================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _______ to _______
Commission
File No. 1-11596
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-1954497
-------- ----------
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
32653
1940 N.W. 67th Place, Gainesville, FL (Zip Code)
(Address of principal executive offices)
(352) 373-4200
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.001 Par Value Boston Stock Exchange
NASDAQ Small Cap Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated file (as defined
in Rule 12b-2 of the Act). Yes X No [ ]
The aggregate market value of the Registrant's voting and non-voting common
equity held by nonaffiliates of the Registrant computed by reference to the
closing sale price of such stock as reported by NASDAQ as of the last business
day of the most recently completed second fiscal quarter (June 30, 2003), was
approximately $61,380,000. For the purposes of this calculation, all executive
officers and directors of the Registrant (as indicated in Item 12) are deemed to
be affiliates. Capital Bank Grawe Gruppe AG is not considered an affiliate based
on representations made to the Registrant by Capital Bank. Such determination
should not be deemed an admission that such directors or officers, are, in fact,
affiliates of the Registrant. The Company's Common Stock is listed on the NASDAQ
SmallCap Market and the Boston Stock Exchange.
As of March 8, 2004, there were 36,689,937 shares of the registrant's Common
Stock, $.001 par value, outstanding, excluding 988,000 shares held as treasury
stock.
Documents incorporated by reference: none
================================================================================
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
INDEX
PART I Page No.
Item 1. Business............................................................1
Item 2. Properties.........................................................12
Item 3. Legal Proceedings..................................................12
Item 4A. Executive Officers of the Company..................................15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................16
Item 6. Selected Financial Data............................................17
Item 7. Management's Discussion and Analysis of Financial Condition
And Results of Operations..........................................18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........34
Special Note Regarding Forward-Looking Statements..................35
Item 8. Financial Statements and Supplementary Data........................37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................69
Item 9A. Controls and Procedures............................................69
PART III
Item 10. Directors and Executive Officers of the Registrant.................70
Item 11. Executive Compensation.............................................73
Item 12. Security Ownership of Certain Beneficial Owners and Management.....77
Item 13. Certain Relationships and Related Transactions.....................80
Item 14. Principal Accountant Fees and Services.............................81
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....83
PART I
ITEM 1. BUSINESS
Company Overview and Principal Products and Services
Perma-Fix Environmental Services, Inc. (the Company, which may be referred to as
we, us, or our), an environmental and technology know-how company, is a Delaware
corporation, engaged through its subsidiaries, in:
o Industrial Waste Management Services ("Industrial"), which includes:
o Treatment, storage, processing, and disposal of hazardous and
non-hazardous waste; and
o Wastewater management services, including the collection, treatment,
processing and disposal of hazardous and non-hazardous wastewater.
o Nuclear Waste Management Services ("Nuclear"), which includes:
o Treatment, storage, processing and disposal of mixed waste (which is
both low-level radioactive and hazardous waste) including on and
off-site waste remediation and processing;
o Nuclear and low-level radioactive waste treatment, processing and
disposal; and
o Research and development of innovative ways to process low-level
radioactive and mixed waste.
o Consulting Engineering Services, which includes:
o Consulting services regarding broad-scope environmental issues,
including environmental management programs, regulatory permitting,
compliance and auditing, landfill design, field testing and
characterization.
We have grown through both acquisitions and internal development. Our present
objective is to focus on the efficient operation of our existing facilities,
evaluate strategic acquisitions within both the Nuclear and Industrial segments,
and to continue the research and development of innovative technologies for the
treatment of nuclear waste, mixed waste and industrial waste.
We service research institutions, commercial companies, public utilities and
governmental agencies nationwide. The distribution channels for our services are
through direct sales to customers or via intermediaries.
We were incorporated in December of 1990. Our executive offices are located at
1940 N.W. 67th Place, Gainesville, Florida 32653.
Website access to Company's reports
Our internet website address is www.perma-fix.com. Our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to section 13(a) or
15(d) of the Exchange Act are available free of charge through our website as
soon as reasonably practicable after they are electronically filed with, or
furnished to, the Securities and Exchange Commission ("Commission"). We have
adopted a code of ethics applicable to our executive officers including our CEO,
CFO, principal financial officer or controller or persons performing similar
functions. Our code of ethics is also available free of charge on our website.
Segment Information and Foreign and Domestic Operations and Export Sales
During 2003, we were engaged in three operating segments. Pursuant to FAS 131,
we define an operating segment as:
o a business activity from which we may earn revenue and incur expenses;
o whose operating results are regularly reviewed by the president to make
decisions about resources to be allocated and assess its performance; and
o for which discrete financial information is available.
-1-
We therefore define our operating segments as each business line that we
operate. These segments, however, exclude the Corporate headquarters, which does
not generate revenue.
Most of our activities are conducted nationwide, however, our Industrial segment
maintains a significant role in the Southeast and Midwest portions of the United
States. We had no foreign operations or export sales during 2003.
Operating Segments
We have three operating segments, which represent each business line that we
operate. The Industrial segment, which operates six facilities, the Nuclear
segment, which operates three facilities, and the Consulting Engineering
Services segment as described below:
INDUSTRIAL WASTE MANAGEMENT SERVICES, which includes, off-site waste storage,
treatment, processing and disposal services of hazardous and non-hazardous waste
(solids and liquids) through six permitted treatment and/or disposal facilities
and numerous related operations provided by our other location, as discussed
below.
Perma-Fix Treatment Services, Inc. ("PFTS") is a Resource Conservation and
Recovery Act of 1976 ("RCRA") permitted treatment, storage and disposal ("TSD")
facility located in Tulsa, Oklahoma. PFTS stores and treats hazardous and
non-hazardous waste liquids, provides waste transportation and disposal of
non-hazardous liquid waste via its on-site Class I Injection Well located at the
facility. The injection well is permitted for the disposal of non-hazardous
liquids and characteristic hazardous wastes that have been treated to remove the
hazardous characteristic. PFTS operates a non-hazardous wastewater treatment
system for oil and solids removal, a corrosive treatment system for
neutralization and metals precipitation, and a container stabilization system.
The injection well is controlled by a state-of-the-art computer system to assist
in achieving compliance with all applicable state and federal regulations.
Perma-Fix of Dayton, Inc. ("PFD") is a RCRA permitted TSD facility located in
Dayton, Ohio. PFD has four main processing areas. The four production areas are
a RCRA permitted TSD, a centralized wastewater treatment area, a used oil
recycling area, and a non-hazardous solids solidification area. Hazardous waste
accepted under the RCRA permit is typically drum waste for fuel bulking,
incineration or stabilization. Wastewaters accepted at the facility include
hazardous and non-hazardous wastewaters, which are treated by ultra filtration,
metals precipitation and bio-degradation, including the biological wastewater
process, to meet the requirements of PFD's Clean Water Act pretreatment permit.
Waste industrial oils and used motor oils are processed through high-speed
centrifuges to produce a high quality fuel that is burned by industrial burners.
Perma-Fix of Ft. Lauderdale, Inc. ("PFFL") is a permitted facility located in
Ft. Lauderdale, Florida. PFFL collects and treats wastewaters, oily wastewaters,
used oil and other off-specification petroleum-based products, some of which may
potentially be recycled into usable products. Key activities at PFFL include
process cleaning and material recovery, production and sales of on-specification
fuel oil, custom tailored waste management programs and hazardous material
disposal and recycling materials from generators such as the cruise line and
marine industries.
Perma-Fix of Orlando, Inc. ("PFO"), is a RCRA permitted TSD facility located in
Orlando, Florida. PFO collects, stores and treats hazardous and non-hazardous
wastes out of two processing buildings, under one of our most inclusive permits.
PFO is also a transporter of hazardous waste and operates a transfer facility at
the site.
Perma-Fix of South Georgia, Inc. ("PFSG"), is a RCRA permitted TSD facility
located in Valdosta, Georgia. PFSG provides storage, treatment and disposal
services to hazardous and non-hazardous waste generators throughout the United
States, in conjunction with the utilization of the PFO facility and
transportation services. PFSG operates a hazardous waste storage facility that
primarily blends and
-2-
processes hazardous and non-hazardous waste liquids, solids and sludges into
substitute fuel or as a raw material substitute in cement kilns that have been
specially permitted for the processing of hazardous and non-hazardous waste.
Perma-Fix of Michigan, Inc. ("PFMI"), is a permitted TSD facility located in
Detroit, Michigan. PFMI is a waste treatment and storage facility, situated on
60 acres, that treats hazardous, non-hazardous and inorganic wastes with
solidification/chemical fixation and bulks, repackages and remanifests wastes
that are determined to be unsuitable for treatment. This large bulk processing
facility utilizes a chemical fixation and stabilization process to produce a
solid non-hazardous matrix that can safely be disposed of in a solid waste
landfill. During the later half of 2003, PFMI's facility sustained a fire. As a
result of this fire, this facility is unable to perform bulking services. As of
the date of this report, we are unable to determine when or if this facility
will be able to begin performing in bulking services.
PFMI also operates under a trade name of Perma-Fix Field Services ("PFFS"),
formerly referred to as PFGS, specializes in the on-site (at the customer's
site) environmental and hazardous waste management, and transportation services.
PFFS provides services to the government under Defense Reutilization & Marketing
Service ("DRMS"), with emphasis on the management of large long-term federal
on-site field service contracts. PFFS currently manages five hazardous waste
management service contracts with the DRMS. PFFS also provides transportation
and waste management services to a number of large commercial/retail customers
across the US and Puerto Rico. PFFS also provides remedial field services to
customers for hazardous waste site cleanup and restoration. PFFS operates out of
three field service offices, located throughout the United States.
For 2003, the Industrial segment accounted for approximately $44,251,000 (or
52.1%) of our total revenue, as compared to approximately $37,641,000 (or 45.1%)
for 2002. See "Financial Statements and Supplementary Data" for further details.
NUCLEAR WASTE MANAGEMENT SERVICES, which includes nuclear, low-level radioactive
and mixed (containing both hazardous and low-level radioactive) waste treatment,
processing and disposal services through three uniquely licensed (Nuclear
Regulatory Commission) and permitted (Environmental Protection Agency) TSD
facilities. 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 segment, as discussed below.
Perma-Fix of Florida, Inc. ("PFF"), located in Gainesville, Florida, specializes
in the processing and treatment of certain types of wastes containing both
low-level radioactive and hazardous wastes, which are known in the industry as
mixed waste ("mixed waste"). PFF is one of the first facilities nationally to
operate under both a hazardous waste permit and a radioactive materials license,
from which it has built its reputation based on its ability to treat difficult
waste streams using its unique processing technologies and its ability to
provide related research and development services. With the amended permits and
licenses received during 2000 and the expansion of its mixed waste processing
equipment and capabilities, PFF has substantially increased the amount and type
of mixed waste and low level radioactive waste that it can store and treat. Its
mixed waste services have included the treatment and processing of waste Liquid
Scintillation Vials (LSVs) since the mid 1980's. The LSVs are generated
primarily by institutional research agencies and biotechnical companies. The
business has expanded into receiving and handling other types of mixed waste,
primarily from the nuclear utilities, commercial generators, prominent
pharmaceutical companies, the Department of Energy ("DOE") and other government
facilities as well as select mixed waste field remediation projects.
Diversified Scientific Services, Inc. ("DSSI"), located in Kingston, Tennessee,
specializes in the processing and destruction of certain types of (mixed waste).
DSSI, like PFF, is one of only a few facilities nationally to operate under both
a hazardous waste permit and a radioactive materials license.
-3-
Additionally, DSSI is the only commercial facility of its kind in the U.S. that
is currently operating and licensed to destroy liquid organic mixed waste,
through such a treatment unit. DSSI provides mixed waste disposal services for
nuclear utilities, commercial generators, prominent pharmaceutical companies,
and agencies and contractors of the U.S. government, including the DOE and the
Department of Defense ("DOD").
East Tennessee Materials & Energy Corporation ("M&EC"), located in Oak Ridge,
Tennessee, is our third mixed waste facility, which was acquired effective June
25, 2001. As with PFF and DSSI, M&EC also operates under both a hazardous waste
permit and radioactive materials license. M&EC represents the largest of our
three mixed waste facilities, covering 150,000 sq.ft., and is located in leased
facilities on the DOE East Tennessee Technology Park. M&EC operates in a newly
constructed facility, whose initial construction phase was completed during the
third quarter of 2001 and became operational in September 2001. In addition to
providing mixed waste treatment services to commercial generators, nuclear
utilities and various agencies and contractors of the U.S. Government, including
the DOD, M&EC was awarded three contracts to treat DOE mixed waste by
Bechtel-Jacobs Company, LLC, DOE's Environmental Program Manager, which covers
the treatment of mixed waste throughout all DOE facilities.
For 2003, the Nuclear business accounted for $37,418,000 (or 44.1%) of total
revenue, as compared to $42,260,000 (or 50.7%) of total revenue for 2002. See
"Financial Statements and Supplementary Data" for further details.
CONSULTING ENGINEERING SERVICES, which provides environmental engineering and
regulatory compliance consulting services through one subsidiary, as discussed
below.
Schreiber, Yonley & Associates ("SYA") is located in St. Louis, Missouri. SYA
specializes in environmental management programs, permitting, compliance and
auditing, in addition to landfill design, field investigation, testing and
monitoring. SYA clients are primarily industrial, including many within the
cement manufacturing industry. SYA also provides the necessary support,
compliance and training as required by our operating facilities.
During 2003, environmental engineering and regulatory compliance consulting
services accounted for approximately $3,223,000 (or 3.8%) of our total revenue,
as compared to approximately $3,503,000 (or 4.2%) in 2002. See "Financial
Statements and Supplementary Data" for further details.
Agreement to Acquire Additional Facilities
In March 2004, we signed a letter of intent to acquire substantially all of the
assets of USL Environmental Services, Inc.. d/b/a A&A Environmental ("A&A") of
Baltimore, Maryland and US Liquids of Pennsylvania, Inc. d/b/a EMAX ("EMAX") of
Pittsburgh, Pennsylvania, both of which are wholly owned subsidiaries of US
Liquids Inc. A&A is a full line provider of environmental, marine and industrial
maintenance services. EMAX provides a variety of environmental services through
its field and industrial services group and its wastewater treatment group. The
unaudited combined revenues of A&A and EMAX were approximately $15,000,000 in
2003. We will pay in cash, at closing, $3,200,000, subject to a net working
capital adjustment. The closing of this acquisition is subject to the completion
of due diligence, execution of a definitive agreement, approval of our Board of
Directors, and certain other conditions, which we expect to finalize in March
2004.
Importance of Patents and Trademarks, or Concessions Held
We do not believe we are dependent on any particular trademark in order to
operate our business or any significant segment thereof. We have received
registration through the year 2006 for the service mark "Perma-Fix" by the U.S.
Patent and Trademark office.
We are active in the research and development of technologies that allow us to
address certain of our customers' environmental needs. To date, our R&D efforts
have resulted in the granting of four patents
-4-
and the filing of an additional five pending patent applications. Our flagship
technology, the Perma-Fix Process, is a proprietary, cost effective, treatment
technology that converts hazardous waste into non-hazardous material.
Subsequently, we developed the Perma-Fix II process, a multi-step treatment
process that converts hazardous organic components into non-hazardous material.
The Perma-Fix II process is particularly important to our mixed waste strategy.
We believe that at least one third of DOE mixed waste contains organic
components.
The Perma-Fix II process is designed to remove certain types of organic
hazardous constituents from soils or other solids and sludges ("Solids") through
a water-based system. We have filed a patent application with the U.S. Patent
and Trademark Office covering the Perma-Fix II process. As of the date of this
report, we have not received a patent for this process, and there are no
assurances that such a patent will be issued. Until development of this
Perma-Fix II process, we were not aware of a relatively simple and inexpensive
process that would remove the organic hazardous constituents from Solids without
elaborate and expensive equipment or expensive treating agents. Due to the
organic hazardous constituents involved, the disposal options for such materials
are limited, resulting in high disposal cost when there is a disposal option
available. By reducing the organic hazardous waste constituents in the Solids to
a level where the Solids meet Land Disposal Requirements, the generator's
disposal options for such waste are substantially increased, allowing the
generator to dispose of such waste at substantially less cost. We began
commercial use of the Perma-Fix II process in 2000. A patent application has
also been filed for processes to treat radon, and other specialty materials
utilizing variations of the Perma-Fix II process. However, changes to current
environmental laws and regulations could limit the use of the Perma-Fix II
process or the disposal options available to the generator. See
"BUSINESS--Permits and Licenses" and "BUSINESS--Research and Development."
In September 2002, we completed the construction of our new biological
wastewater process at PFD and began accepting commercial wastewater for
treatment through this process. The biological wastewater process is a new
technology which we developed utilizing our variable depth biological treatment
process and several proprietary water treatment processes. The biological
wastewater process is designed to remove certain organic constituents from
highly organic, contaminated wastewaters. The biological wastewater process
enables us to treat heavily contaminated wastewater streams, such as waste oils,
phenols, and "lean" waters, at more competitive prices than traditional methods.
The biological wastewater process meets the EPA's new centralized treatment
standards that became effective in December of 2003.
Permits and Licenses
Waste management companies are subject to extensive, evolving and increasingly
stringent federal, state and local environmental laws and regulations. Such
federal, state and local environmental laws and regulations govern our
activities regarding the treatment, storage, processing, disposal and
transportation of hazardous, non-hazardous and radioactive wastes, and require
us to obtain and maintain permits, licenses and/or approvals in order to conduct
certain of our waste activities. Failure to obtain and maintain our permits or
approvals would have a material adverse effect on us, our operations and
financial condition. The permits and licenses have a term ranging from five to
ten years and, provided that we maintain a reasonable level of compliance, renew
with minimal effort and cost. Historically, there have been no compelling
challenges to the permit and license renewals. Such permits and licenses,
however, represent a potential barrier to entry for possible competitors.
PFTS is a permitted solid and hazardous waste treatment, storage, and disposal
facility. The RCRA Part B permit to treat and store certain types of hazardous
waste was issued by the Waste Management Section of the Oklahoma Department of
Environmental Quality ("ODEQ"). Additionally, PFTS maintains an Injection
Facility Operations Permit issued by the ODEQ Underground Injection Control
Section for our waste disposal injection well, and a pre-treatment permit in
order to discharge industrial wastewaters to the local Publicly Owned Treatment
Works ("POTW"). PFTS is also registered with the ODEQ and the Department of
Transportation as a hazardous waste transporter.
-5-
PFFL operates under a general permit and used oil processors license issued by
the Florida Department of Environmental Protection ("FDEP"), a transporter
license issued by the FDEP and a transfer facility license issued by Broward
County, Florida. Broward County also issued PFFL a discharge Pre-Treatment
permit that allows discharge of treated water to the Broward County POTW.
PFD operates a hazardous and non-hazardous waste treatment and storage facility
under various permits, including a RCRA Part B permit. PFD provides wastewater
pretreatment under a discharge permit with the local POTW and is a specification
and off-specification used oil processor under the guidelines of the Ohio EPA.
PFMI operates under an operating license issued in 1982 as an existing facility
for the treatment and storage of certain hazardous wastes. The operating license
continues in effect in conjunction with the terms of a consent judgment as
agreed to in 1991.
PFO operates a hazardous and non-hazardous waste treatment and storage facility
under various permits, including a RCRA Part B permit, issued by the State of
Florida.
PFSG operates a hazardous waste treatment and storage facility under a RCRA Part
B permit, issued by the State of Georgia.
PFF operates its hazardous and low-level radioactive waste activities under a
RCRA Part B permit and a radioactive materials license issued by the State of
Florida.
DSSI operates hazardous and low-level radioactive waste activities under a RCRA
Part B permit and a radioactive materials license issued by the State of
Tennessee.
M&EC operates hazardous and low-level radioactive waste activities under a RCRA
Part B permit and a radioactive materials license issued by the State of
Tennessee.
The combination of a RCRA Part B hazardous waste permit and a radioactive
materials license, as held by PFF, DSSI and M&EC, are very difficult to obtain
for a single facility and make these facilities very unique.
We believe that our facilities presently have obtained all approvals, licenses
and permits necessary to enable them to conduct their business as they are
presently conducted. The failure of our facilities to renew any of their present
approvals, licenses and permits, or the termination of any such approvals,
licenses or permits, could have a material adverse effect on us, our operations
and financial condition.
Seasonality
We experience a seasonal slowdown within our industrial segment operations and
revenues during the winter months extending from late November through early
March. The seasonality factor is a combination of poor weather conditions in the
central plains and Midwestern geographical markets we serve for on-site and
off-site waste management services, and the impact of reduced activities during
holiday periods resulting in a decrease in revenues and earnings during such
period. Our engineering segment also experiences reduced activities and related
billable hours throughout the November and December holiday periods. The DOE and
DOD represent major customers for the Nuclear segment. In conjunction with the
federal government's September 30 fiscal year-end, the Nuclear segment
experiences seasonably large shipments during the third quarter, leading up to
this government fiscal year-end, as a result of incentives and other quota
requirements. Correspondingly for a period of approximately three months
following September 30, the Nuclear segment is generally seasonably slow, as the
governmental budgets are still being finalized, planning for the new year is
occurring and we enter the holiday season.
-6-
Dependence Upon a Single or Few Customers
The majority of our revenues for fiscal 2003 have been derived from hazardous,
non-hazardous and mixed waste management services provided to a variety of
industrial, commercial customers, and government agencies and contractors. Our
customers are principally engaged in research, biotechnical development,
transportation, chemicals, metal processing, electronic, automotive,
petrochemical, refining and other similar industries, in addition to government
agencies that include the DOE, DOD, and other federal, state and local agencies.
We are not dependent upon a single customer, or a few customers. However, we
have and continue to enter into contracts with (directly or indirectly as a
subcontractor) the federal government. The contracts that we are a party to with
the federal government or with others as a subcontractor to the federal
government, generally provide that the government may terminate on 30 days
notice or renegotiate the contracts, at the government's election. Our inability
to continue under existing contracts that we have with the federal government
(directly or indirectly as a subcontractor) could have a material adverse effect
on our operations and financial condition.
M&EC was awarded three subcontracts ("Oak Ridge Contracts") by Bechtel Jacobs
Company, LLC, ("Bechtel Jacobs"), the government-appointed manager of the
environmental program for Oak Ridge, to perform certain treatment and disposal
services relating to Oak Ridge. The Oak Ridge Contracts were issued to M&EC by
Bechtel Jacobs, as a contractor to the DOE. The Oak Ridge Contracts are similar
in nature to a blanket purchase order whereby the DOE specifies the approved
waste treatment process and team to be used for certain disposal, but the DOE
does not specify a schedule as to dates for disposal or quantities of disposal
material to be processed. The initial term of the contract contained a
demonstration period for the team's successful treatment of the waste and the
resulting ability of such processed waste to meet acceptance criteria for its
ultimate disposal location. All three of our mixed waste facilities (PFF, DSSI
and M&EC) successfully performed under the demonstration period. The Oak Ridge
contracts have been extended for a period of two years, through June 2005, with
standard pricing modifications. We are currently receiving and processing waste
under the Oak Ridge Contracts.
As with most such blanket processing agreements, the Oak Ridge Contracts contain
no minimum or maximum processing guarantees, and may be terminated at any time
pursuant to federal contracting terms and conditions. Each specific waste stream
processed under the Oak Ridge Contracts will require a separate work order from
DOE and will be priced separately with the intent of recognizing an acceptable
profit margin. Consolidated revenues from Bechtel Jacobs for 2003, which
includes revenues under the Oak Ridge Contracts total $13,139,000 or 15.5% of
total revenues, as compared to $9,664,000 or 11.6% for the year ended December
31, 2002. Further, we have performed waste related services under other
contracts with (directly or indirectly as a subcontractor) - federal governments
agencies. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations -- Liquidity and Capital Resources of the Company."
During the first quarter of 2003, M&EC filed a lawsuit against Bechtel Jacobs
seeking approximately $4.3 million in surcharges under the Oak Ridge Contracts.
Since the filing of the lawsuit, Bechtel Jacobs has continued to deliver waste
to M&EC under the Oak Ridge Contracts and M&EC has entered into an additional
contract with Bechtel Jacobs relating to DOE waste at Oak Ridge. There are no
assurances that the filing of the lawsuit will not result in Bechtel Jacobs
canceling the Oak Ridge Contracts, which can be canceled at any time by either
party.
Competitive Conditions
Competition is intense within certain product lines within the Industrial
segment of our business. We compete with numerous companies both large and
small, that are able to provide one or more of the environmental services
offered by us, certain of which may have greater financial, human and other
resources than we have. However, we believe that the range of waste management
and environmental consulting, treatment, processing and remediation services we
provide affords us a competitive advantage with respect to certain of our more
specialized competitors. We believe that the treatment processes we
-7-
utilize offer a cost savings alternative to more traditional remediation and
disposal methods offered by certain of our competitors. The intense competition
for performing the services provided by us within the Industrial segment, in
conjunction with the economic downturn over the past two years, has resulted in
reduced gross margin levels for certain of those services.
The Nuclear segment however has only a few competitors and does not currently
experience such intense competitive pressures. At present we believe there are
only three other facilities in the United States with the required radioactive
materials license and hazardous waste permit that provide mixed waste
processing.
The permitting and licensing requirements, and the cost to obtain such permits,
are barriers to the entry of hazardous waste TSD facilities and radioactive and
mixed waste activities as presently operated by our subsidiaries. We believe
that there are no formidable barriers to entry into certain of the on-site
treatment businesses, and certain of the non-hazardous waste operations, which
do not require such permits. If the permit requirements for both hazardous waste
storage, treatment and disposal activities and/or the licensing requirements for
the handling of low level radioactive matters are eliminated or if such licenses
or permits were made easier to obtain, such would allow more companies to enter
into these markets and provide greater competition.
Within our Industrial segment we solicit business on a nationwide basis.
However, we believe that we are a significant provider in the delivery of
off-site waste treatment services in the Southeast, Midwest and Southwest
portions of the United States. We compete with facilities operated by national,
regional and independent environmental services firms located within a several
hundred-mile radius of our facilities. Our Nuclear segment, with permitted
radiological activities, solicits business on a nationwide basis, including the
U.S. Territories and Antarctica.
Environmental engineering and consulting services provided by us through SYA
involve competition with larger engineering and consulting firms. We believe
that we are able to compete with these firms based on our established reputation
in these market areas and our expertise in several specific elements of
environmental engineering and consulting such as environmental applications in
the cement industry.
Capital Spending, Certain Environmental Expenditures and Potential Environmental
Liabilities
During 2003, we spent approximately $3,462,000 in capital expenditures, which
was principally for the expansion and improvements to our operating facilities.
This 2003 capital spending total includes $1,284,000, which was financed. We
have budgeted approximately $5,600,000 for 2004 capital expenditures, to improve
and expand our operations into new markets, reduce the cost of waste processing
and handling, expand the range of wastes that can be accepted for treatment and
processing and to maintain permit compliance requirements. We have also budgeted
for 2004 approximately $1,143,000 to comply with federal, state and local
regulations in connection with remediation activities at four locations. See
Note 9 to Notes to Consolidated Financial Statements. However, there is no
assurance that we will have the funds available for such budgeted expenditures.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources of the Company."
In June 1994, we acquired from Quadrex Corporation and/or a subsidiary of
Quadrex Corporation (collectively, "Quadrex") three TSD companies, including
PFD. The former owners of PFD had merged Environmental Processing Services, Inc.
("EPS") with PFD, which was subsequently sold to Quadrex. Through our
acquisition of PFD in 1994 from Quadrex, we were indemnified by Quadrex for
costs associated with remediating certain property leased by EPS from an
affiliate of EPS on which EPS operated a RCRA storage and processing facility
("Leased Property"). Such remediation involves soil and/or groundwater
restoration. The Leased Property used by EPS to operate its facility is separate
and apart from the property on which PFD's facility is located. The
contamination of the leased property occurred prior to PFD being acquired by
Quadrex or us. During 1995, in conjunction with the bankruptcy
-8-
filing by Quadrex, we recognized an environmental liability of approximately
$1,200,000 for remedial activities at the Leased Property. We have accrued
approximately $755,000 for the estimated, remaining costs of remediating the
Leased Property used by EPS, which will extend over the next two years. The
accrual includes $400,000 that was received as a settlement to a lawsuit we
filed in connection with the remediation of the EPS site against the owners of
the Leased Property and the parties that owned EPS prior to its acquisition by
Quadrex.
In conjunction with the acquisition of Perma-Fix of Memphis, Inc. ("PFM"), we
assumed and recorded certain liabilities to remediate gasoline contaminated
groundwater and investigate, under the hazardous and solid waste amendments,
potential areas of soil contamination on PFM's property. Prior to our ownership
of PFM, the owners installed monitoring and treatment equipment to restore the
groundwater to acceptable standards in accordance with federal, state and local
authorities. We have accrued approximately $819,000 for the estimated, remaining
cost of remediating the groundwater contamination.
The PFM facility is situated in the vicinity of the Memphis Military Defense
Depot (the "Defense Facility"), which Defense Facility is listed as a Superfund
Site. The Defense Facility is located in the general up gradient direction of
ground water flow of the Allen Well Field utilized by Memphis Light, Gas &
Water, a public water supply utilized in Memphis, Tennessee. Chlorinated
compounds have previously been detected in the groundwater beneath the Defense
Facility, as well as in very limited amounts in certain production wells in the
adjacent Allen Well Field. The PFM facility is located in the down gradient
direction of ground water flow from the Allen Well Field. Based upon a study
performed by our environmental engineering group, we do not believe the PFM
facility is the source of the chlorinated compounds in the noted production
wells in the Allen Well Field.
In conjunction with the acquisition of PFSG during 1999, we recognized an
environmental accrual of $2,199,000 for estimated long-term costs to remove
contaminated soil and to undergo ground water remediation activities at the
acquired facility in Valdosta, Georgia. Initial valuation has recently been
completed, and the remedial process selected. The planning and approval process
continued throughout 2002, with remedial activities beginning in 2003. For the
year ended December 31, 2003, we have a remaining accrual of $912,000, of which
we anticipate spending $246,000 during 2004, with the remaining $666,000 to be
spent over the next five to seven years.
In conjunction with the acquisition of PFMI during 1999, we recognized a
long-term environmental accrual of $2,120,000. This amount represented our
estimate of the long-term costs to remove contaminated soil at the PFMI acquired
facility in Detroit, Michigan. The facility has pursued remedial activities over
the past four years, and principally completed such activities during 2003. We
accrued $89,000 to complete the project in 2004, which includes backfilling with
clean soil and completing certain analytical studies.
No insurance or third party recovery was taken into account in determining our
cost estimates or reserves, nor do our cost estimates or reserves reflect any
discount for present value purposes. See Note 9 to Notes to Consolidated
Financial Statements for discussion on environmental liabilities.
