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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, 2004
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
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State or other jurisdiction (IRS Employer Identification
of incorporation or organization) Number)
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
NASDAQ Small Cap Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No
The aggregate market value of the Registrant's voting and non-voting common
equity held by nonaffiliates of the Registrant computed by reference to the
closing sale price of such stock as reported by NASDAQ as of the last business
day of the most recently completed second fiscal quarter (June 30, 2004), was
approximately $70,800,000. For the purposes of this calculation, all executive
officers and directors of the Registrant (as indicated in Item 12) are deemed to
be affiliates. Capital Bank Grawe Gruppe AG is not considered an affiliate based
on representations made to the Registrant by Capital Bank. Such determination
should not be deemed an admission that such directors or officers, are, in fact,
affiliates of the Registrant. The Company's Common Stock is listed on the NASDAQ
SmallCap market and the Boston Stock Exchange.
As of March 28, 2005, there were 41,805,267 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.
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PART I
Item 1. Business..................................................................................1
Item 2. Properties...............................................................................13
Item 3. Legal Proceedings........................................................................13
Item 4A. Executive Officers of the Company........................................................16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................17
Item 6. Selected Financial Data..................................................................18
Item 7. Management's Discussion and Analysis of Financial Condition
And Results of Operations................................................................19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...............................39
Special Note Regarding Forward-Looking Statements........................................40
Management's Report on Internal Control..................................................42
Item 8. Financial Statements and Supplementary Data..............................................46
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................................................84
Item 9A. Controls and Procedures..................................................................84
Item 9B. Other Information........................................................................84
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................85
Item 11. Executive Compensation...................................................................88
Item 12. Security Ownership of Certain Beneficial Owners and Management...........................91
Item 13. Certain Relationships and Related Transactions...........................................95
Item 14. Principal Accountant Fees and Services...................................................96
PART IV
Item 15. Exhibits and Financial Statement Schedules...............................................98
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW AND PRINCIPAL PRODUCTS AND SERVICES
Perma-Fix Environmental Services, Inc. (the Company, which may be referred to as
we, us, or our), an environmental and technology know-how company, is a Delaware
corporation, engaged through its subsidiaries, in:
.. Industrial Waste Management Services ("Industrial"), which includes:
. Treatment, storage, processing, and disposal of hazardous and
non-hazardous waste;
. Turnkey waste management and disposal services for large retail
companies;
. Wastewater management services, including the collection, treatment,
processing and disposal of hazardous and non-hazardous wastewater; and
. Environmental Services, including emergency response, vacuum services,
marine environmental and other remediation services.
.. Nuclear Waste Management Services ("Nuclear"), which includes:
. Treatment, storage, processing and disposal of mixed waste (which is
both low-level radioactive and hazardous waste) including on and
off-site waste remediation and processing;
. Nuclear, low-level radioactive, hazardous and non-hazardous waste
treatment, processing and disposal; and
. Research and development of innovative ways to process low-level
radioactive and mixed waste.
.. Consulting Engineering Services, which includes:
. Consulting services regarding broad-scope environmental issues,
including environmental management programs, regulatory permitting,
compliance and auditing, landfill design, field testing and
characterization.
We have grown through both acquisitions and internal development. Our present
objective is to focus on the efficient operation of our existing facilities,
evaluate strategic acquisitions within both the Nuclear and Industrial segments,
and to continue the research and development of innovative technologies for the
treatment of nuclear waste, mixed waste and industrial waste.
We service research institutions, commercial companies, retail companies, public
utilities and governmental agencies nationwide. The distribution channels for
our services are through direct sales to customers or via intermediaries.
We were incorporated in December of 1990. Our executive offices are located at
1940 N.W. 67th Place, Gainesville, Florida 32653.
WEBSITE ACCESS TO COMPANY'S REPORTS
Our internet website address is www.perma-fix.com. Our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to section 13(a) or
15(d) of the Exchange Act are available free of charge through our website as
soon as reasonably practicable after they are electronically filed with, or
furnished to, the Securities and Exchange Commission ("Commission").
SEGMENT INFORMATION AND FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
During 2004, we were engaged in three operating segments. Pursuant to FAS 131,
we define an operating segment as:
.. a business activity from which we may earn revenue and incur expenses;
.. whose operating results are regularly reviewed by the president to make
decisions about resources to be allocated and assess its performance; and
.. for which discrete financial information is available.
1
We therefore define our operating segments as each business line that we
operate. These segments, however, exclude the Corporate headquarters, which does
not generate revenue, and Perma-Fix of Michigan Inc. ("PFMI"), a discontinued
operation.
Most of our activities are conducted nationwide, however, our Industrial segment
maintains a significant role in the Eastern and Midwest portions of the United
States. We had no foreign operations or export sales during 2004.
OPERATING SEGMENTS
We have three operating segments, which represent each business line that we
operate. The Industrial segment, which operates seven facilities, the Nuclear
segment, which operates three facilities, and the Consulting Engineering
Services segment as described below:
INDUSTRIAL WASTE MANAGEMENT SERVICES, which includes, off-site waste storage,
treatment, processing and disposal services of hazardous and non-hazardous waste
(solids and liquids) through seven permitted treatment and/or disposal
facilities and numerous related operations provided by our other field office
locations, 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 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, which is bulked and sent
off as a fuel, for 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 a
biological wastewater process. Waste industrial oils and used motor oils are
processed through high-speed centrifuges to produce a high quality fuel that is
sold to and burned by industrial burners. See discussion below under "--Permits
and Licenses" and "Legal Proceedings" as to certain actions brought by the U.S.
Environmental Protection Agency ("EPA") and others alleging that PFD does not
have the proper air permits under federal and certain state Clean Air Acts.
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. It is the base of our retail sales operations.
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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 Maryland, Inc. ("PFMD") is located in Baltimore, Maryland, and
operates two near by sales and service offices. Effective March 23, 2004, we
established PFMD and through acquisition, assumed certain assets and liabilities
of USL Environmental Services, Inc. d/b/a A&A Environmental. PFMD offers
environmental services such as 24-hour emergency response, vacuum services,
hazardous and non-hazardous waste disposal, marine environmental and other
remediation services.
Perma-Fix of Pittsburgh, Inc. ("PFP") is located in Pittsburgh, Pennsylvania.
Effective March 23, 2004, we established PFP, and acquired certain assets of US
Liquids of Pennsylvania, Inc. d/b/a EMAX. PFP provides environmental services
such as transportation of drums and bulk loads, tank cleaning, industrial
maintenance, dewatering, drum management, and chemical packaging. PFP also
provides treatment of non-hazardous wastewaters such as leachates, oily waters,
industrial process waters and off-spec products.
For 2004, the Industrial segment accounted for approximately $37,490,000 (or
45.0%) of our total revenue, as compared to approximately $38,512,000 (or 48.7%)
for 2003. See "Financial Statements and Supplementary Data" for further details.
NUCLEAR WASTE MANAGEMENT SERVICES, which includes nuclear, low-level
radioactive, mixed (waste containing both hazardous and low-level radioactive
constituents) hazardous and non-hazardous waste treatment, processing and
disposal services through three uniquely licensed (Nuclear Regulatory
Commission) and permitted (Environmental Protection Agency) TSD facilities. The
presence of nuclear and low-level radioactive constituents within the waste
streams processed by this segment create different and unique operational,
processing and permitting/licensing requirements, from those contained within
the Industrial segment, as discussed below.
Perma-Fix of Florida, Inc. ("PFF"), located in Gainesville, Florida, specializes
in the processing and treatment of certain types of wastes containing both
low-level radioactive and hazardous wastes, which are known in the industry as
mixed waste ("mixed waste"). PFF is one of the first facilities nationally to
operate under both a hazardous waste permit and a radioactive materials license,
from which it has built its reputation based on its ability to treat difficult
waste streams using its unique processing technologies and its ability to
provide related research and development services. With the amended permits and
licenses received during 2000 and the expansion of its mixed waste processing
equipment and capabilities, PFF has substantially increased the amount and type
of mixed waste and low level radioactive waste that it can store and treat. Its
mixed waste services have included the treatment and processing of waste Liquid
Scintillation Vials (LSVs) since the mid 1980's. The LSVs are generated
primarily by institutional research agencies and biotechnical companies. The
business has expanded into receiving and handling other types of mixed waste,
primarily from the nuclear utilities, commercial generators, prominent
pharmaceutical companies, the Department of Energy ("DOE") and other government
facilities as well as select mixed waste field remediation projects. PFF also
continues to receive and process certain hazardous and non-hazardous waste
streams as a compliment to its expanded nuclear and mixed waste processing
activities.
Diversified Scientific Services, Inc. ("DSSI"), located in Kingston, Tennessee,
specializes in the processing and destruction of certain types of mixed waste.
DSSI, like PFF, is one of only a few facilities nationally to operate under both
a hazardous waste permit and a radioactive materials license.
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Additionally, DSSI is the only commercial facility of its kind in the U.S. that
is currently operating and licensed to destroy liquid organic mixed waste,
through such a treatment unit. DSSI provides mixed waste disposal services for
nuclear utilities, commercial generators, prominent pharmaceutical companies,
and agencies and contractors of the U.S. government, including the DOE and the
Department of Defense ("DOD").
East Tennessee Materials & Energy Corporation ("M&EC"), located in Oak Ridge,
Tennessee, is our third mixed waste facility. As with PFF and DSSI, M&EC also
operates under both a hazardous waste permit and radioactive materials license.
M&EC represents the largest of our three mixed waste facilities, covering
150,000 sq. ft., and is located in leased facilities on the DOE East Tennessee
Technology Park. In addition to providing mixed waste treatment services to
commercial generators, nuclear utilities and various agencies and contractors of
the U.S. Government, including the DOD, M&EC was awarded three contracts to
treat DOE mixed waste by Bechtel-Jacobs Company, LLC, DOE's Environmental
Program Manager, which covers the treatment of mixed waste throughout all DOE
facilities.
For 2004, the Nuclear business accounted for $42,679,000 (or 51.2%) of total
revenue, as compared to $37,418,000 (or 47.3%) of total revenue for 2003. 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 2004, environmental engineering and regulatory compliance consulting
services accounted for approximately $3,204,000 (or 3.8%) of our total revenue,
as compared to approximately $3,223,000 (or 4.1%) in 2003. 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.
We are active in the research and development of technologies that allow us to
address certain of our customers' environmental needs. To date, our R&D efforts
have resulted in the granting of five patents and the filing of an additional
two pending patent applications. Our flagship technology, the Perma-Fix Process,
is a proprietary, cost effective, treatment technology that converts hazardous
waste into non-hazardous material. Subsequently, we developed the Perma-Fix II
process, a multi-step treatment process that converts hazardous organic
components into non-hazardous material. The Perma-Fix II process is particularly
important to our mixed waste strategy. We believe that at least one third of DOE
mixed waste contains organic components.
The Perma-Fix II process is designed to remove certain types of organic
hazardous constituents from soils or other solids and sludges ("Solids") through
a water-based system. We have filed a patent application with the U.S. Patent
and Trademark Office covering the Perma-Fix II process. As of the date of this
report, we have not received a patent for this process, and there are no
assurances that such a patent will be issued. Until development of this
Perma-Fix II process, we were not aware of a relatively simple and inexpensive
process that would remove the organic hazardous constituents from Solids without
elaborate and expensive equipment or expensive treating agents. Due to the
organic hazardous constituents
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involved, the disposal options for such materials are limited, resulting in high
disposal cost when there is a disposal option available. By reducing the organic
hazardous waste constituents in the Solids to a level where the Solids meet Land
Disposal Requirements, the generator's disposal options for such waste are
substantially increased, allowing the generator to dispose of such waste at
substantially less cost. We began commercial use of the Perma-Fix II process in
2000. A patent application has also been filed for processes to treat radon, and
other specialty materials utilizing variations of the Perma-Fix II process.
However, changes to current environmental laws and regulations could limit the
use of the Perma-Fix II process or the disposal options available to the
generator. See "BUSINESS--Permits and Licenses" and "BUSINESS--Research and
Development."
In September 2002, we completed the construction of our new biological
wastewater process at PFD and began accepting commercial wastewater for
treatment through this process. The biological wastewater process is a new
technology which we developed utilizing our variable depth biological treatment
process and several proprietary water treatment processes. The biological
wastewater process is designed to remove certain organic constituents from
highly organic, contaminated wastewaters. The biological wastewater process
enables us to treat heavily contaminated wastewater streams, such as waste oils,
phenols, and "lean" waters, at more competitive prices than traditional methods.
The biological wastewater process meets the EPA's new centralized treatment
standards that became effective in December of 2003.
PERMITS AND LICENSES
Waste management companies are subject to extensive, evolving and increasingly
stringent federal, state and local environmental laws and regulations. Such
federal, state and local environmental laws and regulations govern our
activities regarding the treatment, storage, processing, disposal and
transportation of hazardous, non-hazardous and radioactive wastes, and require
us to obtain and maintain permits, licenses and/or approvals in order to conduct
certain of our waste activities. Failure to obtain and maintain our permits or
approvals would have a material adverse effect on us, our operations and
financial condition. The permits and licenses have a term ranging from one to
ten years and, provided that we maintain a reasonable level of compliance, renew
with minimal effort and cost. Historically, there have been no compelling
challenges to the permit and license renewals. Such permits and licenses,
however, represent a potential barrier to entry for possible competitors.
PFTS is a permitted solid and hazardous waste treatment, storage, and disposal
facility. The RCRA Part B permit to treat and store certain types of hazardous
waste was issued by the Waste Management Section of the Oklahoma Department of
Environmental Quality ("ODEQ"). Additionally, PFTS maintains an Injection Well
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 used oil processors license and a solid waste processing
permit 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.
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.
The EPA has advised PFD that it is required to operate under a Title V air
permit. In connection therewith, on September 21, 2004, the EPA issued to PFD a
Notice of Administrative Compliance Order ("Order") that, as a result, since PFD
was operating without a Title V air permit and failed to install proper air
pollution control equipment, it has been operating in violation of the Clean Air
Act and PFD has six months from the effective date of the Order to develop,
submit, obtain and comply with the Order. PFD does not believe, and its experts
have advised PFD that they do not believe, that
5
PFD is required to obtain a Title V air permit. If, however, it is determined
that PFD is and was required to operate under a Title V air permit, this
determination could have a material adverse effect on PFD's operations. In
addition, a citizens' suit has been filed against PFD in federal court located
in Dayton, Ohio, alleging, among other things, that PFD is operating in
violation of the federal and Ohio state clean air laws as a result of operating
without proper air permits. See "Legal Proceedings" for further discussion as to
legal proceedings relating to actions against PFD under the Clean Air Act.
PFO operates a hazardous and non-hazardous waste treatment and storage facility
under various permits, including a RCRA Part B permit, and a used oil processors
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.
PFMD operates under an oil operations permit issued by the Maryland Department
of Environment and has permits/licenses to transport hazardous waste in over 13
states. PFMD also has a wastewater discharge permit through the city of
Baltimore POTW.
PFP operates under an industrial discharge permit through a local POTW and a
residual waste permit issued by the Pennsylvania Department of Environmental
Protection ("PADEP").
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. However, as discussed above and in "Legal Proceedings", our
subsidiary, PFD, is involved in certain legal proceedings alleging that PFD is
operating without proper air permits. 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, or if it is determined that PFD is operating
without proper air permits, such could have a material adverse effect on us, our
operations and financial condition.
SEASONALITY
We experience a seasonal slowdown within our industrial segment operations and
revenues during the winter months extending from late November through early
March. The seasonality factor is a combination of poor weather conditions in the
central plains and Midwestern geographical markets we serve for on-site and
off-site waste management services, and the impact of reduced activities during
holiday periods resulting in a decrease in revenues and earnings during such
periods. Our engineering segment also experiences reduced activities and related
billable hours throughout the November and December holiday periods. The DOE and
DOD represent major customers for the Nuclear segment. In conjunction with the
federal government's September 30 fiscal year-end, the Nuclear segment
experiences seasonably large shipments during the third quarter, leading up to
this government fiscal year-end, as a result of incentives and other quota
requirements. Correspondingly for a period of approximately three months
following September 30, the Nuclear segment is generally seasonably slow, as the
governmental budgets are still being finalized, planning for the new year is
occurring and we enter the holiday season.
6
BACKLOG
The Nuclear segment of our Company maintains a backlog of stored waste, which
represents waste that has not been processed. The backlog is principally a
result of the timing and complexity of the waste being brought into the
facilities and the selling price per container. We generally have an influx of
mixed waste shipped to us during the third quarter of the year. As of December
31, 2004, our Nuclear segment had a backlog of $16,243,000, as compared to
$15,782,000, as of December 31, 2003. Additionally the time it takes to process
mixed waste from the time it arrives may increase due to the types and
complexities of the waste we are currently receiving, as was experienced in the
fourth quarter of 2004. The first quarter of our fiscal year is typically our
slow period and the time in which we process more of our backlog.
DEPENDENCE UPON A SINGLE OR FEW CUSTOMERS
The majority of our revenues for fiscal 2004 have been derived from hazardous,
non-hazardous and mixed waste management services provided to a variety of
industrial, commercial customers, retail services, and government agencies and
contractors. Our customers are principally engaged in research, biotechnical
development, transportation, chemicals, metal processing, electronic,
automotive, petrochemical, refining and other similar industries, in addition to
government agencies that include the DOE, DOD, and other federal, state and
local agencies. We are not dependent upon a single customer, or a few customers.
However, we have and continue to enter into contracts with (directly or
indirectly as a subcontractor) the federal government. The contracts that we are
a party to with the federal government or with others as a subcontractor to the
federal government, generally provide that the government may terminate on 30
days notice or renegotiate the contracts, at the government's election. Our
inability to continue under existing contracts that we have with the federal
government (directly or indirectly as a subcontractor) could have a material
adverse effect on our operations and financial condition.
M&EC was awarded three subcontracts ("Oak Ridge Contracts") by Bechtel Jacobs
Company, LLC, ("Bechtel Jacobs"), the government-appointed manager of the
environmental program for Oak Ridge, to perform certain treatment and disposal
services relating to Oak Ridge. The Oak Ridge Contracts were issued to M&EC by
Bechtel Jacobs, as a contractor to the DOE. The Oak Ridge Contracts are similar
in nature to a blanket purchase order whereby the DOE specifies the approved
waste treatment process and team to be used for certain disposal, but the DOE
does not specify a schedule as to dates for disposal or quantities of disposal
material to be processed. The Oak Ridge Contracts have been extended for a
period of two years, through June 2005, with standard pricing modifications. We
are currently receiving and processing waste under the Oak Ridge Contracts.
As with most such blanket processing agreements, the Oak Ridge Contracts contain
no minimum or maximum processing guarantees, and may be terminated at any time
pursuant to federal contracting terms and conditions. Each specific waste stream
processed under the Oak Ridge Contracts will require a separate work order from
DOE and will be priced separately with the intent of recognizing an acceptable
profit margin. Consolidated revenues from Bechtel Jacobs for 2004, which
includes revenues under the Oak Ridge Contracts total $9,405,000 or 11.3% of
total revenues, as compared to $13,139,000 or 16.6% for the year ended December
31, 2003. Further, we have performed waste related services either directly or
indirectly as a subcontractor to federal government agencies. Our total revenues
relating to agencies of the federal government, directly or indirectly as
subcontractors (including Bechtel Jacobs discussed above), represented
$31,791,000, or 38.1% of our consolidated revenues during 2004, as compared to
$34,969,000, or 44.2% of our consolidated revenues, during 2003. However, the
government revenue is managed by numerous subcontractors to the government, who
operate and make decisions independent of each other. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations --
Liquidity and Capital Resources of the Company."
During the first quarter of 2003, M&EC filed a lawsuit against Bechtel Jacobs
seeking approximately $4.3 million in surcharges under the Oak Ridge Contracts.
Since the filing of the lawsuit, Bechtel Jacobs has continued to deliver waste
to M&EC under the Oak Ridge Contracts and M&EC has entered into an
7
additional contract with Bechtel Jacobs relating to DOE waste at Oak Ridge.
There are no assurances that the filing of the lawsuit will not result in
Bechtel Jacobs canceling the Oak Ridge Contracts, which can be canceled at any
time by either party.
COMPETITIVE CONDITIONS
Competition is intense within certain product lines within the Industrial
segment of our business. We compete with numerous companies both large and
small, that are able to provide one or more of the environmental services
offered by us, certain of which may have greater financial, human and other
resources than we have. However, we believe that the range of waste management
and environmental consulting, treatment, processing and remediation services we
provide affords us a competitive advantage with respect to certain of our more
specialized competitors. We believe that the treatment processes we utilize
offer a cost savings alternative to more traditional remediation and disposal
methods offered by certain of our competitors. The intense competition for
performing the services provided by us within the Industrial segment, in
conjunction with the economic downturn over the past two years, has resulted in
reduced gross margin levels for certain of those services.
The Nuclear segment has only a few competitors and does not currently experience
such intense competitive pressures. At present we believe there are only four
other facilities in the United States with the required radioactive materials
license and hazardous waste permit that provide mixed waste processing. However,
the generators always have the option to treat their own waste onsite.
The permitting and licensing requirements, and the cost to obtain such permits,
are barriers to the entry of hazardous waste TSD facilities and radioactive and
mixed waste activities as presently operated by our subsidiaries. We believe
that there are no formidable barriers to entry into certain of the on-site
treatment businesses, and certain of the non-hazardous waste operations, which
do not require such permits. If the permit requirements for both hazardous waste
storage, treatment and disposal activities and/or the licensing requirements for
the handling of low level radioactive matters are eliminated or if such licenses
or permits were made easier to obtain, such would allow more companies to enter
into these markets and provide greater competition.
Within our Industrial segment we solicit business on a nationwide basis.
However, we believe that we are a significant provider in the delivery of
off-site waste treatment services in the Southeast, Midwest and Southwest
portions of the United States. We compete with facilities operated by national,
regional and independent environmental services firms located within a several
hundred-mile radius of our facilities. Our Nuclear segment, with permitted
radiological activities, solicits business on a nationwide basis, including the
U.S. Territories and Antarctica.
Environmental engineering and consulting services provided by us through SYA
involve competition with larger engineering and consulting firms. We believe
that we are able to compete with these firms based on our established reputation
in these market areas and our expertise in several specific elements of
environmental engineering and consulting such as environmental applications in
the cement industry.
CAPITAL SPENDING, CERTAIN ENVIRONMENTAL EXPENDITURES AND POTENTIAL ENVIRONMENTAL
LIABILITIES
During 2004, we spent approximately $3,053,000 in capital expenditures, which
was principally for the expansion and improvements to our operating facilities.
This 2004 capital spending total includes $320,000, which was financed. We have
budgeted approximately $6,000,000 for 2005 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. Certain of these
budgeted projects are discretionary and may either be delayed until later in the
year or deferred altogether. We have traditionally incurred actual capital
spending totals for a given year less than initial budget amount. The initiation
and timing of projects are also determined by financing alternatives or funds
available for such capital projects. We have also budgeted for 2005
approximately $721,000 to comply with federal, state, and local regulations
8
in connection with remediation activities at our facilities. See Note 10 to
Notes to Consolidated Financial Statements. However, there is no assurance that
we will have the funds available for such budgeted expenditures. The above
budgeted amounts for capital expenditures assumes that PFD is not required to
have a Title V air permit in connection with its operations. If it is determined
that PFD is required to have a Title V air permit, we anticipate that
substantial additional capital expenditures at PFD will be required in order to
bring PFD into compliance with Title V air permit requirements. We do not have
reliable estimates of the cost of such additional capital 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 chemical processing facility ("Leased
Property"). Such remediation involves soil and/or groundwater restoration. The
Leased Property used by EPS to operate its facility is separate and apart from
the property on which PFD's facility is located. The contamination of the leased
property occurred prior to PFD being acquired by Quadrex or us. During 1995, in
conjunction with the bankruptcy filing by Quadrex, we recognized an
environmental liability of approximately $1,200,000 for remedial activities at
the Leased Property. We have accrued approximately $722,000, at December 31,
2004, for the estimated, remaining costs of remediating the Leased Property used
by EPS, which will extend over the next two to five years.
In conjunction with the acquisition of Perma-Fix of Memphis, Inc. ("PFM"), we
assumed and recorded certain liabilities to remediate gasoline contaminated
groundwater and investigate, under the hazardous and solid waste amendments,
potential areas of soil contamination on PFM's property. Prior to our ownership
of PFM, the owners installed monitoring and treatment equipment to restore the
groundwater to acceptable standards in accordance with federal, state and local
authorities. We have accrued approximately $736,000, at December 31, 2004, for
the estimated, remaining costs 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 been completed,
along with the selection of the remedial process, and the planning and approval
process. The remedial activities began in 2003. We have accrued approximately
$769,000, at December 31, 2004, to complete remediation of the facility, which
we anticipate spending over the next two to three years. In conjunction with an
oil spill at PFTS, we have accrued as of December 31, 2004, approximately
$69,000 to remediate the contaminated soil and ground water at this location. We
expect to complete spending on this remedial project over the next two years.
9
During 2004, we have accrued $25,000 to remediate oily contaminated soil on
property adjacent to our PFFL property. We anticipate spending on this remedial
activity to be completed in 2005.
In conjunction with the acquisition of PFMD in March 2004, we accrued for
long-term environmental liabilities of $391,000 as a best estimate of the cost
to remediate the hazardous and/or non-hazardous contamination on certain
properties owned by PFMD. This facility is not a RCRA facility, and is currently
under no obligation to clean up the contamination. We do not intend to begin
remediation in the immediate future, but if environmental regulations change, we
could be forced to begin clean up of such contamination.
In conjunction with the acquisition of PFP in March 2004, we accrued $150,000 in
environmental liabilities as our best estimate of the cost to remediate and
restore this leased property back to its original condition. The liability
estimate is based on an environmental assessment completed by a third party as
part of the due diligence work prior to acquisition. The Company operates a
non-hazardous waste water facility on this leased property. We are currently
under no obligation, and do not intend, to begin remediation of this leased
property. However, upon termination of our lease or closure of this operation,
such remediation, restoration, and equipment removal will be required.
As a result of the discontinuation of operation at the PFMI facility, we are
required to complete certain closure and remediation activities pursuant to our
RCRA permit. Also, in order to close and dispose of or sell the facility, we may
have to complete certain additional remediation activities related to the land,
building, and equipment. The extent and cost of the clean-up and remediation
will be determined by state mandated requirements, the extent to which is not
known at this time. Also, impacting this estimate is the level of contamination
discovered, as we begin remediation, and the related clean-up standards which
must be met in order to dispose of or sell the facility. We engaged our
engineering firm, SYA, to perform an analysis and related estimate of the cost
to complete the RCRA portion of the closure/clean-up costs and the potential
long-term remediation costs. Based upon this analysis, we recorded an additional
$2,373,000 to arrive at our best estimate of the cost of this environmental
closure and remediation liability, of $2,464,000. We are unclear as to the
extent of remediation necessary to dispose of or sell the facility and to what
extent the state will require us to remediate the contamination. However, in the
event of a sale of the facility all or part of this reserve could be reduced.
During the fourth quarter of 2004, we spent approximately $116,000 of this
closure cost estimate. In the event we do not sell the PFMI facility, we would
anticipate spending $544,000 in 2005 and the remainder over the next two to five
years.
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 10 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. 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.
10
RESEARCH AND DEVELOPMENT
Innovation and technical know-how by our operations is very important to the
success of our business. Our goal is to discover, develop and bring to market
innovative ways to process waste that address unmet environmental needs. We
conduct research internally, and also through collaborations with other third
parties. The majority of our research activities are performed as we receive new
and unique waste to treat, as such we recognize these expenses as a part of our
processing costs. We feel that our investments in research have been rewarded by
the discovery of the Perma-Fix Process and the Perma-Fix II process. Our
competitors also devote resources to research and development and many such
competitors have greater resources at their disposal than we do. We have
estimated that during 2002, 2003, and 2004, we spent approximately $388,000,
$661,000, and $433,000, 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, 2004,
we employed approximately 498 full time persons, of which approximately 16 were
assigned to our Corporate office, approximately 21 were assigned to our
Consulting Engineering Services segment, approximately 262 to the Industrial
segment, and approximately 199 to the Nuclear segment.
GOVERNMENTAL REGULATION
Environmental companies and their customers are subject to extensive and
evolving environmental laws and regulations by a number of national, state and
local environmental, safety and health agencies, the principal of which being
the EPA. These laws and regulations largely contribute to the demand for our
services. Although our customers remain responsible by law for their
environmental problems, we must also comply with the requirements of those laws
applicable to our services. We cannot predict the extent to which our operations
may be affected by future enforcement policies as applied to existing laws or by
the enactment of new environmental laws and regulations. Moreover, any
predictions regarding possible liability are further complicated by the fact
that under current environmental laws we could be jointly and severally liable
for certain activities of third parties over whom we have little or no control.
Although we believe that we are currently in substantial compliance with
applicable laws and regulations, we could be subject to fines, penalties or
other liabilities or could be adversely affected by existing or subsequently
enacted laws or regulations. The principal environmental laws affecting our
customers and us are briefly discussed below.
THE RESOURCE CONSERVATION AND RECOVERY ACT OF 1976, AS AMENDED ("RCRA")
RCRA and its associated regulations establish a strict and comprehensive
regulatory program applicable to hazardous waste. The EPA has promulgated
regulations under RCRA for new and existing treatment, storage and disposal
facilities including incinerators, storage and treatment tanks, storage
containers, storage and treatment surface impoundments, waste piles and
landfills. Every facility that treats, stores or disposes of hazardous waste
must obtain a RCRA permit or must obtain interim status from the EPA, or a 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.
11
THE SAFE DRINKING WATER ACT, AS AMENDED (THE "SDW ACT")
SDW Act regulates, among other items, the underground injection of liquid wastes
in order to protect usable groundwater from contamination. The SDW Act
established the Underground Injection Control Program ("UIC Program") that
provides for the classification of injection wells into five classes. Class I
wells are those which inject industrial, municipal, nuclear and hazardous wastes
below all underground sources of drinking water in an area. Class I wells are
divided into non-hazardous and hazardous categories with more stringent
regulations imposed on Class I wells which inject hazardous wastes. PFTS' permit
to operate its underground injection disposal wells is limited to non-hazardous
wastewaters.
THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT OF 1980
("CERCLA," ALSO REFERRED TO AS THE "SUPERFUND ACT")
CERCLA governs the cleanup of sites at which hazardous substances are located or
at which hazardous substances have been released or are threatened to be
released into the environment. CERCLA authorizes the EPA to compel responsible
parties to clean up sites and provides for punitive damages for noncompliance.
CERCLA imposes joint and several liability for the costs of clean up and damages
to natural resources.
HEALTH AND SAFETY REGULATIONS
The operation of our environmental activities is subject to the requirements of
the Occupational Safety and Health Act ("OSHA") and comparable state laws.
Regulations promulgated under OSHA by the Department of Labor require employers
of persons in the transportation and environmental industries, including
independent contractors, to implement hazard communications, work practices and
personnel protection programs in order to protect employees from equipment
safety hazards and exposure to hazardous chemicals.
Atomic Energy Act
The Atomic Energy Act of 1954 governs the safe handling and use of Source,
Special Nuclear and Byproduct materials in the U.S. and its territories. This
act authorized the Atomic Energy Commission (now the Nuclear Regulatory
Commission) to enter into "Agreements with States to carry out those regulatory
functions in those respective states except for Nuclear Power Plants and federal
facilities like the VA hospitals and the DOE operations." The State of Florida
(with the USNRC oversight), Office of Radiation Control, regulates the
radiological program of the PFF facility, and the State of Tennessee (with the
USNRC oversight), Tennessee Department of Radiological Health, regulates the
radiological program of the DSSI and M&EC facilities.
OTHER LAWS
Our activities are subject to other federal environmental protection and similar
laws, including, without limitation, the Clean Water Act, the Clean Air Act, the
Hazardous Materials Transportation Act and the Toxic Substances Control Act.
Many states have also adopted laws for the protection of the environment 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.
12
INSURANCE
We believe we maintain insurance coverage adequate for our needs and similar to,
or greater than, the coverage maintained by other companies of our size in the
industry. There can be no assurances, however, that liabilities, which we may
incur will be covered by our insurance or that the dollar amount of such
liabilities, which are covered will not exceed our policy limits. Under our
insurance contracts, we usually accept self-insured retentions, which we believe
appropriate for our specific business risks. We are required by EPA regulations
to carry environmental impairment liability insurance providing coverage for
damages on a claims-made basis in amounts of at least $1 million per occurrence
and $2 million per year in the aggregate. To meet the requirements of customers,
we have exceeded these coverage amounts.
In June 2003, we entered into a 25-year finite risk insurance policy, which
provides financial assurance to the applicable states for our permitted
facilities in the event of unforeseen closure. Prior to obtaining, and at all
times while operating under our permits, we are required to provide financial
assurance that guarantees to the states that, in the event of closure, our
permitted facilities will be closed in accordance with the regulations. The
policy provides $35 million of financial assurance coverage.
