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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, 2002
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)
1940 N.W. 67th Place, Gainesville, FL 32653
(Address of principal executive offices) (Zip Code)
(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
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 28, 2002), was
approximately $86,487,000. For the purposes of this calculation, all 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 24, 2003, there were 34,699,254 shares of the registrant's Common
Stock, $.001 par value, outstanding, excluding 988,000 shares held as treasury
stock.
Documents incorporated by reference: none
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PERMA-FIX ENVIRONMENTAL SERVICES, INC.
INDEX
Page No.
--------
PART I
Item 1. Business ......................................................... 1
Item 2. Properties ....................................................... 12
Item 3. Legal Proceedings ................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders .............. 14
Item 4A. Executive Officers of the Company ................................ 14
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 ....... 33
Special Note Regarding Forward-Looking Statements ................ 33
Item 8. Financial Statements and Supplementary Data ...................... 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .............................. 70
PART III
Item 10. Directors and Executive Officers of the Registrant ............... 71
Item 11. Executive Compensation ........................................... 73
Item 12. Security Ownership of Certain Beneficial Owners and Management ... 76
Item 13. Certain Relationships and Related Transactions ................... 80
Item 14. Controls and Procedures .......................................... 82
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 technology and knowhow company, is a Delaware
corporation, engaged through its subsidiaries, in:
o Industrial Waste Management Services, which includes:
o treatment, storage, processing, and disposal of hazardous and
nonhazardous waste; and
o wastewater management services, including the collection,
treatment, processing and disposal of hazardous and
non-hazardous wastewater.
o Nuclear Waste Management Services, which includes:
o treatment, storage, processing and disposal of mixed waste
(which is both low-level radioactive and hazardous waste)
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 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 operations, 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.
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.
Segment Information and Foreign and Domestic Operations and Export Sales During
2002, we were engaged in eleven 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 of
the segment to make decisions about resources to be allocated within
the segment and assess its performance; and
o for which discrete financial information is available.
We therefore define our operating segments as each separate facility or location
that we operate. These segments, however, exclude the Corporate headquarters
which does not generate revenue and Perma-Fix of Memphis, Inc. ("PFM") a
discontinued operation which is reported with Corporate headquarters.
-1-
Pursuant to FAS 131 we have aggregated our operating segments into three
reportable segments for ease in the presentation and understanding of our
business. Each reportable segment has a president who manages and makes
decisions for the reportable segment as a whole. The results of the reportable
segments are then reviewed by the Company's chief operating decision maker. We
used the following criteria to aggregate our segments:
o The nature of our products and services;
o The nature of the production processes;
o The type or class of customer for our products and services;
o The methods used to distribute our products or provide our services;
and
o The nature of the regulatory environment.
Most of our activities are conducted nationwide, however, our Industrial Waste
Management Services segment maintains a significant role in the Southeast and
Midwest portions of the United States. We had no foreign operations or export
sales during 2002.
Operating Segments
We have eleven operating segments which represent each separate facility or
location that we operate. Seven of these segments provide Industrial Waste
Management Services, three of these segments provide Nuclear Waste Management
Services and one segment provides Consulting Engineering Services 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 of our treatment 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 new Bio-Fix 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.
-2-
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 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.
Perma-Fix Government Services ("PFGS") specializes in the on-site (at the
government's site) environmental and hazardous waste management, with emphasis
on the management of large long-term federal and industrial on-site field
service contracts. PFGS operates out of four field service offices, located
throughout the United States. PFGS currently manages five hazardous waste
management service contracts with the Defense Reutilization & Marketing Service
("DRMS"), working closely with the above noted permitted facilities for certain
transportation and waste management services.
For 2002, the Company's Industrial Waste Management Services segment accounted
for approximately $37,641,000 (or 45.1%) of the Company's total revenue, as
compared to approximately $42,355,000 (or 56.9%) for 2001. See "Financial
Statements and Supplementary Data" for further details.
NUCLEAR WASTE MANAGEMENT SERVICES, which includes nuclear, mixed and low-level
radioactive waste treatment, processing and disposal services through three of
our 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 Waste Management Services segment, as
discussed below.
Perma-Fix of Florida, Inc. ("PFF"), located in Gainesville, Florida, is a
uniquely permitted and licensed TSD. PFF 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. PFF is one of
only a few 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,
is also a uniquely permitted and licensed TSD, which was acquired effective
August 31, 2000. DSSI specializes in the processing and destruction of certain
types of wastes containing both low-level radioactive and hazardous waste (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.
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").
-3-
East Tennessee Materials & Energy Corporation ("M&EC"), located in Oak Ridge,
Tennessee, is the Company's 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 the Company's three mixed waste facilities, covering 150,000 sq.ft.,
and is located within the DOE K-25 complex. 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.
The Company is currently negotiating for the acquisition of another mixed waste
treatment and storage facility that operates under both a hazardous waste permit
and a nuclear materials license. As of the date of this report, it is unknown as
to whether the Company will be successful in acquiring this facility and no
agreements have been executed relating to this proposed acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Potential Acquisition."
For 2002, the Company's nuclear waste management services business accounted for
$42,260,000 (or 50.7%) of total revenue for 2002, as compared to $28,932,000 (or
38.8%) of total revenue for 2001. 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 2002, environmental engineering and regulatory compliance consulting
services accounted for approximately $3,503,000 (or 4.2%) of our total revenue,
as compared to approximately $3,205,000 (or 4.3%) in 2001. See "Financial
Statements and Supplementary Data" for further details.
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.
The Company is active in the research and development of technologies that allow
it to address certain of its customers' environmental needs. To date, the
Company's R&D efforts have resulted in the granting of three patents and the
filing of an additional ten pending patent applications. The Company's flagship
technology, the Perma-Fix Process, is a proprietary, cost effective, treatment
technology that converts hazardous waste into non-hazardous material.
Subsequently, the Company developed a new Perma-Fix II process ("New Process"),
a multi-step treatment process that converts hazardous organic components into
non-hazardous material. The New Process is particularly important to the
Company's mixed waste strategy. Management believes that at least one third of
DOE mixed wastes contain organic components.
The New 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 New Process. As of the date of this report, we
have not received a patent for the New Process, and there are no assurances that
such a patent will be issued. Until development of this New 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
-4-
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 from the Solids to a level where the Solids may be returned
to the ground, 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 New Process in 2000. Patent applications
have also been filed for processes to treat radon, selenium and other speciality
materials utilizing variations of this New Process. However, changes to current
environmental laws and regulations could limit the use of the New 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 Bio-Fix process at
PFD. The facility has begun accepting commercial wastewater for treatment
through this process. The Bio-Fix process is a new technology which we developed
utilizing our variable depth biological treatment process and several
proprietary water treatment processes. The Bio-Fix process is designed to remove
certain organic constituents from highly organic, contaminated wastewaters. The
Bio-Fix 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 Bio-Fix process meets the EPA's new centralized
treatment standards that become effective in December of 2003, potentially
giving us an advantage over competing treatment facilities.
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 the Company maintains 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.
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 judgement as
agreed to in 1991.
-5-
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 in 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 along with
the inability to generate consistent billable hours in the consulting
engineering segment, resulting in a decrease in revenues and earnings during
such period.
Dependence Upon a Single or Few Customers
The majority of our revenues for fiscal 2002 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. PFGS currently manages five hazardous
waste management service contracts with the DRMS. The DRMS is a subagency of the
Defense Logistics Agency and the DOD, which is considered to be a single
customer. The consolidated revenues for the DRMS contracts for 2002 total
$6,642,000 (or 8.0%) of total revenue, as compared to $5,996,000 (or 8.0%) for
the year ended December 31, 2001, which resulted in an increase of $646,000 for
2002.
M&EC was awarded three subcontracts ("Oak Ridge Contracts") by Bechtel Jacobs
Company, LLC, 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 by Bechtel Jacobs Company, as a
contractor to the DOE, based on proposals by M&EC and the Company. The Oak Ridge
Contracts are similar in nature to a blanket purchase order whereby the DOE
specifies the approved waste
-6-
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 represented 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 the Company's mixed waste facilities (PFF, DSSI
and M&EC) have successfully performed under the demonstration period and 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 an intent of recognizing an acceptable
profit margin.
Effective June 25, 2001, the Company acquired M&EC and the facility became
operational in the third quarter of 2001. Consolidated revenues under the Oak
Ridge Contracts for 2002 total $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. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Liquidity and Capital Resources of the Company," and "Note 4 to
Notes to Consolidated Financial Statements."
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. There are no assurances that this filing
of the lawsuit will not result in Bechtel Jacobs canceling the Oak Ridge
Contracts, which contracts are cancelable at any time by either party.
Newport Contract Award
The Company's subsidiary, PFD was awarded a subcontract and limited notice to
proceed with the posttreatment of the neutralized VX byproduct called
hydrolysate by Parsons. Parsons is currently contracted by the Army to destroy
the nerve agent VX stockpile at Newport Chemical Depot, Newport, Indiana.
Finalization of this subcontract is subject to Perma-Fix and Parsons entering
into a definitive agreement.
Perma-Fix will be responsible for transporting the hydrolysate material from
Newport Chemical Depot to its facility for disposal. In addition, Perma-Fix will
perform initial demonstration studies and conduct associated public outreach
activities in their community.
Parsons will neutralize the stockpile in the Newport Chemical Agent Disposal
Facility now under construction at the depot. The neutralization process, which
irreversibly destroys the chemical agent, will create a byproduct with
characteristics similar to household liquid drain cleaner. Prior to off-site
shipment, the hydrolysate will be analyzed to ensure that all of the agent has
been destroyed. The neutralization process is expected to create approximately
900,000 gallons of hydrolysate that will be biologically treated, utilizing the
Company's Bio-Fix process, at an approximate value of $9.0 million. Destruction
of the Newport chemical agent stockpile is expected to begin in the fall of 2003
and will take approximately nine months to complete.
Competitive Conditions
Competition is intense within certain product lines within the Industrial Waste
Management Services 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
utilize offer a cost savings alternative to more traditional remediation and
disposal methods offered by our competitors. The intense competition for
performing the services provided by us within the Industrial Waste Management
Services segment, in conjunction with the current economic downturn, has
resulted in reduced gross margin levels for certain of those services.
-7-
The Nuclear Waste Management Services segment, however has only a few
competitors and does not currently experience such competitive pressures. In
addition, at present we believe there are only two other facilities in the
United States that provide mixed waste processing which requires both a
radioactive materials license and a hazardous waste permit.
Competition in the waste management industry is likely to increase as the
industry continues to mature, and as consolidations continue to occur. 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. However, management believes
that environmental laws will tighten, creating even stronger barriers to
obtaining a permit and entry into the market.
Within our Industrial Waste Management Services segment we participate
nationwide. However, we believe that we are a significant participant in the
delivery of off-site waste treatment services in the Southeast, Midwest and
Southwest portions of the United States. We compete with TSD facilities operated
by national, regional and independent environmental services firms located
within a several hundred-mile radius of our facilities. Our subsidiaries, PFF,
DSSI and M&EC, with permitted radiological activities solicit 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 2002, we spent approximately $5,822,000 in capital expenditures, which
was principally for the expansion and improvements to our operating facilities.
This 2002 capital spending total includes $1,061,000 which was financed. We have
budgeted approximately $6,500,000 for 2003 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
approximately $982,000 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 us
or Quadrex. During 1995, in conjunction with the bankruptcy filing by Quadrex,
we recognized an environmental liability of approximately $1,200,000 for
remedial activities at the Leased Property. We have accrued approximately
$211,000 for the estimated, remaining costs of remediating the Leased Property
used by EPS, which will extend over the next year.
-8-
PFD has filed a lawsuit for contribution 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. Recently, PFD and the defendants
entered into an agreement in principal to settle this lawsuit, and under the
terms of this settlement the defendants would pay PFD $400,000. This settlement
is subject to the parties entering into definitive settlement documents.
In conjunction with the acquisition of 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 $918,000 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, 2002, we have a remaining accrual of $1,260,000, of
which we anticipate spending $126,000 during 2003, with the remaining $1,134,000
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 the
Company's 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, and anticipates completion of such
activities during 2003. The accrued balance at December 31, 2002, for the PFMI
remediation is $307,000.
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 4 to Notes to Consolidated
Financial Statements for discussion on the acquisition and Note 9 to Notes to
Consolidated Financial Statements for discussion on environmental liabilities.
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 or in the
providing of our products. 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.
-9-
Research and Development
Innovation and technical knowhow 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 are
planning for future growth of our research operations. We conduct research
internally, and also through collaborations with universities. We feel that our
investments in research have been rewarded by the discovery of the Perma-Fix
Process and the New 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 2000, 2001 and 2002, we spent
approximately $359,000, $428,000, and $388,000, 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, 2002,
we employed approximately 490 full time persons, of which approximately 12 were
assigned to our corporate office, approximately 23 were assigned to our
Consulting Engineering Services segment, approximately 276 to the Industrial
Waste Management Services segment of which 18 employees at one facility are
represented by a collective bargaining unit, under a contract expiring on March
31,2006, and approximately 179 to the Nuclear Waste Management Services 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 us and our customers 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 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.
-10-
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 nonhazardous 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 nonhazardous
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 the Company's 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 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 which is
similar to, or greater than, the coverage maintained by other companies of our
size in the industry. There can be no assurances, however, that liabilities
which may be incurred by us will be covered by our insurance or that the dollar
amount of such liabilities which are covered will not exceed our policy limits.
Under our insurance contracts, we usually
-11-
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.
ITEM 2. PROPERTIES
Our principal executive offices are in Gainesville, Florida. Our Industrial
Waste Management Services segment maintains facilities in Orlando and Ft.
Lauderdale, Florida; Dayton, Ohio; Tulsa, Oklahoma; Valdosta, Georgia; and
Detroit, Michigan. Our Nuclear Waste Management Services 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 Government Services offices in Jacksonville, Florida;
Anniston, Alabama; Oklahoma City, Oklahoma; 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 the Company's senior lender. In
addition, we lease nine 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 Oak Ridge
K-25 weapons facility of the DOE. 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.
ITEM 3. LEGAL PROCEEDINGS
PFMI, which was purchased by the Company effective June 1, 1999, has been
advised 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. The relationship of PFMI to the third site, if any, is currently being
investigated by the Company. PFO, which was also purchased by the Company
effective June 1, 1999, has been advised that it is a PRP in two Superfund
sites. The Company is currently investigating the relationship of PFO to the two
sites.
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 the Company's acquisition of PFD.
The Leased Property contains certain contaminated waste in the soils and
groundwater. The Company was indemnified by Quadrex, the entity that sold PFD to
the Company, 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 the acquisition of PFD by the
Company, 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 the Company purchased PFD, it was 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. The Company has
subsequently put an additional $197,000 into the Remediation Trust Fund. PFD has
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
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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 have agreed in principal to
settle the lawsuit, subject to finalization and execution of definitive
settlement agreements. Under the proposed settlement, the defendants would pay
PFD $400,000 towards remediation of the Leased Property.
PFMI was previously named as a PRP under the Indiana state equivalent to the
federal Comprehensive Environmental Response, Compensation and Liability Act of
1980 at the Four County Landfill site near DeLong, Indiana. In March 1999 PFMI,
the Indiana Department of Environmental Management ("IDEM"), and the members of
the Four County Landfill Group and the Four County Landfill Operable Unit One
RD/RA Group (collectively the "Groups") entered into an Agreed Order (the
"Agreed Order") in an administrative proceeding before IDEM pursuant to which
PFMI received a full and complete release from the Groups, a covenant from IDEM
not to sue or take any administrative action against PFMI with respect to
present or future liability relating to the site (with the exception of
liability, if any, associated with loss of natural resources), and protection
from contribution actions of third parties relating to the site. On July 13,
2001, the United States of America (the "Government") filed an action against
PFMI and others, including members of the Groups, seeking to recover response
costs allegedly incurred by the United States Environmental Protection Agency
("EPA") in connection with the Four County Landfill site. During the second
quarter of 2002 PFMI, and other PRPs entered into an agreement to settle the
suit. PFMI will pay approximately $153,000 of the total settlement of which the
total amount was accrued in September 2002. The settlement agreement was
finalized in October 2002, and provides that the Company will pay its portion of
the settlement over a twelve month period beginning in March 2003.
Patrick Sullivan ("P. Sullivan"), the son of a former member of our Board of
Directors, Thomas P. Sullivan ("Mr. Sullivan"), was employed by a subsidiary of
the Company, Perma-Fix of Orlando, Inc. ("PFO"), as an executive and/or general
manager from the date of the Company's acquisition of PFO in June 1999 to June
2002, when he terminated his employment to go to work for a competitor of PFO in
Orlando, Florida. P. Sullivan is subject to an agreement with the Company that
provides, in part, that P. Sullivan would not solicit customers, suppliers or
employees of the Company or PFO for a period of two years after termination of
his employment. The Company has been advised that P. Sullivan violated the
agreement and his duties to the Company and PFO prior to and after he terminated
his employment with PFO. P. Sullivan reimbursed the Company for certain personal
expenses charged to, and paid by, the Company after the Company notified P.
Sullivan of the claims. In December 2002, the Company 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 the Company in connection with these alleged actions by his
son.
In October 2002, the Company's subsidiary Perma-Fix of Memphis, Inc. ("PFM"), a
discontinued operation, entered into a settlement agreement with Mid-South
Industrial, Inc. and CNA Insurance Company to settle a lawsuit PFM filed seeking
damages resulting from an explosion and fire which occurred in January 1997.
Under the settlement agreement PFM received approximately $233,000 in October
2002, which was recorded as other income in the fourth quarter of 2002.
On February 24, 2003, East Tennessee Materials and Energy Corporation ("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 many months. In
2002, the revenues generated by M&EC under the subcontracts with Bechtel Jacobs
represented approximately 11.6% of Perma-Fix's 2002 total revenues. Bechtel
Jacobs continues to deliver waste to M&EC for treatment and disposal, and M&EC
continues to accept such waste. Although Perma-Fix does not believe that this
lawsuit will have a material adverse effect on its operations, Bechtel Jacobs
could terminate the subcontracts with M&EC, as the subcontracts may be
terminated at any time by either party.
-13-
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders ("Annual Meeting") was held on
November 6, 2002. At the Annual Meeting, the following matters were voted on and
approved by the stockholders:
1. The election of six directors to serve until the next annual meeting of
stockholders or until their respective successors are duly elected and
qualified.
2. Approval and ratification of the appointment of BDO Seidman, LLP as the
independent auditors of the Company for fiscal 2002.
The directors elected at the Annual Meeting and the votes cast for and withhold
authority for each director are as follows:
Withhold
For Authority
---------- ---------
Dr. Louis F. Centofanti 23,661,671 2,094,642
Jon Colin 25,717,863 38,450
Thomas P. Sullivan(1) 25,711,680 44,633
Mark A. Zwecker 25,717,288 39,025
Jack Lahav 25,715,663 40,650
Alfred C. Warrington, IV 25,720,485 35,828
(1) Effective December 16, 2002, Thomas P. Sullivan resigned from the Board of
Directors.
Also, at the Annual Meeting the stockholders approved the appointment of BDO
Seidman, LLP as the independent auditors of the Company for fiscal 2002. The
votes for, against and abstentions and broker nonvotes are as follows:
Abstentions
and Broker
For Against Non-Votes
---------- ------- -----------
Approval and Ratification of the Appointment
of BDO Seidman, LLP as the Independent
Auditors 25,723,476 23,203 9,624
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 59 Chairman of the Board, President and Chief Executive Officer
Mr. Richard T. Kelecy 47 Chief Financial Officer, Vice President and Secretary
Mr. Roger Randall 59 Vice President - Contract Management
Mr. Larry McNamara 53 President, Nuclear Services
Mr. William Carder 53 Vice President, Sales and Marketing
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
-14-
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 holds a
B.A. in Accounting and Business Administration from Westminster College.
MR. ROGER RANDALL
Mr. Randall currently serves as Vice President - Contract Management. He
previously served as President of the Industrial Waste Management Services
Segment from October 2000 to February 2003, as Vice President of Industrial
Services from December 1997 to October 2000 and as Vice President/General
Manager of PFD since its acquisition by the Company in June 1994. From June 1992
to June 1994, Mr. Randall served as General Manager of PFD under the ownership
of Quadrex Corporation. From 1982 to June 1992, Mr. Randall served a variety of
management roles at the Dayton facility, ranging from Operations Manager to
Chairman of the Board and Chief Executive Officer under the ownership of Clark
Processing, Inc. Prior to his involvement with the waste management industry,
Mr. Randall spent 17 years in public education serving a variety of
administrative roles. He has a B.S. from Wittenberg University and an M.A. from
Wright State University.
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, 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.
-15-
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.
2002 2001
------------------ ------------------
Low High Low High
--- ---- --- ----
Common Stock: 1st Quarter $ 2.510 $ 3.440 $ 1.250 $ 2.094
2nd Quarter 2.550 3.500 1.620 2.810
3rd Quarter 1.920 3.010 2.160 3.650
4th Quarter 2.090 2.650 2.400 3.890
Such over-the-counter market quotations reflect inter-dealer prices, without
retail markups or commissions and may not represent actual transactions.
As of March 18, 2003, there were approximately 319 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 18, 2003, was approximately 3,444.
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.