During the later part of 2003, PFMI's facility had a fire, which resulted in
bulking activities at the facility being halted as a result of property damage
caused by the fire. We have placed our insurance carrier on notice, which has a
$500,000 deductibility per occurrence. We are in the process of determining the
cost of repairing or replacing the damage to the facility and whether to
continue bulking activity at the facility.
In January 2004, PFD received notice of findings of violations from the U.S.
Environmental Protection Agency ("EPA") of the U.S. Clean Air Act. Although the
notice alleged that PFD committed numerous violations of the Clean Air Act, it
did not assert any fines or penalties as a result of the alleged violations. PFD
is in the process of evaluating the allegations contained in the notice, and
have scheduled a meeting with the EPA to discuss the alleged violations.
-9-
The nature of our business exposes us to significant risk of liability for
damages. Such potential liability could involve, for example, claims for cleanup
costs, personal injury or damage to the environment in cases where we are held
responsible for the release of hazardous materials; claims of employees,
customers or third parties for personal injury or property damage occurring in
the course of our operations; and claims alleging negligence or professional
errors or omissions in the planning or performance of our services. In addition,
we could be deemed a responsible party for the costs of required cleanup of any
property, which may be contaminated by hazardous substances generated or
transported by us to a site we selected, including properties owned or leased by
us. We could also be subject to fines and civil penalties in connection with
violations of regulatory requirements.
Research and Development
Innovation and technical know-how by our operations is very important to the
success of our business. Our goal is to discover, develop and bring to market
innovative ways to process waste that address unmet environmental needs. We
conduct research internally, and also through collaborations with other third
parties. The majority of our research activities are performed as we receive new
and unique waste to treat, as such we recognize these expenses as a part of our
processing costs. We feel that our investments in research have been rewarded by
the discovery of the Perma-Fix Process and the Perma-Fix II process. Our
competitors also devote resources to research and development and many such
competitors have greater resources at their disposal than we do. We have
estimated that during 2001, 2002 and 2003, we spent approximately $428,000,
$388,000, and $95,000, respectively, in Company-sponsored research and
development activities.
Number of Employees
In our service-driven business, our employees are vital to our success. We
believe we have good relationships with our employees. As of December 31, 2003,
we employed approximately 420 full time persons, of which approximately 12 were
assigned to our corporate office, approximately 23 were assigned to our
Consulting Engineering Services segment, approximately 204 to the Industrial
segment of which 12 employees at one facility are represented by a collective
bargaining unit, under a contract expiring on March 31, 2006, and approximately
181 to the Nuclear segment.
Governmental Regulation
Environmental companies and their customers are subject to extensive and
evolving environmental laws and regulations by a number of national, state and
local environmental, safety and health agencies, the principal of which being
the EPA. These laws and regulations largely contribute to the demand for our
services. Although our customers remain responsible by law for their
environmental problems, we must also comply with the requirements of those laws
applicable to our services. Because the field of environmental protection is
both relatively new and rapidly developing, we cannot predict the extent to
which our operations may be affected by future enforcement policies as applied
to existing laws or by the enactment of new environmental laws and regulations.
Moreover, any predictions regarding possible liability are further complicated
by the fact that under current environmental laws we could be jointly and
severally liable for certain activities of third parties over whom we have
little or no control. Although we believe that we are currently in substantial
compliance with applicable laws and regulations, we could be subject to fines,
penalties or other liabilities or could be adversely affected by existing or
subsequently enacted laws or regulations. The principal environmental laws
affecting our customers and us are briefly discussed below.
The Resource Conservation and Recovery Act of 1976, as amended ("RCRA")
RCRA and its associated regulations establish a strict and comprehensive
regulatory program applicable to hazardous waste. The EPA has promulgated
regulations under RCRA for new and existing treatment, storage and disposal
facilities including incinerators, storage and treatment tanks, storage
containers, storage and treatment surface impoundments, waste piles and
landfills. Every facility that treats, stores or disposes of hazardous waste
must obtain a RCRA permit or must obtain interim status from the EPA, or a
-10-
state agency, which has been authorized by the EPA to administer its program,
and must comply with certain operating, financial responsibility and closure
requirements. RCRA provides for the granting of interim status to facilities
that allows a facility to continue to operate by complying with certain minimum
standards pending issuance or denial of a final RCRA permit.
Boiler and Industrial Furnace Regulations under RCRA ("BIF Regulations")
BIF Regulations require boilers and industrial furnaces, such as cement kilns,
to obtain permits or to qualify for interim status under RCRA before they may
use hazardous waste as fuel. If a boiler or industrial furnace does not qualify
for interim status under RCRA, it may not burn hazardous waste as fuel or use
such as raw materials without first having obtained a final RCRA permit. In
addition, the BIF Regulations require 99.99% destruction of the hazardous
organic compounds used as fuels in a boiler or industrial furnace and impose
stringent restrictions on particulate, carbon monoxide, hydrocarbons, toxic
metals and hydrogen chloride emissions.
The Safe Drinking Water Act, as amended (the "SDW Act")
SDW Act regulates, among other items, the underground injection of liquid wastes
in order to protect usable groundwater from contamination. The SDW Act
established the Underground Injection Control Program ("UIC Program") that
provides for the classification of injection wells into five classes. Class I
wells are those which inject industrial, municipal, nuclear and hazardous wastes
below all underground sources of drinking water in an area. Class I wells are
divided into non-hazardous and hazardous categories with more stringent
regulations imposed on Class I wells which inject hazardous wastes. PFTS' permit
to operate its underground injection disposal wells is limited to non-hazardous
wastewaters.
The Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA," also referred to as the "Superfund Act")
CERCLA governs the cleanup of sites at which hazardous substances are located or
at which hazardous substances have been released or are threatened to be
released into the environment. CERCLA authorizes the EPA to compel responsible
parties to clean up sites and provides for punitive damages for noncompliance.
CERCLA imposes joint and several liability for the costs of clean up and damages
to natural resources.
Health and Safety Regulations
The operation of our environmental activities is subject to the requirements of
the Occupational Safety and Health Act ("OSHA") and comparable state laws.
Regulations promulgated under OSHA by the Department of Labor require employers
of persons in the transportation and environmental industries, including
independent contractors, to implement hazard communications, work practices and
personnel protection programs in order to protect employees from equipment
safety hazards and exposure to hazardous chemicals.
Atomic Energy Act
The Atomic Energy Act of 1954 governs the safe handling and use of Source,
Special Nuclear and Byproduct materials in the U.S. and its territories. This
act authorized the Atomic Energy Commission (now the Nuclear Regulatory
Commission) to enter into "Agreements with States to carry out those regulatory
functions in those respective states except for Nuclear Power Plants and federal
facilities like the VA hospitals and the DOE operations." The State of Florida
(with the USNRC oversight), Office of Radiation Control, regulates the
radiological program of the PFF facility, and the State of Tennessee (with the
USNRC oversight), Tennessee Department of Radiological Health, regulates the
radiological program of the DSSI and M&EC facilities.
Other Laws
Our activities are subject to other federal environmental protection and similar
laws, including, without limitation, the Clean Water Act, the Clean Air Act, the
Hazardous Materials Transportation Act and the Toxic Substances Control Act.
Many states have also adopted laws for the protection of the environment
-11-
which may affect us, including laws governing the generation, handling,
transportation and disposition of hazardous substances and laws governing the
investigation and cleanup of, and liability for, contaminated sites. Some of
these state provisions are broader and more stringent than existing federal law
and regulations. Our failure to conform our services to the requirements of any
of these other applicable federal or state laws could subject us to substantial
liabilities which could have a material adverse affect on us, our operations and
financial condition. In addition to various federal, state and local
environmental regulations, our hazardous waste transportation activities are
regulated by the U.S. Department of Transportation, the Interstate Commerce
Commission and transportation regulatory bodies in the states in which we
operate. We cannot predict the extent to which we may be affected by any law or
rule that may be enacted or enforced in the future, or any new or different
interpretations of existing laws or rules.
Insurance
We believe we maintain insurance coverage adequate for our needs and 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 we may
incur 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.
In June 2003, we entered into a 25-year finite risk insurance policy, which
provides financial assurance to the applicable states for our permitted
facilities in the event of unforeseen closure. Prior to obtaining or renewing
operating permits we are required to provide financial assurance that guarantees
to the states that in the event of closure our permitted facilities will be
closed in accordance with the regulations. The policy provides $35 million of
financial assurance coverage.
ITEM 2. PROPERTIES
Our principal executive offices are in Gainesville, Florida. Our Industrial
segment maintains facilities in Orlando and Ft. Lauderdale, Florida; Dayton,
Ohio; Tulsa, Oklahoma; Valdosta, Georgia; and Detroit, Michigan. Our Nuclear
segment maintains facilities in Gainesville, Florida; Kingston, Tennessee; and
Oak Ridge, Tennessee. Our Consulting Engineering Services are located in St.
Louis, Missouri. We also maintain Field Services offices in Jacksonville,
Florida; Anniston, Alabama; and Honolulu, Hawaii.
We own nine facilities, all of which are in the United States. Five of our
facilities are subject to mortgages as placed by our senior lender. In addition,
we lease properties for office space, all of which are located in the United
States as described above. Included in our leased properties is M&EC's 150,000
square-foot facility, located on the grounds of the DOE East Tennessee
Technology Park located in Oak Ridge, Tennessee.
We believe that the above facilities currently provide adequate capacity for our
operations and that additional facilities are readily available in the regions
in which we operate, which could support and supplement our existing facilities.
ITEM 3. LEGAL PROCEEDINGS
PFMI, which was purchased by us effective June 1, 1999, has been notified that
it is considered a potentially responsible party ("PRP") in three Superfund
sites, two of which had no relationship with PFMI according to PFMI records. As
to the third site, which PFMI has been unable to determine whether PFMI had any
relationship with this site, such relationship, if any, would appear to be de
minimus.
PFO, which was purchased by us in June, 1999, has been notified that it is a PRP
in two separate Superfund sites. At the Spectron Superfund site in Elkton,
Maryland, PFO has been notified by the EPA
-12-
that the EPA is seeking reimbursement from all PRPs at the site for the EPA's
Phase II cost and to further investigate the contamination at the facility. At
this point, we believe that PFO may have sent some waste to the site, but not a
substantial amount. At this time, we are unable to determine what exposure, if
any, PFO may have in connection with this site.
PFO has also been notified that it is a PRP at the Seaboard Chemical Corporation
Superfund Site in Jamestown, North Carolina. In October, 1991, PFO joined the
"Seaboard Group," a group of potentially responsible parties organized to clean
up the site while keeping costs at a minimum. Initially, PFO was identified as a
de minimus party under the Seaboard Group agreement which defined a de minimus
contributor as one acting as either a transporter or generator who was
responsible for less than 1% of the waste at the site. However, in June, 1992,
the Seaboard Group adopted an amendment to the Seaboard Group agreement which
allows a potentially responsible party who is a generator to participate in the
Seaboard Group without relinquishing contributions claims against its broker
and/or transporter. Based upon the amount of waste which PFO brokered to the
site, PFO's status may no longer considered de minimus under the Seaboard Group
agreement. PFO is unable to determine what exposure, if any, it may have in
connection with this site.
PFFL has been advised by the EPA that a release or threatened release of
hazardous substances has been documented by the EPA at the former facility of
Florida Petroleum Reprocessors (the "Site"), which is located approximately
3,000 feet northwest of the PFFL facility in Davie, Florida. However, studies
conducted by, or under the direction of, the EPA, together with data previously
provided to PFFL by the EPA, do not indicate that the PFFL facility in Davie,
Florida has contributed to the deep groundwater contamination associated with
the Site. As a result, we are unable to determine with any degree of certainty
what exposure, if any, PFFL may have as a result of the documented release from
the Site.
PFD is required to remediate a parcel of leased property ("Leased Property"),
which was formerly used as a Resource Conservation and Recovery Act of 1976
storage facility that was operated as a storage and solvent recycling facility
by a company that was merged with PFD prior to our acquisition of PFD. The
Leased Property contains certain contaminated waste in the soils and
groundwater. We were indemnified by Quadrex, the entity that sold us PFD, for
costs associated with remediating the Leased Property, which entails remediation
of soil and/or groundwater restoration. However, during 1995, Quadrex filed for
bankruptcy. Prior to our acquisition of PFD, Quadrex had established a trust
fund ("Remediation Trust Fund"), which it funded with Quadrex's stock to support
the remedial activity on the Leased Property pursuant to the agreement with the
Ohio Environmental Protection Agency ("Ohio EPA"). After we purchased PFD, we
were required to advance $250,000 into the Remediation Trust Fund due to the
reduction in the value of Quadrex's stock that comprised the Remediation Trust
Fund, which stock had been sold by the trustee prior to Quadrex's filing
bankruptcy. We have subsequently put an additional $200,000 into the Remediation
Trust Fund. PFD filed a lawsuit against the owners and former operators of the
Leased Property to remediate the Leased Property and/or to recover any cost
incurred by PFD in connection therewith. The lawsuit was filed in the United
States District Court, for the Southern District of Ohio, styled Perma-Fix of
Dayton, Inc. v. R.D. Baker Enterprises, Inc., case no. C-3-99-469. PFD and the
defendants finalized a settlement of the lawsuit in October 2003. The defendants
paid PFD $400,000 that PFD will use to remediate the Leased Property.
During January 2004, the EPA issued to PFD a notice of Findings of Violation
alleging that PFD committed numerous violations of the Clean Air Act. The EPA
did not assert any penalties or fines but advised PFD that it had several
enforcement options including issuing administrative penalty order or bringing
judicial action against PFD. In its January 2004 notice, the EPA requested a
conference with PFD's technical and management personnel, which we have
scheduled.
Patrick Sullivan ("P. Sullivan"), the son of a former member of our Board of
Directors, Thomas P. Sullivan ("Mr. Sullivan"), was employed by one of our
subsidiaries, Perma-Fix of Orlando, Inc. ("PFO"), as an executive and/or general
manager from the date of our acquisition of PFO in June 1999 to June
-13-
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 us that provides,
in part, that P. Sullivan would not solicit customers, suppliers or employees of
PFO or ours for a period of two years after termination of his employment. We
have been advised that P. Sullivan violated the agreement and his duties to PFO
and to us prior to and after he terminated his employment with PFO. P. Sullivan
reimbursed us for certain personal expenses charged to, and paid by, us after we
notified P. Sullivan of the claims. In December 2002, we filed a lawsuit against
P. Sullivan in the circuit court of the Ninth Judicial Circuit in Orange County,
Florida, for injunction relief and damages related to the above. P. Sullivan has
denied the allegations. Mr. Sullivan has denied committing any breach of his
fiduciary duties to us in connection with these alleged actions by his son.
During the fourth quarter of 2003, we reached a settlement agreement in
principal with P. Sullivan, which among other things provided for a payment of
$30,000 from P. Sullivan to us.
On February 24, 2003, M&EC, commenced legal proceedings against Bechtel Jacobs
Company, LLC, in the chancery court for Knox County, Tennessee, seeking payment
from Bechtel Jacobs of approximately $4.3 million in surcharges relating to
certain wastes that were treated by M&EC during 2001 and 2002. M&EC is operating
primarily under three subcontracts with Bechtel Jacobs, which were awarded under
contracts between Bechtel Jacobs and the U.S. Department of Energy. M&EC and
Bechtel Jacobs have been discussing these surcharges under the subcontracts for
over a year. These surcharges have not yet been billed. In 2003, the revenues
generated by M&EC with Bechtel Jacobs represented approximately 15.5% of our
2003 total revenues. Since the filing of this lawsuit, Bechtel Jacobs has
continued to deliver waste to M&EC for treatment and disposal, and M&EC
continues to accept such waste, under the subcontracts, and M&EC and Bechtel
Jacobs have entered into an additional contract for M&EC to treat DOE waste.
Although we do not believe that this lawsuit will have a material adverse effect
on our operations, Bechtel Jacobs could terminate the subcontracts with M&EC, as
either party can terminate the subcontracts at any time.
Bryson Adams, et al. v. Environmental Purification Advancement Corporation, et
al.; Civil Action No. 99-1998, United States District Court, Western District of
Louisiana. In April, 2003, the plaintiffs, hundreds of individuals residing in
or around Bayou Sorrel, Louisiana, filed their Fifth Supplemental and Amending
Complaint naming, inter alia, PFMI and PFSG as defendants, both of which are
subsidiaries we acquired in 1999. The lawsuit, which has been pending since
1999, includes as defendants hundreds of entities (and their insurers) which
allegedly disposed of hazardous and toxic substances at a hazardous waste
disposal site and hazardous waste injection well in Bayou Sorrel, Louisiana,
both of which were permitted by the appropriate governmental authorities to
treat and dispose of hazardous and toxic waste. The plaintiffs allege that the
defendant entities, other than the insurers, including PFMI and PFSG, were
negligent in their selection of the sites for the treatment and/or disposal of
hazardous and toxic substances, that the plaintiffs have suffered physical
injuries, property damage and diminished property values as a result of the
escape or migration of contaminants from the sites, and that the defendants are
liable for the damages allegedly suffered by the plaintiffs. The plaintiffs seek
unspecified amounts of compensatory and exemplary damages, interest, costs and
attorney's fees. PFMI and PFSG will defend themselves vigorously in connection
with this matter. However, at this point, we are unable to determine with any
degree of certainty what exposure, if any, PFMI and/or PFSG may have in this
regard. Our insurance carrier is currently defending PFMI and PFSG in this
matter under a reservation of rights. The case is in settlement negotiations,
with the discussions being that the insurers and non-insurer defendants
contributing to any proposed settlement.
In addition to the above matters and in the normal course of conducting our
business, we are involved in various other litigation. We are not a party to any
litigation or governmental proceeding which our management believes could result
in any judgments or fines against us that would have a material adverse affect
on our financial position, liquidity or results of future operations.
-14-
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth, as of the date hereof, information concerning
the Executive Officers of the Company:
NAME AGE POSITION
---- --- --------
Dr. Louis F. Centofanti 60 Chairman of the Board, President and Chief
Executive Officer
Mr. Richard T. Kelecy 48 Chief Financial Officer, Vice President and
Secretary
Mr. Larry McNamara 54 President, Nuclear Services
Mr. William Carder 54 Vice President, Sales and Marketing
Mr. Timothy Keegan 46 President, Industrial Services
DR. LOUIS F. CENTOFANTI
Dr. Centofanti has served as Chairman of the Board since he joined the Company
in February 1991. Dr. Centofanti also served as President and Chief Executive
Officer of the Company from February 1991 until September 1995 and again in
March 1996 was elected to serve as President and Chief Executive Officer of the
Company. From 1985 until joining the Company, Dr. Centofanti served as Senior
Vice President of USPCI, Inc., a large hazardous waste management company, where
he was responsible for managing the treatment, reclamation and technical groups
within USPCI. In 1981 he founded PPM, Inc., a hazardous waste management company
specializing in the treatment of PCB contaminated oils, which was subsequently
sold to USPCI. From 1978 to 1981, Dr. Centofanti served as Regional
Administrator of the U.S. Department of Energy for the southeastern region of
the United States. Dr. Centofanti has a Ph.D. and a M.S. in Chemistry from the
University of Michigan, and a B.S. in Chemistry from Youngstown State
University.
MR. RICHARD T. KELECY
Mr. Kelecy was elected Vice-President and Chief Financial Officer in September
1995. He previously served as Chief Accounting Officer and Treasurer of the
Company from July 1994 until beginning his current positions. From 1992 until
June 1994, Mr. Kelecy was Corporate Controller and Treasurer for Quadrex
Corporation. From 1990 to 1992 Mr. Kelecy was Chief Financial Officer for
Superior Rent-a-Car, and from 1983 to 1990 held various positions at Anchor
Glass Container Corporation including Assistant Treasurer. Mr. Kelecy has a B.A.
in Accounting and Business Administration from Westminster College.
MR. LARRY MCNAMARA
Mr. McNamara has served as President of the Nuclear Waste Management Services
Segment since October 2000. From December 1998 to October 2000, he served as
Vice President of the Nuclear Waste Management Services Segment for the
Company's nuclear activities. Between 1997 and 1998, he served as Mixed Waste
Program Manager for Waste Control Specialists (WCS) developing plans for the WCS
mixed waste processing facilities, identifying markets and directing proposal
activities. Between 1995 and 1996, Mr. McNamara was the single point of contact
for the DOD to all state and federal regulators for issues related to disposal
of Low Level Radioactive Waste and served on various National Committees and
advisory groups. Mr. McNamara served, from 1992 to 1995, as Chief of the
Department of Defense Low Level Radioactive Waste office. Between 1986 and 1992
he served as the Chief of Planning for the Department of Army overseeing project
management and program policy for the Army program. Mr. McNamara has a B.S. from
the University of Iowa.
MR. WILLIAM CARDER
Mr. Carder joined the Company in January 2003 as Vice President of Sales and
Marketing. Previously, Mr. Carder was Regional Manager for COGEMA, Inc. from
June 1997 to July of 2002. From February 1992 to April 1997 he served in a
number of positions for Scientific Ecology Group, a division of Westinghouse,
including Vice President of Government Sales, Vice President of Business
Development,
-15-
and finally Vice President of Sales and Marketing. From 1987 through 1991, Mr.
Carder served with Quadrex Corporation as Vice President of Sales and Marketing.
Prior to joining Quadrex, he spent fifteen years (1971 to 1987) with the Nuclear
Energy Business Operation of General Electric Company as field engineer, project
engineer, service supervisor and manager, service sales engineer and manager and
finally as the Commercial Program Manager for the northeast region. Mr. Carder
has a B.S. in Nuclear Engineering from North Carolina State University.
MR. TIMOTHY KEEGAN
Mr. Keegan joined the Company in April 2003, as President of the Industrial
Waste Management Services segment. Most recently, Mr. Keegan served as Senior
Vice President of Safety-Kleen Corporation from 1999 to 2001, where he had
sales, operational, and accounting responsibility for over $300 million in
revenue. Mr. Keegan also served as Corporate Vice President for southeast
operations at Safety-Kleen from 1998 to 1999, and Vice President of PCB/remedial
services from 1995 to 1998. Prior to joining Safety-Kleen, Mr. Keegan served as
Vice President of PCB services for USPCI from 1991 to 1995. Mr. Keegan also
served as President of PPM, Inc., a PCB waste management company from 1988 to
1991. He has an M.B.A. from Syracuse University.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock, with a par value of $.001 per share, is traded on the NASDAQ
SmallCap Market ("NASDAQ") and the Boston Stock Exchange ("BSE") under the
symbol "PESI" on both NASDAQ and BSE. Our Common Stock is also traded on the
Berlin Stock Exchange under the symbol "PES.BE." The following table sets forth
the high and low market trade prices quoted for the Common Stock during the
periods shown. The source of such quotations and information is the NASDAQ
online trading history reports.
2003 2002
-------------- --------------
Low High Low High
----- ----- ----- -----
Common Stock 1st Quarter $1.49 $2.62 $2.51 $3.44
2nd Quarter 1.68 2.20 2.55 3.50
3rd Quarter 1.60 2.28 1.92 3.01
4th Quarter 1.68 3.56 2.09 2.65
Such over-the-counter market quotations reflect inter-dealer prices, without
retail markups or commissions and may not represent actual transactions.
As of March 4, 2004, there were approximately 311 stockholders of record of our
Common Stock, including brokerage firms and/or clearing houses holding shares of
our Common Stock for their clientele (with each brokerage house and/or clearing
house being considered as one holder). However, the total number of beneficial
stockholders as of March 4, 2004, was approximately 3,837.
Since our inception, we have not paid any cash dividends on our Common Stock and
have no dividend policy. Our loan agreement prohibits paying any cash dividends
on our Common Stock without prior approval.
-16-
Recent sales of unregistered securities, in addition to the securities sold by
us during 2003, as reported in our Forms 10-Q for the quarters ended March 31,
2003, June 30, 2003 and September 30, 2003, which were not registered under the
Securities Act of 1933, as amended, we sold or issued during 2003 the following
securities which were also not registered under the Act:
1. On or about October 29, 2003, Capital Bank Grawe Gruppe, AG
("Capital Bank"), exercised one of its outstanding Warrants to
purchase 150,000 shares of our Common Stock at a total exercise
price of $243,750, or $1.625 per share, in accordance with the terms
of the Warrant. The shares were issued under the exemption from
registration provided by Section 4(2) and/or Rule 506 of Regulation
D based on Capital Bank's representations contained in the Warrant
and prior dealings with us. The proceeds were used to fund capital
expenditures and current working capital needs.
2. On or about November 27, 2003, Capital Bank Grawe Gruppe, AG
("Capital Bank"), exercised one of its outstanding Warrants to
purchase 300,000 shares of our Common Stock at a total exercise
price of $562,500, or $1.875 per share, in accordance with the terms
of the Warrant. The shares were issued under the exemption from
registration provided by Section 4(2) and/or Rule 506 of Regulation
D based on Capital Bank's representations contained in the Warrant
and prior dealings with us. The proceeds were used to fund capital
expenditures and current working capital needs.
3. On or about December 22, 2003, Capital Bank Grawe Gruppe, AG
("Capital Bank"), exercised one of its outstanding Warrants to
purchase 105,000 shares of our Common Stock at a total exercise
price of $149,300, or $1.4219 per share, in accordance with the
terms of the Warrant. The shares were issued under the exemption
from registration provided by Section 4(2) and/or Rule 506 of
Regulation D based on Capital Bank's representations contained in
the Warrant and prior dealings with us. The proceeds were used to
fund capital expenditures and current working capital needs.
ITEM 6. SELECTED FINANCIAL DATA
The financial data included in this table has been derived from our audited
consolidated financial statements, which have been audited by BDO Seidman, LLP.
Statement of Operations Data:
(Amounts in Thousands, Except for Share Amounts)
December 31,
---------------------------------------------------------------------------
2003 2002 2001(3) 2000(2) 1999(1)
--------- --------- -------- -------- --------
Revenues $ 84,892 $ 83,404 $ 74,492 $ 59,139 $ 46,464
Net income (loss) 3,118 2,202 (602) (556) 1,570
Preferred Stock dividends (189) (158) (145) (206) (308)
Gain on Preferred Stock redemption -- -- -- -- 188
Net income (loss) applicable to
Common Stock 2,929 2,044 (747) (762) 1,450
Basic Net income (loss) per common
share .08 .06 (.03) (.04) .08
Diluted net income (loss) per common share .08 .05 (.03) (.04) .07
Basic number of shares used in
computing net income (loss) per share 34,982 34,217 27,235 21,558 17,488
Diluted number of shares and potential
common shares used in computing net
income (loss) per share 39,436 42,618 27,235 21,558 21,224
-17-
Balance Sheet Data:
December 31,
---------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- -------- -------- --------
Working capital (deficit) $ 4,159 $ 731 $ 134 $ (3,233) $ (1,455)
Total assets 109,645 105,825 99,137 72,771 54,644
Current and long-term debt 29,088 30,515 31,146 25,490 15,306
Total liabilities 57,918 59,955 56,011 50,751 34,825
Preferred Stock of subsidiary 1,285 1,285 1,285 -- --
Stockholders' equity 50,442 44,585 41,841 22,020 19,819
(1) Includes financial data of PFO, PFSG and PFMI as acquired during 1999 and
accounted for using the purchase method of accounting from the date of
acquisition, June 1, 1999.
(2) Includes financial data of DSSI as acquired during 2000 and accounted for
using the purchase method of accounting from the date of acquisition,
August 31, 2000.
(3) Includes financial data of M&EC as acquired during 2001 and accounted for
using the purchase method of accounting from the date of acquisition, June
25, 2001.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained within this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" 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"). See
"Special Note regarding Forward-Looking Statements" contained in this report.
Management's discussion and analysis is based, among other things, upon our
audited consolidated financial statements and includes our accounts and the
accounts of our wholly-owned subsidiaries, after elimination of all significant
intercompany balances and transactions.
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and the notes thereto included in Item 8 of
this report.
Overview
The year 2003 was challenging for us, as our revenues were negatively impacted
by the war, terrorism alerts, and DOE's heightened security issues and resulting
lockdowns, which clearly impacted the Nuclear Waste Management Services
("Nuclear") segment. In addition, the U.S. recession negatively impacted our
Industrial Waste Management Services ("Industrial") segment and engineering
segment. During the year we initiated a restructuring and a refocus of our
Industrial segment. During 2003 we brought in a new management team for the
Industrial segment, initiated work force reductions, which should result in
annual savings of approximately $3.2 million beginning in 2004 and began
focusing our marketing efforts on higher margin accounts, eliminating
unprofitable business. We were however able to work through these issues,
achieve an increase in consolidated revenues of 1.8% over 2002 and increase our
profitability 43.3%. The Industrial segment demonstrated its processing
capabilities during the year by successfully completing the treatability portion
of the Newport hydrolysate project for the Army. However, due to public concerns
over such chemical weapon byproducts the contract to bring such waste into our
facility was terminated. We continue to identify attractive growth opportunities
for the Industrial segment, which include such areas as biological wastewater
treatment, chemical weapons byproducts and contracts such as comprehensive waste
management services for a leading home-
-18-
improvement retail chain. Our Nuclear segment has also recently received several
new contracts, which demonstrate the continued growth within this market
segment. During 2003, we continued to discuss improving our capital and
liquidity position. In connection therewith, we have entered into an arrangement
to raise additional capital as discussed below.
Results of Operations
The reporting of financial results and pertinent discussions are tailored to
three reportable segments: Industrial Waste Management Services, Nuclear Waste
Management Services and Consulting Engineering Services.