ITEM 2. PROPERTIES
Our principal executive offices are in Gainesville, Florida. Our Industrial
segment headquarters is located in Atlanta, Georgia, and maintains facilities in
Orlando and Ft. Lauderdale, Florida; Dayton, Ohio; Tulsa, Oklahoma; Valdosta,
Georgia; Baltimore, Maryland; and Pittsburgh, Pennsylvania. Our Nuclear segment
headquarters is located in Oak Ridge, Tennessee, and maintains facilities in
Gainesville, Florida; Kingston, Tennessee; and Oak Ridge, Tennessee. Our
Consulting Engineering Services are located in St. Louis, Missouri. We also
maintain Field Services offices in Jacksonville, Florida; Anniston, Alabama;
Honolulu, Hawaii; Memphis, Tennessee; Stafford, Virginia; and Salisbury,
Maryland.
We own ten facilities, all of which are in the United States. Six of our
facilities are subject to mortgages as placed by our senior lender. In addition,
we lease properties for office space, all of which are located in the United
States as described above. Included in our leased properties is M&EC's 150,000
square-foot facility, located on the grounds of the DOE East Tennessee
Technology Park located in Oak Ridge, Tennessee.
We believe that the above facilities currently provide adequate capacity for our
operations and that additional facilities are readily available in the regions
in which we operate, which could support and supplement our existing facilities.
ITEM 3. LEGAL PROCEEDINGS
PFMI, which was purchased by us effective June 1, 1999, has been notified that
it is considered a potentially responsible party ("PRP") in four Superfund
sites, three of which had no relationship with PFMI according to PFMI records.
As to the fourth site, which PFMI has been unable to determine whether PFMI had
any relationship with this site, such relationship, if any, would appear to be
de minimus.
PFO, which was purchased by us in June, 1999, has been notified that it is a PRP
in two separate Superfund sites. At the Spectron Superfund site in Elkton,
Maryland, PFO has been notified by the EPA that the EPA is seeking reimbursement
from all PRPs at the site for the EPA's Phase II cost and to further investigate
the contamination at the facility. At this point, we believe that PFO may have
sent some waste to the site, but not a substantial amount. At this time, we are
unable to determine what exposure, if any, PFO may have in connection with this
site.
PFO has also been notified that it is a PRP at the Seaboard Chemical Corporation
Superfund Site in Jamestown, North Carolina. In October, 1991, PFO joined the
"Seaboard Group," a group of potentially responsible parties organized to clean
up the site while keeping costs at a minimum. Initially, PFO was
13
identified as a de minimus party under the Seaboard Group agreement which
defined a de minimus contributor as one acting as either a transporter or
generator who was responsible for less than 1% of the waste at the site.
However, in June, 1992, the Seaboard Group adopted an amendment to the Seaboard
Group agreement which allows a potentially responsible party who is a generator
to participate in the Seaboard Group without relinquishing contributions claims
against its broker and/or transporter. Based upon the amount of waste which PFO
brokered to the site, PFO's status may no longer be considered de minimus under
the Seaboard Group agreement. PFO is unable to determine what exposure, if any,
it may have in connection with this site.
PFFL had previously 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. However, in January 2005, PFFL received a notice letter from the EPA
indicating that it was a PRP, and providing a de minimis settlement offer. If we
accept the settlement offer our liability would be approximately $40,000. We are
in the process of reviewing this claim and our potential exposure in connection
with this site.
On February 24, 2003, M&EC, commenced legal proceedings against Bechtel Jacobs
Company, LLC, in the chancery court for Knox County, Tennessee, seeking payment
from Bechtel Jacobs of approximately $4.3 million in surcharges relating to
certain wastes that were treated by M&EC during 2001 and 2002. M&EC is operating
primarily under three subcontracts with Bechtel Jacobs, which were awarded under
contracts between Bechtel Jacobs and the U.S. Department of Energy. M&EC and
Bechtel Jacobs had been discussing these surcharges under the subcontracts for
over a year prior to filing the suit. During 2003, M&EC recognized revenue and
recorded a receivable in the amount of $381,000 related to these surcharges. In
2004, the revenues generated by M&EC with Bechtel Jacobs represented
approximately 11.3% of our 2004 total revenues. Since the filing of this
lawsuit, Bechtel Jacobs has continued to deliver waste to M&EC for treatment and
disposal, and M&EC continues to accept such waste, under the subcontracts, and
M&EC and Bechtel Jacobs have entered into an additional contract for M&EC to
treat DOE waste. Although we do not believe that this lawsuit will have a
material adverse effect on our operations, Bechtel Jacobs could terminate the
subcontracts with M&EC, as either party can terminate the subcontracts at any
time.
During January 2004, the EPA issued to PFD, our wholly owned subsidiary, a
Notice of Findings of Violations ("Findings") alleging that PFD committed
numerous violations of the Clean Air Act (the "Act") or regulations thereunder.
On September 28, 2004, PFD received an Administrative Compliance Order
("Order"), dated September 21, 2004, from EPA alleging that PFD was a "major
source" of hazardous air pollutants and, as a major source, PFD was required to
have obtained a Title V air permit, in connection with its operations, and
thereby was not in compliance with provisions of the Act and/or regulations
thereunder applicable to a major source, and, as a result, PFD also failed to
install proper air pollution equipment and failed to meet certain administrative
burdens relating to equipment that was constructed or modified at PFD's facility
in 2000 and 2001. The Order further provides that PFD has six months from the
effective date of the Order, to develop, submit, obtain and comply with numerous
costly and burdensome compliance initiatives applicable to one that is a major
source of hazardous air pollutants and to submit an application to the State of
Ohio for a Title V Air permit, which six month period is about to expire. The
Order does not assert any penalties or fines but provides that PFD is not
absolved of any liabilities, including liability for penalties, for the alleged
violations cited in the Order, and that failure to comply with the Order may
subject PFD to penalties up to $32,500 per day for each violation. PFD has
subsequently and timely met with the EPA on several occasions and the EPA and
PFD are exchanging information in an effort to resolve this matter. We have
retained environmental consultants who have advised us that, based on the tests
that they have performed, they do not believe that PFD is a major source of
hazardous air pollutants. We have been further advised by counsel that if PFD is
not a major
14
source of hazardous air pollutants, PFD would not be required to obtain a Title
V air permit, would not have violated the provisions of the Act alleged in the
Order and would not be required to comply with the costly and burdensome
compliance initiatives contained in the Order. Upon expiration of the six month
period referenced in the Order, the EPA may, at its option, seek to enforce the
Order in a court of competent jurisdiction and seek penalties for the alleged
violations and failure to comply with the Order. At that time PFD may assert its
defenses, including, but not limited to, any constitutional arguments that it
may have. A determination that PFD was a major source of hazardous air
pollutants and required to comply with the Order, such could have a material
adverse effect on us. We intend that PFD will vigorously defend itself in
connection with this matter.
In December 2004, PFD received a complaint brought under the citizen's suit
provisions of the Clean Air Act in the United States District Court for the
Southern District of Ohio, Western district, styled Barbara Fisher v. Perma-Fix
of Dayton, Inc. The suit alleges violation by PFD of a number of state and
federal clean air statutes in connection with the operation of PFD's facility,
primarily due to the operating without a Title V air permit, and further alleges
that air emissions from PFD's facility endanger the health of the public and
constitutes a nuisance in violation of Ohio law. The action seeks injunctive
relief, imposition of civil penalties, attorney fees and costs and other forms
of relief. We intend to vigorously defend ourselves in connection with this
matter. See above discussion as to administrative proceedings instituted by the
EPA.
In October 2004, Perma-Fix of South Georgia, Inc. ("PFSG") and Perma-Fix of
Orlando, Inc. ("PFO") were notified that they are PRPs at the Malone Service
Company Superfund site in Texas City, Texas ("Site"). The EPA designated both
PFSG and PFO as de minimis parties, which is determined as a generator that
contributed less than 0.6% of the total hazardous materials at the Site. The EPA
has made a settlement offer to all de minimis parties, that requires response
within 45 days of receipt of the notice. PFSG and PFO have accepted the
settlement offer and recorded a liability at December 31, 2004, in the amount of
$229,000. As of the date of this report, payment has not however been made to
satisfy this liability.
During February 2003, PFMI received a letter alleging that PFMI owed Reliance
Insurance Company, in liquidation, the sum of $515,000 as a result of
retrospective premiums under a retroactive premium agreement. In November 2003,
PFMI received a second letter alleging that PFMI owed Reliance Insurance
Company, in liquidation, the sum of $583,000, reflecting an adjustment to the
original amount of retrospective premiums under a retroactive premium agreement.
Our counsel responded and advised that PFMI had numerous defenses to the demand,
including, but not limited to, that the policy expired almost eight years ago
and failure to adjust the premiums in a timely manner violated the agreement
between the Company and Reliance and that under Michigan law it is deemed to be
an unfair and deceptive act or practice in the business of insurance for an
insurer to fail to complete a final audit within 120 days after termination of
the policy. The Company and PFMI intend to vigorously defend this matter.
However, in December 2003, we accrued approximately $217,000 for this contingent
liability.
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.
15
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 61 Chairman of the Board, President and Chief Executive Officer
Mr. Richard T. Kelecy 49 Chief Financial Officer, Vice President and Secretary
Mr. Larry McNamara 55 President, Nuclear Services
Mr. Timothy Keegan 47 President, Industrial Services
Mr. William Carder 55 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 treatment, reclamation and technical groups
within USPCI. In 1981 he founded PPM, Inc., a hazardous waste management company
specializing in the treatment of PCB contaminated oils, which was subsequently
sold to USPCI. From 1978 to 1981, Dr. Centofanti served as Regional
Administrator of the U.S. Department of Energy for the southeastern region of
the United States. Dr. Centofanti has a Ph.D. and a M.S. in Chemistry from the
University of Michigan, and a B.S. in Chemistry from Youngstown State
University.
MR. RICHARD T. KELECY
Mr. Kelecy was elected Vice-President and Chief Financial Officer in September
1995. He previously served as Chief Accounting Officer and Treasurer of the
Company from July 1994 until beginning his current positions. From 1992 until
June 1994, Mr. Kelecy was Corporate Controller and Treasurer for Quadrex
Corporation. From 1990 to 1992 Mr. Kelecy was Chief Financial Officer for
Superior Rent-a-Car, and from 1983 to 1990 held various positions at Anchor
Glass Container Corporation including Assistant Treasurer. Mr. Kelecy has a B.A.
in Accounting from Westminster College.
MR. LARRY MCNAMARA
Mr. McNamara has served as President of the Nuclear Waste Management Services
Segment since October 2000. From December 1998 to October 2000, he served as
Vice President of the Nuclear Waste Management Services Segment for the
Company's nuclear activities. Between 1997 and 1998, he served as Mixed Waste
Program Manager for Waste Control Specialists (WCS) developing plans for the WCS
mixed waste processing facilities, identifying markets and directing proposal
activities. Between 1995 and 1996, Mr. McNamara was the single point of contact
for the DOD to all state and federal regulators for issues related to disposal
of Low Level Radioactive Waste and served on various National Committees and
advisory groups. Mr. McNamara served, from 1992 to 1995, as Chief of the
Department of Defense Low Level Radioactive Waste office. Between 1986 and 1992
he served as the Chief of Planning for the Department of Army overseeing project
management and program policy for the Army program. Mr. McNamara has a B.S. from
the University of Iowa.
MR. TIMOTHY KEEGAN
Mr. Keegan joined the Company in April 2003, as President of the Industrial
Waste Management Services segment. Previously, Mr. Keegan served as Senior Vice
President of Operations of Safety-Kleen from 1999 to 2001, where he had sales,
operational, and accounting responsibility for over $300 million in revenue. Mr.
Keegan also served as Vice President for southeast operations at Safety-Kleen
from 1998 to 1999, and Vice President of PCB/remedial services from 1995 to
1998. Prior to joining Safety-Kleen, Mr. Keegan served as Vice President of PCB
services for USPCI from 1991 to 1995. Mr. Keegan also
16
served as President of PPM, Inc., a PCB waste management company from 1988 to
1991. Mr. Keegan has an M.B.A. from Syracuse University.
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.
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.
2004 2003
----------------- -----------------
Low High Low High
-------- -------- -------- --------
Common Stock 1st Quarter $ 2.17 $ 3.79 $ 1.49 $ 2.62
2nd Quarter 1.57 2.33 1.68 2.20
3rd Quarter 1.44 1.91 1.60 2.28
4th Quarter 1.20 1.85 1.68 3.56
Such over-the-counter market quotations reflect inter-dealer prices, without
retail markups or commissions and may not represent actual transactions.
As of March 7, 2005, there were approximately 296 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 10, 2005, was approximately 4,103.
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.
No sales of unregistered securities, other than the securities sold by us during
2004, as reported in our Forms 10-Q for the quarters ended March 31, 2004, June
30, 2004 and September 30, 2004, which were not registered under the Securities
Act of 1933, as amended, were issued during 2004.
17
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:
2004(3) 2003 2002 2001(2) 2000(1)
---------- ---------- ---------- ---------- ----------
Revenues $ 83,373 $ 79,153 $ 77,778 $ 68,890 $ 52,776
Income (loss) from continuing operations (9,548) 3,644 2,677 (954) (1,063)
Income (loss) from discontinued operations (9,813) (526) (475) 352 507
Net income (loss) (19,361) 3,118 2,202 (602) (556)
Preferred Stock dividends (190) (189) (158) (145) (206)
Net income (loss) applicable to
Common Stock (19,551) 2,929 2,044 (747) (762)
Income (loss) per common share - Basic
Continuing operations (.24) .10 .07 (.04) (.06)
Discontinued operations (.24) (.02) (.01) .01 .02
Net income (loss) per share (.48) .08 .06 (.03) (.04)
Income (loss) per common share - Diluted
Continuing operations (.24) .09 .06 (.04) (.06)
Discontinued operations (.24) (.01) (.01) .01 .02
Net income (loss) per share (.48) .08 .05 (.03) (.04)
Basic number of shares used in computing
net income (loss) per share 40,478 34,982 34,217 27,235 21,558
Diluted number of shares and potential
common shares used in computing
net income (loss) per share 40,478 39,436 42,618 27,235 21,558
BALANCE SHEET DATA:
December 31,
------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Working capital (deficit) $ (497) $ 4,159 $ 731 $ 134 $ (3,233)
Total assets 100,455 110,215 105,825 99,137 72,771
Current and long-term debt 18,956 29,088 30,515 31,146 25,490
Total liabilities 56,922 58,488 59,955 56,011 50,751
Preferred Stock of subsidiary 1,285 1,285 1,285 1,285 --
Stockholders' equity 42,248 50,442 44,585 41,841 22,020
(1) 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.
(2) 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.
(3) Includes financial data of PFMD and PFP as acquired during 2004 and
accounted for using the purchase method of accounting from the date of
acquisition, March 23, 2004.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained within this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" may be deemed "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(collectively, the "Private Securities Litigation Reform Act of 1995"). See
"Special Note regarding Forward-Looking Statements" contained in this report.
Management's discussion and analysis is based, among other things, upon our
audited consolidated financial statements and includes our accounts and the
accounts of our wholly-owned subsidiaries, after elimination of all significant
intercompany balances and transactions.
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and the notes thereto included in Item 8 of
this report.
OVERVIEW
Looking back at 2004, this was certainly a challenging year for us. We completed
the acquisition of the Pittsburgh and Maryland Industrial facilities, improved
our operating cash flow, paid down our long-term debt by more than $10.0 million
and completed the restructuring of our Industrial segment. Consolidated revenues
for the year increased 5.3% to $83.4 million. We continued to see unique
opportunities within the Nuclear segment, received contract awards from both
government and commercial customers for the treatment of Nuclear mixed waste and
correspondingly experienced strong growth in revenues from this segment. Our
Nuclear segment revenues increased 14.1% or $5.3 million during 2004. Increased
Nuclear mixed waste shipments in the fourth quarter, in addition to favorable
pricing per container, resulted in a record $16.2 million backlog of stored
waste within the Nuclear segment, at December 31, 2004. During the third
quarter, we made the difficult decision to discontinue the operations of our
Michigan Industrial facility, resulting in the total loss on discontinued
operations of $9.8 million, at December 31, 2004. We also recorded during the
year a number of Industrial segment nonrecurring charges, such as the goodwill
and other intangible impairment charge of $9.0 million, the $1.0 million loss on
disposal of fixed assets and certain other charges recorded to selling, general
and administrative and "other expense" categories, a majority of which are non
cash charges. In conjunction with the equity we raised earlier in the year, we
prepaid the $5.6 million 13.5% senior subordinated notes and recorded a non cash
charge of $1.2 million for the acceleration of the amortization of prepaid
financing fees and debt discount, and paid an early termination fee of $190,000,
the benefit of which is already seen in our interest and amortization expense
reductions in the fourth quarter. We believe that the restructuring charges
related to our Industrial segment are principally behind us now, we continue to
see growth and opportunities within our Nuclear segment and are continuing to
improve our balance sheet and liquidity position. This improvement was furthered
during the first quarter of 2005 with the renewal of our revolving credit, term
loan and security agreement, and extension to May 2008, which included a
reduction in our interest rate and an increase in our term loan. As we move into
2005, two of our more important challenges will be the effective execution of
the Industrial segment business plan and strategy, now that the structure is in
place and the restructuring has been completed, and the continued growth and
expansion of our Nuclear segment, which may include new markets, new contracts
or partnering arrangements. We will continue to focus on improving our balance
sheet, paying down debt, which includes the completion of the PNC debt extension
and improving our liquidity position, which includes the selling or alternative
use of the Michigan facility and receipt of proceeds from our Michigan insurance
claims.
RESULTS OF OPERATIONS
The reporting of financial results and pertinent discussions are tailored to
three reportable segments: Industrial Waste Management Services ("Industrial"),
Nuclear Waste Management Services ("Nuclear") and Consulting Engineering
Services ("Engineering").
19
Below are the results of operations for our years ended December 31, 2004, 2003,
and 2002 (amounts in thousands:
(Consolidated) 2004 % 2003 % 2002 %
- ------------------------------------------------ -------- ------- -------- ------- -------- -------
Net Revenues $ 83,373 100.0 $ 79,153 100.0 $ 77,778 100.0
Cost of goods sold 59,523 71.4 54,041 68.3 54,875 70.6
-------- ------- -------- ------- -------- -------
Gross Profit 23,850 28.6 25,112 31.7 22,903 29.4
Selling, general and administrative 18,702 22.4 17,527 22.1 16,603 21.3
Loss (gain) on disposal or impairment of fixed
assets 994 1.2 (4) -- 19 --
Impairment loss on intangible assets 9,002 10.8 -- -- -- --
-------- ------- -------- ------- -------- -------
Income (loss) from operations (4,848) (5.8) 7,589 9.6 6,281 8.1
Interest expense (2,020) (2.4) (2,804) (3.5) (2,842) (3.7)
Interest expense - financing fees (2,191) (2.6) (1,070) (1.4) (1,044) (1.3)
Other (492) (.6) (79) (.1) 266 .3
-------- ------- -------- ------- -------- -------
Income loss from continuing operations (9,548) (11.4) 3,644 4.6 2,677 3.4
Preferred Stock dividends (190) (.2) (189) (.2) (158) (.2)
SUMMARY - YEARS ENDED DECEMBER 31, 2004 AND 2003
Net Revenue
Consolidated revenues increased for the year ended December 31, 2004, compared
to the year ended December 31, 2003, as follows:
(In thousands) 2004 % Revenue 2003 % Revenue Change % Change
- ------------------------------ --------- --------- --------- --------- --------- ---------
Nuclear
Government waste $ 16,533 19.8 $ 13,739 17.4 $ 2,794 20.3
Hazardous/Non-hazardous 3,895 4.7 3,458 4.4 437 12.6
Other nuclear waste 12,846 15.4 6,427 8.1 6,418 99.9
Bechtel Jacobs 9,405 11.3 13,794 17.4 (4,389) (31.8)
--------- --------- --------- --------- --------- ---------
Total 42,679 51.2 37,418 47.3 5,260 14.1
Industrial Revenues
Commercial waste 23,167 27.8 26,123 33.0 (2,956) (11.3)
Hydrolysate project -- -- 4,953 6.2 (4,953) (100.0)
Government services 5,853 7.0 7,436 9.4 (1,583) (21.3)
Acquisitions 8,470 10.2 -- -- 8,470 100.0
--------- --------- --------- --------- --------- ---------
Total 37,490 45.0 38,512 48.6 (1,022) (2.7)
Engineering 3,204 3.8 3,223 4.1 (19) (0.6)
--------- --------- --------- --------- --------- ---------
Total $ 83,373 100.0 $ 79,153 100.0 $ 4,219 5.3
========= ========= ========= ========= ========= =========
The Nuclear segment realized growth in consolidated revenues. The increase in
the Nuclear segment is primarily the result of continued expansion within the
mixed waste market as our facilities demonstrate their ability to accept and
process more complex waste streams, including new contracts, such as a contract
awarded by a Fortune 500 company in late June 2004 to treat and dispose of mixed
waste from research and development activities. Government waste for the first
two quarters of 2003 was negatively effected by the government's inability to
ship waste to our facilities due to the war in Iraq and prolonged
20
terrorism alerts, which was not an obstacle during 2004. We continue to service
certain of the hazardous and non-hazardous waste streams from existing
industrial customers, which increased due to special event projects in 2004.
Partially offsetting these increases was a decline in the Bechtel Jacobs
revenue, as a result of decreased waste receipts due to certain DOE projects
nearing completion, and shipment delays as they plan for new projects to begin.
The Bechtel Jacobs revenue includes shipments received under the Oak Ridge
contracts. See "Known Trends and Uncertainties - Significant Contracts" of this
Management's Discussion and Analysis. The backlog of stored waste within the
Nuclear segment at December 31, 2004, was approximately $16,247,000, compared to
$5,782,000 at December 31, 2003. This increase in backlog reflects the increased
shipments of mixed waste coming into the facilities during the fourth quarter
which has traditionally not been the trend, and the increased price per
container, as a result of the nature of such waste received. This increased
backlog should position the Nuclear segment well, from a processing revenue
perspective, for the first quarter of 2005. The principal offset to the increase
in Nuclear segment revenues was a decrease from the Industrial segment, as well
as, a small decrease in the Engineering segment. The primary decrease in the
Industrial segment was due to the Army's Newport Hydrolysate project, in 2003,
which was not repeated in 2004. The remaining decrease is attributable to the
continued restructuring including the strategic decision to eliminate low margin
broker business and replace it with higher margin generator direct revenue and a
reduction in government business resulting from contract expirations. Partially
offsetting the decrease within the Industrial segment was revenue contributed by
two facilities acquired as of March 23, 2004. See "Acquisitions" in this
Management's Discussion and Analysis for further information on the acquired
facilities.
Cost of Goods Sold
Cost of goods sold increased for the year ended December 31, 2004, compared to
the year ended December 31, 2003, as follows:
(In thousands) 2004 % Revenue 2003 % Revenue Change % Change
- ------------------------------ --------- --------- --------- --------- --------- ---------
Nuclear $ 25,937 60.8 $ 22,382 59.8 $ 3,555 15.9
Industrial 31,194 83.2 29,515 76.6 1,679 5.7
Engineering 2,392 74.7 2,144 66.5 248 11.6
--------- --------- --------- --------- --------- ---------
Total $ 59,523 71.4 $ 54,041 68.3 $ 5,482 10.1
========= ========= ========= ========= ========= =========
The increase in cost of goods sold was present in all three segments. The
Nuclear segment increase principally correlates to the additional revenues, as
well as, an increase in disposal rates due to the waste mix. The increase in the
Industrial segment predominantly relates to additional costs associated with the
revenue generated from the two facilities acquired, as of March 23, 2004, and
added operating costs incurred as this segment completes its restructuring and
integration efforts. Partially offsetting this increase is the reduction in
costs from 2003 due to the Army's Newport Hydrolysate project, not repeated in
2004, which carried significantly lower costs than the replacement revenue from
the acquired facilities. The Engineering segment accounted for the remaining
increase experiencing higher payroll and other direct costs for projects
completed this year. Included within cost of goods sold is depreciation and
amortization expense of $4,344,000 and $3,969,000 for the year ended December
31, 2004 and 2003, respectively, reflecting an increase of $375,000 over 2003,
of which $264,000 was a result of the acquired facilities.
21
Gross Profit
Gross profit for the year ended December 31, 2004, decreased over 2003, as
follows:
(In thousands) 2004 % Revenue 2003 % Revenue Change % Change
- ------------------------------ --------- --------- --------- --------- --------- ---------
Nuclear $ 16,742 39.2 $ 15,036 40.2 $ 1,706 11.3
Industrial 6,296 16.8 8,997 23.4 (2,701) (30.0)
Engineering 812 25.3 1,079 33.5 (267) (24.7)
--------- --------- --------- --------- --------- ---------
Total $ 23,850 28.6 $ 25,112 31.7 $ (1,262) (5.0)
========= ========= ========= ========= ========= =========
The resulting gross profit decrease is attributable to the decline in the
Industrial segment slightly aided by the Engineering segment. However, the
decline in the gross profit percentage was experienced across all segments with
the major decrease occurring in the Industrial segment. This segment's decrease
is principally a result of the reduction in gross profit from the elimination of
the Army's Newport Hydrolysate project, a higher margin contract, in 2003, and
fixed costs of operating the facilities spread over reduced revenues, due in
part to the restructuring. The addition of the March 2004, acquisitions
partially offset the decrease. The decrease in gross profit percentage in the
Engineering segment is a result of lower margin projects in 2004 compared to
2003.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased for the year
ended December 31, 2004, as compared to the corresponding period for 2003, as
follows:
(In thousands) 2004 % Revenue 2003 % Revenue Change % Change
- ------------------------------ --------- --------- --------- --------- --------- ---------
Administrative $ 4,199 -- $ 3,085 -- $ 1,112 36.0
Nuclear 6,238 14.6 5,806 15.5 434 7.5
Industrial 7,815 20.1 8,027 20.8 (212) (2.6)
Engineering 450 14.0 609 18.9 (159) (26.1)
--------- --------- --------- --------- --------- ---------
Total $ 18,702 22.4 $ 17,527 22.1 $ 1,175 6.7
========= ========= ========= ========= ========= =========
The increase in SG&A expenses predominately relates to corporate administrative
expense, which include third party charges of $446,000 incurred for the
compliance work performed with regard to Sarbanes Oxley and the related internal
control assessment required under Section 404 of the Act. We anticipate the
third party consulting fees related to Section 404 to decline slightly in 2005,
as we have documented deficiencies and are focused on the successful
remediation. Also, additional payroll related expenses to build stronger
infrastructures within the Corporate office and the Nuclear segment, were
incurred during the year, a trend that is anticipated to continue into 2005.
Partially offsetting these increases were decreases realized by both the
Industrial and Engineering segments. These reductions were achieved due to lower
payroll and related expenses, with the decrease in the Industrial segment
primarily due to the restructuring of the segment. Partially offsetting the
decrease within the Industrial segment were the additional expenses related to
the two facilities acquired, effective March 23, 2004. Also adding to the
partial offset were expenses of $458,000 for analytical and defense fees related
to the Title V air issues at one Industrial facility and additional remediation
requirements needed at two other facilities. Included in SG&A expenses is
depreciation and amortization expense of $287,000 and $268,000 for the years
ended December 31, 2004 and 2003, respectively.
Loss (Gain) on Disposal/Impairment of Fixed Assets
The loss on fixed asset disposal/impairment for the year ended December 31,
2004, was $994,000, as compared to a gain of $4,000 for the same period in 2003.
This loss is principally a result of the Industrial segment writing down certain
fixed assets, totaling $1,026,000, which have been determined to
22
have no fair value. As part of the restructuring process, management abandoned
various projects at certain facilities.
Impairment Loss on Intangible Assets
In conjunction with our annual intangible asset impairment test, pursuant to
Statement of Financial Accounting Standards 142 Goodwill and Other Intangible
Assets ("SFAS 142"), and the discontinuation of our operations at our Industrial
facility in Michigan, we engaged a third party appraisal firm to test goodwill
and permits separately for impairment, as of October 1, 2004. The impairment
test showed an impairment of indefinite life intangible assets in our Industrial
segment. As such, the appraisal firm tested all assets of our Industrial segment
to determine the recognized impairment to our assets. The resulting impairment
to our goodwill and permits, of our Industrial segment is $4,886,000 and
$4,116,000, respectively. During the third quarter we recorded an estimated
impairment of $7,101,000 for both goodwill and permits, based on a preliminary
third party impairment test, with the final impairment test resulting in an
additional impairment of $1,901,000 for both goodwill and permits. The
additional impairment included $972,000 due principally to increased appraised
values of our fixed assets. Additionally, the original impairment amount of
$929,000 allocated to our discontinued operation, PFMI was reclassified to the
impairment loss on intangible assets in continuing operations of the Industrial
segment due to the negative value we ultimately determined PFMI to have when we
refined our estimate.
Interest Expense
Interest expense decreased for the year ended December 31, 2004, as compared to
the corresponding period of 2003.
(In thousands) 2004 2003 Change %
- --------------- -------- -------- -------- --------
PNC interest $ 789 $ 967 $ (178) (18.4)
AMI/BEC 506 759 (253) (33.3)
Other 725 1,078 (353) (32.7)
-------- -------- -------- --------
Total $ 2,020 $ 2,804 $ (784) (27.9)
======== ======== ======== ========
This decrease reflects lower borrowing levels on our PNC revolving credit and
term loan resulting from improved cash flows from operations and scheduled
repayments on the term loan. In addition, during March 2004, we received
proceeds related to the private placement that were used to temporarily reduce
the revolver, which resulted in a further reduction in PNC interest expense.
Subsequently, in August 2004, we reborrowed certain of the private placements
funds from the revolver to prepay in full the AMI/BEC 13.5% Senior Subordinated
Debt. We also experienced a decrease in interest expense due to the final
repayment of debt associated with our 1999 acquisitions, an adjustment to the
interest payable associated with the PDC and IRS notes, which totaled $219,000,
and from the final repayment of debt to various other sources as our overall
debt position continues to improve.
Interest Expense - Financing Fees
Interest expense-financing fees increased approximately $1,121,000 for the year
ended December 31, 2004, as compared to the corresponding period of 2003. This
increase was principally due to the write-off of $1,217,000 of prepaid financing
fees and debt discount associated with the early termination of senior
subordinated notes, which were paid in full in August 2004, offset by the
savings realized throughout the remainder of the year due to no longer
amortizing these costs. The acceleration of expense due to the early termination
subsequently resulted in increased Interest Expense - Financing fees associated
with the senior subordinated debt totaling $974,000. Additionally, we expensed
an early termination fee of $190,000 paid as a result of the pre-payment.
Offsetting this increase was a one-time fee associated with other short term
financing of $45,000 which was written off in March 2003. These financing fees
are principally associated with the PNC revolving credit and term loan and the
senior subordinated notes, and are amortized to expense over the term of the
loan agreements. As of December
23
31, 2004, the unamortized balance of prepaid financing fees is $440,000, which
will be amortized to expense at the rate of approximately $37,000 per month
during 2005.
Other Expense
Other expense increased for the year ended December 31, 2004, as compared to the
same period of 2003, as follows:
(In thousands) 2004 2003 Change
- ------------------------------ -------- -------- --------
Environmental issues $ 259 $ -- $ 259
Royalty settlement 225 -- 225
Other 8 79 (71)
-------- -------- --------
Total $ 492 $ 79 $ 413
======== ======== ========
The increase in other expense was primarily due to environmental issues related
to the settlement of two, potentially responsible party, "PRP" claims against
certain of our Industrial segment facilities, regarding waste shipped to these
superfund sites prior to our acquisition of these Industrial segment facilities.
Additionally, other expense increased due to a royalty settlement related to the
method of calculation utilized in determining the monthly royalty to the
previous owner of one of the Industrial segment facilities.
Income Tax
See Note 11 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, 2004 and 2003, we had no federal income tax
expense, and as such no provision for income tax, due to utilization of our net
operating loss carry-forward and permanent and temporary book-tax timing
differences.
Preferred Stock Dividends
Preferred Stock dividends remained relatively constant at approximately $189,000
and $190,000 for the years ended December 31, 2004, and December 31, 2003,
respectively. The Preferred dividends are comprised of approximately $125,000 in
dividends from our Series 17 Preferred Stock, and $64,000 from the accrual of
preferred dividends on the Preferred Stock of our subsidiary, M&EC.
SUMMARY - YEARS ENDED DECEMBER 31, 2003 AND 2002
Net Revenue
The year 2003 started out slow, as nuclear revenues were negatively impacted by
the war and terrorism alerts, and industrial revenues were negatively impacted
by the economy. However, nuclear shipments increased late in the third quarter
and we successfully completed the treatability portion of the Army's Newport
hydrolysate project. We continued with the reorganization and refocus of the
Industrial segment throughout the last half of 2003. Consolidated revenues
increased $1,375,000 or 1.8% for the year ended December 31, 2003, compared to
the year ended December 31, 2002. This increase is attributable to an increase
in the Industrial segment of approximately $6,497,000 resulting from certain new
product lines, such as lab packing, improved waste volumes and approximately
$4.9 million in revenues recognized for public outreach and treatability studies
related to the Army's Newport hydrolysate project, which was terminated in the
fourth quarter of 2003 for convenience. Offsetting this increase was a decrease
in the Nuclear segment of approximately $4,842,000 resulting partially from a
change in accounting estimate for revenue recognition. (See Note 2 to Notes to
Consolidated Financial Statements.) The impact of this change in nuclear revenue
recognition as of December 31, 2003 is a deferral of revenues of approximately
$2,765,000. The decrease is also a result of the government's reduced shipment
of waste to our facilities during the first six months of 2003 due to the war
and ongoing campaign in Iraq and prolonged terrorism alerts. The decrease can
further be explained by the impact of increased revenues during 2002, which
included an event project of approximately $2.4 million and a surcharge of
approximately $2.2 million.