In addition to the securities sold by us during 2002, as reported in our Forms
10-Q for the quarters ended March 31, 2002, June 30, 2002 and September 30,
2002, which were not registered under the Securities Act of 1933, as amended, we
sold or issued during 2002 the following securities which were also not
registered under the Act:
1. On or about June 3, 2002, pursuant to the terms of a certain Consulting
Agreement ("Consulting Agreement") entered into effective as of January 1,
1998, the Company issued 4,397 shares of Common Stock in payment of
accrued fees of $9,000 to Alfred C. Warrington IV, an outside, independent
consultant to the Company, as consideration for certain consulting
services rendered to the Company by Warrington from October 2001 through
March 11, 2002. The issuance of Common Stock pursuant to the Consulting
Agreement was a private placement under Section 4(2) of the Act. The
Consulting Agreement provided that Warrington be paid $1,500 per month of
service to the Company, payable, at the option of Warrington (i) all in
cash, (ii) sixty-five percent in shares of Common Stock and thirty-five
percent in cash, or (iii) all in Common Stock. If Warrington elected to
receive part or all of his compensation in Common Stock, such would be
valued at seventy-five percent of its "Fair Market Value" (as defined in
the Consulting Agreement). Warrington elected to receive all of his
accrued compensation from October 2001 through March 11, 2002 in Common
Stock. Warrington represented and warranted in the Consulting Agreement,
among other things, as follows: (i) the Common Stock is being acquired for
Warrington's own account, and not on behalf of any other persons; (ii)
Warrington is acquiring the Common Stock to hold for investment, and not
with a view to the resale or distribution of all or any part of the Common
Stock; (iii) Warrington will not sell or otherwise transfer the Common
Stock in the absence of an effective registration statement under the Act,
or an opinion of counsel satisfactory to the Company, that the transfer
can be made without
-16-
violating the registration provisions of the Act and the rules and
regulations promulgated thereunder; (iv) Warrington is an "accredited
investor" as defined in Rule 501 of Regulation D as promulgated under the
Act; (v) Warrington has such knowledge, sophistication and experience in
financial and business matters that he is capable of evaluating the merits
and risks of the acquisition of the Common Stock; (vi) Warrington fully
understands the nature, scope and duration of the limitations on transfer
of the Common Stock as contained in the Consulting Agreement; and (vii)
Warrington understands that a restrictive legend as to transferability
will be placed upon the certificates for any of the shares of Common Stock
received by Warrington under the Consulting Agreement and that stop
transfer instructions will be given to the Company's transfer agent
regarding such certificates. Mr. Warrington was subsequently elected as a
director of the Company in March 2002 to fill a newly created
directorship. Upon his election to the board the Consulting Agreement was
terminated.
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,
--------------------------------------------------------
2002 2001(3) 2000(2) 1999(1) 1998
-------- -------- -------- -------- --------
Revenues $ 83,404 $ 74,492 $ 59,139 $ 46,464 $ 30,551
Net income (loss) 2,202 (602) (556) 1,570 462
Preferred Stock dividends (158) (145) (206) (308) (1,160)
Gain on Preferred Stock redemption -- -- -- 188 --
Net income (loss) applicable to Common
Stock 2,044 (747) (762) 1,450 (698)
Basic net income (loss) per common share .06 (.03) (.04) .08 (.06)
Diluted net income (loss) per common
share .05 (.03) (.04) .07 (.06)
Basic number of shares used in computing
net income (loss) per share 34,217 27,235 21,558 17,488 12,028
Diluted number of shares and potential
common shares used in computing net
income (loss) per share 42,618 27,235 21,558 21,224 12,028
Balance Sheet Data:
December 31,
----------------------------------------------------
2002 2001 2000 1999 1998
-------- ------- -------- -------- -------
Working capital (deficit) $ 731 $ 134 $ (3,233) $ (1,455) $ 292
Total assets 105,825 99,137 72,771 54,644 28,748
Current and long-term debt 30,515 31,146 25,490 15,306 3,042
Total liabilities 59,955 56,011 50,751 34,825 12,795
Preferred Stock of subsidiary 1,285 1,285 -- -- --
Stockholders' equity 44,585 41,841 22,020 19,819 15,953
(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.
-17-
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 the accounts of the
Company and 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.
Critical Accounting Policies and 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. The Company believes the following critical accounting policies affect
the more significant estimates used in preparation of the consolidated financial
statements:
Allowance for Doubtful Accounts. The carrying amount of accounts receivable is
reduced by an allowance for doubtful accounts which is a valuation allowance
that reflects management's best estimate of the amounts that will not be
collected. Management regularly reviews all accounts receivable balances that
exceed 60 days from the invoice date and based on an assessment of current
credit worthiness, estimates the portion, if any, of the balance that will not
be collected. This allowance was approximately 0.9%, 0.8% and 0.4% of revenue
and approximately 4.2%, 3.9% and 1.5% of accounts receivable for 2002, 2001 and
2000, respectively.
Intangible Assets. Intangible assets relating to acquired businesses consist
primarily of the cost of purchased businesses in excess of the estimated fair
value of net assets acquired ("goodwill") and the recognized permit value of the
business. The Company continually reevaluates the propriety of the carrying
amount of permits and goodwill to determine whether current events and
circumstances warrant adjustments to the carrying value. Effective January 1,
2002, the Company adopted SFAS 142. The Company hired an independent appraisal
firm to test goodwill and permits, separately, for impairment. The report
provided by the appraiser indicated that no impairment existed as of January 1,
2002. Goodwill and permits were again tested as of October 1, 2002, which also
indicated no impairment. Effective January 1, 2002, the Company discontinued
amortizing indefinite life intangible assets (goodwill and permits) as required
by SFAS 142.
Accrued Closure Costs. Accrued closure costs represent a contingent
environmental liability to clean up a facility in the event the Company ceases
operations in an existing facility. The accrued closure costs are estimates
based on guidelines developed by federal and/or state regulatory authorities
under RCRA. Such costs are evaluated annually and adjusted for inflationary
factors and for approved changes or expansions to the facilities. Increases due
to inflationary factors for the years ended December 31, 2002, 2001 and 2000
have been approximately 2.2%, 2.1% and 1.5%, respectively, and based on the
historical information, the Company does 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, the Company has no intention, at this time, to close any of
its facilities.
-18-
Accrued Environmental Liabilities. The Company has four remediation projects
currently in progress. The current and long-term accrual amounts for the
projects are our best estimates based on proposed or approved processes for
clean-up. The circumstances that could affect the outcome range from new
technologies that are being developed every day to reduce the Company's overall
costs, to increased contamination levels that could arise as the Company
completes remediation which could increase the Company's costs, neither of which
the Company anticipates at this time. In addition, significant changes in
regulations could adversely or favorably affect our costs to remediate existing
sites or potential future sites, which cannot be reasonably quantified.
Disposal Costs. The Company accrues for waste disposal based upon a physical
count of the total waste at each facility at the end of each accounting period.
Current market prices for transportation and disposal costs are applied to the
end of period waste inventories to calculate the disposal accrual. Costs are
calculated using current costs for disposal, but economic trends could
materially affect our actual costs for disposal. As there are limited disposal
sites available to us, a change in the number of available sites or an increase
or decrease in demand for the existing disposal areas could significantly affect
the actual disposal costs either positively or negatively.
Self Insurance. We have a self-insurance program for certain health benefits.
The cost of such benefits is recognized as expense in the period in which the
claim occurred and includes an estimate of claims incurred but not reported
("IBNR"), with such estimates based upon historical trends. Actual health
insurance claims may differ materially from the estimates, as a result of the
nature and extent of the actual IBNR claims paid. The Company maintains separate
insurance to cover the excess liability over an established specific single
claim amount and also an aggregate annual claim total.
Results of Operations
The 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, 2002, 2001
and 2000 (amounts in thousands, except for share amounts):
(Consolidated) 2002 % 2001 % 2000 %
- -------------- -------- ------- -------- ------- -------- -------
Net Revenues $ 83,404 100.0 $ 74,492 100.0 $ 59,139 100.0
Cost of goods sold 59,055 70.8 52,442 70.4 43,349 73.3
-------- ------- -------- ------- -------- -------
Gross profit 24,349 29.2 22,050 29.6 15,790 26.7
Selling, general and administrative 17,909 21.5 16,631 22.3 13,977 23.7
Other income (expense):
Interest income 16 -- 29 -- 41 .1
Interest expense (2,903) (3.5) (3,038) (4.1) (2,132) (3.6)
Interest expense-Warrants -- -- (234) (.3) (344) (.6)
Interest expense-financing fees (1,044) (1.2) (2,732) (3.6) (181) (.3)
Other (307) (.4) (46) (.1) 247 .4
-------- ------- -------- ------- -------- -------
Net income (loss) 2,202 2.6 (602) (.8) (556) (1.0)
-------- ------- -------- ------- -------- -------
Preferred Stock dividends (158) (.2) (145) (.2) (206) (.3)
Net income (loss) applicable
to Common Stock $ 2,044 2.4 $ (747) (1.0) $ (762) (1.3)
======== ======= ======== ======= ======== =======
Basic net income (loss) per
common share $ .06 $ (.03) $ (.04)
======== ======== ========
Diluted net income (loss) per
common share $ .05 $ (.03) $ (.04)
======== ======== ========
-19-
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 Waste Management Services
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 Company 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. The Company 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 Waste
Management Services 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 Waste Management
Services 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 Waste Management Services
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 Waste management Services 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 Waste Management Services 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
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 Waste Management
Services segment from 31.9% in 2001 to 37.6% in 2002. This increase reflects the
progress of the newly expanded mixed waste
-20-
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 Waste Management Services 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 expensefinancing 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 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,
-21-
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 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. Summary
- - Years Ended December 31, 2001 and 2000
Net Revenues
Consolidated revenues increased $15,353,000 or 26.0% for the year ended December
31, 2001, compared to the year ended December 31, 2000. This increase is
principally attributable to a full year of additional revenues resulting from
the acquisition of DSSI, effective August 31, 2000, which contributed
approximately $5,095,000 of the increase and the additional revenues resulting
from the acquisition of M&EC, effective June 25, 2001, which contributed
approximately $6,702,000 of the increase. Additionally, revenues increased in
the Nuclear Waste Management Services segment due to the mixed waste subcontract
work preformed for M&EC prior to the acquisition and from growth in mixed waste
revenues driven by the expansion of the mixed waste treatment facility in North
Florida. These factors combined increased revenues by approximately $17,195,000
in the Nuclear Waste Management Services segment. Offsetting this increase, were
decreases in the Industrial Waste Management Services segment totaling
approximately $1,836,000 and in the Consulting Engineering Services segment
totaling approximately $6,000. The decreases were primarily due to the harsher
weather conditions in the winter months, the impact of the downturn in the
economy and the reduced revenue in September 2001 within all segments resulting
from the tragic events of September 11, 2001. The strategy to target higher
margin business and the expiration of certain government contracts also
contributed to the decrease within the Industrial Waste Management Services
segment.
Cost of Goods Sold
Cost of goods sold increased $9,093,000, or 21.0% for the year ended December
31, 2001, compared to the year ended December 31, 2000. This increase in cost of
goods sold reflects principally the increased operating, disposal and
transportation costs corresponding to the increased revenues from the August 31,
2000, acquisition of DSSI, and the June 25, 2001, acquisition of M&EC. The
acquired facilities contributed additional cost of goods sold totaling
approximately $4,216,000 and $4,056,000, respectively. Additionally, cost of
goods sold increases were experienced in the Nuclear Waste Management Services
segment in conjunction with increased revenues from the mixed waste subcontract
work performed for M&EC prior to the acquisition and from growth in mixed waste
revenues driven by the expansion of the mixed waste facility in North Florida.
Combined, these factors increased cost of goods sold by $12,066,000 in the
Nuclear Waste Management Services segment. Offsetting these increases, were
decreases in cost of goods sold in the Industrial Waste Management Services
segment totaling approximately $2,721,000 and in the Consulting Engineering
Services segment totaling approximately $252,000. These decreases were in
conjunction with the decrease in revenues in these segments mentioned above and
cost reduction programs.
Gross Profit
Gross profit for the year ended December 31, 2001, increased to $22,050,000,
which as a percentage of revenue is 29.6%, reflecting an increase over the 2000
percent of revenue of 26.7%. This increase in the gross profit percentage
principally reflects the impact of increased wastewater activity, including
certain new
-22-
processes, the benefit of cost reduction programs and the impact of targeting
higher margin business in the Industrial Waste Management Services segment.
Additionally, the Consulting Engineering Services segment showed an increase in
gross profit percentage reflecting the benefits from the restructuring and
consolidation of our engineering businesses. Offsetting these increases was a
decrease in gross profit percentage in the Nuclear Waste Management Services
segment associated with the subcontract work performed for M&EC prior to the
acquisition at agreed upon reduced margins and the increased start-up costs
incurred as this segment ramps up to normal activities.
Selling, General and Administrative
Selling, general and administrative expenses increased $2,654,000 or 19.0% for
the year ended December 31, 2001, as compared to the corresponding period for
2000. The increase in selling, general and administrative expense is principally
due to the acquisition of DSSI, which reflects additional expense of $768,000
for this facility, as compared to the year ended December 31, 2000.
Additionally, selling, general and administrative expense increased due to the
impact of the acquisition of M&EC, effective June 25, 2001, which resulted in
additional expense of $1,232,000 and the remaining increase of $654,000 is
associated with additional sales and marketing efforts as we continue to refocus
the business segments into new environmental markets, such as nuclear and mixed
waste. However, as a percentage of revenue, selling, general and administrative
expenses decreased to 22.3% for the year ended December 31, 2001, compared to
23.7% for the same period of 2000.
Interest Expense
Interest expense increased approximately $906,000 for the year ended December
31, 2001, as compared to the corresponding period of 2000. This increase
reflects the impact of DSSI, which was acquired during August 2000. Two
promissory notes were executed in conjunction with the DSSI acquisition,
comprising $6,000,000 of the purchase price, resulting in approximately $126,000
of additional interest expense for the year 2001. This increase also reflects
the impact of M&EC, which was acquired during June 2001. As a condition of the
closing, M&EC entered into two installment agreements, comprising of the
original principal balance of $4,637,000, which resulted in approximately
$218,000 of additional interest expense. The remaining increase is a direct
result of the interest expense on the BHC Interim Funding, L.P. ("BHC") loan
agreement, which totaled $390,000, and the interest expense on the Associated
Mezzanine Investors-PESI, L.P. ("AMI") and Bridge East Capital, L.P. ("BEC")
loan agreement, which totaled $319,000, both related to the expansion of our
mixed waste facilities. This increase is offset by the impact of lower interest
rates due to a drop in the prime lending rate, reduced borrowing levels on the
revolving and term loan with PNC Bank, National Association ("PNC") and the debt
to equity conversion on amounts due to Capital Bank. Combined, these factors
resulted in a decrease in interest expense of $147,000.
Interest Expense - Warrants
Interest expense-Warrants for the year ended December 31, 2001, was $234,000.
This expense reflects the Black-Scholes pricing valuation for certain Warrants
issued to Capital Bank pursuant to the $3,000,000 Unsecured Promissory Note and
the $750,000 Unsecured Promissory Note. The notes required that certain Warrants
be issued upon the initial execution of the note and at monthly intervals until
the debt obligations to Capital Bank were repaid in full. During 2001, the
Company issued 315,000 Warrants to Capital Bank resulting in the above noted
expense.
Interest Expense Financing Fees
Interest expense-financing fees increased approximately $2,551,000 for the year
ended December 31, 2001, as compared to the corresponding period of 2000. This
increase is partially due to the amortization and write-off of unamortized
financing fees from the BHC debt of approximately $2,041,000. The increase is
also due to the amortization of PNC financing fees of $438,000 offset by the
financing fees of the previous primary lender recorded in 2000 of $171,000 and
AMI and BEC financing fees of $243,000. See Liquidity and Capital Resources in
this section and Note 6 to Notes to Consolidated Financial Statements regarding
the debt.
-23-
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, 2001 and 2000, we had no federal income tax
expense.
Preferred Stock Dividends
Preferred Stock dividends decreased approximately $61,000, for the year ended
December 31, 2001, as compared to the year ended December 31, 2000. This
decrease is principally due to the conversion of $1,735,000 (1,735 preferred
shares) of the Preferred Stock into Common Stock in January and April of 2001.
See Note 5 to Notes to Consolidated Financial Statements regarding the issuance
of Preferred Stock.
Liquidity and Capital Resources of the Company
Our capital requirements consist of general working capital needs, scheduled
principal payments on our debt obligations and capital leases, remediation
projects and planned capital expenditures. Our capital resources consist
primarily of cash generated from operations and funds available under our
revolving credit facility and proceeds from issuance of our common stock. Our
capital resources are impacted by changes in accounts receivable as a result of
revenue fluctuation, economic trends, and collection activities.
At December 31, 2002, we had cash of $212,000. This cash total reflects a
decrease of $648,000 from December 31, 2001, as a result of net cash provided by
operations of $5,613,000 offset by cash used in investing activities of
$4,757,000 (principally purchases of equipment, net totaling $4,761,000) and
cash used in financing activities of $1,504,000 (consisting of proceeds from
issuance of stock of $512,000, offset by net debt repayments of $2,016,000). The
Company is in a net borrowing position and therefore attempts to move all excess
cash balances immediately to the revolving credit facility, so as to reduce debt
and interest expense. During 2002 the Company implemented a centralized cash
management system which included new remittance lock boxes and resulted in
accelerated collection activities and reduced cash balances, as idle cash is
able to be moved without delay to the revolving credit facility.
Operating Activities
Accounts Receivable, net of allowances for doubtful accounts, totaled
$21,820,000, an increase of $4,629,000 over the December 31, 2001, balance of
$17,191,000. This increase principally reflects the impact of the higher fourth
quarter 2002 revenues within the Nuclear Waste Management Services segment,
which resulted in an increase of $6,848,000. Offsetting this was a decrease in
the accounts receivable of the Industrial Waste Management Services segment,
resulting from increased collection efforts, write-off of certain unreserved
uncollectible accounts and reduced revenue levels during the fourth quarter of
2002.
As of December 31, 2002, total consolidated accounts payable was $9,759,000, an
increase of $2,592,000 from the December 31, 2001, balance of $7,167,000. This
increase in accounts payable reflects the impact of increased revenues and
operating activities, and the timing of payments in the fourth quarter of 2002
as compared to 2001. This increase is also reflective of unfinanced capital
expenditures. During the fourth quarter, the accounts payable balance and its
aging will increase during seasonal periods and in conjunction with increases in
our accounts receivable balances or delays in collection of such accounts
receivable balances.
Accrued Expenses as of December 31, 2002, totaled $10,724,000, an increase of
$2,293,000 over the December 31, 2001, balance of $8,431,000. This increase in
accrued expenses reflects the increase in waste disposal and other operating
related expenses which increased by $1,407,000 over prior year. This increase
reflects the impact of larger amounts of mixed waste being received and
processed in conjunction with increased revenues in the Nuclear Waste Management
Services segment. Additionally, the salaries and employee benefits expense
accrual increased by $742,000 when compared to prior year. This increase
correlates to the increase in the number of employees in the Nuclear Waste
Management Services segment as we increase our sales and marketing efforts and
mixed waste processing activities.
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The working capital position at December 31, 2002, was $731,000, as compared to
a working capital position of $134,000 at December 31, 2001. The increase in
this position of $597,000 is principally a result of increased trade receivables
associated with the growth in revenue and an increase in prepaid insurance
relating to policy renewals late in the third quarter offset by an increase in
accounts payable and other operating accruals.
Investing Activities
Our purchases of new capital equipment for the twelve-month period ended
December 31, 2002, totaled approximately $5,822,000. These expenditures were for
expansion and improvements to the operations principally within the waste
management segments. These capital expenditures were principally funded by the
cash provided by operations of $1,061,000, through various other lease financing
sources and through Warrant proceeds raised during the year. We have budgeted
capital expenditures of approximately $6,500,000 for 2003, which includes an
estimated $1,393,000 to complete certain current projects committed at December
31, 2002, 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, the Company entered into a Revolving Credit, Term Loan and
Security Agreement ("Agreement") with PNC acting as agent ("Agent") for lenders,
and as issuing bank. The Agreement provides for a term loan ("Term Loan") in the
amount of $7,000,000, which requires principal repayments based upon a
seven-year amortization, payable over five years, with monthly installments of
$83,000 and the remaining unpaid principal balance of $2,083,000 due on December
22, 2005. Payments commenced on February 1, 2001. The Agreement also provided
for a revolving line of credit ("Revolving Credit") with a maximum principal
amount outstanding at any one time of $15,000,000. The Revolving Credit advances
are subject to limitations of an amount up to the sum of a) up to 85% of
Commercial Receivables aged 90 days or less from invoice date, b) up to 85% of
Commercial Broker Receivables aged up to 120 days from invoice date, c) up to
85% of acceptable Government Agency Receivables aged up to 150 days from invoice
date, and d) up to 50% of acceptable unbilled amounts aged up to 60 days, less
e) reserves Agent reasonably deems proper and necessary. The Revolving Credit
advances shall be due and payable in full on December 22, 2005. As of December
31, 2002, our excess availability under our revolving credit facility was
$4,108,000 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% (5.75% at December 31, 2002), and the Revolving
Credit at a floating rate equal to the prime rate plus 1% (5.25% at December 31,
2002). The loans are subject to a prepayment fee of 1 1/2% in the first year, 1%
in the second and third years and 3/4% after the third anniversary until
termination date.
In December 2000, the Company entered into an interest rate swap agreement
related to its Term Loan. This hedge has effectively fixed the interest rate on
the notional amount of $3,500,000 of the floating rate $7,000,000 PNC Term Loan.
The Company will pay the counterparty interest at a fixed rate equal to the base
rate of 6.25%, for a period from December 22, 2000, through December 22, 2005,
in exchange for the counterparty paying the Company one month LIBOR rate for the
same term (1.44% at December 31, 2002). The value of the interest rate swap at
January 1, 2001, was deminimus. At December 31, 2002, the market value of the
interest rate swap was in an unfavorable value position of $215,000 and was
recorded as a liability. During the twelve months ended December 31, 2002, the
Company recorded a loss on the interest rate swap of $57,000 which offset
against other comprehensive income on the Statement of Stockholders' Equity (see
Note 6 to Notes to Consolidated Financial Statements).
Effective as of June 2002, the Company and PNC entered into Amendment No. 1 to
the Agreement, which, among other things, increased the letter of credit
commitment from $500,000 to $4,500,000 and provided for a $4.0 million standby
letter of credit. The standby Letter of Credit was issued to secure certain
surety bond obligations. Pursuant to the terms of Amendment No. 1, as partial
collateral for the issuance of the standby letter of credit, PNC will charge a
reserve of approximately $66,000 each month against the availability under
-25-
the Revolving Credit beginning July 15, 2002, until such time as the standby
letter of credit is fully reserved. As of December 31, 2002, $400,000 has been
charged against availability. As a condition precedent to this Amendment No. 1,
the Company paid a $50,000 amendment fee to PNC.
Pursuant to the terms of the Stock Purchase Agreements in connection with the
acquisition of Perma-Fix of Orlando, Inc. ("PFO"), Perma-Fix of South Georgia,
Inc. ("PFSG") and Perma-Fix of Michigan, Inc. ("PFMI"), a portion of the
consideration was paid in the form of Promissory Notes, in the aggregate amount
of $4,700,000, payable to the former owners of PFO, PFSG and PFMI. The
Promissory Notes are paid in equal monthly installments of principal and
interest of approximately $90,000 over five years with the first installment due
on July 1, 1999, and having an interest rate of 5.5% for the first three years
and 7% for the remaining two years. The aggregate outstanding balance of the
Promissory Notes total $1,538,000 at December 31, 2002, of which $1,008,000 is
in the current portion. Payments of such Promissory Notes are guaranteed by PFMI
under a non-recourse guaranty, which non-recourse guaranty is secured by certain
real estate owned by PFMI. These Promissory Notes are subject to subordination
agreements with the Company's senior and subordinated lenders.