Below are the results of operations for our years ended December 31, 2003, 2002
and 2001 (amounts in thousands, except for share amounts):
(Consolidated) 2003 % 2002 % 2001 %
-------- ------- -------- ------- -------- -------
Net Revenues $ 84,892 100.0 $ 83,404 100.0 $ 74,492 100.0
Cost of goods sold 58,633 69.1 59,055 70.8 52,442 70.4
-------- ------- -------- ------- -------- -------
Gross Profit 26,259 30.9 24,349 29.2 22,050 29.6
Selling, general and administrative 18,637 22.0 17,909 21.5 16,631 22.3
Other income (expense):
Interest income 8 -- 16 -- 29 --
Interest expense (2,841) (3.3) (2,903) (3.5) (3,038) (4.1)
Interest expense - Warrants -- -- -- -- (234) (.3)
Interest expense - financing fees (1,070) (1.2) (1,044) (1.2) (2,732) (3.6)
Other (601) (.7) (307) (.4) (46) (.1)
-------- ------- -------- ------- -------- -------
Net income (loss) 3,118 3.7 2,202 2.6 (602) (.8)
Preferred Stock dividends (189) (.2) (158) (.2) (145) (.2)
-------- ------- -------- ------- -------- -------
Net income (loss) applicable to
Common Stock $ 2,929 3.5 $ 2,044 2.4 $ (747) (1.0)
======== ======= ======== ======= ======== =======
Basic net income (loss) per
common share $ .08 $ .06 $ (.03)
======== ======== =======
Diluted net income (loss) per
common share $ .08 $ .05 $ (.03)
======== ======== =======
Summary - Years Ended December 31, 2003 and 2002
Net Revenue
The year 2003 started out slow, as nuclear revenues were negatively impacted by
the war and terrorism alerts, and industrial revenues were negatively impacted
by the economy. However, nuclear shipments increased late in the third quarter
and we successfully completed the treatability portion of the Army's Newport
hydrolysate project. We continued with the reorganization and refocus of the
Industrial segment throughout the last half of 2003. Consolidated revenues
increased $1,488,000 or 1.8% for the year ended December 31, 2003, compared to
the year ended December 31, 2002. This increase is attributable to an increase
in the Industrial segment of approximately $6,610,000 resulting from certain new
product lines, such as lab packing, improved waste volumes and approximately
$4.9 million in revenues recognized for public outreach and treatability studies
related to the Army's Newport hydrolysate project, which was terminated in
October 2003 for convenience. Offsetting this increase was a decrease in the
Nuclear segment of approximately $4,842,000 resulting partially from a change in
accounting estimate for revenue recognition. (See Note 2 to Notes to
Consolidated Financial Statements.) The impact of this change in nuclear revenue
recognition as of December 31, 2003 is a deferral of revenues of approximately
$2,765,000. The decrease is also a result of the government's reduced shipment
of waste to our facilities during the first six months of 2003 due to the war
and ongoing campaign in Iraq and prolonged terrorism
-19-
alerts. The decrease can further be explained by the impact of increased
revenues during 2002, which included an event project of approximately $2.4
million and a surcharge of approximately $2.2 million. These decreases were
partially offset by continued expansion within the mixed waste market as our
facilities demonstrate the ability to accept and process more complex waste
streams, thus increasing sales volumes. Consolidated revenues with Bechtel
Jacobs Company, which includes the Oak Ridge contracts totaled $13,139,000 or
15.5% of total revenues for the year ending December 31, 2003, compared to
$9,664,000 or 11.6% for the year ended December 31, 2002. This increase reflects
additional revenues under the Oak Ridge Contracts and an additional contract
entered into recently with Bechtel Jacobs, due in part to the benefit of our
facility being located within the DOE K-25 site. See "Known Trends and
Uncertainties-Significant Contracts" of this Management's Discussion and
Analysis as to a lawsuit involving the Oak Ridge Contracts. The backlog of
stored waste within the Nuclear segment at December 31, 2003, was approximately
$5,782,000, compared to $9,000,000 at December 31, 2002. Additionally, the
Consulting Engineering Services segment experienced a decrease of approximately
$280,000, which reflects the impact a weaker economy has on our client's
expansion projects in 2003 and certain one-time projects completed in 2002.
Cost of Goods Sold
Cost of goods sold decreased $422,000, or 0.7% for the year ended December 31,
2003, compared to the year ended December 31, 2002. This decrease in cost of
goods sold principally reflects a decrease in the Nuclear segment of $3,975,000
indicative of a reduction in disposal and processing costs associated with the
continued refinement of our treatment processes. The initial focus within the
Nuclear segment was the demonstration of our processing capabilities, which was
followed by the refinement and enhancement of our processes throughout 2003. The
remaining decrease in this segment was due to the deferral of disposed expenses
that correlates with the deferral of revenues as a result of our change in
accounting estimate for revenue recognition. Additionally, the Consulting
Engineering Services segment experienced a decrease of $155,000, which was
primarily a result of the corresponding revenue reduction, despite a 0.9% cost
increase. Mainly offsetting these decreases was an increase in the Industrial
segment of approximately $3,708,000, primarily associated with increased labor
and material costs, which relates to the increase in revenues, including the
expenses associated with the Army's Newport hydrolysate project. Depreciation
expense of $4,441,000 and $3,934,000 for the years ended December 31, 2003 and
2002, respectively, is included in cost of goods sold, which reflects an
increase of $507,000 over 2002. During 2002, we purchased capital equipment
which totaled approximately $5.8 million, a majority of which related to our
continued expansion of the Nuclear segment. These projects were principally
completed in the fourth quarter of 2002 and resulted in additional depreciation
in 2003.
Gross Profit
Gross profit for the year ended December 31, 2003, increased to $26,259,000,
which as a percentage of revenue is 30.9%, reflecting an increase over the 2002
percent of revenue of 29.2%. This increase in gross profit percentage
principally reflects an increase in the Industrial segment from 19.2% in 2002 to
22.9% in 2003. This increase reflects the impact of margins of approximately
$2.8 million recognized on the Army's Newport hydrolysate project. During the
last half of 2003, the Industrial segment restructured its management,
implemented a cost savings initiative and made certain operational changes,
which had only a limited impact on 2003. Additionally, the increase in the gross
profit percentage was attributable to the Nuclear segment, which rose from 37.6%
in 2002 to 40.2% in 2003, reflecting mainly the favorable product mix,
surcharges and operational improvements within the mixed waste processing lines.
The 2002 margins were positively impacted by the effect of the $2.2 million
surcharge related to the Oak Ridge contracts. Without the surcharge, the gross
profit percentage for this segment for 2002 would have been 27.3%. Offsetting
these increases was a decrease in the Consulting Engineering Services segment,
which fell from 34.4% in 2002 to 33.5% in 2003, reflecting the net impact of
lower margin projects performed over the year.
-20-
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased $728,000 or 4.1%
for the year ended December 31, 2003, as compared to the corresponding period
for 2002. This increase reflects the additional sales and marketing expenses
within the Industrial segment, somewhat offset by a decline in payroll and
related marketing expenses for the Nuclear segment, which combined accounted for
$396,000 of this increase. Administrative payroll and related expenses accounted
for $543,000 of this increase, mainly reflecting the management infrastructure,
relocation and severance costs within the Industrial segment as we complete our
restructuring, all of which have been expensed during the year, along with
increased administrative support within the Nuclear segment. Partially
offsetting these administrative payroll increases was a $309,000 decrease in
other administrative expenses, primarily attributable to a net decrease in
general expense of $604,000, arising mainly from the reduction in bad debt
expense and a $306,000 increase in outside services for the same period of 2002.
Depreciation and amortization expense included within selling, general and
administrative expenses was $424,000 and $310,000 for the years ended 2003 and
2002, respectively. As a percentage of revenue, selling, general and
administrative expenses increased to 22.0% for the year ended December 31, 2003,
compared to 21.5% for the same period of 2002.
Interest Expense
Interest expense decreased approximately $62,000 for the year ended December 31,
2003, as compared to the corresponding period of 2002. This decrease reflects
the impact of the reduction in debt associated with past acquisitions resulting
in a decrease in interest expense of $54,000 when compared to prior year.
Additionally, this decrease reflects the impact of lower interest rates on the
revolving credit and term loans with PNC and decreased borrowing levels on the
term loan with PNC partially offset by increased borrowings under the revolving
credit to fund the finite risk insurance program, which resulted in a net
decrease of $46,000. Offsetting these decreases was an increase in interest
expense of $38,000 associated with an increase in additional debt entered into
during the year, related to facility and computer upgrades.
Interest Expense - Financing Fees
Interest expense-financing fees increased approximately $26,000 for the year
ended December 31, 2003, as compared to the corresponding period of 2002. This
increase was principally due to a one-time charge of fees associated with other
short term financing.
Other Expense
Other expense increased by $294,000 for the year ended December 31, 2003, as
compared to the same period of 2002. This increase was primarily due to
additional remediation expenses for the Perma-Fix of Michigan, Inc. site, which
was recorded in the amount of $178,000. The additional expense is needed to
complete the remediation of soil that was contaminated prior to our acquiring
the facility. See "Environmental Contingencies" in this section for further
discussion on this reserve. Additionally, other expense increased due to a
workers compensation insurance adjustment of $217,000 related to a prior
acquisition.
Income Tax
See Note 10 to Notes to Consolidated Financial Statements for a reconciliation
between the expected tax benefit and the provision for income taxes as reported.
For the years ended December 31, 2003 and 2002, we had no federal income tax
expense, due to utilization of our net operating loss carry-forward and
permanent and temporary book-tax timing differences.
Preferred Stock Dividends
Preferred Stock dividends increased approximately $31,000 for the year ended
December 31, 2003, as compared to the year ended December 31, 2002. This
increase is due to the accrual of preferred dividends on the Series B Preferred,
issued in conjunction with the acquisition of M&EC, which began accruing in July
2002.
-21-
Summary - Years Ended December 31, 2002 and 2001
Net Revenue
Consolidated revenues increased $8,912,000 or 12.0% for the year ended December
31, 2002, compared to the year ended December 31, 2001. This increase is
principally attributable to an increase in the Nuclear segment of approximately
$13,328,000 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. This increase also reflects the impact of a
full year of additional revenues resulting from the acquisition of East
Tennessee Materials & Energy Corporation (M&EC), effective June 25, 2001 and
changes in pricing under the Oak Ridge Contracts. Consolidated revenues under
the Oak Ridge Contracts for 2002 totaled $9,664,000 or 11.6% of total revenues,
as compared to $6,300,000 or 8.5% for the year ended December 31, 2001. The
backlog of stored waste within the nuclear segment at December 31, 2002, was
approximately $9,000,000 compared to $5,873,000 at the end of 2001. The segment
recognized during the second quarter of 2002 approximately $2.2 million of
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 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. We also attempted to negotiate certain other surcharges under
the Oak Ridge Contracts, which negotiations were not successful. See "Known
Trends and Uncertainties" in this section for discussion on legal proceedings.
Additionally, the Consulting Engineering Services segment experienced an
increase of approximately $297,000, which was primarily due to new projects that
were awarded by nationally known cement companies. Offsetting these increases
was a decrease in the Industrial segment of approximately $4,713,000 resulting
from the downturn in the economy, the expiration of certain government contracts
and the effect of the start-up of the new biological wastewater treatment
system, which occurred over the first five months of 2002. Partly offsetting
this decrease was an increase in revenue over the last six months of 2002
generated from the implementation of the biological wastewater treatment system.
Cost of Goods Sold
Cost of goods sold increased $6,613,000, or 12.6% for the year ended December
31, 2002, compared to the year ended December 31, 2001. This increase in cost of
goods sold reflects principally an increase in the Nuclear segment of
approximately $6,654,000 reflecting the increase in waste processing and
disposal costs which directly correlates to the increase in revenues for this
segment. Additionally, the Nuclear segment experienced increased costs as it
started up new processing lines, developed new processing techniques and added
certain fixed costs in conjunction with its build-up. The Consulting Engineering
Services segment also experienced an increase of approximately $288,000
primarily due to increased staffing associated with the new projects awarded.
Offsetting these increases, was a decrease in the Industrial segment of
approximately $329,000, which corresponds to the decrease in revenues for this
segment, partially offset by additional operating costs associated with the
development and installation of its new biological wastewater treatment
technology.
Gross Profit
Gross profit for the year ended December 31, 2002, increased to $24,349,000,
which as a percentage of revenue is 29.2%, reflecting a decrease over the 2001
percent of revenue of 29.6%. This decrease in gross percentage principally
reflects a decrease in the Industrial segment from 27.5% in 2001 to 19.2% in
2002. This decrease reflects the impact of the high fixed cost nature of the
facilities in conjunction with reduced revenues in this segment, and the
additional operating costs associated with the development and
-22-
installation of the new wastewater treatment technology. Additionally, the
Consulting Engineering Services segment experienced a decrease from 37.3% in
2001 to 34.4% in 2002. This decrease reflects the impact of additional staffing
associated with the new projects, as noted above. Offsetting these decreases in
gross profit percentage was an increase in the Nuclear segment from 31.9% in
2001 to 37.6% 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 of 2001 was negatively affected by the
low margin subcontract work performed by this segment during the completion of
the M&EC facility.
Selling, General and Administrative
Selling, general and administrative expenses increased $1,278,000 or 7.7% for
the year ended December 31, 2002, as compared to the corresponding period for
2001. The increase in selling, general and administrative expense is principally
due to the acquisition of M&EC, which reflects additional expense of $1,248,000
for this facility, as compared to the year ended December 31, 2001.
Additionally, these expenses increased due to the impact of increasing the sales
and marketing efforts within the Nuclear segment in anticipation of the growth
in the mixed waste market. This increase also reflects the impact of an increase
in bad debt expense due to the need for additional reserve of $514,000
associated with certain contract changes related to the Oak Ridge Contracts.
Offsetting these increases, is an amortization expense decrease, across all
segments, of approximately $1,573,000 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). As a percentage
of revenue, selling, general and administrative expenses decreased to 21.5% for
the year ended December 31, 2002, compared to 22.3% for the same period of 2001.
Interest Expense
Interest expense decreased approximately $135,000 for the year ended December
31, 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 $145,000. Additionally, interest expense decreased by $545,000 due to the
elimination of interim financing related to the mixed waste construction
activities and a decrease of $85,000 was due to the reduction in debt with other
creditors. These decreases were partially offset by an increase in interest
expense of $199,000 associated with new debt obligations incurred in conjunction
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
No Warrants were issued during 2002 and therefore no interest expense-Warrants
was recorded during the twelve months ended December 31, 2002, as compared to
$234,000 for the twelve months ended December 31, 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 had
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
Interest expense-financing fees decreased approximately $1,688,000 for the year
ended December 31, 2002, as compared to the corresponding period of 2001. This
decrease is principally due to a write-off of prepaid financing fees of
$1,440,000 during the third quarter of 2001 related to short-term construction
financing within the mixed waste segment, which was paid in full in July 2001.
Additionally, interest expense-financing fees decreased by $601,000 due to the
elimination of the above discussed short-term construction financing expense as
amortized for the period from January through July 2001. Partially
-23-
offsetting these decreases was an increase principally associated with our
Senior Subordinated Notes issued to Associated Mezzanine Investors - PESI, L.P.
("AMI") and Bridge East Capital, L.P. ("BEC") of $340,000 when compared to prior
year.
Other Expense
Other expense increased by $261,000 for the year ended December 31, 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
year and from an additional remediation reserve for the Perma-fix of Michigan,
Inc. site, which was recorded in the amount of $228,000. See "Environmental
Contingencies" in this section for further discussion on this reserve. This
increase was offset by a one-time insurance settlement of $233,000, received in
the fourth quarter of 2002, related to the Perma-Fix of Memphis, Inc. facility.
Income Tax
See Note 10 to Notes to Consolidated Financial Statements for a reconciliation
between the expected tax benefit and the provision for income taxes as reported.
For the years ended December 31, 2002 and 2001, we had no federal income tax
expense, due to utilization of our net operating loss carry-forward and
permanent and temporary book-tax timing differences.
Preferred Stock Dividends
Preferred Stock dividends increased approximately $13,000 for the year ended
December 31, 2002, as compared to the year ended December 31, 2001. This
increase is due to the accrual for preferred dividends on the Series B
Preferred, issued in conjunction with the acquisition of M&EC. Partially
offsetting the increase was a decrease 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.
Liquidity and Capital Resources of the Company
Our capital requirements consist of general working capital needs, scheduled
principal payments on our debt obligations and capital leases, remediation
projects and planned capital expenditures. Our capital resources consist
primarily of cash generated from operations, 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, collection activities, and the profitability of
the segments.
At December 31, 2003, we had cash of $411,000. This cash total reflects an
increase of $199,000 from December 31, 2002, as a result of net cash provided by
operations of $3,959,000 offset by cash used in investing activities of
$3,408,000 (principally purchases of equipment, net totaling $2,178,000 and
$1,234,000 for finite risk sinking fund) and cash used in financing activities
of $352,000 (consisting of proceeds from issuance of stock of $2,684,000, offset
by net debt repayments of $3,036,000). We are in a net borrowing position and
therefore attempt to move all excess cash balances immediately to the revolving
credit facility, so as to reduce debt and interest expense. During 2002 we
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 can be moved without delay to the revolving credit
facility. The cash balance at December 31, 2003 represents payroll account
fundings which were not withdrawn until after year-end.
Operating Activities
Accounts Receivable, net of allowances for doubtful accounts, totaled
$24,052,000, an increase of $2,232,000 over the December 31, 2002, balance of
$21,820,000. This increase principally reflects the impact of increased revenues
and final billing of the Army's Newport hydrolysate project at December 31,
2003, within the Industrial segment, which resulted in an increase of
$1,552,000. Additionally, the Nuclear segment experienced an increase of
$719,000, which was also due to increased billings within the
-24-
segment. Offsetting these increases was a decrease in the Consulting Engineering
Services segment of $39,000.
As of December 31, 2003, total consolidated accounts payable was $6,359,000, a
decrease of $3,400,000 from the December 31, 2002, balance of $9,759,000. This
decrease in accounts payable is a result of proceeds received in the amount of
$2,502,000 for warrant and option exercises, the impact of increased revenues
and billings during the last half of the year, and from the improved margins and
profitability, all of which enabled us to reduce our accounts payable balances.
Accrued Expenses as of December 31, 2003, totaled $11,553,000, an increase of
$1,025,000 over the December 31, 2002, balance of $10,528,000. Accrued expenses
are made up of disposal and processing cost accruals, accrued compensation,
interest payable, insurance payable and certain tax accruals. Pursuant to the
termination of the Parson's contract we accrued $661,000 for the continued
assistance of consultants and attorneys related to regulatory, consulting and
legal activities, which we anticipate incurring over the next year.
The working capital position at December 31, 2003, was $4,159,000, as compared
to a working capital position of $731,000 at December 31, 2002. The increase in
this position of $3,428,000 is principally a result of the increased accounts
receivable balance, associated with increased revenues and billings, along with
the decreased accounts payable balance at the end of the period. Increased
profitability, and operating cash flow, along with the proceeds that we received
from warrant and option exercises enabled us to improve this working capital
position.
Investing Activities
Our purchases of new capital equipment for the twelve-month period ended
December 31, 2003, totaled approximately $3,462,000 of which $1,284,000 was
financed, resulting in net purchases of $2,178,000, funded out of cash flow.
These expenditures were for expansion and improvements to the operations
principally within the Nuclear and Industrial segments. These capital
expenditures were principally funded by the cash provided by operations, through
various other lease financing sources and through Warrant and option proceeds
raised during the year. We have budgeted capital expenditures of approximately
$5,600,000 for 2004, which includes an estimated $1,675,000 to complete certain
current projects committed at December 31, 2003, as well as other identified
capital and permit compliance purchases. We anticipate funding these capital
expenditures by a combination of lease financing, internally generated funds,
and/or the proceeds received from Warrant exercises.
Financing Activities
On December 22, 2000, we entered into a Revolving Credit, Term Loan and Security
Agreement ("Agreement") with PNC Bank, National Association, a national banking
association ("PNC") acting as agent ("Agent") for lenders, and as issuing bank.
The Agreement provides for a term loan ("Term Loan") in the amount of
$7,000,000, which requires principal repayments based upon a seven-year
amortization, payable over five years, with monthly installments of $83,000 and
the remaining unpaid principal balance due on December 22, 2005. The Agreement
also provided for a revolving line of credit ("Revolving Credit") with a maximum
principal amount outstanding at any one time of $18,000,000, as amended. 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 December 31, 2003, the excess availability under our
Revolving Credit was $7,465,000 based on our eligible receivables.
Pursuant to the Agreement the Term Loan bears interest at a floating rate equal
to the prime rate plus 1 1/2%, and the Revolving Credit at a floating rate equal
to the prime rate plus 1%. The loans are subject to a
-25-
prepayment fee of 1 1/2% in the first year, 1% in the second and third years and
3/4% after the third anniversary until termination date.
Pursuant to the terms of the Stock Purchase Agreements in connection with the
acquisition of Perma-Fix of Orlando, Inc. ("PFO"), Perma-Fix of South Georgia,
Inc. ("PFSG") and Perma-Fix of Michigan, Inc. ("PFMI"), a portion of the
consideration was paid in the form of the Promissory Notes, in the aggregate
amount of $4,700,000 payable to the former owners of PFO, PFSG and PFMI. The
Promissory Notes are paid in equal monthly installments of principal and
interest of approximately $90,000 over five years and having an interest rate of
5.5% for the first three years and 7% for the remaining two years. The aggregate
outstanding balance of the Promissory Notes total $531,000 at December 31, 2003,
which is in the current portion. Payments of such Promissory Notes are
guaranteed by PFMI under a non-recourse guaranty, which non-recourse guaranty is
secured by certain real estate owned by PFMI. These Promissory Notes are subject
to subordination agreements with our senior and subordinated lenders.
On August 31, 2000, as part of the consideration for the purchase of Diversified
Scientific Services, Inc. ("DSSI"), we 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, we 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 us, Associated Mezzanine Investors -
PESI, L.P. ("AMI"), and Bridge East Capital, L.P. ("BEC"). The Notes are
unsecured and are unconditionally guaranteed by our subsidiaries. Our payment
obligations under the Notes are subordinate to our payment obligations to our
primary lender and to certain other of our debts up to an aggregate amount of
$25 million. The net proceeds from the sale of the Notes were used to repay our
previous short-term loan.
Under the terms of the Purchase Agreement, we also issued to AMI and BEC
Warrants to purchase up to 1,281,731 shares of our Common Stock ("Warrant
Shares") at an initial exercise price of $1.50 per share (the "Warrants"),
subject to adjustment under certain conditions, which were valued at $1,622,000
and recorded as a debt discount and are being amortized over the term of the
Notes. As of December 31, 2003, the unamortized portion of the debt discount was
$838,000. The Warrants, as issued, also contain a cashless exercise provision.
The Warrant Shares are registered under an S-3 Registration Statement that was
declared effective on November 27, 2002.
In conjunction with our acquisition of M&EC, M&EC issued a promissory note for a
principal amount of $3.7 million to Performance Development Corporation ("PDC"),
dated June 25, 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. The principal repayments for 2004 will be approximately
$160,000 semiannually. 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. (7% on December 31, 2003) and payable in one
lump sum at the end of the loan period. On December 31, 2003, the outstanding
balance was $4,266,000 including accrued interest of approximately $912,000. 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.
Additionally, M&EC entered into an installment agreement with the Internal
Revenue Service ("IRS") for a principal amount of $923,000 effective June 25,
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. The
principal repayments for 2004 will be approximately $40,000 semiannually.
Interest is accrued at the Applicable Rate, and is adjusted on a quarterly basis
and payable in lump sum at the end of the
-26-
installment period. On December 31, 2003, the rate was 7%. On December 31, 2003,
the outstanding balance was $1,054,000 including accrued interest of
approximately $221,000.
We have outstanding 2,500 shares of Preferred Stock, with each share having a
liquidation preference of $1,000 ("Liquidation Value"). Annual dividends on the
Preferred Stock are 5% of the Liquidation Value. Dividends on the Preferred
Stock are cumulative, and are payable, if and when declared by our Board of
Directors, on a semiannual basis. Dividends on the outstanding Preferred Stock
may be paid at our option, if declared by the Board of Directors, in cash or in
shares of our Common Stock as described under Note 5 to Notes to Consolidated
Financial Statements. Under the terms of our loan agreement, we may not pay
these dividends in cash without the lender's prior consent.
During 2003, accrued dividends for the period July 1, 2002, through December 31,
2002, in the amount of approximately $63,000 were paid in January 2003, in the
form of 25,165 shares of Common Stock. Dividends for the period January 1, 2003
through June 30, 2003, of approximately $62,000 were paid in the form of 33,835
shares of Common Stock. The accrued dividends for the period July 1, 2003,
through December 31, 2003, in the amount of approximately $63,000 were paid in
February 2004, in the form of 19,643 shares of Common Stock. Under our loan
agreement, any dividends declared by our Board of Directors on its outstanding
shares of Preferred Stock is required to be paid in our Common Stock.
In summary, we have continued to take steps to improve our operations and
liquidity, as discussed above. However, we continue to invest our working
capital back into our facilities to fund capital additions within both the
nuclear and industrial segments. The first half of the year was negatively
impacted by the downturn in the economy, the war in Iraq and prolonged terrorist
alerts. However, our working capital position has improved during the third and
fourth quarters as a result of the improved operating performance and revenues,
and from the equity and cash flow raised in conjunction with Warrant and option
exercises.
Potential Acquisition
As discussed under "Business," we have entered into a letter of intent to
acquire substantially all of the assets and business of A&A and EMAX from U S
Liquids. These two businesses had unaudited revenues of approximately $15
million for 2003. If completed, we have agreed to pay for these acquisitions
$3.2 million, subject to working capital adjustments, at closing. We intend to
use a portion of the proceeds from the proposed private placement discussed
below to pay this purchase price.
Other Potential Transactions
We have entered into an arrangement with an investment banker to act as our
advisor and underwriter in connection with the structuring, issuance and sale of
up to $15 million, or such other principal amount as agreed to, of units,
consisting of Common Stock and warrants to purchase Common Stock, in a private
placement. Each investor on the private placement is to be a qualified
institutional buyer, as defined under Regulation 144A. Under the proposed terms
of the private placement, the investor(s) will purchase shares of our Common
Stock at a per share discounted price from current market and will receive a
warrant to purchase one share of our Common Stock for every four shares of
Common Stock purchased by the investor with an exercise price equal to 120% of
the market price on the day of closing subject to certain anti-dilution
adjustments. Each warrant will have a term of three years and may be callable by
us under certain conditions. The proposed securities to be issued under this
transaction are not registered under the Securities Act of 1933, as amended (the
"Act"), and may not be offered or sold in the United States absent registration
or pursuant to an applicable exemption from the registration requirements of the
Act. If completed, the net proceeds from the sale of the securities will be used
to repay certain of our indebtedness, to pay the consideration in connection
with the proposed asset purchases discussed above, and working capital. We do
have certain obligations to register these securities after completion of the
private placement. This transaction is subject to numerous conditions being met.
This does not constitute an offer to sell or solicitation of an offer to buy the
proposed securities.
-27-
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2003,
and the effect such obligations are expected to have on its liquidity and cash
flow in future periods, (in thousands):
Payments due by period
----------------------------------------------------
Less
than 1-3 4-5 After
Contractual Obligations Total 1 year years years 5 years
- ----------------------- ------- ------ ------- ------ -------
Long-term debt $29,088 $2,896 $25,208 $ 984 $ --
Interest on long-term debt 1,133 -- -- 1,133 --
Operating leases 4,137 1,492 2,571 74 --
Finite risk policy 9,034 1,004 3,011 2,008 3,011
Purchase obligations (1) -- -- -- -- --
------- ------ ------- ------ ------
Total contractual obligations $42,259 $5,392 $30,790 $3,066 $3,011
======= ====== ======= ====== ======
(1) We are not a party to any significant long-term service or supply
contracts with respect to our processes. We refrain from entering into any
long-term purchase commitments in the ordinary course of business.
In June 2003, we entered into a 25-year finite risk insurance policy, which
provides financial assurance to the applicable states for our permitted
facilities in the event of unforeseen closure. Prior to obtaining or renewing
operating permits we are required to provide financial assurance that guarantees
to the states that in the event of closure our permitted facilities will be
closed in accordance with the regulations. The policy provides $35 million of
financial assurance coverage of which the coverage amount totals $27,421,000 at
December 31, 2003, and has available capacity to allow for annual inflation and
other performance and surety bond requirements. This finite risk insurance
policy required an upfront payment of $4.0 million, of which $2,766,000
represents the full premium for the 25-year term of the policy, and the
remaining $1,234,000, to be deposited in a sinking fund account representing a
restricted cash account. During the second and third quarters of 2003, we made
initial payments for a total of $4,000,000, as discussed above. Additionally,
the policy requires nine annual installments of $1,004,000 that are due on the
anniversary date of the policy. These annual installments will also be deposited
in the sinking fund account. In comparison, we paid $1,121,000 of non-returnable
insurance premiums for the year 2002 financial assurance program, along with an
additional collateral requirement of $4.0 million in the form of a letter of
credit issued by PNC, at an annual fee of $160,000 per year. On the fourth and
subsequent anniversaries of the contract inception, we may elect to terminate
this contract. If we so elect, the Insurer will pay us an amount equal to 100%
of the sinking fund account balance in return for complete releases of liability
from both us and any applicable regulatory agency using this policy as an
instrument to comply with financial assurance requirements.
Critical Accounting Estimates
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. We believe the following critical accounting policies affect the more
significant estimates used in preparation of the consolidated financial
statements:
Revenue Recognition Estimates. Effective September 1, 2003 we refined our
percentage of completion methodology for purposes of revenue recognition in our
Nuclear Segment. As we accept more complex waste streams in this segment, the
treatment of those waste streams becomes more complicated and more time
consuming. We have continued to enhance our waste tracking capabilities and
systems, which has enabled us to better match the revenue earned to the
processing milestones achieved. The major milestones are receipt,
treatment/processing, and shipment/final disposition. Upon receiving mixed waste
-28-
we recognize a certain percentage (33%) of revenue as we incur costs for
transportation, analytical and labor associated with the receipt of mixed
wastes. As the waste is processed, shipped and disposed of we recognize
remaining 67% of revenue and the associated costs of transportation and burial.
The impact of the change for the year ended December 31, 2003, was a reduction
in net income by approximately $681,000 or $0.02 per share, due to timing
differences.
Allowance for Doubtful Accounts. The carrying amount of accounts receivable is
reduced by an allowance for doubtful accounts, which is a valuation allowance
that reflects management's best estimate of the amounts that are uncollectable.
We regularly review all accounts receivable balances that exceed 60 days from
the invoice date and based on an assessment of current credit worthiness,
estimate the portion, if any, of the balance that are uncollectable. This
allowance was approximately 0.8%, 0.8%, and 1.0% of revenue and approximately
2.9%, 3.2%, and 4.1% of accounts receivable for 2003, 2002 and 2001,
respectively. The allowance was adversely affected in years 2002 and 2001 due to
an increase in bankruptcy filings in the industrial and manufacturing business
sectors.
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. We continually reevaluate 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, we adopted
SFAS 142. We utilized an independent appraisal firm to test goodwill and
permits, separately, for impairment. The initial report provided by the
appraiser indicated that no impairment existed as of January 1, 2002. Goodwill
and permits were again tested as of October 1, 2002 and October 1, 2003, and
each of these tests also indicated no impairment. Effective January 1, 2002, we
discontinued amortizing indefinite life intangible assets (goodwill and permits)
as required by SFAS 142. The appraisers estimated the fair value of our
operating segments using a discounted cash flow valuation approach. This
approach is dependent on estimates for future sales, operating income,
depreciation and amortization, working capital changes, and capital
expenditures, as well as, expected growth rates for cash flows and long-term
interest rates, all of which are impacted by economic conditions related to our
industry as well as conditions in the U.S. capital markets.