24
These decreases were partially offset by continued expansion within the mixed
waste market as our facilities demonstrate the ability to accept and process
more complex waste streams, thus increasing sales volumes. Consolidated revenues
with Bechtel Jacobs Company, which includes the Oak Ridge contracts totaled
$13,139,000 or 15.5% of total revenues for the year ending December 31, 2003,
compared to $9,664,000 or 11.6% for the year ended December 31, 2002. This
increase reflects additional revenues under the Oak Ridge contracts and an
additional contract entered into recently with Bechtel Jacobs, due in part to
the benefit of our facility being located within the DOE K-25 site. See "Known
Trends and Uncertainties-Significant Contracts" of this Management's Discussion
and Analysis as to a lawsuit involving the Oak Ridge contracts. The backlog of
stored waste within the Nuclear segment at December 31, 2003, was approximately
$5,782,000, compared to $9,000,000 at December 31, 2002. Additionally, the
Consulting Engineering Services segment experienced a decrease of approximately
$280,000, which reflects the impact a weaker economy has on our client's
expansion projects in 2003 and certain one-time projects completed in 2002.
Cost of Goods Sold
Cost of goods sold decreased $834,000, or 1.5% for the year ended December 31,
2003, compared to the year ended December 31, 2002. This decrease in cost of
goods sold principally reflects a decrease in the Nuclear segment of $3,975,000
indicative of a reduction in disposal and processing costs associated with the
continued refinement of our treatment processes. The initial focus within the
Nuclear segment was the demonstration of our processing capabilities, which was
followed by the refinement and enhancement of our processes throughout 2003. The
remaining decrease in this segment was due to the deferral of disposed expenses
that correlates with the deferral of revenues as a result of our change in
accounting estimate for revenue recognition. Additionally, the Consulting
Engineering Services segment experienced a decrease of $155,000, which was
primarily a result of the corresponding revenue reduction, despite a 0.9% cost
increase. Mainly offsetting these decreases was an increase in the Industrial
segment of approximately $3,296,000, primarily associated with increased labor
and material costs, which relates to the increase in revenues, including the
expenses associated with the Army's Newport hydrolysate project. Depreciation
expense of $3,969,000 and $3,469,000 for the years ended December 31, 2003 and
2002, respectively, is included in cost of goods sold, which reflects an
increase of $500,000 over 2002. During 2002, we purchased capital equipment
which totaled approximately $5.8 million, a majority of which related to our
continued expansion of the Nuclear segment. These projects were principally
completed in the fourth quarter of 2002 and resulted in additional depreciation
in 2003.
Gross Profit
Gross profit for the year ended December 31, 2003, increased to $25,112,000,
which as a percentage of revenue is 31.7%, reflecting an increase over the 2002
percent of revenue of 29.4%. This increase in gross profit percentage
principally reflects an increase in the Industrial segment from 18.1% in 2002 to
23.4% in 2003. This increase reflects the impact of margins of approximately
$2.8 million recognized on the Army's Newport hydrolysate project. During the
last half of 2003, the Industrial segment restructured its management,
implemented a cost savings initiative and made certain operational changes,
which had only a limited impact on 2003. Additionally, the increase in the gross
profit percentage was attributable to the Nuclear segment, which rose from 37.6%
in 2002 to 40.2% in 2003, reflecting mainly the favorable product mix,
surcharges and operational improvements within the mixed waste processing lines.
The 2002 margins were positively impacted by the effect of the $2.2 million
surcharge related to the Oak Ridge contracts. Without the surcharge, the gross
profit percentage for this segment for 2002 would have been 27.3%. Offsetting
these increases was a decrease in the Consulting Engineering Services segment,
which fell from 34.4% in 2002 to 33.5% in 2003, reflecting the net impact of
lower margin projects performed over the year.
25
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased $924,000 or 5.6%
for the year ended December 31, 2003, as compared to the corresponding period
for 2002. This increase reflects the additional sales and marketing expenses
within the Industrial segment, somewhat offset by a decline in payroll and
related marketing expenses for the Nuclear segment, which combined accounted for
$602,000 of this increase. Administrative payroll and related expenses accounted
for $611,000 of this increase, mainly reflecting the management infrastructure,
relocation and severance costs within the Industrial segment as we complete our
restructuring, all of which have been expensed during the year, along with
increased administrative support within the Nuclear segment. Partially
offsetting these administrative payroll increases was a $273,000 decrease in
other administrative expenses, primarily attributable to a net decrease in
general expense of $476,000, arising mainly from the reduction in bad debt
expense and a $319,000 increase in outside services for the same period of 2002.
Depreciation and amortization expense included within selling, general and
administrative expenses was $268,000 and $269,000 for the years ended 2003 and
2002, respectively. As a percentage of revenue, selling, general and
administrative expenses increased to 22.1% for the year ended December 31, 2003,
compared to 21.3% for the same period of 2002.
Interest Expense
Interest expense decreased approximately $38,000 for the year ended December 31,
2003, as compared to the corresponding period of 2002. This decrease reflects
the impact of the reduction in debt associated with past acquisitions resulting
in a decrease in interest expense of $30,000 when compared to prior year.
Additionally, this decrease reflects the impact of lower interest rates on the
revolving credit and term loans with PNC and decreased borrowing levels on the
term loan with PNC partially offset by increased borrowings under the revolving
credit to fund the finite risk insurance program, which resulted in a net
decrease of $46,000. Offsetting these decreases was an increase in interest
expense of $38,000 associated with an increase in additional debt entered into
during the year, related to facility and computer upgrades.
Interest Expense - Financing Fees
Interest expense-financing fees increased approximately $26,000 for the year
ended December 31, 2003, as compared to the corresponding period of 2002. This
increase was principally due to a one-time charge of fees associated with other
short term financing.
Other Expense
Other expense increased by $345,000 for the year ended December 31, 2003, as
compared to the same period of 2002. This increase was primarily due to a
workers' compensation insurance adjustment of $217,000 related to a prior
acquisition.
Income Tax
See Note 10 to Notes to Consolidated Financial Statements for a reconciliation
between the expected tax benefit and the provision for income taxes as reported.
For the years ended December 31, 2003 and 2002, we had no federal income tax
expense, and as such no provision for income tax, due to utilization of our net
operating loss carry-forward and permanent and temporary book-tax timing
differences.
Preferred Stock Dividends
Preferred Stock dividends increased approximately $31,000 for the year ended
December 31, 2003, as compared to the year ended December 31, 2002. This
increase is due to the accrual of preferred dividends on the Series B Preferred,
issued in conjunction with the acquisition of M&EC, which began accruing in July
2002.
DISCONTINUED OPERATION
On October 4, 2004, our Board of Directors approved the discontinuation of
operations at the facility in Detroit, Michigan, owned by our subsidiary,
Perma-Fix of Michigan, Inc. ("PFMI"). The decision to discontinue operations at
PFMI was principally a result of two fires that significantly disrupted
operations
26
at the facility in 2003, and the facility's continued drain on the financial
resources of our Industrial segment. We are in the process of remediating the
facility and evaluating our available options for future use or sale of the
property. The operating activities for the current and prior periods have been
reclassified to discontinued operations in our Consolidated Statements of
Operations.
PFMI recorded revenues of $1,569,000 and $5,739,000, and operating losses of
$635,000 and $526,000 for the years ended December 31, 2004, and 2003,
respectively. We have submitted three insurance claims relative to the two fires
at PFMI, a property claim for the first fire and a property claim and business
interruption claim for the second fire. During the fourth quarter, we finalized
our negotiations with the insurance carrier on the business interruption claim
and recorded an additional $1,130,000 receivable, an increase to the previous
receivable amount of $455,000. The income from recording this additional
receivable was recorded against "loss from discontinued operations" and reduced
the operating losses for 2004.
Our estimated loss on disposal of discontinued operations of $9,178,000 for the
year ended December 31, 2004, consisted of asset impairments, pension costs,
environmental remediation and other expenses. We recorded a $1,474,000 pension
withdrawal liability at September 30, 2004, based upon a withdrawal letter
received from Central States Pension Fund, resulting from the termination of
substantially all of the union employees at PFMI. The estimated calculation
contained within the withdrawal letter was based upon a 2004 withdrawal date. We
subsequently engaged an actuarial firm to confirm and update the calculation
through December 31, 2004. Based upon this actuarial study, we increased the
pension withdrawal liability to $1,680,000 at December 31, 2004. This withdrawal
liability represents our best estimate, and is subject to numerous factors such
as the date and timing of union employee terminations, partial versus complete
termination status, the pension fund's unfunded vested benefit liability and
PFMI's portion of such liability. Additionally, we recorded accruals for
additional environmental closure and remediation costs of $2,373,000, severance
and other payroll related costs of $256,000 and miscellaneous costs of $236,000,
which includes insurance expenses, and legal fees. We recorded a non-cash
tangible asset impairment of $4,633,000. The tangible asset impairment is a
write down of tangible assets to our estimate of fair value at the time of
discontinuing operations. The environmental closure and remediation accrual is
based on our best estimate at the time of this report and could change as a
result of state mandated cleanup standards which we would be required to meet
and the related remediation efforts required. During the third quarter of 2004,
we allocated an intangible asset impairment of $929,000 based on the value of
PFMI compared to the remainder of the Industrial segment, pursuant to
preliminary third party appraisals. Upon completion of the final SFAS 142
impairment test, as of October 1, 2004, the third party appraisers determined
the value of PFMI was negative at that time, and as such no goodwill or permits
were allocable to PFMI to be impaired. Therefore, during the fourth quarter we
reclassified the $929,000 impairment of intangible assets from discontinued
operations to the Industrial segment as an impairment of continuing operations.
Assets and liabilities related to the discontinued operation have been
reclassified to separate categories in the Consolidated Balance Sheets as of
December 31, 2004 and December 31, 2003. As of December 31, 2004, assets are
recorded at their net realizable value, and consist of property and equipment of
$600,000, accounts receivable of $24,000, and insurance proceeds receivable of
$1,585,000. The insurance receivable, as discussed above, represents the
business interruption costs from the second fire at PFMI. We are currently
negotiating settlements for the remaining claims, but at this time we cannot
estimate the additional actual proceeds to be received. Additional proceeds, if
any, received on these remaining claims, will be recorded as income from
discontinued operations. Liabilities as of December 31, 2004, consist of
accounts payable and current accruals of $326,000, the pension withdrawal
liability of $1,680,000, and environmental and closure accruals of $2,348,000.
27
LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements consist of general working capital needs, scheduled
principal payments on our debt obligations and capital leases, remediation
projects and planned capital expenditures. Our capital resources consist
primarily of cash generated from operations, funds available under our revolving
credit facility and proceeds from issuance of our Common Stock. Our capital
resources are impacted by changes in accounts receivable as a result of revenue
fluctuation, economic trends, collection activities, and the profitability of
the segments.
At December 31, 2004, we had cash of $215,000. The following table reflects the
cash flow activities during 2004.
(Amounts in thousands) 2004
- ------------------------------------------- ------------
Cash provided by operations $ 6,897
Cash used in investing activities (6,754)
Cash used in financing activities (339)
------------
Decrease in cash $ (196)
============
We are in a net borrowing position and therefore attempt to move all excess cash
balances immediately to the revolving credit facility, so as to reduce debt and
interest expense. We utilize a centralized cash management system, which
includes remittance lock boxes and is structured to accelerate collection
activities and reduced cash balances, as idle cash is moved without delay to the
revolving credit facility. The cash balance at December 31, 2004, primarily
represents payroll account fundings which were not withdrawn until after
year-end.
Operating Activities
Accounts Receivable, net of allowances for doubtful accounts, totaled
$27,192,000, an increase of $3,616,000 over the December 31, 2003, balance of
$23,576,000. This increase principally reflects the impact of additional
accounts receivable of $2,331,000 as a result of our activities from the two
Industrial facilities acquired in 2004, as discussed below. Additionally, the
Nuclear segment experienced an increase of $2,433,000 as a result of the
increase in revenues in the fourth quarter when compared to prior year and the
complexity involved with government accounts which require a greater amount of
documentation that results in delays in the collection of these receivables. The
Engineering segment also experienced an increase of $107,000. Offsetting these
increases, was a decrease in the accounts receivable from the Industrial segment
of $1,076,000 after excluding the impact of the acquisitions mentioned above.
This decrease primarily resulted from the reduction in government business
resulting from contract expirations and the Army's Newport Hydrolysate project,
in 2003, which was not repeated in 2004.
As of December 31, 2004, total consolidated accounts payable was $6,529,000, an
increase of $1,011,000 from the December 31, 2003, balance of $5,518,000. This
increase in accounts payable reflects the activities of the two Industrial
facilities acquired in 2004, which resulted in an increase of $661,000. Accounts
payable also increased due to additional operating expenses associated with
revenues from the Nuclear segment during the fourth quarter. Additionally,
accounts payable increased as we continue to fund capital expenditures through
the use of working capital.
Accrued Expenses as of December 31, 2004, totaled $12,100,000, an increase of
$962,000 over the December 31, 2003, balance of $11,138,000. Accrued expenses
are made up of disposal and processing cost accruals, accrued compensation,
interest payable, insurance payable and certain tax accruals. The increase to
accrued expenses was principally a result of the expenses accrued for
environmental issues totaling $717,000, which include additional accrued
analytical and defense fees associated with the Title V air issues at one of the
Industrial segment facilities, PRP issues primarily related to superfund
settlements at two of our Industrial segment facilities and other environmental
reserves. Additionally, we
28
accrued for royalty settlements related to the method of calculation utilized in
determining the monthly operating royalty to the previous owner of one of the
Industrial segment facilities, totaling $225,000. Also impacting this increase
were the accrued operating expenses associated with the acquisitions in March
2004, which resulted in an increase of $500,000. Offsetting these increases was
a decrease in Accrued Expenses of $480,000 primarily as a result of decrease
accrued disposal and accrued processing costs within the Nuclear segment.
The working capital deficit at December 31, 2004, was $497,000, as compared to a
working capital position of $4,159,000 at December 31, 2003. The decrease in
this position of $4,656,000 is principally a result of the increased current
portion of our long-term debt. In the third and fourth quarters, we increased
the current portion of long-term debt by $4.1 million associated with the DSSI
and M&EC acquisitions, the largest portion of which is the reclass of the $3.5
million Unsecured Promissory Note which is due in full on August 31, 2005.
Additionally, our working capital position experienced the negative impact of
the recording of certain liabilities associated with discontinued operations.
While our working capital position ended in a deficit position at year end, we
greatly improved our overall debt position due in large part to the prepayment
of the subordinated senior debt.
Investing Activities
Our purchases of new capital equipment for the twelve-month period ended
December 31, 2004, totaled approximately $3,053,000 of which $320,000 was
financed, resulting in net purchases of $2,733,000, funded out of cash flow.
These expenditures were for expansion and improvements to the operations
principally within the Nuclear and Industrial segments. These capital
expenditures were principally funded by the cash provided by operations, through
various other lease financing sources and through Warrant and option proceeds
raised during the year. We have budgeted capital expenditures of approximately
$6,000,000 for 2005, which includes an estimated $523,000 to complete certain
current projects committed at December 31, 2004, as well as other identified
capital and permit compliance purchases. Certain of these budgeted projects are
discretionary and may either be delayed until later in the year or deferred
altogether. We have traditionally incurred actual capital spending totals for a
given year less than initial budget amount. The initiation and timing of
projects are also determined by financing alternatives or funds available for
such capital projects. We anticipate funding these capital expenditures by a
combination of lease financing, internally generated funds, and/or the proceeds
received from Warrant exercises.
In June 2003, we entered into a 25-year finite risk insurance policy, which
provides financial assurance to the applicable states for our permitted
facilities in the event of unforeseen closure. Prior to obtaining or renewing
operating permits we are required to provide financial assurance that guarantees
to the states that in the event of closure of our permitted facilities will be
closed in accordance with the regulations. The policy provides $35 million of
financial assurance coverage of which the coverage amount totals $27,932,000 at
December 31, 2004, and has available capacity to allow for annual inflation and
other performance and surety bond requirements. This finite risk insurance
policy required an upfront payment of $4.0 million, of which $2,766,000
represents the full premium for the 25-year term of the policy, and the
remaining $1,234,000, to be deposited in a sinking fund account representing a
restricted cash account. Additionally, in February 2004, we paid the first of
nine required annual installments of $1,004,000, of which $991,000 was deposited
in the sinking fund account, the remaining $13,000 represents a terrorism
premium. As of December 31, 2004, we have recorded $2,225,000 in our sinking
fund on the balance sheet. On the fourth and subsequent anniversaries of the
contract inception, we may elect to terminate this contract. If we so elect, the
Insurer will pay us an amount equal to 100% of the sinking fund account balance
in return for complete releases of liability from both us and any applicable
regulatory agency using this policy as an instrument to comply with financial
assurance requirements.
On March 23, 2004, our subsidiary, PFMD completed it's acquisition of certain
assets of A&A and our subsidiary, PFP completed its acquisition of certain
assets of EMAX. We paid $2,915,000 in cash for the acquired assets and assumed
liabilities of A&A and EMAX, using funds received in connection with the
29
private placement discussed below, under financing activities. A&A and EMAX had
unaudited combined revenues of approximately $15.0 million in 2003 and a
combined loss of approximately $299,000.
Financing Activities
On December 22, 2000, we entered into a Revolving Credit, Term Loan and Security
Agreement ("Agreement") with PNC Bank, National Association, a national banking
association ("PNC") acting as agent ("Agent") for lenders, and as issuing bank.
The Agreement provides for a term loan ("Term Loan") in the amount of
$7,000,000, which requires principal repayments based upon a seven-year
amortization, payable over five years, with monthly installments of $83,000 and
the remaining unpaid principal balance due on December 22, 2005. The Agreement
also provided for a revolving line of credit ("Revolving Credit") with a maximum
principal amount outstanding at any one time of $18,000,000, as amended. The
Revolving Credit advances are subject to limitations of an amount up to the sum
of (a) up to 85% of Commercial Receivables aged 90 days or less from invoice
date, (b) up to 85% of Commercial Broker Receivables aged up to 120 days from
invoice date, (c) up to 85% of acceptable Government Agency Receivables aged up
to 150 days from invoice date, and (d) up to 50% of acceptable unbilled amounts
aged up to 60 days, less (e) reserves Agent reasonably deems proper and
necessary. The Revolving Credit advances shall be due and payable in full on
December 22, 2005. As of December 31, 2004, the excess availability under our
Revolving Credit was $8,516,000 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.
On March 15, 2005, the Company entered into a commitment letter with PNC,
whereby PNC agreed to renew and extend the agreement, and to increase the term
loan back up to $7.0 million. Effective March 25, 2005, the Company and PNC
entered into an amended agreement (Amendment No. 4), which, among other things,
extends the $25 million credit facility through May 31, 2008. The credit
facility consists of an $18 million revolving line of credit and a $7 million
term loan. The terms of the credit facility remain principally unchanged, with
the exception of a 50 basis point reduction in the variable interest rate on
both loans. The increase to the term loan will be handled as a subsequent
amendment, subject to the updating of the existing mortgages held by PNC. We
expect the mortgage updates to be completed in April, with proceeds of
approximately $4.0 million to be received shortly thereafter. As a condition of
this amended agreement, we paid a $140,000 fee to PNC.
Pursuant to the terms of the Stock Purchase Agreements in connection with the
acquisition of Perma-Fix of Orlando, Inc. ("PFO"), Perma-Fix of South Georgia,
Inc. ("PFSG") and Perma-Fix of Michigan, Inc. ("PFMI"), a portion of the
consideration was paid in the form of the Promissory Notes, in the aggregate
amount of $4,700,000 payable to the former owners of PFO, PFSG and PFMI. The
Promissory Notes were paid in full in June 2004.
On August 31, 2000, as part of the consideration for the purchase of Diversified
Scientific Services, Inc. ("DSSI"), we issued to Waste Management Holdings a
long-term unsecured promissory note (the "Unsecured Promissory Note") in the
aggregate principal amount of $3,500,000, bearing interest at a rate of 7% per
annum and having a five-year term with interest to be paid annually and
principal due in one lump sum at the end of the term of the Unsecured Promissory
Note (August 2005). This debt balance was reclassed in its entirety from long
term to current in the third quarter of 2004. We plan to utilize the proceeds of
the amended agreement with PNC, mentioned above, to repay this note prior to its
August 2005 expiration date.
30
On July 31, 2001, we issued approximately $5.6 million of its 13.50% Senior
Subordinated Notes due July 31, 2006 (the "Notes"). The Notes were issued
pursuant to the terms of a Note and Warrant Purchase Agreement dated July 31,
2001 (the "Purchase Agreement"), between us, Associated Mezzanine Investors -
PESI, L.P. ("AMI"), and Bridge East Capital, L.P. ("BEC"). The Notes are
unsecured and are unconditionally guaranteed by our subsidiaries. The Notes were
paid in full in August 2004. We also paid early termination fees of $190,000 and
recorded a non-cash expense of $1,217,000 for the write-off of prepaid financing
fees and a debt discount.
Under the terms of the Purchase Agreement, we also issued to AMI and BEC
Warrants to purchase up to 1,281,731 shares of our Common Stock ("Warrant
Shares") at an initial exercise price of $1.50 per share (the "Warrants"),
subject to adjustment under certain conditions, which were valued at $1,622,000.
The Warrants, as issued, also contain a cashless exercise provision. The Warrant
Shares are registered under an S-3 Registration Statement that was declared
effective on November 27, 2002.
In conjunction with our acquisition of M&EC, M&EC issued a promissory note for a
principal amount of $3.7 million to Performance Development Corporation ("PDC"),
dated June 25, 2001, for monies advanced to M&EC for certain services performed
by PDC. The promissory note is payable over eight years on a semiannual basis on
June 30 and December 31. The principal repayments for 2005 will be approximately
$400,000 semiannually. Interest is accrued at the applicable law rate
("Applicable Rate") pursuant to the provisions of section 6621 of the Internal
Revenue Code of 1986 as amended. (7% on December 31, 2004) and payable in one
lump sum at the end of the loan period. On December 31, 2004, the outstanding
balance was $4,099,000 including accrued interest of approximately $1,065,000.
PDC has directed M&EC to make all payments under the promissory note directly to
the IRS to be applied to PDC's obligations under its installment agreement with
the IRS.
Additionally, M&EC entered into an installment agreement with the Internal
Revenue Service ("IRS") for a principal amount of $923,000 effective June 25,
2001, for certain withholding taxes owed by M&EC. The installment agreement is
payable over eight years on a semiannual basis on June 30 and December 31. The
principal repayments for 2005 will be approximately $100,000 semiannually.
Interest is accrued at the Applicable Rate, and is adjusted on a quarterly basis
and payable in lump sum at the end of the installment period. On December 31,
2004, the rate was 7%. On December 31, 2004, the outstanding balance was
$1,010,000 including accrued interest of approximately $257,000.
On March 22, 2004, we completed a private placement for gross proceeds of
approximately $10,386,000 through the sale of 4,616,113 shares of our Common
Stock at $2.25 per share and Warrants to purchase an additional 1,615,638 shares
of our Common Stock exercisable at $2.92 per share and a term of three years.
The private placement was sold to fifteen accredited investors. The net cash
proceeds received of $9,870,000, after paying placement agent fees, and other
related expenses, were used in connection with the acquisitions of certain
acquired assets of A&A and EMAX discussed above, and to pay down the Revolving
Credit. We subsequently reborrowed the private placement funds from the
revolving credit facility in August 2004, and prepaid the higher interest, 13.5%
Notes, as discussed above. We also issued Warrants to purchase an aggregate of
160,000 shares of our Common Stock, exercisable at $2.92 per share and with a
three year term, for consulting services related to the private placement.
During 2004, Capital Bank Grawe Gruppe, AG ("Capital Bank") exercised three of
its outstanding warrants and a portion of two other warrants to purchase an
aggregate of 329,262 shares of our Common Stock at a total exercise price of
approximately $625,000. Additionally, various other investors exercised Warrants
to purchase 86,787 shares of our Common Stock, of which 36,787 shares were
issued on a cashless basis, and proceeds of $85,000 were received for the
remaining shares. Holders of certain outstanding options exercised their options
to purchase 196,940 shares of our Common Stock for an aggregate purchase price
of approximately $257,000. The Warrants and options were exercised in accordance
with the terms of their respective documents. The proceeds of the Warrant and
options exercise were used to fund capital expenditures and current working
capital needs.
31
We have outstanding 2,500 shares of Preferred Stock, with each share having a
liquidation preference of $1,000 ("Liquidation Value"). Annual dividends on the
Preferred Stock are 5% of the Liquidation Value. Dividends on the Preferred
Stock are cumulative, and are payable, if and when declared by our Board of
Directors, on a semiannual basis. Dividends on the outstanding Preferred Stock
may be paid at our option, if declared by the Board of Directors, in cash or in
shares of our Common Stock as described under Note 6 to Notes to Consolidated
Financial Statements.
During 2004, accrued dividends for the period July 1, 2003, through December 31,
2003, in the amount of approximately $63,000 were paid in February 2004, in the
form of 19,643 shares of Common Stock. Dividends for the period January 1, 2004
through June 30, 2004, of approximately $62,000 were paid in the form of 34,938
shares of Common Stock. The accrued dividends for the period July 1, 2004,
through December 31, 2004, in the amount of approximately $63,000 were paid in
March 2005.
In summary, we have continued to take steps to improve our operations and
liquidity, as discussed above. However, we continue to invest our working
capital back into our facilities to fund capital additions within both the
Nuclear and Industrial segments. We have experienced the positive impact of
increased accounts receivable and increased availability under our Revolving
Credit. Additionally, accounts payable have remained relatively steady through
the last half of the year. Offsetting these positives was the negative impact of
current reserves recorded on discontinued operations and the reclassification of
long-term debt to current. The reserves recorded on discontinued operations
could be reduced or paid over a longer period of time than initially
anticipated. If we are unable to improve our operations and become profitable in
the foreseeable future, such would have a material adverse effect on our
liquidity position.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at December 31, 2004,
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods, (in thousands):
Payments due by period
-------------------------------------------------
Less
than 1-3 4-5 After
Contractual Obligations Total 1 year years years 5 years
- -------------------------------------- ---------- ---------- ---------- ---------- ----------
Long-term debt $ 18,956 $ 6,376 $ 12,556 $ 24 $ --
Interest on long-term debt (1) 1,322 -- -- 1,322 --
Operating leases 3,506 1,433 2,042 31 --
Finite risk policy (2) 8,030 1,004 3,011 2,008 2,007
Pension withdrawal liability (3) 1,680 1,680 -- -- --
Purchase obligations (4) -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total contractual obligations $ 33,494 $ 10,493 $ 17,609 $ 3,385 $ 2,007
========== ========== ========== ========== ==========
(1) Our IRS Note and PDC Note agreements state that the interest on those
notes is paid at the end of the term, December 2008.
(2) Our finite risk insurance policy provides financial assurance guarantees
to the states in the event of unforeseen closure of our permitted
facilities. See Liquidity and Capital Resources - Investing activities
earlier in this Management's Discussion and Analysis for further
discussion on our finite risk policy.
(3) The pension withdrawal liability is the estimated liability to us upon
termination of substantially all of our union employees at our
discontinued operation, PFMI. See Discontinued Operation earlier in this
section for discussion on our discontinued operation.
32
(4) We are not a party to any significant long-term service or supply
contracts with respect to our processes. We refrain from entering into
any long-term purchase commitments in the ordinary course of business.
CRITICAL ACCOUNTING ESTIMATES
In preparing the consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as, the reported amounts of revenues and expenses during the reporting
period. We believe the following critical accounting policies affect the more
significant estimates used in preparation of the consolidated financial
statements:
Revenue Recognition Estimates. Effective September 1, 2003 we refined our
percentage of completion methodology for purposes of revenue recognition in our
Nuclear Segment. As we accept more complex waste streams in this segment, the
treatment of those waste streams becomes more complicated and more time
consuming. We have continued to enhance our waste tracking capabilities and
systems, which has enabled us to better match the revenue earned to the
processing phases achieved. The major processing phases are receipt,
treatment/processing and shipment/final disposition. Upon receiving mixed waste
we recognize a certain percentage (33%) of revenue as we incur costs for
transportation, analytical and labor associated with the receipt of mixed
wastes. As the waste is processed, shipped and disposed of we recognize the
remaining 67% of revenue and the associated costs of transportation and burial.
We monitor and evaluate the percentage of completion methodology utilized for
the Nuclear revenue recognition on a quarterly basis, and periodically, evaluate
the revenue recognition methodology utilized for the Industrial segment.
Allowance for Doubtful Accounts. The carrying amount of accounts receivable is
reduced by an allowance for doubtful accounts, which is a valuation allowance
that reflects management's best estimate of the amounts that are uncollectable.
We regularly review all accounts receivable balances that exceed 60 days from
the invoice date and based on an assessment of current credit worthiness,
estimate the portion, if any, of the balance that are uncollectable. Specific
accounts that are deemed to be uncollectible are reserved at 100% of their
outstanding balance. The remaining balances aged over 60 days have a percentage
applied by aging category (5% for balances 61-90 days, 20% for balances 91-120
days and 40% for balances over 120 days aged), based on a historical valuation,
that allows us to calculate the total reserve required. This allowance was
approximately 0.7%, 0.8%, and 0.8% of revenue and approximately 2.1%, 2.9%, and
3.2% of accounts receivable for 2004, 2003, and 2002, respectively. The
allowance was adversely affected in 2002 due to an increase in bankruptcy
filings in the industrial and manufacturing business sectors.
Intangible Assets. Intangible assets relating to acquired businesses consist
primarily of the cost of purchased businesses in excess of the estimated fair
value of net assets acquired ("goodwill") and the recognized permit value of the
business. We continually reevaluate the propriety of the carrying amount of
permits and goodwill to determine whether current events and circumstances
warrant adjustments to the carrying value. Effective January 1, 2002, we adopted
SFAS 142. We utilized an independent appraisal firm to test goodwill and
permits, separately, for impairment. The initial report provided by the
appraiser indicated that no impairment existed as of January 1, 2002. Goodwill
and permits were again tested as of October 1, 2002 and October 1, 2003, and
each of these tests also indicated no impairment. Our annual impairment test as
of October 1, 2004, resulted in an impairment of goodwill and permits, in our
Industrial segment in the amounts of $4,886,000 and $4,116,000, respectively,
which resulted in remaining balance of Industrial segment intangible permits in
the amount of $2,370,000. Effective January 1, 2002, we discontinued amortizing
indefinite life intangible assets (goodwill and permits) as required by SFAS
142. The appraisers estimated the fair value of our operating segments using a
discounted cash flow valuation approach. This approach is dependent on estimates
for future sales, operating income, depreciation and amortization, working
capital changes, and capital expenditures, as
33
well as, expected growth rates for cash flows and long-term interest rates, all
of which are impacted by economic conditions related to our industry as well as
conditions in the U.S. capital markets.
Accrued Closure Costs. Accrued closure costs represent a contingent
environmental liability to clean up a facility in the event we cease operations
in an existing facility. The accrued closure costs are estimates based on
guidelines developed by federal and/or state regulatory authorities under RCRA.
Such costs are evaluated annually and adjusted for inflationary factors and for
approved changes or expansions to the facilities. Increases due to inflationary
factors for the years ended December 31, 2004, 2003, and 2002 have been
approximately 1.6%, 1.1%, and 2.2%, respectively, and based on the historical
information, we do not expect future inflationary changes to differ materially
from the last three years. Increases or decreases in accrued closure costs
resulting from changes or expansions at the facilities are determined based on
specific RCRA guidelines applied to the requested change. This calculation
includes certain estimates, such as disposal pricing, external labor, analytical
costs and processing costs, which are based on current market conditions.
However, with the exception of the Michigan facility, we have no intention, at
this time, to close any of our facilities.
Accrued Environmental Liabilities. We have six remediation projects currently in
progress. The current and long-term accrual amounts for the projects are our
best estimates based on proposed or approved processes for clean-up. The
circumstances that could affect the outcome range from new technologies that are
being developed every day to reduce our overall costs, to increased
contamination levels that could arise as we complete remediation which could
increase our costs, neither of which we anticipate at this time. In addition,
significant changes in regulations could adversely or favorably affect our costs
to remediate existing sites or potential future sites, which cannot be
reasonably quantified. We have also accrued long-term environmental liabilities
for our recently acquired facilities, however, as these are not permitted
facilities we are currently under no obligation to clean up the contamination.