On August 31, 2000, as part of the consideration for the purchase of DSSI, the
Company issued to Waste Management Holdings a long term unsecured promissory
note (the "Unsecured Promissory Note") in the aggregate principal amount of
$3,500,000, bearing interest at a rate of 7% per annum and having a five-year
term with interest to be paid annually and principal due in one lump sum at the
end of the term of the Unsecured Promissory Note (August 2005).
On July 31, 2001, the Company issued approximately $5.6 million of its 13.50%
Senior Subordinated Notes due July 31, 2006 (the "Notes"). The Notes were issued
pursuant to the terms of a Note and Warrant Purchase Agreement, dated July 31,
2001 (the "Purchase Agreement"), between the Company, Associated Mezzanine
Investors-PESI, L.P. ("AMI"), and Bridge East Capital, L.P. ("BEC"). The Notes
are unsecured and are unconditionally guaranteed by the subsidiaries of the
Company. The Company's payment obligations under the Notes are subordinate to
the Company's payment obligations to its primary lender and to certain other
debts of the Company up to an aggregate amount of $25 million. The net proceeds
from the sale of the Notes were used to repay the Company's short term loan.
Under the terms of the Purchase Agreement, the Company also issued to AMI and
BEC Warrants to purchase up to 1,281,731 shares of the Company's Common Stock
("Warrant Shares") at an initial exercise price of $1.50 per share (the
"Warrants"), subject to adjustment under certain conditions, which were valued
at $1,622,000 and recorded as a debt discount and are being amortized over the
term of the Notes. The Warrants, as issued, also contain a cashless exercise
provision. The Warrant Shares are registered under an S-3 Registration Statement
that was declared effective on November 27, 2002.
In connection with the sale of the Notes, the Company, AMI, and BEC entered into
an Option Agreement, dated July 31, 2001 (the "Option Agreement"). Pursuant to
the Option Agreement, the Company granted each purchaser an irrevocable option
requiring the Company to purchase any of the Warrants or the shares of Common
Stock issuable under the Warrants (the "Warrant Shares") then held by the
purchaser (the "Put Option"). The Put Option may be exercised at any time
commencing July 31, 2004, and ending July 31, 2008. In addition, each purchaser
granted to the Company an irrevocable option to purchase all the Warrants or the
Warrant Shares then held by the purchaser (the "Call Option"). The Call Option
may be exercised at any time commencing July 31, 2005, and ending July 31, 2008.
The purchase price under the Put Option and the Call Option is based on the
quotient obtained by dividing (a) the sum of six times the Company's
consolidated EBITDA for the period of the 12 most recent consecutive months
minus Net Debt plus the Warrant Proceeds by (b) the Company's Diluted Shares (as
the terms EBITDA, Net Debt, Warrant Proceeds, and Diluted Shares are defined in
the Option Agreement). Pursuant to the guidance under EITF 00-19 on accounting
for and financial presentation of securities that could potentially be settled
in a Company's own stock, the put warrants would be classified outside of equity
based on the ability of the holder to require cash settlement. Also, EITF Topic
D-98 discusses the accounting for a security that will become redeemable at a
future determinable date and its redemption is variable. This is the case with
the Warrants as the date is
-26-
fixed, but the put or call price varies. The EITF gives two possible
methodologies for valuing the securities. The Company accounts for the changes
in redemption value immediately as they occur and the Company adjusts the
carrying value of the security to equal the redemption value at the end of each
reporting period. On December 31, 2002, the Put Option had no value and no
liability was recorded.
M&EC issued a promissory note for a principal amount of $3.7 million to PDC,
dated June 7, 2001, for monies advanced to M&EC for certain services performed
by PDC. The promissory note is payable over eight years on a semiannual basis on
June 30 and December 31. Interest is accrued at the applicable rate (7% on
December 31, 2002) and payable in one lump sum at the end of the loan period. On
December 31, 2002, the outstanding balance was $4,125,000 including accrued
interest of approximately $531,000. PDC has directed M&EC to make all payments
under the promissory note directly to the IRS to be applied to PDC's obligations
under its installment agreement with the IRS.
In conjunction with the Company's acquisition of M&EC, M&EC entered into an
installment agreement with the Internal Revenue Service ("IRS") for a principal
amount of $923,000 dated June 7, 2001, for certain withholding taxes owed by
M&EC. The installment agreement is payable over eight years on a semiannual
basis on June 30 and December 31. Interest is accrued at the applicable law rate
("Applicable Rate") pursuant to the provisions of section 6621 of the Internal
Revenue Code of 1986 as amended. Such rate is adjusted on a quarterly basis and
payable in lump sum at the end of the installment period. On December 31, 2002,
the rate was 7%. On December 31, 2002, the outstanding balance was $1,020,000
including accrued interest of approximately $127,000.
The following table summarizes the Company's contractual obligations at December
31, 2002, and the effect such obligations are expected to have on its liquidity
and cash flow in future periods, (in thousands):
Contractual Obligations
Payments due by period
-------------------------------------------------
Less than After
Total 1 year 1-3 years 4-5 years 5 years
------- --------- --------- --------- -------
Long-term debt $30,515 $3,373 $25,294 $1,848 $ --
Operating leases 6,128 2,008 3,450 665 5
------- ------ ------- ------ ----
Total contractual obligations $36,643 $5,381 $28,744 $2,513 $ 5
======= ====== ======= ====== ====
The Company has 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 the
Company's Board of Directors, on a semiannual basis. Dividends on the
outstanding Preferred Stock may be paid at the option of the Company, if
declared by the Board of Directors, in cash or in shares of the Company's Common
Stock as described under Note 5 to Notes to Consolidated Financial Statements.
Under the terms of the Company's loan agreement, the Company may not pay these
dividends in cash without the lender's prior consent.
During 2002, accrued dividends for the period July 1, 2001, through December 31,
2001, in the amount of approximately $63,000 were paid in March 2002, in the
form of 24,217 shares of Common Stock. Dividends for the period January 1, 2002
through June 30, 2002, of approximately $62,000 were paid in the form of 22,106
shares of Common Stock. The 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. Under the Company's
loan agreement, any dividends declared by the Company's Board of Directors on
its outstanding shares of Preferred Stock is required to be paid in Common Stock
of the Company.
During 2001, the Company completed a private placement offering of units (the
"Offering") to accredited investors. Each unit was comprised of one share of the
Company's Common Stock and one Warrant to purchase one share of Common Stock.
The purchase price for each unit was $1.75, and the exercise price of each
Warrant included in the units is $1.75, subject to adjustment under certain
conditions. At the
-27-
completion of the offering, on July 30, 2001, 4,397,566 units were accepted for
an aggregate purchase price of $7,696,000. Expenses related to the offering
subscriptions, were approximately $814,000.
In summary, we have continued to take steps to improve our operations as
discussed above. However, with the acquisition of M&EC in 2001, the completion
of M&EC's initial phase of construction and the ramp-up of the mixed waste
segment, we incurred and assumed certain debt obligations and long-term
liabilities, which had a short-term impact on liquidity. Additionally, reduced
revenue levels, the start-up of the new wastewater treatment technology within
the Industrial Waste Management Services segment and the utilization of working
capital funds for capital spending purposes has contributed toward the negative
impact on liquidity. However, as these projects became fully operational and the
mixed waste segment continues to expand, our liquidity position demonstrated
improvement during the last three quarters of 2002. If we are unable to continue
to improve our operations, to successfully expand our mixed waste activities,
and to continue profitability in the foreseeable future, such would have a
material adverse effect on our liquidity position.
Known Trends and Uncertainties
Seasonality. Historically the Company has experienced reduced revenues,
operating losses or decreased operating profits during the first and fourth
quarters of the Company's fiscal years due to a seasonal slowdown in operations
from poor weather conditions and overall reduced activities during the holiday
season. During the Company's second and third fiscal quarters there has
historically been an increase in revenues and operating profits. Management
expects this trend to continue in future years as this was evident in the four
quarters of 2002.
Economic Conditions. Economic downturns or recessionary conditions can adversely
affect the demand for the Company's services, principally within the Industrial
Waste Management Services segment. Reductions in industrial production generally
follow such economic conditions, resulting in reduced levels of waste being
generated and/or sent off for treatment. The Company believes that its revenues
and profits were negatively affected within this segment by the recessionary
conditions in 2001 and 2002, and believes that this trend may continue into
2003.
Significant contracts. The Company's revenues are principally derived from
numerous and varied customers. However, Perma-Fix Government Services ("PFGS")
manages six contracts with the Defense Reutilization & Marketing Service, a
sub-agency of the Department of Defense which accounted for 8.0% of total
consolidated revenues in 2002, and M&EC operates under the Oak Ridge Contracts
which contributed 11.6% of total consolidated revenues in 2002. As the newly
constructed M&EC facility continues to enhance its processing capabilities and
completes certain expansion projects and with the amended pricing structure
under the Oak Ridge Contracts, the Company could see higher total revenue under
the Oak Ridge Contracts. In February 2003, M&EC commenced legal proceedings
against the general contractor under the Oak Ridge Contracts, seeking payment
from Bechtel Jacobs of approximately $4.3 million in surcharges relating to
certain wastes that were treated by M&EC in 2001 and 2002 under the Oak Ridge
Contracts. Bechtel Jacobs continues to deliver waste to M&EC for treatment, and
M&EC continues to accept such waste. There is no guarantee of future business
under the Oak Ridge Contracts, and the Oak Ridge Contracts may be terminated by
either party at any time. Termination of these contracts could have a material
adverse effect on the Company. The Company is working towards increasing other
sources of revenues at M&EC to reduce the risk of reliance on one major source
of revenues.
As discussed under "BUSINESS - Dependence Upon a Single or Few Customers", PFD,
a subsidiary of the Company has been awarded a subcontract and limited notice to
proceed with post-treatment of the neutralized VX product called hydrolysate.
This award is subject to PFD and the general contractor entering into definitive
agreements. It is anticipated that under the definitive agreements, when
finalized, there will be approximately 900,000 gallons of hydrolysate to be
biologically treated by PFD, at an approximate value of $9.0 million. It is
anticipated that, if the agreements are completed, work by PFD to treat this
waste will begin in the Fall of 2003 and will take approximately nine months to
complete.
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Insurance. The Company maintains insurance coverage similar to, or greater than,
the coverage maintained by other companies of the same size and industry, which
complies with the requirements under applicable environmental laws. The Company
evaluates its insurance policies annually to determine adequacy, cost
effectiveness and desired deductible levels. Due to the downturn in the economy
and changes within the environmental insurance market, the Company has no
guarantee that it will be able to obtain similar insurance in future years, or
that the cost of such insurance will not increase materially.
Acquisition - East Tennessee Materials and Energy Corporation
On June 25, 2001, the Company 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,
the Company now owns all of the issued and outstanding voting capital stock of
M&EC.
The purchase price paid by the Company for the M&EC voting stock was
approximately $2,396,000, which was paid by the Company issuing 1,597,576 shares
of the Company's Common Stock to the stockholders of M&EC, with each share of
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. In addition, 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. The
Series B Preferred Stock is non-voting 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. As a
condition to the closing of the acquisition, the Company also issued 346,666
shares of the Company's Common Stock to certain creditors of M&EC in
satisfaction of $520,000 of M&EC's liabilities.
Prior to the date of acquisition, the Company was operating under a subcontract
agreement for the design and construction of M&EC's facility. Pursuant to the
subcontract agreement, the Company, as of the date of acquisition, had loaned
and advanced M&EC approximately $2.3 million for working capital purposes and
had billed approximately $9.8 million related to the construction of the new
facility. At the date of closing, the Company advanced funds to M&EC to pay
certain liabilities to the IRS, 401(k) plans and several debt holders, in the
aggregate amount of $2,048,000. During 2001, the net cash used for acquisition,
including the above noted construction and advanced funds, totaled approximately
$10,083,000.
As a condition to the closing of the M&EC Acquisition, M&EC entered into an
installment agreement with the Internal Revenue Service (the "IRS") relating to
various withholding taxes owing by M&EC in the amount of approximately $923,000
("M&EC Installment Agreement"). The M&EC Installment Agreement provides for the
payment of such withholding taxes over a term of approximately eight years. In
addition, as a condition to such closing, one of M&EC's stockholders,
Performance Development Corporation, a Tennessee corporation ("PDC") and two
corporations affiliated with PDC, PDC Services Corporation ("PDC Services") and
Management Technologies, Inc. ("MTI") each entered into an installment agreement
with the IRS relating to withholding taxes owing by each of PDC, PDC Services
and MTI ("PDC Installment Agreement"). The PDC Installment Agreement provides
for the payment of semiannual installments over a term of eight years in the
aggregate amount of approximately $3,714,000. The M&EC Installment Agreement and
the PDC Installment Agreement provides that (a) the Company does not have any
liability for any taxes, interest or penalty with respect to M&EC, PDC, PDC
Services or MTI; (b) M&EC will be solely liable for paying the obligations of
M&EC under the M&EC Installment Agreement; (c) the IRS will not assert any
liability against the Company, M&EC or any current or future related affiliate
of the Company for any tax, interest or penalty of PDC, PDC Services or MTI; and
(d) as long as the payments of M&EC
-29-
under its installment agreement are made timely, pursuant to the terms of the
installment agreement, the IRS will not file a notice of a federal tax lien,
change or cancel the installment agreement, or take any other type of action
against M&EC with respect to the withholding taxes and interest set forth in the
installment agreement. The Company did not acquire any interest in PDC, PDC
Services or MTI.
Prior to the closing of the M&EC Acquisition, PDC had advanced monies to, and
performed certain services for M&EC totaling an aggregate of $3.7 million. In
payment of such advances and services and as a condition to closing, M&EC issued
a Promissory Note, dated June 7, 2001, to PDC in the principal amount of
approximately $3.7 million. The promissory note is payable over eight years to
correspond to payments due to the IRS under the PDC Installment Agreement. PDC
has directed M&EC to make all payments under the promissory note directly to the
IRS to be applied to PDC's obligations under its installment agreement with the
IRS.
In connection with the closing of the M&EC Acquisition, the Company also made
certain corrective contributions to M&EC's 401(k) Plan and to the 401(k) Plan of
PDC. The total amount of corrective contributions made to the M&EC 401(k) Plan
and the PDC 401(k) Plan was $1.8 million. The Company utilized a portion of the
proceeds of its private placement offering described in Note 11 to Notes to
Consolidated Financial Statements and a portion of its working capital line of
credit to fund the corrective contributions to the 401(k) Plans described above.
Acquisition - Diversified Scientific Services, Inc.
On August 31, 2000, the Company purchased all of the outstanding capital stock
of DSSI and paid $8,500,000, as follows: (i) $2,500,000 in cash at closing, (ii)
a guaranteed promissory note (the "Guaranteed Note"), guaranteed by DSSI, with
the DSSI guarantee secured by certain assets of DSSI (except for accounts
receivable, general intangibles, contract rights, cash, real property and
proceeds thereof), executed by the Company in favor of Waste Management Holdings
in the aggregate principal amount of $2,500,000 and bearing interest at a rate
equal to the prime rate charged on August 30, 2000, as published in the Wall
Street Journal plus 1.75% per annum and having a term of the lesser of 120 days
from August 31, 2000, or the business day that the Company acquires any entity
or substantially all of the assets of an entity (the "Guaranteed Note Maturity
Date"), with interest and principal due in a lump sum at the end of the
Guaranteed Note Maturity Date, and (iii) an unsecured promissory note (the
"Unsecured Promissory Note"), executed by the Company in favor of Waste
Management Holdings in the aggregate principal amount of $3,500,000, and bearing
interest at a rate of 7% per annum and having a five-year term with interest to
be paid annually and principal due at the end of the term of the Unsecured
Promissory Note. The $2.5 million guaranteed promissory note was paid in
December 2000, using proceeds received under our new senior credit facility.
Potential Acquisition
The Company is in the process of negotiating to acquire from a trustee another
mixed waste permitted facility which is currently in bankruptcy. As of the date
of this report, no agreements have been entered into with the seller, and the
Company does not know if it will be successful in acquiring this mixed waste
facility. If the Company is successful, it is anticipated that the purchase
price to be paid by the Company will be approximately $6,000,000, payable in
notes or a combination of notes and cash, with the notes secured certain by the
assets of the acquired 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.
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We routinely use third party disposal companies, who ultimately destroy or
secure landfill residual materials generated at our facilities or at a client's
site. We, compared to certain of our competitors, dispose of significantly less
hazardous or industrial by-products from our operations due to rendering
material nonhazardous, discharging treated wastewaters to publicly-owned
treatment works and/or processing wastes into saleable products. In the past,
numerous third party disposal sites have improperly managed wastes 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 2003 $982,000 in environmental 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 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 2003 to be approximately $211,000 at the
EPS site, $307,000 at the PFM location, $126,000 at the PFSG site and $338,000
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 these expenses to
remediate these four sites from funds generated internally, however, no
assurances can be made that we will be able to do so.
At December 31, 2002, the Company had accrued environmental liabilities totaling
$2,696,000, which reflects a decrease of $838,000 from the December 31, 2001,
balance of $3,534,000. The decrease represents payments on remediation projects.
The December 31, 2002, current and long-term accrued environmental balance is
recorded as follows:
PFD PFMI PFSG PFM Total
-------- -------- ---------- -------- ----------
Current accrual $211,000 $307,000 $ 126,000 $338,000 $ 982,000
Long-term accrual -- -- 1,134,000 580,000 1,714,000
-------- -------- ---------- -------- ----------
Total $211,000 $307,000 $1,260,000 $918,000 $2,696,000
======== ======== ========== ======== ==========
Interest Rate Swap
The Company entered into an interest rate swap agreement effective December 22,
2000, to modify the interest characteristics of its outstanding debt from a
floating basis to a fixed rate, thus reducing the impact of interest rate
changes on future income. This agreement involves the receipt of floating rate
amounts in exchange for fixed rate interest payments over the life of the
agreement without an exchange of the underlying principal amount. The
differential to be paid or received is accrued as interest rates change and
recognized as an adjustment to interest expense related to the debt. The related
amount payable to or receivable from counter parties is included in other assets
or liabilities. The value of the interest rate swap at January 1, 2001, was
deminimus. At December 31, 2002, the market value of the interest rate swap was
in an unfavorable value position of $215,000 and was recorded as a liability.
During the twelve months ended December 31, 2002, the Company recorded a loss on
the interest rate swap of $57,000 which offset other comprehensive income on the
Statement of Stockholders' Equity (see Note 6 to Notes to Consolidated Financial
Statements).
Recently Adopted Accounting Standards
The Company adopted the Financial Accounting Standards Board FASB Statements No.
141, Business Combinations ("SFAS 141"), and No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), effective January 1, 2002. SFAS 141 requires the
use of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that the Company recognize acquired
intangible assets apart from goodwill if the acquired intangible assets meet
certain criteria, SFAS 141 applies to all business combinations initiated after
June 30, 2001, and for purchase business combinations completed on or after July
1, 2001. It also requires, upon
-31-
adoption of SFAS 142, that the Company reclassify the carrying amounts of
intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 required the Company to
complete a transitional goodwill impairment test six months from the date of
adoption. The Company was also required to reassess the useful lives of other
intangible assets within the first interim quarter after adoption of SFAS 142.
The Company hired an independent appraisal firm to complete its transitional
evaluation of intangible assets for impairment, and the appraisal report
indicated that no impairment existed as of January 1, 2002. The Company also
completed its annual impairment test as of October 1, 2002, which also indicated
no impairment to intangible assets. The Company has discontinued amortizing its
indefinite-life intangible assets (goodwill and permits). Prior to January 1,
2002, goodwill and permits were amortized on a straight-line basis over ten to
forty years.
Pursuant to the Company's adoption of SFAS 141 and 142, the Company changed its
method of recording acquired permits in connection with business combinations.
For all acquisitions prior to June 2001, the Company allocated the excess
purchase price between goodwill and permits, based upon the percentage of
revenue generated through permitted activities. For all acquisitions after May
2001, the Company believes that all of the excess purchase price should be
attributed to the permit. The Company will expense as incurred any ongoing costs
to maintain and renew its permits. These ongoing costs are significantly less
than the initial costs to obtain a permit.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS 144"). This statement supersedes FAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of" and Accounting Principals Board Opinion No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This Statement retains the fundamental provisions of FAS 121 for
recognition and measurement of impairment, but amends the accounting and
reporting standards for segments of a business to be disposed of. The adoption
of this pronouncement had no impact on the Company's financial position or
results operations.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143 ("FAS 143"), Accounting for Asset
Retirement Obligations, effective for the fiscal years beginning after June 15,
2002. This statement provides the accounting for the cost of legal obligations
associated with the retirement of long-lived assets. FAS 143 also requires that
companies recognize the fair value of a liability for asset retirement
obligations in the period in which the obligations are incurred and capitalize
that amount as a part of the book value of the long-lived asset. That cost is
then depreciated over the remaining life of the underlying long-lived asset. The
Company is currently evaluating the impact of the adoption of FAS 143.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," issued in July 2002, addresses financial accounting and reporting
for costs associated with exit or disposal activities. It nullifies EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability be recognized for the
cost associated with an exit or disposal activity only when the liability is
incurred, that is, when it meets the definition of a liability in the FASB
conceptual framework. SFAS No. 146 also establishes fair value as the objective
for initial measurement of liabilities related to exit or disposal activities.
The Statement is effective for exit or disposal activities that are initiated
after December 31, 2002. The
-32-
Company believes the adoption of SFAS No. 146 will not have a material impact on
the Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks arising from adverse changes in
interest rates, primarily due to the potential effect of such changes on the
Company's variable rate loan arrangements with PNC, as described under Note 6 to
Notes to Consolidated Financial Statements. As discussed therein, the Company
entered into an interest rate swap agreement to modify the interest
characteristics of $3.5 million of its $7.0 million term loan with PNC Bank,
from a floating rate basis to a fixed rate, thus reducing the impact of interest
rate changes on this portion of the debt.