Accrued Closure Costs. Accrued closure costs represent a contingent
environmental liability to clean up a facility in the event we cease operations
in an existing facility. The accrued closure costs are estimates based on
guidelines developed by federal and/or state regulatory authorities under RCRA.
Such costs are evaluated annually and adjusted for inflationary factors and for
approved changes or expansions to the facilities. Increases due to inflationary
factors for the years ended December 31, 2003, 2002 and 2001 have been
approximately 1.1%, 2.2%, and 2.1%, respectively, and based on the historical
information, we do not expect future inflationary changes to differ materially
from the last three years. Increases or decreases in accrued closure costs
resulting from changes or expansions at the facilities are determined based on
specific RCRA guidelines applied to the requested change. This calculation
includes certain estimates, such as disposal pricing, external labor, analytical
costs and processing costs, which are based on current market conditions.
However, we have no intention, at this time, to close any of our facilities.
Accrued Environmental Liabilities. We have four remediation projects currently
in progress. The current and long-term accrual amounts for the projects are our
best estimates based on proposed or approved processes for clean-up. The
circumstances that could affect the outcome range from new technologies that are
being developed every day to reduce our overall costs, to increased
contamination levels that could arise as we complete remediation which could
increase our costs, neither of which we anticipate at this time. In addition,
significant changes in regulations could adversely or favorably affect our costs
to remediate existing sites or potential future sites, which cannot be
reasonably quantified.
Disposal Costs. We accrue 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
-29-
using current costs for disposal, but economic trends could materially affect
our actual costs for disposal. As there are limited disposal sites available to
us, a change in the number of available sites or an increase or decrease in
demand for the existing disposal areas could significantly affect the actual
disposal costs either positively or negatively.
Known Trends and Uncertainties
Seasonality. Historically we have experienced reduced revenues, operating losses
or decreased operating profits during the first and fourth quarters of our
fiscal years due to a seasonal slowdown in operations from poor weather
conditions and overall reduced activities during the holiday season. During our
second and third fiscal quarters there has historically been an increase in
revenues and operating profits. Management expects this trend to continue in
future years. However, the second quarter of 2003 was adversely affected by the
war in Iraq, prolonged terrorist alerts and the downturn in the economy, while
the third and fourth quarters returned to trend. The DOE and DOD represent major
customers for the Nuclear segment. In conjunction with the federal government's
September 30 fiscal year-end, the Nuclear segment experiences seasonably large
shipments during the third quarter, leading up to this government fiscal
year-end, as a result of incentives and other quota requirements.
Correspondingly for a period of approximately three months following September
30, the Nuclear segment is generally seasonably slow, as the governmental
budgets are still being finalized, planning for the new year is occurring and we
enter the holiday season.
Economic Conditions. Economic downturns or recessionary conditions can adversely
affect the demand for our services, principally within the Industrial segment.
Reductions in industrial production generally follow such economic conditions,
resulting in reduced levels of waste being generated and/or sent off for
treatment. We believe that our revenues and profits were negatively affected
within this segment by the recessionary conditions in 2002, and that this trend
continued into 2003. However, recent months have shown the economy is improving.
Significant contracts. Our revenues are principally derived from numerous and
varied customers. However, our nuclear segment has a significant relationship
with Bechtel Jacobs, who manages the Oak Ridge contracts under which our
facility, M&EC operates. Our revenues with Bechtel Jacobs contributed 15.5% of
total consolidated revenues in 2003 and 11.6% of total consolidated revenues in
2002. As the M&EC facility continues to enhance its processing capabilities and
completes certain expansion projects and with the amended pricing structure
under the Oak Ridge Contracts, we could see higher total revenue with Bechtel
Jacobs and under the Oak Ridge Contracts. The Oak Ridge contracts have been
extended for a period of two years, through June 2005, with several pricing
modifications. In February 2003, M&EC commenced legal proceedings against
Bechtel Jacobs, the general contractor under the Oak Ridge Contracts, seeking
payment from Bechtel Jacobs of approximately $4.3 million in surcharges relating
to certain wastes that were treated by M&EC in 2001 and 2002 under the Oak Ridge
Contracts. These surcharges have not yet been billed. Bechtel Jacobs continues
to deliver waste to M&EC for treatment, and M&EC continues to accept such waste.
In addition, subsequent to the filing of the lawsuit, M&EC has entered into a
new contract with Bechtel Jacobs to treat DOE waste. There is no guarantee of
future business under the Oak Ridge Contracts, and either party may terminate
the Oak Ridge Contracts at any time. Termination of these contracts could have a
material adverse effect for us. We are working towards increasing other sources
of revenues at M&EC to reduce the risk of reliance on one major source of
revenues.
Our subsidiary, PFD, entered into a subcontract, in December 2002, to perform
treatability studies to determine if its process can successfully and safely
treat a neutralized VX gas by-product called hydrolysate generated and/or
handled by the U.S. Army and, if these studies were successful, to treat the
hydrolysate at PFD's Dayton facility. During the third quarter of 2003, PFD
successfully completed the treatability studies, demonstrating the ability to
treat and destroy the materials. However, in October 2003, as a result of
complaints by certain local public interest groups opposed to the project being
performed in the Dayton area, the subcontract for the treatment of the
hydrolysate was terminated
-30-
for convenience by Parsons and the Army. This cancellation eliminated the PFD
facility as an alternative for the treatment and disposal of the hydrolysate, at
the PFD site. During 2003, we recognized $4.9 million in revenue under this
contract, of which $1.6 million had not yet been billed as of December 31, 2003.
On January 26, 2004, the United States Environmental Protection Agency (EPA)
issued a Finding of Violation (FOV) letter to PFD. The letter, among other
things, referenced a series of potential violations, all of which relate to air
emission issues and the bioplant activities at the facility. Such concerns or
issues were facilitated by the local public interest group's opposition to the
Army's Newport hydrolysate contract waste coming into the PFD facility. We are
currently investigating the potential violations and will work with the EPA to
resolve such issues. At this time, the EPA has not asserted any fines, and we
are unable to determine the cost to correct those alleged violations that are
required to be corrected.
We are currently in negotiations to form a joint venture with other remedial
waste companies for purposes of performing various remedial activities. If this
joint venture is completed we may be required to invest up to $600,000, which we
anticipate would be paid during 2004.
Insurance. We maintain 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. We evaluate
our 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, we have no guarantee that we will be able to
obtain similar insurance in future years, or that the cost of such insurance
will not increase materially.
During the later part of 2003, PFMI's facility had a fire, which resulted in
bulking activities at the facility being halted as a result of property damage
caused by the fire. We have placed our insurance carrier on notice, which has a
$500,000 deductibility per occurrence. We are in the process of determining the
cost of repairing or replacing the damage to the facility and whether to
continue bulking activity at the facility.
Environmental Contingencies
We are 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, we are subject to rigorous
federal, state and local regulations. These regulations mandate strict
compliance and therefore are a cost and concern to us. Because of their integral
role in providing quality environmental services, we make every reasonable
attempt to maintain complete compliance with these regulations; however, even
with a diligent commitment, we, along with many of our competitors, may be
required to pay fines for violations or investigate and potentially remediate
our waste management facilities.
We routinely use third party disposal companies, who ultimately destroy or
secure landfill residual materials generated at our facilities or at a client's
site. We, compared to certain of our competitors, dispose of significantly less
hazardous or industrial by-products from our operations due to rendering
material 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 our
aggressive compliance and auditing procedures for disposal of wastes, we could,
in the future, be notified that we are a PRP at a remedial action site, which
could have a material adverse effect.
We have budgeted for 2004, $1,143,000 in environmental remediation expenditures
to comply with federal, state and local regulations in connection with
remediation of certain contaminates at four locations. As previously discussed
under "Business -- Capital Spending, Certain Environmental
-31-
Expenditures and Potential Environmental Liabilities," 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 2004 to be
approximately $592,000 at the EPS site, $216,000 at the PFM location, $246,000
at the PFSG site and $89,000 at the PFMI site. Additional funds will be required
for the next one to seven years to properly remediate these sites. We expect to
fund the 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 December 31, 2003, we had total accrued environmental remediation liabilities
of $2,575,000, of which $1,143,000 is recorded as a current liability, which
reflects a decrease of $121,000 from the December 31, 2002, balance of
$2,696,000. The decrease represents payments on remediation projects partially
offset by an increase in the remediation accrual. The funds received will be
used to further remediate the EPS site. The December 31, 2003, current and
long-term accrued environmental balance is recorded as follows:
PFD PFM PFSG PFMI Total
-------- -------- -------- ------- ---------
Current accrual $592,000 $216,000 $246,000 $89,000 1,143,000
Long-term accrual 163,000 603,000 666,000 -- 1,432,000
-------- -------- -------- ------- ---------
Total $755,000 $819,000 $912,000 $89,000 2,575,000
======== ======== ======== ======= =========
Interest Rate Swap
We entered into an interest rate swap agreement effective December 22, 2000, to
modify the interest characteristics of its outstanding debt from a floating
basis to a fixed rate, thus reducing the impact of interest rate changes on
future income. This agreement involves the receipt of floating rate amounts in
exchange for fixed rate interest payments over the life of the agreement without
an exchange of the underlying principal amount. The differential to be paid or
received is accrued as interest rates change and recognized as an adjustment to
interest expense related to the debt. The related amount payable to or
receivable from counter parties is included in other assets or liabilities. The
value of the interest rate swap at January 1, 2001, was deminimus. At December
31, 2003, the market value of the interest rate swap was in an unfavorable value
position of $130,000 and was recorded as a liability. During the twelve months
ended December 31, 2003, we recorded a gain on the interest rate swap of
$85,000, which was included in other comprehensive income on the Statement of
Stockholders' Equity (see Note 6 to Notes to Consolidated Financial Statements).
Recently Adopted Accounting Standard
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and normal use of the asset.
SFAS 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made, and that the associated asset retirement
costs be capitalized as part of the carrying amount of the long-lived asset. In
conjunction with the state mandated permit and licensing requirements, we are
obligated to determine our best estimate of the cost to close, at some
undetermined future date, our permitted and/or licensed facilities. We recorded
this liability at the date of acquisition of each facility, with its offsetting
entry being to goodwill and/or permits and have subsequently increased this
liability as a result of changes to the facility
-32-
and/or for inflation. Our current accrued closure costs reflect the current fair
value of the cost of asset retirement. We adopted SFAS 143 as of January 1,
2003, and pursuant to the adoption we reclassified from goodwill and permits
approximately $4,559,000 into an asset retirement obligations account, which
represents the fair value of our closing cost as recorded to goodwill or permits
at the time each facility was acquired. The asset retirement obligation account
is recorded as property and equipment (buildings). We will depreciate the asset
retirement obligation on a straight-line basis over a period of 50 years. The
new standard did not have a material impact on net income in 2003, nor would it
have had a material impact in 2002 and 2001 assuming an adoption of this
accounting standard on January 1, 2001.
Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
The adoption of SFAS did not have an impact on our consolidated financial
statements.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities" (FIN 46R), which clarifies
how a business enterprise should evaluate whether it has a controlling interest
in an entity through means other than voting rights and accordingly should
consolidate the entity. FIN 46R replaces FASB interpretation No. 46,
Consolidation of Variable Interest Entities, which was issued in January 2003.
We currently do not have any variable interests in variable interest entities.
We are in negotiations to form a joint venture, but at this time we are unable
to determine what effect this will have in regards to FIN 46R.
-33-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks arising from adverse changes in interest
rates, primarily due to the potential effect of such changes on our variable
rate loan arrangements with PNC, as described under Note 6 to Notes to
Consolidated Financial Statements. As discussed therein, we 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.
-34-
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be deemed "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(collectively, the "Private Securities Litigation Reform Act of 1995"). All
statements in this report other than a statement of historical fact are
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors, which could cause actual results and
performance of the Company to differ materially from such statements. The words
"believe," "expect," "anticipate," "intend," "will," and similar expressions
identify forward-looking statements. Forward-looking statements contained herein
relate to, among other things,
o Ability or inability to continue and improve operations and maintain
profitability on an annualized basis;
o our ability to develop or adopt new and existing technologies in the
conduct of our operations;
o anticipated improvement in our financial performance;
o ability to comply with our general working capital requirements;
o ability to retain or receive certain permits or patents;
o ability to renew permits with minimal effort and costs;
o ability to be able to continue to borrow under our revolving line of
credit;
o ability to generate sufficient cash flow from operations to fund all
costs of operations and remediation of certain formerly leased
property in Dayton, Ohio, and our facilities in Memphis, Tennessee;
Valdosta, Georgia and Detroit, Michigan;
o ability to remediate certain contaminated sites for projected
amounts;
o no impairment to intangible assets and does not expect a write down
of intangible assets;
o no intention to close any facilities;
o our possession of all necessary approvals, licenses and permits, and
our ability to attain, renew, or receive certain approvals,
licenses, permits, or patents;
o potential acquisition of another facility;
o no expectation of material future inflationary changes;
o ability to fund budgeted capital expenditures for 2004;
o sale of securities up to $15 million in a private placement;
o work force reductions which should result in annual savings of $3.2
million beginning 2004; and
o focusing on higher margin business.
-35-
While the Company believes the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance such expectations will prove
to have been correct. There are a variety of factors which could cause future
outcomes to differ materially from those described in this report, including,
but not limited to:
o general economic conditions;
o material reduction in revenues;
o inability to collect in a timely manner a material amount of
receivables;
o increased competitive pressures;
o the ability to maintain and obtain required permits and approvals to
conduct operations;
o the ability to develop new and existing technologies in the conduct
of operations;
o ability to retain or renew certain required permits;
o discovery of additional contamination or expanded contamination at a
certain Dayton, Ohio, property formerly leased by us or our
facilities at Memphis, Tennessee; Valdosta, Georgia and Detroit,
Michigan, which would result in a material increase in remediation
expenditures;
o changes in federal, state and local laws and regulations, especially
environmental laws and regulations, or in interpretation of such;
o potential increases in equipment, maintenance, operating or labor
costs;
o management retention and development;
o financial valuation of intangible assets is substantially less than
expected;
o the requirement to use internally generated funds for purposes not
presently anticipated;
o termination of the Oak Ridge Contracts as a result of our lawsuit
again Bechtel Jacobs or otherwise;
o inability to maintain profitability on an annualized basis;
o the inability to maintain the listing of our Common Stock on the
NASDAQ;
o the determination the PFMI or PFO was responsible for a material
amount of remediation at certain Superfund sites;
o terminations of contracts with federal agencies or subcontracts
involving federal agencies, or reduction in amount of waste
delivered to us under these contracts or subcontracts; and
o the price of our Common Stock as quoted on the NASDAQ.
We undertake no obligations to update publicly any forward-looking statement,
whether as a result of new information, future events or otherwise.
-36-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Consolidated Financial Statements Page No.
- --------------------------------- --------
Report of Independent Certified Public Accountants BDO Seidman, LLP 38
Consolidated Balance Sheets as of December 31, 2003 and 2002 39
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002, and 2001 41
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 42
Consolidated Statements of Stockholders' Equity for the years
Ended December 31, 2003, 2002 and 2001 43
Notes to Consolidated Financial Statements 44
Financial Statement Schedule
II Valuation and Qualifying Accounts for the years ended
December 31, 2003, 2002, and 2001 85
Schedules Omitted
In accordance with the rules of Regulation S-X, other schedules are not
submitted because (a) they are not applicable to or required by the Company, or
(b) the information required to be set forth therein is included in the
consolidated financial statements or notes thereto.
-37-
Report of Independent Certified Public Accountants
Board of Directors
Perma-Fix Environmental Services, Inc.
We have audited the accompanying consolidated balance sheets of Perma-Fix
Environmental Services, Inc. and subsidiaries as of December 31, 2003 and 2002,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2003. We
have also audited the schedule listed in the accompanying index. These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements and schedule.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Perma-Fix
Environmental Services, Inc. and subsidiaries at December 31, 2003 and 2002, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in the Summary of Significant Accounting Policies in the
consolidated financial statements, on January 1, 2002, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets."
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO Seidman, LLP
Chicago, Illinois
February 27, 2004
-38-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
(Amounts in Thousands, Except for Share Amounts) 2003 2002
- --------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 411 $ 212
Restricted cash 30 20
Accounts receivable, net of
allowance for doubtful
accounts of $703 and $698 24,052 21,820
Inventories 589 682
Prepaid expenses 2,332 2,722
Other receivables 397 113
--------- ---------
Total current assets 27,811 25,569
Property and equipment:
Buildings and land 21,391 16,161
Equipment 32,121 29,125
Vehicles 2,881 2,616
Leasehold improvements 11,082 10,963
Office furniture and equipment 2,153 1,954
Construction-in-progress 2,636 4,325
--------- ---------
72,264 65,144
Less accumulated depreciation
and amortization (19,195) (15,219)
--------- ---------
Net property and equipment 53,069 49,925
Intangibles and other assets:
Permits 16,680 20,759
Goodwill 6,216 6,525
Finite Risk Sinking Fund 1,234 --
Other assets 4,635 3,047
--------- ---------
Total assets $ 109,645 $ 105,825
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
-39-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
As of December 31,
(Amounts in Thousands, Except for Share Amounts) 2003 2002
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,359 $ 9,759
Current environmental accrual 1,143 982
Accrued expenses 11,553 10,528
Unearned revenue 1,701 196
Current portion of long-term debt 2,896 3,373
--------- ---------
Total current liabilities 23,652 24,838
Environmental accruals 1,432 1,714
Accrued closure costs 4,965 4,929
Other long-term liabilities 1,677 1,332
Long-term debt, less current portion 26,192 27,142
--------- ---------
Total long-term liabilities 34,266 35,117
--------- ---------
Total liabilities 57,918 59,955
Commitments and Contingencies (see Note 12) -- --
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,
37,241,881 and 35,326,734 shares
issued, including 988,000 shares
held as treasury stock, respectively 37 35
Additional paid-in capital 69,640 66,799
Accumulated deficit (17,243) (20,172)
Interest rate swap (130) (215)
--------- ---------
52,304 46,447
Less Common Stock in treasury
at cost; 988,000 shares (1,862) (1,862)
--------- ---------
Total stockholders' equity 50,442 44,585
--------- ---------
Total liabilities and
stockholders' equity $ 109,645 $ 105,825
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
-40-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31
(Amounts in Thousands,
Except for Share Amounts) 2003 2002 2001
- --------------------------------------------------------------------------------
Net Revenues $ 84,892 $ 83,404 $ 74,492
Cost of goods sold 58,633 59,055 52,442
-------- -------- --------
Gross Profit 26,259 24,349 22,050
Selling, general and administrative
expenses 18,637 17,909 16,631
-------- -------- --------
Income from operations 7,622 6,440 5,419
Other income (expense):
Interest income 8 16 29
Interest expense (2,841) (2,903) (3,038)
Interest expense - Warrants -- -- (234)
Interest expense - financing fees (1,070) (1,044) (2,732)
Other (601) (307) (46)
-------- -------- --------
Net income (loss) 3,118 2,202 (602)
Preferred Stock dividends (189) (158) (145)
-------- -------- --------
Net income (loss) applicable
to Common Stock $ 2,929 $ 2,044 $ (747)
======== ======== ========
Net income (loss) per common share
Basic $ .08 $ .06 $ (.03)
======== ======== ========
Diluted $ .08 $ .05 $ (.03)
======== ======== ========
Number of shares and potential
common shares Used in computing
net income (loss) per share:
Basic 34,982 34,217 27,235
======== ======== ========
Diluted 39,436 42,618 27,235
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
-41-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31
(Amounts in Thousands) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 3,118 $ 2,202 $ (602)
Adjustments to reconcile net income (loss) to cash provided by
(used in) operations:
Depreciation and amortization 4,865 4,244 4,616
Debt discount amortization 324 -- --
Provision for bad debt and other reserves 271 697 334
(Gain) loss on sale of plant, property and equipment (4) 19 28
Issuance of Warrants for financing and services -- -- 234
Changes in assets and liabilities, net of effects from business
acquisitions:
Accounts receivable (2,503) (5,325) (4,143)
Prepaid expenses, inventories and other assets (1,102) (252) 512
Accounts payable, accrued expenses and unearned revenue (1,010) 4,028 (1,183)
------- ------- --------
Net cash provided by (used in) operations 3,959 5,613 (204)
------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment, net (2,178) (4,761) (4,081)
Proceeds from sale of plant, property and equipment 17 10 167
Change in restricted cash, net (13) (6) (18)
Change in finite risk sinking fund (1,234) -- --
Cash used for acquisition consideration -- -- (10,083)
------- ------- --------
Net cash used in investing activities (3,408) (4,757) (14,015)
------- ------- --------
Cash flows from financing activities:
Net borrowings of revolving credit 494 78 921
Principal repayments of long term debt (3,530) (2,094) (3,136)
Proceeds from issuance of long term debt -- -- 6,161
Proceeds from issuance of stock 2,684 512 10,635
------- ------- --------
Net cash (used in) provided by financing activities (352) (1,504) 14,581
------- ------- --------
Increase (decrease) in cash 199 (648) 362
Cash at beginning of period 212 860 498
------- ------- --------
Cash at end of period $ 411 $ 212 $ 860
======= ======= ========
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure:
Interest paid $ 2,381 $ 2,569 $ 2,656
Non-cash investing and financing activities:
Issuance of Common Stock for services 34 120 63
Issuance of Common Stock for payment of dividends 125 125 184
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 -- -- 3,550
Interest rate swap valuation 85 57 158
Long-term debt incurred for purchase of property and equipment 1,284 1,061 517
Long-term debt and accrued interest exchanged for Common Stock -- -- 3,144
The accompanying notes are an integral part of these consolidated
financial statements.
-42-
PERMA-FIX ENVIRONMENTAL SERVICES, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31
Common
Preferred Stock Common Stock Additional Interest Stock Total
(Amounts in thousands, --------------- ------------------ Paid-In Rate Accumulated Held In Stockholders'
except for share amounts) Shares Amount Shares Amount Capital Swap Deficit Treasury Equity
------ ------- ---------- ------ -------- ----- -------- ------- --------
Balance at December 31, 2000 4,187 $ -- 23,429,759 $ 23 $ 45,328 $ -- $(21,469) $(1,862) $ 22,020
====== ===== ========== ====== ======== ===== ======== ======= ========
Comprehensive loss
Net loss -- -- -- -- -- -- (602) -- (602)
Other Comprehensive loss:
Interest rate swap -- -- -- -- -- (158) -- -- (158)
--------
Comprehensive loss (760)
Preferred Stock dividends -- -- -- -- -- -- (145) -- (145)
Issuance of Common Stock for
Preferred Stock dividends -- -- 117,676 -- 184 -- -- -- 184
Issuance of Common Stock for
cash and services -- -- 120,784 -- 165 -- -- -- 165
Conversion of Preferred Stock to
Common Stock (1,735) -- 1,156,666 1 (1) -- -- -- --
Issuance of Common Stock in
conjunction with acquisition -- -- 1,944,242 2 2,914 -- -- -- 2,916
Issuance of Common Stock from
Private Placement Offering -- -- 4,397,566 5 6,877 -- -- -- 6,882
Exchange of Preferred Stock
Series 14, 15 & 16 for
Series 17 48 -- -- -- -- -- -- -- --
Debt for Equity Exchange -- -- 1,999,437 2 3,142 -- -- -- 3,144
Issuance of Warrants for
services and financing -- -- -- -- 3,784 -- -- -- 3,784
Exercise of Warrants and
Options -- 1,841,875 2 3,649 -- -- -- 3,651
------ ----- ---------- ------ -------- ----- -------- ------- --------
Balance at December 31, 2001 2,500 $ -- 35,008,005 $ 35 $ 66,042 $(158) $(22,216) $(1,862) $ 41,841
====== ===== ========== ====== ======== ===== ======== ======= ========
Comprehensive income
Net income -- -- -- -- -- -- 2,202 -- 2,202
Other comprehensive income
(loss):
Interest Rate Swap -- -- -- -- -- (57) -- -- (57)
--------
Comprehensive income 2,145
Preferred Stock dividends -- -- -- -- -- -- (158) -- (158)
Issuance of Common Stock for
Preferred Stock dividends -- -- 46,323 -- 125 -- -- -- 125
Issuance of Common Stock for
cash and services -- -- 121,360 -- 282 -- -- -- 282
Exercise of Warrants and Options -- -- 151,046 -- 350 -- -- -- 350
------ ----- ---------- ------ -------- ----- -------- ------- --------
Balance at December 31, 2002 2,500 $ -- 35,326,734 $ 35 $ 66,799 $(215) $(20,172) $(1,862) $ 44,585
====== ===== ========== ====== ======== ===== ======== ======= ========
Comprehensive income
Net income -- -- -- -- -- -- 3,118 -- 3,118
Other comprehensive income:
Interest Rate Swap -- -- -- -- -- 85 -- -- 85
--------
Comprehensive income 3,203
Preferred Stock dividends -- -- -- -- -- -- (189) -- (189)
Issuance of Common Stock for
Preferred Stock dividends -- -- 59,000 -- 125 -- -- -- 125
Issuance of Common Stock for
cash and services -- -- 102,850 -- 216 -- -- -- 216
Exercise of Warrants and Options -- -- 1,753,297 2 2,500 -- -- -- 2,502
------ ----- ---------- ------ -------- ----- -------- ------- --------
Balance at December 31, 2003 2,500 $ -- 37,241,881 $ 37 $ 69,640 $(130) $(17,243) $(1,862) $ 50,442
====== ===== ========== ====== ======== ===== ======== ======= ========
The accompanying notes are an integral part of these
consolidated financial statements.
-43-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Perma-Fix Environmental Services, Inc. (the Company, which may be referred to as
we, us, or our), an environmental and technology know-how company, is a Delaware
corporation, engaged through its subsidiaries, in:
o Industrial Waste Management Services ("Industrial"), which includes:
o Treatment, storage, processing, and disposal of hazardous and
non-hazardous waste; and
o Wastewater management services, including the collection, treatment,
processing and disposal of hazardous and non-hazardous wastewater.
o Nuclear Waste Management Services ("Nuclear"), which includes:
o Treatment, storage, processing and disposal of mixed waste (waste
that is both low-level radioactive and hazardous) which includes on
and off-site waste remediation and processing;
o Nuclear and low-level radioactive waste treatment, processing and
disposal; and
o Research and development of innovative ways to process low-level
radioactive and mixed waste.
o Consulting Engineering Services, which includes:
o Broad-scope environmental issues, including environmental management
programs, regulatory permitting, compliance and auditing, landfill
design, field testing and characterization.
We have grown through both acquisitions and internal development. Our present
objective is to focus on the efficient operation of our existing facilities,
evaluate strategic acquisitions within both the nuclear and industrial segments,
and to continue the research and development of innovative technologies for the
treatment of nuclear, mixed waste and industrial waste. Such research and
development expenses, although important, are not considered material.
We are subject to certain risks: (1) We are involved in the treatment, handling,
storage and transportation of hazardous and non-hazardous, mixed and industrial
wastes and wastewater. Such activities contain risks against which we believe we
are adequately insured, and (2) in general, certain product lines within the
Industrial segment, are characterized by competition among a number of larger,
more established companies with significantly greater resources.
Our consolidated financial statements include our accounts, and the accounts of
our wholly-owned subsidiaries, Schreiber, Yonley and Associates ("SYA"),
Perma-Fix Treatment Services, Inc. ("PFTS"), Perma-Fix of Florida, Inc. ("PFF"),
Perma-Fix of Dayton, Inc. ("PFD"), Perma-Fix of Ft. Lauderdale, Inc. ("PFFL"),
Perma-Fix of Orlando, Inc. ("PFO"), Perma-Fix of South Georgia, Inc. ("PFSG"),
Perma-Fix of Michigan, Inc. ("PFMI"), Diversified Scientific Services, Inc.
("DSSI"), and effective June 25, 2001, East Tennessee Materials & Energy
Corporation ("M&EC"), which has been included in our consolidated financial
statements in 2001, from the date of acquisition.
-44-
- --------------------------------------------------------------------------------
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidatio
Our consolidated financial statements include our accounts and our wholly-owned
subsidiaries after elimination of all significant intercompany accounts and
transactions.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Use of Estimates
When we prepare financial statements in conformity with generally accepted
accounting principles, we make 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. See Note
8 and 9 for estimates of closure costs and environmental liabilities. Actual
results could differ from those estimates.
Restricted Cash
Restricted cash reflects secured collateral relative to the various financial
assurance instruments guaranteeing the standard Resource Conservation and
Recovery Act of 1976 ("RCRA") closure bonding requirements for the PFFL
treatment, storage and disposal facility, while the long-term portion reflects
cash held for long-term commitments related to the RCRA remedial action at a
facility affiliated with PFD as further discussed in Note 9. The letter of
credit secured by the current restricted cash renews annually, and we plan to
replace the letter of credit with other alternative financial assurance
instruments.
Accounts Receivable
Accounts receivable are customer obligations due under normal trade terms
requiring payment within 30 or 60 days from the invoice date based on the
customer type (government, broker, or commercial). Account balances are stated
by invoice at the amount billed to the customer. Payments of accounts receivable
are made directly to a lockbox and are applied to the specific invoices stated
on the customer's remittance advice. The carrying amount of accounts receivable
is reduced by an allowance for doubtful accounts, which is a valuation allowance
that reflects management's best estimate of the amounts that will not be
collected. We regularly review all accounts receivable balances that exceed 60
days from the invoice date and based on an assessment of current credit
worthiness, estimate the portion, if any, of the balance that will not be
collected.
Inventories
Inventories consist of treatment chemicals and certain supplies and replacement
parts as utilized in maintenance of the operating equipment. Inventories are
valued at the lower of cost or market with cost determined by the first-in,
first-out method.
Property and Equipment
Property and equipment expenditures are capitalized and depreciated using the
straight-line method over the estimated useful lives of the assets for financial
statement purposes, while accelerated depreciation methods are principally used
for tax purposes. Generally, annual depreciation rates range from ten to fifty
years for buildings (including improvements) and three to seven years for office
furniture and equipment, vehicles, and decontamination and processing equipment.
Leasehold improvements are capitalized and depreciated over the lesser of the
life of the lease or the life of the asset. Maintenance and repairs are charged
directly to expense as incurred. The cost and accumulated depreciation of assets
sold or retired are removed from the respective accounts, and any gain or loss
from sale or retirement is recognized in the accompanying consolidated
statements of operations. Renewals and improvements, which extend the useful
lives of the assets, are capitalized. Included within buildings is an asset
retirement obligation,
-45-
which represents our best estimate of the cost to close, at some undetermined
future date, our permitted and/or licensed facilities.