Disposal Costs. We accrue for waste disposal based upon a physical count of the
total waste at each facility at the end of each accounting period. Current
market prices for transportation and disposal costs are applied to the end of
period waste inventories to calculate the disposal accrual. Costs are calculated
using current costs for disposal, but economic trends could materially affect
our actual costs for disposal. As there are limited disposal sites available to
us, a change in the number of available sites or an increase or decrease in
demand for the existing disposal areas could significantly affect the actual
disposal costs either positively or negatively.
KNOWN TRENDS AND UNCERTAINTIES
Seasonality. Historically we have experienced reduced revenues, operating losses
or decreased operating profits during the first and fourth quarters of our
fiscal years due to a seasonal slowdown in operations from poor weather
conditions and overall reduced activities during the holiday season and through
January and February of the first quarter. During our second and third fiscal
quarters there has historically been an increase in revenues and operating
profits. Management expects this trend to continue in future years. As discussed
above, this trend continued in 2004, but the reduction in revenues and the net
loss for the first quarter 2004 was greater than we have historically
experienced in prior first quarter periods as previously discussed. The DOE and
DOD represent major customers for the Nuclear segment. In conjunction with the
federal government's September 30 fiscal year-end, the Nuclear segment
experiences seasonably large shipments during the third quarter, leading up to
this government fiscal year-end, as a result of incentives and other quota
requirements. Correspondingly for a period of approximately three months
following September 30, the Nuclear segment is generally seasonably slow, as the
governmental budgets are still being finalized, planning for the new year is
occurring and we enter the holiday season.
Economic Conditions. Economic downturns or recessionary conditions can adversely
affect the demand for our services, principally within the Industrial segment.
Reductions in industrial production generally follow such economic conditions,
resulting in reduced levels of waste being generated and/or sent off for
34
treatment. We believe that our revenues and profits were negatively affected
within this segment by the recessionary conditions in 2003, and that this trend
continued into 2004.
Significant Contracts. Our revenues are principally derived from numerous and
varied customers. However, our Nuclear segment has a significant relationship
with Bechtel Jacobs. Bechtel Jacobs is the DOE's appointed manager of the
environmental program to perform certain treatment and disposal services in Oak
Ridge, Tennessee. In this capacity Bechtel Jacobs entered into certain
subcontracts with our Oak Ridge, Tennessee subsidiary ("M&EC"). Our revenues
from Bechtel Jacobs contributed 11.3% of total consolidated revenues in the year
ended December 31, 2004 and 15.5% of total consolidated revenues during the same
period in 2003. The Oak Ridge contracts have been extended for a period of two
years, through June 2005, with several pricing modifications, but, as with most
contracts with the federal government, may be terminated or renegotiated at any
time at the government's election. As the DOE site in Oak Ridge continues to
complete certain of its clean-up milestones and moves toward completing its
closure efforts, the revenue from this contract may continue to decline. The
Nuclear segment has and will pursue other similar or related contracts for
environmental programs at other DOE and government sites. In February 2003, M&EC
commenced legal proceedings against Bechtel Jacobs, the general contractor under
the Oak Ridge contracts, seeking payment from Bechtel Jacobs of approximately
$4.3 million in surcharges relating to certain wastes that were treated by M&EC
in 2001 and 2002 under the Oak Ridge contracts. We have recognized approximately
$381,000 in revenue for these surcharges, which represented an initial offer for
settlement by Bechtel Jacobs. Bechtel Jacobs continues to deliver waste to M&EC
for treatment, and M&EC continues to accept such waste. In addition, subsequent
to the filing of the lawsuit, M&EC has entered into a new contract with Bechtel
Jacobs to treat DOE waste. There is no guarantee of future business under the
Oak Ridge contracts, and either party may terminate the Oak Ridge contracts at
any time. Termination of these contracts could have a material adverse effect on
us. We are working towards increasing other sources of revenues at M&EC to
reduce the risk of reliance on one major source of revenues.
During the second quarter of 2004, the Nuclear segment was awarded a contract
from a Fortune 500 company valued at approximately $6,218,000 to treat and
dispose of mixed waste generated from research and development activities. This
contract requires innovative treatment processing technologies we developed to
accommodate the complex nature of these wastes. The contract should be completed
during the second quarter of 2005. We recognized $3,195,000 in revenues from
this contract for the year ended December 31, 2004 or 3.8% of total consolidated
revenues for the year.
During October 2004, the Nuclear segment was awarded a three-year contract
valued at approximately $23,000,000 for the treatment of mixed low-level wastes
generated at the DOE's Hanford Site. Fluor Hanford, a prime contractor
supporting DOE's cleanup mission at Hanford, has awarded this contract to us to
provide specialized thermal treatment for a variety of mixed low-level
radioactive wastes generated at Hanford. As with contracts or subcontracts with
or involving the federal government, this contract may be terminated or
renegotiated at anytime at the government's option. We recognized $459,000 in
revenues from this contract for the year ended December 31, 2004.
Insurance. We maintain insurance coverage similar to, or greater than, the
coverage maintained by other companies of the same size and industry, which
complies with the requirements under applicable environmental laws. We evaluate
our insurance policies annually to determine adequacy, cost effectiveness and
desired deductible levels. Due to the downturn in the economy and changes within
the environmental insurance market, we have no guarantee that we will be able to
obtain similar insurance in future years, or that the cost of such insurance
will not increase materially.
PFD Litigation. As discussed under "Legal Proceedings", and other sections of
this report, PFD is involved in legal proceedings with the EPA and others
alleging, among other things, that PFD is required to have obtained a Title V
air permit in order to carry out its operations, which PFD vigorously disagrees
with and is contesting. If it is determined that PFD is required to have a Title
V air permit, such could
35
have a material adverse effect on our liquidity and we anticipate substantial
additional capital expenditures at PFD would be required in order to bring PFD
into compliance with Title V air permit requirements. As of the date of this
report, we do not have any reliable estimates of the effect on our liquidity or
the cost of such additional capital expenditures if there is an adverse ruling
regarding the Title V air permit issue.
ENVIRONMENTAL CONTINGENCIES
We are engaged in the waste management services segment of the pollution control
industry. As a participant in the on-site treatment, storage and disposal market
and the off-site treatment and services market, we are subject to rigorous
federal, state and local regulations. These regulations mandate strict
compliance and therefore are a cost and concern to us. Because of their integral
role in providing quality environmental services, we make every reasonable
attempt to maintain complete compliance with these regulations; however, even
with a diligent commitment, we, along with many of our competitors, may be
required to pay fines for violations or investigate and potentially remediate
our waste management facilities.
We routinely use third party disposal companies, who ultimately destroy or
secure landfill residual materials generated at our facilities or at a client's
site. We, compared to certain of our competitors, dispose of significantly less
hazardous or industrial by-products from our operations due to rendering
material non-hazardous, discharging treated wastewaters to publicly-owned
treatment works and/or processing wastes into saleable products. In the past,
numerous third party disposal sites have improperly managed wastes and
consequently require remedial action; consequently, any party utilizing these
sites may be liable for some or all of the remedial costs. Despite our
aggressive compliance and auditing procedures for disposal of wastes, we could,
in the future, be notified that we are a PRP at a remedial action site, which
could have a material adverse effect.
We have budgeted for 2005, $1,265,000 in environmental remediation expenditures
to comply with federal, state and local regulations in connection with
remediation of certain contaminates at our facilities. As previously discussed
under "Business -- Capital Spending, Certain Environmental Expenditures and
Potential Environmental Liabilities," our facilities where the remediation
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, PFTS's
facility in Tulsa, Oklahoma, a property adjacent to our PFFL facility, PFMD's
facility in Baltimore, Maryland, PFP's leased property in Pittsburgh,
Pennsylvania, and PFMI's facility in Detroit, Michigan. We expect to fund the
expenses to remediate the sites from funds generated internally, however, no
assurances can be made that we will be able to do so.
At December 31, 2004, we had total accrued environmental remediation liabilities
of $5,210,000, of which $1,265,000 is recorded as a current liability, which
reflects an increase of $2,635,000 from the December 31, 2003, balance of
$2,575,000. The increase represents additional accruals upon acquisition of PFMD
and PFP of approximately $541,000, and an increase of approximately $2,259,000
for our discontinued operation, PFMI, based on third party evaluations. These
increases were partially offset by payments on remediation projects. The
December 31, 2004, current and long-term accrued environmental balance is
recorded as follows:
36
Current Long-term
Accrual Accrual Total
--------------- --------------- ---------------
PFD $ 110,000 $ 612,000 $ 722,000
PFM 302,000 434,000 736,000
PFSG 257,000 512,000 769,000
PFTS 27,000 42,000 69,000
PFFL 25,000 -- 25,000
PFMD -- 391,000 391,000
PFP -- 150,000 150,000
--------------- --------------- ---------------
721,000 2,141,000 2,862,000
PFMI 544,000 1,804,000 2,348,000
--------------- --------------- ---------------
$ 1,265,000 $ 3,945,000 $ 5,210,000
=============== =============== ===============
INTEREST RATE SWAP
We entered into an interest rate swap agreement effective December 22, 2000, to
modify the interest characteristics of its outstanding debt from a floating
basis to a fixed rate, thus reducing the possible 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 de
minimus. At December 31, 2004, the market value of the interest rate swap was in
an unfavorable value position of $41,000 and was recorded as a liability. During
the twelve months ended December 31, 2004, we recorded a gain on the interest
rate swap of $89,000, which was an offset to other comprehensive loss on the
Statement of Stockholders' Equity (see Note 7 to Notes to Consolidated Financial
Statements).
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 151 ("SFAS 151"), Inventory Costs. SFAS 151 amends ARB No. 43,
Chapter 4 to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage). SFAS 151
requires that those items be recognized as current-period charges regardless of
whether they meet the criterion of "so abnormal," as defined in ARB No. 43. In
addition, SFAS 151 introduces the concept of "normal capacity" and requires the
allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. Unallocated overheads must be recognized
as an expense in the period in which they are incurred. This statement is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. We do not believe that the adoption of SFAS 151 will have a material
effect on our financial statements.
In December 2004, FASB issued Statement No. 153 ("SFAS 153"), Exchanges of
Nonmonetary Assets. SFAS 153 amends the guidance in APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. SFAS 153 specifies that a nonmonetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. This statement is
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005, and would be applied prospectively. We do not expect the
impact of SFAS 153 on our financial position, results of operations and cash
flows to be material.
In December 2004, FASB issued Statement No. 123 (revised) ("SFAS 123R"),
Share-Based Payment. SFAS 123R is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and its related
37
implementation guidance, and establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. SFAS 123R requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions). That cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award. This statement requires companies to
recognize the fair value of stock options and other stock-based compensation to
employees prospectively, beginning with awards granted, modified, repurchased or
cancelled after the fiscal periods beginning after June 15, 2005. We currently
measure stock-based compensation in accordance with APB Opinion No. 25 as
discussed above. We anticipate adopting SFAS 123R on July 1, 2005. The impact on
our financial condition or results of operations will depend on the number and
terms of stock options outstanding on the date of change, as well as future
options that may be granted. See Note 2 to Notes to Consolidated Financial
Statements - Stock-based Compensation for the pro forma impact that the fair
value method would have had on our net income/loss for each of the years ended
December 31, 2004, 2003 and 2002. We do not expect the impact of SFAS 123R to
have an impact on our cash flows or liquidity.
38
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks arising from adverse changes in interest
rates, primarily due to the potential effect of such changes on our variable
rate loan arrangements with PNC, as described under Note 7 to Notes to
Consolidated Financial Statements. As discussed therein, we entered into an
interest rate swap agreement in December 2000, 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 possible impact of
interest rate changes on this portion of the debt.
39
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,
. Ability or inability to continue and improve operations and achieve
profitability on an annualized basis;
. our ability to develop or adopt new and existing technologies in the
conduct of our operations;
. anticipated improvement in our financial performance;
. ability to comply with our general working capital requirements;
. ability to retain or receive certain permits or patents;
. ability to renew permits with minimal effort and costs;
. ability to be able to continue to borrow under our revolving line of
credit;
. ability to generate sufficient cash flow from operations to fund all
costs of operations and remediation of certain formerly leased property
in Dayton, Ohio, and our facilities in Memphis, Tennessee; Valdosta,
Georgia; Detroit, Michigan; Ft. Lauderdale, Florida; and Tulsa,
Oklahoma;
. ability to remediate certain contaminated sites for projected amounts;
. no further impairment to intangible assets;
. no intention to close any facilities, other than the Michigan facility;
. our possession of all necessary approvals, licenses and permits, and our
ability to attain, renew, or receive certain approvals, licenses,
permits, or patents;
. no expectation of material future inflationary changes;
. ability to fund budgeted capital expenditures for 2005;
. no further restructuring charges related to our Industrial segment;
. our increased backlog positioning us well from a processing revenue
perspective, in the first quarter of 2005;
. expectation that third party consulting fees related to Section 404 of
Sarbanes-Oxley, will decline slightly in 2005;
. ability to close and remediate the Michigan facility for the estimated
amounts;
. ability to repay our Unsecured Promissory Note utilizing proceeds from
the amended term loan with PNC Bank.
. completion of the amendments to the PNC Loan Agreement; and
. goal to improve our balance sheet, pay down debt and improve our
liquidity.
40
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:
. general economic conditions;
. material reduction in revenues;
. inability to collect in a timely manner a material amount of
receivables;
. increased competitive pressures;
. the ability to maintain and obtain required permits and approvals to
conduct operations;
. the ability to develop new and existing technologies in the conduct of
operations;
. ability to retain or renew certain required permits;
. discovery of additional contamination or expanded contamination at a
certain Dayton, Ohio, property formerly leased by us or our facilities
at Memphis, Tennessee; Valdosta, Georgia; Detroit, Michigan; Ft.
Lauderdale, Florida; and Tulsa, Oklahoma, which would result in a
material increase in remediation expenditures;
. changes in federal, state and local laws and regulations, especially
environmental laws and regulations, or in interpretation of such;
. potential increases in equipment, maintenance, operating or labor costs;
. management retention and development;
. financial valuation of intangible assets is substantially less than
expected;
. the requirement to use internally generated funds for purposes not
presently anticipated;
. termination of the Oak Ridge Contracts as a result of our lawsuit again
Bechtel Jacobs or otherwise;
. inability to maintain profitability on an annualized basis;
. the inability to maintain the listing of our Common Stock on the NASDAQ;
. the determination that PFMI, PFSG or PFO was responsible for a material
amount of remediation at certain Superfund sites;
. terminations of contracts with federal agencies or subcontracts
involving federal agencies, or reduction in amount of waste delivered to
us under these contracts or subcontracts;
. the price of our Common Stock as quoted on the NASDAQ; and
. determination that PFD is required to have a Title V air permit in
connection with its operations.
We undertake no obligations to update publicly any forward-looking statement,
whether as a result of new information, future events or otherwise.
41
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules 13a-15(f) of
the Securities Exchange Act of 1934. Internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. A control system, no matter how well designed,
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
Management, under the supervision and participation of our Chief Executive
Officer and Chief Financial Officer, conducted an evaluation of the
effectiveness of internal control over financial reporting based on the
framework in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on this
evaluation, we concluded the Company did not maintain effective internal control
over financial reporting as of December 31, 2004.
Our assessment of and conclusion on the effectiveness of internal control over
financial reporting did not include the internal control of PFMD and PFP,
acquired during 2004, which are included in the 2004 consolidated financial
statements and constituted $5,105,000 of total assets, and $8,470,000 of
revenues and $414,000 net loss for the year then ended. We did not assess the
effectiveness of internal control over financial reporting at these facilities
because of the timing of the acquisition which was completed in March 2004.
An internal control significant deficiency is a control deficiency, or
combination of control deficiencies, that adversely affects our ability to
initiate, authorize, record, process, or report external financial data reliably
in accordance with generally accepted accounting principles such that there is
more than a remote likelihood that a misstatement of our annual or interim
financial statements that is more than inconsequential will not be prevented or
detected. An internal control material weakness is a control deficiency, or
combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.
As of December 31, 2004, certain significant deficiencies were identified, and
aggregated into three material weaknesses in our internal control over financial
reporting. The material weaknesses related to the following areas:
1. ineffective monitoring of controls surrounding our pricing and
invoicing process evidenced by certain facilities principally within
our Industrial segment, which were not applying the controls
consistently;
2. lack of evidence of the performance or review of monthly, quarterly,
and annual financial statement close processes management has
designated integral to financial reporting (relevant to all
segments);
3. lack of formal corporate policies and procedures that define
accounting responsibilities of financial personnel within each of
our operating segments in addition to establishing appropriate
segregation of duties within each of our operating segments.
We have taken certain steps towards remediation of the material weaknesses
listed in 1 and 2 above; however, due to time constraints we have not been able
to fully implement such corrective processes, procedures and controls. We are in
the process of reviewing what steps should be taken to remediate the material
weakness in 3 above. Further, we are in the process of developing a formal
remediation plan for the Audit Committee's review and approval, which will then
be executed across all segments.
42
Management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004, has been audited by BDO Seidman
LLP, an independent registered public accounting firm, as stated in their
attestation report which is included herein.
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Perma-Fix Environmental Services, Inc.
Gainesville, Florida
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Perma-Fix
Environmental Services, Inc. and subsidiaries (the "Company") did not maintain
effective internal control over financial reporting as of December 31, 2004,
because of the effect of three material weaknesses identified in management's
assessment with respect to ineffective monitoring of certain invoicing and
pricing controls primarily within the Company's Industrial segment, the lack of
documented review and approval of financial statement closing processes
including facility level financial statements and account reconciliations, and
the lack of formal corporate policies and procedures that define accounting
responsibilities and establish appropriate segregation of duties of financial
personnel within each of the Company's operating segments, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As indicated in the accompanying Management's Report on Internal Control over
Financial Reporting, management's assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the
internal control of its subsidiaries, Perma-Fix of Maryland, Inc. ("PFMD"),
which was formed to acquire certain assets of USL Environmental Services, Inc.
d/b/a A&A Environmental ("A&A"), and Perma-Fix of Pittsburgh, Inc. ("PFP"),
which was formed to acquire certain assets of US Liquids of
44
Pennsylvania, Inc. d/b/a EMAX ("EMAX"), which were included in the 2004
consolidated financial statements of the Company and constituted $5,105,000 of
total assets at December 31, 2004, and $8,470,000 of revenues and $414,000 of
operating loss for the year ended December 31, 2004. Management did not assess
the effectiveness of internal control over financial reporting at these entities
because of the timing of the acquisition. Our audit of internal control over
financial reporting of the Company also did not include an evaluation of the
internal control over financial reporting of PFMD or PFP.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weaknesses have been identified and included
in management's assessment as of December 31, 2004:
1) The monitoring of pricing and invoicing process controls at
certain facilities within the Company's Industrial segment; were
ineffective, and were not being applied consistently. This
weakness could result in sales being priced and invoiced at
amounts, which were not approved by the customer or the
appropriate level of management.
2) The lack of documentation evidencing the performance or review of
monthly, quarterly, and annual financial statement closing
processes that management has designated integral to financial
reporting within all of the Company's segments. This weakness
could result in a schedule or report being overlooked in the
financial statement closing process and an error not being
detected.
3) The lack of formal corporate policies and procedures that define
accounting responsibilities and establish appropriate segregation
of duties of financial personnel within each of the Company's
operating segments. This weakness could result in facility level
accounting personnel effecting unauthorized transactions or
overlooking valid transactions to be recorded due to a lack of
segregation of duties and defined responsibilities.
These material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2004 financial statements, and
this report does not affect our report dated March 28, 2005 on those financial
statements.
In our opinion, management's assessment that the Company did not maintain
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the COSO control criteria.
Also, in our opinion, because of the effect of the material weaknesses described
above on the achievement of the objectives of the control criteria, the Company
has not maintained effective internal control over financial reporting as of
December 31, 2004, based on the COSO control criteria.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements of the Company as of and for the year ended December 31, 2004, and
our report dated March 28, 2005 expressed an unqualified opinion on those
financial statements.
West Palm Beach, Florida BDO Seidman, LLP
March 28, 2005
45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
PAGE NO.
--------
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm, BDO Seidman, LLP 47
Consolidated Balance Sheets as of December 31, 2004 and 2003 48
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003, and 2002 50
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003, and 2002 51
Consolidated Statements of Stockholders' Equity for the years
Ended December 31, 2004, 2003, and 2002 52
Notes to Consolidated Financial Statements 53
FINANCIAL STATEMENT SCHEDULE
II Valuation and Qualifying Accounts for the years ended 100
December 31, 2004, 2003, and 2002
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.
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Perma-Fix Environmental Services, Inc.
Gainesville, Florida
We have audited the accompanying consolidated balance sheets of Perma-Fix
Environmental Services, Inc. and subsidiaries as of December 31, 2004 and 2003,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 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, 2004 and 2003, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Perma-Fix
Environmental Services, Inc.'s internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 28, 2005 expressed an
adverse opinion thereon.
West Palm Beach, Florida BDO Seidman, LLP
March 28, 2005
47
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
(Amounts in Thousands, Except for Share Amounts) 2004 2003
- -------------------------------------------------------------------------------- ---------- ----------
ASSETS
Current assets
Cash $ 215 $ 411
Restricted cash 60 30
Accounts receivable, net of allowance for doubtful
accounts of $570 and $661 27,192 23,576
Inventories 882 544
Prepaid expenses 2,891 2,274
Other receivables 45 92
Current assets of discontinued operations, net of allowance for doubtful
accounts of $125 and $42 1,609 1,454
---------- ----------
Total current assets 32,894 28,381
Property and equipment:
Buildings and land 18,313 17,629
Equipment 30,281 28,513
Vehicles 4,187 2,709
Leasehold improvements 11,514 11,082
Office furniture and equipment 2,396 1,654
Construction-in-progress 1,852 2,621
---------- ----------
68,543 64,208
Less accumulated depreciation and amortization (21,282) (16,897)
---------- ----------
Net property and equipment 47,261 47,311
Property and equipment of discontinued operations, net of accumulated
depreciation of $0 and $2,299 600 5,758
Intangibles and other assets:
Permits 12,895 16,680
Goodwill 1,330 6,216
Finite Risk Sinking Fund 2,225 1,234
Other assets 3,250 4,635
---------- ----------
Total assets $ 100,455 $ 110,215
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
48
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
As of December 31,
(Amounts in Thousands, Except for Share Amounts) 2004 2003
- -------------------------------------------------------------------------------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,529 $ 5,518
Current environmental accrual 721 1,054
Accrued expenses 12,100 11,138
Unearned revenue 5,115 2,271
Current liabilities of discontinued operations 2,550 1,345
Current portion of long-term debt 6,376 2,896
---------- ----------
Total current liabilities 33,391 24,222
Environmental accruals 2,141 1,432
Accrued closure costs 5,062 4,874
Other long-term liabilities 1,944 1,677
Long-term liabilities of discontinued operations 1,804 91
Long-term debt, less current portion 12,580 26,192
---------- ----------
Total long-term liabilities 23,531 34,266
---------- ----------
Total liabilities 56,922 58,488
Commitments and Contingencies (see Note 13) -- --
Preferred Stock of subsidiary, $1.00 par value; 1,467,396 shares authorized,
1,284,730 shares issued and outstanding, liquidation value $1.00 per share 1,285 1,285
Stockholders' equity:
Preferred Stock, $.001 par value; 2,000,000 shares authorized, 2,500
shares issued and outstanding -- --
Common Stock, $.001 par value; 75,000,000 shares authorized,
42,749,117 and 37,241,881 shares issued, including 988,000 shares
held as treasury stock, respectively 43 37
Additional paid-in capital 80,902 69,640
Accumulated deficit (36,794) (17,243)
Interest rate swap (41) (130)
---------- ----------
44,110 52,304
Less Common Stock in treasury at cost; 988,000 shares (1,862) (1,862)
---------- ----------
Total stockholders' equity 42,248 50,442
---------- ----------
Total liabilities and stockholders' equity $ 100,455 $ 110,215
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
49
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31
(Amounts in Thousands, Except for Share Amounts) 2004 2003 2002
- ---------------------------------------------------------- ------------ ------------ ------------
Net Revenues $ 83,373 $ 79,153 $ 77,778
Cost of goods sold 59,523 54,041 54,875
------------ ------------ ------------
Gross Profit 23,850 25,112 22,903
Selling, general and administrative expenses 18,702 17,527 16,603
Loss (gain) on disposal or impairment of fixed assets 994 (4) 19
Impairment loss on intangible assets 9,002 -- --
------------ ------------ ------------
Income (loss) from operations (4,848) 7,589 6,281
Other income (expense):
Interest income 3 8 16
Interest expense (2,020) (2,804) (2,842)
Interest expense - financing fees (2,191) (1,070) (1,044)
Other (492) (79) 266
------------ ------------ ------------
Income (loss) from continuing operations (9,548) 3,644 2,677
Discontinued operations:
Loss from discontinued operations (635) (526) (475)
Loss on disposal of discontinued operations (9,178) -- --
------------ ------------ ------------
Total loss from discontinued operations (9,813) (526) (475)
------------ ------------ ------------
Net income (loss) (19,361) 3,118 2,202
------------ ------------ ------------
Preferred Stock dividends (190) (189) (158)
------------ ------------ ------------
Net income (loss) applicable to Common Stock $ (19,551) $ 2,929 $ 2,044
============ ============ ============
Net income (loss) per common share - basic:
Continuing operations $ (.24) $ .10 $ .07
Discontinued operations (.24) (.02) (.01)
------------ ------------ ------------
Net income (loss) per common share $ (.48) $ .08 $ .06
============ ============ ============
Net income (loss) per common share - diluted:
Continuing operations $ (.24) $ .09 $ .06
Discontinued operations (.24) (.01) (.01)
------------ ------------ ------------
Net income (loss) per common share $ (.48) $ .08 $ .05
============ ============ ============
Number of shares and potential common shares
Used in computing net income (loss) per share:
Basic 40,478 34,982 34,217
============ ============ ============
Diluted 40,478 39,436 42,618
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
50
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31
(Amounts in Thousands) 2004 2003 2002
- --------------------------------------------------------------------------- ---------- ---------- ----------
Cash flows from operating activities:
Net income (loss) $ (19,361) $ 3,118 $ 2,202
Adjustments to reconcile net income (loss) to cash provided by
(used in) operations:
Depreciation and amortization 4,631 4,237 3,738
Debt discount amortization 838 324 --
Provision for bad debt and other reserves 224 271 697
(Gain) loss on disposal or impairment of plant, property and equipment 994 (4) 19
Intangible asset impairment 9,002 -- --
Discontinued operation 9,162 (292) 772
Changes in assets and liabilities, of continuing operations net of
effects from business acquisitions:
Accounts receivable (1,636) (2,382) (5,379)
Prepaid expenses, inventories and other assets 827 (741) (267)
Accounts payable, accrued expenses and unearned revenue 2,216 (572) 3,831
---------- ---------- ----------
Net cash provided by operations 6,897 3,959 5,613
Cash flows from investing activities:
Purchases of property and equipment, net (2,733) (2,126) (4,548)
Proceeds from sale of plant, property and equipment (3) 17 10
Change in restricted cash, net (2) (13) (6)
Change in finite risk sinking fund (991) (1,234) --
Cash used for acquisition consideration, net of cash acquired (2,903) -- --
Cash used in discontinued operations (122) (52) (213)
---------- ---------- ----------
Net cash used in investing activities (6,754) (3,408) (4,757)
---------- ---------- ----------
Cash flows from financing activities:
Net borrowings (repayments) of revolving credit (2,755) 494 78
Principal repayments of long term debt (8,535) (3,530) (2,094)
Proceeds from issuance of stock 10,951 2,684 512
---------- ---------- ----------
Net cash used in financing activities (339) (352) (1,504)
---------- ---------- ----------
Increase (decrease) in cash (196) 199 (648)
Cash at beginning of period 411 212 860
---------- ---------- ----------
Cash at end of period $ 215 $ 411 $ 212
========== ========== ==========
Supplemental disclosure:
Interest paid $ 1,920 $ 2,381 $ 2,569
Non-cash investing and financing activities:
Issuance of Common Stock for services 192 34 120
Issuance of Common Stock for payment of dividends 125 125 125
Interest rate swap valuation 89 85 57
Long-term debt incurred for purchase of property and equipment 320 1,284 1,061
The accompanying notes are an integral part of these consolidated
financial statements.
51
PERMA-FIX ENVIRONMENTAL SERVICES, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31
Additional Interest
Preferred Stock Common Stock Paid-In Accumulated Rate
Shares Amount Shares Amount Capital Deficit Swap
------ ------- ---------- ------ ---------- ----------- --------
Balance at December 31, 2001 2,500 $ -- 35,008,005 $ 35 $ 66,042 $ (22,216) $ (158)
====== ======= ========== ====== ========== =========== ========
Comprehensive income
Net income -- -- -- -- -- 2,202 --
Other comprehensive (loss):
Interest Rate Swap -- -- -- -- -- -- (57)
Comprehensive income
Preferred Stock dividends -- -- -- -- -- (158) --
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 $ (20,172) $ (215)
====== ======= ========== ====== ========== =========== ========
Comprehensive income
Net income -- -- -- -- -- 3,118 --
Other comprehensive income:
Interest Rate Swap -- -- -- -- -- -- 85
Comprehensive income
Preferred Stock dividends -- -- -- -- -- (189) --
Issuance of Common Stock for
Preferred Stock dividends -- -- 59,000 -- 125 -- --
Issuance of Common Stock for
cash and services -- -- 102,850 -- 216 -- --
Exercise of Warrants and Options -- -- 1,753,297 2 2,500 -- --
------ ------- ---------- ------ ---------- ----------- --------
Balance at December 31, 2003 2,500 $ -- 37,241,881 $ 37 $ 69,640 $ (17,243) $ (130)
====== ======= ========== ====== ========== =========== ========
Comprehensive loss
Net loss -- -- -- -- -- (19,361) --
Other comprehensive income:
Interest rate swap -- -- -- -- -- -- 89
Comprehensive loss
Preferred stock dividends -- -- -- -- -- (190) --
Issuance of Common Stock for -- -- 54,581 -- 125 -- --
Preferred Stock dividends
Issuance of Common Stock for
cash and services -- -- 172,647 -- 305 -- --
Issuance of Common Stock in
private placement -- -- 4,616,113 5 9,865 -- --
Exercise of Warrants and Options -- -- 663,895 1 967 -- --
------ ------- ---------- ------ ---------- ----------- --------
Balance at December 31, 2004 2,500 $ -- 42,749,117 $ 43 $ 80,902 $ (36,794) $ (41)
====== ======= ========== ====== ========== =========== ========
Common
Stock Total
Held In Stockholders'
Treasury Equity
-------- -------------
Balance at December 31, 2001 $ (1,862) $ 41,841
======== =============
Comprehensive income
Net income -- 2,202
Other comprehensive (loss):
Interest Rate Swap -- (57)
-------------
Comprehensive income 2,145
Preferred Stock dividends -- (158)
Issuance of Common Stock for
Preferred Stock dividends -- 125
Issuance of Common Stock for -- 282
cash and services
Exercise of Warrants and Options -- 350
-------- -------------
Balance at December 31, 2002 $ (1,862) $ 44,585
======== =============
Comprehensive income
Net income -- 3,118
Other comprehensive income:
Interest Rate Swap -- 85
-------------
Comprehensive income 3,203
Preferred Stock dividends -- (189)
Issuance of Common Stock for
Preferred Stock dividends -- 125
Issuance of Common Stock for -- 216
cash and services
Exercise of Warrants and Options -- 2,502
-------- -------------
Balance at December 31, 2003 $ (1,862) $ 50,442
======== =============
Comprehensive loss
Net loss -- (19,361)
Other comprehensive income:
Interest rate swap -- 89
-------------
Comprehensive loss (19,280)
Preferred stock dividends -- (190)
Issuance of Common Stock for -- 125
Preferred Stock dividends
Issuance of Common Stock for
cash and services -- 305
Issuance of Common Stock in
private placement -- 9,870
Exercise of Warrants and Options -- 968
-------- -------------
Balance at December 31, 2004 $ (1,862) $ 42,248
======== =============
The accompanying notes are an integral part of these
consolidated financial statements.
52
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
NOTE 1
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Perma-Fix Environmental Services, Inc. (the Company, which may be referred to as
we, us, or our), an environmental and technology know-how company, is a Delaware
corporation, engaged through its subsidiaries, in:
.. Industrial Waste Management Services ("Industrial"), which includes:
. Treatment, storage, processing, and disposal of hazardous and
non-hazardous waste;
. Turnkey waste management and disposal services for large retail
companies;
. Wastewater management services, including the collection, treatment,
processing and disposal of hazardous and non-hazardous wastewater; and
. Environmental services, including emergency response, vacuum services,
marine environmental and other remediation services.
.. Nuclear Waste Management Services ("Nuclear"), which includes:
. Treatment, storage, processing and disposal of mixed waste (waste that
is both low-level radioactive and hazardous) which includes on and
off-site waste remediation and processing;
. Nuclear, low-level radioactive, hazardous and non-hazardous waste
treatment, processing and disposal; and
. Research and development of innovative ways to process low-level
radioactive and mixed waste.