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 the Company's ability to develop or adopt new and existing technologies in
the conduct of its operations;
o anticipated improvement in the financial performance of the Company;
o ability to comply with the Company's general working capital requirements;
o ability to 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 the Company's revolving
line of credit;
o ability to generate sufficient cash flow from operations to fund all costs
of operations and remediation of certain formerly leased property in
Dayton, Ohio, and the Company's facilities in Memphis, Tennessee;
Valdosta, Georgia and Detroit Michigan;
o ability to remediate certain contaminated sites for projected amounts;
o 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 permitted mixed waste facility;
o no expectation of material future inflationary changes;
o the volume of hydrolysate expected to be created under the subcontract
relating to the Newport Chemical Agent Disposal Facility;
o our potential advantage over our competitors due to our Bio-Fix process;
and
o ability to fund budgeted capital expenditures for 2003;
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;
-33-
o the ability to maintain and obtain required permits and approvals to
conduct operations;
o the ability to develop new and existing technologies in the conduct of
operations;
o ability to retain or renew certain required permits;
o discovery of additional contamination or expanded contamination at a
certain Dayton, Ohio, property formerly leased by the Company or the
Company's facilities at Memphis, Tennessee; Valdosta, Georgia and Detroit,
Michigan, which would result in a material increase in remediation
expenditures;
o determination that PFM is the source of chlorinated compounds at the Allen
Well Field;
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 against
Bechtel Jacobs or otherwise;
o inability to maintain profitability on an annualized basis;
o the inability of the Company to maintain the listing of its Common Stock
on the NASDAQ;
o the determination that PFMI or PFO was responsible for a material amount
of remediation at certain Superfund sites; and
o terminations of contracts with federal agencies or subcontracts involving
federal agencies, or reduction in amount of waste delivered to the Company
under these contracts or subcontracts.
The Company undertakes no obligations to update publicly any forward-looking
statement, whether as a result of new information, future events or otherwise.
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 35
Consolidated Balance Sheets as of December 31, 2002 and 2001 36
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 38
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 39
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2002, 2001 and 2000 40
Notes to Consolidated Financial Statements 41
Financial Statement Schedule:
II Valuation and Qualifying Accounts for the years ended
December 31, 2002, 2001 and 2000 87
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.
-34-
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, 2002 and 2001,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2002. 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, 2002 and 2001, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2002, 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 26, 2003
-35-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31
(Amounts in Thousands, Except for Share Amounts) 2002 2001
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 212 $ 860
Restricted cash 20 20
Accounts receivable, net of allowance for doubtful
accounts of $1,212 and $725, respectively 21,820 17,191
Inventories 682 756
Prepaid expenses 2,722 954
Other receivables 113 142
--------- --------
Total current assets 25,569 19,923
Property and equipment:
Buildings and land 16,161 15,210
Equipment 29,125 26,915
Vehicles 2,616 2,120
Leasehold improvements 10,963 10,029
Office furniture and equipment 1,954 1,657
Construction in progress 4,325 4,382
--------- --------
65,144 60,313
Less accumulated depreciation/amortization (15,219) (11,940)
--------- --------
Net property and equipment 49,925 48,373
Intangibles and other assets:
Permits, net 20,759 20,639
Goodwill, net 6,525 6,509
Other assets 3,047 3,693
--------- --------
Total assets $ 105,825 $ 99,137
========= ========
The accompanying notes are an integral part of these
consolidated financial statements.
-36-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
As of December 31
(Amounts in Thousands, Except for Share Amounts) 2002 2001
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,759 $ 7,167
Current environmental accrual 982 1,202
Accrued expenses 10,724 8,431
Current portion of long-term debt 3,373 2,989
--------- --------
Total current liabilities 24,838 19,789
Environmental accruals 1,714 2,332
Accrued closure costs 4,929 4,919
Other long-term liabilities 1,332 814
Long-term debt, less current portion 27,142 28,157
--------- --------
Total long-term liabilities 35,117 36,222
--------- --------
Total liabilities 59,955 56,011
Commitments and Contingencies (see Notes 6, 8, 9 and 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 (see Note 5) 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; 50,000,000 shares authorized,
35,326,734 and 35,008,005 shares issued, including 988,000
shares held as treasury stock, respectively 35 35
Additional paid-in capital 66,799 66,042
Accumulated deficit (20,172) (22,216)
Interest rate swap (215) (158)
--------- --------
46,447 43,703
Less Common Stock in treasury at cost; 988,000 shares (1,862) (1,862)
--------- --------
Total stockholders' equity 44,585 41,841
--------- --------
Total liabilities and stockholders' equity $ 105,825 $ 99,137
========= ========
The accompanying notes are an integral part of these
consolidated financial statements.
-37-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31
(Amounts in Thousands, Except for Share Amounts) 2002 2001 2000
- ---------------------------------------------------------------------------------------
Net revenues $ 83,404 $ 74,492 $ 59,139
Cost of goods sold 59,055 52,442 43,349
-------- -------- --------
Gross profit 24,349 22,050 15,790
Selling, general and administrative expenses 17,909 16,631 13,977
Income from operations 6,440 5,419 1,813
Other income (expense):
Interest income 16 29 41
Interest expense (2,903) (3,038) (2,132)
Interest expense-Warrants -- (234) (344)
Interest expense-financing fees (1,044) (2,732) (181)
Other (307) (46) 247
-------- -------- --------
Net income (loss) 2,202 (602) (556)
Preferred Stock dividends (158) (145) (206)
-------- -------- --------
Net income (loss) applicable
to Common Stock $ 2,044 $ (747) $ (762)
======== ======== ========
Net income (loss) per common share:
Basic $ .06 $ (.03) $ (.04)
======== ======== ========
Diluted $ .05 $ (.03) $ (.04)
======== ======== ========
Number of shares and potential common shares used in
computing net income (loss) per share:
Basic 34,217 27,235 21,558
======== ======== ========
Diluted 42,618 27,235 21,558
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
-38-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
As of December 31
(Amounts in Thousands) 2002 2001 2000
- ---------------------- ------- -------- -------
Cash flows from operating activities:
Net income (loss) $ 2,202 $ (602) $ (556)
Adjustments to reconcile net income (loss) to cash provided by
(used in) operations:
Depreciation and amortization 4,244 4,616 3,651
Provision for bad debt and other reserves 1,211 334 99
Loss (gain) on sale of plant, property and equipment 19 28 (122)
Issuance of Warrants for financing and services -- 234 389
Changes in assets and liabilities, net of effects from business
acquisitions:
Accounts receivable (5,839) (4,143) (980)
Prepaid expenses, inventories and other assets (252) 512 (2,515)
Accounts payable and accrued expenses 4,028 (1,183) (193)
------- -------- -------
Net cash provided by (used in) operations 5,613 (204) (227)
------- -------- -------
Cash flows from investing activities:
Purchases of property and equipment, net (4,761) (4,081) (3,170)
Proceeds from sale of plant, property and equipment 10 167 227
Change in restricted cash, net (6) (18) 295
Cash used for acquisition consideration -- (10,083) (2,500)
------- -------- -------
Net cash used in investing activities (4,757) (14,015 (5,148)
------- -------- -------
Cash flows from financing activities:
Borrowings of revolving loan and term note facility 78 921 3,731
Principal repayments of long term debt (2,094) (3,136) (3,940)
Proceeds from issuance of long term debt -- 6,161 3,750
Proceeds from issuance of stock 512 10,635 1,516
------- -------- -------
Net cash (used in) provided by financing activities (1,504) 14,581 5,057
------- -------- -------
(Decrease) increase in cash (648) 362 (318)
Cash at beginning of period 860 498 816
------- -------- -------
Cash at end of period $ 212 $ 860 $ 498
======= ======== =======
- -----------------------------------------------------------------------------------------------------
Supplemental disclosure:
Interest paid $ 2,569 $ 2,656 $ 1,772
Non-cash investing and financing activities:
Issuance of Common Stock for services 120 63 236
Issuance of Common Stock for payment of dividends 125 184 214
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 -- 3,550 997
Interest rate swap valuation 57 158 --
Long-term debt incurred for purchase of property and equipment 1,061 517 642
Long-term debt incurred for acquisition -- -- 6,000
Long-term debt and accrued interest exchanged for Common Stock -- 3,144 --
The accompanying notes are an integral part of these
consolidated financial statements.
-39-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31
Preferred Stock Common Stock Additional
(Amounts in thousands --------------- ------------ Paid-in
except for share amounts) Shares Amount Shares Amount Capital
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 4,537 $ -- 21,501,776 $ 21 $ 42,367
Net loss -- -- -- -- --
Preferred Stock dividends -- -- -- -- --
Issuance of Common Stock for
Preferred Stock dividends -- -- 168,825 -- 214
Issuance of Common Stock
for acquisition -- -- 55,904 -- --
Issuance of stock for cash
and services -- -- 219,703 -- 276
Conversion of Preferred Stock to
Common Stock (350) -- 322,351 1 (1)
Issuance of Warrants in
conjunction with financing -- -- -- -- 997
Issuance of Warrants for
services -- -- -- -- 163
Exercise of Warrants -- -- 1,161,200 1 1,312
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2000 4,187 $ -- 23,429,759 $ 23 $ 45,328
============= ============= ============= ============= =============
Comprehensive loss
Net loss -- -- -- -- --
Other Comprehensive loss:
Interest rate swap -- -- -- -- --
Comprehensive loss (760)
Preferred Stock dividends -- -- -- -- --
Issuance of Common Stock for
Preferred Stock dividends -- -- 117,676 -- 184
Issuance of Common Stock for
cash and services -- -- 120,784 -- 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
Issuance of Common Stock from
Private Placement Offering -- -- 4,397,566 5 6,877
Exchange of Preferred Stock
Series 14, 15 & 16 for Series 17 48 -- -- -- --
Debt for equity exchange -- -- 1,999,437 2 3,142
Issuance of Warrants for services
and financing -- -- -- -- 3,784
Exercise of Warrants and Options -- 1,841,875 2 3,649
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2001 2,500 $ -- 35,008,005 $ 35 $ 66,042
============= ============= ============= ============= =============
Comprehensive income
Net income -- -- -- -- --
Other comprehensive income (loss):
Interest rate swap -- -- -- -- --
Comprehensive income
Preferred Stock dividends -- -- -- -- --
Issuance of Common Stock for
Preferred Stock dividends -- -- 46,323 -- 125
Issuance of Common Stock for
cash and services -- -- 121,360 -- 282
Exercise of Warrants and Options -- -- 151,046 -- 350
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2002 2,500 $ -- 35,326,734 $ 35 $ 66,799
============= ============= ============= ============= =============
Common
Interest Stock Total
(Amounts in thousands Rate Accumulated Held in Stockholders
except for share amounts) Swap Deficit Treasury Equity
- ----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ -- $ (20,707) $ (1,862) $ 19,819
Net loss -- (556) -- (556)
Preferred Stock dividends -- (206) -- (206)
Issuance of Common Stock for
Preferred Stock dividends -- -- -- 214
Issuance of Common Stock
for acquisition -- -- -- --
Issuance of stock for cash
and services -- -- -- 276
Conversion of Preferred Stock to
Common Stock -- -- -- --
Issuance of Warrants in
conjunction with financing -- -- -- 997
Issuance of Warrants for
services -- -- -- 163
Exercise of Warrants -- -- -- 1,313
------------- ------------- ------------- -------------
Balance at December 31, 2000 $ -- $ (21,469) $ (1,862) $ 22,020
============= ============= ============= =============
Comprehensive loss
Net loss -- (602) -- (602)
Other Comprehensive loss:
Interest rate swap (158) -- -- (158)
-------------
Comprehensive loss
Preferred Stock dividends -- (145) -- (145)
Issuance of Common Stock for
Preferred Stock dividends -- -- -- 184
Issuance of Common Stock for
cash and services -- -- -- 165
Conversion of Preferred Stock to
Common Stock -- -- -- --
Issuance of Common Stock in
conjunction with acquisition -- -- -- 2,916
Issuance of Common Stock from
Private Placement Offering -- -- -- 6,882
Exchange of Preferred Stock
Series 14, 15 & 16 for Series 17 -- -- -- --
Debt for equity exchange -- -- -- 3,144
Issuance of Warrants for services
and financing -- -- -- 3,784
Exercise of Warrants and Options -- -- -- 3,651
------------- ------------- ------------- -------------
Balance at December 31, 2001 $ (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 -- -- -- 125
Issuance of Common Stock for
cash and services -- -- -- 282
Exercise of Warrants and Options -- -- -- 350
------------- ------------- ------------- -------------
Balance at December 31, 2002 $ (215) $ (20,172) $ (1,862) $ 44,585
============= ============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
-40-
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
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 technology and knowhow company, is a Delaware
corporation, engaged through its subsidiaries, in:
o Industrial Waste Management Services, which includes:
o treatment, storage, processing, and disposal of hazardous and
nonhazardous waste; and
o wastewater management services, including the collection, treatment,
processing and disposal of hazardous and non-hazardous wastewater.
o Nuclear Waste Management Services, which includes:
o treatment, storage, processing and disposal of mixed waste (which is
both low-level radioactive and hazardous waste) 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 operations, 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 nonhazardous, 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 Waste Management Services segment, in which we operate, are
characterized by competition among a number of larger, more established
companies with significantly greater resources.
Our consolidated financial statements for the year 2000 include the accounts of
Perma-Fix Environmental Services, Inc. ("PESI") and 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"), and effective August 31, 2000, Diversified Scientific
Services, Inc. ("DSSI"), which has been included in our consolidated financial
statements in 2000, from the date of acquisition. Effective June 25, 2001, we
acquired East Tennessee Materials & Energy Corporation ("M&EC"), which has been
included in our consolidated financial statements in 2001, from the date of
acquisition.
-41-
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
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
In preparing 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. See Note
8 and 9 for management estimates of closure costs and environmental liabilities.
Actual results could differ from those estimates.
Restricted Cash
Restricted cash, which is classified as a current asset, remained constant at
$20,000 for December 31, 2002 and 2001. In addition to this current asset, a
trust fund of $447,000, which is classified as a long term asset, increased
$5,000 at December 31, 2002, as compared to $442,000 as of December 31, 2001.
These restricted instruments reflect 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 ("TSD") 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 the
Company plans 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 advise. 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. Management regularly reviews all accounts receivable balances that
exceed 60 days from the invoice date and based on an assessment of current
credit worthiness, estimates the portion, if any, of the balance that will not
be collected.
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 forty
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
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consolidated statements of operations. Renewals and improvements which extend
the useful lives of the assets are capitalized.
Construction in Progress
The Company has recorded as of December 31, 2002, $4,325,000 in current
construction in progress projects. It is estimated that the Company will incur
an additional $1,393,000 to complete the current projects by the end of 2003.
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, the Company discontinued amortizing its indefinite life intangible
assets (goodwill and permits). Amortization expense approximated $1,575,000, and
$948,000, for the years ended 2001 and 2000, respectively. 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 valuation was performed as of October 1, 2002, and also
indicated no impairment.
Accrued Closure Costs
Accrued closure costs represent our estimated environmental liability to clean
up our facilities 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. Other comprehensive income for the Company consists of the market value
of the interest rate swap. For more information see Interest Rate Swap.
Net Revenues
Revenues for services and reimbursable costs are recognized at the time services
are rendered. Under certain agreements whereby the Company is contracted to
perform only select services (excluding, for example, final disposal
responsibilities) revenue is recognized on a percentage of completion basis. For
the year ended 2002, our customer Bechtel-Jacobs accounted for revenues of
approximately $9,664,000 or 11.6% of our consolidated revenues. The contracts
with Bechtel-Jacobs are terminable at any time by either party. See Note 12 -
Commitments and Contingencies.
Self-Insurance
We have a self-insurance program for certain health benefits. The cost of such
benefits is recognized as expense in the period in which the claim occurred,
including estimates of claims incurred but not reported.
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Claims expense for 2002 was approximately $3,006,000, as compared to $1,881,000
and $1,533,000 for 2001 and 2000, respectively.
Stock-Based Compensation
The Company accounts for, and plans to continue accounting for, its stock-based
employee compensation plans under the accounting provisions of APB Opinion No.
25, Accounting for Stock Issued to Employees, and has 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 the
Company's 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 2002,
2001, and 2000, respectively: no dividend yield for all years; an expected life
of ten years for all years; expected volatility of 30.51%, 36.92% and 39.6%, and
risk-free interest rates of 2.93%, 4.60% and 6.08%.
Under the accounting provisions of FASB Statement 123, our net income (loss) and
net income (loss) per share would have been reduced to the pro forma amounts
indicated below (in thousands except for per share amounts):
2002 2001 2000
--------- --------- ---------
Net income (loss) as reported $ 2,044 $ (747) $ (762)
Deduct: Total Stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (407) (276) (256)
Pro forma net income (loss) $ 1,637 $ (1,023) $ (1,018)
========= ========= =========
Earnings per share
Basic - as reported $ .06 $ (.03) $ (.04)
========= ========= =========
Basic - pro-forma $ .05 $ (.04) $ (.05)
========= ========= =========
Diluted - as reported $ .05 $ (.03) $ (.04)
========= ========= =========
Diluted - pro forma $ .04 $ (.04) $ (.05)
========= ========= =========
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 years ended December 31,
2001 and 2000 do 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, 2002, 2001
and 2000:
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(Amounts in Thousands, Except for Share Amounts) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to Common Stock - basic $ 2,044 $ (747) $ (762)
Effect of dilutive securities:
Preferred Stock dividends 158 -- --
-------- ------------ -----------
Net income (loss) applicable to Common Stock - diluted $ 2,202 $ (747) $ (762)
======== ============ ===========
Basic net income (loss) per share $ .06 $ (.03) $ (.04)
======== ============ ===========
Diluted net income (loss) per share $ .05 $ (.03) $ (.04)
======== ============ ===========
Weighted average shares outstanding - basic 34,217 27,235 21,558
Potential shares exercisable under stock option plans 1,070 -- --
Potential shares upon exercise of Warrants 5,664 -- --
Potential share upon conversion of Preferred Stock 1,667 -- --
-------- ------------ -----------
Weighted average shares outstanding - diluted 42,618 27,235 21,558
======== ============ ===========
===========================================================================================================
Potential shares excluded from above weighted average
share calculations due to their antidilutive effect include:
Upon exercise of options 186,800 2,966,805 2,090,949
Upon exercise of Warrants -- 14,468,052 6,438,582
Upon conversion of Preferred Stock -- 1,666,667 2,791,333
Interest Rate Swap
The Company entered into an interest rate swap agreement effective December 22,
2000, to modify the interest characteristics of its outstanding debt from a
floating basis to a fixed rate, thus reducing the impact of interest rate
changes on future income. This agreement involves the receipt of floating rate
amounts in exchange for fixed rate interest payments over the life of the
agreement without an exchange of the underlying principal amount. The
differential to be paid or received is accrued as interest rates change and
recognized as an adjustment to interest expense related to the debt. The related
amount payable to or receivable from counter parties is included in other assets
or liabilities.
Fair Value of Financial Instruments
The book values of cash, trade accounts receivable, trade accounts payable and
accrued expenses 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, 2002 and 2001.
Recently Adopted Accounting Standards
The Company adopted the Financial Accounting Standards Board FASB Statements No.
141, Business Combinations ("SFAS 141"), and No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), effective January 1, 2002. SFAS 141 requires the
use of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that the Company recognize acquired
intangible assets apart from goodwill if the acquired intangible assets meet
certain criteria, SFAS 141 applies to all business combinations initiated after
June 30, 2001, and for purchase business combinations completed on or after July
1, 2001. It also requires, upon adoption of SFAS 142 (see Note 3 below), that
the Company reclassify the carrying amounts of intangible assets and goodwill
based on the criteria in SFAS 141.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS 144"). This statement supersedes FAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of" and Accounting Principals Board Opinion No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This Statement retains the fundamental provisions of FAS 121 for
recognition and measurement of impairment, but amends the accounting and
reporting standards for
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segments of a business to be disposed of. The adoption of this pronouncement had
no impact on the Company's financial position or results of operations.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143 ("FAS 143"), Accounting for Asset
Retirement Obligations, effective for the fiscal years beginning after June 15,
2002. This statement provides the accounting for the cost of legal obligations
associated with the retirement of long-lived assets. FAS 143 also requires that
companies recognize the fair value of a liability for asset retirement
obligations in the period in which the obligations are incurred and capitalize
that amount as a part of the book value of the long-lived asset. That cost is
then depreciated over the remaining life of the underlying long-lived asset. The
Company is currently evaluating the impact of the adoption of FAS 143.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," issued in July 2002, addresses financial accounting and reporting
for costs associated with exit or disposal activities. It nullifies EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability be recognized for the
cost associated with an exit or disposal activity only when the liability is
incurred, that is, when it meets the definition of a liability in the FASB
conceptual framework. SFAS No. 146 also establishes fair value as the objective
for initial measurement of liabilities related to exit or disposal activities.
The Statement is effective for exit or disposal activities that are initiated
after December 31, 2002. The Company believes the adoption of SFAS No. 146 will
not have a material impact on the Company's financial statements.
NOTE 3
GOODWILL AND OTHER INTANGIBLE ASSETS
The Company 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 the
Company identify reporting units for the purposes of assessing potential future
impairments of goodwill, reassess the useful lives of other existing recognized
intangible assets, and cease amortization of intangible assets with an
indefinite useful life. An intangible asset with an indefinite useful life
should be tested for impairment in accordance with the guidance in SFAS 142.
SFAS 142 required the Company to complete a transitional goodwill impairment
test six months from the date of adoption. The Company was also required to
reassess the useful lives of other intangible assets within the first interim
quarter after adoption of SFAS 142. The Company hired an independent appraisal
firm to test goodwill and permits, separately, for impairment. The report
provided by the appraiser for the transitional period indicated that no
impairment existed as of January 1, 2002. The Company also completed its annual
impairment test as of October 1, 2002, which also indicated no impairment to
intangible assets. The Company has discontinued amortizing its indefinite-life
intangible assets (goodwill and permits). Prior to January 1, 2002, goodwill and
permits were amortized on a straight-line basis over ten to forty years.
Pursuant to the Company's adoption of SFAS 141 and 142, the Company changed its
method of recording acquired permits in connection with business combinations.
For all acquisitions prior to June 2001, the Company allocated the excess
purchase price between goodwill and permits, based upon the percentage of
revenue generated through permitted activities. For all acquisitions after June
2001, the Company believes that all of the excess purchase price should be
attributed to the permit. The Company will expense as incurred any ongoing costs
to maintain and renew its permits. These ongoing costs are significantly less
than the initial costs to obtain a permit.