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. Prior to
our adoption of SFAS 142, effective January 1, 2002, goodwill had been amortized
over 20 to 40 years and permits amortized over 10 to 20 years. Effective January
1, 2002, we discontinued amortizing our indefinite life intangible assets
(goodwill and permits). Amortization expense approximated $1,575,000, for the
year ended 2001. We continually reevaluate the propriety of the carrying amount
of permits and goodwill to determine whether current events and circumstances
warrant adjustments to the carrying value and estimates of useful lives.
Effective January 1, 2002, we adopted SFAS 142 and obtained an initial financial
valuation of our intangible assets, which indicated no impairment to our
indefinite life intangible assets. Our annual financial valuations performed as
of October 1, 2003, and October 1, 2002 indicated no impairments.
Accrued Closure Costs
Accrued closure costs represent our estimated environmental liability to clean
up our facilities as required by our permits, in the event of closure.
Income Taxes
We account for income taxes under Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes", which requires use of the
liability method. SFAS No. 109 provides that deferred tax assets and liabilities
are recorded based on the differences between the tax basis of assets and
liabilities and their carrying amounts for financial reporting purposes,
referred to as temporary differences. Deferred tax assets or liabilities at the
end of each period are determined using the currently enacted tax rates to apply
to taxable income in the periods in which the deferred tax assets or liabilities
are expected to be settled or realized.
Comprehensive Income
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. Comprehensive income has two components, net income and other
comprehensive income, and is included on the balance sheet in the equity
section. Our comprehensive income consists of the market value of the interest
rate swap. For more information see Interest Rate Swap.
Change in Accounting Estimate
Effective September 1, 2003 we refined our percentage of completion methodology
for purposes of revenue recognition in the Nuclear Waste Management Services
segment. As we accept more complex waste streams in this segment, the treatment
of those waste streams becomes more complicated and more time consuming. We have
continued to enhance our waste tracking capabilities and systems, which has
enabled us to better match the revenue earned to the processing milestones
achieved. The refined methodology more closely represents the timing of the
treatment process. We treated the change in methodology as a change in
accounting estimate, according to APB Opinion 20 Accounting Changes and
accounted for such changes prospectively. The impact of the change was a
reduction in net income by approximately $681,000 or $0.02 per share for the
year ended December 31, 2003.
-46-
Revenue Recognition
Nuclear revenues. The processing of mixed waste is complex and can take months
to complete, as such we recognize revenues for both commercial and government
mixed waste services on a percentage of completion basis. The revenues are
recognized as each of the following phases are completed: receipt,
treatment/processing and shipment/final disposal. Upon receiving mixed waste we
recognize a percentage of revenues as we incur costs for transportation,
analytical and labor associated with the receipt of mixed wastes. As the waste
is processed, shipped and disposed of, we recognize the remaining revenues and
associated costs.
Revenues with Bechtel Jacobs, which includes revenues under the Oak Ridge
Contracts, accounted for approximately $13,139,000 or 15.5%, and $9,664,000 or
11.6% of total revenues for the years ended December 31, 2003 and December 31,
2002, respectively. Either party may at any time terminate the Oak Ridge
Contracts. See Note 12 - Commitments and Contingencies.
Industrial waste revenues. Since industrial waste streams are much less
complicated than mixed waste streams and they require a short processing period,
we recognize revenues for industrial services at the time the services are
substantially rendered, which generally happens upon receipt of the waste, or
shortly thereafter. These large volumes of bulk waste are received and
immediately commingled with various customers' wastes, which transfers the legal
and regulatory responsibility and liability to us upon receipt.
Consulting revenues. Consulting revenues are recognized as services are
rendered, as is consistent with industry standards. The services provided are
based on billable hours and revenues are recognized in relation to incurred
labor and consulting costs.
Self-Insurance
We have a self-insurance program for certain health benefits. The cost of these
benefits is recognized as expense in the period in which the claim occurred,
including estimates of claims incurred but not reported. Claims expense for 2003
was approximately $2,631,000, as compared to $3,006,000 and $1,881,000 for 2002
and 2001, respectively.
Stock-Based Compensation
We account for our stock-based employee compensation plans under the accounting
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
have furnished the pro forma disclosures required under SFAS No. 123, Accounting
for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. See Note 11 for additional disclosures
on our stock-based employee compensation plans.
Statement of Financial Accounting Standards No. 123 ("FAS 123") "Accounting for
Stock-Based Compensation," requires us to provide pro forma information
regarding net income and earnings per share as if compensation cost for our
employee and directors stock options had been determined in accordance with the
fair market value-based method prescribed in FAS 123. We estimate the fair value
of each stock option at the grant date by using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants in 2003,
2002, and 2001, respectively: no dividend yield for all years; an expected life
of ten years for all years; expected volatility of 23.19% - 25.75%, 30.51%, and
36.92% and risk-free interest rates of 2.75% - 3.33%, 2.93%, and 4.60%.
-47-
Under the accounting provisions of FASB Statement 123, our net income (loss) and
net income (loss) per share would have been reduced (increased) to the pro forma
amounts indicated below (in thousands except for per share amounts):
2003 2002 2001
--------- --------- ---------
Net income (loss) as reported $ 2,929 $ 2,044 $ (747)
Deduct: Total Stock-based employee
compensation expense
determined under fair value
based method for all awards,
net of related tax effects (470) (327) (358)
--------- --------- ---------
Pro forma net income (loss) $ 2,459 $ 1,716 $ (1,105)
========= ========= =========
Earnings per share
Basic - as reported $ .08 $ .06 $ (.03)
========= ========= =========
Basic - pro-forma $ .07 $ .05 $ (.04)
========= ========= =========
Diluted - as reported $ .08 $ .05 $ (.03)
========= ========= =========
Diluted - pro-forma $ .07 $ .04 $ (.04)
========= ========= =========
Net Income (Loss) Per Share
Basic EPS is based on the weighted average number of shares of Common Stock
outstanding during the year. Diluted EPS includes the dilutive effect of
potential common shares. Diluted loss per share for the year ended December 31,
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 to
diluted net income (loss) per share for the years ended December 31, 2003, 2002
and 2001:
(Amounts in Thousands, Except for Per Share Amounts) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to Common Stock - basic $ 2,929 $ 2,044 $ (747)
Effect of dilutive securities:
Preferred Stock dividends 189 158 --
------- -------- -----------
Net income (loss) applicable to Common Stock - diluted $ 3,118 $ 2,202 $ (747)
======= ======== ===========
Basic net income (loss) per share $ .08 $ .06 $ (.03)
======= ======== ===========
Diluted net income (loss) per share $ .08 $ .05 $ (.03)
======= ======== ===========
Weighted average shares outstanding - basic 34,982 34,217 27,235
Potential shares exercisable under stock option plans 477 1,070 --
Potential shares upon exercise of Warrants 2,310 5,664 --
Potential shares upon conversion of Preferred Stock 1,667 1,667 --
------- -------- -----------
Weighted average shares outstanding - diluted 39,436 42,618 27,235
======= ======== ===========
- -----------------------------------------------------------------------------------------------------------------------------------
Potential shares excluded from above weighted
average share calculations due to
their antidilutive effect include:
Upon exercise of options 1,472 187 2,967
Upon exercise of Warrants 20 -- 14,468
Upon conversion of Preferred Stock -- -- 1,667
-48-
Interest Rate Swap
We entered into an interest rate swap agreement effective December 22, 2000, to
modify the interest characteristics of its outstanding debt from a floating
basis to a fixed rate, thus reducing the impact of interest rate changes on
future income. This agreement involves the receipt of floating rate amounts in
exchange for fixed rate interest payments over the life of the agreement without
an exchange of the underlying principal amount. The differential to be paid or
received is accrued as interest rates change and recognized as an adjustment to
interest expense related to the debt. The related amount payable to or
receivable from counter parties is included in other assets or liabilities.
Fair Value of Financial Instruments
The book values of cash, trade accounts receivable, trade accounts payable,
accrued expenses and unearned revenues approximate their fair values principally
because of the short-term maturities of these instruments. The fair value of our
long-term debt is estimated based on the current rates offered to us for debt of
similar terms and maturities. Under this method, the fair value of long-term
debt was not significantly different from the stated value at December 31, 2003
and 2002.
Recently Adopted Accounting Standard
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and normal use of the asset.
SFAS 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made, and that the associated asset retirement
costs be capitalized as part of the carrying amount of the long-lived asset. In
conjunction with the state mandated permit and licensing requirements, we are
obligated to determine our best estimate of the cost to close, at some
undetermined future date, our permitted and/or licensed facilities. We recorded
this liability at the date of acquisition of each facility, with its offsetting
entry being to goodwill and/or permits and have subsequently increased this
liability as a result of changes to the facility and/or for inflation. Our
current accrued closure costs reflect the current fair value of the cost of
asset retirement. We adopted SFAS 143 as of January 1, 2003, and pursuant to the
adoption we reclassified from goodwill and permits approximately $4,559,000,
which represents the fair value of our closing cost as recorded to goodwill or
permits at the time each facility was acquired, into an asset retirement
obligation account. The asset retirement obligation account is recorded as
property and equipment (buildings). We will depreciate the asset retirement
obligation on a straight-line basis over a period of 50 years. The new standard
did not have a material impact on net income during 2003, nor would it have had
a material impact in 2002 and 2001 assuming an adoption of this accounting
standard on January 1, 2001.
Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
The adoption of SFAS did not have an impact on our consolidated financial
statements.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities" (FIN 46R), which clarifies
how a business enterprise should evaluate whether it has a controlling interest
in an entity through means other than voting rights and
-49-
accordingly should consolidate the entity. FIN 46R replaces FASB interpretation
No. 46, Consolidation of Variable Interest Entities, which was issued in January
2003. We currently do not have any variable interests in variable interest
entities. We are in negotiations to form a joint venture, but at this time we
are unable to determine what effect this will have in regards to FIN 46R.
- --------------------------------------------------------------------------------
NOTE 3
GOODWILL AND OTHER INTANGIBLE ASSETS
We adopted SFAS 142 January 1, 2002. 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 we 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 required us to complete a
transitional goodwill impairment test six months from the date of adoption. We
were also required to reassess the useful lives of other intangible assets
within the first interim quarter after adoption of SFAS 142. We utilized an
independent appraisal firm to test goodwill and permits, separately, for
impairment. The appraiser's report indicated no impairment as of January 1,
2002. We also completed annual impairment tests as of October 1, 2003, and
October 1, 2002, which also indicated no impairment to intangible assets. We
have discontinued amortizing our 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.
Pursuant to our adoption of SFAS 141 and 142, we changed our method of recording
acquired permits in connection with business combinations. For all acquisitions
prior to June 2001, we allocated the excess purchase price between goodwill and
permits, based upon the estimated percentage of revenue generated through
permitted activities. For all acquisitions of permitted facilities after June
2001, we believe that all of the excess purchase price should be attributed to
the permit. We will expense as incurred any ongoing costs to maintain and renew
our permits. These ongoing costs are significantly less than the initial costs
to obtain a permit.
The following table shows results assuming discontinuation of amortization
beginning January 1, 2000:
Amounts in Thousands,
Except for Share Amounts) 2003 2002 2001
- --------------------------------------------------------------------------------
Net income (loss) $ 2,929 $ 2,044 $ (747)
Goodwill amortization -- -- 315
Permit amortization -- -- 1,260
--------- --------- ---------
Adjusted net income $ 2,929 $ 2,044 $ 828
========= ========= =========
Net income (loss) per share - basic $ .08 $ .06 $ (.03)
Goodwill amortization -- -- .01
Permit amortization -- -- .05
--------- --------- ---------
Adjusted net income per share - basic $ .08 $ .06 $ .03
========= ========= =========
Net income (loss) per share - diluted $ .08 $ .05 $ (.03)
Goodwill amortization -- -- .01
Permit amortization -- -- .04
--------- --------- ---------
Adjusted net income per share - diluted $ .08 $ .05 $ .02
========= ========= =========
-50-
The following table is a summary of changes in the carrying amount of goodwill
for the years ended December 31, 2001, 2002 and 2003 (amounts in thousands). Our
Nuclear segment has been excluded as it has no goodwill recorded.
Industrial Engineering
Goodwill Segment Segment Total
- --------------------------------------------------------------------------------
Balance as of January 1, 2001 $ 5,467 $ 1,373 $ 6,840
Reclass of accumulated amortization (16) -- (16)
Amortization during the year (271) (44) (315)
------- ------- -------
Balance as of December 31, 2001 5,180 1,329 6,509
Reclass of accumulated amortization 16 -- 16
------- ------- -------
Balance as of December 31, 2002 5,196 1,329 6,525
Reclass of goodwill (309) -- (309)
------- ------- -------
Balance as of December 31, 2003 $ 4,887 $ 1,329 $ 6,216
======= ======= =======
The following table is a summary of changes in the carrying amount of permits
for the years ended December 31, 2001, 2002 and 2003 (amounts in thousands). Our
Engineering segment has been excluded as it has no permits recorded.
Industrial Nuclear
Permits Segment Segment Total
- --------------------------------------------------------------------------------
Balance as of January 1, 2001 $ 6,763 $ 6,575 $ 13,338
Permits acquired -- 8,443 8,443
Permits in progress 102 -- 102
Reclass of accumulated amortization 16 -- 16
Amortization during the year (447) (813) (1,260)
------- -------- --------
Balance as of December 31, 2001 6,434 14,205 20,639
Permits acquired -- 63 63
Permits in progress 73 -- 73
Reclass of accumulated amortization (16) -- (16)
Amortization during the year -- -- --
------- -------- --------
Balance as of December 31, 2002 6,491 14,268 20,759
Permits in progress 161 -- 161
Permits obtained -- 9 9
Reclass of permits (170) (4,079) (4,249)
------- -------- --------
Balance as of December 31, 2003 $ 6,482 $ 10,198 $ 16,680
======= ======== ========
- --------------------------------------------------------------------------------
NOTE 4
ACQUISITION
Acquisition - East Tennessee Materials and Energy Corporation
On June 25, 2001, we completed the acquisition of M&EC, pursuant to the terms of
the Stock Purchase Agreement, dated January 18, 2001, (the "Purchase
Agreement"), between the Company, M&EC, all of the stockholders of M&EC and Bill
Hillis. Pursuant to the terms of the Purchase Agreement, all of the outstanding
voting stock of M&EC was acquired by the Company and M&EC with (a) M&EC
acquiring 20% of the outstanding shares of voting stock of M&EC (held as
treasury stock), and (b) the Company acquiring all of the remaining outstanding
shares of M&EC voting stock (collectively, the "M&EC Acquisition"). As a result,
we now own all of the issued and outstanding voting capital stock of M&EC.
The purchase price we paid for the M&EC voting stock was approximately
$2,396,000, which we paid by issuing 1,597,576 shares of our Common Stock to the
stockholders of M&EC, with each share of
-51-
Common Stock having an agreed value of $1.50, the closing price of the Common
Stock as represented on the NASDAQ on the date of the initial letter of intent
relating to this acquisition. Also, as partial consideration of the M&EC
Acquisition, M&EC issued shares of its newly created Series B Preferred Stock to
stockholders of M&EC having a stated value of approximately $1,285,000. (See
Note 5)
The acquisition was accounted for using the purchase method effective June 25,
2001, and accordingly, the fair values of the assets and liabilities of M&EC as
of this date are included in the accompanying consolidated financial statements.
The results of the acquired business has been included in our consolidated
financial statements since the date of acquisition.
- --------------------------------------------------------------------------------
NOTE 5
PREFERRED STOCK ISSUANCE AND CONVERSION
As of January 1, 2001, 4,187 shares of our Preferred Stock were issued and
outstanding. During 2001, 1,735 of such shares were converted into 1,171,336
shares of Common Stock including 14,670 shares issued in payment of accrued
dividends, with the remaining 2,452 shares of Preferred Stock exchanged for
2,500 shares of a new Series 17 Preferred Stock, which were issued and
outstanding as of December 31, 2003.
Series 17 Preferred
Effective as of April 6, 2001, we entered into a Conversion and Exchange
Agreement with Capital Bank, whereby Capital Bank converted a portion of our
Preferred Stock owned of record by Capital Bank, as agent for certain of its
accredited investors, for shares of our Common Stock and exchanged the remaining
Preferred Stock held by Capital Bank for shares of our newly designated Series
17 Preferred Stock.
Prior to the consummation of the Conversion and Exchange Agreement, Capital Bank
owned of record, as its agent for certain of its accredited investors, 1,769
shares of our Series 14 Preferred, 616 shares of our Series 15 Preferred, and
1,797 shares of our Series 16 Preferred. Capital Bank converted 1,314 shares of
Series 14 Preferred and 416 shares of Series 15 Preferred into an aggregate of
1,153,333 shares of Common Stock on April 6, 2001. Capital Bank then exchanged
the remaining shares of Series 14 Preferred, Series 15 Preferred, and Series 16
Preferred for a total of 2,500 shares of the Series 17 Preferred. As a result of
the consummation of the Conversion and Exchange Agreement, no shares of Series
14 Preferred, Series 15 Preferred, or Series 16 Preferred remain outstanding.
The Series 17 Preferred may be converted into shares of Common Stock at any time
at a conversion price of $1.50 per share, subject to adjustment as set forth in
the Certificate of Designations relating to the Series 17 Preferred. The Series
17 Preferred has a "stated value" of $1,000 per share. We may, at our sole
option, redeem, in whole or in part, at any time, and from time to time the then
outstanding Series 17 Preferred at $1,200 per share. Upon any notice of
redemption, Capital Bank shall have only five business days to exercise its
conversion rights regarding the redeemed shares.
The Series 17 Preferred accrues dividends on a cumulative basis at a rate of 5%
per annum which dividends are payable semiannually when and as declared by the
Board of Directors. Our loan agreement prohibits paying any cash dividends on
our Common Stock without prior approval. During 2003, accrued dividends on the
Series 17 Preferred of approximately $125,000 were paid in the form of 53,478
shares of Common Stock, of which 19,643 were issued in February 2004.
Series B Preferred Stock
As partial consideration of the M&EC Acquisition (see Note 4), M&EC issued
shares of its Series B Preferred Stock to stockholders of M&EC having a stated
value of approximately $1,285,000. No other shares of M&EC's Series B Preferred
Stock are outstanding. The Series B Preferred Stock is non-voting
-52-
and non-convertible, has a $1.00 liquidation preference per share and may be
redeemed at the option of M&EC at any time after one year from the date of
issuance for the per share price of $1.00. Following the first 12 months after
the original issuance of the Series B Preferred Stock, the holders of the Series
B Preferred Stock will be entitled to receive, when, as, and if declared by the
Board of Directors of M&EC out of legally available funds, dividends at the rate
of 5% per year per share applied to the amount of $1.00 per share, which shall
be fully cumulative. We began accruing dividends for the Series B Preferred
Stock in July 2002, and have accrued a total of approximately $97,000 since July
2002, of which $64,000 was accrued in 2003.
- --------------------------------------------------------------------------------
NOTE 6
LONG-TERM DEBT
Long-term debt consists of the following at December 31, 2003, and December 31,
2002:
(Amounts in Thousands) 2003 2002
------- -------
Revolving Credit facility dated December 22, 2000,
borrowings based upon eligible accounts
receivable, subject to monthly borrowing base
calculation, variable interest paid monthly at
prime rate plus 1% (5.00% at December 31, 2003),
balance due in December 2005. $ 9,235 $ 8,742
Term Loan dated December 22, 2000, payable in equal
monthly installments of principal of $83, balance
due in December 2005, variable interest paid
monthly at prime rate plus 1 1/2% (5.50% at
December 31, 2003). 4,083 5,083
Three promissory notes dated May 27, 1999, payable in
equal monthly installments of principal and
interest of $90 over 60 months, due June 2004,
interest at 7.0%. 531 1,538
Unsecured promissory note dated August 31, 2000, payable
in lump sum in August 2005, interest paid annually
at 7.0%. 3,500 3,500
Senior subordinated notes dated July 31, 2001, payable
in lump sum on July 31, 2006, interest payable
quarterly at an annual interest rate of 13.5%, net
of unamortized debt discount of $838 at December
31, 2003 and $1,163 at December 31, 2002. 4,787 4,462
Promissory note dated June 25, 2001, payable in
semiannual installments on June 30 and December 31
through December 31, 2008, variable interest
accrues at the applicable law rate determined
under the IRS Code Section (7.0% on December 31,
2003) and is payable in one lump sum at the end of
installment period. 3,354 3,594
Installment agreement dated June 25, 2001, payable in
semiannual installments on June 30 and December 31
through December 31, 2008, variable interest
accrues at the applicable law rate determined
under the IRS Code Section (7.0% on December 31,
2003) and is payable in one lump sum at the end of
installment period. 833 893
Various capital lease and promissory note obligations,
payable 2004 to 2008, interest at rates ranging
from 5.2% to 17.9%. 2,765 2,703
------- -------
29,088 30,515
Less current portion of long-term debt 2,896 3,373
------- -------
$26,192 $27,142
======= =======
Revolving Credit and Term Loan Agreement
On December 22, 2000, we 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")
-53-
in the amount of $7,000,000, which requires principal repayments based upon a
seven-year amortization, payable over five years, with monthly installments of
$83,000 and the remaining unpaid principal balance due on December 22, 2005. The
Agreement also provided for a revolving line of credit ("Revolving Credit") with
a maximum principal amount outstanding at any one time of $18,000,000, as
amended. 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 loans are subject to a prepayment fee
of 1 1/2 % in the first year, 1% in the second and third years and 3/4 % after
the third anniversary until termination date. The Revolving Credit advances
shall be due and payable in full on December 22, 2005. As of December 31, 2003,
the excess availability under our Revolving Credit was $7,465,000 based on our
eligible receivables.
In December 2000, we entered into an interest rate swap agreement related to our
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. We 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 us one month LIBOR rate for the same term (1.12% at December
31, 2003). At December 31, 2003, the market value of the interest rate swap was
in an unfavorable value position of $130,000 and was recorded as a liability.
During the twelve months ended December 31, 2003, we recorded a gain on the
interest rate swap of $85,000, which was included in other comprehensive income
on the Statement of Stockholders' Equity.
Three Promissory Notes
Pursuant to the terms of stock purchase agreements in connection with the
acquisition of Perma-Fix of Orlando, Inc. ("PFO"), Perma-Fix of South Georgia,
Inc. ("PFSG") and Perma-Fix of Michigan, Inc. ("PFMI"), a portion of the
consideration was paid in the form of the Promissory Notes, in the aggregate
amount of $4,700,000 payable to the former owners of PFO, PFSG and PFMI. The
Promissory Notes are paid in equal monthly installments of principal and
interest of approximately $90,000 over five years and having an interest rate of
5.5% for the first three years and 7% for the remaining two years. The aggregate
outstanding balance of the Promissory Notes total $531,000 at December 31, 2003,
which is in the current portion. Payments of such Promissory Notes are
guaranteed by PFMI under a non-recourse guaranty, which non-recourse guaranty is
secured by certain real estate owned by PFMI. These Promissory Notes are subject
to subordination agreements with our senior and subordinated lenders.
Unsecured Promissory Note
On August 31, 2000, as part of the consideration for the purchase of Diversified
Scientific Services, Inc. ("DSSI"), we issued to Waste Management Holdings a
long-term unsecured promissory note (the "Unsecured Promissory Note") in the
aggregate principal amount of $3,500,000, bearing interest at a rate of 7% per
annum and having a five-year term with interest to be paid annually and
principal due in one lump sum at the end of the term of the Unsecured Promissory
Note (August 2005).
Senior Subordinated Note
On July 31, 2001, we 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 us, Associated Mezzanine Investors -
PESI, L.P. ("AMI"), and Bridge East Capital, L.P. ("BEC"). The Notes are
unsecured and are unconditionally guaranteed by our subsidiaries. Our payment
obligations under the Notes are subordinate to our payment obligations to our
primary lender and to certain other debts of ours up to an aggregate amount of
$25 million. The net proceeds from the sale of the Notes were used to repay our
previous short-term loan.
-54-
Under the terms of the Purchase Agreement, we also issued to AMI and BEC
Warrants to purchase up to 1,281,731 shares of our Common Stock ("Warrant
Shares") at an initial exercise price of $1.50 per share (the "Warrants"),
subject to adjustment under certain conditions which were valued at $1,622,000
and recorded as a debt discount and are being amortized over the term of the
Notes. As of December 31, 2003, the unamortized portion of the debt discount was
$838,000. The Warrants, as issued, also contain a cashless exercise provision.
The Warrant Shares are registered under an S-3 Registration Statement that was
declared effective on November 27, 2002.
In connection with the sale of the Notes, we entered into an Option Agreement
with AMI and BEC, dated July 31, 2001 (the "Option Agreement"). Pursuant to the
Option Agreement, we granted each purchaser an irrevocable option requiring us
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 us 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 our consolidated EBITDA for the period of the 12 most recent
consecutive months minus Net Debt plus the Warrant Proceeds by (b) our Diluted
Shares (as the terms EBITDA, Net Debt, Warrant Proceeds, and Diluted Shares are
defined in the Option Agreement). At December 31, 2003 and 2002, the Put Option
had no value and no liability was recorded.
Promissory Note
In conjunction with our acquisition of M&EC, M&EC issued a promissory note for a
principal amount of $3.7 million to Performance Development Corporation ("PDC"),
dated June 25, 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. The principal repayments for 2004 will be approximately
$160,000 semiannually. 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, (7% on December 31, 2003) and payable in one
lump sum at the end of the loan period. On December 31, 2003, the outstanding
balance was $4,266,000 including accrued interest of approximately $912,000. PDC
has directed M&EC to make all payments under the promissory note directly to the
IRS to be applied to PDC's obligations under its installment agreement with the
IRS.
Installment Agreement
Additionally, M&EC entered into an installment agreement with the Internal
Revenue Service ("IRS") for a principal amount of $923,000 effective as of June
25, 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.
The principal repayments for 2004 will be approximately $40,000 semiannually.
Interest is accrued at the Applicable Rate. Such rate is adjusted on a quarterly
basis and payable in lump sum at the end of the installment period. On December
31, 2003, the rate was 7%. On December 31, 2003, the outstanding balance was
$1,054,000 including accrued interest of approximately $221,000.
The aggregate approximate amount of the maturities of long-term debt maturing in
future years as of December 31, 2003, is $2,896,000 in 2004; $17,544,000 in
2005; $6,223,000 in 2006; $1,441,000 in 2007; and $984,000 in 2008.
-55-
- --------------------------------------------------------------------------------
NOTE 7
ACCRUED EXPENSES
Accrued expenses at December 31 include the following (in thousands):
2003 2002
------- -------
Salaries and employee benefits $ 3,368 $ 3,084
Accrued sales, property and other tax 630 1,032
Waste disposal and other operating related expenses 7,223 6,051
Other 332 361
------- -------
Total accrued expenses $11,553 $10,528
======= =======
- --------------------------------------------------------------------------------
NOTE 8
ACCRUED CLOSURE COSTS
We accrue for the estimated closure costs as determined pursuant to RCRA
guidelines for all fixed-based regulated facilities, even though we do not
intend to or have present plans to close any of our existing facilities. The
permits and/or licenses define the waste, which may be received at the facility
in question, and the treatment or process used to handle and/or store the waste.
In addition, the permits and/or licenses specify, in detail, the process and
steps that a hazardous waste or mixed waste facility must follow should the
facility be closed or cease operating as a hazardous waste or mixed waste
facility. Closure procedures and cost calculations in connection with closure of
a facility are based on guidelines developed by the federal and/or state
regulatory authorities under RCRA and the other appropriate statutes or
regulations promulgated pursuant to the statutes. The closure procedures are
very specific to the waste accepted and processes used at each facility. We
recognize the closure cost as a contingent liability on the balance sheet. Since
all our facilities are acquired facilities, the closure cost for each facility
was recognized pursuant to a business combination and recorded as part of the
purchase price allocation to assets acquired and liabilities assumed.
The closure calculation is increased annually for inflation based on RCRA
guidelines, and for any approved changes or expansions to the facility, which
may result in either an increase or decrease in the approved closure amount. An
increase resulting from changes or expansions is recorded to expense over the
term of such a renewed/expanded permit, generally five (5) years, and annual
inflation factor increases are expensed during the current year.
During 2003, the accrued long-term closure cost increased by $36,000 to a total
of $4,965,000 as compared to the 2002 total of $4,929,000. This increase is
principally a result of normal inflation factor increases.
- --------------------------------------------------------------------------------
NOTE 9
ENVIRONMENTAL LIABILITIES
We have four remediation projects, which are currently in progress at four of
the permitted facilities owned and operated by our subsidiaries. These
remediation projects principally entail the removal of contaminated soil and
remediation of surrounding ground water. All of the remedial clean-up projects
in question were an issue for that facility for years prior to our acquisition
of the facility and were recognized pursuant to a business combination and
recorded as part of the purchase price allocation to assets acquired and
liabilities assumed. Due to the fact that these are RCRA permitted facilities,
the remediation activities are closely reviewed and monitored by the applicable
state regulators. We have recognized certain environmental liabilities upon the
acquisition of certain facilities, as part of the acquisition cost. Subsequent
to our acquisition of these facilities, we have not recognized new
-56-
environmental liabilities as a result of the operations of the facilities due to
the stringent operational procedures instituted at the facilities after they
have been acquired.
At December 31, 2003, we had accrued environmental liabilities totaling
$2,575,000, which reflects a decrease of $121,000 from the December 31, 2002,
balance of $2,696,000. The net decrease principally represents payments on
remediation projects. The December 31, 2003 current and long-term accrued
environmental balance is recorded as follows:
PFD PFM PFSG PFMI Total
-------- -------- -------- ------- ----------
Current accrual $592,000 $216,000 $246,000 $89,000 $1,143,000
Long-term accrual 163,000 603,000 666,000 -- 1,432,000
-------- -------- -------- ------- ----------
Total $755,000 $819,000 $912,000 $89,000 $2,575,000
======== ======== ======== ======= ==========
PFD
In June 1994, we acquired from Quadrex Corporation and/or a subsidiary of
Quadrex Corporation (collectively, "Quadrex") three treatment, storage and
disposal companies, including the PFD facility. The former owners of PFD had
merged EPS with PFD, which was subsequently sold to Quadrex. Through our
acquisition of PFD in 1994 from Quadrex, we were indemnified by Quadrex for
costs associated with remediating a 1989 former RCRA facility leased by PFD
("Leased Property"), which entails remediation of soil and/or groundwater
restoration. The Leased Property used by EPS to operate its facility is separate
and apart from the property on which PFD's facility is located. In conjunction
with the subsequent bankruptcy filing by Quadrex, and our recording of purchase
accounting for the acquisition of PFD, we recognized an environmental liability
of approximately $1,200,000 for the remediation of this leased facility. This
facility has pursued remedial activities for the past seven years and after
evaluating various technologies, is seeking approval from appropriate
governmental authority for the final remedial process, through the utilization
of third party consultants, which should extend for two to three years after
approval by the appropriate governmental authorities of the final remedial
process. For the year ended December 31, 2003, we increased the reserve by
approximately $570,000, a portion of which resulted from the payment of $400,000
we received as settlement of a lawsuit we filed against prior owners of the
Leased Property. We have estimated the potential liability related to the
remaining remedial activity of the above property to be approximately $755,000,
representing the remaining reserve balance, which we anticipate spending
$592,000 in 2004 and $163,000 in 2005.