.. Consulting Engineering Services, which includes:
. Broad-scope environmental issues, including environmental management
programs, regulatory permitting, compliance and auditing, landfill
design, field testing and characterization.
We have grown through both acquisitions and internal development. Our present
objective is to focus on the efficient operation of our existing facilities,
evaluate strategic acquisitions within both the nuclear and industrial segments,
and to continue the research and development of innovative technologies for the
treatment of nuclear, mixed waste and industrial waste. Such research and
development expenses, although important, are not considered material.
We are subject to certain risks: (1) We are involved in the treatment, handling,
storage and transportation of hazardous and non-hazardous, mixed and industrial
wastes and wastewater. Such activities contain risks against which we believe we
are adequately insured, and (2) in general, certain product lines within the
Industrial segment, are characterized by competition among a number of larger,
more established companies with significantly greater resources.
Our consolidated financial statements include our accounts, and the accounts of
our wholly-owned subsidiaries, Schreiber, Yonley and Associates ("SYA"),
Perma-Fix Treatment Services, Inc. ("PFTS"), Perma-Fix of Florida, Inc. ("PFF"),
Perma-Fix of Dayton, Inc. ("PFD"), Perma-Fix of Ft. Lauderdale, Inc. ("PFFL"),
Perma-Fix of Orlando, Inc. ("PFO"), Perma-Fix of South Georgia, Inc. ("PFSG"),
Diversified Scientific Services, Inc. ("DSSI"), East Tennessee Materials &
Energy Corporation ("M&EC"), and Perma-Fix of Michigan, Inc. ("PFMI"), a
discontinued operation (see Note 5 ). Perma-Fix of Maryland, Inc. ("PFMD") and
Perma-Fix of Pittsburgh, Inc. ("PFP") have been included in our consolidated
financial statements in 2004, from their date of acquisition.
53
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
When we prepare financial statements in conformity with generally accepted
accounting principles, we make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements, as well as, the
reported amounts of revenues and expenses during the reporting period. See Notes
5, 9, 10, and 13 for estimates of discontinued operations, closure costs,
environmental liabilities and contingencies. Actual results could differ from
those estimates.
RESTRICTED CASH
Restricted cash reflects secured collateral relative to the various bonding
requirements required for the PFFL treatment, storage and disposal facility, the
PFMD hazardous waste transporter permit in the state of Pennsylvania and the PFP
hazardous waste storage and transporter permit in the state of Pennsylvania. The
long-term portion of approximately $452,000 is included in other long-term
assets on our Consolidated Balance Sheets, and reflects cash held for long-term
commitments related to the RCRA remedial action at a facility affiliated with
PFD as further discussed in Note 10. The letter of credit secured by the current
restricted cash renews annually.
ACCOUNTS RECEIVABLE
Accounts receivable are customer obligations due under normal trade terms
requiring payment within 30 or 60 days from the invoice date based on the
customer type (government, broker, or commercial). Account balances are stated
by invoice at the amount billed to the customer. Payments of accounts receivable
are made directly to a lockbox and are applied to the specific invoices stated
on the customer's remittance advice. The carrying amount of accounts receivable
is reduced by an allowance for doubtful accounts, which is a valuation allowance
that reflects management's best estimate of the amounts that will not be
collected. We regularly review all accounts receivable balances that exceed 60
days from the invoice date and based on an assessment of current credit
worthiness, estimate the portion, if any, of the balance that will not be
collected. This analysis excludes government related receivables due to our
confidence in their collectibility. Specific accounts that are deemed to be
uncollectible are reserved at 100% of their outstanding balance. The remaining
balances aged over 60 days have a percentage applied by aging category (5% for
balances 61-90 days, 20% for balances 91-120 days and 40% for balances over 120
days aged), based on a historical valuation, that allows us to calculate the
total reserve required. Once we have exhausted all options in the collection of
a delinquent accounts receivable balance, which includes collection letters,
demands for payment, collection agencies and attorneys, the account is deemed
uncollectible and subsequently written off. The write off process involves
approvals, based on dollar amount, from senior management.
INVENTORIES
Inventories consist of treatment chemicals, salable used oils, and certain
supplies. Additionally, we have replacement parts in inventory, which are deemed
critical to the operating equipment and may also have extended lead times should
the part fail and need to be replaced. Inventories are valued at the lower of
cost or market with cost determined by the first-in, first-out method.
54
PROPERTY AND EQUIPMENT
Property and equipment expenditures are capitalized and
depreciated using the straight-line method over the estimated useful lives of
the assets for financial statement purposes, while accelerated depreciation
methods are principally used for tax purposes. Generally, annual depreciation
rates range from ten to fifty years for buildings (including improvements and
asset retirement costs) and three to seven years for office furniture and
equipment, vehicles, and decontamination and processing equipment. Leasehold
improvements are capitalized and depreciated over the lesser of the life of the
lease or the life of the asset. Maintenance and repairs are charged directly to
expense as incurred. The cost and accumulated depreciation of assets sold or
retired are removed from the respective accounts, and any gain or loss from sale
or retirement is recognized in the accompanying consolidated statements of
operations. Renewals and improvements, which extend the useful lives of the
assets, are capitalized. Included within buildings is an asset retirement
obligation, which represents our best estimate of the cost to close, at some
undetermined future date, our permitted and/or licensed facilities. The asset
retirement cost was originally recorded at $4,559,000 and depreciates over the
life of the property.
Long-lived assets are reviewed for impairment as events and circumstances
indicate that the assets carrying value is impaired. The impairment recognized
is the amount that carrying value exceeds fair value of the assets impaired,
less costs to sell the assets. During the third quarter of 2004, we reevaluated
certain assets of projects that had been abandoned as part of the restructuring
process of our Industrial segment. Those assets were determined to have no fair
value, and as a result, we recognized an impairment to our fixed assets of
approximately $1,026,000 in 2004.
INTANGIBLE ASSETS
Intangible assets relating to acquired businesses consist primarily of the cost
of purchased businesses in excess of the estimated fair value of net assets
acquired ("goodwill") and the recognized permit value of the business. Prior to
our adoption of SFAS 142, effective January 1, 2002, goodwill had been amortized
over 20 to 40 years and permits amortized over 10 to 20 years. Effective January
1, 2002, we discontinued amortizing our indefinite life intangible assets
(goodwill and permits). We continually reevaluate the propriety of the carrying
amount of permits and goodwill to determine whether current events and
circumstances warrant adjustments to the carrying value and estimates of useful
lives. Effective January 1, 2002, we adopted SFAS 142 and obtained an initial
financial valuation of our intangible assets, which indicated no impairment to
our indefinite life intangible assets. Our annual financial valuations performed
as of October 1, 2003, and October 1, 2002 indicated no impairments. Our annual
impairment test performed as of October 1, 2004 resulted in an impairment of
$9,002,000 to our goodwill and permits in our Industrial segment. For further
discussion on the impairment see Note 3.
ACCRUED CLOSURE COSTS
Accrued closure costs represent our estimated environmental liability to clean
up our facilities as required by our permits, in the event of closure.
INCOME TAXES
We account for income taxes under Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes", which requires use of the
liability method. SFAS No. 109 provides that deferred tax assets and liabilities
are recorded based on the differences between the tax basis of assets and
liabilities and their carrying amounts for financial reporting purposes,
referred to as temporary differences. Deferred tax assets or liabilities at the
end of each period are determined using the currently enacted tax rates to apply
to taxable income in the periods in which the deferred tax assets or liabilities
are expected to be settled or realized. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
55
COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. Comprehensive income has two components, net income and other
comprehensive income, and is included on the balance sheet in the equity
section. Our comprehensive income consists of the market value of the interest
rate swap. For more information see Interest Rate Swap.
CHANGE IN ACCOUNTING ESTIMATE
Effective September 1, 2003 we refined our percentage of completion methodology
for purposes of revenue recognition in the Nuclear Waste Management Services
segment. As we accept more complex waste streams in this segment, the treatment
of those waste streams becomes more complicated and more time consuming. We have
continued to enhance our waste tracking capabilities and systems, which has
enabled us to better match the revenue earned to the processing phases achieved.
The refined methodology more closely represents the timing of the treatment
process. We treated the change in methodology as a change in accounting
estimate, according to APB Opinion 20 Accounting Changes and accounted for such
changes prospectively.
REVENUE RECOGNITION
Nuclear revenues. The processing of mixed waste is complex and may take several
months to complete, as such we recognize revenues on a percentage of completion
basis. We have waste tracking capabilities, which we continue to enhance, to
allow us to better match the revenues earned to the processing phases achieved.
The revenues are recognized as each of the following three processing phases are
completed: receipt, treatment/processing and shipment/final disposal. However,
based on the processing of certain waste streams, the treatment/processing and
shipment/final disposal phases may be combined as they are completed
concurrently. As the waste moves through these processing phases and revenues
are recognized the correlating expenses are incurred.
As a significant customer, revenues with Bechtel Jacobs, which includes revenues
under the Oak Ridge contracts, accounted for approximately $9,405,000 or 11.3%,
and $13,139,000 or 16.6%, of total revenues for the years ended December 31,
2004 and December 31, 2003, respectively. Either party may at any time terminate
the Oak Ridge contracts. See Note 13 - Commitments and Contingencies.
Industrial waste revenues. Since industrial waste streams are much less
complicated than mixed waste streams and they require a short processing period,
we recognize revenues for industrial services at the time the services are
substantially rendered, which generally happens upon receipt of the waste, or
shortly thereafter. These large volumes of bulk waste are received and
immediately commingled with various customers' wastes, which transfers the legal
and regulatory responsibility and liability to us upon receipt. As we continue
to enhance our waste tracking systems within the segment we will continue to
review and reevaluate our revenue recognition policy.
Consulting revenues. Consulting revenues are recognized as services are
rendered, as is consistent with industry standards. The services provided are
based on billable hours and revenues are recognized in relation to incurred
labor and consulting costs.
SELF-INSURANCE
We have a self-insurance program for certain health benefits. The cost of these
benefits is recognized as expense in the period in which the claim occurred,
including estimates of claims incurred but not reported. Claims expense for 2004
was approximately $2,985,000, as compared to $2,631,000 and $3,006,000 for 2003
and 2002, respectively.
56
STOCK-BASED COMPENSATION
We account for our stock-based employee compensation plans under the accounting
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
have furnished the pro forma disclosures required under SFAS No. 123, Accounting
for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. See Note 12 for additional disclosures
on our stock-based employee compensation plans.
Statement of Financial Accounting Standards No. 123 ("FAS 123") "Accounting for
Stock-Based Compensation," requires us to provide pro forma information
regarding net income and earnings per share as if compensation cost for our
employee and directors stock options had been determined in accordance with the
fair market value-based method prescribed in FAS 123. We estimate the fair value
of each stock option at the grant date by using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants in 2004,
2003, and 2002, respectively: no dividend yield for all years; an expected life
of ten years for all years; expected volatility of 21.72% - 37.50%, 23.19% -
25.75%, and 30.51%, and risk-free interest rates of 3.34% - 3.82%, 2.75% -
3.33%, and 2.93%.
Under the accounting provisions of FASB Statement 123, our net income (loss) and
net income (loss) per share would have been reduced (increased) to the pro forma
amounts indicated below (in thousands except for per share amounts):
2004 2003 2002
---------- ---------- ----------
Net income (loss) from continuing operations, applicable to
Common Stock, as reported $ (9,738) $ 3,455 $ 2,519
Deduct: Total Stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects (383) (470) (327)
---------- ---------- ----------
Pro forma net income (loss) from continuing operations applicable to
Common Stock $ (10,121) $ 2,985 $ 2,192
========== ========== ==========
Earnings (loss) per share
Basic - as reported $ (.24) $ .10 $ .07
========== ========== ==========
Basic - pro-forma $ (.25) $ .09 $ .06
========== ========== ==========
Diluted - as reported $ (.24) $ .09 $ .06
========== ========== ==========
Diluted - pro-forma $ (.25) $ .08 $ .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 year ended December 31,
2004 does not include potential common shares, as their effect would be
anti-dilutive.
The following is a reconciliation of basic net income (loss) per share to
diluted net income (loss) per share for the years ended December 31, 2004, 2003,
and 2002:
57
(Amounts in Thousands, Except for Per Share Amounts) 2004 2003 2002
- ---------------------------------------------------------------------- --------- ---------- ----------
Earnings per share from continuing operations
Income (loss) from continuing operations $ (9,548) $ 3,644 $ 2,677
Preferred stock dividends (190) (189) (158)
Income (loss) from continuing operations applicable to Common
Stock (9,738) 3,455 2,519
Effect of dilutive securities:
Preferred Stock dividends -- 189 158
--------- ---------- ----------
Income (loss) - diluted $ (9,738) $ 3,644 $ 2,677
========= ========== ==========
Basic income (loss) per share $ (.24) $ .10 $ .07
========= ========== ==========
Diluted income (loss) per share $ (.24) $ .09 $ .06
========= ========== ==========
Earnings per share from discontinued operations
Loss - basic and diluted $ (9,813) $ (526) $ (475)
========= ========== ==========
Basic loss per share $ (.24) $ (.02) $ (.01)
========= ========== ==========
Diluted loss per share $ (.24) $ (.01) $ (.01)
========= ========== ==========
Weighted average shares outstanding - basic 40,478 34,982 34,217
Potential shares exercisable under stock option plans -- 477 1,070
Potential shares upon exercise of Warrants -- 2,310 5,664
Potential shares upon conversion of Preferred Stock -- 1,667 1,667
---------- ----------- ----------
Weighted average shares outstanding - diluted 40,478 39,436 42,618
========== ========== ==========
Potential shares excluded from above weighted average share
calculations due to their anti-dilutive effect include:
Upon exercise of options 2,976 1,472 187
Upon exercise of Warrants 12,791 20 --
Upon conversion of Preferred Stock 1,667 -- --
INTEREST RATE SWAP
We entered into an interest rate swap agreement effective December 22, 2000, to
modify the interest characteristics of its outstanding debt from a floating
basis to a fixed rate, thus reducing the possible impact of interest rate
changes on future income. This agreement involves the receipt of floating rate
amounts in exchange for fixed rate interest payments over the life of the
agreement without an exchange of the underlying principal amount. The
differential to be paid or received is accrued as interest rates change and
recognized as an adjustment to interest expense related to the debt. The related
amount payable to or receivable from counter parties is included in other assets
or liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash, trade accounts receivable, trade accounts payable,
accrued expenses and unearned revenues approximate their fair values principally
because of the short-term maturities of these instruments. The fair value of our
long-term debt is estimated based on the current rates offered to us for debt of
similar terms and maturities. Under this method, the fair value of long-term
debt was not significantly different from the stated value at December 31, 2004
and 2003. The book value of our subsidiary's preferred stock is not
significantly different than its fair value.
58
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 151 ("SFAS 151"), Inventory Costs. SFAS 151 amends ARB No. 43,
Chapter 4 to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage). SFAS 151
requires that those items be recognized as current-period charges regardless of
whether they meet the criterion of "so abnormal," as defined in ARB No. 43. In
addition, SFAS 151 introduces the concept of "normal capacity" and requires the
allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. Unallocated overheads must be recognized
as an expense in the period in which they are incurred. This statement is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. We do not believe that the adoption of SFAS 151 will have a material
effect on our financial statements.
In December 2004, FASB issued Statement No. 153 ("SFAS 153"), Exchanges of
Nonmonetary Assets. SFAS 153 amends the guidance in APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. SFAS 153 specifies that a nonmonetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. This statement is
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005, and would be applied prospectively. We do not expect the
impact of SFAS 153 on our financial position, results of operations and cash
flows to be material.
In December 2004, FASB issued Statement No. 123 (revised) ("SFAS 123R"),
Share-Based Payment. SFAS 123R is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and its related implementation
guidance, and establishes standards for the accounting for transactions in which
an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
SFAS 123R requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide service in
exchange for the award. This statement requires companies to recognize the fair
value of stock options and other stock-based compensation to employees
prospectively, beginning with awards granted, modified, repurchased or cancelled
after the fiscal periods beginning after June 15, 2005. We currently measure
stock-based compensation in accordance with APB Opinion No. 25 as discussed
above. We anticipate adopting SFAS 123R on July 1, 2005. The impact on our
financial condition or results of operations will depend on the number and terms
of stock options outstanding on the date of change, as well as future options
that may be granted. See "Stock-based Compensation" earlier in this Note 2 for
the pro forma impact that the fair value method would have had on our net income
for each of the years ended December 31, 2004, 2003 and 2002. We do not expect
the impact of SFAS 123R to have an impact on our cash flows or liquidity.
NOTE 3
GOODWILL AND OTHER INTANGIBLE ASSETS
We adopted SFAS 142 January 1, 2002. SFAS 142 requires, among other things, that
companies no longer amortize goodwill, but instead test goodwill for impairment
at least annually. In addition, SFAS 142 requires that we identify reporting
units for the purposes of assessing potential future impairments of goodwill,
reassess the useful lives of other existing recognized intangible assets, and
cease amortization of intangible assets with an indefinite useful life. We
discontinued amortizing our indefinite-life intangible assets (goodwill and
permits) in January 2002. An intangible asset with an indefinite useful
59
life should be tested for impairment in accordance with the guidance in SFAS
142. SFAS 142 required us to complete a transitional goodwill impairment test
six months from the date of adoption. We were also required to reassess the
useful lives of other intangible assets within the first interim quarter after
adoption of SFAS 142. We utilized an independent appraisal firm to test goodwill
and permits, separately, for impairment. The appraiser's reports indicated no
impairment as of October 1, 2003, and October 1, 2002. Our annual impairment
test as of October 1, 2004, resulted in an impairment of goodwill and permits,
in our Industrial segment in the amounts of $4,886,000 and $4,116,000,
respectively. During the third quarter we recorded an estimated impairment of
$7,101,000 for both goodwill and permits, based on a preliminary third party
impairment test, with the final impairment test resulting in an additional
impairment of $1,901,000 for both goodwill and permits. The additional
impairment included $972,000 due principally to increased appraised values of
our fixed assets. Additionally, the original impairment amount of $929,000
allocated to our discontinued operation, PFMI was reclassified to the impairment
loss on intangible assets of continuing operations of the Industrial segment.
See Note 5 for further discussion. The aggregate impairment of $9,002,000 is
recorded in our loss from operations for the twelve months ended December 31,
2004, in our Consolidated Statement of Operations. The annual impairment test
indicated no impairment for our Nuclear and Engineering segments.
The following table is a summary of changes in the carrying amount of goodwill
for the years ended December 31, 2002, 2003, and 2004 (amounts in thousands).
Our Nuclear segment has been excluded as it has no goodwill recorded.
Industrial Engineering
Goodwill Segment Segment Total
- ----------------------------------------------------------------- ------------ ------------ ------------
Balance as of January 1, 2002 $ 5,180 $ 1,330 $ 6,840
Reclass of accumulated amortization 16 -- 16
------------ ------------ ------------
Balance as of December 31, 2002 5,196 1,330 6,525
Reclass of goodwill to asset retirement costs (Notes 2 and 9) (309) -- (309)
------------ ------------ ------------
Balance as of December 31, 2003 4,886 1,330 6,216
Impairment of goodwill (4,886) -- (4,886)
------------ ------------ ------------
Balance as of December 31, 2004 $ -- $ 1,330 $ 1,330
============ ============ ============
The following table is a summary of changes in the carrying amount of permits
for the years ended December 31, 2002, 2003, and 2004 (amounts in thousands).
Our Engineering segment has been excluded as it has no permits recorded.
Industrial Nuclear
Permits Segment Segment Total
- ----------------------------------------------------------------- ------------ ------------ ------------
Balance as of January 1, 2002 $ 6,434 $ 14,205 $ 20,639
Permits acquired -- 63 63
Permits in progress 73 -- 73
Reclass of accumulated amortization (16) -- (16)
------------ ------------ ------------
Balance as of December 31, 2002 6,491 14,268 20,759
Permits in progress 161 -- 161
Permits obtained -- 9 9
Reclass of permits to asset retirement costs (Notes 2 and 9) (170) (4,079) (4,249)
------------ ------------ ------------
Balance as of December 31, 2003 6,482 10,198 16,680
Permits in progress 3 328 331
Impairment of permits (4,116) -- (4,116)
------------ ------------ ------------
Balance as of December 31, 2004 $ 2,369 $ 10,526 $ 12,895
============ ============ ============
60
NOTE 4
ACQUISITIONS
On March 23, 2004, our subsidiary, Perma-Fix of Maryland, Inc. ("PFMD")
completed it's acquisition of certain assets of USL Environmental Services, Inc.
d/b/a A&A Environmental ("A&A"), primarily located in Baltimore, Md., and our
subsidiary, Perma-Fix of Pittsburgh, Inc. ("PFP") completed its acquisition of
certain assets of US Liquids of Pennsylvania, Inc. d/b/a EMAX ("EMAX"). Both A&A
and EMAX are wholly owned subsidiaries of US Liquids Inc. ("USL"). PFMD is using
the acquired assets of A&A to provide a full line of environmental, marine and
industrial maintenance services. PFMD offers expert environmental services such
as 24-hour emergency response, vacuum services, hazardous and non-hazardous
waste disposal, marine environmental and other remediation services. PFP is
utilizing the acquired assets of EMAX to provide a variety of environmental
services such as transportation of drums and bulk loads, tank cleaning,
industrial maintenance, dewatering, drum management and chemical packaging. PFP
also has a wastewater treatment group, which provides for the treatment of
non-hazardous wastewaters such as leachates, oily waters, industrial process
waters and off-spec products.
We paid $2,915,000 in cash for the acquired assets and assumed certain
liabilities of A&A and EMAX. The acquisitions were accounted for using the
purchase method effective March 23, 2004, and accordingly, the estimated fair
values of the assets acquired and liabilities assumed as of this date, and the
results of operations since this date, were included in the accompanying
consolidated financial statements. As of March 23, 2004, we performed
preliminary purchase price allocations based upon information available as of
that date. Costs incurred related to the acquisitions were $275,000 and are
included in our purchase price allocation as liabilities assumed. We
subsequently obtained third party evaluations of certain assets and at December
31, 2004, finalized our purchase price allocation to the net assets acquired and
the net liabilities assumed, as follows:
PFMD PFP
--------- ----------
Assets acquired:
Current tangible assets $ 2,457 $ 24
Fixed assets 1,810 413
Liabilities assumed:
Current accounts payable and accruals (1,141) (107)
Long-term environmental reserve (391) (150)
--------- ----------
Total purchase price allocation $ 2,735 $ 180
========= ==========
The third party evaluations resulted in higher fair values for property and
equipment than was allocable to those assets based upon the purchase price of
such assets and, as such, we reduced on a pro rata basis the value of the
property and equipment to their final book values, as recorded through purchase
accounting.
NOTE 5
DISCONTINUED OPERATIONS
On October 4, 2004, our Board of Directors approved the discontinuation of
operations at the facility in Detroit, Michigan, owned by our subsidiary,
Perma-Fix of Michigan, Inc. ("PFMI"). The decision to discontinue operations at
the Detroit facility was principally as a result of two fires that significantly
disrupted operations at the facility in 2003, and the facility's continued drain
on the financial resources of our Industrial segment. We are in the process of
remediating the facility and evaluating our available
61
options for future use or sale of the property. The operating activities for the
current and prior periods have been reclassified to discontinued operations in
our Consolidated Statements of Operations.
PFMI recorded revenues of $1,569,000 and $5,739,000, and operating losses of
$635,000 and $526,000 for the year ended December 31, 2004 and 2003,
respectively. Our operating losses for 2004 were reduced by an insurance claim
we submitted for business interruption from the second fire. The claim recorded
against expenses in December 2004, was $1,130,000, an increase to the previous
amount of $455,000. Our estimated loss on disposals from discontinued operations
of $9,178,000 for the year ended December 31, 2004, consisted of asset
impairments, pension costs, environmental remediation and other expenses as
described in the following table:
Noncash Total
(Amounts in thousands) Charges Accruals Charges
- ------------------------------------------------ ---------- -------- ----------
Pension plan withdrawal liability $ -- $ 1,680 $ 1,680
Environmental closure and remediation accrual -- 2,373 2,373
Tangible asset impairment 4,633 -- 4,633
Severance and other payroll related liabilities -- 256 256
Other -- 236 236
---------- -------- ----------
Loss on disposal from discontinued operations $ 4,633 $ 4,545 $ 9,178
========== ======== ==========
The pension plan withdrawal liability is a result of the termination of
substantially all of the union employees of PFMI. The PFMI union employees
participate in the Central States Teamsters Pension Fund ("CST"), which provides
that a partial or full termination of union employees may result in a withdrawal
liability, due from PFMI to CST. We recorded a $1,474,000 pension withdrawal
liability at September 30, 2004, based upon a withdrawal letter received from
CST Fund. The estimated calculation contained within the withdrawal letter was
based upon a 2004 withdrawal date. We subsequently engaged an actuarial firm to
confirm and update the calculation through December 31, 2004. Based upon this
actuarial study, we increased the pension withdrawal liability to $1,680,000 at
December 31, 2004. This withdrawal liability represents our best estimate, and
is subject to numerous factors such as the date and timing of union employee
terminations, partial versus complete termination status, the pension funds
unfunded vested benefit liability and PFMI's portion of such liability. This
obligation was recorded as a current liability but may not be paid out in the
current year, due to the timing of the termination event and process of
determining the final liability. The tangible asset impairment is our write down
of tangible fixed assets as of September 30, 2004, such as property, plant, and
equipment to our estimate of fair value. Based upon the valuations performed
subsequent to September 30, 2004, pursuant to SFAS 142, the property, plant, and
equipment appear to have a much greater value, which could be realized upon the
sale of the facility. Other costs consist of estimated amounts to be paid to
close the facility and remediate the property. We previously allocated an
intangible asset impairment of $929,000 based on the value of PFMI compared to
the remainder of the Industrial segment, pursuant to preliminary third party
appraisals. Upon completion of the final SFAS 142 impairment test, as of October
1, 2004, the third party appraisers determined the value of PFMI was negative at
that time, and as such no goodwill or permits were allocable to PFMI to be
impaired. Therefore, during the fourth quarter the $929,000 impairment of
intangible assets originally allocated to discontinued operations, was
reclassified and included in the $9,002,000 impairment loss on intangible assets
of the Industrial segment in continuing operations.
As a result of the discontinuation of operations at the PFMI facility, we are
required to complete certain closure and remediation activities pursuant to our
RCRA permit. Also, in order to close and dispose of or sell the facility, we may
have to complete certain additional remediation activities related to the land,
building, and equipment. The extent and cost of the clean-up and remediation
will be determined by state mandated requirements, the extent to which are not
known at this time. Also, impacting this estimate is the
62
level of contamination discovered, as we begin remediation, and the related
clean-up standards which must be met in order to dispose of or sell the
facility. We engaged our engineering firm, SYA, to perform an analysis and
related estimate of the cost to complete the RCRA portion of the
closure/clean-up costs and the potential long-term remediation costs. Based upon
this analysis, we recorded an additional $2,373,000 to arrive at our best
estimate of the cost of this environmental closure and remediation liability of
$2,464,000. During the fourth quarter of 2004, we spent approximately $116,000
of this closure cost estimate. In the event we retain PFMI, we anticipate
spending $544,000 in 2005 and the remainder over the next two to five years.
Assets and liabilities related to the discontinued operation have been
reclassified to separate categories in the Consolidated Balance Sheets as of
December 31, 2004 and 2003. As of December 31, 2004, assets are recorded at
their net realizable value, and consist of property, plant, and equipment of
$600,000, accounts receivable of $24,000, and insurance proceeds receivable of
$1,585,000. We have submitted three insurance claims relative to the two fires
at PFMI, a property claim for the first fire and a property claim and business
interruption claim for the second fire. During the fourth quarter, we finalized
our negotiations with the insurance carrier on the business interruption claim
and recorded an additional $1,130,000 receivable, an increase to the previous
receivable amount of $455,000. We are currently negotiating settlements for the
remaining two claims, but at this time we cannot estimate actual proceeds to be
received. Additional proceeds, if any, received on these remaining claims will
be recorded as income from discontinued operations. Liabilities as of December
31, 2004, consist of accounts payable and current accruals of $2,006,000 and
environmental accruals of $2,348,000.
NOTE 6
PREFERRED STOCK ISSUANCE AND CONVERSION
SERIES 17 PREFERRED
As of January 1, 2002, Capital Bank held 2,500 shares of the Series 17 Preferred
record, as agent for certain of its accredited investors. The Series 17
Preferred may be converted into shares of Common Stock at any time at a
conversion price of $1.50 per share, subject to adjustment as set forth in the
Certificate of Designations relating to the Series 17 Preferred. The Series 17
Preferred has a "stated value" of $1,000 per share. We may, at our sole option,
redeem, in whole or in part, at any time, and from time to time the then
outstanding Series 17 Preferred at $1,200 per share. Upon any notice of
redemption, Capital Bank shall have only five business days to exercise its
conversion rights regarding the redeemed shares.
The Series 17 Preferred accrues dividends on a cumulative basis at a rate of 5%
per annum which dividends are payable semiannually when and as declared by the
Board of Directors. During 2004, approximately $125,000 of dividends were
accrued on the Series 17 Preferred of which $62,000 were paid in the form of
32,938 shares of Common Stock, and $63,000 were paid in March 2005.
SERIES B PREFERRED STOCK
As partial consideration of the M&EC Acquisition, 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. We
began accruing dividends for the Series B Preferred Stock in
63
July 2002, and have accrued a total of approximately $162,000 since July 2002,
of which $64,000 was accrued in 2004 and 2003.
NOTE 7
LONG-TERM DEBT
Long-term debt consists of the following at December 31, 2004, and December 31,
2003:
(Amounts in Thousands) 2004 2003
--------- ---------
Revolving Credit facility dated December 22, 2000, borrowings based upon $ 6,480 $ 9,235
eligible accounts receivable, subject to monthly borrowing base
calculation, variable interest paid monthly at prime rate plus 1% (6.25%
at December 31, 2004), beginning in March 2005, the interest rate will
be reduced to prime rate plus1/2%, balance due in May 2008.
Term Loan dated December 22, 2000, payable in equal monthly installments of 3,083 4,083
principal of $83, balance due in May 2008, variable interest paid
monthly at prime rate plus 1 1/2% (6.75% at December 31, 2004). Beginning
in March 2005, the interest rate will be reduced to prime rate plus 1%.
Three promissory notes dated May 27, 1999, payable in equal monthly -- 531
installments of principal and interest of $90 over 60 months. Repaid in
full in June, 2004.
Unsecured promissory note dated August 31, 2000, payable in lump sum in 3,500 3,500
August 2005, interest paid annually at 7.0%.
Senior subordinated notes dated July 31, 2001, payable in lump sum on July -- 4,787
31, 2006, interest payable quarterly at an annual interest rate of
13.5%, net of unamortized debt discount of $838 at December 31, 2003.
Notes were repaid in full in August, 2004.
Promissory note dated June 25, 2001, payable in semiannual installments on 3,034 3,354
June 30 and December 31 through December 31, 2008, variable interest
accrues at the applicable rate determined under the IRS Code Section
(7.0% on December 31, 2004) and is payable in one lump sum at the end of
installment period.
Installment agreement dated June 25, 2001, payable in semiannual installments 753 833
on June 30 and December 31 through December 31, 2008, variable interest
accrues at the applicable rate determined under the IRS Code Section
(7.0% on December 31, 2004) and is payable in one lump sum at the end of
installment period.
Various capital lease and promissory note obligations, payable 2005 to 2008, 2,106 2,765
interest at rates ranging from 5.2% to 17.9%.
--------- ---------
18,956 29,088
Less current portion of long-term debt 6,376 2,896
--------- ---------
$ 12,580 $ 26,192
========= =========
REVOLVING CREDIT AND TERM LOAN AGREEMENT
On December 22, 2000, we entered into a Revolving Credit, Term Loan and Security
Agreement ("Agreement") with PNC Bank, National Association, a national banking
association ("PNC") acting as agent ("Agent") for lenders, and as issuing bank.
The Agreement provides for a term loan ("Term Loan") in the amount of
$7,000,000, which requires principal repayments based upon a seven-year
amortization,
64
payable over five years, with monthly installments of $83,000 and the remaining
unpaid principal balance due on December 22, 2005. The Agreement also provided
for a revolving line of credit ("Revolving Credit") with a maximum principal
amount outstanding at any one time of $18,000,000, as amended. The Revolving
Credit advances are subject to limitations of an amount up to the sum of (a) up
to 85% of Commercial Receivables aged 90 days or less from invoice date, (b) up
to 85% of Commercial Broker Receivables aged up to 120 days from invoice date,
(c) up to 85% of acceptable Government Agency Receivables aged up to 150 days
from invoice date, and (d) up to 50% of acceptable unbilled amounts aged up to
60 days, less (e) reserves Agent reasonably deems proper and necessary. The
loans are subject to a prepayment fee of 1 1/2 % in the first year, 1% in the
second and third years and 3/4 % after the third anniversary until termination
date. The Revolving Credit advances shall be due and payable in full on December
22, 2005. As of December 31, 2004, the excess availability under our Revolving
Credit was $8,516,000 based on our eligible receivables.
