the "Drum Site"). During the third quarter of 1998, the government agreed to PFM's offer to pay $225,000 ($150,000 payable at closing and the balance payable over a twelve-month period) to settle any potential liability regarding this Drum Site. During January 1999, the Company executed a "Partial Consent Decree" pursuant to this settlement, and paid the initial settlement payment amount of $150,000 in October 1999 and an installment of $37,000 in March 2000. The remaining amount of $38,000 is to be paid on September 15, 2000. The accrued dividends on the outstanding Preferred Stock for the period July 1, 1999, through December 31, 1999, in the amount of approximately $109,000 were paid in February 2000, in the form of 95,582 shares of Common Stock of the Company. The dividends for the period January 1, 2000, through March 31, 2000, total $54,000, of which $3,000 was paid in conjunction with the first quarter 2000 conversions and $51,000 will be paid in July 2000, in the form of Common Stock, or if approved by the lender, at the Company's option, in the form of cash. 19 In order to fund the cash portion of the purchase price relating to the proposed acquisition of DSSI, as discussed above, and to provide the Company additional liquidity to fund other capital expenditures and the continuing growth of the Company, the Company has retained Ryan, Beck & Co. and Larkspur Capital Corporation (collectively, the "Agents") as its financial advisors in the private placement of new debt and possible equity. There are no assurances that the Company will be successful in arranging lenders to participate in the private placement, or if participants are available, that the private placement can be completed on terms satisfactory to the Company. In connection with the retention of the Agents as financial advisors to the Company, the Company has granted the Agents or their permitted designees a five-year warrant to purchase up to 150,000 shares of the Company's Common Stock ("Retainer Warrants"). If the Company is successful in finalizing the private placement prior to termination of the agreement with the Agents or within twelve months following termination of the agreement with the Agents and the placement involves a party contacted by the Agents prior to the termination, the Company has agreed to pay the Agents certain cash fees and additional warrants. In summary, we have continued to take steps to improve our operations and liquidity as discussed above. However, with the acquisition in 1999, we incurred and assumed certain debt obligations and long-term liabilities, which had a short term impact on liquidity. If we are unable to continue to improve our operations and to continue profitability in the foreseeable future, such would have a material adverse effect on our liquidity position. Environmental Contingencies The Company is engaged in the Waste Management Services segment of the pollution control industry. As a participant in the on-site treatment, storage and disposal market and the off-site treatment and services market, the Company is subject to rigorous federal, state and local regulations. These regulations mandate strict compliance and therefore are a cost and concern to the Company. 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. The Company routinely uses third party disposal companies, who ultimately destroy or secure landfill residual materials generated at its facilities or at a client's site. The Company, compared to its competitors, disposes of significantly less hazardous or industrial by-products from its operations due to rendering material non-hazardous, discharging treated wastewaters to publicly-owned treatment works and/or processing wastes into saleable products. In the past, numerous third party disposal sites have improperly managed wastes and consequently require remedial action; consequently, any party utilizing these sites may be liable for some or all of the remedial costs. Despite the Company's aggressive compliance and auditing procedures for disposal of wastes, the Company could, in the future, be notified that it is a PRP at a remedial action site, which could have a material adverse effect on the Company. 20 In addition to budgeted capital expenditures of $4,000,000 for 2000 at the TSD facilities, which are necessary to maintain permit compliance and improve operations, as discussed above in this Management's Discussion and Analysis, we have also budgeted for 2000 an additional $1,656,000 in environmental expenditures to comply with federal, state and local regulations in connection with remediation of certain contaminates at four locations. The four locations where these expenditures will be made are a parcel of property leased by a predecessor to PFD in Dayton, Ohio (EPS), a former RCRA storage facility as operated by the former owners of PFD, PFM's facility in Memphis, Tennessee, CCG's facility in Valdosta Georgia and CM's facility in Detroit, Michigan. We have estimated the expenditures for 2000 to be approximately $254,000 at the EPS site, $265,000 at the PFM location, $499,000 at the CCG site and $638,000 at the CM site, of which $83,000, $63,000, $23,000 and $127,000 were spent during the first quarter of 2000, respectively. Additional funds will be required for the next five to ten years to properly investigate and 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. Year 2000 Issues The Year 2000 problem arises because many computer systems were designed to identify a year using only two digits, instead of four digits, in order to conserve memory and other resources. For instance, "1999" would be held in the memory of a computer as "99." When the year changes from 1999 to 2000, a two-digit system would read the year as changing from "99" to "00." For a variety of reasons, many computer systems are not designed to make such a date change or are not designed to "understand" or react appropriately to such a date change. Therefore, after the date changes to the year 2000, many computer systems