PFM
Pursuant to our acquisition, effective December 31, 1993, of Perma-Fix of
Memphis, Inc. (f/k/a American Resource Recovery, Inc.), we assumed certain
liabilities relative to the removal of contaminated soil and to undergo
groundwater remediation at the facility. Prior to our ownership of Perma-Fix of
Memphis, Inc., the owners installed monitoring and treatment equipment to
restore the groundwater to acceptable standards in accordance with federal,
state and local authorities. The groundwater remediation at this facility has
been ongoing since approximately 1990, and, subject to the approval of the
appropriate agency, Perma-Fix of Memphis, Inc. intends to begin final
remediation of this facility. For the year ended December 31, 2003, we incurred
$99,000 in remedial costs, which reduced the reserve. Our estimate of the
potential liability at December 31, 2003, for completion of this project is
$819,000, which we anticipate spending $216,000 in 2004 and the remaining
$603,000 over the next two to four years.
-57-
PFSG
During 1999, we recognized an environmental accrual of $2,199,000, in
conjunction with the acquisition of PFSG. This amount represented our estimate
of the long- term costs to remove contaminated soil and to undergo groundwater
remediation activities at the PFSG acquired facility in Valdosta, Georgia. PFSG,
in conjunction with third party consultants, have over the past three years,
completed the initial valuation and selected the remedial process to be
utilized. The planning and approval process continued throughout 2003, and
remedial activities began in 2003. For the year ended December 31, 2003, we
incurred $348,000 in environmental costs, which reduced the reserve. Our
estimate of the potential liability at December 31, 2003, for the PFSG
remediation is $912,000, which we anticipate spending $246,000 during 2004, with
the remaining $666,000 to be spent over the next two to six years.
PFMI
In conjunction with the acquisition of PFMI during 1999, we recognized an
environmental accrual of $2,120,000. This amount represented our estimate of the
long-term costs to remove contaminated soil at the PFMI acquired facility in
Detroit, Michigan. The facility has pursued remedial activities over the past
three years. For the year ended December 31, 2003, we incurred $218,000 in
remedial costs, which reduced the reserve. Our estimate of the potential
liability at December 31, 2003, for the PFMI remediation is $89,000, which we
anticipate spending in 2004.
Prior to the acquisition of these facilities, we performed, or had performed,
due diligence on each of these environmental projects, and also
reviewed/utilized reports obtained form third party engineering firms who have
been either engaged by the prior owners or by us to assist in our review. Based
upon our expertise and the analysis performed, we have accrued our best estimate
of the cost to complete the remedial projects. No insurance or third party
recovery was taken into account in determining our cost estimates or reserve,
nor do our cost estimates or reserves reflect any discount for present value
purposes. We do not believe that any adverse changes to our estimates would be
material to us. The circumstances that could affect the outcome range from new
technologies, that are being developed every day that reduce our overall costs,
to increased contamination levels that could arise as we complete remediation
which could increase our costs, neither of which we anticipate at this time.
- --------------------------------------------------------------------------------
NOTE 10
INCOME TAXES
We had temporary differences and net operating loss carry forwards, which gave
rise to deferred tax assets and liabilities at December 31, as follows (in
thousands):
2003 2002
------- --------
Deferred tax assets:
Net operating losses $ 7,847 $ 7,887
Environmental and closure reserves 1,172 1,240
Impairment of assets 7,611 7,611
Other 1,061 471
Valuation allowance (9,966) (10,195)
------- --------
Deferred tax assets 7,725 7,014
Deferred tax liabilities
Depreciation and amortization (7,725) (7,014)
------- --------
Net deferred tax asset (liability $ -- $ --
======= ========
-58-
A reconciliation between the expected tax benefit using the federal statutory
rate of 34% and the provision for income taxes as reported in the accompanying
consolidated statements of operations is as follows (in thousands):
2003 2002 2001
------- ----- -------
Tax expense (benefit) at statutory rate $ 1,060 $ 749 $ (205)
Goodwill amortization -- -- 440
Other (831) (119) (651)
Deferred tax assets acquired -- -- (1,910)
Increase (decrease) in valuation allowance (229) (630) 2,326
------- ----- -------
Provision for income taxes $ -- $ -- $ --
======= ===== =======
We have recorded a valuation allowance to state our deferred tax assets at
estimated net realizable value due to the uncertainty related to realization of
these assets through future taxable income. Our valuation allowance increased
(decreased) by approximately $(229,000), $(630,000) and $2,326,000, for the
years ended December 31, 2003, 2002, and 2001, respectively, which represents
the effect of changes in the temporary differences and net operating losses
(NOLs), as amended. Included in deferred tax assets is an impairment of assets
for $7,611,000, of which approximately $7,051,000 is in conjunction with our
acquisition of DSSI in August 2000. This deferred tax asset is a result of an
impairment charge related to fixed assets and goodwill of approximately $24.5
million recorded by DSSI in 1997 prior to our acquisition of DSSI. This
write-off will not be deductible for tax purposes until the assets are disposed.
We have estimated net operating loss carryforwards (NOL's) for federal income
tax purposes of approximately $23,100,000 at December 31, 2003. These net
operating losses can be carried forward and applied against future taxable
income, if any, and expire in the years 2007 through 2023. However, as a result
of various stock offerings and certain acquisitions, the use of these NOLs will
be limited under the provisions of Section 382 of the Internal Revenue Code of
1986, as amended. According to Section 382, we have approximately $14.4 million
in total NOLs available to offset consolidated taxable income for the tax year
ended December 31, 2003. For each subsequent year that the pre-1996 NOLs remain
unused, an additional $1,049,070 will become available to offset consolidated
taxable income. Additionally, NOLs may be further limited under the provisions
of Treasury Regulation 1.1502-21 regarding Separate Return Limitation Years.
- --------------------------------------------------------------------------------
NOTE 11
CAPITAL STOCK EMPLOYEE STOCK PLAN AND INCENTIVE COMPENSATION
Employee Stock Purchase Plan
At our Annual Meeting of Stockholders ("Annual Meeting") as held on December 12,
1996, the stockholders approved the adoption of the Perma-Fix Environmental
Services, Inc. 1996 Employee Stock Purchase Plan. This plan provides our
eligible employees, who wish to become stockholders, an opportunity to purchase
our Common Stock through payroll deductions. The maximum number of shares of our
Common Stock that may be issued under the plan will be 500,000 shares. The plan
provides that shares will be purchased two times per year and that the exercise
price per share shall be 85% of the market value of each such share of Common
Stock on the offering date on which such offer commences or on the exercise date
on which the offer period expires, whichever is lowest. The first purchase
period commenced July 1, 1997. We currently have a remaining 27,611 shares of
our Common Stock available to use under the plan. The following table details
the resulting employee stock purchase totals.
-59-
Purchase Period Proceeds Shares Purchased
- --------------- -------- ----------------
July 1 - December 31, 1997 $16,000 8,276
January 1 - June 30, 1998 17,000 10,732
July 1 - December 31, 1998 22,000 17,517
January 1 - June 30, 1999 28,000 21,818
July 1 - December 31, 1999 49,000 48,204
January 1 - June 30, 2000 54,000 53,493
July 1 - December 31, 2000 52,000 46,632
January 1 - June 30, 2001 48,000 43,324
July 1 - December 31, 2001 69,000 33,814
January 1 - June 30, 2002 94,000 42,917
July 1 - December 31, 2002 92,000 43,243
January 1 - June 30, 2003 91,000 57,620
July 1 - December 31, 2003 76,000 44,799
The shares for the purchase period ending December 31, 2003, were purchased in
February 2004.
At our Annual Meeting of Stockholders held on July 29, 2003, our stockholders
approved the adoption of the Perma-Fix Environmental Services, Inc. 2003
Employee Stock Purchase Plan. The terms and conditions of this 2003 plan
principally represent the same terms and conditions as the previous 1996 plan.
The plan provides our eligible employees an opportunity to become stockholders
and purchase our Common Stock through payroll deductions. The maximum number of
shares issuable under this plan is 1,500,000. The Plan authorized the purchase
of shares two times per year, at an exercise price per share of 85% of the
market price of our Common Stock on the offering date of the period or on the
exercise date of the period, whichever is lower. Currently, no shares have been
issued under this plan.
Employment Options
During October 1997, Dr. Centofanti entered into an Employment Agreement, which
expired in October 2000 and provided for, the issuance of Non-qualified Stock
Options ("Non-qualified Stock Options"). The Non-qualified Stock Options provide
Dr. Centofanti with the right to purchase an aggregate of 300,000 shares of
Common Stock as follows: (i) after one year 100,000 shares of Common Stock at a
price of $2.25 per share, (ii) after two years 100,000 shares of Common Stock at
a price of $2.50 per share, and (iii) after three years 100,000 shares of Common
Stock at a price of $3.00 per share. The Non-qualified Stock Options expire in
October 2007.
Stock Option Plans
On December 16, 1991, we adopted a Performance Equity Plan (the "Plan"), under
which 500,000 shares of our Common Stock is reserved for issuance, pursuant to
which officers, directors and key employees are eligible to receive incentive or
Non-qualified stock options. Incentive awards consist of stock options,
restricted stock awards, deferred stock awards, stock appreciation rights and
other stock-based awards. Incentive stock options granted under the Plan are
exercisable for a period of up to ten years from the date of grant at an
exercise price which is not less than the market price of the Common Stock on
the date of grant, except that the term of an incentive stock option granted
under the Plan to a stockholder owning more than 10% of the then-outstanding
shares of Common Stock may not exceed five years and the exercise price may not
be less than 110% of the market price of the Common Stock on the date of grant.
All grants of options under the Performance Equity Plan have been made at an
exercise price equal to the market price of the Common Stock at the date of
grant. On December 16, 2001, the Plan expired. No new options will be issued
under the Plan, but the options issued under the Plan prior to the expiration
date will remain in effect until their respective maturity dates.
-60-
Effective September 13, 1993, we adopted a Non-qualified Stock Option Plan
pursuant to which officers and key employees can receive long-term
performance-based equity interests in the Company. The maximum number of shares
of Common Stock as to which stock options may be granted in any year shall not
exceed twelve percent (12%) of the number of common shares outstanding on
December 31 of the preceding year, less the number of shares covered by the
outstanding stock options issued under our 1991 Performance Equity Plan as of
December 31 of such preceding year. The option grants under the plan are
exercisable for a period of up to ten years from the date of grant at an
exercise price, which is not less than the market price of the Common Stock at
date of grant. On September 13, 2003, the plan expired. No new options will be
issued under this plan, but the options issued under the Plan prior to the
expiration date will remain in effect until their respective maturity dates.
Effective December 12, 1993, we adopted the 1992 Outside Directors Stock Option
Plan, pursuant to which options to purchase an aggregate of 100,000 shares of
Common Stock had been authorized. This plan provides for the grant of options to
purchase up to 5,000 shares of Common Stock for each of our outside directors
upon initial election and each re-election. The plan also provides for the grant
of additional options to purchase up to 10,000 shares of Common Stock on the
foregoing terms to each outside director upon initial election to the Board. The
options have an exercise price equal to the closing trading price, or, if not
available, the fair market value of the Common Stock on the date of grant.
During our annual meeting held on December 12, 1994, the stockholders approved
the Second Amendment to our 1992 Outside Directors Stock Option Plan which,
among other things, (i) increased from 100,000 to 250,000 the number of shares
reserved for issuance under the plan, and (ii) provides for automatic issuance
to each of our directors, who is not our employee, a certain number of shares of
Common Stock in lieu of 65% of the cash payment of the fee payable to each
director for his services as director. The Third Amendment to the Outside
Directors Plan, as approved at the December 1996 Annual Meeting, provided that
each eligible director shall receive, at such eligible director's option, either
65% or 100% of the fee payable to such director for services rendered to us as a
member of the Board in Common Stock. In either case, the number of shares of our
Common Stock issuable to the eligible director shall be determined by valuing
our Common Stock at 75% of its fair market value as defined by the Outside
Directors Plan. The Fourth Amendment to the Outside Directors Plan, was approved
at the May 1998 Annual Meeting and increased the number of authorized shares
from 250,000 to 500,000 reserved for issuance under the plan.
Effective July 29, 2003, we adopted the 2003 Outside Directors Stock Plan, which
was approved by our stockholders at the Annual Meeting of Stockholders on such
date. A maximum of 1,000,000 shares of our Common Stock are authorized for
issuance under this plan. The plan provides for the grant of an option to
purchase up to 30,000 shares of Common Stock for each outside director upon
initial election to the board of directors, and the grant of an option to
purchase up to 12,000 shares of Common Stock upon each reelection. The options
have an exercise price equal to the closing trade price on the date prior to
grant date. The plan also provides for the issuance to each outside director a
number of shares of Common Stock in lieu of 65% or 100% of the fee payable to
the eligible director for services rendered as a member of the board of
directors. The number of shares issued is determined at 75% of the market value
as defined in the plan.
We applied APB Opinion 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for options issued to employees and
directors. Accordingly, no compensation cost has been recognized for options
granted to employees and directors at exercise prices, which equal or exceed the
market price of our Common Stock at the date of grant. Should options be granted
at exercise prices below market prices, compensation cost is measured and
recognized as the difference between market price and exercise price at the date
of grant.
-61-
A summary of the status of options under the plans as of December 31, 2003,
2002, and 2001 and changes during the years ending on those dates is presented
below:
2003 2002 2001
---------------------- ----------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- ---------- -------- ---------- --------
Performance Equity Plan:
Balance at beginning of year 87,100 $1.43 174,005 $2.14 251,149 $2.33
Exercised -- -- (78,837) 2.84 (10,000) 1.00
Forfeited (26,500) 2.04 (8,068) 3.02 (67,144) 2.99
---------- ----- ---------- ----- ---------- -----
Balance at end of year 60,600 1.17 87,100 1.43 174,005 2.14
========== ========== ==========
Options exercisable at year end 60,600 1.17 78,500 1.45 156,805 2.24
Non-qualified Stock Option Plan
Balance at beginning of year 2,068,900 $1.51 2,237,800 $1.50 1,319,800 $1.33
Granted 1,103,000 2.17 -- -- 918,000 1.75
Exercised (294,460) 1.19 (21,400) 1.31 -- --
Forfeited (320,050) 1.82 (147,500) 1.48 -- --
---------- ----- ---------- ----- ---------- -----
Balance at end of year 2,557,390 1.79 2,068,900 1.51 2,237,800 1.50
========== ========== ==========
Options exercisable at year end 985,140 1.51 1,085,500 1.42 788,900 1.37
Weighted average fair value of
options granted during the year
at exercise prices, which equal
market price of stock at date
of grant 1,103,000 .85 -- -- 918,000 .99
1992 Outside Directors Stock Option Plan:
Balance at beginning of year 250,000 $2.28 255,000 $2.34 225,000 $2.31
Granted 15,000 2.02 40,000 2.73 30,000 2.59
Forfeited -- -- (45,000) 3.02 -- --
---------- ----- ---------- ----- ---------- -----
Balance at end of year 265,000 2.27 250,000 2.28 255,000 2.34
========== ========== ==========
Options exercisable at year end 265,000 2.27 225,000 2.25 240,000 2.32
Weighted average fair value of
options granted during the year
at exercise prices which equal
market price of stock at date
of grant 15,000 .84 40,000 1.27 30,000 1.47
2003 Outside Directors Stock Plan:
Balance at beginning of year -- $ -- -- $ -- -- $ --
Granted 90,000 1.99 -- -- -- --
---------- ----- ---------- ----- ---------- -----
Balance at end of year 90,000 1.99 -- -- -- --
========== ========== ==========
Options exercisable at year end -- -- -- -- -- --
Weighted average fair value of
options granted during the year
at exercise prices which equal
market price of stock at date
of grant 90,000 .83 -- -- -- --
-62-
The following table summarizes information about options under the plans
outstanding at December 31, 2003:
Options Outstanding Options Exercisable
--------------------------------------- ----------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
At Remaining Average At Average
Dec. 31, Contractual Exercise Dec. 31, Exercise
Description and Range of Exercise Prices 2003 Life Price 2003 Price
----------- ----------- -------- ----------- --------
Performance Equity Plan:
1996 Awards ($1.00) 20,000 2.4 years $1.00 20,000 $1.00
1998 Awards ($1.25) 40,600 4.8 years 1.25 40,600 1.25
--------- -------
60,600 4.0 years 1.17 60,600 1.17
========= =======
Non-qualified Stock Option Plan
1994 Awards ($4.75) 300 0.2 years $4.75 300 $4.75
1995 Awards ($2.88) 75,000 1.0 years 2.88 75,000 2.88
1996 Awards ($1.00) 148,340 2.4 years 1.00 148,340 1.00
1997 Awards ($1.375) 131,500 3.3 years 1.38 131,500 1.38
1998 Awards ($1.25) 130,000 4.8 years 1.25 130,000 1.25
2000 Awards ($1.25-$1.50) 352,000 6.3 years 1.27 208,800 1.27
2001 Awards ($1.75) 734,000 7.3 years 1.75 291,200 1.75
2003 Awards ($2.05-$2.19) 986,250 9.2 years 2.17 -- --
--------- -------
2,557,390 7.1 years 1.79 985,140 1.51
========= =======
1992 Outside Directors Stock Option Plan:
1994 Awards ($3.00-$3.22) 45,000 0.8 years $3.04 45,000 $3.04
1995 Awards ($3.25) 20,000 1.0 years 3.25 20,000 3.25
1996 Awards ($1.75) 35,000 2.9 years 1.75 35,000 1.75
1997 Awards ($2.125) 15,000 3.9 years 2.13 15,000 2.13
1998 Awards ($1.375 15,000 4.4 years 1.38 15,000 1.38
1999 Awards ($1.2188-$1.25) 35,000 5.7 years 1.24 35,000 1.24
2000 Awards ($1.688) 15,000 7.0 years 1.69 15,000 1.69
2001 Awards ($2.43-$2.75) 30,000 7.6 years 2.59 30,000 2.59
2002 Awards ($2.58-$2.98) 40,000 8.6 years 2.73 40,000 2.73
2003 Awards ($2.02) 15,000 9.3 years 2.02 15,000 2.02
--------- -------
265,000 4.9 years 2.27 265,000 2.27
========= =======
2003 Outside Directors Stock Plan:
2003 Awards ($1.99) 90,000 9.6 years $1.99 -- $ --
Warrants
We have issued various Warrants pursuant to acquisitions, private placements,
debt and debt conversion and to facilitate certain financing arrangements. The
Warrants principally are for a term of three to five years and entitle the
holder to purchase one share of Common Stock for each warrant at the stated
exercise price.
We issued no warrants in 2003 and 2002. The Black-Scholes valuation of all
warrants issued during 2001 was approximately $3,784,000, using the following
weighted average assumptions: no dividend yield, an expected life ranging from
three to seven years, expected volatility ranging from 25.0% to 53.5% and a
risk-free interest rate of 4.25% to 4.99%. During 2003, a total of 1,555,870
Warrants were exercised for proceeds in the amount of $2,151,000 and 851,875
Warrants expired. During 2002, a total of 55,000 Warrants were exercised for
proceeds in the amount of $110,000 and 1,500 Warrants expired.
-63-
The following details the Warrants currently outstanding as of December 31,
2003:
Number of Exercise
Warrant Series Underlying Shares Price Expiration Date
- --------------------------------- ----------------- ------------- ---------------
Consulting Warrants 724,650 $1.44 - $2.35 6/04 - 6/06
PNC Financing Warrants 1,069,444 $1.44 12/05
Financing Warrants 315,000 $1.81 - $1.97 1/04 - 3/04
BHC Financing Warrants 1,062,865 $1.44 - $1.46 1/06 - 3/06
Debt for Equity Exchange Warrants 2,464,405 $1.75 7/06
Private Placement Warrants 4,505,566 $1.75 7/06
AMI and BEC Financing Warrants 1,511,877 $1.44 - $1.50 7/06 - 7/08
----------
11,653,807
==========
Shares Reserved
At December 31, 2003, we have reserved approximately 16.6 million shares of
Common Stock for future issuance under all of the above option and warrant
arrangements and the convertible Series 17 Preferred Stock. (See Note 5.)
- --------------------------------------------------------------------------------
NOTE 12
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
PFMI, which was purchased by us effective June 1, 1999, has been notified that
it is considered a potentially responsible party ("PRP") in three Superfund
sites, two of which had no relationship with PFMI according to PFMI records. As
to the third site, which PFMI has been unable to determine whether PFMI had any
relationship with this site, such relationship, if any, would appear to be de
minimus.
PFO, which was purchased by us in June, 1999, has been notified that it is a PRP
in two separate Superfund sites. At the Spectron Superfund site in Elkton,
Maryland, PFO has been notified by the EPA that the EPA is seeking reimbursement
from all PRPs at the site for the EPA's Phase II cost and to further investigate
the contamination at the facility. At this point, we believe that PFO may have
sent some waste to the site, but not a substantial amount. At this time, we are
unable to determine what exposure, if any, PFO may have in connection with this
site.
PFO has also been notified that it is a PRP at the Seaboard Chemical Corporation
Superfund Site in Jamestown, North Carolina. In October, 1991, PFO joined the
"Seaboard Group," a group of potentially responsible parties organized to clean
up the site while keeping costs at a minimum. Initially, PFO was identified as a
de minimus party under the Seaboard Group agreement which defined a de minimus
contributor as one acting as either a transporter or generator who was
responsible for less than 1% of the waste at the site. However, in June, 1992,
the Seaboard Group adopted an amendment to the Seaboard Group agreement which
allows a potentially responsible party who is a generator to participate in the
Seaboard Group without relinquishing contributions claims against its broker
and/or transporter. Based upon the amount of waste which PFO brokered to the
site, PFO's status may no longer considered
-64-
deminimus under the Seaboard Group agreement. PFO is unable to determine what
exposure, if any, it may have in connection with this site.
PFFL has been advised by the EPA that a release or threatened release of
hazardous substances has been documented by the EPA at the former facility of
Florida Petroleum Reprocessors (the "Site"), which is located approximately
3,000 feet northwest of the PFFL facility in Davie, Florida. However, studies
conducted by, or under the direction of, the EPA, together with data previously
provided to PFFL by the EPA, do not indicate that the PFFL facility in Davie,
Florida has contributed to the deep groundwater contamination associated with
the Site. As a result, we are unable to determine with any degree of certainty
what exposure, if any, PFFL may have as a result of the documented release from
the Site.
PFD is required to remediate a parcel of leased property ("Leased Property"),
which was formerly used as a Resource Conservation and Recovery Act of 1976
storage facility that was operated as a storage and solvent recycling facility
by a company that was merged with PFD prior to our acquisition of PFD. The
Leased Property contains certain contaminated waste in the soils and
groundwater. We were indemnified by Quadrex, the entity that sold us PFD, for
costs associated with remediating the Leased Property, which entails remediation
of soil and/or groundwater restoration. However, during 1995, Quadrex filed for
bankruptcy. Prior to our acquisition of PFD, Quadrex had established a trust
fund ("Remediation Trust Fund"), which it funded with Quadrex's stock to support
the remedial activity on the Leased Property pursuant to the agreement with the
Ohio Environmental Protection Agency ("Ohio EPA"). After we purchased PFD, we
were required to advance $250,000 into the Remediation Trust Fund due to the
reduction in the value of Quadrex's stock that comprised the Remediation Trust
Fund, which stock had been sold by the trustee prior to Quadrex's filing
bankruptcy. We have subsequently put an additional $200,000 into the Remediation
Trust Fund. PFD filed a lawsuit against the owners and former operators of the
Leased Property to remediate the Leased Property and/or to recover any cost
incurred by PFD in connection therewith. The lawsuit was filed in the United
States District Court, for the Southern District of Ohio, styled Perma-Fix of
Dayton, Inc. v. R.D. Baker Enterprises, Inc., case no. C-3-99-469. PFD and the
defendants finalized a settlement of the lawsuit in October 2003. The defendants
paid PFD $400,000 that PFD will use to remediate the Leased Property.
During January, 2004, the EPA issued to PFD a notice of Findings of Violation
alleging that PFD committed numerous violations of the Clean Air Act. The EPA
did not assert any penalties or fines but advised PFD that it had several
enforcement options including issuing administrative penalty order or bringing
judicial action against PFD. In its January 2004 notice, the EPA requested a
conference with PFD's technical and management personnel, which we have
scheduled.
Patrick Sullivan ("P. Sullivan"), the son of a former member of our Board of
Directors, Thomas P. Sullivan ("Mr. Sullivan"), was employed by one of our
subsidiaries, Perma-Fix of Orlando, Inc. ("PFO"), as an executive and/or general
manager from the date of our 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 us that provides, in part,
that P. Sullivan would not solicit customers, suppliers or employees of PFO or
ours for a period of two years after termination of his employment. We have been
advised that P. Sullivan violated the agreement and his duties to PFO and to us
prior to and after he terminated his employment with PFO. P. Sullivan reimbursed
us for certain personal expenses charged to, and paid by, us after we notified
P. Sullivan of the claims. In December 2002, we filed a lawsuit against P.
Sullivan in the circuit court of the Ninth Judicial Circuit in Orange County,
Florida, for injunction relief and damages related to the above. P. Sullivan has
denied the allegations. Mr. Sullivan has denied committing any breach of his
fiduciary duties to us in connection with these alleged actions by his son.
During the fourth quarter of 2003, we reached a settlement agreement in
principal with P. Sullivan, which among other things provided for a payment of
$30,000 from P. Sullivan to us.
-65-
On February 24, 2003, M&EC, commenced legal proceedings against Bechtel Jacobs
Company, LLC, in the chancery court for Knox County, Tennessee, seeking payment
from Bechtel Jacobs of approximately $4.3 million in surcharges relating to
certain wastes that were treated by M&EC during 2001 and 2002. M&EC is operating
primarily under three subcontracts with Bechtel Jacobs, which were awarded under
contracts between Bechtel Jacobs and the U.S. Department of Energy. M&EC and
Bechtel Jacobs have been discussing these surcharges under the subcontracts for
over a year. These surcharges have not yet been billed. In 2003, the revenues
generated by M&EC with Bechtel Jacobs represented approximately 15.5% of our
2003 total revenues. Since the filing of this lawsuit, Bechtel Jacobs has
continued to deliver waste to M&EC for treatment and disposal, and M&EC
continues to accept such waste, under the subcontracts, and M&EC and Bechtel
Jacobs have entered into an additional contract for M&EC to treat DOE waste.
Although we do not believe that this lawsuit will have a material adverse effect
on our operations, Bechtel Jacobs could terminate the subcontracts with M&EC, as
either party can terminate the subcontracts at any time.
Bryson Adams, et al. v. Environmental Purification Advancement Corporation, et
al.; Civil Action No. 99-1998, United States District Court, Western District of
Louisiana. In April, 2003, the plaintiffs, hundreds of individuals residing in
or around Bayou Sorrel, Louisiana, filed their Fifth Supplemental and Amending
Complaint naming, inter alia, PFMI and PFSG as defendants, both of which are
subsidiaries we acquired in 1999. The lawsuit, which has been pending since
1999, includes as defendants hundreds of entities (and their insurers) which
allegedly disposed of hazardous and toxic substances at a hazardous waste
disposal site and hazardous waste injection well in Bayou Sorrel, Louisiana,
both of which were permitted by the appropriate governmental authorities to
treat and dispose of hazardous and toxic waste. The plaintiffs allege that the
defendant entities, other than the insurers, including PFMI and PFSG, were
negligent in their selection of the sites for the treatment and/or disposal of
hazardous and toxic substances, that the plaintiffs have suffered physical
injuries, property damage and diminished property values as a result of the
escape or migration of contaminants from the sites, and that the defendants are
liable for the damages allegedly suffered by the plaintiffs. The plaintiffs seek
unspecified amounts of compensatory and exemplary damages, interest, costs and
attorney's fees. PFMI and PFSG will defend themselves vigorously in connection
with this matter. However, at this point, we are unable to determine with any
degree of certainty what exposure, if any, PFMI and/or PFSG may have in this
regard. Our insurance carrier is currently defending PFMI and PFSG in this
matter under a reservation of rights. The case is in settlement negotiations,
with the discussions being that the insurers and non-insurer defendants
contributing to any proposed settlement.
In addition to the above matters and in the normal course of conducting our
business, we are involved in various other litigation. We are not a party to any
litigation or governmental proceeding which our management believes could result
in any judgments or fines against us that would have a material adverse affect
on our financial position, liquidity or results of future operations.
Insurance
Our business exposes us to various risks, including claims for causing damage to
property or injuries to persons or claims alleging negligence or professional
errors or omissions in the performance of its services, which claims could be
substantial. We believe that our coverage is adequate to insure us against the
various types of risks encountered.
In June 2003, we entered into a 25-year finite risk insurance policy, which
provides financial assurance to the applicable states for our permitted
facilities in the event of unforeseen closure. Prior to obtaining or renewing
operating permits we are required to provide financial assurance that guarantees
to the states that in the event of closure our permitted facilities will be
closed in accordance with the regulations. The policy provides $35 million of
financial assurance coverage.
-66-
Construction in Progress
As of December 31, 2003, we have recorded $2,636,000 in current construction in
progress projects. It is estimated that we will incur an additional $1,675,000
to complete the current projects by the end of 2004.
Operating Leases
We lease certain facilities and equipment under operating leases. Future minimum
rental payments as of December 31, 2003, required under these leases are
$1,492,000 in 2004, $1,198,000 in 2005, $897,000 in 2006, $476,000 in 2007,
$70,000 in 2008 and $4,000 thereafter.
Net rent expense relating to our operating leases was $3,006,000, $3,109,000,
and $2,922,000 for 2003, 2002 and 2001, respectively.
- --------------------------------------------------------------------------------
NOTE 13
PROFIT SHARING PLAN
We adopted the Perma-Fix Environmental Services, Inc. 401(k) Plan (the "401(k)
Plan") in 1992, which is intended to comply under Section 401 of the Internal
Revenue Code and the provisions of the Employee Retirement Income Security Act
of 1974. All full-time employees who have attained the age of 18 are eligible to
participate in the 401(k) Plan. Participating employees may make annual pretax
contributions to their accounts up to 18% of their compensation, up to a maximum
amount as limited by law. We, at our discretion, may make matching contributions
based on the employee's elective contributions. Company contributions vest over
a period of five years. We currently match up to 25% of our employees'
contributions, not to exceed 3% of a participant's compensation. We contributed
$251,000, $253,000 and $241,000 in matching funds during 2003, 2002 and 2001,
respectively.