In December 2000, we entered into an interest rate swap agreement related to our
Term Loan. This hedge, has effectively fixed the interest rate on the notional
amount of $3,500,000 of the floating rate $7,000,000 PNC Term Loan. We will pay
the counterparty interest at a fixed rate equal to the base rate of 6.25%, for a
period from December 22, 2000, through December 22, 2005, in exchange for the
counterparty paying us one month LIBOR rate for the same term (2.39% at December
31, 2004). At December 31, 2004, the market value of the interest rate swap was
in an unfavorable value position of $41,000 and was recorded as a liability.
During the twelve months ended December 31, 2004, we recorded a gain on the
interest rate swap of $89,000, which was included in other comprehensive income
on the Statement of Stockholders' Equity.
On March 15, 2005, the Company entered into a commitment letter with PNC,
whereby PNC agreed to renew and extend the agreement, and to increase the term
loan back up to $7.0 million. Effective March 25, 2005, the Company and PNC
entered into an amended agreement (Amendment No. 4), which, among other things,
extends the $25 million credit facility through May 31, 2008. The credit
facility consists of an $18 million revolving line of credit and a $7 million
term loan. The new terms of the credit facility remain principally unchanged,
with the exception of a 50 basis point reduction in the interest rate on both
loans. The increase to the term loan will be handled as a subsequent amendment,
subject to the updating of the existing mortgages held by PNC. We expect the
mortgage updates to be completed in April 2005, with proceeds of approximately
$4.0 million to be received shortly thereafter. As a condition of this amended
agreement, we paid a $140,000 fee to PNC.
THREE PROMISSORY NOTES
Pursuant to the terms of stock purchase agreements in connection with the
acquisition of Perma-Fix of Orlando, Inc. ("PFO"), Perma-Fix of South Georgia,
Inc. ("PFSG") and Perma-Fix of Michigan, Inc. ("PFMI"), a portion of the
consideration was paid in the form of the Promissory Notes, in the aggregate
amount of $4,700,000 payable to the former owners of PFO, PFSG and PFMI. The
Promissory Notes were paid in full in June, 2004.
UNSECURED PROMISSORY NOTE
On August 31, 2000, as part of the consideration for the purchase of Diversified
Scientific Services, Inc. ("DSSI"), we issued to Waste Management Holdings a
long-term unsecured promissory note (the "Unsecured Promissory Note") in the
aggregate principal amount of $3,500,000, bearing interest at a rate of 7% per
annum and having a five-year term with interest to be paid annually and
principal due in one lump sum at the end of the term of the Unsecured Promissory
Note (August 2005). We plan to utilize the proceeds of the amended agreement
with PNC, mentioned above, to repay this balance.
65
SENIOR SUBORDINATED NOTES
On July 31, 2001, we issued approximately $5.6 million in 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 Associated Mezzanine Investors - PESI,
L.P. ("AMI"), Bridge East Capital, L.P. ("BEC"), and us. The Notes were
unsecured and were unconditionally guaranteed by our subsidiaries. The Notes
were paid in full in August, 2004. We also paid early termination fees of
$190,000 and recorded a non-cash expense of $1,217,000 for the write-off of
unamortized prepaid financing fees and a debt discount.
Under the terms of the Purchase Agreement, we also issued to AMI and BEC
Warrants to purchase up to 1,281,731 shares of our Common Stock ("Warrant
Shares") at an initial exercise price of $1.50 per share (the "Warrants"),
subject to adjustment under certain conditions which were valued at $1,622,000.
The Warrants, as issued, also contain a cashless exercise provision. The Warrant
Shares are registered under an S-3 Registration Statement that was declared
effective on November 27, 2002.
In connection with the sale of the Notes, we entered into an Option Agreement
with AMI and BEC, dated July 31, 2001 (the "Option Agreement"). Pursuant to the
Option Agreement, we granted each purchaser an irrevocable option requiring us
to purchase any of the Warrants or the shares of Common Stock issuable under the
Warrants (the "Warrant Shares") then held by the purchaser (the "Put Option").
The Put Option may be exercised at any time commencing July 31, 2004, and ending
July 31, 2008. In addition, each purchaser granted to us an irrevocable option
to purchase all the Warrants or the Warrant Shares then held by the purchaser
(the "Call Option"). The Call Option may be exercised at any time commencing
July 31, 2005, and ending July 31, 2008. The purchase price under the Put Option
and the Call Option is based on the quotient obtained by dividing (a) the sum of
six times our consolidated EBITDA for the period of the 12 most recent
consecutive months minus Net Debt plus the Warrant Proceeds by (b) our Diluted
Shares (as the terms EBITDA, Net Debt, Warrant Proceeds, and Diluted Shares are
defined in the Option Agreement). At December 31, 2004, and 2003, the Put Option
had no value and no liability was recorded.
PROMISSORY NOTE
In conjunction with our acquisition of M&EC, M&EC issued a promissory note for a
principal amount of $3.7 million to Performance Development Corporation ("PDC"),
dated June 25, 2001, for monies advanced to M&EC for certain services performed
by PDC. The promissory note is payable over eight years on a semiannual basis on
June 30 and December 31. The principal repayments for 2005 will be approximately
$400,000 semiannually. Interest is accrued at the applicable law rate
("Applicable Rate") pursuant to the provisions of section 6621 of the Internal
Revenue Code of 1986 as amended, (7% on December 31, 2004) and payable in one
lump sum at the end of the loan period. On December 31, 2004, the outstanding
balance was $4,099,000, including accrued interest of approximately $1,065,000.
PDC has directed M&EC to make all payments under the promissory note directly to
the IRS to be applied to PDC's obligations under its installment agreement with
the IRS.
INSTALLMENT AGREEMENT
Additionally, M&EC entered into an installment agreement with the Internal
Revenue Service ("IRS") for a principal amount of $923,000 effective as of June
25, 2001, for certain withholding taxes owed by M&EC. The installment agreement
is payable over eight years on a semiannual basis on June 30 and December 31.
The principal repayments for 2004 will be approximately $100,000 semiannually.
Interest is accrued at the Applicable Rate. Such rate is adjusted on a quarterly
basis and payable in lump sum at the end of the installment period. On December
31, 2004, the rate was 7%. On December 31, 2004, the outstanding balance was
$1,010,000 including accrued interest of approximately $257,000.
66
The aggregate approximate amount of the maturities of long-term debt maturing in
future years as of December 31, 2004, is $6,376,000 in 2005; $9,067,000 in 2006;
$2,334,000 in 2007; $1,155,000 in 2008; and $24,000 in 2009.
NOTE 8
ACCRUED EXPENSES
Accrued expenses at December 31 include the following (in thousands):
2004 2003
-------- --------
Salaries and employee benefits $ 3,405 $ 3,201
Accrued sales, property and other tax 826 596
Waste disposal and other operating related expenses 7,678 7,010
Other 191 331
-------- --------
Total accrued expenses $ 12,100 $ 11,138
======== ========
NOTE 9
ACCRUED CLOSURE COSTS
We accrue for the estimated closure costs as determined pursuant to RCRA
guidelines for all fixed-based regulated facilities, even though we do not
intend to or have present plans to close any of our existing facilities. The
permits and/or licenses define the waste, which may be received at the facility
in question, and the treatment or process used to handle and/or store the waste.
In addition, the permits and/or licenses specify, in detail, the process and
steps that a hazardous waste or mixed waste facility must follow should the
facility be closed or cease operating as a hazardous waste or mixed waste
facility. Closure procedures and cost calculations in connection with closure of
a facility are based on guidelines developed by the federal and/or state
regulatory authorities under RCRA and the other appropriate statutes or
regulations promulgated pursuant to the statutes. The closure procedures are
very specific to the waste accepted and processes used at each facility. We
recognize the closure cost as a contingent liability on the balance sheet. Since
all our facilities are acquired facilities, the closure cost for each facility
was recognized pursuant to a business combination and recorded as part of the
purchase price allocation to assets acquired and liabilities assumed.
The closure calculation is increased annually for inflation based on RCRA
guidelines, and for any approved changes or expansions to the facility, which
may result in either an increase or decrease in the approved closure amount. An
increase resulting from changes or expansions is recorded to expense over the
term of such a renewed/expanded permit, generally five (5) years, and annual
inflation factor increases are expensed during the current year.
During 2004, the accrued long-term closure cost increased by $188,000 to a total
of $5,062,000 as compared to the 2003 total of $4,874,000. This increase is
principally a result of normal inflation factor increases.
Statements of Financial Accounting Standard No. 143, Accounting for Asset
Retirement Obligations, ("SFAS 143") requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made, and that the
associated asset retirement costs be capitalized as part of the carrying amount
of the long-lived asset. In conjunction with the state mandated permit and
licensing requirements, we are obligated to determine our best estimate of the
cost to close, at some undetermined future date, our permitted and/or licensed
facilities. We recorded this liability at the date of acquisition of each
facility, with its offsetting entry
67
being to goodwill and/or permits and have subsequently increased this liability
as a result of changes to the facility and/or for inflation. Our current accrued
closure costs reflect the current fair value of the cost of asset retirement. We
adopted SFAS 143 as of January 1, 2003, and pursuant to the adoption we
reclassified from goodwill and permits approximately $4,559,000 (see Note 3),
which represents the fair value of our closing cost as recorded to goodwill or
permits at the time each facility was acquired, into an asset retirement
obligation account. The associated asset retirement cost is recorded as property
and equipment (buildings). We are depreciating the asset retirement cost on a
straight-line basis over a period of 50 years. The new standard did not have a
material impact on net income during 2003, nor would it have had a material
impact in 2002 and 2001 assuming an adoption of this accounting standard on
January 1, 2001.
NOTE 10
ENVIRONMENTAL LIABILITIES
We have various remediation projects, which are currently in progress at certain
of our permitted Industrial segment facilities owned and operated by our
subsidiaries. These remediation projects principally entail the removal of
contaminated soil and, in some cases, the remediation of surrounding ground
water. Five of the remedial clean-up projects in question were an issue for that
facility for years prior to our acquisition of the facility and were recognized
pursuant to a business combination and recorded as part of the purchase price
allocation to assets acquired and liabilities assumed. Three of the facilities,
(PFD, PFM, and PFSG) are RCRA permitted facilities, and as a result, the
remediation activities are closely reviewed and monitored by the applicable
state regulators. Additionally, we recorded environmental liabilities upon
acquisition of PFMD and PFP in March 2004, which are not RCRA permitted
facilities. We have recognized our best estimate of such environmental
liabilities upon the acquisition of these five facilities, as part of the
acquisition cost. In the normal course of our business, the operations will on
occasion create a minor environmental remediation issue, which will be evaluated
and a corresponding remedial liability recorded. Minor environmental remediation
liabilities were recognized and recorded for the PFTS and PFFL facilities during
2004. As further discussed in the discontinued operations footnote, we accrued
environmental liabilities for PFMI, our discontinued operation (see Note 5).
At December 31, 2004, we had accrued environmental liabilities totaling
$2,862,000, at our continuing operations, which reflects an increase of $287,000
from the December 31, 2003, balance of $2,575,000. The increase is a result of
environmental liabilities recorded when we acquired PFMD and PFP in March 2004.
The increase is partially offset by payments on the remediation projects. We
also have accrued environmental liabilities of $2,348,000 for PFMI, our
discontinued operation. The December 31, 2004 current and long-term accrued
environmental balance is recorded as follows:
Current Long-term
Accrual Accrual Total
----------- ----------- ------------
PFD $ 110,000 $ 612,000 $ 722,000
PFM 302,000 434,000 736,000
PFSG 257,000 512,000 769,000
PFTS 27,000 42,000 69,000
PFFL 25,000 -- 25,000
PFMD -- 391,000 391,000
PFP -- 150,000 150,000
----------- ----------- ------------
721,000 2,141,000 2,862,000
PFMI 544,000 1,804,000 2,348,000
----------- ----------- ------------
$ 1,265,000 $ 3,945,000 $ 5,210,000
=========== =========== ============
68
PFD
In June 1994, we acquired from Quadrex Corporation and/or a subsidiary of
Quadrex Corporation (collectively, "Quadrex") three treatment, storage and
disposal companies, including the PFD facility. The former owners of PFD had
merged EPS with PFD, which was subsequently sold to Quadrex. Through our
acquisition of PFD in 1994 from Quadrex, we were indemnified by Quadrex for
costs associated with remediating this facility leased by PFD ("Leased
Property") but never used or operated by PFD, which entails remediation of soil
and/or groundwater restoration. The Leased Property used by EPS to operate its
facility is separate and apart from the property on which PFD's facility is
located. In conjunction with the subsequent bankruptcy filing by Quadrex, and
our recording of purchase accounting for the acquisition of PFD, we recognized
an environmental liability of approximately $1,200,000 for the remediation of
this leased facility. This facility has pursued remedial activities for the past
seven years and after evaluating various technologies, is seeking approval from
appropriate governmental authority for the final remedial process, through the
utilization of third party consultants, which should extend for two to three
years after approval by the appropriate governmental authorities of the final
remedial process. For the year ended December 31, 2004, we decreased the reserve
by approximately $33,000, a result of payments on remedial evaluation and
planning efforts. We anticipate spending for the remaining remedial activity
over the next two to five years.
PFM
Pursuant to our acquisition, effective December 31, 1993, of Perma-Fix of
Memphis, Inc. (f/k/a American Resource Recovery, Inc.), we assumed certain
liabilities relative to the removal of contaminated soil and to undergo
groundwater remediation at the facility. Prior to our ownership of Perma-Fix of
Memphis, Inc., the owners installed monitoring and treatment equipment to
restore the groundwater to acceptable standards in accordance with federal,
state and local authorities. The groundwater remediation at this facility has
been ongoing since approximately 1990, and, subject to the approval of the
appropriate agency, Perma-Fix of Memphis, Inc. intends to begin final
remediation of this facility. For the year ended December 31, 2004, we incurred
$83,000 in remedial evaluation and planning costs, which reduced the reserve.
Our anticipated spending on the remaining remedial activities will be over the
next two to five years.
PFSG
During 1999, we recognized an environmental accrual of $2,199,000, in
conjunction with the acquisition of PFSG. This amount represented our estimate
of the long- term costs to remove contaminated soil and to undergo groundwater
remediation activities at the PFSG acquired facility in Valdosta, Georgia. PFSG,
in conjunction with third party consultants, have over the past four years,
completed the initial valuation, selected the remedial process to be utilized,
and completed the planning and approval process. Remedial activities began in
2003. For the year ended December 31, 2004, we incurred $143,000 in remediation
costs, which reduced the reserve. We anticipate our spending for the remaining
remedial activities to be incurred over the next two to three years.
PFTS
In conjunction with an oil spill, we have accrued as of December 31, 2004,
approximately $69,000 to remediate the contaminated soil and ground water at
this location. We expect to complete spending on this remedial project over the
next two years.
PFFL
We have accrued $25,000 to remediate contaminated soil on property adjacent to
our PFFL property. We anticipate spending on this remedial activity to be
completed in 2005.
69
PFMD
In conjunction with the acquisition of PFMD in March 2004, we accrued for
long-term environmental liabilities of $391,000 as a best estimate of the cost
to remediate the hazardous and/or non-hazardous contamination on certain
properties owned by PFMD. This facility is not a RCRA facility, and is currently
under no obligation to clean up the contamination. We do not intend to begin
remediation in the immediate future, but if environmental regulations change, we
could be forced to begin clean up of such contamination.
PFP
In conjunction with the acquisition of PFP in March 2004, we accrued $150,000 in
environmental liabilities as our best estimate of the cost to remediate and
restore this leased property back to its original condition. The liability
estimate is based on an environmental assessment completed by a third party as
part of the due diligence work prior to acquisition. The Company operates a
non-hazardous waste water facility on this leased property. We are currently
under no obligation, and do not intend, to begin remediation of this leased
property. However, upon termination of our lease or closure of this operation,
such remediation, restoration, and equipment removal will be required.
PFMI
As a result of the discontinuation of operation at the PFMI facility, we are
required to complete certain closure and remediation activities pursuant to our
RCRA permit. Also, in order to close and dispose of or sell the facility, we may
have to complete certain additional remediation activities related to the land,
building, and equipment. The extent and cost of the clean-up and remediation
will be determined by state mandated requirements, the extent to which are not
known at this time. Also, impacting this estimate is the level of contamination
discovered, as we begin remediation, and the related clean-up standards which
must be met in order to dispose of or sell the facility. We engaged our
engineering firm, SYA, to perform an analysis and related estimate of the cost
to complete the RCRA portion of the closure/clean-up costs and the potential
long-term remediation costs. Based upon this analysis, we recorded our best
estimate of the cost of this environmental closure and remediation liability, of
$2,464,000. We are unclear as to the extent of remediation necessary to dispose
of or sell the facility and to what extent the state will require us to
remediate the contamination. However, in the event of a sale of the facility all
or part of this reserve could be reduced. During the fourth quarter of 2004, we
spent approximately $116,000 of this closure cost estimate. In the event we
retain PFMI, we anticipate spending $544,000 in 2005 and the remainder over the
next two to five years.
We performed, or had performed, due diligence on each of these environmental
projects, and also reviewed/utilized reports obtained from third party
engineering firms who have been either engaged by the prior owners or by us to
assist in our review. Based upon our expertise and the analysis performed, we
have accrued our best estimate of the cost to complete the remedial projects. No
insurance or third party recovery was taken into account in determining our cost
estimates or reserve, nor do our cost estimates or reserves reflect any discount
for present value purposes. We do not believe that any adverse changes to our
estimates would be material to us. The circumstances that could affect the
outcome range from new technologies, that are being developed every day that
reduce our overall costs, to increased contamination levels that could arise as
we complete remediation which could increase our costs, neither of which we
anticipate at this time.
70
NOTE 11
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):
2004 2003
--------- ---------
Deferred tax assets:
Net operating losses $ 9,962 $ 7,847
Environmental and closure reserves 2,348 1,172
Impairment of assets 7,611 7,611
Other 1,010 1,061
Valuation allowance (13,912) (9,966)
--------- ---------
Deferred tax assets 7,019 7,725
Deferred tax liabilities
Depreciation and amortization (7,019) (7,725)
--------- ---------
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):
2004 2003 2002
------- ------- -------
Tax expense (benefit) at statutory rate $(6,647) $ 1,060 $ 749
Intangible asset impairment 3,061 -- --
Other (360) (831) (119)
Increase (decrease) in valuation allowance $ 3,946 (229) (630)
------- ------- -------
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 $3,946,000, $(229,000) and $(630,000), for the
years ended December 31, 2004, 2003, and 2002, respectively, which represents
the effect of changes in the temporary differences and net operating losses
(NOLs), as amended. Included in deferred tax assets is an impairment of assets
for $7,611,000, of which approximately $7,051,000 is in conjunction with our
acquisition of DSSI in August 2000. This deferred tax asset is a result of an
impairment charge related to fixed assets and goodwill of approximately $24.5
million recorded by DSSI in 1997 prior to our acquisition of DSSI. This
write-off will not be deductible for tax purposes until the assets are disposed.
We have estimated net operating loss carryforwards (NOL's) for federal income
tax purposes of approximately $29,300,000 at December 31, 2004. These net
operating losses can be carried forward and applied against future taxable
income, if any, and expire in the years 2007 through 2024. However, as a result
of various stock offerings and certain acquisitions, the use of these NOLs will
be limited under the provisions of Section 382 of the Internal Revenue Code of
1986, as amended. According to Section 382, we have approximately $15.4 million
in total NOLs available to offset consolidated taxable income for the tax year
ended December 31, 2004. For each subsequent year that the pre-1996 NOLs remain
unused, an additional $1,049,070 will become available to offset consolidated
taxable income. Additionally, NOLs may be further limited under the provisions
of Treasury Regulation 1.1502-21 regarding Separate Return Limitation Years.
71
NOTE 12
CAPITAL STOCK, EMPLOYEE STOCK PLAN AND INCENTIVE COMPENSATION
PRIVATE PLACEMENT
On March 22, 2004, we completed a private placement for gross proceeds of
approximately $10,386,000 through the sale of 4,616,113 shares of our Common
Stock at $2.25 per share and Warrants to purchase an additional 1,615,638 shares
of our Common Stock exercisable at $2.92 per share and a term of three years.
The private placement was sold to fifteen accredited investors. The net cash
proceeds received of $9,870,000, after paying placement agent fees and other
related expenses, were used in connection with the acquisitions of certain
acquired assets of A&A and EMAX discussed above, and to pay down the Revolving
Credit. We subsequently utilized excess availability under our Revolving Credit,
resulting from this private placement, to repay the higher interest 13.5% Notes.
We also issued Warrants to purchase an aggregate of 160,000 shares of our Common
Stock, exercisable at $2.92 per share and with a three year term, for consulting
services related to the private placement.
EMPLOYEE STOCK PURCHASE PLAN
At our Annual Meeting of Stockholders ("Annual Meeting") as held on December 12,
1996, the stockholders approved the adoption of the Perma-Fix Environmental
Services, Inc. 1996 Employee Stock Purchase Plan. This plan provides our
eligible employees, who wish to become stockholders, an opportunity to purchase
our Common Stock through payroll deductions. The maximum number of shares of our
Common Stock that may be issued under the plan was 500,000 shares. The plan
provided that shares would 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 maximum number of shares available was issued
after the first offering period in 2004, with no additional shares issuable
under the plan. The following table details the resulting employee stock
purchase totals.
Shares
Purchase Period Proceeds Purchased
-------------------------- ---------- ---------
July 1 - December 31, 1997 $ 16,000 8,276
January 1 - June 30, 1998 17,000 10,732
July 1 - December 31, 1998 22,000 17,517
January 1 - June 30, 1999 28,000 21,818
July 1 - December 31, 1999 49,000 48,204
January 1 - June 30, 2000 54,000 53,493
July 1 - December 31, 2000 52,000 46,632
January 1 - June 30, 2001 48,000 43,324
July 1 - December 31, 2001 69,000 33,814
January 1 - June 30, 2002 94,000 42,917
July 1 - December 31, 2002 92,000 43,243
January 1 - June 30, 2003 91,000 57,620
July 1 - December 31, 2003 76,000 44,799
January 1 - June 30, 2004 42,000 27,611
At our Annual Meeting of Stockholders held on July 29, 2003, our stockholders
approved the adoption of the Perma-Fix Environmental Services, Inc. 2003
Employee Stock Purchase Plan. The terms and conditions of this 2003 plan
principally represent the same terms and conditions as the previous 1996 plan.
The plan provides our eligible employees an opportunity to become stockholders
and purchase our
72
Common Stock through payroll deductions. The maximum number of shares issuable
under this plan is 1,500,000. The Plan authorized the purchase of shares two
times per year, at an exercise price per share of 85% of the market price of our
Common Stock on the offering date of the period or on the exercise date of the
period, whichever is lower. The first purchase period commenced July 1, 2004,
which resulted in the issuance for the period ended December 31, 2004, of 31,287
shares purchased in February 2005 for proceeds of $47,000.
EMPLOYMENT OPTIONS
During October 1997, Dr. Centofanti entered into an Employment Agreement, which
expired in October 2000 and provided for, the issuance of Non-qualified Stock
Options ("Non-qualified Stock Options"). The Non-qualified Stock Options provide
Dr. Centofanti with the right to purchase an aggregate of 300,000 shares of
Common Stock as follows: (i) after one year 100,000 shares of Common Stock at a
price of $2.25 per share, (ii) after two years 100,000 shares of Common Stock at
a price of $2.50 per share, and (iii) after three years 100,000 shares of Common
Stock at a price of $3.00 per share. The Non-qualified Stock Options expire in
October 2007.
STOCK OPTION PLANS
On December 16, 1991, we adopted a Performance Equity Plan (the "Plan"), under
which 500,000 shares of our Common Stock is reserved for issuance, pursuant to
which officers, directors and key employees are eligible to receive incentive or
Non-qualified stock options. Incentive awards consist of stock options,
restricted stock awards, deferred stock awards, stock appreciation rights and
other stock-based awards. Incentive stock options granted under the Plan are
exercisable for a period of up to ten years from the date of grant at an
exercise price which is not less than the market price of the Common Stock on
the date of grant, except that the term of an incentive stock option granted
under the Plan to a stockholder owning more than 10% of the then-outstanding
shares of Common Stock may not exceed five years and the exercise price may not
be less than 110% of the market price of the Common Stock on the date of grant.
All grants of options under the Performance Equity Plan have been made at an
exercise price equal to the market price of the Common Stock at the date of
grant. On December 16, 2001, the Plan expired. No new options will be issued
under the Plan, but the options issued under the Plan prior to the expiration
date will remain in effect until their respective maturity dates.
Effective September 13, 1993, we adopted a Non-qualified Stock Option Plan
pursuant to which officers and key employees can receive long-term
performance-based equity interests in the Company. The maximum number of shares
of Common Stock as to which stock options may be granted in any year shall not
exceed twelve percent (12%) of the number of common shares outstanding on
December 31 of the preceding year, less the number of shares covered by the
outstanding stock options issued under our 1991 Performance Equity Plan as of
December 31 of such preceding year. The option grants under the plan are
exercisable for a period of up to ten years from the date of grant at an
exercise price, which is not less than the market price of the Common Stock at
date of grant. On September 13, 2003, the plan expired. No new options will be
issued under this plan, but the options issued under the Plan prior to the
expiration date will remain in effect until their respective maturity dates.
Effective December 12, 1993, we adopted the 1992 Outside Directors Stock Option
Plan, pursuant to which options to purchase an aggregate of 100,000 shares of
Common Stock had been authorized. This plan provides for the grant of options to
purchase up to 5,000 shares of Common Stock for each of our outside directors
upon initial election and each re-election. The plan also provides for the grant
of additional options to purchase up to 10,000 shares of Common Stock on the
foregoing terms to each outside director upon initial election to the Board. The
options have an exercise price equal to the closing trading price, or, if not
available, the fair market value of the Common Stock on the date of grant.
During our annual meeting held on December 12, 1994, the stockholders approved
the Second Amendment to our 1992 Outside Directors Stock Option Plan which,
among other things, (i) increased from 100,000 to
73
250,000 the number of shares reserved for issuance under the plan, and (ii)
provides for automatic issuance to each of our directors, who is not our
employee, a certain number of shares of Common Stock in lieu of 65% of the cash
payment of the fee payable to each director for his services as director. The
Third Amendment to the Outside Directors Plan, as approved at the December 1996
Annual Meeting, provided that each eligible director shall receive, at such
eligible director's option, either 65% or 100% of the fee payable to such
director for services rendered to us as a member of the Board in Common Stock.
In either case, the number of shares of our Common Stock issuable to the
eligible director shall be determined by valuing our Common Stock at 75% of its
fair market value as defined by the Outside Directors Plan. The Fourth Amendment
to the Outside Directors Plan, was approved at the May 1998 Annual Meeting and
increased the number of authorized shares from 250,000 to 500,000 reserved for
issuance under the plan.
Effective July 29, 2003, we adopted the 2003 Outside Directors Stock Plan, which
was approved by our stockholders at the Annual Meeting of Stockholders on such
date. A maximum of 1,000,000 shares of our Common Stock are authorized for
issuance under this plan. The plan provides for the grant of an option to
purchase up to 30,000 shares of Common Stock for each outside director upon
initial election to the board of directors, and the grant of an option to
purchase up to 12,000 shares of Common Stock upon each reelection. The options
have an exercise price equal to the closing trade price on the date prior to
grant date. The plan also provides for the issuance to each outside director a
number of shares of Common Stock in lieu of 65% or 100% of the fee payable to
the eligible director for services rendered as a member of the board of
directors. The number of shares issued is determined at 75% of the market value
as defined in the plan.
Effective July 28, 2004, we adopted the 2004 Stock Option Plan, which was
approved by our stockholders at the Annual Meeting of Stockholders on such date.
A maximum of 2,000,000 shares of our Common Stock are authorized for issuance
under this plan in the form of either incentive or non-qualified stock options.
The option grants under the plan are exercisable for a period of up to 10 years
from the date of grant at an exercise price of not less than market price of the
Common Stock at grant date.
We applied APB Opinion 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for options issued to employees and
directors. Accordingly, no compensation cost has been recognized for options
granted to employees and directors at exercise prices, which equal or exceed the
market price of our Common Stock at the date of grant. Should options be granted
at exercise prices below market prices, compensation cost is measured and
recognized as the difference between market price and exercise price at the date
of grant.
74
A summary of the status of options under the plans as of December 31, 2004,
2003, and 2002 and changes during the years ending on those dates is presented
below:
2004 2003 2002
-------------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ---------- ---------- ---------- ---------- ----------
PERFORMANCE EQUITY PLAN:
Balance at beginning of year 60,600 $ 1.17 87,100 $ 1.43 174,005 $ 2.14
Exercised (25,000) 1.15 -- -- (78,837) 2.84
Forfeited -- -- (26,500) 2.04 (8,068) 3.02
------------ ---------- ---------- ---------- ---------- ----------
Balance at end of year 35,600 1.18 60,600 1.17 87,100 1.43
============ ========== ==========
Options exercisable at year end 35,600 1.18 60,600 1.17 78,500 1.45
NON-QUALIFIED STOCK OPTION PLAN:
Balance at beginning of year 2,557,390 $ 1.79 2,068,900 $ 1.51 2,237,800 $ 1.50
Granted -- -- 1,103,000 2.17 -- --
Exercised (171,940) 1.33 (294,460) 1.19 (21,400) 1.31
Forfeited (233,600) 1.93 (320,050) 1.82 (147,500) 1.48
------------ ---------- ---------- ---------- ---------- ----------
Balance at end of year 2,151,850 1.81 2,557,390 1.79 2,068,900 1.51
============ ========== ==========
Options exercisable at year end 1,151,250 1.62 985,140 1.51 1,085,500 1.42
Weighted average fair value of options
granted during the year at exercise
prices which equal market
price of stock at date of grant -- -- 1,103,000 .85 -- --
1992 OUTSIDE DIRECTORS STOCK PLAN:
Balance at beginning of year 265,000 $ 2.27 250,000 $ 2.28 255,000 $ 2.34
Granted -- -- 15,000 2.02 40,000 2.73
Forfeited (45,000) 3.08 -- -- (45,000 3.02
------------ ---------- ---------- ---------- ---------- ----------
Balance at end of year 220,000 2.11 265,000 2.27 250,000 2.28
============ ========== ==========
Options exercisable at year end 220,000 2.11 265,000 2.27 225,000 2.25
Weighted average fair value of options
granted during the year at exercise
prices which equal market
price of stock at date of grant -- -- 15,000 .84 40,000 1.27
2003 OUTSIDE DIRECTORS STOCK PLAN:
Balance at beginning of year 90,000 $ 1.99 -- $ -- -- $ --
Granted 72,000 1.70 90,000 1.99 -- --
------------ ---------- ---------- ---------- ---------- ----------
Balance at end of year 162,000 1.86 90,000 1.99 -- --
============ ========== ==========
Options exercisable at year end 90,000 1.99 -- -- -- --
Weighted average fair value of options
granted during the year at exercise
prices which equal market
price of stock at date of grant 72,000 .71 90,000 .83 -- --
2004 STOCK OPTION PLAN:
Balance at beginning of year -- $ -- -- $ -- -- $ --
Granted 106,500 1.44 -- -- -- --
------------ ---------- ---------- ---------- ---------- ----------
Balance at end of year 106,500 1.44 -- -- -- --
============ ========== ==========
Options exercisable at year end -- -- -- -- -- --
Weighted average fair value of options
granted during the year at exercise
prices which equal market
price of stock at date of grant 106,500 .78 -- -- -- --
75
The following table summarizes information about options under the plans
outstanding at December 31, 2004:
Options Outstanding Options Exercisable
---------------------------------------- -------------------------
Number Weighted Weighted Number
Outstanding Average Weighted Exercisable Weighted
At Remaining Average At Average
Dec. 31, Contractual Exercise Dec. 31, Exercise
Description and Range of Exercise Prices 2004 Life Price 2004 Price
- ---------------------------------------- ------------ ----------- ---------- ----------- -----------
PERFORMANCE EQUITY PLAN:
1996 Awards ($1.00) 10,000 1.4 years $ 1.00 10,000 $ 1.00
1998 Awards ($1.25) 25,600 3.8 years 1.25 25,600 1.25
------------ -----------
35,600 3.1 years 1.18 35,600 1.18
============ ===========
NON-QUALIFIED STOCK OPTION PLAN
1995 Awards ($2.88) 75,000 0.1 years 2.88 75,000 2.88
1996 Awards ($1.00) 130,000 1.4 years 1.00 130,000 1.00
1997 Awards ($1.375) 89,000 2.3 years 1.38 89,000 1.38
1998 Awards ($1.25) 70,000 3.8 years 1.25 70,000 1.25
2000 Awards ($1.25-$1.50) 287,800 5.3 years 1.27 230,200 1.27
2001 Awards ($1.75) 651,200 6.3 years 1.75 388,000 1.75
2003 Awards ($2.05-$2.19) 848,850 8.2 years 2.17 169,050 2.17
------------ -----------
2,151,850 6.1 years 1.81 1,151,250 1.64
============ ===========
2004 STOCK OPTION PLAN
2004 Awards ($1.44) 106,500 9.8 years 1.44 -- --
1992 OUTSIDE DIRECTORS STOCK OPTION PLAN:
1995 Awards ($3.25) 20,000 0.1 years 3.25 20,000 3.25
1996 Awards ($1.75) 35,000 1.9 years 1.75 35,000 1.75
1997 Awards ($2.125) 15,000 2.9 years 2.13 15,000 2.13
1998 Awards ($1.375 15,000 3.4 years 1.38 15,000 1.38
1999 Awards ($1.2188-$1.25) 35,000 4.7 years 1.24 35,000 1.24
2000 Awards ($1.688) 15,000 5.9 years 1.69 15,000 1.69
2001 Awards ($2.43-$2.75) 30,000 6.6 years 2.59 30,000 2.59
2002 Awards ($2.58-$2.98) 40,000 7.6 years 2.73 40,000 2.73
2003 Awards ($2.02) 15,000 8.3 years 2.02 15,000 2.02
------------ -----------
220,000 4.7 years 2.11 220,000 2.11
============ ===========
2003 OUTSIDE DIRECTORS STOCK PLAN:
2003 Awards ($1.99) 90,000 8.6 years 1.99 90,000 1.99
2004 Awards ($1.70) 72,000 9.6 years 1.70 -- --
------------ -----------
162,000 9.1 years 1.86 90,000 1.99
============ ===========
WARRANTS
We have issued various Warrants pursuant to acquisitions, private placements,
debt and debt conversion and to facilitate certain financing arrangements. The
Warrants principally are for a term of three to five years and entitle the
holder to purchase one share of Common Stock for each warrant at the stated
exercise price.