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The following table shows results assuming discontinuation of amortization
beginning January 1, 2000:
(Amounts in Thousands, Except for Share Amounts) 2002 2001 2000
--------- --------- ---------
Net income (loss) $ 2,044 $ (747) $ (762)
Goodwill amortization -- 315 315
Permit amortization -- 1,260 633
Adjusted net income $ 2,044 $ 828 $ 186
========= ========= =========
Net income (loss) per share - basic $ .06 $ (.03) $ (.04)
Goodwill amortization -- .01 .02
Permit amortization -- .05 .03
Adjusted net income (loss) per share - basic $ .06 $ .03 $ .01
========= ========= =========
Net income (loss) per share - diluted $ .05 $ (.03) $ (.04)
Goodwill amortization -- .01 .02
Permit amortization -- .04 .03
---------
Adjusted net income (loss) per share - diluted $ .05 $ .02 $ .01
========= ========= =========
The following table is a summary of changes in the carrying amount of goodwill
for the years ended December 31, 2001 and 2002 (amounts in thousands). The
Company's Nuclear Waste segment has been excluded as it has no goodwill
recorded.
Industrial
Waste Engineering
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
Amortization during the year -- -- --
Balance as of December 31, 2002 $ 5,196 $ 1,329 $ 6,525
======= ======= =======
The following table is a summary of changes in the carrying amount of permits
for the years ended December 31, 2001 and 2002 (amounts in thousands). The
Company's Engineering segment has been excluded as it has no permits recorded.
Industrial Nuclear
Waste Waste
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 during the year (16) -- (16)
Amortization during the year -- -- --
Balance as of December 31, 2002 $ 6,491 $ 14,268 $ 20,759
======= ======== ========
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NOTE 4
ACQUISITIONS
Acquisition - East Tennessee Materials and Energy Corporation
On June 25, 2001, the Company 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,
the Company now owns all of the issued and outstanding voting capital stock of
M&EC.
The purchase price paid by the Company for the M&EC voting stock was
approximately $2,396,000, which was paid by the Company issuing 1,597,576 shares
of the Company's Common Stock to the stockholders of M&EC, with each share of
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. In addition, 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. The
Series B Preferred Stock is non-voting 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. As a
condition to the closing of the acquisition, the Company also issued 346,666
shares of the Company's Common Stock to certain creditors of M&EC in
satisfaction of $520,000 of M&EC's liabilities.
Prior to the date of acquisition, the Company was operating under a subcontract
agreement for the design and construction of M&EC's facility. Pursuant to the
subcontract agreement, the Company, as of the date of acquisition, had loaned
and advanced M&EC approximately $2.3 million for working capital purposes and
had billed approximately $9.8 million related to the construction of the new
facility. At the date of closing, the Company advanced funds to M&EC to pay
certain liabilities to the IRS, 401(k) plans and several debt holders, in the
aggregate amount of $2,048,000. During 2001, the net cash used for acquisition,
including the above noted construction and advanced funds, totaled approximately
$10,083,000.
As a condition to the closing of the M&EC Acquisition, M&EC entered into an
installment agreement with the Internal Revenue Service (the "IRS") relating to
various withholding taxes owing by M&EC in the amount of approximately $923,000
("M&EC Installment Agreement"). The M&EC Installment Agreement provides for the
payment of such withholding taxes over a term of approximately eight years. In
addition, as a condition to such closing, one of M&EC's stockholders,
Performance Development Corporation, a Tennessee corporation ("PDC") and two
corporations affiliated with PDC, PDC Services Corporation ("PDC Services") and
Management Technologies, Inc. ("MTI") each entered into an installment agreement
with the IRS relating to withholding taxes owing by each of PDC, PDC Services
and MTI ("PDC Installment Agreement"). The PDC Installment Agreement provides
for the payment of semiannual installments over a term of eight years in the
aggregate amount of approximately $3,714,000. The M&EC Installment Agreement and
the PDC Installment Agreement provides that (a) the Company does not have any
liability for any taxes, interest or penalty with respect to M&EC, PDC, PDC
Services or MTI; (b) M&EC will be solely liable for paying the obligations of
M&EC under the M&EC Installment Agreement; (c) the IRS will not assert any
liability against the Company, M&EC or any current or future related affiliate
of the Company for any tax, interest or penalty of PDC, PDC Services or MTI; and
(d) as long as the payments of M&EC under its installment agreement are made
timely, pursuant to the terms of the installment agreement, the IRS will not
file a notice of a federal tax lien, change or cancel the installment agreement,
or take any other type
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of action against M&EC with respect to the withholding taxes and interest set
forth in the installment agreement. The Company did not acquire any interest in
PDC, PDC Services or MTI.
Prior to the closing of the M&EC Acquisition, PDC had advanced monies to, and
performed certain services for M&EC totaling an aggregate of $3.7 million. In
payment of such advances and services and as a condition to closing, M&EC issued
a Promissory Note, dated June 7, 2001, to PDC in the principal amount of
approximately $3.7 million. The promissory note is payable over eight years to
correspond to payments due to the IRS under the PDC Installment Agreement. PDC
has directed M&EC to make all payments under the promissory note directly to the
IRS to be applied to PDC's obligations under its installment agreement with the
IRS.
In connection with the closing of the M&EC Acquisition, the Company also made
certain corrective contributions to M&EC's 401(k) Plan and to the 401(k) Plan of
PDC. The total amount of corrective contributions made to the M&EC 401(k) Plan
and the PDC 401(k) Plan was $1.8 million. The Company utilized a portion of the
proceeds of its private placement offering described in Note 11 and a portion of
its working capital line of credit to fund the corrective contributions to the
401(k) Plans described above.
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.
As of June 25, 2001, the Company performed a preliminary purchase price
allocation based upon information available as of this date. Accordingly, the
purchase price was preliminarily allocated to the net assets and net liabilities
of M&EC based on their estimated fair values. Included in this preliminary
allocation were assets of approximately $18,160,000, liabilities of
approximately $11,171,000 and $12,124,000 due to the Company from M&EC pursuant
to its subcontract agreement, against total consideration of $4,014,000,
consisting of $2,396,000 for Common Stock issued, $1,285,000 for M&EC Preferred
Series B liquidation value and $333,000 for the forgiveness of a receivable from
an M&EC related party. This preliminary allocation resulted in an excess
purchase price assigned to intangible permits of $9,149,000. The results of the
acquired business has been included in the consolidated financial statements
since the date of acquisition. In conjunction with the final purchase price
allocation, completed in June 2002, the Company recognized additional accrued
liabilities, of $63,000, as permits.
The Company accrued for the estimated closure costs, determined pursuant to RCRA
guidelines, for the acquired facility. This accrual, recorded at $2,025,000,
represents the potential future liability to close and remediate the facility,
should such a cessation of operations ever occur. No insurance or third party
recovery was taken into account in determining the Company's cost estimates or
reserve, nor do the Company's cost estimates or reserves reflect any discount
for present value purposes.
M&EC completed the initial phase of construction of its low-level radioactive
and hazardous waste ("mixed waste") treatment facility in Oak Ridge, Tennessee,
during the third quarter of 2001. The 150,000 square-foot facility, located on
the grounds of the Oak Ridge K-25 Weapons Facility of the Department of Energy
("DOE"), uses Perma-Fix's various proprietary technologies to treat mixed waste
coming from governmental, institutional and commercial generators nationwide.
M&EC operates under both a hazardous waste treatment and storage permit and a
license to store and treat low-level radioactive waste, one of only a few such
facilities in the country. M&EC also has three subcontracts with Bechtel-Jacobs
Company, LLC, DOE's site manager, which were awarded in 1998 and covers the
treatment of millions of cubic feet of legacy, operational and remediation
nuclear waste. The facility began accepting waste in June 2001, and became
operational in the third quarter of 2001.
The following unaudited pro forma information presents the consolidated
statement of operations of the Company as if the acquisition had taken place on
January 1, 2000. M&EC had a December 31 fiscal year end and therefore for
purposes of the following pro forma information, their results for the years
ended December 31, 2001 and 2000, have been consolidated with the Company's
results for the years ended December 31, 2001 and 2000, and DSSI's results for
January 1, 2000 through August 30, 2000, prior to the Company's acquisition of
DSSI.
-49-
Year Ended
December 31,
(Amount in thousands, except per share amounts
(unaudited)) 2001 2000
- --------------------------------------------------------------------------------
Net revenues $ 74,659 $ 63,426
Net loss applicable to Common Stock (3,603) (3,818)
Net loss per share:
Basic (.13) (.16)
Diluted (.13) (.16)
Weighted average number of common shares outstanding
Basic 28,173 23,502
Diluted 28,173 23,502
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional amortization expense as
a result of intangible permits, additional dividend expense on the Series B
Preferred, elimination of interest expense related to debt retired with Common
Stock, elimination of Preferred Stock dividends from the M&EC Series A Preferred
exchanged prior to closing and elimination of management fees paid to DSSI's
parent prior to the August 2000 acquisition. They do not purport to be
indicative of the results of operations that actually would have resulted on the
date indicated, or which may result in the future.
Acquisition - Diversified Scientific Services, Inc.
On May 16, 2000, the Company and Waste Management Holdings, Inc., a Delaware
corporation ("Waste Management Holdings") entered into a Stock Purchase
Agreement which was subsequently amended on August 31, 2000 (together, the
"Stock Purchase Agreement"), wherein the Company agreed to purchase all of the
outstanding capital stock of DSSI from Waste Management Holdings pursuant to the
terms of the Stock Purchase Agreement. On August 31, 2000, the conditions
precedent to closing of the Stock Purchase Agreement were completed and the
Stock Purchase Agreement was consummated.
Under the terms of the Stock Purchase Agreement, the purchase price paid by the
Company in connection with the DSSI acquisition was $8,500,000, consisting of
(i) $2,500,000 in cash at closing, (ii) a guaranteed promissory note (the
"Guaranteed Note"), guaranteed by DSSI, with the DSSI guarantee secured by
certain assets of DSSI (except for accounts receivable, general intangibles,
contract rights, cash, real property and proceeds thereof), executed by the
Company in favor of Waste Management Holdings in the aggregate principal amount
of $2,500,000 and bearing interest at a rate equal to the prime rate charged on
August 30, 2000, as published in the Wall Street Journal plus 1.75% per annum
and having a term of the lesser of 120 days from August 31, 2000, or the
business day that the Company acquires any entity or substantially all of the
assets of an entity (the "Guaranteed Note Maturity Date"), with interest and
principal due in a lump sum at the end of the Guaranteed Note Maturity Date, and
(iii) an unsecured promissory note (the "Unsecured Promissory Note"), executed
by the Company in favor of Waste Management Holdings in the aggregate principal
amount of $3,500,000, and bearing interest at a rate of 7% per annum and having
a five-year term with interest to be paid annually and principal due at the end
of the term of the Unsecured Promissory Note. The guaranteed note in the
principal amount of $2,500,000 was subsequently repaid in full in December 2000,
in conjunction with the new PNC Bank credit facility. See Note 6 for additional
discussion of this PNC Bank credit facility.
The acquisition was accounted for using the purchase method effective August 31,
2000, and accordingly, the assets and liabilities as of this date are included
in the accompanying consolidated financial statements. As of September 1, 2000,
the Company performed a preliminary purchase price allocation based upon
information available as of this date. Accordingly, the purchase price was
preliminarily allocated to the net assets acquired and net liabilities assumed
based on their estimated fair values. In conjunction with the final purchase
price allocation, as completed in August 2001, the Company reevaluated the
accrued closure costs recorded at acquisition through purchase accounting.
Included in this final purchase allocation were acquired assets of approximately
$9,165,000 and assumed liabilities of approximately $3,527,000 against total
-50-
consideration of $8,500,000. This final purchase allocation resulted in an
excess purchase price over the fair value of the net assets acquired of
$2,920,000 which was assigned to permits. The results of the acquired business
have been included in the consolidated financial statements since the date of
acquisition.
NOTE 5
PREFERRED STOCK ISSUANCE AND CONVERSION
As of January 1, 2001, 4,187 shares of the Company's 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, 2002.
Series 14 Preferred
On January 1, 2001, 1,769 shares of the Series 14 Preferred (formerly Series 3
Preferred and Series 11 Preferred) were issued and outstanding. On April 6,
2001, Capital Bank converted 1,314 shares of the Series 14 Preferred into
876,000 shares of Common Stock of the Company and exchanged the remaining 455
shares of the Series 14 Preferred into a new Series 17 Class Q preferred Stock
("Series 17 Preferred"). The exchanges were made in private placements under
Section 4(2) and/or Section 3(a)(9) of the Securities Act.
The Series 3 Preferred, Series 11 Preferred and Series 14 Preferred each accrued
dividends on a cumulative basis at a rate of 6% per annum, which dividends were
payable semiannually when and as declared by the Board of Directors. Dividends
are paid, at the Company's option, in the form of cash or Common Stock. During
2001, accrued dividends on the Series 3 Preferred, Series 11 Preferred and
Series 14 Preferred in the combined total of approximately $35,000 were paid in
the form of 16,307 shares of Common Stock.
Series 15 Preferred
On January 1, 2001, 616 shares of the Series 15 Preferred (formerly Series 4
Preferred, Series 6 Preferred, Series 8 Preferred and Series 12 Preferred) were
issued and outstanding. On April 6, 2001, Capital Bank converted 416 shares of
the Series 15 Preferred into 277,333 shares of the Company's Common Stock and
exchanged the remaining 200 shares of the Series 15 Preferred into the new
Series 17 Preferred. The exchanges were made in private placements under Section
4(2) and/or Section 3(a)(9) of the Securities Act.
The Series 8 Preferred, Series 12 Preferred and Series 15 Preferred each accrued
dividends on a cumulative basis at a rate of 4% per annum which dividends were
payable semiannually when and as declared by the Board of Directors. During
2001, accrued dividends on the Series 8 Preferred, Series 12 Preferred and
Series 15 Preferred, in the combined total of approximately $64,000 were paid in
the form of 3,786 shares of Common Stock.
Series 16 Preferred
On January 1, 2001, 1,802 shares of the Series 16 Preferred (formerly Series 10
Preferred and Series 13 Preferred) were issued and outstanding. On January 2,
2001, Capital Bank converted 5 shares of the Series 16 Preferred for 3,333
shares of the Company's Common Stock. The terms of the Series 10 Preferred,
Series 13 Preferred and Series 16 Preferred were substantially the same and the
fair value of the new Series did not exceed the fair value of the Series
exchanged. On April 6, 2001, Capital Bank exchanged the 1,797 outstanding shares
of Series 16 Preferred into Series 17 Preferred. The exchanges were made in
private placements under Section 4(2) and/or Section 3(a)(9) of the Securities
Act.
The Series 10 Preferred, Series 13 Preferred and Series 16 Preferred each
accrued dividends on a cumulative basis at a rate of 4% per annum which
dividends were payable semiannually when and as declared by the Board of
Directors. During 2001, accrued dividends on the Series 10 Preferred, Series 13
Preferred and Series 16 Preferred, in the combined total of approximately
$19,000 were paid in the form of 11,044 shares of Common Stock.
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Series 17 Preferred
Effective as of April 6, 2001, the Company and Capital Bank entered into a
Conversion and Exchange Agreement, whereby Capital Bank converted a portion of
the Company's Preferred Stock owned of record by Capital Bank, as agent for
certain of its accredited investors, for shares of the Company's Common Stock
and exchanged the remaining Preferred Stock held by Capital Bank for shares of
the Company's 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 the Company's Series 14 Preferred, 616 shares of the Company's Series
15 Preferred, and 1,797 shares of the Company's 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. The Company may, at its
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. During 2002, accrued dividends on the Series 17 Preferred of
approximately $125,000 were paid in the form of 47,271 shares of Common Stock,
of which 25,165 were issued in January 2003.
The issuance of the Series 17 Preferred under the terms of the Conversion and
Exchange Agreement was made in a private placement under Section 4(2) and/or
Regulation D of the Securities Act of 1933, as amended. The Warrants previously
issued to Capital Bank in connection with the Series 14 Preferred, Series 15
Preferred, and Series 16 Preferred have not changed. The Company performed a
calculation of the carrying value of the new Series 17 Preferred and determined
that it does not exceed the carrying value of the exchanged Series of Preferred
(Series 14, 15 and 16) and therefore no beneficial conversion dividends were
recorded as a result of this exchange.
The Conversion and Exchange Agreement, dated May 25, 2001 (the "Series 17
Agreement") was extensively negotiated between the Company and holders of the
Series 14 Preferred, Series 15 Preferred, and Series 16 Preferred for many weeks
prior to April 6, 2001. Although the terms of the Series 17 Agreement were
agreed on April 6, 2001, the Series 17 Agreement was not memorialized in the
form of a written agreement until May 25, 2001. The delay in memorializing the
Series 17 Agreement was primarily due to the fact that the Company's executive
officers and its counsel were focused upon, and devoting substantially all of
their time to, completing the acquisition by the Company of M&EC and completing
a $7.7 million private placement. In executing the Series 17 Agreement, the
Company's counsel advised the Company, and the Company agreed that, rather than
"back-dating" the Series 17 Agreement, it was appropriate to note that the
Series 17 Agreement was executed on May 25, 2001, even though the terms of the
agreement had been reached and the parties became committed to the agreement on
April 6, 2001.
Both the Company and the holders of the Series 17 Preferred have relied upon
April 6, 2001, as being the effective date of the Series 17 Agreement. In fact,
the beneficial holders of 1,314 shares of PESI's Series 14 Preferred and 416
shares of the Series 15 Preferred converted such shares of preferred stock into
PESI common stock on April 6, 2001, in reliance on the completion on the Series
17 Agreement and in accordance with the terms of the Series 17 Agreement as
agreed to on that date and memorialized on May 25, 2001.
-52-
Reasons for Exchanges
The Company engaged in the various exchanges of its then outstanding preferred
stock for a newly issued series of preferred stock in order to provide
conversion terms more favorable to the Company and to improve the Company's
capital structure. Prior to the most recent exchanges, the floating conversion
price of the Company's preferred stock resulted in the holders of the preferred
stock realizing decreasing conversion prices for an increasing number of shares
of common stock. By engaging in the exchanges, the Company has set the
conversion price at a fixed price, and the total number of shares issuable upon
conversion of the preferred stock is now fixed at a specified number. The
exchanges have also enabled the Company to simplify its capital structure. The
Company previously had up to three separate series of convertible preferred
stock outstanding at one time. As a result of the series of exchanges and
conversions of a certain number of preferred stock, ending in the exchange for
the currently outstanding Series 17 Preferred, the Company now has only one
series of preferred stock outstanding, and instead of floating conversion rates,
the Series 17 Preferred has a fixed rate. The Company believes that this
simplified capital structure (a) helps facilitate the Company's borrowing and
capital raising efforts, and (b) improves the ability of the Company's investors
and market professionals to analyze the Company's financial status.
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 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. During 2002, the Company accrued approximately $33,000 in
dividends for the Series B Preferred Stock.
NOTE 6
LONG-TERM DEBT
Long-term debt at December 31 includes the following (in thousands):
2002 2001
------ ------
Revolving Credit facility dated December 22, 2000, borrowings based upon
eligible accounts receivable, subject to monthly borrowing base calculation,
variable interest paid monthly at prime rate plus 1% (5.25% at December 31,
2002), balance due in December 2005 $8,742 $7,663
Term Loan dated December 22, 2000, payable in equal monthly installments of
principal of $83, balance due in December 2005, variable interest paid
monthly at prime rate plus 1 1/2% (5.75% at December 31, 2002) 5,083 6,083
Three promissory notes dated May 27, 1999, payable in equal monthly
installments of principal and interest of $90 over 60 months, due June 2004,
interest at 5.5% for first three years and 7% for remaining two years 1,538 2,495
Unsecured promissory note dated August 31, 2000, payable in lump sum in
August 2005, interest paid annually at 7% 3,500 3,500
Senior subordinated notes dated July 31, 2001, payable in lump sum on July
31, 2006, interest payable quarterly at an annual interest rate of 13.5%,
net of unamortized debt discount of December 31, 2002 and 2001, of $1,163
and $1,487, respectively 4,462 4,138
Promissory note dated June 25, 2001, payable in semiannual installments on
June 30 and December 31 through December 31, 2008, variable interest
accrues at the applicable law rate determined under the IRS Code (7.0% on
December 31, 2002) and is payable in lump sum at the end of installment
period 3,594 3,634
-53-
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 (7.0% on
December 31, 2002) and is payable in lump sum at the end of installment
period 893 903
Various capital lease and promissory note obligations, payable 2003 to 2007,
interest at rates ranging from 5.2% to 17.9% 2,703 2,730
------- -------
30,515 31,146
Less current portion of long-term debt 3,373 2,989
------- -------
$27,142 $28,157
======= =======
Revolving Credit and Term Loan Agreement
On December 22, 2000, the Company entered into a Revolving Credit, Term Loan and
Security Agreement ("Agreement") with PNC acting as agent ("Agent") for lenders,
and as issuing bank. The Agreement provides for a term loan ("Term Loan") in the
amount of $7,000,000, which requires principal repayments based upon a
seven-year amortization, payable over five years, with monthly installments of
$83,000 and the remaining unpaid principal balance of $2,083,000 due on December
22, 2005. Payments commenced on February 1, 2001. The Agreement also provided
for a revolving line of credit ("Revolving Credit") with a maximum principal
amount outstanding at any one time of $15,000,000. The Revolving Credit advances
are subject to limitations of an amount up to the sum of a) up to 85% of
Commercial Receivables aged 90 days or less from invoice date, b) up to 85% of
Commercial Broker Receivables aged up to 120 days from invoice date, c) up to
85% of acceptable Government Agency Receivables aged up to 150 days from invoice
date, and d) up to 50% of acceptable unbilled amounts aged up to 60 days, less
e) reserves Agent reasonably deems proper and necessary. The Revolving Credit
advances shall be due and payable in full on December 22, 2005. As of December
31, 2002, our excess availability under our revolving credit facility was
$4,108,000 based on our eligible receivables.
Pursuant to the Agreement, the Term Loan bears interest at a floating rate equal
to the prime rate plus 1 1/2%, and the Revolving Credit at a floating rate equal
to the prime rate plus 1%. The loans are subject to a prepayment fee of 1 1/2%
in the first year, 1% in the second and third years and 3/4% after the third
anniversary until termination date.