- --------------------------------------------------------------------------------
NOTE 14
OPERATING SEGMENTS
During 2003, we were engaged in three operating segments. Pursuant to FAS 131,
we define an operating segment as:
o A business activity from which we may earn revenue and incur expenses;
o Whose operating results are regularly reviewed by the president to make
decisions about resources to be allocated and assess its performance; and
o For which discrete financial information is available.
We therefore define our operating segments as each business line that we
operate. These segments however, exclude the Corporate headquarters, which does
not generate revenue. The accounting policies of the operating segments are the
same as in Note 2.
Our operating segments are defined as follows:
The Industrial Waste Management Services segment provides on-and-off site
treatment, storage, processing and disposal of hazardous and non-hazardous
industrial and commercial and wastewater through our six 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 Field Services
various waste management services to certain governmental agencies.
The Nuclear Waste Management Services segment provides treatment, storage,
processing and disposal services through our three facilities; Perma-Fix of
Florida, Inc., Diversified Scientific Services, Inc., and
-67-
the East Tennessee Materials and Energy Corporation ("M&EC"). The segment also
provides research, development, on and off-site waste remediation of nuclear
mixed and low-level radioactive waste 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 segments.
The table below shows certain financial information by business segment for
2003, 2002 and 2001.
Segment Reporting December 31, 2003
Industrial Nuclear
Waste Waste Segments Consolidated
Services Services Engineering Total Corporate(2) Total
---------- --------- ----------- -------- ------------ ------------
Revenue from external customers $ 44,251 $37,418(3) $ 3,223 $ 84,892 $ -- $ 84,892
Intercompany revenues 4,061 2,704 510 7,275 -- 7,275
Interest income 6 -- -- 6 2 8
Interest expense 733 1,915 (7) 2,641 200 2,841
Interest expense-financing
fees -- 3 -- 3 1,067 1,070
Depreciation and amortization 2,267 2,490 35 4,792 73 4,865
Segment profit (loss) (1,967) 4,674 222 2,929 -- 2,929
Segment assets(1) 41,576 58,422 2,189 102,187 7,458 109,645
Expenditures for segment assets 1,243 1,825 50 3,118 344 3,462
Segment Reporting December 31, 2002
Industrial Nuclear
Waste Waste Segments Consolidated
Services Services Engineering Total Corporate(2) Total
---------- --------- ----------- -------- ------------ ------------
Revenue from external customers $ 37,641 $42,260(3) $ 3,503 $ 83,404 $ -- $ 83,404
Intercompany revenues 5,447 4,053 164 9,664 -- 9,664
Interest income 15 -- -- 15 1 16
Interest expense 683 2,188 1 2,872 31 2,903
Interest expense-financing fees -- 8 -- 8 1,036 1,044
Depreciation and amortization 1,973 2,148 40 4,161 83 4,244
Segment profit (loss) (3,919) 5,625 338 2,044 -- 2,044
Segment assets (1) 40,171 59,035 2,189 101,395 4,430 105,825
Expenditures for segment assets 2,757 2,843 12 5,612 210 5,822
Segment Reporting December 31, 2001
Industrial Nuclear
Waste Waste Segments Consolidated
Services Services Engineering Total Corporate(2) Total
---------- --------- ----------- -------- ------------ ------------
Revenue from external customers $ 42,355 $28,932 $ 3,205 $ 74,492 $ -- $ 74,492
Intercompany revenues 3,799 5,093 245 9,137 -- 9,137
Interest income 21 -- -- 21 8 29
Interest expense 932 1,909 36 2,877 161 3,038
Interest expense-Warrants -- -- -- -- 234 234
Interest expense-financing fees 6 605 -- 611 2,121 2,732
Depreciation and amortization 2,659 1,787 90 4,536 80 4,616
Segment profit (loss) (150) 884 200 934 (1,681) (747)
Segment assets(1) 41,838 51,079 2,100 95,017 4,120 99,137
Expenditures for segment assets 1,757 2,817 14 4,588 10 4,598
-68-
(1) Segment assets have been adjusted for intercompany accounts to reflect
actual assets for each segment.
(2) Amounts reflect the activity for corporate headquarters, not included in
the segment information.
(3) The consolidated revenues within the Nuclear Waste Management Services
segment include the Bechtel Jacobs revenues for 2003 which total
$13,139,000 (or 15.5%) of total revenue and $9,664,000 (or 11.6%) for the
year ended 2002.
- --------------------------------------------------------------------------------
NOTE 15
QUARTERLY OPERATING RESULTS
Unaudited quarterly operating results are summarized as follows (in thousands,
except per share data):
Three Months Ended (unaudited)
-----------------------------------------------------------------
March 31 June 30 September 30 December 31
--------- --------- ------------ -----------
2003
Revenues $ 19,518 $ 19,909 $ 25,463 $ 20,002
Gross Profit 5,061 4,518 10,240 6,440
Net income (loss) applicable to Common Stock (431) (1,251) 4,025 586
Basic net income (loss) per common share (.01) (.04) .12 .02
Diluted net income (loss) per common share (.01) (.04) .11 .01
Stockholders' equity 44,832 43,598 48,327 50,442
Total assets 106,487 107,223 114,449 109,645
2002
Revenues $ 16,451 $ 22,485 $ 24,232 $ 20,236
Gross Profit 3,139 7,950 7,244 6,016
Net income (loss) applicable to Common Stock (2,030) 2,765 1,508 (199)
Basic net income (loss) per common share (.06) .08 .04 (.01)
Diluted net income (loss) per common share (.06) .06 .04 (.01)
Stockholders' equity 40,209 43,071 44,685 44,585
Total assets 99,829 100,764 104,916 105,825
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
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 our management. Based on their most recent evaluation, which was
completed as of the end of the period covered by this Annual Report on Form
10-K, our 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.
-69-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth, as of the date hereof, information concerning
the Directors and Executive Officers of the Company:
NAME AGE POSITION
- ---- --- --------
Dr. Louis F. Centofanti 60 Chairman of the Board, President and Chief
Executive
Mr. Jon Colin 48 Director
Mr. Jack Lahav 55 Director
Mr. Joe Reeder 56 Director
Mr. Alfred C. Warrington, IV 68 Director
Dr. Charles E. Young 71 Director
Mr. Mark A. Zwecker 53 Director
Mr. Richard Kelecy 48 Chief Financial Officer, Vice President,
and Secretary
Mr. Larry McNamara 54 President, Nuclear Services
Mr. William Carder 54 Vice President Sales & Marketing
Mr. Timothy Keegan 46 President, Industrial Services
Each director is elected to serve until the next annual meeting of stockholders.
We have a separately designated standing audit committee of our Board of
Directors. The members of the Audit Committee are: Alfred C. Warrington, IV, Jon
Colin and Mark A. Zwecker.
Our Board of Directors has determined that each of our audit committee members
is an "audit committee financial expert" as defined by Item 401(h) of Regulation
S-K of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
is independent within the meaning of Item 7(d)(3)(iv) Schedule 14A and Items
401(h)(1)(ii) of Regulation S-K of the Exchange Act.
DR. LOUIS F. CENTOFANTI
The information set forth under the caption "Executive Officers of the Company"
on page 14 is incorporated by reference.
MR. JON COLIN
Mr. Colin has served as a Director since December 1996. Mr. Colin is currently
Chief Executive Officer of Lifestar Response Corporation, a position he has held
since April 2002. Mr. Colin served as Chief Operating Officer of Lifestar
Response Corporation from October 2000 to April 2002, and a consultant for
Lifestar Response Corporation from September 1997 to October 2000. From 1990 to
1996, Mr. Colin served as President and Chief Executive Officer for
Environmental Services of America, Inc., a publicly traded environmental
services company. Mr. Colin has a B.S. in Accounting from the University of
Maryland.
MR. JACK LAHAV
Jack Lahav has served as a Director since September 2001. Mr. Lahav is a private
investor, specializing in launching and growing businesses. Previously, Mr.
Lahav founded Remarkable Products Inc. and served as its president from 1980 to
1993; Mr. Lahav was also co-founder of Lamar Signal Processing, Inc.; president
of Advanced Technologies, Inc., a robotics company and director of Vocaltech
Communications, Inc.
-70-
MR. JOE R. REEDER
Mr. Reeder was appointed to the Board of Directors on April 30, 2003, to fill a
vacancy on the Board. Mr. Reeder serves as Shareholder in Charge of the
Mid-Atlantic Region for Greenberg Traurig LLP, an international law firm with 18
offices and 950 attorneys. Mr. Reeder also served as Litigation Chair of Patton
Boggs LLP. His clientele has included countries, international corporations, and
law firms throughout the United States. Mr. Reeder served for three years as
Chairman of the Panama Canal Commission's Board of Directors where he oversaw a
multibillion-dollar infrastructure program. He is a trustee of the Association
of the United States Army and a frequent television commentator on military
issues. Mr. Reeder has a L.L.M. from Georgetown University, J.D. from the
University of Texas and a B.S. from the U.S. Military Academy at West Point.
MR. ALFRED C. WARRINGTON, IV
Mr. Warrington has served as a Director since March 2002. Mr. Warrington was the
founding chairman, co-chief executive officer and chief financial officer of
Sanifill, Inc., a solid waste company that was merged with Waste Management,
Inc. and he currently serves as vice-chairman of HC Industries, Inc., a
manufacturer of health and beauty aids. He has also been very active in
community affairs and higher education. Mr. Warrington served as co-chairman of
the MARTA referendum that brought rapid transit to the city of Atlanta and has
been a strong supporter of the University of Florida, where he was instrumental
in starting the School of Accounting. In recognition of his efforts, the
University of Florida has renamed the College of Business as the Warrington
College of Business. Most recently, Mr. Warrington was appointed to the newly
formed University of Florida Board of Trustees by Governor Jeb Bush. Prior to
joining Sanifill, Mr. Warrington was a practicing CPA and a partner with Arthur
Andersen & Co. Mr. Warrington holds a B.S.B.A. from the University of Florida.
DR. CHARLES E. YOUNG
Dr. Charles E. Young was elected to the Board of Directors on July 29, 2003, to
fill a new directorship position on the Board. Dr. Young was president of the
University of Florida, a position he held from November 1999 to December 2003.
Dr. Young also served as chancellor of the University of California at Los
Angeles (UCLA) for 29 years until his retirement in November 1997. Dr. Young was
formerly the chairman of the Association of American Universities and served on
numerous commissions including the American Council on Education, the National
Association of State Universities and Land-Grant Colleges, and the
Business-Higher Education Forum. Dr. Young serves on the boards of directors of
Intel Corp., Nicholas-Applegate Growth Equity Fund, Inc., I-MARK, Inc.,
Fiberspace, Inc., and Student Advantage, Inc. Dr. Young has a Ph.D. and M.A. in
political science from UCLA and a B.A. from the University of California at
Riverside.
MR. MARK A. ZWECKER
Mark Zwecker has served as a Director since the Company's inception in January
1991. Mr. Zwecker is currently chief financial officer of Intrusec Inc., a
position he has held since September 2003, and president of ACI Technology, LLC,
a position he has held since 1997. Mr. Zwecker was vice president of finance and
administration for American Combustion, Inc., a position he held from 1986 until
1998. In 1983, Mr. Zwecker participated as a founder with Dr. Centofanti in the
start up of PPM, Inc. He remained with PPM, Inc. until its acquisition in 1985
by USPCI. Mr. Zwecker has a B.S. in Industrial and Systems Engineering from the
Georgia Institute of Technology and an M.B.A. from Harvard University.
MR. RICHARD T. KELECY
The information set forth under the caption "Executive Officers of the Company"
on page 15 is incorporated by reference.
-71-
MR. LARRY MCNAMARA
The information set forth under the caption "Executive Officers of the Company"
on page 15 is incorporated by reference.
MR. WILLIAM CARDER
The information set forth under the caption "Executive Officers of the Company"
on page 15 is incorporated by reference.
MR. TIMOTHY KEEGAN
The information set forth under the caption "Executive Officers of the Company"
on page 15 is incorporated by reference.
Certain Relationships
There are no family relationships between any of our existing Directors or
executive officers. Dr. Centofanti is the only Director who is our employee.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the regulations promulgated thereunder require our executive officers
and directors and beneficial owners of more than ten percent (10%) of any of our
equity security registered pursuant to Section 12 of the Exchange Act to file
reports of ownership and changes of ownership of our equity securities with the
Securities and Exchange Commission, and to furnish us with copies of all such
reports. Based solely on a review of the copies of such reports furnished to us
and information provided to us, we believe that during 2003 none of our
executive officers and directors failed to timely file reports under Section
16(a).
Capital Bank-Grawe Gruppe AG ("Capital Bank") has advised us that it is a
banking institution regulated by the banking regulations of Austria, which holds
shares of our Common Stock as agent on behalf of numerous investors. Capital
Bank has represented that all of its investors are accredited investors under
Rule 501 of Regulation D promulgated under the Act. In addition, Capital Bank
has advised us that none of its investors beneficially own more than 4.9% of our
Common Stock. Capital Bank has further informed us that its clients (and not
Capital Bank) maintain full voting and dispositive power over such shares.
Consequently, Capital Bank has advised us that it believes it is not the
beneficial owner, as such term is defined in Rule 13d-3 of the Exchange Act, of
the shares of our Common Stock registered in the name of Capital Bank because it
has neither voting nor investment power, as such terms are defined in Rule
13d-3, over such shares. Capital Bank has informed us that it does not believe
that it is required (a) to file, and has not filed, reports under Section 16(a)
or (b) to file either Schedule 13D or Schedule 13G in connection with the shares
of our Common Stock registered in the name of Capital Bank.
If the representations, or information provided, by Capital Bank are incorrect
or Capital Bank was historically acting on behalf of its investors as a group,
rather than on behalf of each investor independent of other investors, then
Capital Bank and/or the investor group would have become a beneficial owner of
more than 10% of our Common Stock on February 9, 1996, as a result of the
acquisition of 1,100 shares of Series 1 Preferred Stock that were convertible
into a maximum of 1,282,798 shares of our Common Stock commencing 45 days after
issuance of the Series 1 Preferred. If either Capital Bank or a group of Capital
Bank's investors became a beneficial owner of more than 10% of our Common Stock
on February 9, 1996, and thereby required to file reports under Section 16(a) of
the Exchange Act, then Capital Bank also failed to file a Form 3 or any Forms 4
or 5 for period from February 9, 1996, until the present.
-72-
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the aggregate cash compensation paid to our
Chairman and Chief Executive Officer, Chief Financial Officer, President of
Nuclear Services, Vice President of Sales and Marketing, and President of
Industrial Services.
Long-Term
Annual Compensation Compensation
------------------------------ -----------------------------
Other All
Annual Restricted Securities Other
Compen- Stock Underlying Compen-
Salary Bonus Sation Award(s) Options/SARs Sation
Name and Principal Position Year ($) ($) ($) ($) (#) ($)(1)
- --------------------------- ------ ------ ----- ------- ---------- ------------- -------
Dr. Louis F. Centofanti
Chairman of the Board, 2003 183,069 40,000 -- -- 100,000 11,503
President and Chief 2002 149,500 -- -- -- -- 11,214
Executive Officer 2001 138,667 40,000 -- -- 100,000 11,310
Richard T. Kelecy 2003 168,885 30,000 -- -- 75,000 10,950
Vice President and Chief 2002 138,958 -- -- -- -- 10,725
Financial Officer 2001 128,333 30,000 -- -- 70,000 10,800
Larry McNamara 2003 167,231 30,000 -- -- 100,000 11,457
President of Nuclear Services 2002 137,042 -- -- -- -- 10,826
2001 127,667 30,000 -- -- 120,000 10,708
William Carder 2003 141,346 -- -- -- 50,000 10,475
Vice President - Sales &
Marketing
Timothy Keegan 2003 104,615 -- -- -- 100,000 6,375
President of Industrial
Services
(1) Each noted executive is provided a monthly automobile allowance in the
amount of $750. Also included, where applicable, is our 401(k) matching
contribution.
-73-
Option Grants in 2003
The following table sets forth certain information relating to individual grants
of stock options made to each of the named executive officers in the above
Summary Compensation Table during the last fiscal year and the potential
realizable value of each grant of options, assuming that the market price of the
underlying Common Stock appreciates in value during the ten-year option term at
annualized rates of 5% and 10%.
Individual Grants Potential Realizable
--------------------------------------------------------- Value at Assumed
Number of % of Annual
Shares of Total Rates of Stock Price
Common Stock Options) Appreciation
Underlying Granted to Exercise for Option Term(3)
Options Employees Price Expiration ----------------------
Name Granted(1) in 2003 ($/sh)(2) Date 5%($) 10%($)
- ---- ------------ ---------- --------- ---------- ------- --------
Dr. Louis F. Centofanti 100,000 9.1% $ 2.19 02/27/13 137,728 $349,030
Richard T. Kelecy 75,000 6.8 2.19 02/27/13 103,296 261,772
Larry McNamara 100,000 9.1 2.19 02/27/13 137,728 349,030
William Carder 50,000 4.5 2.19 02/27/13 68,864 174,515
Timothy Keegan 100,000 9.1 2.05 07/30/13 128,923 326,717
(1) Options to purchase shares of our Common Stock granted under our 1993
Non-qualified Stock Option Plan (the "1993 Plan"). The 1993 Plan provides
that the options granted vest at the end of years one through five in 20%
increments.
(2) All options were granted at or above market price (the closing price of
the Common Stock on the NASDAQ Small Cap Market on the date of grant).
(3) The potential realizable value of each grant of options assumes that the
market price of our Common Stock appreciates in value from the date of
grant to the end of the option term at the annualized rates shown above
each column. The actual value that an executive may realize, if any, will
depend on the amount by which the market price of our Common Stock at the
time of exercise exceeds the exercise price of the option. As of December
31, 2003, the closing price of a share of our Common Stock as quoted on
NASDAQ was $3.11. There is no assurance that any executive will receive
the amounts estimated in this table.
Aggregated Option Exercised in 2003 and Fiscal Year-end Option Values
The following table sets forth information concerning each exercise of stock
options during 2003, by each of the executive officers named in the Summary
Compensation Table and the fiscal year-end value of unexercised options:
Number of Unexercised Value of Unexercised
Shares Options at Fiscal Year End In-the-Money Options
Acquired on Value (#) At Fiscal Year End ($)(2)
Exercise Realized --------------------------- ---------------------------
Name (#)(1) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Dr. Louis F. Centofanti -- -- 405,000 190,000 300,700 229,400
Richard Kelecy -- -- 218,000 137,000 352,580 163,320
Larry McNamara -- -- 78,000 192,000 121,080 227,120
William Carder -- -- -- 50,000 -- 46,000
Timothy Keegan -- -- -- 100,000 -- 106,000
(1) No options were exercised during 2003.
-74-
(2) Represents the difference between $3.11 (the closing price of our Common
Stock reported on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") Small Cap Market on December 31, 2003), and the
option exercise price. The actual value realized by a named executive
officer on the exercise of these options depends on the market value of
our Common Stock on the date of exercise.
401(k) Plan
We adopted the Perma-Fix Environmental Services, Inc. 401(k) Plan (the "401(k)
Plan") in 1992, which is intended to comply with Section 401 of the Internal
Revenue Code and the provisions of the Employee Retirement Income Security Act
of 1974. All employees who have attained the age of 18 are eligible to
participate in the 401(k) Plan. Participating employees may make annual pretax
contributions to their accounts up to 18% of their compensation, up to a maximum
amount as limited by law. We, at our discretion, may make matching contributions
based on the employee's elective contributions. Company contributions vest over
a period of five years. We currently match up to 25% of our employee's
contributions, not to exceed 3% of a participant's compensation. We contributed
$251,000 in matching funds during 2003.
Employee Stock Purchase Plan
The Perma-Fix Environmental Services, Inc. 1996 Employee Stock Purchase Plan
provides our eligible employees an opportunity to purchase our Common Stock
through payroll deductions. The maximum number of shares of our Common Stock
that may be issued under the plan is 500,000 shares. The plan provides that
shares may be purchased two times per year and that the exercise price per share
shall be 85% of the market value of each such share of Common Stock on the
offering date on which such offer commences or on the exercise date on which the
offer period expires, whichever is lowest. The first purchase period commenced
July 1, 1997. We currently have a remaining 27,611 shares of our Common Stock
available to use under the plan. The following table details the resulting
employee stock purchase totals.
Purchase Period Proceeds Shares Purchased
- --------------- -------- ----------------
July 1 - December 31, 1997 $16,000 8,276
January 1 - June 30, 1998 17,000 10,732
July 1 - December 31, 1998 22,000 17,517
January 1 - June 30, 1999 28,000 21,818
July 1 - December 31, 1999 49,000 48,204
January 1 - June 30, 2000 54,000 53,493
July 1 - December 31, 2000 52,000 46,632
January 1 - June 30, 2001 48,000 43,324
July 1 - December 31, 2001 69,000 33,814
January 1 - June 30, 2002 94,000 42,917
July 1 - December 31, 2002 92,000 43,243
January 1 - June 30, 2003 91,000 57,620
July 1 - December 31, 2003 76,000 44,799
The shares for the purchase period ending December 31, 2003, were purchased in
February 2004.
At our Annual Meeting of Stockholders held on July 29, 2003, our stockholders
approved the adoption of the Perma-Fix Environmental Services, Inc. 2003
Employee Stock Purchase Plan. The plan provides our eligible employees an
opportunity to purchase our Common Stock through payroll deductions. The maximum
number of shares issuable under the plan is 1,500,000. The Plan authorized the
purchase of shares two times per year, at an exercise price per share of 85% of
the market price of our Common Stock on the offering date of the period or on
the exercise date of the period, whichever is lower. Currently, no shares have
been issued under this plan.
-75-
Compensation of Directors
In 2003, we paid our outside directors fees of $1,500 for each month of service,
resulting in the six outside directors earning annual director's fees in the
total amount of $92,000. Each Director elects to receive either 65% or 100% of
the director's fee in shares of our Common Stock based on 75% of the fair market
value of the Common Stock determined on the business day immediately preceding
the date that the fee is due. The balance of each director fee, if any, is
payable in cash. The aggregate amount of accrued director's fees at December 31,
2003, to be paid during 2004 to the six outside directors (Messrs. Colin, Lahav,
Reeder, Warrington, Young and Zwecker) was $110,000. Reimbursement of expenses
for attending meetings of the Board are paid in cash at the time of the
applicable Board meeting. The outside directors do not receive additional
compensation for committee participation or special assignments except for
reimbursement of expenses. We do not compensate the directors that also serve as
our officers or employees of our subsidiaries for their service as directors.
Although Dr. Centofanti is not compensated for his services provided as a
director, Dr. Centofanti is compensated for his services rendered as an officer
of the Company. See "EXECUTIVE COMPENSATION -- Summary Compensation Table."
We believe that it is important for our directors to have a personal interest in
our success and growth and for their interests to be aligned with those of our
stockholders. Therefore, under our 1992 Outside Directors Stock Option and
Incentive Plan ("1992 Directors Plan"), each outside director was granted an
option to purchase up to 15,000 shares of Common Stock on the date such director
was initially elected to the Board of Directors and received on each reelection
date an option to purchase up to another 5,000 shares of Common Stock, with the
exercise price being the fair market value of the Common Stock on the date that
the option is granted. No option granted under the 1992 Directors Plan is
exercisable until after the expiration of six months from the date the option is
granted and no option shall be exercisable after the expiration of ten years
from the date the option is granted. At our annual meeting of stockholders, in
July 2003, our stockholders approved the 2003 Outside Directors Stock Plan
("2003 Directors Plan"). The 2003 Directors Plan is substantially the same as
the 1992 Directors Plan, with the exception that each outside director is
granted an option to purchase 30,000 shares of Common Stock when initially
elected, and granted an option to purchase 12,000 shares of Common Stock on each
reelection date. As of December 31, 2003, options to purchase 265,000 shares of
Common Stock had been granted under the 1992 Directors Plan and options to
purchase 90,000 shares of Common Stock were granted under the 2003 Directors
Plan.
As of the date of this report, we have issued 226,550 shares of our Common Stock
in payment of director fees under the 1992 Directors Plan, covering the period
January 1, 1995 through December 31, 2003. No new shares may be issued under the
1992 Directors Plan, except for the exercise of options already granted.
Our 1991 Performance Equity Plan and the 1993 Non-qualified Stock Option Plan,
(collectively, the "Plans") provide that in the event of a change in control (as
defined in the Plans) of the Company, each outstanding option and award granted
under the Plans shall immediately become exercisable in full notwithstanding the
vesting or exercise provisions contained in the stock option agreement. As a
result, all outstanding stock options and awards granted under the Plans to our
executive officers shall immediately become exercisable upon such a change in
control of the Company.
Compensation Committee Interlocks and Insider Participation
During the period January to December 2003, the Compensation and Stock Option
Committee for our Board of Directors was composed of Mark Zwecker and Jack
Lahav.
-76-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The table below sets forth information as to the shares of voting securities
beneficially owned as of March 4, 2004, by each person known by us to be the
beneficial owners of more than 5% of any class of our voting securities.
Amount and Percent
Title Nature of Of
Name of Beneficial Owner Of Class Ownership Class(1)
- ------------------------------- ----------- ------------ -----------
Kern Capital Management, LLC(2) Common 2,675,100 7.3%
(1) In computing the number of shares and the percentage of outstanding Common
Stock "beneficially owned" by a person, the calculations are based upon
36,689,937 shares of Common Stock issued and outstanding on March 4, 2004
(excluding 988,000 Treasury Shares), plus the number of shares of Common
Stock which such person has the right to acquire beneficial ownership of
within 60 days. Beneficial ownership by our stockholders has been
determined in accordance with the rules promulgated under Section 13(d) of
the Exchange Act.
(2) This beneficial ownership amount is according to the Schedule 13G, filed
with the Securities and Exchange Commission, dated February 13, 2004,
which provides that Kern Capital Management, L.L.C. ("KCM") has sole
voting and despositive power over all of these shares, but that Robert E.
Kern, Jr. and David G. Kern, as controlling members of KCM may be deemed
the beneficial owners of the securities owned by KCM as of December 31,
2003, in that they might be deemed to share the power to direct the voting
or disposition of the securities. The address of Kern Capital Management
is: 114 West 47th Street, Suite 1926, New York, NY 10036.
Capital Bank represented to us that:
o Capital Bank owns shares of our Common Stock and rights to acquire shares
of our Common Stock only as agent for certain of Capital Bank's investors;
o None of Capital Bank's investors beneficially own more than 4.9% of our
Common Stock;
o Capital Bank's investors maintain full voting and dispositive power over
the Common Stock beneficially owned by such investors; and
o Capital Bank has neither voting nor investment power over the shares of
Common Stock owned by Capital Bank, as agent for its investors.
Notwithstanding the previous paragraph, if Capital Bank's representations to us
described above are incorrect or if Capital Bank's investors are acting as a
group, then Capital Bank or a group of Capital Bank's investors could be a
beneficial owner of more than 5% of our voting securities. The following table
sets forth information as to the shares of voting securities owned of record by
Capital Bank on March 4, 2004.
Amount and Percent
Name of Title Nature of Of
Record Owner Of Class Ownership Class(1)
- ----------------------------- ---------- ----------------- -----------
Capital Bank Grawe Gruppe(2) Common 11,768,818 (2) 28.6%
(1) This calculation is based upon 36,689,937 shares of Common Stock issued
and outstanding on March 4, 2004 (excluding 988,000 Treasury Shares), plus
the number of shares of Common Stock which Capital Bank, as agent for
certain accredited investors has the right to acquire within 60 days.
-77-
(2) This amount includes 7,329,013 shares that Capital Bank owns of record, as
agent for certain accredited investors and 2,773,138 shares that Capital
Bank has the right to acquire, as agent for certain investors, within 60
days under certain Warrants. The Warrants are exercisable at exercise
prices ranging from $1.75 to $1.81 per share of Common Stock. This amount
also includes 1,666,667 shares of Common Stock issuable upon the
conversion of 2,500 shares of Series 17 Preferred held by Capital Bank.
This amount does not include the shares of Common Stock, which may be
issuable for payment of dividends on the Series 17 Preferred. Capital Bank
has also advised us that it is holding these Warrants and shares on behalf
of numerous clients, all of which are accredited investors. Although
Capital Bank is the record holder of the shares of Common Stock and
Warrants described in this note, Capital Bank has advised us that it does
not believe it is a beneficial owner of the Common Stock or that it is
required to file reports under Section 16(a) or Section 13(d) of the
Exchange Act. Because Capital Bank (a) has advised us that it holds the
Common Stock as a nominee only and that it does not exercise voting or
investment power over the Common Stock held in its name and that no one
investor of Capital Bank for which it holds our Common Stock holds more
than 4.9% of our issued and outstanding Common Stock; (b) has no right to,
and is not believed to possess the power to, exercise control over our
management or its policies; (c) has not nominated, and has not sought to
nominate, a director to our board; and (d) has no representative serving
as an executive officer of the Company, we do not believe that Capital
Bank is our affiliate. Capital Bank's address is Burgring 16, 8010 Graz,
Austria. Capital Bank has advised us that it is a banking institution.
Security Ownership of Management
The following table sets forth information as to the shares of voting securities
beneficially owned as of March 4, 2004, by each of our Directors and executive
officers named in the Summary Compensation Table and by all of our Directors and
executive officers as a group. Beneficial ownership by our stockholders has been
determined in accordance with the rules promulgated under Section 13(d) of the
Exchange Act. A person is deemed to be a beneficial owner of any voting
securities for which that person has the right to acquire beneficial ownership
within 60 days.
Number of Shares
Of Common Stock Percentage of
Name of Beneficial Owner Beneficially Owned Common Stock (1)
- --------------------------------- ------------------ ----------------
Dr. Louis F. Centofanti(2)(3) 1,297,934(3) 3.49%
Jon Colin(2)(4) 79,339(4) *
Jack Lahav(2)(5) 1,183,876(5) 3.17%
Joe Reeder(2)(6) 27,000(6) *
Alfred C. Warrington, IV(2)(7) 172,725(7) *
Dr. Charles E. Young(2)(8) 30,000(8) *
Mark A. Zwecker(2)(9) 270,853(9) *
Richard T. Kelecy(2)(10) 278,950(10) *
Larry McNamara(2)(11) 132,000(11) *
Bill Carder(2)(12) 15,000(12) *
Timothy Keegan(2)(13) --(13) *
Directors and Executive Officers
as a Group (11 persons) 3,487,677 9.09%
* Indicates beneficial ownership of less than one percent (1%).
(1) See footnote (1) of the table under "Security Ownership of Certain
Beneficial Owners."