In March 2004, we issued warrants for the exercise of 1,775,638 shares of our
Common Stock as part of the private placement described earlier in this Note 12.
We issued no warrants in 2003 and 2002. During 2004, a total of 618,860 warrants
were exercised for proceeds in the amount of $710,000 and 20,000 warrants
expired.
76
During 2003, a total of 1,555,870 Warrants were exercised for proceeds
in the amount of $2,151,000 and 851,875 Warrants expired. During 2002, a total
of 55,000 Warrants were exercised for proceeds in the amount of $110,000 and
1,500 Warrants expired.
The following details the Warrants currently outstanding as of December 31,
2004:
Number of Exercise
Warrant Series Underlying Shares Price Expiration Date
- --------------------------------- ----------------- ----------------- ----------------
Consulting Warrants 651,650 $1.44 - $1.75 1/05 - 6/06
PNC Financing Warrants 899,536 $1.44 12/05
BHC Financing Warrants 1,036,175 $1.44 - $1.46 1/06 - 3/06
Debt for Equity Exchange Warrants 2,455,687 $1.75 7/06
Private Placement Warrants 6,235,660 $1.75 - $2.92 7/06 - 3/07
AMI and BEC Financing Warrants 1,511,877 $1.44 - $1.50 7/06 - 7/08
-----------------
12,790,585
=================
SHARES RESERVED
At December 31, 2004, we have reserved approximately 17.4 million shares of
Common Stock for future issuance under all of the above option and warrant
arrangements and the convertible Series 17 Preferred Stock. (See Note 6.)
NOTE 13
COMMITMENTS AND CONTINGENCIES
HAZARDOUS WASTE
In connection with our waste management services, we handle both hazardous and
non-hazardous waste, which we transport to our own, or other facilities for
destruction or disposal. As a result of disposing of hazardous substances, in
the event any cleanup is required, we could be a potentially responsible party
for the costs of the cleanup notwithstanding any absence of fault on our part.
LEGAL
PFMI, which was purchased by us effective June 1, 1999, has been notified that
it is considered a potentially responsible party ("PRP") in four Superfund
sites, three of which had no relationship with PFMI according to PFMI records.
As to the fourth site, which PFMI has been unable to determine whether PFMI had
any relationship with this site, such relationship, if any, would appear to be
de minimus.
PFO, which was purchased by us in June, 1999, has been notified that it is a PRP
in two separate Superfund sites. At the Spectron Superfund site in Elkton,
Maryland, PFO has been notified by the EPA that the EPA is seeking reimbursement
from all PRPs at the site for the EPA's Phase II cost and to further investigate
the contamination at the facility. At this point, we believe that PFO may have
sent some waste to the site, but not a substantial amount. At this time, we are
unable to determine what exposure, if any, PFO may have in connection with this
site.
PFO has also been notified that it is a PRP at the Seaboard Chemical Corporation
Superfund Site in Jamestown, North Carolina. In October, 1991, PFO joined the
"Seaboard Group," a group of potentially responsible parties organized to clean
up the site while keeping costs at a minimum. Initially, PFO was identified as a
de minimus party under the Seaboard Group agreement which defined a de minimus
contributor as one acting as either a transporter or generator who was
responsible for less than 1% of the waste at the site. However, in June, 1992,
the Seaboard Group adopted an amendment to the Seaboard
77
Group agreement which allows a potentially responsible party who is a generator
to participate in the Seaboard Group without relinquishing contributions claims
against its broker and/or transporter. Based upon the amount of waste which PFO
brokered to the site, PFO's status may no longer considered deminimus under the
Seaboard Group agreement. PFO is unable to determine what exposure, if any, it
may have in connection with this site.
PFFL had previously 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. However, in January 2005, PFFL received a notice letter from the EPA
indicating that it was a PRP, and providing a de minimis settlement offer. If we
accept the settlement offer our liability would be approximately $40,000. We are
in the process of reviewing this claim and our potential exposure in connection
with this site.
On February 24, 2003, M&EC, commenced legal proceedings against Bechtel Jacobs
Company, LLC, in the chancery court for Knox County, Tennessee, seeking payment
from Bechtel Jacobs of approximately $4.3 million in surcharges relating to
certain wastes that were treated by M&EC during 2001 and 2002. M&EC is operating
primarily under three subcontracts with Bechtel Jacobs, which were awarded under
contracts between Bechtel Jacobs and the U.S. Department of Energy. M&EC and
Bechtel Jacobs had been discussing these surcharges under the subcontracts for
over a year prior to filing the suit. During 2003, M&EC recognized revenue and
recorded a receivable in the amount of $381,000 related to these surcharges. In
2004, the revenues generated by M&EC with Bechtel Jacobs represented
approximately 11.3% of our 2004 total revenues. Since the filing of this
lawsuit, Bechtel Jacobs has continued to deliver waste to M&EC for treatment and
disposal, and M&EC continues to accept such waste, under the subcontracts, and
M&EC and Bechtel Jacobs have entered into an additional contract for M&EC to
treat DOE waste. Although we do not believe that this lawsuit will have a
material adverse effect on our operations, Bechtel Jacobs could terminate the
subcontracts with M&EC, as either party can terminate the subcontracts at any
time.
During January 2004, the U.S. Environmental Protection Agency ("EPA") issued to
Perma-Fix of Dayton, Inc. ("PFD"), our wholly owned subsidiary, a Notice of
Findings of Violations ("Findings") alleging that PFD committed numerous
violations of the Clean Air Act (the "Act") or regulations thereunder. On
September 28, 2004, PFD received an Administrative Compliance Order ("Order"),
dated September 21, 2004, from EPA alleging that PFD was a "major source" of
hazardous air pollutants and, as a major source, PFD was required to have
obtained a Title V air permit, in connection with its operations, and thereby
was not in compliance with provisions of the Act and/or regulations thereunder
applicable to a major source, and, as a result, PFD also failed to install
proper air pollution equipment and failed to meet certain administrative burdens
relating to equipment that was constructed or modified at PFD's facility in 2000
and 2001. The Order further provides that PFD has six months from the effective
date of the Order, to develop, submit, obtain and comply with numerous costly
and burdensome compliance initiatives applicable to one that is a major source
of hazardous air pollutants and to submit an application to the State of Ohio
for a Title V Air permit. The Order does not assert any penalties or fines but
provides that PFD is not absolved of any liabilities, including liability for
penalties, for the alleged violations cited in the Order, and that failure to
comply with the Order may subject PFD to penalties up to $32,500 per day for
each violation. PFD had 10 days from the receipt of the Order to request a
conference with EPA regarding the Order. PFD has subsequently and timely met
with the EPA on several occasions and the EPA and PFD are exchanging information
in an effort to resolve this matter. We have retained environmental consultants
who have advised us that, based on the tests that they have performed, they do
not believe that PFD is a major source of hazardous air pollutants. We have been
further advised
78
by counsel that if PFD is not a major source of hazardous air pollutants, PFD
would not be required to obtain a Title V air permit, would not have violated
the provisions of the Act alleged in the Order and would not be required to
comply with the costly and burdensome compliance initiatives contained in the
Order. Also, we have been further advised that the Order may be in violation of
certain constitutional issues involving due process based on a recent decision
by the United States Court of Appeals, 11th Circuit. A determination that PFD
was a major source of hazardous air pollutants and required to comply with the
Order, such could have a material adverse effect on us. We intend that PFD will
vigorously defend itself in connection with this matter.
In December 2004, PFD received a complaint brought under the citizen's suit
provisions of the Clean Air Act in the United States District Court for the
Southern District of Ohio, Western district, styled Barbara Fisher v. Perma-Fix
of Dayton, Inc. The suit alleges violation by PFD of a number of state and
federal clean air statutes in connection with the operation of PFD's facility,
primarily due to the operating without a Title V air permit, and further alleges
that air emissions from PFD's facility endanger the health of the public and
constitutes a nuisance in violation of Ohio law. The action seeks injunctive
relief, imposition of civil penalties, attorney fees and costs and other forms
of relief. We intend to vigorously defend ourselves in connection with this
matter. See above discussion as to administrative proceedings instituted by the
EPA.
In October 2004, Perma-Fix of South Georgia, Inc. ("PFSG") and Perma-Fix of
Orlando, Inc. ("PFO") were notified that they are PRPs at the Malone Service
Company Superfund site in Texas City, Texas ("Site"). The EPA designated both
PFSG and PFO as de minimis parties, which is determined as a generator that
contributed less than 0.6% of the total hazardous materials at the Site. The EPA
has made a settlement offer to all de minimis parties, that requires response
within 45 days of receipt of the notice. PFSG and PFO have accepted the
settlement offer and recorded a liability at December 31, 2004, in the amount of
$229,000. As of the date of this report, payment has not however been made to
satisfy this liability.
During February 2003, PFMI received a letter alleging that PFMI owed Reliance
Insurance Company, in liquidation, the sum of $515,000 as a result of
retrospective premiums under a retroactive premium agreement. In November 2003,
PFMI received a second letter alleging that PFMI owed Reliance Insurance
Company, in liquidation, the sum of $583,000, reflecting an adjustment to the
original amount of retrospective premiums under a retroactive premium agreement.
Our counsel responded and advised that PFMI had numerous defenses to the demand,
including, but not limited to, that the policy expired almost eight years ago
and failure to adjust the premiums in a timely manner violated the agreement
between the Company and Reliance and that under Michigan law it is deemed to be
an unfair and deceptive act or practice in the business of insurance for an
insurer to fail to complete a final audit within 120 days after termination of
the policy. The Company and PFMI intend to vigorously defend this matter.
However, in December 2003, we accrued approximately $217,000 for this contingent
liability.
See Note 5 for a discussion as to certain contingent liabilities due to the
discontinuation of operations at the facility in Detroit, Michigan, owned by our
subsidiary, Perma-Fix of Michigan, Inc.
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.
79
INSURANCE
Our business exposes us to various risks, including claims for causing damage to
property or injuries to persons or claims alleging negligence or professional
errors or omissions in the performance of its services, which claims could be
substantial. We believe that our coverage is adequate to insure us against the
various types of risks encountered.
In June 2003, we entered into a 25-year finite risk insurance policy, which
provides financial assurance to the applicable states for our permitted
facilities in the event of unforeseen closure. Prior to obtaining and at all
times while operating under our permits, we are required to provide financial
assurance that guarantees to the states that, in the event of closure, our
permitted facilities will be closed in accordance with the regulations. The
policy provides $35 million of financial assurance coverage.
PENSION LIABILITY
We recorded a $1,474,000 pension withdrawal liability at September 30, 2004,
based upon a withdrawal letter received from Central States Pension Fund,
resulting from the termination of substantially all of the union employees at
PFMI. The estimated calculation contained within the withdrawal letter was based
upon a 2004 withdrawal date. We subsequently engaged an actuarial firm to
confirm and update the calculation through December 31, 2004. Based upon this
actuarial study, we increased the pension withdrawal liability to $1,680,000 at
December 31, 2004. This withdrawal liability represents our best estimate, and
is subject to numerous factors such as the date and timing of union employee
terminations, partial versus complete termination status, the pension fund's
unfunded vested benefit liability and PFMI's portion of such liability.
CONSTRUCTION IN PROGRESS
As of December 31, 2004, we have recorded $1,852,000 in current construction in
progress projects. It is estimated that we will incur an additional $523,000 to
complete the current projects by the end of 2005.
OPERATING LEASES
We lease certain facilities and equipment under operating leases. Future minimum
rental payments as of December 31, 2004, required under these leases are
$1,433,000 in 2005, $1,157,000 in 2006, $723,000 in 2007, $162,000 in 2008, and
$31,000 in 2009.
Net rent expense relating to our operating leases was $3,674,000, $3,006,000,
and $3,109,000 for 2004, 2003, and 2002, respectively.
NOTE 14
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
$272,000, $251,000, and $253,000 in matching funds during 2004, 2003, and 2002,
respectively.
80
NOTE 15
OPERATING SEGMENTS
During 2004, we were engaged in three operating segments. Pursuant to FAS 131,
we define an operating segment as a business activity:
.. from which we may earn revenue and incur expenses;
.. whose operating results are regularly reviewed by the president to make
decisions about resources to be allocated and assess its performance; and
.. for which discrete financial information is available.
We therefore define our operating segments as each business line that we
operate. These segments however, exclude the Corporate headquarters, which does
not generate revenue, and Perma-Fix of Michigan, Inc., a discontinued operation.
See Note 5 for further information on discontinued operations. The accounting
policies of the operating segments are summarized in Note 2.
Our operating segments are defined as follows:
The Industrial Waste Management Services segment provides on-and-off site
treatment, storage, processing and disposal of hazardous and non-hazardous
industrial waste and wastewater through our seven 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.,
Perma-Fix of Maryland, Inc., (which acquired certain assets and assumed certain
liabilities of A&A), and Perma-Fix of Pittsburgh, Inc., (which acquired certain
assets of EMAX). We provide through certain of our facilities various waste
management services to certain governmental agencies.
The Nuclear Waste Management Services segment provides treatment, storage,
processing and disposal of nuclear, low-level radioactive, mixed (waste
containing both hazardous and non-hazardous constituents), hazardous and
non-hazardous waste through our three facilities; Perma-Fix of Florida, Inc.,
Diversified Scientific Services, Inc., and the East Tennessee Materials and
Energy Corporation. The segment also provides research, and development
services, and on and off-site waste remediation of nuclear mixed and low-level
radioactive waste.
The Consulting Engineering Services segment provides environmental engineering
and regulatory compliance services through Schreiber, Yonley & Associates, Inc.
which includes oversight management of environmental restoration projects, air
and soil sampling and compliance and training activities, as well as,
engineering support as needed by our other segment.
81
The table below shows certain financial information by business segment for
2004, 2003, and 2002.
SEGMENT REPORTING DECEMBER 31, 2004
Industrial Nuclear
Waste Waste Segments Corporate(2) Consolidated
Services Services Engineering Total and Other Total
---------- ---------- ----------- ---------- ------------ ------------
Revenue from external customers $ 37,490 $ 42,679(3) $ 3,204 $ 83,373 $ -- $ 83,373
Intercompany revenues 2,410 3,480 444 6,334 -- 6,334
Interest income 3 -- -- 3 -- 3
Interest expense 787 1,195 -- 1,982 38 2,020
Interest expense-financing fees -- 194 -- 194 1,997 2,191
Depreciation and amortization 1,910 2,657 29 4,596 35 4,631
Impairment loss on intangible
assets (9,002) -- -- (9,002) -- (9,002)
Segment profit (loss) (14,690) 6,117 52 (8,521) (1,217) (9,738)
Segment assets(1) 27,912 60,642 2,261 90,815 9,640(4) 100,455
Expenditures for segment assets 828 2,115 48 2,991 62 3,053
SEGMENT REPORTING DECEMBER 31, 2003
Industrial Nuclear
Waste Waste Segments Corporate(2) Consolidated
Services Services Engineering Total and Other Total
---------- ---------- ----------- ---------- ------------ ------------
Revenue from external customers $ 38,512 $ 37,418(3) $ 3,223 $ 79,153 $ -- $ 79,153
Intercompany revenues 3,675 2,704 510 6,889 -- 6,889
Interest income 6 -- -- 6 2 8
Interest expense 696 1,915 (7) 2,604 200 2,804
Interest expense-financing fees -- 3 -- 3 1,067 1,070
Depreciation and amortization 1,639 2,490 35 4,164 73 4,237
Segment profit (loss) (1,441) 4,674 222 3,455 -- 3,455
Segment assets (1) 31,852 58,992 2,189 93,033 17,182(4) 110,215
Expenditures for segment assets 1,191 1,825 50 3,066 344 3,410
SEGMENT REPORTING DECEMBER 31, 2002
Industrial Nuclear
Waste Waste Segments Corporate(2) Consolidated
Services Services Engineering Total and Other Total
---------- ---------- ----------- ---------- ------------ ------------
Revenue from external customers $ 32,015 $ 42,260(3) $ 3,503 $ 77,778 $ -- $ 77,778
Intercompany revenues 4,970 4,053 164 9,187 -- 9,187
Interest income 15 -- -- 15 1 16
Interest expense 622 2,188 1 2,811 31 2,842
Interest expense-financing fees -- 8 -- 8 1,036 1,044
Depreciation and amortization 1,467 2,148 40 3,655 83 3,738
Segment profit (loss) (3,443) 5,625 337 2,519 -- 2,519
Segment assets(1) 30,291 59,035 2,189 91,515 14,310(4) 105,825
Expenditures for segment assets 2,543 2,843 12 5,398 211 5,609
(1) Segment assets have been adjusted for intercompany accounts to reflect
actual assets for each segment.
(2) Amounts reflect the activity for corporate headquarters, not included in the
segment information.
(3) The consolidated revenues within the Nuclear Waste Management Services
segment include the Bechtel Jacobs revenues for 2004 which total $9,405,000
(or 11.3%) of total revenue and $13,139,000 (or 16.6%) for the year ended
2003 and $9,664,000 (or 11.6%) for the year ended 2002.
(4) Amount includes assets from Perma-Fix of Michigan, Inc., a discontinued
operation from the Industrial segment, of approximately $2,209,000,
$7,211,000, and $7,298,000 as of the years ended 2004, 2003, and 2002,
respectively.
82
NOTE 16
QUARTERLY OPERATING RESULTS (UNAUDITED)
Unaudited quarterly operating results are summarized as follows (in thousands,
except per share data):
Three Months Ended (unaudited)
--------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31 Total
----------- ----------- ----------- ----------- -----------
2004
Revenues $ 16,811 $ 19,128 $ 24,337 $ 23,097 $ 83,373
Gross Profit 3,850 5,703 7,529 6,768 23,850
Income (loss) from continuing operations (1,445) 590 (6,957) (1,736) (9,548)
Discontinued operations (553) (473) (10,575) 1,788 (9,813)
Net income (loss) applicable to
Common Stock (2,045) 70 (17,580) 4 (19,551)
Basic net income (loss) per common share:
Continuing operations (.04) .01 (.17) (.04) (.24)
Discontinued operations (.02) (.01) (.25) .04 (.24)
Net income (loss) (.06) -- (.42) -- (.48)
Diluted net income (loss) per common share
Continued operations (.04) .01 (.17) (.04) (.24)
Discontinued operations (.02) (.01) (.25) .04 (.24)
Net income (loss) (.06) -- (.42) -- (.48)
2003
Revenues $ 18,224 $ 18,419 $ 23,781 $ 18,729 $ 79,153
Gross Profit 4,835 4,194 9,671 6,412 25,112
Income (loss) from continuing operations (198) (1,134) 4,044 932 3,644
Discontinued operations (187) (69) 29 (299) (526)
Net income (loss) applicable to Common
Stock (431) (1,251) 4,025 586 2,929
Basic net income (loss) per common share:
Continuing operations (.01) (.03) .12 .03 .10
Discontinued operations -- (.01) -- (.01) (.02)
Net income (loss) (.01) (.04) .12 .02 .08
Diluted net income (loss) per common share
Continued operations (.01) (.04) .11 .02 .09
Discontinued operations -- -- -- (.01) (.01)
Net income (loss) (.01) (.04) .11 .01 .08
83
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our periodic
reports filed with the Securities and Exchange Commission (the "SEC")
is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC and that such
information is accumulated and communicated to our management. Based
on their most recent evaluation, which was completed as of the end of
the period covered by this Annual Report on Form 10-K, our Chief
Executive Officer and Chief Financial Officer believe that the
Company's disclosure controls and procedures (as defined in Rules
13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended)
are not effective, as a result of identifying three material
weaknesses in our internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). See our
Management's Report on Internal Control, over Financial Reporting,
located prior to Item 8 of this report.
ITEM 9B. OTHER INFORMATION
None.
84
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 61 Chairman of the Board, President and Chief Executive Officer
Mr. Jon Colin 49 Director
Mr. Jack Lahav 56 Director
Mr. Joe Reeder 57 Director
Mr. Alfred C. Warrington, IV 69 Director
Dr. Charles E. Young 72 Director
Mr. Mark A. Zwecker 54 Director
Mr. Richard Kelecy 49 Chief Financial Officer, Vice President, and Secretary
Mr. Larry McNamara 55 President, Nuclear Services
Mr. Timothy Keegan 47 President, Industrial Services
Mr. William Carder 55 Vice President Sales & Marketing
Each director is elected to serve until the next annual meeting of stockholders.
We have a separately designated standing audit committee of our Board of
Directors. The members of the Audit Committee are: Alfred C. Warrington, IV, Jon
Colin and Mark A. Zwecker.
Our Board of Directors has determined that each of our audit committee members
is an "audit committee financial expert" as defined by Item 401(h) of Regulation
S-K of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
is independent within the meaning of Item 7(d)(3)(iv) Schedule 14A and Items
401(h)(1)(ii) of Regulation S-K of the Exchange Act.
DR. LOUIS F. CENTOFANTI
The information set forth under the caption "Executive Officers of the Company"
on page 14 is incorporated by reference.
MR. JON COLIN
Mr. Colin has served as a Director since December 1996. Mr. Colin is currently
Chief Executive Officer of Lifestar Response Corporation, a position he has held
since April 2002. Mr. Colin served as Chief Operating Officer of Lifestar
Response Corporation from October 2000 to April 2002, and a consultant for
Lifestar Response Corporation from September 1997 to October 2000. From 1990 to
1996, Mr. Colin served as President and Chief Executive Officer for
Environmental Services of America, Inc., a publicly traded environmental
services company. Mr. Colin has a B.S. in Accounting from the University of
Maryland.
MR. JACK LAHAV
Jack Lahav has served as a Director since September 2001. Mr. Lahav is a private
investor, specializing in launching and growing businesses. Previously, Mr.
Lahav founded Remarkable Products Inc. and served as its president from 1980 to
1993; Mr. Lahav was also co-founder of Lamar Signal Processing, Inc.; president
of Advanced Technologies, Inc., a robotics company and director of Vocaltech
Communications, Inc.
85
MR. JOE R. REEDER
Mr. Reeder has served as a Director since April 2003. Mr. Reeder serves as
Shareholder in Charge of the Mid-Atlantic Region for Greenberg Traurig LLP, an
international law firm with 18 offices and 950 attorneys. Mr. Reeder also served
as Litigation Chair of Patton Boggs LLP. His clientele has included countries,
international corporations, and law firms throughout the United States. Mr.
Reeder served for three years as Chairman of the Panama Canal Commission's Board
of Directors where he oversaw a multibillion-dollar infrastructure program. He
is a trustee of the Association of the United States Army and a frequent
television commentator on military issues. Mr. Reeder has a L.L.M. from
Georgetown University, J.D. from the University of Texas and a B.S. from the
U.S. Military Academy at West Point.
MR. ALFRED C. WARRINGTON, IV
Mr. Warrington has served as a Director since March 2002. Mr. Warrington was the
founding chairman, co-chief executive officer and chief financial officer of
Sanifill, Inc., a solid waste company that was merged with Waste Management,
Inc. He currently serves as vice-chairman of HC Industries, Inc., a manufacturer
of health and beauty aids. He has also been very active in community affairs and
higher education. Mr. Warrington served as co-chairman of the MARTA referendum
that brought rapid transit to the city of Atlanta and has been a strong
supporter of the University of Florida, where he was instrumental in starting
the School of Accounting. In recognition of his efforts and a significant
donation, the University of Florida has renamed the College of Business as the
Warrington College of Business. Most recently, Mr. Warrington was appointed to
the newly formed University of Florida Board of Trustees by Governor Jeb Bush.
Prior to joining Sanifill, Mr. Warrington was a practicing CPA and a partner
with Arthur Andersen & Co. Mr. Warrington holds a B.S.B.A. from the University
of Florida.
DR. CHARLES E. YOUNG
Dr. Charles E. Young has served as a Director since July 2003. Dr. Young was
president of the University of Florida, a position he held from November 1999 to
January 2004. Dr. Young also served as chancellor of the University of
California at Los Angeles (UCLA) for 29 years until his retirement in July 1997.
Dr. Young was formerly the chairman of the Association of American Universities
and served on numerous commissions including the American Council on Education,
the National Association of State Universities and Land-Grant Colleges, and the
Business-Higher Education Forum. Dr. Young serves on the board of directors of
I-MARK, Inc., a software and professional services company. He previously served
on the board of directors of Intel Corp., Nicholas-Applegate Growth Equity Fund,
Inc., Fiberspace, Inc., and Student Advantage, Inc. Dr. Young has a Ph.D. and
M.A. in political science from UCLA and a B.A. from the University of California
at Riverside.
MR. MARK A. ZWECKER
Mark Zwecker has served as a Director since the Company's inception in January
1991. Mr. Zwecker has served as chief financial officer of Cambia Security,
Inc., a software development company, since September 2003, and president of ACI
Technology, LLC, since 1997. Mr. Zwecker was vice president of finance and
administration for American Combustion, Inc., from 1986 until 1998. In 1983, Mr.
Zwecker participated as a founder with Dr. Centofanti in the start up of PPM,
Inc. He remained with PPM, Inc. until its acquisition in 1985 by USPCI. Mr.
Zwecker has a B.S. in Industrial and Systems Engineering from the Georgia
Institute of Technology and an M.B.A. from Harvard University.
MR. RICHARD T. KELECY
The information set forth under the caption "Executive Officers of the Company"
on page 16 is incorporated by reference.
86
MR. LARRY MCNAMARA
The information set forth under the caption "Executive Officers of the Company"
on page 16 is incorporated by reference.
MR. TIMOTHY KEEGAN
The information set forth under the caption "Executive Officers of the Company"
on page 16 is incorporated by reference.
MR. WILLIAM CARDER
The information set forth under the caption "Executive Officers of the Company"
on page 17 is incorporated by reference.
CERTAIN RELATIONSHIPS
There are no family relationships between any of our existing Directors or
executive officers. Dr. Centofanti is the only Director who is our employee.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the regulations promulgated thereunder require our executive officers
and directors and beneficial owners of more than ten percent (10%) of any of our
equity security registered pursuant to Section 12 of the Exchange Act to file
reports of ownership and changes of ownership of our equity securities with the
Securities and Exchange Commission, and to furnish us with copies of all such
reports. Based solely on a review of the copies of such reports furnished to us
and information provided to us, we believe that during 2004 none of our
executive officers and directors failed to timely file reports under Section
16(a).
Capital Bank-Grawe Gruppe AG ("Capital Bank") has advised us that it is a
banking institution regulated by the banking regulations of Austria, which holds
shares of our Common Stock as agent on behalf of numerous investors. Capital
Bank has represented that all of its investors are accredited investors under
Rule 501 of Regulation D promulgated under the Act. In addition, Capital Bank
has advised us that none of its investors beneficially own more than 4.9% of our
Common Stock. Capital Bank has further informed us that its clients (and not
Capital Bank) maintain full voting and dispositive power over such shares.
Consequently, Capital Bank has advised us that it believes it is not the
beneficial owner, as such term is defined in Rule 13d-3 of the Exchange Act, of
the shares of our Common Stock registered in the name of Capital Bank because it
has neither voting nor investment power, as such terms are defined in Rule
13d-3, over such shares. Capital Bank has informed us that it does not believe
that it is required (a) to file, and has not filed, reports under Section 16(a)
or (b) to file either Schedule 13D or Schedule 13G in connection with the shares
of our Common Stock registered in the name of Capital Bank.
If the representations, or information provided, by Capital Bank are incorrect
or Capital Bank was historically acting on behalf of its investors as a group,
rather than on behalf of each investor independent of other investors, then
Capital Bank and/or the investor group would have become a beneficial owner of
more than 10% of our Common Stock on February 9, 1996, as a result of the
acquisition of 1,100 shares of Series 1 Preferred Stock that were convertible
into a maximum of 1,282,798 shares of our Common Stock commencing 45 days after
issuance of the Series 1 Preferred. If either Capital Bank or a group of Capital
Bank's investors became a beneficial owner of more than 10% of our Common Stock
on February 9, 1996, and thereby required to file reports under Section 16(a) of
the Exchange Act, then Capital Bank has failed to file a Form 3 or any Forms 4
or 5 for period from February 9, 1996, until the present.
CODE OF ETHICS
We have adopted a Code of Ethics that applies to all our executive officers. Our
Code of Ethics is available on our website at www.perma-fix.com. If any
amendments are made to the Code of Ethics or
87
any grants of waivers are made to any provision of the Code of Ethics to any of
our executive officers, we will promptly disclose the amendment or waiver and
nature of such amendment of waiver on our website.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate compensation paid to our Chairman
and Chief Executive Officer, Chief Financial Officer, President of Nuclear
Services, Vice President of Sales and Marketing, and President of Industrial
Services.
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ----------------------- ALL
OTHER RESTRICTED SECURITIES OTHER
ANNUAL STOCK UNDERLYING COMPEN-
SALARY BONUS COMPEN- AWARD(S) OPTIONS/ SATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) SATION ($) ($) SARS (#) ($)(2)
- ---------------------------------- ---- -------- -------- ---------- ---------- ---------- ----------
Dr. Louis F. Centofanti 2004 190,000 50,000 -- -- -- 11,695
Chairman of the Board, 2003 183,069 40,000 -- -- 100,000 11,503
President and Chief 2002 149,500 -- -- -- -- 11,214
Executive Officer
Richard T. Kelecy 2004 175,000 30,000 -- -- -- 12,250
Vice President and Chief 2003 168,885 30,000 -- -- 75,000 10,950
Financial Officer 2002 138,958 -- -- -- -- 10,725
Larry McNamara 2004 173,000 35,000 -- -- -- 11,569
President of Nuclear Services 2003 167,231 30,000 -- -- 100,000 11,457
2002 137,042 -- -- -- -- 10,826
Timothy Keegan 2004 160,000 15,000 -- -- -- 11,760
President of Industrial Services 2003 104,615 -- -- -- 100,000 6,375
William Carder 2004 150,000 25,000 -- -- -- 12,250
Vice President/Sales & Marketing 2003 141,346 -- -- -- 50,000 10,475
(1) The bonuses represent amounts paid in the respective year, but accrued for
and expensed in the prior year. We have accrued for 2004, approximately
$175,000 for officer performance bonuses to be paid in 2005.
(2) Each noted executive is provided a monthly automobile allowance in the
amount of $750. Also included, where applicable, is our 401(k) matching
contribution.
The Company has, with the assistance of an outside consultant, proposed to the
Compensation Committee a new compensation plan for the Company's CEO, CFO and
the presidents of the Company's Nuclear Segment and Industrial Segment. The
Compensation Committee has preliminarily approved the plan, subject to
completion and finalization of terms as directed by the Compensation Committee.
Final approval of any such plan by the Compensation Committee would be subject
to the approval of the Board of Directors. If the new plan is finalized and
approved by the Compensation Committee and the Board of Directors, the above
executive officers would receive an increase in their annual base compensation
and would further receive during the year incentive performance bonuses. Under
the plan, the incentive performance bonuses would be payable only if certain
thresholds and targets are met during the course of a year.
88
OPTION GRANTS IN 2004
During 2004, there were no individual grants of stock options made to any of the
executive officers named in the Summary Compensation Table.
AGGREGATED OPTION EXERCISED IN 2004 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth the fiscal year-end value of unexercised options
held by executive officers named in the Summary Compensation table. None of the
named executive officers exercised stock options during 2004.