In December 2000, the Company entered into an interest rate swap agreement
related to its Term Loan. This hedge has effectively fixed the interest rate on
the notional amount of $3,500,000 of the floating rate $7,000,000 PNC Term Loan.
The Company will pay the counterparty interest at a fixed rate equal to the base
rate of 6.25%, for a period from December 22, 2000, through December 22, 2005,
in exchange for the counterparty paying the Company one month LIBOR rate for the
same term (1.44% at December 31, 2002). The value of the interest rate swap at
January 1, 2001, was de minimis. At December 31, 2002, the market value of the
interest rate swap was in an unfavorable value position of $215,000 and was
recorded as a liability. During the twelve months ended December 31, 2002, the
Company recorded a loss on the interest rate swap of $57,000 which offset
against other comprehensive income on the Statement of Stockholders' Equity.
Effective as of June 2002, the Company and PNC entered into Amendment No. 1 to
the Agreement, which, among other things, increased the letter of credit
commitment from $500,000 to $4,500,000 and provided for a $4.0 million standby
letter of credit. The standby Letter of Credit was issued to secure certain
surety bond obligations. Pursuant to the terms of Amendment No. 1, as partial
collateral for the issuance of the standby letter of credit, PNC will charge a
reserve of approximately $66,000 each month against the availability under the
Revolving Credit beginning July 15, 2002, until such time as the standby letter
of credit is fully reserved. As of December 31, 2002, $400,000 has been charged
against availability. As a condition precedent to this Amendment No. 1, the
Company paid a $50,000 amendment fee to PNC.
-54-
Three Promissory Notes
Pursuant to the terms of the Stock Purchase Agreements in connection with the
acquisition of Perma-Fix of Orlando, Inc. ("PFO"), Perma-Fix of South Georgia,
Inc. ("PFSG") and Perma-Fix of Michigan, Inc. ("PFMI"), a portion of the
consideration was paid in the form of Promissory Notes, in the aggregate amount
of $4,700,000, payable to the former owners of PFO, PFSG and PFMI. The
Promissory Notes are paid in equal monthly installments of principal and
interest of approximately $90,000 over five years with the first installment due
on July 1, 1999, and having an interest rate of 5.5% for the first three years
and 7% for the remaining two years. The aggregate outstanding balance of the
Promissory Notes total $1,538,000 at December 31, 2002, of which $1,008,000 is
in the current portion. Payments of such Promissory Notes are guaranteed by PFMI
under a non-recourse guaranty, which non-recourse guaranty is secured by certain
real estate owned by PFMI. These Promissory Notes are subject to subordination
agreements with the Company's senior and subordinated lenders.
Unsecured Promissory Note
On August 31, 2000, as part of the consideration for the purchase of DSSI, the
Company issued to Waste Management Holdings a long term unsecured promissory
note (the "Unsecured Promissory Note") in the aggregate principal amount of
$3,500,000, bearing interest at a rate of 7% per annum and having a five-year
term with interest to be paid annually and principal due in one lump sum at the
end of the term of the Unsecured Promissory Note (August 2005).
Senior Subordinated Note
On July 31, 2001, the Company issued approximately $5.6 million of its 13.50%
Senior Subordinated Notes due July 31, 2006 (the "Notes"). The Notes were issued
pursuant to the terms of a Note and Warrant Purchase Agreement, dated July 31,
2001 (the "Purchase Agreement"), between the Company, Associated Mezzanine
Investors-PESI, L.P. ("AMI"), and Bridge East Capital, L.P. ("BEC"). The Notes
are unsecured and are unconditionally guaranteed by the subsidiaries of the
Company. The Company's payment obligations under the Notes are subordinate to
the Company's payment obligations to its primary lender and to certain other
debts of the Company up to an aggregate amount of $25 million. The net proceeds
from the sale of the Notes were used to repay the Company's short term loan.
Under the terms of the Purchase Agreement, the Company also issued to AMI and
BEC Warrants to purchase up to 1,281,731 shares of the Company's Common Stock
("Warrant Shares") at an initial exercise price of $1.50 per share (the
"Warrants"), subject to adjustment under certain conditions, which were valued
at $1,622,000 and recorded as a debt discount and are being amortized over the
term of the Notes. The Warrants, as issued, also contain a cashless exercise
provision. The Warrant Shares are registered under an S-3 Registration Statement
that was declared effective on November 27, 2002.
In connection with the sale of the Notes, the Company, AMI, and BEC entered into
an Option Agreement, dated July 31, 2001 (the "Option Agreement"). Pursuant to
the Option Agreement, the Company granted each purchaser an irrevocable option
requiring the Company to purchase any of the Warrants or the shares of Common
Stock issuable under the Warrants (the "Warrant Shares") then held by the
purchaser (the "Put Option"). The Put Option may be exercised at any time
commencing July 31, 2004, and ending July 31, 2008. In addition, each purchaser
granted to the Company an irrevocable option to purchase all the Warrants or the
Warrant Shares then held by the purchaser (the "Call Option"). The Call Option
may be exercised at any time commencing July 31, 2005, and ending July 31, 2008.
The purchase price under the Put Option and the Call Option is based on the
quotient obtained by dividing (a) the sum of six times the Company's
consolidated EBITDA for the period of the 12 most recent consecutive months
minus Net Debt plus the Warrant Proceeds by (b) the Company's Diluted Shares (as
the terms EBITDA, Net Debt, Warrant Proceeds, and Diluted Shares are defined in
the Option Agreement). Pursuant to the guidance under EITF 00-19 on accounting
for and financial presentation of securities that could potentially be settled
in a Company's own stock, the put warrants would be classified outside of equity
based on the ability of the holder to require cash settlement. Also, EITF Topic
D-98 discusses the accounting for a security that will become redeemable at a
future determinable date and its redemption is variable. This is the case with
the Warrants as the date is fixed, but the put or call price varies. The EITF
gives two possible methodologies for valuing the securities.
-55-
The Company accounts for the changes in redemption value as they occur and the
Company adjusts the carrying value of the security to equal the redemption value
at the end of each reporting period. On December 31, 2002, the Put Option had no
value and no liability was recorded.
In connection with the sale of the Notes, Ann L. Sullivan Living Trust, dated
September 6, 1978, and the Thomas P. Sullivan Living Trust, dated September 8,
1978 (collectively the "Sullivan Trusts") each have entered into a certain
Subordination Agreement, dated July 30, 2001. Under the terms of the
Subordination Agreement, the Sullivan Trusts have subordinated all amounts owing
by the Company to the Sullivan Trusts in favor of the Company's obligations
under the Notes. Notwithstanding the subordination, the Company may (a) as long
as no event of default under the Purchase Agreement has occurred and is
continuing and if such payments would not create an event of default, continue
to make regularly scheduled payments of principal and interest owing under
certain promissory notes, dated May 28, 1999, in the original aggregate
principal amount of $4.7 million, which were issued to the Sullivan Trusts in
connection with the Company's acquisition of Perma-Fix of Michigan, Inc.,
Perma-Fix of South Georgia, Inc., and Perma-Fix of Orlando, Inc.; and (b) make
such payments as may be required pursuant to a certain Mortgage, dated May 28,
1999, by Perma-Fix of Michigan, Inc. in favor of the Sullivan Trusts. The
outstanding principal amount due to the Sullivan Trusts is approximately $1.5
million.
Promissory Note
M&EC issued a promissory note for a principal amount of $3.7 million to PDC,
dated June 7, 2001, for monies advanced to M&EC for certain services performed
by PDC. The promissory note is payable over eight years on a semiannual basis on
June 30 and December 31. Interest is accrued at the applicable rate (7% on
December 31, 2002) and payable in one lump sum at the end of the loan period. On
December 31, 2002, the outstanding balance was $4,125,000 including accrued
interest of approximately $531,000. 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
In conjunction with the Company's acquisition of M&EC, M&EC entered into an
installment agreement with the Internal Revenue Service ("IRS") for a principal
amount of $923,000 dated June 7, 2001, for certain withholding taxes owed by
M&EC. The installment agreement is payable over eight years on a semiannual
basis on June 30 and December 31. Interest is accrued at the applicable law rate
("Applicable Rate") pursuant to the provisions of section 6621 of the Internal
Revenue Code of 1986 as amended. Such rate is adjusted on a quarterly basis and
payable in lump sum at the end of the installment period. On December 31, 2002,
the rate was 7%. On December 31, 2002, the outstanding balance was $1,020,000
including accrued interest of approximately $127,000.
The aggregate approximate amount of the maturities of long-term debt maturing in
future years as of December 31, 2002, is $3,373,000 in 2003; $2,591,000 in 2004;
$16,867,000 in 2005; $5,836,000 in 2006; $1,061,000 in 2007, and $787,000, in
2008.
NOTE 7
ACCRUED EXPENSES
Accrued expenses at December 31 include the following (in thousands):
2002 2001
------- ------
Salaries and employee benefits $ 3,084 $2,342
Accrued sales, property and other tax 1,032 735
Waste disposal and other operating related expenses 6,247 4,840
Other 361 514
------- ------
Total accrued expenses $10,724 $8,431
======= ======
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NOTE 8
ACCRUED CLOSURE COSTS
The Company accrues for the estimated closure costs as determined pursuant to
RCRA guidelines for all fixed-based regulated facilities, even though the
Company does not intend to or have present plans to close any of the Company's
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. The Company recognizes the closure cost as a contingent liability on
the balance sheet. Since all the Company's 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 2002, the accrued long-term closure cost increased by $10,000 to a total
of $4,929,000 as compared to the 2001 total of $4,919,000. This increase is
principally a result of normal inflation factor increases.
NOTE 9
ENVIRONMENTAL LIABILITIES
The Company has four remediation projects, which are currently in progress at
four of the permitted facilities owned and operated by subsidiaries of the
Company. 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 the acquisition by the Company 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. Although the Company
has recognized certain environmental liabilities as a result of environmental
concerns at, or due to the operations of, a particular facility at the time of
acquisition as part of the acquisition cost, subsequent to the acquisition of
these facilities by the Company, the Company has not recognized new
environmental liabilities as a result of the operations of the facilities after
acquisition due to the stringent operational procedures instituted at the
facilities after they have been acquired by the Company.
At December 31, 2002, the Company had accrued environmental liabilities totaling
$2,696,000, which reflects a decrease of $838,000 from the December 31, 2001,
balance of $3,534,000. The net decrease principally represents payments on
remediation projects. The December 31, 2002 current and long-term accrued
environmental balance is recorded as follows:
PFD PFMI PFSG PFM Total
-------- -------- ---------- -------- ----------
Current accrual $211,000 $307,000 $ 126,000 $338,000 $ 982,000
Long-term accrual -- -- 1,134,000 580,000 1,714,000
-------- -------- ---------- -------- ----------
Total $211,000 $307,000 $1,260,000 $918,000 $2,696,000
======== ======== ========== ======== ==========
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PFD
In June 1994, the Company acquired from Quadrex Corporation and/or a subsidiary
of Quadrex Corporation (collectively, "Quadrex") three treatment, storage and
disposal ("TSD") companies, including the PFD facility. The former owners of PFD
had merged EPS with PFD, which was subsequently sold to Quadrex. Through the
Company's acquisition of PFD in 1994 from Quadrex, the Company was 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 the Company's
recording of purchase accounting for the acquisition of PFD, the Company
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, 2002, the Company incurred $34,000 in remedial costs which reduced
the reserve. The Company has estimated the potential liability related to the
remaining remedial activity of the above property to be approximately $211,000,
representing the remaining reserve balance, of which the Company anticipates
spending during 2003.
PFD has filed a lawsuit for contribution 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. Recently, PFD and the defendants
entered into an agreement in principal to settle this lawsuit, and under the
terms of this settlement the defendants would pay PFD $400,000. This settlement
is subject to the parties entering into definitive settlement documents.
PFMI
In conjunction with the acquisition of PFMI during 1999, the Company recognized
an environmental accrual of $2,120,000. This amount represented the Company's
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, and anticipates completion of such activities during 2003.
For the year ended December 31, 2002, the Company incurred $856,000 in remedial
costs which reduced the reserve. The Company's estimate of the potential
liability at December 31, 2002, for the PFMI remediation is $307,000, of which
the Company anticipates spending in 2003.
PFSG
During 1999, the Company recognized an environmental accrual of $2,199,000, in
conjunction with the acquisition of PFSG. This amount represented the Company's
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 (3) years, completed the initial valuation and selected the remedial
process to be utilized. The planning and approval process will continue
throughout 2002, with remedial activities beginning in 2003. For the year ended
December 31, 2002, the Company incurred $103,000 in environmental costs which
reduced the reserve. The Company's estimate of the potential liability at
December 31, 2002, for the PFSG remediation is $1,260,000, of which the Company
anticipates spending $126,000 during 2003, with the remaining $1,134,000 to be
spent over the next five (5) to seven (7) years.
PFM
Pursuant to the Company's acquisition, effective December 31, 1993, of Perma-Fix
of Memphis, Inc. (f/k/a American Resource Recovery, Inc.), the Company assumed
certain liabilities relative to the removal of contaminated soil and to undergo
groundwater remediation at the facility. Prior to the Company's 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
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year ended December 31, 2002, the Company incurred $56,000 in remedial costs
which reduced the reserve. The Company's estimate of the potential liability at
December 31, 2002, for completion of this project is $918,000, of which the
Company anticipates spending $338,000 in 2003 and the remaining $580,000 over
the next three to five years.
Prior to the acquisition of these facilities, the Company 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 our Company to assist in our
review. Based upon the Company's expertise and the analysis performed, the
Company has accrued its best estimate of the cost to complete the remedial
projects. No insurance or third party recovery was taken into account in
determining the Company's cost estimates or reserve, nor do the Company's cost
estimates or reserves reflect any discount for present value purposes. The
Company does not believe that any adverse changes to its estimates would be
material to the Company. The circumstances that could affect the outcome range
from new technologies, that are being developed every day that reduce the
Company's overall costs, to increased contamination levels that could arise as
the Company completes remediation which could increase the Company's costs,
neither of which the Company anticipates at this time.
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):
2002 2001
-------- --------
Deferred tax assets:
Net operating losses $ 7,887 $ 8,381
Environmental reserves 1,240 967
Impairment of assets 7,611 7,611
Other 471 175
Valuation allowance (10,195) (10,825)
-------- --------
Deferred tax assets 7,014 6,309
Deferred tax liabilities:
Depreciation and amortization (7,014) (6,124)
Other -- (185)
-------- --------
Deferred tax liabilities (7,014) (6,309)
Net deferred tax asset (liability) $ -- $ --
======== ========
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):
2002 2001 2000
----- ------- -------
Tax expense (benefit) at statutory rate $ 749 $ (205) $ (189)
Goodwill amortization -- 440 241
Other (119) (651) 100
Deferred tax assets acquired -- (1,910) (3,534)
Increase (decrease) in valuation allowance (630) 2,326 3,382
----- ------- -------
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 $(630,000), $2,326,000, and $3,382,000 for the
years ended December 31, 2002, 2001, and 2000, 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 the
Company's
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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 the Company's 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 for federal income tax
purposes of approximately $23,200,000 at December 31, 2002. These net operating
losses can be carried forward and applied against future taxable income, if any,
and expire in the years 2007 through 2022. 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.
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
Private Placement Offering
On April 6, 2001, the Company commenced a private placement offering of units
(the "Offering") to accredited investors. Each unit is comprised of one share of
the Company's Common Stock and one Warrant to purchase one share of Common
Stock. The purchase price for each unit was $1.75, and the exercise price of
each Warrant included in the units is $1.75, subject to adjustment under certain
conditions. The Offering was made pursuant to an exemption from registration
under Section 4(2) of the Securities Act of 1933, as amended (the "Act"), and/or
Rule 506 of Regulation D promulgated under the Act. The Offering was made only
to accredited investors through one or more broker/dealer placement agents. At
the completion of the offering, on July 30, 2001, 4,397,566 units were accepted
for an aggregate purchase price of $7,696,000. Expenses related to the offering
subscriptions, were approximately $814,000.
Employee Stock Purchase Plan
At the Company's 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 eligible employees of the Company and its subsidiaries, who wish to
become stockholders, an opportunity to purchase Common Stock of the Company
through payroll deductions. The maximum number of shares of Common Stock of the
Company 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. 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
The shares for the purchase period ending December 31, 2002, were purchased in
January 2003.
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Employment Options
During October 1997, Dr. Centofanti entered into a three year Employment
Agreement with us which provided for, among other things, an annual salary of
$110,000, subject to annual inflationary increases and 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 the Company's Common Stock are 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.
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 the Company's 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.
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 outside director of the
Company 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 director of the Company, who is not an employee of the Company,
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 the Company as a member of the Board in Common Stock. In
either case, the number of shares of Common Stock of the Company issuable to the
eligible director shall be determined by valuing the Common Stock of the Company
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.
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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 the Company's 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.
A summary of the status of options under the plans as of December 31, 2002, 2001
and 2000 and changes during the years ending on those dates is presented below:
2002 2001
-------------------------- --------------------------
Weighted
Average
Exercise
Shares Price Shares Price
---------- ---------- ---------- ----------
Performance Equity Plan:
Balance at beginning of year 174,005 $ 2.14 251,149 $ 2.33
Exercised (78,837) 2.84 (10,000) 1.00
Forfeited (8,068) 3.02 (67,144) 2.99
---------- ---------- ---------- ----------
Balance at end of year 87,100 1.43 174,005 2.14
========== ==========
Options exercisable at year end 78,500 1.45 156,805 2.24
Non-qualified Stock Option Plan:
Balance at beginning of year 2,237,800 $ 1.50 1,319,800 $ 1.33
Granted -- -- 918,000 1.75
Exercised (21,400) 1.31 -- --
Forfeited (147,500) 1.48 -- --
---------- ----------
Balance at end of year 2,068,900 1.51 2,237,800 1.50
========== ==========
Options exercisable at year end 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 -- -- 918,000 .99
Outside Directors Stock Option Plan:
Balance at beginning of year 255,000 $ 2.34 225,000 $ 2.31
Granted 40,000 2.73 30,000 2.59
Forfeited (45,000) 3.02 -- --
---------- ----------
Balance at end of year 250,000 2.28 255,000 2.34
========== ==========
Options exercisable at year end 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 40,000 1.27 30,000 1.47
2000
--------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price
---------- ----------
Performance Equity Plan:
Balance at beginning of year 260,149 $ 2.28
Exercised -- --
Forfeited (9,000) 1.25
---------- ----------
Balance at end of year 251,149 2.33
========== ==========
Options exercisable at year end 213,748 2.53
Non-qualified Stock Option Plan:
Balance at beginning of year 837,800 $ 1.37
Granted 510,000 1.27
Exercised -- --
Forfeited (28,000) 1.26
----------
Balance at end of year 1,319,800 1.33
==========
Options exercisable at year end 542,000 1.44
Weighted average fair value of options
granted during the year at exercise
prices which equal market price of
stock at date of grant 510,000 0.79
Outside Directors Stock Option Plan:
Balance at beginning of year 210,000 $ 2.36
Granted 15,000 1.69
Forfeited -- --
----------
Balance at end of year 225,000 2.31
==========
Options exercisable at year end 225,000 2.31
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 1.06
The following table summarizes information about options under the plan
outstanding at December 31, 2002:
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Options Outstanding Options Exercisable
------------------------------------- -----------------------
Number Weighted Number
Outstanding Average Weighted Outstanding Weighted
at Remaining Average at Average
Description and Range Dec. 31, Contractual Exercise Dec. 31, Exercise
of Exercise Prices 2002 Life Price 2002 Price
---------- -------------------------------------------------
Performance Equity Plan:
1993 Awards ($5.25) 6,500 0.8 years $ 5.25 6,500 $ 5.25
1996 Awards ($1.00) 40,000 3.4 years 1.00 40,000 1.00
1998 Awards ($1.25) 40,600 5.8 years 1.25 32,000 1.25
---------- ---------
87,100 4.3 years 1.43 78,500 1.45
========== =========
Non-qualified Stock Option Plan:
1994 Awards ($4.75) 300 1.2 years $ 4.75 300 $ 4.75
1995 Awards ($2.88) 85,000 2.0 years 2.88 85,000 2.88
1996 Awards ($1.00) 270,000 3.4 years 1.00 270,000 1.00
1997 Awards ($1.375) 229,000 4.3 years 1.38 229,000 1.38
1998 Awards ($1.25) 195,000 5.8 years 1.25 156,000 1.25
2000 Awards ($1.25-$1.50) 438,000 7.3 years 1.26 175,200 1.26
2001 Awards ($1.75) 851,600 8.3 years 1.75 170,000 1.75
---------- ---------
2,068,900 6.5 years 1.51 1,085,500 1.42
========== =========
Outside Directors Stock Option Plan:
1994 Awards ($3.00 - $3.22) 45,000 1.8 years 3.04 45,000 3.04
1995 Awards ($3.25) 20,000 2.0 years 3.25 20,000 3.25
1996 Awards ($1.75) 35,000 3.9 years 1.75 35,000 1.75
1997 Awards ($2.125) 15,000 4.9 years 2.13 15,000 2.13
1998 Awards ($1.375) 15,000 5.4 years 1.38 15,000 1.38
1999 Awards ($1.2188 - $1.25) 35,000 6.7 years 1.24 35,000 1.24
2000 Awards ($1.688) 15,000 8.0 years 1.69 15,000 1.69
2001 Awards ($2.43 - $2.75) 30,000 8.6 years 2.59 30,000 2.59
2002 Awards ($2.58 - $2.98) 40,000 9.6 years 2.73 15,000 2.98
---------- ---------
250,000 5.6 years 2.28 225,000 2.25
========== =========
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.
o In connection with the Preferred Stock issuances as discussed fully
in Note 5, we issued Warrants during 1997 for the purchase of
1,591,250 shares of Common Stock of which 751,250 shares are
currently outstanding exercise prices from $1.81 to $2.50 per share.
o During 1999, the Company entered into a consulting agreement for
certain investor relations services whereby we agreed to pay a
consulting fee and issued two Common Stock purchase Warrants for an
aggregate of up to 480,000 shares of Common Stock exercisable at
exercise prices from $1.20 to $1.40 per share.
o During 2000, the Company entered into a consulting agreement for
certain investment banking services whereby we agreed to pay a
consulting fee and issued Warrants in the aggregate amount of up to
150,000 shares of Common Stock exercisable at an exercise price
equal to $1.44 per share.