(2) The business address of such person, for the purposes hereof, is c/o
Perma-Fix Environmental Services, Inc., 1940 N.W. 67th Place, Gainesville,
Florida 32653.
(3) These shares include (i) 533,934 shares held of record by Dr. Centofanti;
(ii) options to purchase 160,000 shares granted pursuant to the 1991
Performance Equity Plan and the 1993 Non-qualified Stock
-78-
Option Plan, which are immediately exercisable; (iii) options to purchase
300,000 shares granted pursuant to Dr. Centofanti's employment agreement
that expired in 2000, which are immediately exercisable; and (iv) 304,000
shares held by Dr. Centofanti's wife. This amount does not include options
to purchase 135,000 shares granted pursuant to the 1993 Non-qualified
Stock Option Plan, which are not exercisable within 60 days. Dr.
Centofanti has sole voting and investment power of these shares, except
for the shares held by Dr. Centofanti's wife, over which Dr. Centofanti
shares voting and investment power.
(4) Mr. Colin has sole voting and investment power over these shares which
include: (i) 22,339 shares held of record by Mr. Colin, and (ii) options
to purchase 57,000 shares granted pursuant to the 1992 Outside Directors
Stock Option and Incentive Plan and the 2003 Outside Directors Stock Plan,
which are immediately exercisable.
(5) Mr. Lahav has sole voting and investment power over these shares which
include: (i) 580,447 shares of Common Stock held of record by Mr. Lahav;
(ii) 32,000 options to purchase Common Stock pursuant to the 1992 Outside
Directors Stock Option and Incentive Plan and the 2003 Outside Directors
Stock Plan which are immediately exercisable; and (iii) 571,429 Warrants
to purchase Common Stock purchased pursuant to a private offering we held
in 2001, which are exercisable immediately.
(6) Mr. Reeder has sole voting and investment power over options to purchase
27,000 shares granted pursuant to the 1992 Outside Directors Stock Option
and Incentive Plan and the 2003 Outside Directors Stock Plan, which are
immediately exercisable.
(7) Mr. Warrington has sole voting and investment power over these shares
which include: (i) 125,725 shares of Common Stock held of record by Mr.
Warrington; (ii) 37,000 options to purchase Common Stock pursuant to the
1992 Outside Directors Stock Option and Incentive Plan and the 2003
Outside Directors Stock Plan which are immediately exercisable, and (iii)
10,000 options to purchase Common Stock granted pursuant to the 1993
Non-qualified Stock Option Plan.
(8) Dr. Young has sold voting and investment power over an option to purchase
30,000 shares granted pursuant to the 2003 Outside Directors Stock Plan,
which is immediately exercisable.
(9) Mr. Zwecker has sole voting and investment power over these shares which
include: (i) 208,853 shares of Common Stock held of record by Mr. Zwecker;
(ii) 5,000 options to purchase Common Stock pursuant to the 1993
Non-qualified Stock Option Plan, which are immediately exercisable; and
(iii) options to purchase 57,000 shares granted pursuant to the 1992
Outside Directors Stock Option and Incentive Plan and the 2003 Outside
Directors Stock Plan which are immediately exercisable.
(10) Mr. Kelecy has sole voting and investment power over 21,950 shares of
Common Stock held of record by Mr. Kelecy and 257,000 options to purchase
Common Stock granted pursuant to the 1993 Non-qualified Stock Option Plan.
This amount does not include options to purchase 98,000 shares of Common
Stock granted pursuant to the 1993 Non-qualified Stock Option Plan, which
are not exercisable within 60 days.
(11) Mr. McNamara has sole voting and investment power over these shares which
include: (i) 132,000 options to purchase Common Stock pursuant to the 1993
Non-qualified Stock Option Plan which are exercisable within 60 days. This
amount does not include options to purchase 138,000 shares pursuant to the
1993 Non-qualified Stock Option Plan which are not exercisable within 60
days.
(12) Mr. Carder has sole voting and investment power over 5,000 shares of
Common Stock held of record by Mr. Carder and 10,000 options to purchase
Common Stock granted pursuant to the 1993 Non-qualified Stock Option Plan
which are exercisable within 60 days. This amount does not include options
to purchase 40,000 shares of Common Stock granted pursuant to the 1993
Non-qualified Stock Option Plan, which are not exercisable within 60 days.
-79-
(13) Not included are options to purchase 100,000 shares of Common Stock
granted pursuant to the 1993 Non-qualified Stock Option Plan, which are
not exercisable within 60 days.
Equity Compensation Plans
The following table sets forth information as of December 31, 2003, with respect
to our equity compensation plans.
Equity Compensation Plan
-----------------------------------------------------------------------------
Number of securities
remaining available for
Weighted average future issuance under
Number of securities to exercise price of equity compensation
be issued upon exercise outstanding plans (excluding
of outstanding options options, warrants securities reflected in
Plan Category warrants and rights and rights column (a)
- ----------------------------------- --------------------------- --------------------- -------------------------
(a) (b) (c)
Equity compensation plans
Approved by stockholders 2,972,990 $1.83 845,621
Equity compensation plans not
Approved by stockholders (1) 300,000 2.58 --
--------- ----- -------
Total 3,292,990 $1.90 845,621
(1) These shares are issuable pursuant to options granted to Dr. Centofanti
under his 1997 employment agreement, which terminated in 2000. The options
expire in October 2007.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Capital Bank Grawe Gruppe
As of March 4, 2004, Capital Bank owned of record, as agent for certain
accredited investors, 7,329,013 shares of Common Stock representing 20.0% of our
issued and outstanding Common Stock. As of March 4, 2004, Capital Bank also had
the right to acquire an additional 4,439,805 shares of Common Stock, comprised
of (a) 2,773,138 shares of Common Stock issuable under various warrants held by
Capital Bank, as agent for certain investors; and (b) 1,666,667 shares of Common
Stock issuable to Capital Bank upon the conversion of 2,500 shares of Series 17
Preferred held by Capital Bank, as agent for certain investors. During 2003,
Capital Bank exercised Warrants to purchase 744,375 shares of our Common Stock.
The 2,500 shares of Series 17 Preferred may be converted into shares of Common
Stock at any time at a conversion price of $1.50 per share, subject to
adjustment as set forth in the Certificate of Designations relating to the
Series 17 Preferred. The Series 17 Preferred has a "stated value" of $1,000 per
share. We may, at our sole option, redeem, in whole or in part, at any time, and
from time to time the then outstanding Series 17 Preferred at the cash
redemption prices of $1,200 per share. Upon any notice of redemption, Capital
Bank shall have only five business days to exercise its conversion rights
regarding the redeemed shares.
The Series 17 Preferred accrues dividends on a cumulative basis at a rate of
five percent (5%) per annum which dividends are payable semiannually when and as
declared by the Board of Directors. During 2002, accrued dividends on the Series
17 Preferred of approximately $125,000 were paid in the form of 47,271 shares of
our Common Stock, of which 25,165 were issued in January 2003. During 2003,
accrued
-80-
dividends on the Series 17 Preferred of approximately $125,000 were paid in the
form of 53,478 shares of our Common Stock, of which 19,643 were issued in
February 2004.
If Capital Bank were to acquire all of the shares of Common Stock issuable upon
exercise of the various warrants held by Capital Bank and the shares of Common
Stock issuable upon conversion of the Series 17 Preferred, then Capital Bank
would own of record 11,768,818 shares of Common Stock, representing 28.6% of the
issued and outstanding Common Stock. The foregoing estimates assume that we do
not issue any other shares of Common Stock; no other warrants or options are
exercised; we do not acquire additional shares of Common Stock as treasury
stock; and Capital Bank does not dispose of any shares of Common Stock.
Capital Bank has advised us that it is a banking institution regulated by the
banking regulations of Austria, which holds shares of our Common Stock on behalf
of numerous investors. Capital Bank asserts that it is precluded by Austrian law
from disclosing the identities of its investors, unless so approved by each such
investor. Certain of its investors gave Capital Bank permission to disclose
their identities in order to be included as Selling Stockholders in our Form S-3
Registration Statement, effective November 22, 2002. Capital Bank has
represented that all of its investors are accredited investors under Rule 501 of
Regulation D promulgated under the Act. In addition, Capital Bank has advised us
that none of its investors beneficially own more than 4.9% of our Common Stock.
Capital Bank has further informed us that its clients (and not Capital Bank)
maintain full voting and dispositive power over such shares. Consequently,
Capital Bank has advised us that it believes it is not the beneficial owner, as
such term is defined in Rule 13d-3, of the shares of our Common Stock registered
in the name of Capital Bank because it has neither voting nor investment power,
as such terms are defined in Rule 13d-3, over such shares. Capital Bank has
informed us that it does not believe that it is required to file, and has not
filed, reports under Section 16(a) or to file either Schedule 13D or Schedule
13G in connection with the shares of our Common Stock registered in the name of
Capital Bank.
If the representations or information provided, by Capital Bank are incorrect or
if Capital Bank was historically acting on behalf of its investors as a group,
rather than on behalf of each investor independent of other investors, Capital
Bank and/or the investor group could have become a beneficial owner (as that
term is defined under Rule 13d-3 as promulgated under the Exchange Act of 1934,
as amended (the "Exchange Act") of more than 10% of our Common Stock. Capital
Bank and/or its investor group has not filed with the Securities and Exchange
Commission and us, among other reports, any Forms 3, 4 or 5, and has not filed
any applicable Schedules 13D or 13G as a result of acquiring shares of our
voting equity securities.
Because Capital Bank (a) has advised us that it holds the Common Stock as a
nominee only and that it does not exercise voting or investment power over our
Common Stock held in its name and that no one investor of Capital Bank for which
it holds our Common Stock holds more than 4.9% of our issued and outstanding
Common Stock; (b) has no right to, and is not believed to possess the power to,
exercise control over our management or our policies; (c) has not nominated, and
has not sought to nominate, a director to our board; and (d) has no
representative serving as an executive officer of the Company, we do not believe
that Capital Bank is our affiliate.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed by BDO Seidman, LLP ("BDO") for professional services
rendered for the audit of the Company's annual financial statements for the
fiscal years ended December 31, 2003 and 2002, for the reviews of the financial
statements included in the Company's Quarterly Reports on Form 10-Q for those
fiscal years, and for review of documents filed with the Securities and Exchange
Commission for those fiscal years were approximately $195,800 and $195,423,
respectively. Approximately 85% and 87%
-81-
of the total hours spent on audit services for the Company for the years ended
December 31, 2003 and 2002, respectively, were spent by Gallogly, Fernandez and
Riley, LLP ("GFR") members of the BDO alliance network of firms. Such members
are not full time, permanent employees of BDO.
Audit-Related Fees
BDO was not engaged to provide audit-related services to the Company for the
fiscal years ended December 31, 2003 and 2002.
GFR audited the Company's 401(k) Plan during 2003 and 2002, and billed $7,800
and $7,860, respectively.
Tax Services
BDO was not engaged to provide tax services to the Company for the fiscal year
ended December 31, 2003. The aggregate fees billed by BDO for tax consulting
services for 2002 were $18,000.
The aggregate fees billed by GFR for tax compliance services for 2003 and 2002
were $32,000 and $33,000, respectively.
All Other Fees
BDO was not engaged to provide any other services to the Company for the fiscal
years ended December 31, 2003 and 2002.
GFR was not engaged to provide any other services to the Company for the fiscal
years ended December 31, 2003 and 2002.
The Audit Committee of the Company's Board of Directors has considered whether
BDO's provision of the services described above for the fiscal years ended
December 31, 2003 and 2002, is compatible with maintaining its independence. The
Audit Committee also considered services performed by GFR to determine that it
is compatible with maintaining independence.
Engagement of the Independent Auditor
The Audit Committee is responsible for approving all engagements with BDO and
GFR to perform audit or non-audit services for us prior to us engaging BDO and
GFR to provide those services. All of the services under the headings Audit
Related, Tax Services, and All Other Fees were approved by the Audit Committee
pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X of the
Exchange Act. The Audit Committee's pre-approval policy provides as follows:
o The Audit Committee will review and pre-approve on an annual basis
any known audit, audit-related, tax and all other services, along
with acceptable cost levels, to be performed by BDO and GFR. The
Audit Committee may revise the pre-approved services during the
period based on subsequent determinations. Pre-approved services
typically include: statutory audits, quarterly reviews, regulatory
filing requirements, consultation on new accounting and disclosure
standards, employee benefit plan audits, reviews and reporting on
management's internal controls and specified tax matters.
o Any proposed service that is not pre-approved on the annual basis
requires a specific pre-approval by the Audit Committee, including
cost level approval.
o The Audit Committee may delegate pre-approval authority to one or
more of the Audit Committee members. The delegated member must
report to the Audit Committee, at the next Audit Committee meeting,
any pre-approval decisions made.
-82-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report:
(a)(1) Consolidated Financial Statements
See Item 8 for the Index to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
See Item 8 for the Index to Consolidated Financial Statements (which
includes the Index to Financial Statement Schedules)
(a)(3) Exhibits
The Exhibits listed in the Exhibit Index are filed or incorporated by
reference as a part of this report.
(b) Reports on Form 8-K
Current report on Form 8-K (Item 9 - Regulation FD Disclosure) was filed
by the Company on November 4, 2003, regarding the financial results and
conference call for the third quarter of 2003.
-83-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Perma-Fix Environmental Services, Inc.
By /s/ Dr. Louis F. Centofanti Date March 12, 2004
-------------------------------------- --------------
Dr. Louis F. Centofanti
Chairman of the Board
Chief Executive Officer
By /s/ Richard T. Kelecy Date March 12, 2004
-------------------------------------- --------------
Richard T. Kelecy
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in capacities and on the dates indicated.
By /s/ Jon Colin Date March 12, 2004
-------------------------------------- --------------
Jon Colin, Director
By /s/ Jack Lahav Date March 12, 2004
-------------------------------------- --------------
Jack Lahav, Director
By /s/ Alfred C. Warrington IV Date March 12, 2004
-------------------------------------- --------------
Alfred C. Warrington IV, Director
By /s/ Mark A. Zwecker Date March 12, 2004
-------------------------------------- --------------
Mark A. Zwecker, Director
By /s/ Dr. Louis F. Centofanti Date March 12, 2004
-------------------------------------- --------------
Dr. Louis F. Centofanti, Director
By /s/ Joe R. Reeder Date March 12, 2004
-------------------------------------- --------------
Joe R. Reeder, Director
By /s/ Charles E. Young Date March 12, 2004
-------------------------------------- --------------
Charles E. Young, Director
-84-
SCHEDULE II
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS For
the years ended December 31, 2003, 2002, and 2001
(Dollars in thousands)
Additions
Charged to
Balance at Costs, Balance
Beginning Expenses At End
Description Of Year And Other Deductions Of Year
- ----------- ------- --------- ---------- -------
Year ended December 31, 2003: $698 $271 $266 $703
Allowance for doubtful accounts
Year ended December 31, 2002:
Allowance for doubtful accounts $725 $686 $713 $698
Year ended December 31, 2001:
Allowance for doubtful accounts $894 $399 $568 $725
-85-
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
2.1 Stock Purchase Agreement, dated January 18, 2001, among the Company,
East Tennessee Materials and Energy Corporation, Performance
Development Corporation, Joe W. Anderson, M. Joy Anderson, Russell R.
and Cindy F. Anderson, Charitable Remainder Unitrust of William Paul
Cowell, Kevin Cowell, Trustee, Joe B. and Angela H. Fincher, Ken-Ten
Partners, Michael W. Light, Management Technologies, Incorporated,
M&EC 401(k) Plan and Trust, PDC 401(k) Plan and Trust, Robert N.
Parker, James C. Powers, Richard William Schenk, Trustee of the
Richard Schenk Trust dated November 5, 1998, Talahi Partners, Hillis
Enterprises, Inc., Tom Price and Virginia Price, Thomas John Abraham,
Jr. and Donna Ferguson Abraham as incorporated by reference from
Exhibit 2.1 to the Company's Form 8-K dated January 31, 2001.
3(i) Restated Certificate of Incorporation, as amended, and all
Certificates of Designations are incorporated by reference from 3.1(i)
to the Company's Form 10-Q for the quarter ended September 30, 2002.
3(ii) Bylaws are incorporated by reference from the Company's Registration
Statement, No. 33-51874.
4.1 Specimen Common Stock Certificate as incorporated by reference from
Exhibit 4.3 to the Company's Registration Statement, No. 33-51874.
4.2 Loan and Security Agreement by and between the Company, subsidiaries
of the Company as signatories thereto, and PNC Bank, National
Association, dated December 22, 2000, as incorporated by reference
from Exhibit 99.1 to the Company's Form 8-K dated December 22, 2000.
4.3 First Amendment to Loan Agreement and Consent, dated January 30, 2001,
between the Company and PNC Bank, National Association as incorporated
by reference from Exhibit 99.7 to the Company's Form 8-K dated January
31, 2001.
4.4 Note and Warrant Purchase Agreement, dated July 31, 2001, among the
Company, AMI, and BEC is incorporated by reference from Exhibit 99.1
to the Company's Form 8-K, dated July 30, 2001.
4.5 Form of 13.50% Senior Subordinated Note Due 2006 is incorporated by
reference from Exhibit 99.2 to the Company's Form 8-K, dated July 30,
2001.
4.6 Form of Common Stock Purchase Warrant, expiring July 31, 2008, issued
by the Company to AMI and BEC to purchase up to 1,281,731 shares of
the Company's Common Stock is incorporated by reference from Exhibit
99.3 to the Company's Form 8-K, dated July 30, 2001.
4.7 Specimen Certificate relating to Series 17 Preferred as incorporated
by reference from Exhibit 4.4 to the Company's Form 8-K, dated June
15, 2001.
4.8 Conversion and Exchange Agreement, dated May 25, 2001, but effective
as of April 6, 2001, between the Company and RBB Bank
Aktiengesellschaft (k/n/a Capital Bank Grawe-Gruppe) is incorporated
by reference from Exhibit 4.5 to the Company's Form 8-K, dated June
15, 2001.
4.9 Form of Subscription Agreement incorporated by reference from Exhibit
4.2 to Company's Form 8-K dated June 15, 2001.
4.10 Amendment No. 1 to Revolving Credit, Term Loan and Security Agreement,
dated as of June 10, 2002, between the Company and PNC Bank is
incorporated by reference from Exhibit 4.3 to the Company's Form 10-Q
for the quarter ended September 30, 2002.
-86-
Exhibit
No. Description
------- -----------
4.11 Amendment No. 2 to Revolving Credit, Term Loan and Security Agreement,
dated as of May 23, 2003, between the Company and PNC Bank, as
incorporated by reference from Exhibit 4.4 to the Company's Form 10-Q
for the quarter ended June 30, 2003, and filed on August 14, 2003.
4.12 Amendment No. 3 to Revolving Credit, Term Loan, and Security
Agreement, dated as of October 31, 2003, between the Company and PNC
Bank, as incorporated by reference from Exhibit 4.5 to the Company's
Form 10-Q for the quarter ended September 30, 2003, and filed on
November 10, 2003.
10.1 1991 Performance Equity Plan of the Company as incorporated herein by
reference from Exhibit 10.3 to the Company's Registration Statement,
No. 33-51874.
10.2 1992 Outside Directors' Stock Option Plan of the Company as
incorporated by reference from Exhibit 10.4 to the Company's
Registration Statement, No. 33-51874.
10.3 First Amendment to 1992 Outside Directors' Stock Option Plan as
incorporated by reference from Exhibit 10.29 to the Company's Form
10-K for the year ended December 31, 1994.
10.4 Second Amendment to the Company's 1992 Outside Directors' Stock Option
Plan, as incorporated by reference from the Company's Proxy Statement,
dated November 4, 1994.
10.5 Third Amendment to the Company's 1992 Outside Directors' Stock Option
Plan as incorporated by reference from the Company's Proxy Statement,
dated November 8, 1996.
10.6 Fourth Amendment to the Company's 1992 Outside Directors' Stock Option
Plan as incorporated by reference from the Company's Proxy Statement,
dated April 20, 1998.
10.7 1993 Non-qualified Stock Option Plan as incorporated by reference from
the Company's Proxy Statement, dated October 12, 1993.
10.8 401(K) Profit Sharing Plan and Trust of the Company as incorporated by
reference from Exhibit 10.5 to the Company's Registration Statement,
No. 33-51874.
10.9 Stand-Still Agreement, dated January 31, 2001, among the Company,
Chem-Met Services, Inc., PNC Bank, National Association, and RBB Bank
Aktiengesellschaft as incorporated by reference from Exhibit 99.2 to
the Company's Form 8-K dated December 22, 2000.
10.10 Warrant, dated , January 31, 2001, issued to RBB Bank
Aktiengesellschaft for the purchase of 105,000 shares of the Company's
Common Stock as incorporated by reference from Exhibit 99.5 to the
Company's Form 8-K dated December 22, 2000. Substantially similar
warrants dated February 28, 2001 and March 31, 2001 for the purchase
of 105,000 shares of the Company's Common Stock each will be provided
to the Commission upon request.
10.11 Warrant, dated December 22, 2000, issued by the Registrant to Ryan,
Beck & Co., LLC (formerly Ryan, Beck & Co., Inc.) ("Ryan Beck") for
the purchase of 213,889 shares of the Company's Common Stock, as
incorporated by reference from Exhibit 99.6 to the Company's Form 8-K
dated January 31, 2001. Substantially similar warrants for the
purchase of an aggregate 191,067 shares of the Company's Common Stock
assigned by Ryan Beck to each of Randy F. Rock and Michael J.
Kollender, along with the remaining 98,768 warrants issued to Ryan
Beck will be provided to the Commission upon request. Substantially
similar warrants, dated March 9, 2001 issued to Ryan Beck for the
purchase of an aggregate 27,344 shares of the Company's Common Stock
will be provided to the Commission upon request, along with
substantially similar warrants dated March 9, 2001, for the purchase
of 16,710 shares of the Company's Common Stock assigned by Ryan Beck
to each of Randy F. Rock and Michael J. Kollender. Substantially
similar warrants, dated December 22, 2000 for the purchase of an
aggregate 694,791 shares of the Company's Common Stock assigned by
Larkspur Capital Corporation ("Larkspur") to the Christopher T.
Goodwin Trust (3,000 shares), the Kelsey A. Goodwin Trust (3,000
shares), Meera Murdeshwar (36,000 shares), Paul Cronson (219,597
shares), Robert C. Mayer, Jr. (219,597 shares) and Robert Goodwin
(213,597 shares), along with the remaining 60,764 warrants issued to
Larkspur on March 9, 2001 will be provided to the Commission upon
request.
-87-
Exhibit
No. Description
------- -----------
10.12 Warrant, dated January 31, 2001, for the purchase of shares of the
Company's Common Stock issued by the Company to BHC Interim Funding,
L.P. as incorporated by reference from Exhibit 99.5 to the Company's
Form 8-K dated January 31, 2001.
10.13 Basic Oak Ridge Agreement between East Tennessee Materials and Energy
Corporation (M&EC) and Bechtel Jacobs Company, LLC No. 1GB-99446V
dated June 23, 1998, as incorporated by reference from Exhibit 10.1 to
the Company's Form 10-Q for the quarter ended September 30, 1998.
10.14 Basic Oak Ridge Agreement between East Tennessee Materials and Energy
Corporation (M&EC) and Bechtel Jacobs Company, LLC No. 1GB-99447V
dated June 23, 1998, as incorporated by reference from Exhibit 10.2 to
the Company's Form 10-Q for the quarter ended September 30, 1998.
10.15 Basic Oak Ridge Agreement between East Tennessee Materials and Energy
Corporation (M&EC) and Bechtel Jacobs Company, LLC No. 1GB-99448V
dated June 23, 1998, as incorporated by reference from Exhibit 10.3 to
the Company's Form 10-Q for the quarter ended September 30, 1998.
10.16 General agreement between East Tennessee Materials and Energy
Corporation (M&EC) and the Company dated May 27, 1998, as incorporated
by reference from Exhibit 10.4 to the Company's Form 10-Q for the
quarter ended September 30, 1998.
10.17 Appendix B to general agreement between East Tennessee Materials and
Energy Corporation (M&EC) and the Company dated November 6, 1998, as
incorporated by reference from Exhibit 10.5 to the Company's Form 10-Q
for the quarter ended September 30, 1998.
10.18 Subcontract Change Notice between East Tennessee Materials and Energy
Corporation and Bechtel Jacobs Company, LLC, No. BA-99446/7 and 8F,
dated July 2, 2002, are incorporated by reference from Exhibit 10.24
to the Company's Registration Statement No. 333-70676.
10.19 Registration Rights Agreement, dated July 31, 2001, among the Company,
AMI, and BEC is incorporated by reference from Exhibit 99.5 to the
Company's Form 8-K, dated July 30, 2001.
10.20 Senior Subordination Agreement, dated July 31, 2001, among the
Company, PNC Bank, National Association, AMI, and BEC is incorporated
by reference from Exhibit 99.7 to the Company's Form 8-K, dated July
30, 2001.
10.21 Option Agreement, dated July 31, 2001, among the Company, AMI, and BEC
is incorporated by reference from Exhibit 99.8 to the Company's Form
8-K, dated July 30, 2001.
10.22 Promissory Note, dated June 7, 2001, issued by M&EC in favor of
Performance Development Corporation is incorporated by reference from
Exhibit 10.1 to the Company's Form 8-K, dated June 15, 2001.
10.23 Form 433-D Installment Agreement, dated June 11, 2001, between M&EC
and the Internal Revenue Service is incorporated by reference from
Exhibit 10.2 to the Company's Form 8-K, dated June 15, 2001.
10.24 Common Stock Purchase Warrant, dated July 9, 2001, granted by the
Registrant to Capital Bank-Grawe Gruppe AG for the right to purchase
up to 1,839,405 shares of the Registrant's Common Stock at an exercise
price of $1.75 per share incorporated by reference from Exhibit 10.12
to the Company's Registration Statement, No. 333-70676.
10.25 Common Stock Purchase Warrant, dated July 9, 2001, granted by the
Registrant to Herbert Strauss for the right to purchase up to 625,000
shares of the Registrant's Common Stock at an exercise price of $1.75
per share, incorporated by reference from Exhibit 10.13 to the
Company's Registration Statement, No. 333-70676.
10.26 Warrant Agreement, dated July 31, 2001, granted by the Registrant to
Paul Cronson for the right to purchase up to 43,295 shares of the
Registrant's Common Stock at an exercise price of $1.44 per share,
incorporated by reference from Exhibit 10.20 to the Company's
Registration Statement, No. 333-70676. Substantially similar Warrants,
dated July 31,
-88-
2001, for the right to purchase up to an aggregate 218,752 shares of
the Registrant's Common Stock at an exercise price of $1.44 per share
were granted by the Registrant to Ryan Beck (6,836 shares), Ryan Beck
(54,688), Michael Kollender (37,598 shares), Randy Rock (37,598
shares), Robert Goodwin (43,294 shares), Robert C. Mayer, Jr. (43,294
shares), and Meera Murdeshwar (6,837 shares). Copies will be provided
to the Commission upon request.
10.27 Warrant to Purchase Common Stock, dated July 30, 2001, granted by the
Registrant to David Avital for the purchase of up to 143,000 shares of
the Registrant's Common Stock at an exercise price of $1.75 per share,
incorporated by reference from Exhibit 10.21 to the Company's
Registration Statement, No. 333-70676. Substantially similar Warrants
for the purchase of an aggregate 4,254,566 were issued to Capital Bank
(842,995 shares), CICI 1999 Qualified Annuity Trust (85,715 shares),
Gerald D. Cramer (85,715 shares), CRM 1999 Enterprise Fund 3 (200,000
shares), Craig S. Eckenthal (57,143 shares), Danny Ellis Living Trust
(250,000 shares), Europa International, Inc. (571,428 shares), Harvey
Gelfenbein (28,571 shares), A. C. Israel Enterprises (285,715 shares),
Kuekenhof Partners, L.P. (40,000), Kuekenhof Equity Fund, L.P. (60,000
shares), Jack Lahav (571,429 shares), Joseph LaMotta (28,571 shares),
Jay B. Langner (28,571 shares), The F. M. Grandchildren Trust (42,857
shares), Mathers Associates (228,571 shares), Peter Melhado (115,000
shares), Pamela Equities Corp. (42,857 shares), Josef Paradis (143,000
shares), Readington Associates (57,143 shares), Dr. Ralph Richart
(225,000 shares), Edward J. Rosenthal Profit Sharing Plan (28,571
shares), Yariv Sapir IRA (85,714 shares), and Bruce Wrobel (150,000
shares), respectively. Copies will be provided to the Commission upon
request.
10.28 Common Stock Purchase Warrant, dated July 30, 2001, granted by the
Registrant to Ryan, Beck & Co. for the purchase of 20,000 shares of
the Registrant's Common Stock at an exercise price of $1.75 per share,
incorporated by reference from Exhibit 10.22 to the Company's
Registration Statement, No. 333-70676. Substantially similar Warrants,
dated July 30, 2001, for the purchase of an aggregate 74,000 shares of
the Registrant's Common Stock at an exercise price of $1.75 per share
were issued to Ryan, Beck & Co., LLC (14,000 shares), Larkspur Capital
Corporation (34,000 shares), and National Securities Corporation
(40,000 shares). Copies will be provided to the Commission upon
request.
10.29 Common Stock Purchase Warrant, dated July 31, 2001, granted by the
Registrant to Associated Mezzanine Investors-PESI (I), L.P. for the
purchase of up to 712,073 shares of the Registrant's Common Stock at
an exercise price of $1.50 per share, incorporated by reference from
Exhibit 10.23 to the Company's Registration Statement, No. 333-70676.
A substantially similar Warrant was issued to Bridge East Capital L.P.
for the right to purchase of up to 569,658 shares of the Registrant's
Common Stock, and a copy will be provided to the Commission upon
request.
10.30 2003 Outside Directors' Stock Plan of the Company as incorporated by
reference from Exhibit B to the Company's 2003 Proxy Statement.
10.31 2003 Employee Stock Purchase Plan of the Company as incorporated by
reference from Exhibit C to the Company's 2003 Proxy Statement.
21.1 List of Subsidiaries
23.1 Consent of BDO Seidman, LLP
31.1 Certification by Dr. Louis F. Centofanti, Chief Executive Officer of
the Company pursuant to Rule 13a-14(a) or 15d-14(a).
31.2 Certification by Richard T. Kelecy, Chief Financial Officer of the
Company pursuant to Rule 13a-14(a) or 15d-14(a).
32.1 Certification by Dr. Louis F. Centofanti, Chief Executive Officer of
the Company furnished pursuant to 18 U.S.C. Section 1350.
32.2 Certification by Richard T. Kelecy, Chief Financial Officer of the
Company furnished pursuant to 18 U.S.C. Section 1350.
-89-