Number of Unexercised Value of Unexercised
Options at Fiscal Year End In-the-Money Options
Shares Value (#) At Fiscal Year End ($)(2)
Acquired on Realized --------------------------- ---------------------------
Name Exercise (#)(1) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------- --------------- -------- ----------- ------------- ----------- -------------
Dr. Louis F. Centofanti -- -- 460,000 135,000 37,080 10,745
Richard Kelecy -- -- 257,000 98,000 107,508 7,242
Larry McNamara -- -- 132,000 138,000 26,608 8,422
Timothy Keegan -- -- 20,000 80,000 -- --
William Carder -- -- 10,000 40,000 -- --
(1) No options were exercised during 2004.
(2) Represents the difference between $1.809 (the closing price of our Common
Stock reported on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") Small Cap Market on December 31, 2004), and the option
exercise price. The actual value realized by a named executive officer on the
exercise of these options depends on the market value of our Common Stock on the
date of exercise.
401(k) PLAN
We adopted the Perma-Fix Environmental Services, Inc. 401(k) Plan (the "401(k)
Plan") in 1992, which is intended to comply with Section 401 of the Internal
Revenue Code and the provisions of the Employee Retirement Income Security Act
of 1974. All employees who have attained the age of 18 are eligible to
participate in the 401(k) Plan. Participating employees may make annual pretax
contributions to their accounts up to 18% of their compensation, up to a maximum
amount as limited by law. We, at our discretion, may make matching contributions
based on the employee's elective contributions. Company contributions vest over
a period of five years. We currently match up to 25% of our employees'
contributions, not to exceed 3% of a participant's compensation. We contributed
$272,000 in matching funds during 2004.
EMPLOYEE STOCK PURCHASE PLAN
The Perma-Fix Environmental Services, Inc. 1996 Employee Stock Purchase Plan
provides our eligible employees an opportunity to purchase our Common Stock
through payroll deductions. The maximum number of shares of our Common Stock
that may be issued under the plan was 500,000 shares. The plan provided that
shares would 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 maximum number of shares available was issued after the first
offering period in 2004, with no additional shares issuable under the plan. The
following table details the resulting employee stock purchase totals.
89
Shares
Purchase Period Proceeds Purchased
-------------------------- ----------- ---------
July 1 - December 31, 1997 $ 16,000 8,276
January 1 - June 30, 1998 17,000 10,732
July 1 - December 31, 1998 22,000 17,517
January 1 - June 30, 1999 28,000 21,818
July 1 - December 31, 1999 49,000 48,204
January 1 - June 30, 2000 54,000 53,493
July 1 - December 31, 2000 52,000 46,632
January 1 - June 30, 2001 48,000 43,324
July 1 - December 31, 2001 69,000 33,814
January 1 - June 30, 2002 94,000 42,917
July 1 - December 31, 2002 92,000 43,243
January 1 - June 30, 2003 91,000 57,620
July 1 - December 31, 2003 76,000 44,799
January 1 - June 30, 2004 42,000 27,611
In 2003, our stockholders approved the adoption of the Perma-Fix Environmental
Services, Inc. 2003 Employee Stock Purchase Plan. The plan provides our eligible
employees an opportunity to purchase our Common Stock through payroll
deductions. The maximum number of shares issuable under the plan is 1,500,000.
The Plan authorized the purchase of shares two times per year, at an exercise
price per share of 85% of the market price of our Common Stock on the offering
date of the period or on the exercise date of the period, whichever is lower.
The first purchase period commenced July 1, 2004, which resulted in the issuance
for the period ended December 31, 2004, of 31,287 shares purchased in February
2005, for proceeds of $47,000.
COMPENSATION OF DIRECTORS
In 2004, we paid our outside directors fees of $1,500 for each month of service,
resulting in the six outside directors earning annual director's fees in the
total amount of $108,000. As a member of the Board of Directors, 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's fee, if any, is payable in cash. The
aggregate amount of accrued directors' fees at December 31, 2004, to be paid
during 2005 to the six outside directors (Messrs. Colin, Lahav, Reeder,
Warrington, Young and Zwecker) was $54,000. Reimbursement of expenses for
attending meetings of the Board are paid in cash at the time of the applicable
Board meeting. The outside directors do not receive additional compensation for
committee participation or special assignments, except for reimbursement of
expenses. We do not compensate the directors that also serve as our officers or
employees of our subsidiaries for their service as directors. Although Dr.
Centofanti is not compensated for his services provided as a director, Dr.
Centofanti is compensated for his services rendered as an officer of the
Company. See "EXECUTIVE COMPENSATION -- Summary Compensation Table."
We believe that it is important for our directors to have a personal interest in
our success and growth and for their interests to be aligned with those of our
stockholders. Therefore, under our 1992 Outside Directors Stock Option and
Incentive Plan ("1992 Directors Plan"), each outside director was granted a 10
year option to purchase up to 15,000 shares of Common Stock on the date such
director was initially elected to the Board of Directors and received on each
reelection date an option to purchase up to another 5,000 shares of Common
Stock, with the exercise price being the fair market value of the Common Stock
on the date that the option is granted. No option granted under the 1992
Directors Plan is exercisable until after the expiration of six months from the
date the option is granted and no option shall be exercisable after the
expiration of ten years from the date the option is granted. In 2003, our
stockholders approved the 2003 Outside Directors Stock Plan ("2003 Directors
Plan"). The 2003 Directors Plan is
90
substantially similar to the 1992 Directors Plan (which terminated in 2003),
with the exception that each outside director is granted a 10 year option to
purchase 30,000 shares of Common Stock when initially elected, and granted a 10
year option to purchase 12,000 shares of Common Stock on each reelection date.
As of December 31, 2004, options to purchase 220,000 shares of Common Stock had
been granted and are outstanding under the 1992 Directors Plan and options to
purchase 162,000 shares of Common Stock were granted and are outstanding under
the 2003 Directors Plan.
As of the date of this report, we have issued 226,550 shares of our Common Stock
in payment of director fees under the 1992 Directors Plan, covering the period
January 1, 1995 through December 31, 2003. No new shares may be issued under the
1992 Directors Plan, except for the exercise of options already granted. We have
also issued 140,035 shares of our Common Stock in payment of director fees under
the 2003 Directors Plan, covering the period October 1, 2003, through December
31, 2004.
Our 1991 Performance Equity Plan, the 1993 Non-qualified Stock Option Plan, and
the 2004 Stock Option Plan, (collectively, the "Plans") provide that in the
event of a change in control (as defined in the Plans) of the Company, each
outstanding option and award granted under the Plans shall immediately become
exercisable in full notwithstanding the vesting or exercise provisions contained
in the stock option agreement. As a result, all outstanding stock options and
awards granted under the Plans to our executive officers shall immediately
become exercisable upon such a change in control of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2004, the Compensation and Stock Option Committee for our Board of
Directors was composed of Mark Zwecker, Jack Lahav, Jon Colin, Joe Reeder, and
Dr. Charles Young.
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 7, 2005, by each person known by us to be the
beneficial owners of more than 5% of any class of our voting securities.
AMOUNT AND PERCENT
TITLE NATURE OF OF
NAME OF BENEFICIAL OWNER OF CLASS OWNERSHIP CLASS (1)
- ------------------------------ -------- ---------- ---------
Rutabaga Capital Management(2) Common 4,941,582 11.8%
(1) In computing the number of shares and the percentage of outstanding Common
Stock "beneficially owned" by a person, the calculations are based upon
41,805,267 shares of Common Stock issued and outstanding on March 7, 2005
(excluding 988,000 Treasury Shares), plus the number of shares of Common Stock
which such person has the right to acquire beneficial ownership of within 60
days. Beneficial ownership by our stockholders has been determined in accordance
with the rules promulgated under Section 13(d) of the Exchange Act.
(2) This beneficial ownership amount is according to the Schedule 13G/A, filed
with the Securities and Exchange Commission, on January 18, 2005, which provides
that Rutabaga Capital Management, an investment advisor, has sole voting power
over 2,105,200 shares and shared voting power over 2,836,382 shares, and has
sole dispositive power over all of these shares. The address of Rutabaga Capital
Management is: 64 Broad Street, 3rd Floor, Boston, MA 02109.
Capital Bank represented to us that:
. Capital Bank owns shares of our Common Stock and rights to acquire
shares of our Common Stock only as agent for certain of Capital Bank's
investors;
91
. All of the Capital Bank's investors are accredited investors;
. None of Capital Bank's investors beneficially own more than 4.9% of our
Common Stock;
. Capital Bank's investors maintain full voting and dispositive power over
the Common Stock beneficially owned by such investors; and
. Capital Bank has neither voting nor investment power over the shares of
Common Stock owned by Capital Bank, as agent for its investors.
Notwithstanding the previous paragraph, if Capital Bank's representations to us
described above are incorrect or if Capital Bank's investors are acting as a
group, then Capital Bank or a group of Capital Bank's investors could be a
beneficial owner of more than 5% of our voting securities. If Capital Bank is
deemed the beneficial owner of such shares, the following table sets forth
information as to the shares of voting securities that Capital Bank may be
considered to beneficially own on March 7, 2005.
AMOUNT AND PERCENT
TITLE NATURE OF OF
NAME OF RECORD OWNER OF CLASS OWNERSHIP CLASS (1)
- ------------------------------ -------- ---------- ---------
Capital Bank Grawe Gruppe (2) Common 10,959,887(2) 23.8%
(1) This calculation is based upon 41,805,267 shares of Common Stock issued and
outstanding on March 7, 2005 (excluding 988,000 Treasury Shares), plus the
number of shares of Common Stock which Capital Bank, as agent for certain
accredited investors has the right to acquire within 60 days.
(2) This amount includes 6,625,082 shares that Capital Bank owns of record, as
agent for certain accredited investors and 2,668,138 shares that Capital Bank
has the right to acquire, as agent for certain investors, within 60 days under
certain Warrants. The Warrants are exercisable at an exercise price of $1.75 per
share of Common Stock. This amount also includes 1,666,667 shares of Common
Stock issuable upon the conversion of 2,500 shares of Series 17 Preferred held
by Capital Bank. This amount does not include the shares of Common Stock, which
may be issuable for payment of dividends on the Series 17 Preferred. Capital
Bank has also advised us that it is holding these Warrants and shares on behalf
of numerous clients, all of which are accredited investors. Although Capital
Bank is the record holder of the shares of Common Stock and Warrants described
in this note, Capital Bank has advised us that it does not believe it is a
beneficial owner of the Common Stock or that it is required to file reports
under Section 16(a) or Section 13(d) of the Exchange Act. Because Capital Bank
(a) has advised us that it holds the Common Stock as a nominee only and that it
does not exercise voting or investment power over the Common Stock held in its
name and that no one investor of Capital Bank for which it holds our Common
Stock holds more than 4.9% of our issued and outstanding Common Stock; (b) has
no right to, and is not believed to possess the power to, exercise control over
our management or its policies; (c) has not nominated, and has not sought to
nominate, a director to our board; and (d) has no representative serving as an
executive officer of the Company, we do not believe that Capital Bank is our
affiliate. Capital Bank's address is Burgring 16, 8010 Graz, Austria. Capital
Bank has advised us that it is a banking institution.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information as to the shares of voting securities
beneficially owned as of March 7, 2005, by each of our directors and executive
officers named in the Summary Compensation Table and by all of our directors and
executive officers as a group. Beneficial ownership 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.
92
NUMBER OF SHARES
OF COMMON STOCK PERCENTAGE OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED COMMON STOCK (1)
- --------------------------------- ------------------ ----------------
Dr. Louis F. Centofanti (2)(3) 1,334,934 (3) 3.16%
Jon Colin (2)(4) 111,380 (4) *
Jack Lahav (2)(5) 1,225,917 (5) 2.89%
Joe Reeder (2)(6) 252,686 (6) *
Alfred C. Warrington, IV (2)(7) 189,766 (7) *
Dr. Charles E. Young (2)(8) 52,407 (8) *
Mark A. Zwecker (2)(9) 293,874 (9) *
Richard T. Kelecy (2)(10) 287,950 (10) *
Larry McNamara (2)(11) 186,000 (11) *
Timothy Keegan (2)(12) 20,000 (12) *
Bill Carder (2)(13) 28,347 (13) *
Directors and Executive
Officers as a Group (11 persons) 3,983,261 9.12%
*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) 535,934 shares held of record by Dr. Centofanti;
(ii) options to purchase 195,000 shares granted pursuant to the 1991 Performance
Equity Plan and the 1993 Non-qualified Stock Option Plan, which are immediately
exercisable; (iii) options to purchase 300,000 shares granted pursuant to Dr.
Centofanti's employment agreement that expired in 2000, which are immediately
exercisable; and (iv) 304,000 shares held by Dr. Centofanti's wife. This amount
does not include options to purchase 80,000 shares granted pursuant to the 1993
Non-qualified Stock Option Plan, which are not exercisable within 60 days. Dr.
Centofanti has sole voting and investment power of these shares, except for the
shares held by Dr. Centofanti's wife, over which Dr. Centofanti shares voting
and investment power.
(4) Mr. Colin has sole voting and investment power over these shares which
include: (i) 42,380 shares held of record by Mr. Colin, and (ii) options to
purchase 69,000 shares granted pursuant to the 1992 Outside Directors Stock
Option and Incentive Plan and the 2003 Outside Directors Stock Plan, which are
immediately exercisable.
(5) Mr. Lahav has sole voting and investment power over these shares which
include: (i) 610,488 shares of Common Stock held of record by Mr. Lahav; (ii)
44,000 options to purchase Common Stock pursuant to the 1992 Outside Directors
Stock Option and Incentive Plan and the 2003 Outside Directors Stock Plan which
are immediately exercisable; and (iii) 571,429 Warrants to purchase Common
Stock, which are exercisable immediately.
(6) Mr. Reeder has sole voting and investment power over these shares which
include: (i) 213,686 shares of Common Stock held of record by Mr. Reeder, and
(ii) options to purchase 39,000 shares granted pursuant to the 1992 Outside
Directors Stock Option and Incentive Plan and the 2003 Outside Directors Stock
Plan, which are immediately exercisable.
(7) Mr. Warrington has sole voting and investment power over these shares which
include: (i) 145,766 shares of Common Stock held of record by Mr. Warrington;
and (ii) 44,000 options to purchase Common Stock pursuant to the 1992 Outside
Directors Stock Option and Incentive Plan and the 2003 Outside Directors Stock
Plan which are immediately exercisable.
93
(8) Dr. Young has sole voting and investment power over these shares which
include: (i) 10,407 shares held of record by Dr. Young; and (ii) options to
purchase 42,000 shares granted pursuant to the 2003 Outside Directors Stock
Plan, which are immediately exercisable.
(9) Mr. Zwecker has sole voting and investment power over these shares which
include: (i) 224,874 shares of Common Stock held of record by Mr. Zwecker; and
(ii) options to purchase 69,000 shares granted pursuant to the 1992 Outside
Directors Stock Option and Incentive Plan and the 2003 Outside Directors Stock
Plan which are immediately exercisable.
(10) Mr. Kelecy has sole voting and investment power over 21,950 shares of
Common Stock held of record by Mr. Kelecy and 266,000 options to purchase Common
Stock granted pursuant to the 1993 Non-qualified Stock Option Plan. This amount
does not include options to purchase 59,000 shares of Common Stock granted
pursuant to the 1993 Non-qualified Stock Option Plan, which are not exercisable
within 60 days.
(11) Mr. McNamara has sole voting and investment power over these shares which
include: (i) 186,000 options to purchase Common Stock pursuant to the 1993
Non-qualified Stock Option Plan which are exercisable within 60 days. This
amount does not include options to purchase 84,000 shares pursuant to the 1993
Non-qualified Stock Option Plan which are not exercisable within 60 days.
(12) Mr. Keegan has sole voting and investment power over options to purchase
20,000 shares granted pursuant to the 1993 Non-Qualified Stock Option Plan which
are exercisable within 60 days. This amount does not include options to purchase
80,000 shares of Common Stock granted pursuant to the 1993 Non-qualified Stock
Option Plan, which are not exercisable within 60 days.
(13) Mr. Carder has sole voting and investment power over 8,347 shares of Common
Stock held of record by Mr. Carder and 20,000 options to purchase Common Stock
granted pursuant to the 1993 Non-qualified Stock Option Plan which are
exercisable within 60 days. This amount does not include options to purchase
30,000 shares of Common Stock granted pursuant to the 1993 Non-qualified Stock
Option Plan, which are not exercisable within 60 days.
EQUITY COMPENSATION PLANS
The following table sets forth information as of December 31, 2004, with respect
to our equity compensation plans.
Equity Compensation Plan
----------------------------------------------------------------------
Number of securities
remaining available for
Weighted average future issuance under
Number of securities to exercise price of equity compensation
be issued upon exercise outstanding plans (excluding
of outstanding options options, warrants securities reflected in
Plan Category warrants and rights and rights column (a)
- ------------------------------- ----------------------- ----------------- -----------------------
(a) (b) (c)
Equity compensation plans
Approved by stockholders 2,675,950 $ 1.77 2,091,465
Equity compensation plans not
Approved by stockholders (1) 300,000 2.58 --
----------------------- ----------------- -----------------------
Total 2,975,950 $ 1.85 2,091,465
(1) These shares are issuable pursuant to options granted to Dr. Centofanti
under his 1997 employment agreement, which terminated in 2000. The options
expire in October 2007.
94
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CAPITAL BANK GRAWE GRUPPE
As of March 7, 2005, Capital Bank owned of record, as agent for certain
accredited investors, 6,625,082 shares of Common Stock representing 15.8% of our
issued and outstanding Common Stock. As of March 7, 2005, Capital Bank also had
the right to acquire an additional 4,334,805 shares of Common Stock, comprised
of (a) 2,668,138 shares of Common Stock issuable under various warrants held by
Capital Bank, as agent for certain investors; and (b) 1,666,667 shares of Common
Stock issuable to Capital Bank upon the conversion of 2,500 shares of Series 17
Preferred held by Capital Bank, as agent for certain investors. During 2004,
Capital Bank exercised Warrants to purchase 329,262 shares of our Common Stock.
The 2,500 shares of Series 17 Preferred may be converted into shares of Common
Stock at any time at a conversion price of $1.50 per share, subject to
adjustment as set forth in the Certificate of Designations relating to the
Series 17 Preferred. The Series 17 Preferred has a "stated value" of $1,000 per
share. We may, at our sole option, redeem, in whole or in part, at any time, and
from time to time the then outstanding Series 17 Preferred at the cash
redemption prices of $1,200 per share. Upon any notice of redemption, Capital
Bank shall have only five business days to exercise its conversion rights
regarding the redeemed shares.
The Series 17 Preferred accrues dividends on a cumulative basis at a rate of
five percent (5%) per annum which dividends are payable semiannually when and as
declared by the Board of Directors. During 2003, accrued dividends on the Series
17 Preferred of approximately $125,000 were paid in the form of 53,478 shares of
our Common Stock, of which 19,643 were issued in February 2004. During 2004,
accrued dividends on the Series 17 Preferred of approximately $125,000 were
expensed, of which $62,000 were paid in the form of 32,938 shares of our Common
Stock, and $63,000 will be paid in March 2005.
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 10,959,887 shares of Common Stock, representing 23.8% of the
issued and outstanding Common Stock. The foregoing estimates assume that we do
not issue any other shares of Common Stock; no other warrants or options are
exercised; we do not acquire additional shares of Common Stock as treasury
stock; and Capital Bank does not dispose of any shares of Common Stock.
Capital Bank has advised us that it is a banking institution regulated by the
banking regulations of Austria, which holds shares of our Common Stock on behalf
of numerous investors. Capital Bank asserts that it is precluded by Austrian law
from disclosing the identities of its investors, unless so approved by each such
investor. Certain of its investors gave Capital Bank permission to disclose
their identities in order to be included as Selling Stockholders in our Form S-3
Registration Statement, effective November 22, 2002. Capital Bank has
represented that all of its investors are accredited investors under Rule 501 of
Regulation D promulgated under the Act. In addition, Capital Bank has advised us
that none of its investors beneficially own more than 4.9% of our Common Stock.
Capital Bank has further informed us that its clients (and not Capital Bank)
maintain full voting and dispositive power over such shares. Consequently,
Capital Bank has advised us that it believes it is not the beneficial owner, as
such term is defined in Rule 13d-3, of the shares of our Common Stock registered
in the name of Capital Bank because it has neither voting nor investment power,
as such terms are defined in Rule 13d-3, over such shares. Capital Bank has
informed us that it does not believe that it is required to file, and has not
filed, any reports under Forms #3, #4, or #5 as required by Section 16(a) of the
Securities Exchange Act of 1934, as amended ("Exchange Act") 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.
95
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 more
than 10% of our Common Stock.
Because Capital Bank (a) has advised us that it holds the Common Stock as a
nominee only and that it does not exercise voting or investment power over our
Common Stock held in its name and that no one investor of Capital Bank for which
it holds our Common Stock holds more than 4.9% of our issued and outstanding
Common Stock; (b) has no right to, and is not believed to possess the power to,
exercise control over our management or our policies; (c) has not nominated, and
has not sought to nominate, a director to our board; and (d) has no
representative serving as an executive officer of the Company, we do not believe
that Capital Bank is our affiliate.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees and expenses billed by BDO Seidman, LLP ("BDO") for
professional services rendered for the audit of the Company's annual financial
statements for the fiscal years ended December 31, 2004 and 2003, for the
reviews of the financial statements included in the Company's Quarterly Reports
on Form 10-Q for those fiscal years, and for review of documents filed with the
Securities and Exchange Commission for those fiscal years were approximately
$422,100 and $195,800, respectively. Audit fees for 2004 include approximately
$198,900 in fees to provide internal control audit services to the Company.
Approximately 60% and 85% of the total hours spent on audit services for the
Company for the years ended December 31, 2004 and 2003, respectively, were spent
by Gallogly, Fernandez and Riley, LLP ("GFR") members of the BDO alliance
network of firms. Such members are not full time, permanent employees of BDO.
AUDIT-RELATED FEES
BDO was engaged to provide audit related services to the Company for the fiscal
year ended December 31, 2004. The aggregate fees billed by BDO for that period
was $14,600. BDO was not engaged to provide audit related services to the
Company for the fiscal year ended December 31, 2003.
GFR audited the Company's 401(k) Plan during 2004 and 2003, and billed $7,800
and $7,800, respectively.
TAX SERVICES
BDO was not engaged to provide tax services to the Company for the fiscal years
ended December 31, 2004 and 2003.
The aggregate fees billed by GFR for tax compliance services for 2004 and 2003
were approximately $34,400 and $32,000, respectively.
ALL OTHER FEES
BDO was not engaged to provide any other services to the Company for the fiscal
years ended December 31, 2004 and 2003.
GFR was not engaged to provide any other services to the Company for the fiscal
years ended December 31, 2004 and 2003.
The Audit Committee of the Company's Board of Directors has considered whether
BDO's provision of the services described above for the fiscal years ended
December 31, 2004 and 2003, is compatible with maintaining its independence. The
Audit Committee also considered services performed by GFR to determine that it
is compatible with maintaining independence.
96
Engagement of the Independent Auditor
The Audit Committee is responsible for approving all engagements with BDO and
GFR to perform audit or non-audit services for us prior to us engaging BDO and
GFR to provide those services. All of the services under the headings Audit
Related Fees, Tax Services, and All Other Fees were approved by the Audit
Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X of
the Exchange Act. The Audit Committee's pre-approval policy provides as follows:
. The Audit Committee will review and pre-approve on an annual basis any
known audit, audit-related, tax and all other services, along with
acceptable cost levels, to be performed by BDO and GFR. The Audit
Committee may revise the pre-approved services during the period based
on subsequent determinations. Pre-approved services typically include:
statutory audits, quarterly reviews, regulatory filing requirements,
consultation on new accounting and disclosure standards, employee
benefit plan audits, reviews and reporting on management's internal
controls and specified tax matters.
. Any proposed service that is not pre-approved on the annual basis
requires a specific pre-approval by the Audit Committee, including cost
level approval.
. The Audit Committee may delegate pre-approval authority to one or more
of the Audit Committee members. The delegated member must report to the
Audit Committee, at the next Audit Committee meeting, any pre-approval
decisions made.
97
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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.
98
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 29, 2005
---------------------------------
Dr. Louis F. Centofanti
Chairman of the Board
Chief Executive Officer
By /s/ Richard T. Kelecy Date March 30, 2005
---------------------------------
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 30, 2005
---------------------------------
Jon Colin, Director
By /s/ Jack Lahav Date March 30, 2005
---------------------------------
Jack Lahav, Director
By /s/ Alfred C. Warrington IV Date March 30, 2005
---------------------------------
Alfred C. Warrington IV, Director
By /s/ Mark A. Zwecker Date March 30, 2005
---------------------------------
Mark A. Zwecker, Director
By /s/ Dr. Louis F. Centofanti Date March 29, 2005
---------------------------------
Dr. Louis F. Centofanti, Director
By /s/ Joe R. Reeder Date March 30, 2005
---------------------------------
Joe R. Reeder, Director
By /s/ Charles E. Young Date March 30, 2005
---------------------------------
Charles E. Young, Director
99
SCHEDULE II
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2004, 2003, and 2002
(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, 2004: $ 661 $ 251 $ 342 $ 570
Allowance for doubtful accounts -
continuing operations
Allowance for doubtful accounts -
discontinued operations 42 98 15 125
Year ended December 31, 2003:
Allowance for doubtful accounts -
continuing operations $ 577 $ 236 $ 152 $ 661
Allowance for doubtful accounts -
discontinued operations 121 35 114 42
Year ended December 31, 2002:
Allowance for doubtful accounts -
continuing operations $ 639 $ 542 $ 604 $ 577
Allowance for doubtful accounts -
discontinued operations 86 136 101 121
100
EXHIBIT INDEX
Exhibit
No. Description
- ------- ----------------------------------------------------------------------
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 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.
4.5 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.
4.6 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.
4.7 Amendment No. 2 to Revolving Credit, Term Loan and Security Agreement,
dated as of May 23, 2003, between the Company and PNC Bank, as
incorporated by reference from Exhibit 4.4 to the Company's Form 10-Q
for the quarter ended June 30, 2003, and filed on August 14, 2003.
4.8 Amendment No. 3 to Revolving Credit, Term Loan, and Security
Agreement, dated as of October 31, 2003, between the Company and PNC
Bank, as incorporated by reference from Exhibit 4.5 to the Company's
Form 10-Q for the quarter ended September 30, 2003, and filed on
November 10, 2003.
4.9 Securities Purchase Agreement dated March 16, 2004, between the
Company and Alexandra Global Master Fund, Ltd., Alpha Capital AG,
Baystar Capital II, L.P., Bristol Investment Fund, Ltd., Crescent
International Ltd, Crestview Capital Master LLC, Geduld Capital
Partners LP, Gruber & McBaine International, Irwin Geduld Revocable
Trust, J Patterson McBaine, Jon D. Gruber and Linda W. Gruber,
Lagunitas Partners LP, Omicron Master Trust, Palisades Master Fund,
L.P., Stonestreet LP, is incorporated by reference from Exhibit 4.1 of
our Registration Statement No. 333-115061. The Company will furnish
supplementally a copy of all omitted schedules to the Commission upon
request.
4.10 Registration Rights Agreement, dated March 16, 2004, between the
Company and Alexandra Global Master Fund, Ltd., Alpha Capital AG,
Baystar Capital II, L.P., Bristol Investment Fund, Ltd., Crescent
International Ltd, Crestview Capital Master LLC, Geduld Capital
Partners LP, Gruber & McBaine International, Irwin Geduld Revocable
Trust, J Patterson McBaine, Jon D. Gruber and Linda W. Gruber,
Lagunitas Partners LP, Omicron Master Trust, Palisades Master Fund,
L.P., Stonestreet LP, is incorporated by reference from Exhibit 4.2 of
our Registration Statement No. 333-115061.
4.11 Common Stock Purchase Warrant, dated March 16, 2004, issued by the
company to Alexandra Global Master Fund, Ltd., for the purchase of
262,500 shares of the Company's
101
common stock, is incorporated by reference from Exhibit 4.3 of our
Registration Statement No. 333-115061. Substantially similar warrants
were issued by the Company to the following: (1) Alpha Capital AG, for
the purchase of up to 54,444 shares; (2)Baystar Capital II, L.P., for
the purchase of up to 63,000 shares; (3) Bristol Investment Fund,
Ltd., for the purchase of up to 62,222 shares; (4) Crescent
International Ltd, for the purchase of up to 105,000 shares; (5)
Crestview Capital Master LLC, for the purchase of up to 233,334
shares; (6) Geduld Capital Partners LP, for the purchase of up to
26,250 shares; (7) Gruber & McBaine International, for the purchase of
up to 38,889 shares; (8) Irwin Geduld Revocable Trust, for the
purchase of up to 17,500 shares; (9) J Patterson McBaine, for the
purchase of up to 15,555 shares; (10) Jon D. Gruber and Linda W.
Gruber, for the purchase of up to 38,889 shares; (11) Lagunitas
Partners LP, for the purchase of up to 93,333 shares; (12) Omicron
Master Trust, for the purchase of up to 77,778 shares; (13) Palisades
Master Fund, L.P., for the purchase of up to 472,500 shares; and (14)
Stonestreet LP, for the purchase of up to 54,444 shares. Copies will
be provided to the Commission upon request.
4.12 Amendment No. 4 to Revolving Credit, Term Loan, and Security
Agreement, dated as of March 25, 2005, between the Company and PNC
Bank.
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 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 405,504 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 (169,907
shares), and Robert Goodwin (193,597 shares), along with the remaining
41,510 warrants issued to Larkspur on March 9, 2001 will be provided
to the Commission upon request.
102
10.10 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.
10.11 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.
10.12 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.
10.13 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.
10.14 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.
10.15 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.
10.16 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.
10.17 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.
10.18 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.
10.19 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 1,830,687 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.
10.20 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.
10.21 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
186,851 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), and Meera
Murdeshwar (6,837 shares). Copies will be provided to the Commission
upon request.
10.22 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 4,249,022 were issued to Capital Bank
(837,451 shares), CICI
103
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.
10.23 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 48,000 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), and Larkspur
Capital Corporation (34,000 shares). Copies will be provided to the
Commission upon request.
10.24 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.
10.25 2003 Outside Directors' Stock Plan of the Company as incorporated by
reference from Exhibit B to the Company's 2003 Proxy Statement.
10.26 2003 Employee Stock Purchase Plan of the Company as incorporated by
reference from Exhibit C to the Company's 2003 Proxy Statement.
10.27 2004 Stock Option Plan of the Company as incorporated by reference
from Exhibit B to the Company's 2004 Proxy Statement.
10.28 Asset Purchase Agreement dated March 23, 2004, between the Company and
USL Environmental Services, Inc., a Maryland corporation, d/b/a A & A
Environmental, is incorporated by reference from Exhibit 5.1 of our
Current Report on Form 8-K dated March 23, 2004, and filed on April 8,
2004. The Company will furnish supplementally a copy of all omitted
schedules to the Commission upon request.
10.29 Asset Purchase Agreement dated March 23, 2004, between the Company and
US Liquids of Pennsylvania, Inc., a Pennsylvania corporation, d/b/a
EMAX of Pittsburgh, Pa., is incorporated by reference from Exhibit 5.2
of our Current Report on Form 8-K dated March 23, 2004, and filed on
April 8, 2004. The Company will furnish supplementally a copy of all
omitted schedules to the Commission upon request.
10.30 Common Stock Purchase Warrant, dated March 16, 2004, granted by the
Company to R. Keith Fetter, is incorporated by reference from Exhibit
10.3 of our Form S-3 Regisration Statement dated April 30, 2004.
Substantially similar warrants were granted to Joe Dilustro and Chet
Dubov, each for the purchase of 30,000 shares of the Company's common
stock. Copies will be provided to the Commission upon request.
10.31 Agreement between the Company and a Fortune 500 company, dated June
21, 2004 is incorporated by reference from Exhibit 10.1 of our Form
10-Q for the quarter ended June 30, 2004. List of exhibits are
included in the contract and will be provided to the Commission upon
request.
10.32 Agreement between Perma-Fix Environmental Services, Inc. and Fluor
Hanford, dated October 11, 2004 is incorporated by reference from
Exhibit 10.1 of our Form 10-Q for the
104
quarter ended September 30, 2004. CERTAIN INFORMATION WITHIN THIS
EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A REQUEST BY THE
COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE FREEDOM OF INFORMATION ACT. THE OMITTED
INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
SECURITIES AND EXCHANGE COMMISSION FOR PURPOSE OF SUCH REQUEST.
21.1 List of Subsidiaries
23.1 Consent of BDO Seidman, LLP
31.1 Certification by Dr. Louis F. Centofanti, Chief Executive Officer of
the Company pursuant to Rule 13a-14(a) or 15d-14(a).
31.2 Certification by Richard T. Kelecy, Chief Financial Officer of the
Company pursuant to Rule 13a-14(a) or 15d-14(a).
32.1 Certification by Dr. Louis F. Centofanti, Chief Executive Officer of
the Company furnished pursuant to 18 U.S.C. Section 1350.
32.2 Certification by Richard T. Kelecy, Chief Financial Officer of the
Company furnished pursuant to 18 U.S.C. Section 1350.
105