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o During 2000, the Company entered into a financial advisory and
consulting agreement to assist in preparing for a private placement
offering of our Common Stock. Under the terms of the consulting
agreement the Company issued two Warrants for an aggregate of
610,000 shares of Common Stock at exercise prices from $1.50 to
$1.75 per share.
o During 2001, the Company entered into a consulting agreement, and
pursuant to the terms of such agreement the Company issued a Warrant
for the exercise of 20,000 shares of Common Stock at an exercise
price of $2.35 per share.
o Upon completion of a new term loan and revolving credit line
agreement (see note 6), Warrants were issued to certain investment
banking firms and intermediaries for an aggregate amount of up to
1,283,332 shares of Common Stock exercisable at an exercise price
equal to $1.44 per share.
o During 2000 and 2001, pursuant to financing in relation to the DSSI
acquisition, we issued seven Warrants for an aggregate amount of up
to 1,020,000 shares of Common Stock to Capital Bank, exercisable at
exercise prices from $1.42 to $1.97 per share.
o During 2001, the Company issued, as part of completing the interim
financing with BHC, warrants for an aggregate amount of 1,167,141
shares of Common Stock exercisable at exercise prices from $1.44 to
$1.46 per share.
o Pursuant to an agreement with Capital Bank in July 2001 for the
satisfaction of all amounts due under the $3 million loan agreement
with Capital Bank, the Company issued two Warrants for an aggregate
amount of 2,464,405 shares of Common Stock at an exercise price of
$1.75 per share.
o During 2001, the Company issued Warrants to investors as part of a
private placement offering ("Offering") and to appointed placement
agents for assistance in completing the Offering, for an aggregate
of 4,505,566 shares of Common Stock at an exercise price of $1.75
per share.
o On July 31, 2001, pursuant to closing the long-term financing with
AMI and BEC, the Company issued Warrants in the aggregate amount of
1,609,858 shares of Common Stock exercisable at exercise prices from
$1.44 to $1.50.
The Company issued no warrants in 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 2002, a total of 55,000
Warrants were exercised for proceeds in the amount of $110,000 and 1,500
Warrants expired. During 2001, a total of 1,831,875 Warrants were exercised for
proceeds in the amount of $3,641,000 and 830,625 Warrants expired.
The following details the Warrants currently outstanding as of December 31,
2002:
Number of
Underlying Exercise Expiration
Warrant Series Shares Price Date
- --------------------------------- ------------- ------------- -------------
Class D Preferred Stock Warrants 751,250 $1.81 - $2.50 6/03 - 7/03
Consulting Warrants 1,260,000 $1.20 - $2.35 4/03 - 1/05
PNC Financing Warrants 1,283,332 $ 1.44 12/05
Financing Warrants 1,020,000 $1.42 - $1.94 8/03 - 3/04
BHC Financing Warrants 1,167,141 $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 1,609,858 $1.44 - $1.50 7/06 - 7/08
-------------
14,061,552
=============
Shares Reserved
At December 31, 2002, we have reserved approximately 18.8 million shares of
Common Stock for future issuance under all of the above options and warrant
arrangements and the convertible Series 17 Preferred Stock. (See Note 5.)
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NOTE 12
COMMITMENTS AND CONTINGENCIES
Hazardous Waste
In connection with our waste management services, we handle both hazardous and
nonhazardous 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 the Company effective June 1, 1999, has been
advised 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. The relationship of PFMI to the third site, if any, is currently being
investigated by the Company. PFO, which was also purchased by the Company
effective June 1, 1999, has been advised that it is a PRP in two Superfund
sites. The Company is currently investigating the relationship of PFO to the two
sites.
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 the Company's acquisition of PFD.
The Leased Property contains certain contaminated waste in the soils and
groundwater. The Company was indemnified by the seller of PFD for costs
associated with remediating the Leased Property, which entails remediation of
soil and/or groundwater restoration. However, during 1995, the seller filed for
bankruptcy. Prior to the acquisition of PFD by the Company, the seller had
established a trust fund ("Remediation Trust Fund"), which it funded with the
seller's stock to support the remedial activity on the Leased Property pursuant
to the agreement with the Ohio Environmental Protection Agency ("Ohio EPA").
After the Company purchased PFD, it was required to advance $250,000 into the
Remediation Trust Fund due to the reduction in the value of the seller's stock
that comprised the Remediation Trust Fund, which stock had been sold by the
trustee prior to the seller's filing bankruptcy and has subsequently put an
additional $197,000 into the Remediation Trust Fund. PFD has brought action
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. PFD filed a lawsuit against those parties that own the Leased
Property and that operated the Leased Property prior to being sold to Quadrex
for contributions relating to the remediation of the Leased Property. PFD and
the defendants have agreed in principal to settle the lawsuit, subject to
finalization and execution of definitive settlement agreements. Under the
proposed settlement, the defendants would pay PFD $400,000 towards remediation
of the Leased Property.
PFMI was previously named as a PRP under the Indiana state equivalent to the
federal Comprehensive Environmental Response, Compensation and Liability Act of
1980 at the Four County Landfill site near DeLong, Indiana. In March 1999, PFMI
the Indiana Department of Environmental Management ("IDEM"), and the members of
the Four County Landfill Group and the Four County Landfill Operable Unit One
RD/RA Group (collectively the "Groups") entered into an Agreed Order (the
"Agreed Order") in an administrative proceeding before IDEM pursuant to which
PFMI received a full and complete release from the Groups, a covenant from IDEM
not to sue or take any administrative action against PFMI with respect to
present or future liability relating to the site (with the exception of
liability, if any, associated with loss of natural resources), and protection
from contribution actions of third parties relating to the site. On July 13,
2001, the United States of America (the "Government") filed an action against
PFMI and others, including members
-65-
of the Groups, seeking to recover response costs allegedly incurred by the
United States Environmental Protection Agency ("EPA") in connection with the
Four County Landfill site. During the second quarter of 2002 PFMI, and other
PRPs entered into an agreement to settle the suit. PFMI will pay approximately
$153,000 of the total settlement of which the total amount was accrued in
September 2002. The settlement agreement was finalized in October 2002, and
provides that the Company will pay its portion of the settlement over a twelve
month period beginning in March 2003.
Patrick Sullivan ("P. Sullivan"), the son of a former member of our Board of
Directors, Thomas P. Sullivan ("Mr. Sullivan"), was employed by a subsidiary of
the Company, Perma-Fix of Orlando, Inc. ("PFO"), as an executive and/or general
manager from the date of the Company's acquisition of PFO in June 1999 to June
2002, when he terminated his employment to go to work for a competitor of PFO in
Orlando, Florida. P. Sullivan is subject to an agreement with the Company that
provides, in part, that P. Sullivan would not solicit customers, suppliers or
employees of the Company or PFO for a period of two years after termination of
his employment. The Company has been advised that P. Sullivan violated the
agreement and his duties to the Company and PFO prior to and after he terminated
his employment with PFO. P. Sullivan reimbursed the Company for certain personal
expenses charged to, and paid by, the Company after the Company notified P.
Sullivan of the claims. In December 2002, the Company 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 the Company in connection with these alleged actions by his
son.
In October 2002, the Company's subsidiary Perma-Fix of Memphis, Inc. ("PFM"), a
discontinued operation, entered into a settlement agreement with Mid-South
Industrial, Inc. and CNA Insurance Company to settle a lawsuit PFM filed seeking
damages resulting from an explosion and fire which occurred in January 1997.
Under the settlement agreement PFM received approximately $233,000 in October
2002, which was recorded as other income in the fourth quarter of 2002.
On February 24, 2003, East Tennessee Materials and Energy Corporation ("M&EC"),
a subsidiary of Perma- Fix Environmental Services, Inc., 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 many months. In 2002, the revenues
generated by M&EC under the subcontracts with Bechtel Jacobs represented
approximately 11.6% of Perma-Fix's 2002 total revenues. As of the date of this
release, Bechtel Jacobs continues to deliver waste to M&EC for treatment and
M&EC continues to accept such waste. Although Perma-Fix does not believe that
this lawsuit will have a material adverse effect on its operations, Bechtel
Jacobs could terminate the subcontracts with M&EC, as the subcontracts may be
terminated at any time by either party.
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.
Permits
We are subject to various regulatory requirements, including the procurement of
requisite licenses and permits at our facilities. These licenses and permits are
subject to periodic renewal without which our operations would be adversely
affected. We anticipate that, once a license or permit is issued with respect to
a facility, the license or permit will be renewed at the end of its term if the
facility's operations are in compliance with the applicable regulatory
requirements.
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Accrued Closure Costs and Environmental Liabilities
We maintain various closure cost financial assurance instruments to guarantee
the proper decommissioning of our RCRA facilities upon cessation of operations.
Additionally, in the course of owning and operating on- site treatment, storage
and disposal facilities, we are subject to corrective action proceedings to
restore soil and/or groundwater to its original state. These activities are
governed by federal, state and local regulations and we maintain the appropriate
accruals for restoration. As discussed in Note 8 and 9, we have recorded accrued
liabilities for estimated closure costs and identified environmental remediation
costs.
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.
Operating Leases
We lease certain facilities and equipment under operating leases. Future minimum
rental payments as of December 31, 2002, required under these leases are
$2,008,000 in 2003, $1,410,000 in 2004, $1,118,000 in 2005, $922,000 in 2006,
$537,000 in 2007 and $133,000 thereafter.
Net rent expense relating to our operating leases was $3,109,000, $2,922,000 and
$2,245,000 for 2002, 2001 and 2000, 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
$253,000 and $241,000 in matching funds during 2002 and 2001, respectively.
NOTE 14
OPERATING SEGMENTS
During 2002, we were engaged in eleven 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 of the
segment to make decisions about resources to be allocated within the
segment and assess its performance; and
o For which discrete financial information is available.
We therefore define our operating segments as each separate facility or location
that we operate. These segments however, exclude the Corporate headquarters
which does not generate revenue and Perma-Fix of Memphis, Inc., a discontinued
operation, which is reported with Corporate headquarters. The accounting
policies of the operating segments are the same as in Note 2.
Pursuant to FAS 131 we have aggregated our operating segments into three
reportable segments to ease in the presentation and understanding of our
business. Each reportable segment has a president who manages and makes
decisions for the reportable segment as a whole. The results of the reportable
segments are then
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reviewed by the Company's chief operating decision maker. We used the following
criteria to aggregate our segments:
o The nature of our products and services;
o The nature of the production processes;
o The type or class of customer for our products and services;
o The methods used to distribute our products or provide our services;
and
o The nature of the regulatory environment.
Our reportable segments are defined as follows:
The Industrial Waste Management Services segment, which provides on-and-off site
treatment, storage, processing and disposal of hazardous and nonhazardous
industrial and commercial and wastewater through our six TSD facilities;
Perma-Fix Treatment Services, Inc., Perma-Fix of Dayton, Inc., Perma-Fix of Ft.
Lauderdale, Inc., Perma-Fix of Orlando, Inc., Perma-Fix of South Georgia, Inc.,
and Perma-Fix of Michigan, Inc. We provide through Perma-Fix Government Services
various waste management services to certain governmental agencies.
The Nuclear Waste Management Services segment, which provides treatment,
storage, processing and disposal services. Included in such is research,
development, on and off-site waste remediation of nuclear mixed and low-level
radioactive waste through our three TSD facilities; Perma-Fix of Florida, Inc.,
Diversified Scientific Services, Inc., and the East Tennessee Materials and
Energy Corporation ("M&EC").
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.
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The table below shows certain financial information by business segment for
2002, 2001 and 2000 and excludes the results of operations of the discontinued
operations.
Segment Reporting December 31, 2002
Industrial Nuclear
Waste Waste Segments Corporate Consolidated
Services Services Engineering Total Other(2) Total
-------- -------- ----------- ----- -------- -----
Revenue from external customers $ 37,641(3) $42,260(4) $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 Corporate Consolidated
Services Services Engineering Total Other(2) Total
-------- -------- ----------- ----- -------- -----
Revenue from external customers $ 42,355(3) $28,932(4) $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
Segment Reporting December 31, 2000
Industrial Nuclear
Waste Waste Segments Corporate Consolidated
Services Services Engineering Total Other(2) Total
-------- -------- ----------- ----- -------- -----
Revenue from external customers $ 44,191(3) $11,737 $3,211 $ 59,139 $ -- $ 59,139
Intercompany revenues 4,130 1,315 149 5,594 -- 5,594
Interest income 27 -- -- 27 14 41
Interest expense 1,183 445 59 1,687 445 2,132
Interest expense-Warrants -- -- -- -- 344 344
Interest expense-financing fees 8 -- -- 8 173 181
Depreciation and amortization 2,793 703 83 3,579 72 3,651
Segment profit (loss) (1,296) 914 131 (251) (511) (762)
Segment assets(1) 46,546 19,816 2,483 68,845 3,926 72,771
Expenditures for segment assets 2,152 587 51 2,790 46 2,836
(1) Segment assets have been adjusted for intercompany accounts to reflect
actual assets for each segment.
(2) Amounts reflect the activity for corporate headquarters, and the activity
for PFM, which is a discontinued operation, not included in the segment
information.
(3) The consolidated revenues within the Industrial Waste Management Services
segment include DRMS contracts for 2002 which total $6,642,000 (or 8.0%)
of total revenue, $5,996,000 (or 8.0%) for the year ended December 31,
2001, and $7,606,000 (or 12.9%) for the year ended December 31, 2000.
(4) The consolidated revenues within the Nuclear Waste management Services
segment include the Oak Ridge contracts for 2002 which total $9,664,000
(or 11.6%) of total revenue and $6,300,000 (or 8.5%) for the year ended
2001.
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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
-------- --------- --------- ---------
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
2001
Revenues $ 18,712 $ 17,840 $ 17,386 $ 20,554
Gross Profit 4,547 4,463 5,963 7,077
Net income (loss) applicable to Common Stock (572) (746) (613) 1,184
Basic net income (loss) per common share (.03) (.03) (.02) .03
Diluted net income (loss) per common share (.03) (.03) (.02) .03
Stockholders' equity 23,258 30,289 40,408 41,841
Total assets 80,876 97,169 99,180 99,137
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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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 59 Chairman of the Board, President and Chief Executive Officer
Mr. Jon Colin 47 Director
Mr. Mark A. Zwecker 52 Director
Mr. Jack Lahav 54 Director
Mr. Alfred C. Warrington, IV 67 Director
Mr. Richard T. Kelecy 47 Chief Financial Officer, Vice President and Secretary
Mr. Roger Randall 59 Vice President - Contract Management
Mr. Larry McNamara 53 President, Nuclear Services
Mr. William Carder 53 Vice President Sales & Marketing
Each director is elected to serve until the next annual meeting of stockholders.
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 of the Company since December 1996. Mr. Colin
is currently Chief Executive Officer of Lifestar Response Corporation, a
position he has held since April 2002. Previously 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. MARK A. ZWECKER
Mark Zwecker has served as a Director of the Company since its inception in
January 1991. Mr. Zwecker is currently President of ACI Technology, LLC, a
position he has held since 1997. Previously, 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. JACK LAHAV
Jack Lahav has served as a Director of the Company since September 2001. Mr.
Lahav is a private investor, specializing in launching and growing businesses.
Previously, Mr. Lahav was founder and president of Remarkable Products, Inc.
from 1980 to 1993; Co-Founder of Lamar Signal Processing, Inc.; President of
Advanced Technologies, Inc., a robotics company and Director of Vocaltech
Communications, Inc.
MR. ALFRED C. WARRINGTON, IV
Mr. Warrington was elected to the Board of Directors on March 12, 2002, to fill
a newly created directorship. Mr. Warrington was the founding chairman, co-chief
executive officer and chief financial officer of Sanifill, Inc., a solid waste
company that was eventually merged with Waste Management, Inc. and 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
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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.
MR. RICHARD T. KELECY
The information set forth under the caption "Executive Officers of the Company"
on page 15 is incorporated by reference.
MR. ROGER RANDALL
The information set forth under the caption "Executive Officers of the Company"
on page 15 is incorporated by reference.
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.
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 the Company's
executive officers and directors and beneficial owners of more than ten percent
(10%) of any equity security of the Company registered pursuant to Section 12 of
the Exchange Act to file reports of ownership and changes of ownership of the
Company's equity securities with the Securities and Exchange Commission, and to
furnish the Company with copies of all such reports. Based solely on a review of
the copies of such reports furnished to the Company and information provided to
the Company, the Company believes that during 2002 none of the executive
officers and directors of the Company failed to timely file reports under
Section 16(a), except that a Form 5 for Thomas Sullivan was not timely filed for
December 2002.
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 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 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 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
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Preferred Stock that were convertible into a maximum of 1,282,798 shares of
Common Stock of the Company 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 the Company's 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.
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, Vice President -
Contract Management, and President of Nuclear Services.
Annual Compensation
------------------------------------------
Other
Annual
Salary Bonus Compen-
Name and Principal Position Year ($) ($) sation ($)
- ----------------------------------------------- ----------------------- ----------- -----------------
Dr. Louis F. Centofanti (1)
Chairman of the Board, President and
Chief Executive Officer 2002 149,500 -- --
2001 138,667 40,000 --
2000 130,000 -- --
Richard T. Kelecy 2002 138,958 -- --
Vice President and Chief 2001 128,333 30,000 --
Financial Officer 2000 120,000 -- --
Roger Randall 2002 134,167 -- --
Vice President - Contract Management 2001 123,333 25,000 --
2000 115,000 -- --
Larry McNamara 2002 137,042 -- --
President of Nuclear Services 2001 127,667 30,000 --
2000 116,448 -- --
Long-Term
Compensation
--------------------------------------
All
Restricted Securities Other
Stock Underlying Compen-
Award(s) Options/SARs sation
Name and Principal Position ($) (#) ($)(2)
- ----------------------------------------------- --------------- --------------------- --------------
Dr. Louis F. Centofanti (1)
Chairman of the Board, President and
Chief Executive Officer -- -- 11,214
-- 100,000 11,310
-- 75,000 11,310
Richard T. Kelecy -- -- 10,725
Vice President and Chief -- 70,000 10,800
Financial Officer -- 50,000 10,725
Roger Randall -- -- 9,000
Vice President - Contract Management -- 70,000 9,000
-- 50,000 9,000
Larry McNamara -- -- 10,826
President of Nuclear Services -- 120,000 10,708
-- 50,000 4,404
(1) Dr. Centofanti previously received compensation pursuant to an employment
agreement dated October 1, 1997, which expired on September 30, 2000. As of the
date of this report, Dr. Centofanti has not entered into a new employment
agreement. Effective September 1, 2001, Dr. Centofanti's annual salary was
increased from $130,000, as established in July 1999, to $156,000.
(2) Each noted executive is provided a monthly automobile allowance in the
amount of $750. Also included, where applicable, is the Company's 401(k)
matching contribution.
Option Grants in 2002
During 2002, there were no individual grants of stock options made to any of the
executive officers named in the Summary Compensation Table.
Aggregated Option Exercised in 2002 and Fiscal Year-end Option Values
The following table sets forth information concerning each exercise of stock
options during 2002, by each of the executive officers named in the Summary
Compensation Table and the fiscal year-end value of unexercised options:
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Shares Value Number of Unexercised Value of Unexercised
Acquired on Realized Options at Fiscal year-end in-the-Money Options
Name Exercise (#)(1) ($)(1) (#) at Fiscal Year End ($)(2)
------ --------------- -------- -------------------------------- ---------------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------ ------------- ----------- -------------
Dr. Louis F. Centofanti -- -- 370,000 125,000 77,500 116,250
Richard Kelecy -- -- 188,000 92,000 200,500 87,000
Roger Randall -- -- 168,000 92,000 200,500 87,000
Larry McNamara -- -- 44,000 126,000 43,000 109,500
(1) No options were exercised during 2002.
(2) Represents the difference between $2.50 (the closing price of the Company's
Common Stock reported on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") Small Cap Market on December 31, 2002), 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 the Company's
Common Stock on the date of exercise.
401(k) Plan
The Company 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. The Company, at its discretion, may make
matching contributions based on the employee's elective contributions. Company
contributions vest over a period of five years. The Company currently matches up
to 25% of our employee's contributions, not to exceed 3% of a participant's
compensation. The Company contributed $253,000 in matching funds during 2002.
Employee Stock Purchase Plan
The Company has adopted the Perma-Fix Environmental Services, Inc. 1996 Employee
Stock Purchase Plan (the "1996 Plan") which is intended to comply with Section
423 of the Code. All full-time employees who have completed at least six months
of continuous service, other than those that are deemed, for the purpose of
Section 423(b)(3) of the Code, to own stock possessing 5% or more of the total
combined voting power or value of all classes of stock of the Company, are
eligible to participate in the 1996 Plan. Participating employees
("Participants") may authorize for payroll periods beginning on or after January
1, 1997, payroll deductions from compensation for the purpose of funding the
Participant's stock purchase account ("Stock Purchase Account"). This deduction
shall be not less than 1% nor more than 5% of the Participant's gross amount of
compensation. The purchase price per share of the Common Stock to be sold to
Participants pursuant to the 1996 Plan is the sum of (a) 85% of the fair market
value of each share on the offering date on which such Offering commences or on
the Exercise Date (as defined in the 1996 Plan) on which such offering expires,
whichever is the lower, and (b) any transfer, excise or similar tax imposed on
the transaction pursuant to which shares of Common Stock are purchased. The
"Offering Date" means the first day of each January and July during which the
1996 Plan is in effect, commencing with January 1, 1997. There is no holding
period regarding Common Stock purchased under the 1996 Plan, however, in order
for a participant to be entitled to the tax treatment described in Section 423
of the Code with respect to the Participant's sale of Common Stock purchased
under the 1996 Plan, such Stock must not be sold for at least one year after
acquisition under the 1996 Plan, except in the case of death. Any Participant
may voluntarily withdraw from the 1996 Plan by filing a notice of withdrawal
with the Board of Directors prior to the 15th day of the last month in a
Purchase Period (as defined in the 1996 Plan). Upon such withdrawal, there shall
be paid to the Participant the amount, if any, standing to the Participant's
credit in the Participant's Stock Purchase Account. If a Participant ceases to
be an eligible employee, the entire amount standing to the Participant's credit
in the Participant's Stock Purchase Account on the effective date of such
occurrence shall be paid to the Participant. The first purchase period commenced
July 1, 1997. The following table details the resulting employee stock
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purchase totals, which includes 43,243 shares for the purchase period July 1
through December 31, 2002, which were issued in January 2003.