could completely stop working or could perform in an improper and unpredictable manner. We have conducted a review of our computer systems to identify the systems which we anticipated could be effected by the Year 2000 issue and we believe that all such systems were already, or have been converted to be, Year 2000 compliant. Such conversion costs, where required, have not been material and have been expensed as incurred. Pursuant to our Year 2000 planning, we requested information regarding the computer systems of our key suppliers, customers, creditors, and financial service organizations and were informed that they are substantially Year 2000 compliant. As of the date of this Report, the Company has experienced no Year 2000 disruptions to its operations since the year 2000 began. There can be no assurance, however, that such key organizations are actually Year 2000 compliant and that the Year 2000 issue will not adversely affect the Company's financial position or results of operations. We believe that our expenditures in addressing our Year 2000 issues will not have a material adverse effect on our financial position or results of operations. Recent Accounting Pronouncements In June 1998 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. FAS 133 as amended by FAS 137 is effective for periods beginning after June 15, 2000. Historically, we have not entered into derivative contracts. Accordingly, FAS 133 is not expected to affect our financial statements. 21 PERMA-FIX ENVIRONMENTAL SERVICES, INC. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK PART I, ITEM 3 The Company is exposed to certain market risks arising from adverse changes in interest rates, primarily due to the potential effect of such changes on the Company's variable rate loan arrangements with Congress, as described under Note 5 to Notes to Consolidated Financial Statements. The Company does not use interest rate derivative instruments to manage exposure to interest rate changes. 22 PERMA-FIX ENVIRONMENTAL SERVICES, INC. PART II - Other Information Item 1. Legal Proceedings _________________ There are no additional material legal proceedings pending against the Company and/or its subsidiaries not previously reported by the Company in Item 3 of its Form 10-K for the year ended December 31, 1999, which Item 3 is incorporated herein by reference. Item 5. Other Information _________________ The Company has entered into a stock purchase agreement dated May 16, 2000, to purchase Diversified Scientific Systems, Inc. ("DSSI") from Waste Management, Inc. ("Seller"), subject to certain conditions being met. Under the terms of the agreement, upon completion of the purchase of DSSI, the Company is to pay the Seller $8.5 million, subject to the purchase price being increased or decreased under certain conditions, with $5 million payable in cash at closing and the balance evidenced by a promissory note (the "Note"). The Note is to be for a term of five years, will bear an annual rate of interest of 7%, with accrued interest payable annually and the principal amount payable in one lump sum at the end of the five-year term. DSSI's facility, located in Kingston, Tennessee, is permitted to transport, store and treat hazardous waste and mixed waste (waste containing both low level radioactive and hazardous waste) and to dispose of or recycle mixed waste in DSSI's incinerator located at DSSI's facility. The agreement provides that if the acquisition by the Company of DSSI is not completed within 90 days from May 16, 2000, or such longer period as is necessary to obtain approvals of applicable governmental authorities relating to the permits and licenses of DSSI necessary to consummate the transaction, either party may terminate the agreement, except under limited circumstances. See Note 4 to Notes to Consolidated Financial Statements and the "Management's Discussion and Analysis of Financial Condition and Results of Operations--Proposed Acquisition" and "-Liquidity and Capital Resources of the Company." In connection with the retention of Ryan, Beck & Co. and Larkspur Capital Corporation (collectively, the "Agents") as financial advisors to the Company, the Company has granted the Agents or their permitted designees a five-year warrant to purchase up to 150,000 shares of the Company's Common Stock ("Retainer Warrants"). If the Company is successful in finalizing the private placement as discussed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity" prior to termination of the agreement with the Agents or within twelve months following termination of the agreement with the Agents and the placement involves a party contacted by the Agents prior to the termination, the Company has agreed to pay the Agents certain cash fees and certain additional warrants. 23 Item 6. Exhibits and Reports on Form 8-K ________________________________ (a) Exhibits ________ 2.1 Stock Purchase Agreement, dated May 16, 2000, between the Company and Waste Management, Inc. regarding the purchase of DSSI. Schedules and exhibits attached thereto are omitted, but such will be provided to the Commission upon request. 10.1 Form of Warrant Agreement between the Company, Ryan, Beck & Co., Inc. and Larkspur Capital Corporation. 27 Financial Data Schedule (b) Reports on Form 8-K ___________________ No report on Form 8-K was filed by the Company during the first quarter of 2000. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. PERMA-FIX ENVIRONMENTAL SERVICES, INC. Date: May 17, 2000 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 25 EXHIBIT INDEX _____________ Exhibit Sequential No. Description Page No. _______ ___________ __________ 2.1 Stock Purchase Agreement, dated May 16, 2000, between the Company and Waste Management, Inc. regarding the purchase of DSSI. Schedules and exhibits attached thereto are omitted, but such will be provided to the Commission upon request. 27 10.1 Warrant Agreement, between the Company, Ryan, Beck & Co., Inc. and Larkspur Capital Corporation. 60 27 Financial Data Schedule. 69