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 92,000 42,917
July 1 - December 31, 2002 92,000 43,243
Compensation of Directors
In 2002, we paid our outside directors fees of $1,500 for each month of service,
resulting in the five outside directors earning annual director's fees in the
total amount of $85,000. 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 paid during
2002 to the five outside directors (Messrs. Colin, Lahav, Sullivan, Warrington
and Zwecker) was $81,000, paid by the issuance of 40,232 shares of Common Stock.
The aggregate amount of accrued director fees at December 31, 2002, to be paid
in 2003, totals $22,000. 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.
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 the Company's 1992 Outside Directors Stock Option
and Incentive Plan ("Outside Directors Plan"), each outside director is granted
an option to purchase up to 15,000 shares of Common Stock on the date such
director is initially elected to the Board of Directors and receives 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 Outside
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. As of December 31,
2002, options to purchase 250,000 shares of Common Stock had been granted under
the Outside Directors Plan.
As of the date of this report, we have issued 224,563 shares of the Company's
Common Stock in payment of director fees, covering the period January 1, 1995
through December 31, 2002. The number of shares of Common Stock which may be
issued in the aggregate under the Outside Directors Plan, either under options
or stock awards, is 500,000 shares subject to adjustment.
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."
The Company's 1991 Performance Equity Plan and the 1993 Non-qualified Stock
Option Plan, described under "Report of the Compensation and Stock Option
Committee-(c) Stock Options." (collectively, the "Plans") provide that in the
event of a change in control (as defined in the Plans) of the Company, each
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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 2002, the Compensation and Stock Option
Committee for the Company's Board of Directors was composed of Mark Zwecker and
Jack Lahav. Thomas P. Sullivan also served on the Compensation and Stock Option
Committee from January until his resignation in December 2002. Mr. Zwecker was
neither an officer nor an employee during 2002, however, Mr. Zwecker did serve
as our Secretary from June 1995 until June 30, 1996.
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 13, 2003, by each person known by us to be the
beneficial owners of more than 5% of any class of the Company's voting
securities.
Amount and Percent
Name of Title Nature of of
Beneficial Owner of Class Ownership Class(1)
---------------- -------- --------- --------
Kern Capital Management, LLC(2) Common 2,753,400 7.9%
(1) In computing the number of shares and the percentage of outstanding Common
Stock "beneficially owned" by a person, the calculations are based upon
34,697,267 shares of Common Stock issued and outstanding on March 13, 2003
(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.
(2) This beneficial ownership amount is according to the Schedule 13G, filed
with the Securities and Exchange Commission, dated February 14, 2003. Kern
Capital Management, LLC had sole voting and dispositive power over all of these
shares.
Capital Bank represented to us that:
o Capital Bank owns shares of the Company's Common Stock and rights to
acquire shares of the Company's 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
the Company's 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.
Beneficial ownership by the Company's 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 securities of which that person
has the right to acquire beneficial ownership of such securities within 60 days
from March 13, 2003.
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 10% of the Company's voting securities. The
following table sets
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forth information as to the shares of voting securities owned of record by
Capital Bank on the March 13, 2003, as if Capital Bank were the beneficial owner
of such securities.
Amount and Percent
Name of Title Nature of of
Beneficial Owner of Class Ownership Class(1)
---------------- -------- --------- --------
Capital Bank Grawe Gruppe(2) Common 15,030,117 (2) 36.9%
(1) In computing the number of shares and the percentage of outstanding Common
Stock "beneficially owned" by a person, the calculations are based upon
34,697,267 shares of Common Stock issued and outstanding on March 13, 2003
(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.
(2) This amount includes 9,044,175 shares that Capital Bank owns of record, as
agent for certain accredited investors and 4,319,275 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
$1.42 to $1.97 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 the Company 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 the Company
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 the Company 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 Company Common Stock holds more than 4.9% of the issued and
outstanding Common Stock of the Company; (b) has no right to, and is not
believed to possess the power to, exercise control over the Company's management
or its policies; (c) has not nominated, and has not sought to nominate, a
director to the Company's board; and (d) has no representative serving as an
executive officer of the Company, the Company does not believe that Capital Bank
is an affiliate of the Company. Capital Bank's address is Burgring 16, 8010
Graz, Austria. Capital Bank has advised the Company 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 13, 2003, by each Director and executive officer
of the Company named in the Summary Compensation Table and by all Directors and
executive officers of the Company as a group. Beneficial ownership by the
Company's 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.
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Number of Shares
of Common Stock Percentage of
Name of Beneficial Owner Beneficially Owned Common Stock(1)
- ------------------------- ------------------ ---------------
Dr. Louis F. Centofanti(2)(3) 1,250,434(3) 3.56%
Mark A. Zwecker(2)(4) 258,853(4) *
Jon Colin(2)(5) 67,339(5) *
Jack Lahav(2)(6) 1,171,876(6) 3.32%
Alfred C. Warrington, IV(2)(7) 160,725(7) *
Richard T. Kelecy(2)(8) 228,572(8) *
Roger Randall(2)(9) 192,000(9) *
Larry McNamara(2)(10) 78,000(10) *
Bill Carder(2)(11) --(11) *
Directors and Executive Officers as a Group (9 persons) 3,407,799 9.39%
* 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) 541,434 shares held of record by Dr. Centofanti;
(ii) options to purchase 105,000 shares granted pursuant to the 1991 Performance
Equity Plan and the 1993 Non-qualified Stock Option Plan, which are immediately
exercisable; (iii) 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 190,000 shares granted pursuant to the 1993
Non-qualified Stock Option Plan, which are not exercisable within sixty 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. 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
45,000 shares granted pursuant to the 1992 Outside Directors Stock Option and
Incentive Plan which are immediately exercisable.
(5) 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 45,000 shares granted pursuant to the 1992 Outside Directors Stock
Option and Incentive Plan which are immediately exercisable.
(6) 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)
20,000 options to purchase Common Stock pursuant to the 1992 Outside Directors
Stock Option and Incentive Plan which are immediately exercisable; and (iii)
571,429 Warrants to purchase Common Stock purchased pursuant to our Private
Offering held in 2001 which are exercisable immediately.
(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) 25,000 options to purchase Common Stock pursuant to the 1992 Outside
Directors Stock Option and Incentive Plan which are immediately exercisable, and
(iii) 10,000 options to purchase Common Stock granted pursuant to the 1993
Non-qualified Stock Option Plan.
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(8) Mr. Kelecy has sole voting and investment power over 16,572 shares of Common
Stock held of record by Mr. Kelecy and 212,000 options to purchase Common Stock
granted pursuant to the 1993 Non-qualified Stock Option Plan. This amount does
not include options to purchase 143,000 shares of Common Stock granted pursuant
to the 1993 Non-qualified Stock Option Plan which are not exercisable within
sixty days.
(9) Mr. Randall has sole voting and investment power over these shares which
include: (i) 192,000 options to purchase Common Stock pursuant to the 1993
Non-qualified Stock Option Plan, which are immediately exercisable. This amount
does not include options to purchase 93,000 shares of Common Stock granted
pursuant to the 1993 Non-qualified Stock Option Plan which are not exercisable
within sixty days.
(10) Mr. McNamara has sole voting and investment power over these shares which
include: (i) 78,000 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 Warrants to purchase 192,000 shares pursuant to the 1993
Non-qualified Stock Option Plan which are not exercisable within sixty days.
(11) Not included are options to purchase 50,000 shares of Common Stock granted
pursuant to the 1993 Non- qualified stock Option Plan, which are not exercisable
within sixty days.
Equity Compensation Plans
The following table sets forth information as of December 31, 2002, with respect
to the Company's 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 2,406,000 $1.59 1,612,391
Equity compensation plans not
approved by stockholders 300,000 2.58 --
--------------------------------------------------------------------------------------------
Total 2,706,000 $1.70 1,612,391
Potential Change in Control
As of March 13, 2003, Capital Bank owned of record, as agent for certain
accredited investors, 9,044,175 shares of common stock representing 26.1% of our
issued and outstanding common stock. As of that date, Capital Bank also had the
right to acquire an additional 5,985,942 shares of common stock, comprised of
(a) 4,319,275 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.
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 15,030,117 shares of common stock, representing 36.9% 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.
-79-
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 recently gave Capital Bank permission to
disclose their identities in order to be included as Selling Stockholders in our
S-3 Registration Statement. 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 Capital Bank's investors agree to, or reach an understanding to, act as a
group or otherwise to act in concert for the purposes of voting on matters
subject to stockholder vote, our operations and management could be greatly
impacted. For example, if Capital Bank acquires the shares of common stock
described in the previous paragraph, the Capital Bank investor group may be able
to cause a change in at least 50% of the members of our Board of Directors. This
change in Board membership could be an event of default under our $22 million
credit facility (the "Credit Facility") and our $5.6 million outstanding
Subordinated Notes. If the Capital Bank investor group were to cause Dr. Louis
Centofanti to be removed from our Board of Directors or as our president and
chief executive officer, the removal could be an event of default under the
Credit Facility and the Subordinated Notes. The Company is not aware of any
agreement or understanding among Capital Bank's investors to act as a group.
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 the Company, 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 an affiliate of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Capital Bank Grawe Gruppe
Preferred Stock Conversion and Exchange
Effective as of April 6, 2001, the Company and Capital Bank completed the
Conversion and Exchange Agreement, whereby Capital Bank converted a portion of
the Company's Preferred Stock owned of record by Capital Bank, as agent for
certain of its accredited investors, for shares of the Company's Common Stock
and exchanged the remaining Preferred Stock held by Capital Bank for shares of
the Company's newly designated Series 17 Preferred Stock.
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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 the Company's Series 14 Preferred , 616 shares of the Company's Series
15 Preferred, and 1,797 shares of the Company's 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 the Company's 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. The Company may, at its
sole option, redeem, in whole or in part, at any time, and from time to time the
then outstanding Series 17 Preferred at the following cash redemption prices if
redeemed during the following periods: (a) within 12 months from June 1, 2001 -
$1,100 per share, and (b) after June 1, 2002 - $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 Company engaged in the series of exchanges with Capital Bank for various
series of Preferred Stock for a newly issued series of preferred stock in order
to provide conversion terms more favorable to the Company and to improve the
Company's capital structure. Prior to the exchanges, the floating conversion
price of the Company's preferred stock resulted in the holders of the preferred
stock realizing decreasing conversion prices for an increasing number of shares
of common stock. By engaging in the exchanges, the Company has set the
conversion price at a fixed price, and the total number of shares issuable upon
conversion of the preferred stock is now fixed at a specified number. The
exchanges have also enabled the Company to simplify its capital structure. As a
result of the series of exchanges and conversions of a certain number of
preferred stock, ending in the exchange for the currently outstanding Series 17
Preferred, the Company now has only one series of preferred stock outstanding,
and instead of floating conversion rates, the Series 17 Preferred has a fixed
rate. The Company believes that this simplified capital structure (a) helps
facilitate the Company's borrowing and capital raising efforts, and (b) improves
the ability of the Company's investors and market professionals to analyze the
Company's financial status.
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 2001, accrued dividends on the Series
17 Preferred of approximately $92,000 were paid in the form of 36,718 shares of
the Company's Common Stock, of which 24,217 were issued in March 2002.
Debt for Equity Exchange
On August 29, 2000, the Company entered into a short term bridge loan agreement
with Capital Bank in connection with the Company's acquisition of DSSI. This
loan agreement (the "$3,000,000 Capital Loan Agreement") was between the Company
and Capital Bank, pursuant to which Capital Bank, acting as agent for certain
investors who provided the funds, loaned (the "$3,000,000 Capital Loan") the
Company the aggregate principal amount of $3,000,000, as evidenced by a
Promissory Note (the "$3,000,000 Capital Promissory Note") in the face amount of
$3,000,000, having an initial maturity date of November 29, 2000, and bearing an
annual interest rate of 12%. On December 19, 2000, this agreement was also
amended pursuant to the terms of the PNC Revolving Credit and Term Loan
Agreement, which extended the due date of the principal and interest to July 1,
2001.
The Company entered into an agreement (the "Exchange Agreement") with Capital
Bank, to issue to Capital Bank, as agent for certain of its accredited
investors, 1,893,505 shares of the Company's Common Stock and a Warrant to
purchase up to 1,839,405 shares of Common Stock at an exercise price of $1.75
per share (the "Capital Bank Warrant"), in satisfaction of all amounts due or to
become due under the $3,000,000 Capital Loan Agreement and the related
$3,000,000 Capital Promissory Note, including the Company's obligations to issue
to Capital Bank shares of Common Stock if the $3,000,000 Capital Promissory Note
was not paid
-81-
by certain due dates. The $3,000,000 Capital Promissory Note became due on July
1, 2001. The Exchange Agreement was completed effective as of July 9, 2001.
Upon the closing of the Exchange Agreement, the Company (a) paid to Capital Bank
a closing fee of $325,000, payable $75,000 cash and by the issuance by the
Company of 105,932 shares of the Company's Common Stock, such number of shares
being equal to the quotient of $250,000 divided by the last closing bid price of
the Common Stock as quoted on the NASDAQ on June 26, 2001, and (b) issued
certain five year Warrants for the purchase of up to 625,000 shares of Common
Stock at a purchase price of $1.75 per share.
Private Placement Offering
During July 2001, Jack Lahav, a current member of the Company's Board of
Directors, purchased 571,429 units at $1.75 per unit pursuant to the Company's
Private Offering completed July 2001, and Capital Bank, as agent for certain of
its accredited investors, purchased 842,995 units in the Private Offering. Each
unit consisted of one share of Common Stock and a Warrant to purchase one share
of Common Stock at $1.75 per share. Stockholder approval was required prior to
any of the Warrants being exercised. The stockholders of the Company approved
the exercise of the Warrants in a special meeting of stockholders held in June
2002.
ITEM 14. 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 the Company's management. Based on their most recent evaluation,
which was completed within 90 days of the filing of this Annual Report on Form
10-K, the Company's Chief Executive Officer and Chief Financial Officer believe
that the Company's disclosure controls and procedures (as defined in Rules
13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) are
effective. There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these internal controls
subsequent to the date of the most recent evaluation.
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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 5-Other Events and Regulation
FD Disclosure), was filed by the Company on November 26, 2002,
reporting the completion of discussions with the Securities
and Exchange Commission relating to SFAS 141 and 142.
Current report on Form 8-K (Item 5-Other Events and Regulation
FD Disclosure), was filed by the Company on December 17, 2002,
reporting the resignation of Thomas P. Sullivan from the Board
of Directors of Perma-Fix Environmental Services, Inc.
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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 27, 2003
-------------------------------------- --------------------
Dr. Louis F. Centofanti
Chairman of the Board
Chief Executive Officer
By /s/ Dr. Louis F. Centofanti Date March 27, 2003
-------------------------------------- --------------------
Dr. Louis F. Centofanti
By /s/ Richard T. Kelecy Date March 27, 2003
-------------------------------------- --------------------
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 27, 2003
-------------------------------------- --------------------
Jon Colin, Director
/s/ Jack Lahav Date March 27, 2003
-------------------------------------- --------------------
By Jack Lahav, Director
By /s/ Alfred C. Warrington, IV Date March 27, 2003
-------------------------------------- --------------------
Alfred C. Warrington, IV, Director
By /s/Mark A. Zwecker Date March 27, 2003
-------------------------------------- --------------------
Mark A. Zwecker, Director
By /s/ Dr. Louis F. Centofanti Date March 27, 2003
-------------------------------------- --------------------
Dr. Louis F. Centofanti, Director
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CERTIFICATIONS
I, Dr. Louis F. Centofanti, certify that:
1. I have reviewed this annual report on Form 10-K of Perma-Fix
Environmental Services, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this annual report
(the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/ Dr. Louis F. Centofanti
- ----------------------------------------
Dr. Louis F. Centofanti
Chairman of the Board Chief Executive Officer
-85-
CERTIFICATIONS
I, Richard T. Kelecy, certify that:
1. I have reviewed this annual report on Form 10-K of Perma-Fix
Environmental Services, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this annual report
(the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/Richard T. Kelecy
- -------------------------------
Richard T. Kelecy
Chief Financial Officer
-86-
SCHEDULE II
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2002, 2001, and 2000
(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, 2002:
Allowance for doubtful accounts $725 $1,200 $713 $1,212
Year ended December 31, 2001:
Allowance for doubtful accounts $894 $ 399 $568 $ 725
Year ended December 31, 2000:
Allowance for doubtful accounts $952 $ 160 $218 $ 894
-87-
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- -----------
2.1 Stock Purchase Agreement dated as of May 16, 2000, between the
Company and Waste
Management Holdings, Inc. as incorporated by reference from
Exhibit 2.1 to the Company's quarterly report on Form 10-Q for
the quarter ended March 31, 2000.
2.2 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.
2.3 First Amendment to Stock Purchase Agreement dated August 31,
2000, between the Company and Waste Management Holdings, Inc. as
incorporated by reference from Exhibit 2.2 to the Company's Form
8-K dated September 15, 2000.
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.
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Exhibit No. Description
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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 Letter agreement,
dated December 19, 2000, between the Company 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 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.
10.11 Warrant dated August 29, 2000, issued by the Company to RBB Bank
Aktiengesellschaft for the purchase of the Company's common
stock as incorporated by reference from Exhibit 4.3 to the
Company's Form 8-K dated September 15, 2000.
10.12 Warrant, dated November 29, 2000, issued to RBB Bank
Aktiengesellschaft for the purchase of 300,000 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. A
substantially similar warrant, dated October 30, 2000, for the
purchase of 150,000 shares of the Company's common stock issued
to RBB Bank, as well as substantially similar warrants dated
December 29, 2000, January 31, 2001, 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.
10.13 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.
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Exhibit No. Description
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10.14 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.
10.15 Common Stock Purchase Warrant dated June 9, 1997, between the
Company and RBB Bank Aktiengesellschaft as incorporated by
reference from Exhibit 4.4 to the Company's Form 8-K, dated June
11, 1997.
10.16 Common Stock Purchase Warrant dated June 9, 1997, between the
Company and RBB Bank Aktiengesellschaft as incorporated by
reference from Exhibit 4.5 to the Company's Form 8-K, dated June
11, 1997.
10.17 Stock Purchase Agreement, dated December 18, 2000, between the
Company and Dr. Louis F. Centofanti as incorporated by reference
from Exhibit 99.8 to the Company's Form 8-K dated December 22,
2000.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 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.
10.24 Promissory Note for $1,230,000 issued to the Ann L. Sullivan
Living Trust dated September 6, 1978, as incorporated by
reference from Exhibit 10.1 to the Company's Form 8-K dated June
1, 1999.
10.25 Promissory Note for $1,970,000 issued to the Ann L. Sullivan
Living Trust dated September 6, 1978, as incorporated by
reference from Exhibit 10.2 to the Company's Form 8-K dated June
1, 1999.
10.26 Promissory Note for $1,500,000 issued to the Thomas P. Sullivan
Living Trust dated September 6, 1978, as incorporated by
reference from Exhibit 10.3 to the Company's Form 8- K dated
June 1, 1999.
10.27 Non-recourse Guaranty dated May 28, 1999, by and among Perma-Fix
of Michigan, Inc., the Thomas P. Sullivan Living Trust dated
September 6, 1978, and the Ann L. Sullivan Living Trust dated
September 6, 1978, as incorporated by reference from Exhibit
10.4 to the Company's Form 8-K dated June 1, 1999.
10.28 Mortgage dated May 28, 1999, by Perma-Fix of Michigan, Inc. to
the Thomas P. Sullivan Living Trust dated September 6, 1978 and
the Ann L. Sullivan Living Trust dated September 6, 1978, as
incorporated by reference from Exhibit 10.5 to the Company's
Form 8-K dated June 1, 1999.
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Exhibit No. Description
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10.29 Form of Guaranty Agreement, dated as of July 31, 2001, of each
of the Company's subsidiaries, Perma-Fix of Florida, Inc.,
Perma-Fix of Fort Lauderdale, Inc., Perma-Fix of Dayton, Inc.,
Perma-Fix Treatment Services, Inc., Perma-Fix of Memphis, Inc.,
Perma-Fix, Inc., Perma-Fix of New Mexico, Inc., Reclamation
Systems, Inc., Industrial Waste Management, Inc., Schreiber,
Yonley & Associates, Mintech, Inc., Perma-Fix of Orlando, Inc.,
Perma-Fix of South Georgia, Inc., Perma-Fix of Michigan, Inc.,
Diversified Scientific Services, Inc., and East Tennessee
Materials and Energy Corporation, incorporated by reference from
Exhibit 99.4 to the Company's Form 8-K, dated July 30, 2001.
10.30 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.
10.31 Subordination Agreement, dated July 30, 2001, among the Company,
AMI, and the Sullivan Trusts. The Company and the Sullivan
Trusts entered into a substantially similar Subordination
Agreement, dated July 30, 2001, with BEC. A copy of this
Subordination Agreement will be provided to the Commission upon
request is incorporated by reference from Exhibit 99.6 to the
Company's Form 8-K, dated July 30, 2001.
10.32 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.
10.33 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.
10.34 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.
10.35 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.
10.36 Debt-For-Stock Exchange Agreement, dated effective July 9, 2001,
between the Registrant and Capital Bank-Grawe Gruppe AG, as
incorporated by reference from Exhibit 10.1 to the Registrant's
Current Report on Form 8-K dated July 9, 2001, and filed on July
20, 2001.
10.37 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.
10.38 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.
10.39 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, 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.
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Exhibit No. Description
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10.40 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.
10.41 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.
10.42 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.
10.43 Subordination Agreement, dated January 31, 2001, among the
Company, the Ann L. Sullivan Living Trust dated September 6,
1978, and BHC Interim Funding, L.P. as incorporated by reference
from Exhibit 99.3 to the Company's Form 8-K dated January 31,
2001.
21.1 List of Subsidiaries
23.1 Consent of BDO Seidman, LLP
99.1 Certification by Dr. Louis F. Centofanti, Chief Executive
Officer of the Company. A signed original if this written
statement required by Section 906 has been provided to Perma-Fix
Environmental Services, Inc. and will be retained by Perma-Fix
Environmental Services, Inc. and forwarded to the Securities and
Exchange Commission or its staff upon request.
99.2 Certification by Richard T. Kelecy, Chief Financial Officer of
the Company. A signed original if this written statement
required by Section 906 has been provided to Perma-Fix
Environmental Services, Inc. and will be retained by Perma-Fix
Environmental Services, Inc. and forwarded to the Securities and
Exchange Commission or its staff upon request.
-92-